money anticipated changes and policy effectiveness the lucas sargent wallace l s w proposition states that expected policy changes have no influence on real economic variables even in the short run see robert lucas 1972 and thomas sargent and neil wallace 1975 one form of empirical test of the l s w proposition the neutrality proposition began with robert barro s 1977 1978 seminal articles supporting the neutrality proposition however more recent papers including those by david small 1979 john makin 1982 and frederic mishkin 1982a b have reexamined the relationships between anticipated and unanticipated money vs output unemployment and inflation and have found evidence suggesting that anticipated monetary changes do have real effects all of the above cited studies use expectations procedures which estimate for example a money growth equation over the entire period under consideration however this approach assumes that when expectations are being formed at the beginning of the period economic agents have the relevant information for the entire period in this note i reexamine the impact of expected vs unexpected monetary changes focusing on the informational restrictions actually faced by economic agents when formulating expectations the structure of the model used here is similiar to the models of barro and mishkin a measure of real output is assumed to be a function of a policy variable and a vector of predetermined variables the policy variable can be decomposed into anticipated and unanticipated components algebraically

an econometric investigation of the monetary neutrality and rationality propositions from an international perspective t he combination of the natural rate of unemployment and the rational expectations hypotheses in macroeconomic models results in the now well known conclusion that anticipated short run monetary stabilization policies do not influence real economic variables this policy ineffectiveness proposition has been named the macro rational expectations mre hypothesis by modigliani 1977 as a result the implicit policy prescription is that a price level stabilization policy should be pursued the empirical validity of this conclusion is perhaps the central issue in modern stabilization theory barro 1977 1978 1981 barro and rush 1980 and leiderman 1980 have presented empirical evidence for the united states supporting this proposition however a number of recent studies have claimed that previous empirical results which support the finding that anticipated policy is neutral are flawed corrections of these problems often result in conflicting conclusions see small 1979 gordon 1979 and mishkin 1982 given the important implications of the mre hypothesis it is curious that almost all formal testing has been focused upon the united states while barro has suggested that a cross country study would be useful as far as we know only darby 1980 attempts to test whether anticipated changes in monetary policy are neutral across countries unfortunately his results suffer from problems caused by using generated regressors in addition he makes no attempt to test the individual implications of the mre hypothesis which encompasses the propositions that expectations are rational lad anticipated monetary policy does not matter in this paper we employ the methodology developed by mishkin to test the mre hypothesis in six countries canada germany italy japan the united kingdom and the united states the paper is divided into three major sections and a conclusion section ii briefly reviews mishkin s testing method in section iii the procedure employed to specify the money growth equation is discussed and these equations specified section iv presents and discusses the results of applying the method introduced in section ii in the conclusion the major findings are restated possible limitations discussed and extensions suggested

competing macro hypotheses in the united states a kalman filtering approach the empirical validity of alternative views about the short run determinants of real output growth in the united states is investigated a nested framework is used to test the macro rational expectations mre hypothesis directly against two competing hypotheses the neo keynesian view that anticipated and unanticpated monetary policy both matter and friedman s 1977 proposition that increased inflation uncertainty reduces real output at least temporarily the unobservable explanatory variables are obtained from time varying parameter models of inflation and money growth which generate forecast errors and their conditional variances consistent with rational expectations under a continuously chaning policy regime the empirical results strongly support friedman s view the mre hypothesis must be rejected since both anticipated and unanticipated monetary changes matter the results prove robust across different model specifications and estimation techniques

consensus consumer and intertemporal asset pricing with heterogeneous beliefs le fichier attache est egalement edite dans les cahier de la chaire les particuliers face aux risques de l institut de finance de dauphine cahier n 7 mars 2007

a little bit more evidence on the natural rate hypothesis from the u k abstract the evidence for the neutrality of anticipated changes in monetary policy in the u k over the period 1963q1 1982q1 is examined breaks in the stochastic process generating the money stock are used to identify the model the results are generally unfavourable to the proposition that only unanticipated money matters

on fiscal policy and the stock market this paper provides some empirical evidence on the relationship between aggregate quarterly stock prices and other macro variables including measures of monetary and fiscal policy in canada the results indicate the presence of significant lags in the reaction of stock prices to fiscal policy moves to the extent that a proxy for the fiscal policy effect on required expected return to capital was included in the model such a finding conflicts with the stock market efficiency hypothesis further tests also suggest that anticipated and unanticipated fiscal policy changes have significant lagged relationships with current stock prices the canadian stock market therefore appears to have been inefficient with respect to available information on fiscal policy copyright 1988 by ohio state university press

efficient market testing of the expectations adjusted supply function hypothesis for italy 1985 efficient market testing of the expectations adjusted supply function hypothesis for italy applied economics vol 17 no 6 pp 1065 1070

price inertia money supply and price changes price stickiness is incorporated in the partial information localizedmarket framework of rational expectation models to show that the money stock has less than an equiproportionate effect on the aggregate price and that the unanticipated monetary policy component has differing impacts on prices at the market level the empirical analysis involves estimation of generated regressor models of money forecasting and price equations using the computationally intensive parametric bootstrap method developed most recently by smith and mcaleer the results are unfavourable to the hypothesis of a one to one relationship between current money stock and prices rather they lend distinct support to conclusions of a sluggish price adjustment model that money stock has less than equiproportionate effect on prices empirical results also show that the effects of unanticipated money growth on prices vary across markets

