exchange rate effects of financial regulations abstract in this paper we analyze the effects of financial constraints on the exchange rate through the portfolio balance channel we use a sharp policy discontinuity within the colombian financial system to empirically test for the portfolio balance channel using high frequency data during the period of 2004 2015 our findings suggest that the effects on the exchange rate are short lived and significant only when banking constraints are binding to understand the mechanism behind this result we construct a tractable two period general equilibrium model in which banking limits on foreign holdings inhibit capital flows when these limits bind departures from the uncovered interest rate parity enable sterilized foreign exchange interventions to influence the exchange rate

a simple model of disinflation and the optimality of doing nothing abstract this paper analyses the optimal monetary policy of a government facing an election whose disinflationary abilities are uncertain under the assumption that reducing inflation is costly because of backward looking contracts it is shown that if the government likes to be in power it can choose to do nothing on the inflation front in order to avoid risking electoral defeat should disinflation prove too costly the costs of inflation reduction are worth bearing if initial inflation is sufficiently high therefore it is possible to observe quick disinflations that however stop short of low inflation

the credibility of policy announcements greek evidence this paper by using error correction ec methodology along with chow stability tests examines whether three cases of policy announcements in greece over the 1975 1995 period have been considered credible or not by the public focusing on the phillips curve trade off the empirical findings reveal that two out of three policy announcements are characterized as credible by private agents

will the true labor share stand up an applied survey on labor share measures labor s share of income is a key variable in economics it plays a leading role in analysis of in equality globalization technical change growth theories etc notwithstanding this broad application there are many different definitions of the labor share understanding and synthesizing those differences is the purpose of this applied survey empirical measures may vary reflecting the allocation of income components that cannot be directly ascribed to capital or labor we examine the alternative assumptions made in the literature in this regard and quantify and motivate the resulting discrepancies focusing mostly on us data we show that different measures can have very distinct properties in terms of the observed stochastic trends shares of short medium and long run variation and volatilities persistence and mean reversion properties and susceptibility to structural breaks for instance while short run properties of the surveyed labor share measures are relatively consistent across all definitions and countercyclical their medium and long run trends may diverge substantially and are procyclical to substantiate our analysis we document the implications of discrepancies in the empirical labor share definition for growth accounting analyzing the effect of technology shocks and for estimating inflation dynamics

one security many markets determining the contributions to price discovery when homogeneous or closely linked securities trade in multiple markets it is often of interest to determine where price discovery the incorporation of new information occurs this article suggests an econometric approach based on an implicit unobservable efficient price common to all markets the information share associated with a particular market is defined as the proportional contribution of that market s innovations to the innovation in the common efficient price applied to quotes for the thirty dow stocks the technique suggests that the preponderance of the price discovery takes place at the new york stock exchange nyse a median 92 7 percent information share although most of the classic paradigms in market microstructure concern a security that trades in a single centralized market such situations are becoming increasingly rare in practice fragmentation the dispersal of trading in a security to multiple sites has emerged as a dominant institutional trend this process is of concern to financial economists and regulators because price information and price discovery the impounding of new information into the security price arguably the most important products of a security market have many attributes of public goods as the process of fragmentation accelerates it may be important to determine where the price information and price discovery are being produced 1 this paper suggests a practical econometric approach to this problem the technique is illustrated with an application to u s equity markets many stocks listed on the new york stock exchange nyse trade concurrently on the regional exchanges and the national association of securities dealers national market system nasd nms since a share of ibm stock is the same security whether purchased on the midwest or pacific exchange this is a particularly clear instance of multiple markets nevertheless the expres

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

how is the debt managed learning from fiscal stabilizations this paper provides evidence on the behavior of public debt managers during fiscal stabilizations such episodes provide valuable information on the way debt instruments are chosen because they allow to overcome the problem that policymakers expectations of interest rates are generally not observable we find that governments increase the share of fixed rate long term debt denominated in the domestic currency the higher is the conditional volatility of short term interest rates the lower are long term interest rates and the stronger is the fall in long term rates that follows the announcement of the stabilization program by contrast conventional measures of the relative cost of issuing long term debt such as the long short interest rate spread are not significant this evidence suggests that debt managers tend to prefer long to short maturity debt because they are concerned about the risk of refinancing at higher than expected interest rates however when long term rates are high relative to their expectations they issue short maturity debt to minimize borrowing costs

elusive persistence wage and price rigidities the new keynesian phillips curve and inflation dynamics abstract we review the main new keynesian inflation equations that have arisen as a result of aggregation from individual firms price rigidities we find that on the whole they cannot account for inflation persistence a key feature of the empirical dynamics of inflation and with important policy implications the only exceptions seem to be when indexation is allowed in price setting or when price stickiness is combined with wage rigidity and staggering

can information heterogeneity explain the exchange rate determination puzzle empirical evidence shows that most exchange rate volatility at short to medium horizons is related to order flow and not to macroeconomic variables we introduce symmetric information dispersion about future macroeconomic fundamentals in a dynamic rational expectations model in order to explain these stylized facts consistent with the evidence the model implies that a observed fundamentals account for little of exchange rate volatility in the short to medium run b over long horizons the exchange rate is closely related to observed fundamentals c exchange rate changes are a weak predictor of future fundamentals and d the exchange rate is closely related to order flow

carry trades order flow and the forward bias puzzle we investigate the relation between foreign exchange fx order flow and the forward bias we outline a decomposition of the forward bias according to which a negative correlation between interest rate differentials and order flow creates a time varying risk premium consistent with that bias using 10 years of data on fx order flow we find that more than half of the forward bias is accounted for by order flow with the rest being explained by expectational errors we also find that carry trading increases currency crash risk in that order flow generates negative skewness in fx returns

an empirical study of portfolio balance and information effects of order flow on exchange rates abstract we propose a simple structural model of exchange rate determination which is inspired by the analytical framework recently forward by bacchetta and van wincoop 2006 and allows us to disentangle the portfolio balance and information effects of order flow on exchange rates we estimate this model employing an innovative transaction data set that covers all indirect foreign exchange transactions completed in the usd eur market via ebs and reuters between august 2000 and january 2001 our results indicate that the strong contemporaneous correlation between order flow and exchange rates is largely due to portfolio balance effects this result also appears to carry through the four fx intervention events that appear in our sample

news from the u s and japan which moves the yen dollar exchange rate abstract intra daily movements in the yen dollar exchange rate are examined in four non overlapping segments within each business day from january 1980 to september 1985 the results indicate that the dollar tended to appreciate in the new york segment and depreciate in the european segment in three of the four subsamples considered the tokyo segment made virtually no contribution to annual yen dollar rate movements the volatility of the exchange rate also differed across markets finally in examining the relative effects of news from the u s and japan explicitly u s money announcement surprises had the most consistent effects

intraday patterns in fx returns and order flow using a comprehensive high frequency foreign exchange dataset we present evidence of time of day effects in foreign exchange returns through a significant tendency for currencies to depreciate during local trading hours we confirm this pattern across a range of currencies and time zones we also find that this pattern is reflected in order flow and suggest that both patterns relate to the tendency of market participants to be net purchasers of foreign exchange in their own trading hours data from a single market maker appears to corroborate that interpretation

fiscal conservatism as a response to the debt crisis abstract in this paper we develop a model in which social conflict and adjustment costs induce delayed inflation stabilization we show that the longer this delay is the less demanding are the conditions that some groups will accept in order to stabilize in the context of the latin american debt crisis our model gives a rationale for the time lag between the outset of the crisis and the implementation of reform programs as well as for the strongly conservative nature of those that are currently being implemented

optimal sequencing of credible reforms with uncertain outcomes abstract we study a two period representative agent economy in which economic liberalization is modeled as adding a positive random variable to the marginal product of capital we show liberalization always raises the expected utility of agents agents may respond to this by increasing consumption in the first period consequently consumption in the second period is sometimes smaller than the in the first depending on the realization of the random variable this tail may cause the government to reject liberalization of declining gdp enters negatively in the government s objectives we apply these results to the chilean experience of the 1980s

coherence and the credibility of convertibility announcements abstract the recent devaluation crisis in mexico and its tequila effect elsewhere illustrate that two credibility problems associated with convertibility policies currency boards are announcements that violate truth telling and a non zero probability of policy failure we derive the trade off between these problems when announcements resemble cheap talk the strategic uncertainty created by this trade off implies that both the government and investors should recognize the presence of fed watchers who exploit any policy inconsistency for their own gain in this context credibility can be restored if the policy is coherent if it eliminates the marginal benefits for fed watching jel e63 e58 f40 1997 published by elsevier science ltd