effects of financial innovations on market volatility when beliefs are heterogeneous abstract consider a model with two logarithmic utility maximizer agents that observe aggregate consumption but disagree about its expected rate of change markets are incomplete we first show that volatility of the interest rate in an economy with additional information is higher in a complete markets economy with no additional information there are two differences in volatility with the previous the first one due to the increase in volatility of the wealth share of the individuals is always positive the second difference is the change in covariance between the components of the interest rate volatility and can be positive or negative

the time varying parameter model for modeling changing conditional variance the case of the lucas hypothesis the main econometric issue in testing the lucas 1973 hypothesis in a time series context is estimation of the forecast error variance conditional on past information the conditional variance may vary through time as monetary policy evolves and agents are obliged to infer its present state under the assumption that a monetary policy regime is continuously changing a time varying parameter model is proposed for the monetary growth function based on kalman filtering estimation of recursive forecast errors and their conditional variances the lucas hypothesis is tested for the u s economy 1964 1 1985 4 using monetary growth as aggregate demand variable the lucas hypothesis is rejected in favor of friedman s 1977 hypothesis the conditional variance of monetary growth affects real output directly not through the coefficients on the forecast error term in the lucas type output equation

financial market efficiency the decomposition of anticipated versus unanticipated money growth and further tests of the relation between money and real output note probably the most controversial empirical findings in macroeconomics in the last decade stem from robert barro s investigations into the relative effects of unanticipated versus anticipated money growth on unemployment and real output these studies generally proceed by decomposing observed money growth into what is defined to be its anticipated and unanticipated components and then test the restriction that only the unanticipated money measure has important effects for unemployment and real output in black box reduced form real side equations that include determinants of the natural rates of unemployment and real output as additional explanatory variables l the results of these tests for the annual postwar u s data generally cannot reject the hypothesis that only unanticipated money growth is important for the determination of aggregate real activity 2 anticipated money growth is found to be neutral for unemployment and real output these results are important because they give empirical support to the assertion that the apparent nonneutrality of observed money growth does not provide any firm basis for the efficacy of a systematic countercyclical monetary policy it should be clear that a crucial problem in testing for the neutrality nonneutrality of anticipated unanticipated money growth lies in developing an appropriate decomposition of observed money growth into its anticipated and unanticipated parts small 13 mishkin 8 and weintraub 14 among others have

the political viability of rule based monetary policy we have estimated two models explaining political support for the president as a function of economic performance one model reflects the assumption characterizing most of the literature that voters indiscriminately punish inflation and unemployment without regard to the tradeoffs between them the other represents a more demanding conception of voter sophistication about macroeconomic possibilities and about control of the money supply while the data do not unambiguously designate a best model of behavior the sophisticated voter hypothesis performs as well as the naive voter hypothesis in the context of our study clearly this result is subject to the usual econometric caveats including possible misspecification of the model multicollinearity among independent variables etc however there is no particular reason to believe that these problems should favor one model as opposed to the other thus while we cannot conclude that voters really think in terms of rates of growth of velocity and natural output we can question the conventional wisdom that consistent rule based monetary policies may not be politically viable

the marginal income tax rate schedule from 1930 to 1990 abstract although it is well known that marginal income tax rates vary with income few economists have studied the effect on real gdp of the distribution of marginal income tax rates this omission is probably because data on the distribution do not exist we remedy this shortcoming by providing a computer program that calculates marginal income tax rates for all income levels for the years 1930 to 1990 we conduct a preliminary empirical investigation into the effect of taxes on economic growth we find that lowering taxes significantly raises economic growth and that changing the tax rate schedule also has significant effects on economic growth

the response of real wages to unanticipated money growth abstract this paper investigates the response of real wages to unanticipated money growth in the light of equilibrium theories of the business cycle these theories in their main different versions do not deliver a common and unambiguous hypothesis on this issue while some models implu a countercyclical real wage response during monetary cycles others yield the opposite result of a procyclical real wage econometric analysis of annual and quarterly u s data reported in the paper indicates that there is a weak negative real wage response to an unanticipated increase in money growth

a non nested test of the new classical neutrality proposition for canada this paper uses a non nested testing technique to test the neutrality proposition of the new classical economics a new classical model and an alternative model are estimated and tested against each other the test results indicate that the alternative model rejects the new classical model and that the neutrality proposition cannot be supported empirically

heterogeneous expectations and bond markets this paper presents a dynamic equilibrium model of bond markets in which two groups of agents hold heterogeneous expectations about future economic conditions the heterogeneous expectations cause agents to take on speculative positions against each other and therefore generate endogenous relative wealth fluctuation the relative wealth fluctuation amplifies asset price volatility and contributes to the time variation in bond premia our model shows that a modest amount of heterogeneous expectations can help explain several puzzling phenomena including the excessive volatility of bond yields the failure of the expectations hypothesis and the ability of a tent shaped linear combination of forward rates to predict bond returns the author 2009 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please email journals permissions oxfordjournals org oxford university press

option smiling when investors estimates of asset volatility disagree this study sheds light on why heterogeneous beliefs in volatility manifest the smile effect of options and how the degree of belief disagreement influences option implied volatility it is found that when investors level of heterogeneous beliefs increases agents who over estimate volatility raise their subjective probability about those outer dividend states and hence increase more consumption to those states as a result an increase of consumption causes a decrease of their marginal rate of transformation in outer states the raising subjective probability increases the prices of outer states while the lower marginal rate of transformation decreases the prices of that however the influence of the former dominates the latter causing a fatter tail of the state price density as a consequence the values increase for those call options with high strike prices and put options with low strike prices leading to a u shaped implied volatility and hence causes a smell effect