structural uncertainty and subsidy removal for economies in transition abstract economies in transition are faced with a high degree of structural uncertainty i e uncertainty about which it is possible to learn through experience we study structural uncertainty s effects on a subsidy removal program subsidy removal causes unemployment but yields fiscal benefits and facilitates private sector growth when the policymaker does not know the speed with which the private sector absorbs the unemployed he will be driven toward a more decisive and therefore more informative policy the model also rationalizes policy reversals and implies that irreversibility constraints and political instability dampen the learning effect making policy more gradualist

theory measurement and calibration of macroeconomic models abstract calibration has become a standard tool of macroeconomics this paper extends and refines the calibration methodology along several important dimensions first accounting for home production is important both in measuring calibration targets and in organizing the data in a model consistent fashion for this reason thinking about home production is important even if the model under consideration does not include home production second investment specific technological change is included because of its strong balanced growth parameter restrictions third the measurement strategy is laid out as transparently as possible so that others can easily replicate the underlying calculations the data and calculations used in this paper are available at http clevelandfed org research models rbc index cfm

foreign exchange reform in iran badly designed badly managed abstract the paper first highlights the undesirable economic consequences of the multiple exchange rate regime adopted in iran soon after the islamic revolution it then critically assesses the government s march 1993 attempt to unify the exchange rates from two perspectives 1 a the pace timing and the rate chosen for unification 2 b the design administration and therefore the effectiveness of government s safety net policies to overcome the adverse welfare effects of the attempted unification it identifies some of the fundamental political economy obstacles to the exchange rate reform in particular and economic liberalization in general and draws policy implications for the future course of the reform and the economy

macroeconomic effects of regulation and deregulation in goods and labor markets product and labor market deregulation reduce and redistribute rents leading economic players to adjust to this new distribution it typically comes with distribution and dynamic effects to study these effects we build a macroeconomic model on two central assumptions monopolistic competition in the goods market which determines the size of rents and bargaining in the labor market which determines the distribution of rents product market regulation determines entry costs and the degree of competition labor market regulation determines the bargaining power of workers we show the effects of deregulation we then use our results to discuss the political economy of deregulation and recent macroeconomic evolutions in europe

shortages and price decontrol considers a study which analyzed the impact of the political process on the dynamics of reform with a background on the economics of reform data and methods used findings and its implications

can portfolio rebalancing explain the dynamics of equity returns equity flows and exchange rates we explore whether the pattern of international equity returns equity portfolio flows and exchange rate returns are consistent with the hypothesis that unhedged global investors rebalance their portfolio in order to limit their exchange rate exposure when there are 1 relative equity return and 2 exchange rate shocks we also explore whether 3 equity flow shocks influence the exchange rates and relative equity prices in the estimation of the var system we do not impose any causal ordering upon the primitive shocks but instead identify the system based on theoretical priors about the contemporaneous conditional correlations between the three variables international data for the five largest equity markets are consistent with a theory in which equity returns and portfolio rebalancing are an important source of exchange rate dynamics

macroeconomic news order flows and exchange rates under rational expectations and efficient markets the news contained in public information announcements is directly impounded into prices with there being no role for trades in this process of information assimilation this paper directly tests this assertion using transaction level exchange rate data and a sample of scheduled macroeconomic announcements the main result of the paper is that even information that is publicly and simultaneously released to all market participants is largely impounded into prices via the key micro level price determinant order flow we quantify the role that order flow plays and find that between a half and two thirds of price relevant information is incorporated into prices via the trading process

structural change in a multisector model of growth we study a multi sector model of growth with differences in tfp growth rates across sectors and derive sufficient conditions for the coexistence of structural change characterized by sectoral labour reallocation and constant aggregate growth path the conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists we present evidence from us two digit industries that is consistent with our predictions about structural change and successfully calibrate the historical shift from agriculture to manufacturing and services we show quantitatively that reasonable deviations from our conditions do not have a big impact on the properties of the model

order flow and central bank intervention an empirical analysis of recent bank of japan actions in the foreign exchange market abstract this paper examines the behaviour of end user order flows in the foreign exchange market around periods of intense and large scale intervention activity by the bank of japan first we find very limited evidence that corporate customers are more than usually likely to be net sellers of yen on days when the bank of japan is intervening to sell yen however there is somewhat stronger evidence that financial customers are more likely to be net buyers of yen on the same days second we find very clear evidence that intervention matters in a microstructure analysis the strong contemporaneous correlation between order flows and exchange rate changes essentially disappears on days in which the bank of japan intervenes

technology utilization and inflation what drives the new keynesian phillips curve we argue that the new keynesian phillips curve literature has failed to deliver a convincing measure of real marginal costs we start from a careful modeling of optimal price setting allowing for nonunitary factor substitution nonneutral technical change and time varying factor utilization rates this ensures the resulting real marginal cost measures match volatility reductions and level changes witnessed in many u s time series the cost measure comprises conventional countercyclical cost elements plus procyclical and covarying utilization rates although procyclical elements seem to dominate the components of real marginal cost components are becoming less cyclical over time incorporating this richer driving variable produces more plausible price stickiness estimates than otherwise and suggests a more balanced weight of backward and forward looking inflation expectations than commonly found our results challenge existing views of inflation determinants and have important implications for modeling inflation in new keynesian models

time varying liquidity in foreign exchange abstract this paper addresses whether currency trades have greater price impact when public information is flowing rapidly we develop an optimizing model to account for why public news should increase the price impact of trades using transaction data made available by electronic trading we test whether trades following macroeconomic news have higher price impact they do price impact per dollar traded is about 10 percent higher per news announcement in the previous hour after controlling for public information flow we do not find evidence that liquidity depends on trading volume and return volatility the findings provide policy makers with guidance for the timing and magnitude intervention

beyond balanced growth balanced growth models are commonly used in macroeconomics because they are consistent with the well known kaldor facts regarding economic growth these models however are inconsistent with one of the most striking regularities of the growth process the massive reallocation of labour from agriculture into manufacturing and services this paper presents a simple model consistent with both the kaldor facts and the dynamics of sectoral labour reallocation

the timing of stabilizations abstract a unified framework is developed for examining stabilization from high inflation in a stochastic environment optimality conditions for the delay in the adoption of a stabilization program and its possible abandonment are derived and analyzed the anticipation of external aid is shown to reinforce delay in the implementation of a stabilization also conditionality agreements become necessary to ensure that the administration of external aid will increase the probability of success of the program the presence of speculative activity reinforces delay in the implementation of stabilizations and is found to necessitate otherwise unnecessary frontloading of adjustment

animal spirits investment and international capital movements abstract in the aftermath of the debt crisis developing countries are endeavoring to repatriate flight capital and to resume domestic private investment yet investment and the associated capital inflows continue to be disappointing and highly uneven over time in many cases this paper provides a model of investment and capital movements in and out of such countries central to the paper is the introduction of fiscal increasing returns to domestic capital into a standard dynamic optimizing model the resulting system may display multiple steady states and surprising dynamic behavior initial conditions and expectations both matter in selecting the equilibrium on which the economy converges for some initial conditions animal spirits can determine the course of investment and capital flows a limit cycle may occur around one of the welfare inferior equilibria along that cycle capital stocks and relative prices display endogenous fluctuations

credibility and changes in policy regime this paper addresses the issue of credibility from an econometric perspective it develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime the regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program in making their money demand decision the agents need to construct probability inferences regarding the state of the expenditure process credibility is quantified by the agents inferred probability that the joint observation of inflation the nominal interest rate and government spending is generated by the reformed expenditure regime in an application to israel results indicate that the failed stabilization program of november 1984 was less than fully c