irrational exuberance and option smiles disagreement among investors is pervasive some investors see a trend and predict continuation others see the same trend and predict reversal some investors overreact others underreact i explain how disagreement can and does cause markets to be inefficient and i argue that option markets are particularly vulnerable in this respect the volatility smile associated with index options is one manifestation of inefficiency stemming from heterogeneous beliefs as part of the argument i discuss an event study about irrational exuberance the term alan greenspan chair of the u s federal reserve board used in late 1996 to describe stock market sentiment to study this event i combined the information gleaned from option pricing data with other information about market sentiment to assess the impact of heterogeneous beliefs on market efficiency

policy impacts under rational expectations abstract this paper re examines for the u s the validity of the macro rational expectations mre hypothesis in contrast to most previous studies in this area the paper a considers the potential real effects of both monetary and fiscal policies b allows for possible endogeneity of these policies and c uses a joint non linear estimation methodology to distangle the hypothesis of rationality from that of neutrality the empirical results reject the joint mre hypothesis for both policies the results also indicate that policy non neutrality is the culprit behind such rejection this evidence offers further empirical support for macro rational expectations models where monetary and fiscal policies can due to some rigidities play a key role in stabilizing the real economy

expectations and monetary neutrality an empirical reexamination modern monetary business cycle models feature rational expectations and natural rate assumptions which imply that unanticipated changes in nominal aggregates affect real output but anticipated changes do not initial tests conducted by barro 3 and by barro and rush 4 supported the neutrality of anticipated money growth in a particularly influential study mishkin 21 22 rejected the neutrality of anticipated policy mishkin s paper 21 has become one of the most frequently cited studies in empirical macroeconomics the influence of the study probably derives in large part from the unequivocal nature of the results in particular mishkin showed that i the hypothesis that anticipated policy has no effect on output is strongly rejected ii anticipated nominal changes have a greater estimated effect on output than do unanticipated nominal changes iii lags as long as 17 quarters have significant coefficients implying that barro s eight lag model was underspecified iv in some specifications the estimated sign of the effect of nominal innovations is opposite to the prediction of monetary business cycle theory frydman and rappoport 9 used mishkin s empirical model to provide further evidence against the neutrality hypothesis by showing that the data provide no evidence for distinguishing between the output effects of anticipated policy and those of unanticipated policy although several subsequent studies have supported the neutrality hypothesis 7 12 mishkin s careful study and a small number of additional studies suggest that the neutrality hypothesis is not robust the empirical rejection of the neutrality hypothesis contradicts a wide range of modern monetary models including those based on imperfect information 14 18 19 and those based on imperfect competition 8 20 as a consequence the focus of macroeconomists has in recent years shifted to non monetary models in which money responds passively to changes in aggregate output 16 17 this paper explores the robustness of mishkin s results using an updated data set the model yields results that are more consistent with the neutrality hypothesis than those of mishkin in par

state price densities under heterogeneous beliefs the smile effect and implied risk aversion abstract it has been widely noted in the empirical literature that state price densities implicit in financial asset prices are not log normal this paper shows that this phenomenon can be caused by heterogeneity in investors beliefs it derives the state price density under heterogeneous beliefs in closed form and demonstrates that heterogeneous beliefs can give rise to multimodal state price densities consequences for the smile effect in implied option volatility and for measures of risk aversion inferred from empirical state price densities are discussed

the expectation hypothesis of the term structure of very short term rates statistical tests and economic value this paper re examines the validity of the expectation hypothesis eh of the term structure of us repo rates ranging in maturity from overnight to three months we extend the work of longstaff 2000a in two directions i we implement statistical tests designed to increase test power in this context ii more importantly we assess the economic value of departures from the eh based on criteria of profitability and economic significance in the context of a simple trading strategy the eh is rejected throughout the term structure examined on the basis of the statistical tests however the results of our economic analysis are favorable to the eh suggesting that the statistical rejections of the eh in the repo market are economically insignificant

openness and the effects of monetary policy abstract economic theory suggests that an economy s openness reduces the ability of monetary policy to affect output while increasing its effects on inflation using annual data from the 1953 1990 period for a panel of 38 countries the paper s empirical results support the theoretical predictions the more open the economy the smaller larger the output inflation effects of a given change in the money supply this finding is robust across all the different specifications and estimation methods examined

anticipated monetary policy and real output evidence from latin american countries this paper is an empirical investigation of the effects of anticipated and unanticipated monetary policies on real output for 13 ldcs in latin and central america the well know mishkin econometric procedure is applied to the annual imf date for the decomposition of actual money growth into anticipated and unanticipated components and the evidence of significant relation between anticipated money supply and real output for each country is reported the results derived in this paper thus provide additional empirical support for the validity of the non classical rational expectations macro models of fisher and phelps and taylor

differing degree of price flexibilities and the policy ineffectiveness proposition price regulations impart stickiness to prices the degree of response is analysed for three cpi subindex inflations freely determined regulated and mixed prices and of aggregate cpi inflation to anticipated and unanticipated monetary policies freely determined prices and aggregate cpi show similar responses but faster and larger adjustments than regulated prices to anticipated monetary policies the results imply that the extent to which monetary policies can influence prices depends on the degree of price inertia in various sectors for monetary authorities to control inflation effectively they need to focus on price movements in various sectors

effects of fiscal policies on us agriculture according to the macro rational expectation mre hypothesis only unanticipated macroeconomic policy has impacts on real economic variables and anticipated policy changes have no real impacts this study analysis the effects of the anticipated and unanticipated components of fiscal policy on the us farm real gnp by testing the neutrality and rationality propositions of the mre hypothesis the test results show that both the rationality and neutrality propositions are rejected the empirical findings indicate that the anticipated fiscal policy does have significant effects on farm output examination of a specific sector sheds light on the nature of the market and helps ascertain the resons for the non neutrality

endogenous business cycle propagation and the persistence problem the role of labor market frictions contrasting sharply with a recent trend in dsge modeling we propose a business cycle model where frictions and shocks are chosen with parsimony the model emphasizes a few labor market frictions and shocks to monetary policy and technology the model estimated from u s quarterly postwar data accounts well for important differences in the serial correlation of the growth rates of aggregate quantities the size of aggregate fluctuations and key comovements including the correlation between hours and labor productivity despite its simplicity the model offers an answer to the persistence problem chari et al 2000 that does not rely on multiple frictions and adjustment lags or ad hoc backward looking components we conclude modern dsge models need not embed large batteries of frictions and shocks to account for the salient features of postwar business cycles

a lagrange multiplier test of the restrictions for a simple rational expectations model the lagrange multiplier test of the restrictions for a simple but common class of rational expectations model is developed for these kinds of models the value of this test will never exceed the likelihood ratio the difference is usually small because monte carlo evidence suggests that it performs similarly to the likelihood ratio and wald tests in small samples however an economic example suggests that larger differences are possible

the effects of monetary policy news and surprises there is substantial agreement in the monetary policy literature over the effects of exogenous monetary policy shocks the shocks that are investigated however almost exclusively represent unanticipated changes in policy which surprise the private sector and which are typically found to have a delayed and sluggish effect on output in this paper we estimate a new keynesian model that incorporates news about future policies to try to disentangle the anticipated and unanticipated components of policy shocks the paper shows that the conventional estimates confound two distinct effects on output an effect due to unanticipated or surprise shocks which is smaller and more short lived than the response usually obtained in the literature and a large delayed and persistent effect due to anticipated policy shocks or news news shocks play a larger role in influencing the business cycle than unanticipated policy shocks although the overall fraction of economic fluctuations that can be attributed to monetary policy remains limited

on the asymmetric effects of money supply shocks international evidence from a panel of oecd countries we examine whether the asymmetric effect of money on output is an international phenomenon and investigate the reasons for this asymmetry quarterly data from the 1963 93 period for a panel of twelve oecd countries strongly support asymmetry internationally negative money supply shocks are shown to have a stronger effect on output than positive shocks our methodology also enables us to distinguish between two sets of theories consistent with the output asymmetries a convex aggregate supply and a credit view we find that the effects of money on prices are generally symmetric which may be consistent with both sets of theories being operative at once

opportunities and benefits as determinants of the direction of scientific research abstract scientific research and private sector technological innovation differ in objectives constraints and organizational forms scientific research may thus not be driven by the direct practical benefit to others in the way that private sector innovation is alternatively some yet largely unexplored mechanisms drive the direction of scientific research to respond to the expected public benefit we test these two competing hypotheses of scientific research this is important because any coherent specification of what constitutes the socially optimal allocation of research requires that scientists take the public practical benefit of their work into account in setting their agenda we examine whether the composition of medical research responds to changes in disease prevalence while accounting for the quality of available research opportunities we match biomedical publications data with disease prevalence data and develop new methods for estimating the quality of research opportunities from textual information and structural productivity parameters

deficits and the demand for money in recent years the large budget deficits of the federal government have renewed interest in the effects of government debt on private sector behavior to date empirical research has focused on the relationship between debt and two key variables consumption and interest rates by contrast empirical research on the effects of government debt on other variables of interest to macroeconomists is limited this paper examines the relationship between government debt and one such variable real money balances the neglect of government debt as a determinant of money demand is surprising many traditional macroeconomic models such as blinder and solow s 9 influential work include government debt as an argument to the money demand function moreover macroeconomic theorists have long been aware that a government debt money demand relationship has important implications for the efficacy of fiscal policy 2 this paper examines the relationship between government debt and real money holdings over the 1950 1990 period a positive money debt relationship was previously noted by butkiewicz 12 and deravi hegji and moberly 15 hereafter referred to as dhm our work improves upon this research in two ways first in contrast to butkiewicz 12 and dhm 15 we investigate the time series properties stationarity cointegration of relevant variables second we distinguish between supply side and demand side explanations of the debt money relationship the explanation advanced by butkiewicz 12 and dhm 15 is that an increase government debt is perceived by the private sector as an increase in net wealth and hence should increase money demand 3 this explanation ignores a potentially important connection between government debt and money supply if the federal reserve monetizes debt and if the private sector s adjustment to this monetization is lagged then debt and real money balances will exhibit a positive correla

monetary disturbances inventory fluctations and the level of sales a theoretical and empirical analysis there has in the past several years been a revival of interest in the topic of inventory fluctuation and its relationship to the short run dynamics of output one important reason for this interest can be traced to the pioneering work on aggregate supply begun by lucas 11 12 and extended among many others by barro 3 4 in their models the behavior of output is driven by intertemporal considerations it is a natural extension of such models if output is storable to consider the implication of producers whose current output can either be sold immediately or held in stock for future sales current sales by the same token may be either current production or goods from inventory in a recent paper blinder and fischet 6 develop such a model using it they demonstrate that inventory dynamics can be an explanation for an empirical weakness of simple versions of the lucas type models real world business cycles are characterized by considerable persistence simple equilibrium business cycle models do not exhibit such persistence or in some cases it is present only through the ad hoc presence of a lagged output term in the aggregate supply function except for the influence of inventories producers in the blinder fischer analysis behave as do producers in most new classical macro models they are price takers and quantity setters in a model where inventories exert an influence on output decisions such neoclassical behavior cannot be ascribed to perfectly competitive conditions if firms are perfect competitors output decisions will not reflect the state of current inventories