stock index futures does the tail wag the dog the increase in program trading based on a comparatively narrow blue chip stock market barometer the major market index mmi is said to be fueling volatile price swings in the stock market a case of the tail wagging the dog the mmi is a price weighted index of 20 very actively traded stocks 16 of which are included in the dow jones 30 industrials because of its relatively small size the mmi is expected to be more easily arbitragible than other stock index futures contracts basically program trading involves taking a position long or short in a portfolio of stocks comprising the index and simultaneously taking an opposite position in the index futures contracts the objective of the program trade is to create a risk free position that earns a return in excess of the currently available risk free return program trades may move both the futures and the spot market the chain of causality may work as follows 1 investors believe the stock market will rise and they purchase futures contracts in expectation of higher equity values the purchase of the contracts is preferable to the purchase of the underlying stocks because it entails no initial investment and lower transaction costs 2 the rise in futures prices causes an imbalance between the prices of the futures and the underlying index as this premium between futures and index increases it may become profitable to execute a program trade 3 the simultaneous sale of futures and purchase of the underlying index will cause the premium between the futures and index to shrink changes in factors such as interest rates can also affect the equilibrium relation between the index price and the futures price thereby changing the premium or discount between the two markets program traders can take advantage of any change in the spread between the markets it does not matter what causes the change in spreads whether internal factors such as changes in investor expectations or external factors such as interest rate changes all program trading does is to bring cash and futures prices together the program trade may be an essential mechanism that ensures that futures prices and underlying equity prices are efficiently determined and that the hedging effectiveness of the futures contracts is reliable to date most of the literature on the impact of futures trading on the cash market has focused on changes in spot price volatility because of the initiation or cessation of futures trading a common conclusion of these studies is that the futures market has a smoothing effect on the cash market stabilizing the spot price the recent uproar engendered by the triple witching hour and the so called crises at expiration brings into question the smoothing influence that futures have on the underlying index 2 if the market is efficient prices adjust instantaneously to reflect all relevant information and knowledge of such information cannot lead to excess risk adjusted returns the central concept in the efficient market hypothesis is the fair game model 3 a sequence of past returns over time is a fair game if today s price reflects the then available information making it impossible to earn excess risk adjusted returns by trading on that information if the information set today contains all the information known and used by the market participants in the spot market in determining the spot price one of the components of the information set is the previous change in the price of futures contracts 4 does the tail wag the dog the financial press and the sec have answered this question in the affirmative 5 this note investigates the impact of the futures market on the spot market by evaluating the relation between index futures price changes and subsequent spot index price changes in addition we evaluate the degree to which the expiration of the futures contract affects the underlying index

governance structures and the durability of economic reforms evidence from inflation stabilizations abstract this paper investigates the relationship between a country s political economic and institutional environment and its ability to implement sustainable economic reform programs the policy issue on which the study focuses is inflation stabilization it consists principally of econometric estimations of the relationship between the success of stabilizations in a large sample of countries and several political and economic explanatory variables the hypotheses tested are drawn both from the recent macroeconomic literature on policy credibility and from political science the major findings include the following 1 a despite the conventional wisdom to the contrary political repression does not appear to be an effective means for implementing sustainable stabilization policies durable economic reforms and political freedoms appear to be complementary 2 b as has been previously argued theoretically and demonstrated empirically political instability is detrimental to policy reform 3 c the political will and popular consensus for stabilization policies are enhanced during a severe economic crisis 4 d there is weak evidence that intervention by the international monetary fund rather than supporting reform programs can undermine their credibility

what causes the failure of inflation stabilization plans abstract the paper discusses the causes of failure of inflation stabilization plans following a description of stylized facts of inflation stabilization a model of balance of payments crises is presented highlighting some of the main factors leading to the collapse of stabilizations empirical results obtained when estimating a binary probit model over a panel of 34 stabilizations identify real exchange rate appreciation lack of foreign reserves and government budget deficits as the main causes of failure of inflation stabilization plans this is consistent with the model presented in this paper with the stylized facts of stabilizations and with some of the models found in the literature

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

the market microstructure of central bank intervention abstract how quickly do central bank intervention operations impact the foreign exchange market and do intra daily market conditions influence the effectiveness of central bank interventions this paper uses high frequency intra daily data to examine the relationship between the efficacy of intervention operations and the state of the market at the moment that the operation is made public the results indicate that some traders typically know that the fed is intervening at least 1 h prior to the public release of the information in newswire reports also the evidence suggests that the timing of intervention operations matters interventions that occur during heavy trading volume that are closely timed to scheduled macro announcements and that are coordinated with another central bank are the most likely to have large effects

obstacles to disinflation what is the role of fiscal expectations persistently high expected inflation often makes it difficult for policy makers to recover from inflationary episodes without substantial output losses using survey data from eleven disinflation episodes we can assess whether the more or less sluggish decline of inflation rates towards lower target levels is related to backward looking pricing behavior or to imperfect credibility of the stabilization efforts we find that expectations of future inflation play a much more important role than past inflation in shaping the inflation process second we find that an improvement in various measures of fiscal balances significantly reduces inflation expectations this evidence suggests that when attempting to stabilize inflation priority should be given to building fiscal credibility oya celasun r gaston gelos and alessandro prati