anticipated money unanticipated money and output 1873 1930 anticipated money unanticipated money and output 1873 1930 i introduction this paper examines the roles of anticipated and unanticipated money in the period between the civil war and the depression 1 such an examination is warranted for at least two reasons first estimation of the impact of anticipated and unanticipated money on output for historical periods can enhance our understanding of the responses of economic activity to these key variables 2 second recent work has shown that traditional historical estimates of output may be faulty see romer 1986a 1986b 1986c 1988 not only do most studies investigating the economic roles played by anticipated and unanticipated money concentrate on the post world war ii era those that discuss the period before world war ii such as rush 1985 1986 use traditional data indeed despite the interesting analyses by rush if the validity of the conventional data on output and unemployment for the era under consideration is rejected then virtually no results on the importance of monetary and real factors for economic activity are available for this important period thus further discussion of this topic is needed to answer two important questions what do the revised data show us about the historical economy do these revisions change the inferences drawn about monetary influences on economic activity the analysis presented here is comprehensive in that a wide range of output measures are employed both in terms of the types of output and in terms of the manner in which the output measures are constructed given this variety in the output measures consistent results on the effects of anticipated and unanticipated money across output measures indicate that conclusions drawn from the analysis are robust in particular the empirical results presented below support the following hypotheses i that anticipated m2 and monetary base growth have no effect on output regardless of the output measure used ii that unanticipated m2 and monetary base growth do effect output regardless of the output measure used and iii that changes in financial intermediation may be important for the evolution of output over time support for hypotheses i and ii is consistent with the monetary explanation of business cycles support for hypotheses iii may be consistent with real explanations of business cycles if exogenous shocks to the monetary production technology subsequently affect output 3 taken together the joint support for hypotheses i iii suggests that at a minimum neither the real nor the monetary explanations for historical u s business cycles can be discounted without additional work the remainder of the paper is organized as follows section ii presents a brief overview of the historical period under consideration along with a discussion of prior work on the effects of anticipated and unanticipated money on output determination during this time period section iii discusses the data and the methodology the empirical results are presented in section iv and the conclusions in section v ii overview the historical period the period under investigation 1873 1930 is one of substantial economic change banking panics the return to the gold standard the founding of the federal reserve system and world war i are some of the more important events occuring during this period we consider the role played by expected and unexpected money in output determination for several major subperiods while data availability largely determined the selection of these subperiods they generally correspond to major economic events despite the structural and institutional changes over the period we also examine the roles of anticipated and unticipated money growth in the determination of output over the entire time period to be valid tests of the impact of money growth on output require a reasonable degree of homogeneity in the economic environment

the problem of identification of the money demand function cooley and leroy 1981 have argued that if random shifts in money demand are at least partially accommodated by the federal reserve then there is no obvious way to identify the money demand function for the purposes of estimation we argue that this is not correct and that identification is in fact straightforward provided that the monetary authority reacts to at least one variable not in the money demand function if the monetary authority looks at everything in making its policy this condition is likely to be fulfilled

structural federal deficits and interest rates some causality and co integration tests the relationship between federal budget deficits and interest rates has been the focus of extensive research recently cebula 4 examined this relationship empirically and concluded that the federal budget deficit does in fact exercise a positive and significant impact upon the nominal moody s aaa rated corporate bond rate 4 208 such a finding is at odds with the great majority of recent empirical studies in this area if valid this finding assigns to large deficits significant adverse effects on both private investment crowding out and on trade balance via an overvalued dollar given these profound public policy implications cebula s finding warrants further examination

the history of the phillips curve consensus and bifurcation while the early history of the phillips curve up to 1975 is well known less well understood is the post 1975 fork in the road the left fork developed a theory of policy responses to supply shocks in the context of price stickiness in the non shocked sector its econometric implementation interacts shocks with backward looking inertia the right fork approach emphasizes forward looking expectations that can jump in response to anticipated policy changes the left fork approach is better suited to explaining the postwar us inflation process while the right fork approach is essential for understanding behaviour in economies with unstable macroeconomic environments the history of the phillips curve pc has evolved in two phases before and after 1975 with a widespread consensus about the pre 1975 evolution which is well understood bifurcation begins in 1975 when the pc literature split down two forks of the road with little communication or interaction between the two forks the major contribution of this paper and hence the source of bifurcation in its subtitle is to examine contrast and test the contributions of the two post 1975 forks the pre 1975 history is straightforward and is covered in section i the initial discovery of the negative inflation unemployment relation by phillips popularized by samuelson and solow was followed by a brief period in which policy makers assumed that they could exploit the trade off to reduce unemployment at a small cost of additional inflation then the natural rate revolution of friedman phelps and lucas overturned the policy exploitable trade off in favour of long run monetary neutrality those who had implemented the econometric version of the trade off pc in the 1960s reeled in disbelief when sargent demonstrated the logical failure of their test of neutrality and finally were condemned to the wreckage of keynesian economics by lucas and sargent following the twist of the inflation unemployment correlation from negative in the 1960s to positive in the 1970s the architects of neutrality and the opponents of the keynesian trade off emerged triumphant with two major caveats that their own models based on information barriers were unconvincing and that their core result that business cycles were driven by monetary or price surprises floundered without supporting evidence after 1975 the evolution of the pc literature split in two directions each of which has largely failed to recognize the other s contributions section ii reviews the left fork of the road the revival of the pc trade off in a coherent and integrated dynamic aggregate supply and demand framework that emerged in the late 1970s in econometric tests in theoretical contributions and in intermediate macro textbooks this approach which i have called mainstream is resolutely keynesian because the inflation rate is dominated by persistence and inertia in the form of long lags on past inflation an important difference between the mainstream approach and other post 1975 developments is that the role of past inflation is not limited to the formation of expectations but also includes a pure persistence effect due to fixed duration wage and price contracts and lags between

empirical evidence on nominal wage and price flexibility this paper tests a necessary condition for the neutrality of money in a framework that imposes only weak restrictions on the money supply process it extends bernanke s 1986 work by weakening the set of just identifying restrictions and by providing a statistical test of the overidentifying restrictions instead of specifying a structural model to identify primitive shocks i deduce the impact effects of structural money shocks under the neutrality hypothesis and then test whether the system maintains neutrality as it propagates these impact effects the tests reject neutrality for both the m1 and the monetary base

intertemporal asset pricing with heterogeneous beliefs abstract we examine the behaviour of the interest rate asset prices and asset holdings in an economy with heterogeneous rationally updated beliefs about the expected rate of production growth the equilibrium interest rate is a weighted average of the interest rates that would prevail in economies populated by homogeneous agents with the beliefs of the respective agents in the heterogeneous model the weights are given by the fractions of total wealth held financial innovation affects the dynamics of allocations and prices but preserves the aggregate output process and the structure of equilibrium asset prices also display the wealth weighted average characterization journal of economic literature classification numbers c60 d52 d91 g12

labor contracts and the role of monetary policy in an overlapping generations model abstract this paper characterizes labor contracts in a dynamic economy subject to both real and nominal shocks in this environment we compare alternative means of trading labor services spot markets fixed nominal wage contracts and price contingent contracts the welfare ordering of these market structures is shown to depend on the relative variability of the real and nominal shocks and the costs of contingent contracts the paper also investigates the role of monetary policy and the neutrality of feedback rules finally we demonstrate that the optimal policy is nonstochastic

econometric issues in macroeconomic models with generated regressors the paper critically reviews the literature on the econometric issues raised by the use of generated regressors gr in empirical models the economic rationale for the use of gr is considered with examples being drawn from several macroeconomic examples including new classical macroeconomic ncm models which postulate monetary neutrality various estimation methods are discussed for models which include surprise or unexpected terms and the strengths and weaknesses of each approach are investigated drawing upon the work of mcaleer and mckenzie 1991 situations where the typically inefficient two step estimation 2se method will be efficient are highlighted problems of model misspecification and measurement errors are also investigated an empirical section highlights some of the dangers of using uncorrected 2se estimation results through a careful consideration of many recent attempts to test the ncm monetary neutrality hypothesis copyright 1993 by blackwell publishers ltd

the effects on output of anticipated and unanticipated money growth a case study of an oil producing country the new classical macroeconomic hypotheisis regarding the effecs of money growth on real variables sugggests that the anticipated changes in money supply on real variables are neutral irrespective of the time horizon whereas the unanticipated changes in the money supply although neutral in the long run exert significant influence on real variables in the short run this proposition has produced unsettled empirical results the present study attempts to verify empirically the new classical hypothesis in the case of a developing oil producing middle eastern country iraq our study suggests that the anticipated components of money growth rates have positive and significant influence on real variables the results of this study do not lend support to the new classical hypothesis instead they suggest that a steady growth rate of money supply that is fully anticipated by economic agents builds confidence by reducing errors in expectation regarding the behaviour of the money supply and provides easier ac

an aggregate private expenditure function for the bangladesh economy abstract this paper specifies and estimates an aggregate private expenditure function for bangladesh for the period 1974 1 1985 4 it is specified on the basis of a monetary approach where the level of private expenditure depends not only on the level of real permanent disposable income but also on a variable which measures the extent of disequilibrium in the real money market the regression results suggest that the long run income elasticity of private expenditure is around 0 765 which is lower than unity a fact which induces a decline in the ratio of private expenditure to income as income increases the adjustment coefficient to monetary disequilibrium indicates that in the long run around 32 of excess money supply is reflected in an increase in private expenditure while the rest is mainly used for accumulation of assets

bank regulation and monetary policy the depository institutions deregulation and monetary control act 1980 and the garn st germain depository institutions act 1982 are the two most significant pieces of bank legislation since the 193os their significance stems from the fact that they have sought to roll back a number of the regulations and restrictions imposed on bank activity and competition in the 1933 80 period among the important provisions of these acts are a gradual elimination of regulation q ceilings on time and savings deposits by march 1986 the amelioration of state imposed usury ceilings on loans the nationwide provision of interest bearing transaction type accounts negotiable order of withdrawal now and super now accounts permission for thritts to expand into bank like products such as commercial and industrial loans consumer loans and credit cards and the development of new types of savings accounts such as mmdas l in addition to legislative deregulation we have also witnessed homemade deregulation as banks have sought to exploit often with great success loopholes in the bank holding

on interest rate innovations and anticipated monetary policy abstract in this note i investigate whether anticipated money matters by following mccallum s 1983 suggestion that nominal interest rates be included in a var system estimated on data spanned by a policy of interest rate targeting the evidence is in favour of gordon s 1982 natural rate hypothesis gradual price adjustent model of policy ineffectiveness ambler and phaneuf 1988 have shown the results can be interpreted as evidence in favour of contract based models of the business cycle