optimal reform postponement abstract the postponement of a reform program recognized to be necessary to control inflation is examined as a decision in an optimal control framework with a deteriorating and increasingly costlier inflation it is found that reforms are both more likely to be implemented and more likely to fail as inflation rises factors suggesting improved future conditions for a reform such as the possibility of external aid induce further postponement indexation and any other measures that reduce the current costs of inaction have the same effect

is intervention a signal of future monetary policy evidence from the federal funds futures market sterilized foreign exchange market intervelltioll may affect the exchange rate if it signals future monetary policy actions sigllaling will be effective if the celltral bank backs up interventioll with predictable changes in the stance of molletary policy and in turn affects currellt expectations we investigate whether illtervention operations in the united states are lelated to changes in expectatiolls over the stance of future monetary policy whele expectations are proxied by ifederal funds futures rates this relatively new futures market instrument has proved to be all efficiellt and ullbiased predictor of the future spot federal funds rate estimates obtained from a garch time series model over the l 989 93 period using daily data do not suppol1 the signalillg hypothesis dollar suppolt intervention is not related to a rise in expected future short term interest ates monetary tightening however intervention appears to significantly increase the conditional variance of federal funds futures rates suggesting that it adds considerable noise to the market alld possibly increasing the degree of uncertainty ovet the future course of molletary policy the effect of foreign exchange market intervention on exchange rates is a subject of continuing controversy few doubt that unsterilized intervention may affect nominal exchange rates by changing interest rates and monetary aggregates however the effect of sterilized intervention on exchange rates is less clear the portfolio balance channel through which sterilized intervention changes the currency denomination of relative asset supplies and thereby the exchange risk premium if assets are imperfect substitutes has received little empirical support for example rogoff 1984 humpage 1991 edison 1993 sweelaey 1995

are forign exchange intervention and monetary policy related and does it really matter the relationship between foreign exchange intervention and monetary policy underlies the question of whether sterilized interventions can affect the exchange rate in this article the author examines this relationship using data on u s foreign exchange interventions from 1985 to 1990 recently made publicly available she examines whether interventions could be viewed as signaling changes in future monetary policy variables the author also considers whether changes in monetary policy may induce interventions in an effort by central bankers to lean against the wind of exchange rate movements interestingly she finds evidence both that interventions help predict monetary policy variables and that monetary variables help predict interventions copyright 1995 by university of chicago press

on stabilization plans and central bank independence we argue that the benefits of appointing an independent central banker may go beyond low inflation rates within a government debt stabilization framework and with a decentralized policy making where the government acts as a stackelberg leader delegating monetary policy to an indepenent authority monetary policy to an independent authority turns out to be a discipline for the government and overall this leads to better results

a transaction level study of the effects of central bank intervention on exchange rates abstract we study the effects of sterilised intervention operations executed on behalf of the swiss national bank snb using tick by tick transactions data between 1986 and 1995 we extend the preliminary analysis of economic journal 109 1999 662 by matching these data with indicative intra day exchange rate quotes and news wire reports of central bank activity using an event study approach we find that intervention has important short run effects on exchange rate returns in particular among various results we find that i intervention has a stronger impact when the snb moves with the market and when its activity is concerted with that of other central banks and ii exchange rate returns move in the 15 min interval prior to interventions

factor substitution and factor augmenting technical progress in the united states a normalized supply side system approach abstract using a normalized ces function with factor augmenting technical progress we estimate a supply side system of the u s economy from 1953 to 1998 avoiding potential estimation biases that

new phillips curve under alternative production technologies for canada the united states and the euro area abstract this paper shows that alternative production technologies imply two modifications to the new phillips curve npc a specific strategic complementarity parameter that affects the relationship between real marginal cost and inflation and a specific modification to the labour share measure of real marginal cost estimates of average duration of nominal price stickiness obtained conditional on the strategic complementarity parameter are substantially smaller and therefore more plausible relative to when this parameter is ignored modifications to the marginal cost measure alone have little effect on the npc estimates the empirical fit of the npc under alternative production technologies is similar