anticipated federal budget deficits monetary policy and the rate of interest in recent years a number of studies have attempted to investigate the impact of federal budget deficits on the rate of interest studies by evans 6 7 makin 13 hoelscher 9 10 barth iden and russek 2 3 dwyer 5 cebula 4 among others have analyzed this issue but have provided conflicting evidence on the impact of federal budget deficits on the rate of interest this is due in part to differences in methodology definition of budget deficit variables sample period and estimation techniques hoelscher 10 barth iden and russek 2 3 feldstein and eckstein 8 find that budget deficits affect interest rates but evans 6 7 makin 13 and hoelscher 9 conclude that budget deficits have no significant effect on interest rates the contributions of this paper are first to directly introduce within the framework of rational expectations models federal budget deficit and monetary variables this technique of analyzing the impact of deficits on interest rates may shed new light on this important issue which has not appeared in the literature second the deficit measure employed in this study is designed in a manner that it avoids being contaminated by changes in expenditures and tax receipts due to the automatic stabilizing aspects of fiscal policy third it is explicitly recognized that monetary and fiscal policies jointly interact in determining interest rates finally the policy process determining the interest rate is tested for stability over time this is important in light of evans s 6 work who finds various episodes in the u s history when budget deficits increased for a few years but had no appreciable impact on interest rates the intention in this paper is to investigate the reaction of economic agents who find that budget deficits may persist for a longer time in the future

cross regime evidence of macroeconomic rationality rational expectations macromodels predict that the short run effects of monetary shocks on real output x should be negatively related across policy regimes to the variability of such shocks this paper presents cross regime tests of this and related propositions based on a sample of 47 countries the within regime estimates reveal a consistent pattern of positive short run real output effects with neutrality of money holding in the long run the cross regime tests show that x is negatively related to the variance of monetary shocks positively related to the variance of real output shocks negatively related to the variance of velocity shocks and unrelated to either the mean or variance of anticipated money growth

testing the rational expectations hypothesis further evidence this article tests the macro rational expectations hypotheses of rationality and neutrality for quarterly u s data the vector autoregressive representation is derived and the implied interequation nonlinear restrictions are tested using the wald statistic despite several modifications adopted here the results confirm the robustness of earlier findings that is the test results support rationality but not neutrality

european option pricing and hedging with both fixed and proportional transaction costs abstract in this paper we provide a systematic treatment of the utility based option pricing and hedging approach in markets with both fixed and proportional transaction costs we extend the framework developed by davis et al siam j control optim 31 1993 470 and formulate the option pricing and hedging problem we propose and implement a numerical procedure for computing option prices and corresponding optimal hedging strategies we present a careful analysis of the optimal hedging strategy and elaborate on important differences between the exact hedging strategy and the asymptotic hedging strategy of whalley and wilmott risk 7 1994 82 we provide a simulation analysis in order to compare the performance of the utility based hedging strategy against the asymptotic strategy and some other common strategies

non nested tests of three competing theories of business cycles this paper tests the keynesian new classical and real business cycle theories against each other as non nested hypotheses using quarterly data for the us covering the period 1959 1 1989 2 the results indicate that no one theory stands out as the dominant explanation of the business cycle this contrasts with the findings of earlier work which is mostly concerned with testing the keynesian against the new classical theory we find that the introduction of a third theory the real business cycle theory which accounts of real factors blurs the distinction between the demand sided keynesian and the new classical theories

efficiency of the turkish stock exchange with respect to monetary variables a cointegration analysis in this study we test the semistrong form of the efficient market hypothesis in turkey by using the recently developed techniques in time series econometrics namely unit roots and cointegration the long run relationship between stock prices and inflation is investigated by assuming the possible existence of a proxy effect conclusions are made as to the efficiency of the turkish stock exchange and its possible implications for investors to our knowledge this is among the pioneering studies conducted in an emerging market that uses an updated econometric methodology to allow for an analysis of long run steady state properties together with short run dynamics

heterogeneous beliefs asset prices and volatility in a pure exchange economy abstract this paper extends the lucas 1978 asset prices in an exchange economy econometrica 46 1429 1445 model to a setting in which investors have heterogeneous beliefs about the structure of a dividend process by assuming that all investors have logarithmic preferences and different subjective discount rates we can obtain a closed form representation of the stock price this closed form solution enables us to analyze the dynamics of the stock price and its volatility the model can simultaneously generate several well known empirical facts excessive volatility leverage effects and positive relationships between price and trading volume and between volatility and volume all of these effects are driven by the different beliefs of investors

irrational exuberance and option smiles disagreement among investors is pervasive some investors see a trend and predict continuation others see the same trend and predict reversal some investors overreact others underreact i explai

the policy ineffectiveness proposition some further tests abstract this study investigates for denmark the relative merits of the new classical versus the monetarist hypotheses regarding the role of monetary policy in stabilizing real economic activity the results do not reject the monetarist contention that anticipated systematic monetary policy has a significant effect on real output in the short run a finding that is inconsistent with the new classical policy ineffectiveness proposition

does anticipated monetary policy matter an econometric investigation a heated debate has arisen over the policy ineffectiveness proposition associate with the work of lucas sargent and wallace it postulates that anticipated aggregate demand policy will have no effect on business cycle fluctuations so that one deterministic feedback policy rule is as good as any other from the point of view of stabilizing the economy this paper develops a methodology for empirically analyzing rational expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle

forecasting rational expectations and the phillips curve an empirical investigation abstract the rational expectations version of the phillips curve is empirically evaluated for switzerland using a wide variety of specifications it turns out that the results are highly sensitive to measurement of both the natural rate and expectations of nominal variables no reliable phillips curve seems to exist in addition information on the relative quality of different forecasting schemes is obtained for a number of important macroeconomic variables