building consensus for stabilizations abstract several stabilization attempts in the 1980s followed a two stage approach in the first stage some partial and temporary measures were taken to achieve a very drastic fall in the inflation rate in the second stage which sometimes never materialized the fiscal reform was implemented we develop a model where under certain conditions it will be rational for a government that cannot implement a lasting stabilization to go ahead with this two stage approach allowing for political uncertainty introduces the possibility that after the first stage is in place the government is not able to achieve the fiscal reform the probability of success of the program is positively related to the level of individual uncertainty and the speed of learning about the benefits of stabilization and negatively related to the cost of financing the budget deficit during the first stage and under certain conditions to the degree of political uncertainty

money demand during hyperinflation and stabilization bolivia 1980 1988 i introduction the stability of demand for money equations has been at issue in both econometric research and policy analysis the academic debates about the relative merits of the traditional buffer stock and the error correction models of demand for money have centered on parameter stability 1 in policy discussion the scope for remonetization following stabilization depends on the upward shift in the demand for money and the consequent predictability of higher money demand with lower rates of inflation 2 only an increased demand for money would make further credit expansion non inflationary inflation uncertainty has a pervasive effect in the money price nexus high inflation uncertainty makes money a riskier asset depressing the demand for money on a long term and possibly short term basis this impact on the demand for money means that policies influencing inflation will have an additional effect through their impact on inflation uncertainty as well as on expected inflation this paper examines the role of inflation uncertainty in a dramatic case study bolivia during the 1980s this was a decade of extreme macroeconomic instability annual inflation rates reached over 20 000 percent motivating a subsequent stabilization which drove annual inflation rates down to less than 25 percent where they have remained for more than five years perhaps more than any other country in recent history bolivia has undergone a dramatic structural shift in its macroeconomic policy regime to what extent did the demand for money shift during this period in its sensitivity to expected inflation inflation uncertainty and to underlying monetary disequilibria as the inflation stabilization progressed how fast did the money demand parameters react to this new regime change was there scope for remonetization in bolivia following the now famous stabilization plan of august 1985 the new economic plan introduced by president victor paz estenssoro 3 previous literature on the demand for money has explored the role of inflation uncertainty with ambiguous results 4 klein 1977 observed that inflation rate uncertainty reduced the average and marginal productivity of real cash balances in providing monetary services effectively a greater volume of real cash balances is required to obtain the same quality adjusted level of cash balances while the impact on the demand for money is theoretically uncertain because the income and substitution effects work in opposite directions klein provided empirical evidence that inflation uncertainty measured by a moving five year variance around a moving ten year trend with data from 1880 to 1972 actually increased the demand for money in the united states around the same time boonekamp 1978 presented a two period mean variance model of money and bond demand highlighting the potential importance of a hedging role in the demand for money in the face of inflation uncertainty related to aspects of both of these two approaches and working with a capital asset pricing model capm sweeney 1988 drew on university of michigan survey data on inflationary expectations to resolve the theoretical ambiguity of the impact of inflation uncertainty his results based on post war quarterly u s data contrasted with those of klein by showing a negative impact of inflation uncertainty on money demand in his study of the demand for money in the six hyperinflations originally examined by cagan 1956 khan 1977 measured inflation uncertainty by the absolute value of the change in inflation his model assumed that inflation uncertainty would affect the demand for money not directly but by altering the adaptive expectations parameter in the adjustment of inflation expectations his empirical estimates implied a negative impact of inflation uncertainty on the demand for money during accelerating inflation engle 1982 introduced the concept of arch autoregressive conditional heteroskedastic models with a specific application to inflation expectations

credibility and stabilization the paper deals with stabilization as a one shot problem to ask what credibility means in a world where programs will succeed with probability one a model is spelled out where the equilibrium program has some ex ante probability of failure the model draws attention to the factors that raise or lower the probability of success of a stabilization program and thus offers a positive theory of stabilization reputation that emerges as a central element in repeated games has no role in this model

capital repartriation and the waiting game abstract a stylized fact on post stabilization economies is that getting the fundamentals right even though necessary is not sufficient to ensure a prompt and costless resumption of growth uncertainty whether stabilization can in fact be sustained confers an option value to postponing investment in domestic real assets