stock market volatility in a heterogeneous information economy the informational role of prices contributes positively to their variability in a noisy rational expectations equilibrium traders rationally respond to price changes by revising their estimates of other traders private signals and hence their own expectations of future dividends the resultant shifts in traders demands amplify any supply shock induced price changes we develop an infinite horizon noisy rational expectations model and calibrate simulate and test it using u s stock market data the price variability in a heterogeneous information economy is shown to be 20 to 46 higher than in an otherwise equivalent economy in which all signals are publicly announced i introduction a common theme of the rational expectations literature is the ability of prices to convey information a question is the extent to which this informational role induces additional variability in prices grundy and mcnichols 1989 present a rational expectations model with multiple rounds of trade preceding a final consumption date they show that the revelation of existing private information through price changes can be the sole cause of the price variability equilibrium prices can change even in the absence of any change in supply or the arrival of any new information beyond the observation that the price itself has changed we examine the link between the informational role of prices and price variability in a multi period model with heterogeneous information arriving and consumption taking place at each trading date our goal is to obtain a comparison of price variability in a world of heterogeneous information with variability in an otherwise equivalent homogeneous information economy in which in effect all private signals are publicly announced and

discount rate changes and the foreign exchange market abstract changes in the discount rate can have associated announcement effects on the foreign exchange value of the dollar only if these changes are not anticipated by the market this paper provides evidence to support this contention specifically discount rate changes made for reasons other than technical adjustments have not been anticipated fully and consequently their announcements have had a significant impact on the dollar s exchange rate furthermore results are obtained that support the hypothesis that unanticipated discount rate changes alter inflationary expectations

on the robustness of barro s new classical unemployment model in this paper the robustness of barro s new classical model of unemployment is examined using both two and three equation systems to various sample periods and methods of estimation the methods of estimation used are two step ols two step ols with correct standard errors using the same and different numbers of observations for the expectations and structural equations full information maximum likelihood and four novel variants of the computationally intensive parametric bootstrap method not surprisingly the empirical results for barro s model change according to the sample period chosen the different methods of estimation and the different ways of computing the covariance matrix for purposes of inference however the empirical results and inferences are generally robust to variations in any or all of these options

fiscal deficits and long term interest rates further evidence from annual data much debate has recently centered on the popular view that large u s budget deficits financed by the sale of bonds cause high interest rates if valid this view implies that deficits crowd out efficient private investment and adversely affect economic growth however bailey 2 and barro 3 have challenged this conventional view on theoretical grounds based on the ricardian equivalence proposition bailey and barro contend that rational economic agents interpret government deficits as postponed tax liabilities and thus will have no effects on private wealth or interest rates such theoretical ambiguity in regards to the impact of budget deficits has also been matched by an equally conflicting empirical evidence for example barth iden and russek 4 deleeuw and holloway 8 hutchison and pyle 20 makin 24 makin and tanzi 25 and zahid 35 have found a positive and significant effect of deficits on interest rates on the other hand evans 11 12 13 hoelscher 17 motley 28 and plosser 29 30 have all failed to find any systematic support for a significant positive impact of deficits on interest rates it should be observed that the above empirical studies have employed either monthly or quarterly data however some researchers e g hoelscher 18 have recently charged that monthly or quarterly data bias the results in favor of finding no significant linkage between deficits and interest rates they reasoned that portfolio adjustment lags are too long for monthly or even quarterly observations to reflect the actual correlation between deficits and interest rates to eliminate this problem of periodicity annual data was instead advocated 2 using annual data hoelscher 18 concluded that deficits have caused positive and significant changes in long term interest rates in the united states

unanticipated money growth and unemployment post sample forecasts in the late 1970s robert j barro published what has since become a popular model of business fluctuations barro s 3 findings provide evidence advocating the short run neutrality of money under rational expectations forging an important empirical link to the theoretical studies of lucas 19 20 and sargent and wallace 33 the original barro unemployment model has received additional support from further statistical testing 5 6 15 despite criticisms and modifications some of which are considered in barro s 6 updated model these equations have inspired numerous empirical studies analyzing unanticipated effects of macroeconomic variables this paper examines post sample forecasts of barro s original 3 and revised 6 unemployment equations for the 1974 84 period mayer 23 24 harvey 13 179 80 and lovell 18 among many contend that the ability to successfully forecast outside of the sample period is an important criterion for evaluating model robustness this view is also reflected in a substantial body of studies including 10 25 26 29 39 which investigate the post sample predictive performance of macroeconomic models one year ahead forecasts indicate that the barro 3 6 equations accurately predict unemployment for the 1974 79 period during 1980 84 however the predictive performance of both models sharply deteriorates augmenting the barro models with interest rate volatility in accordance with the findings of evans 11 and tatom 38 considerably improves the overall forecasting ability this modification also rectifies the 1980s structural instability of the barro unemployment equations furthermore the basic conclusions of the seminal barro work are retained with this augmented model the results reveal that increases in interest rate volatility exert significantly adverse effects upon unemployment corroborating with the findings of evans 11 and tatom 38 still interest rate volatility could be overlooked in previous estimations of the barro or other models of business fluctuations due to the variable s relative constancy prior to 1979

fiscal policy monetary policy and the efficiency of the stock market abstract this paper tests the semi strong form of the efficient market hypothesis emh with respect to anticipated and unanticipated monetary and fiscal variables using lagged values of these estimates it was found that the hypothesis holds for both types of policy actions