limited commitment and the demand for money understanding money demand is important for our comprehension of macroeconomics and monetary policy its instability has made this a challenge common explications for the instability are financial regulations and financial innovations that shift the money demand function we provide a complementary view by showing that a model where borrowers have limited commitment can significantly improve the fit between the theoretical money demand function and the data limited commitment can also explain why the ratio of credit to m1 is currently so low despite that nominal interest rates are at their lowest recorded levels this article is protected by copyright all rights reserved

the american business cycle continuity and change in recent decades the american economy has experienced the worst peace time inflation in its history and the highest unemployment rate since the great depression these circumstances have prompted renewed interest in the concept of business cycles which joseph schumpeter suggested are like the beat of the heart of the essence of the organism that displays them in the american business cycle some of the most prominent macroeconomics in the united states focuses on the questions to what extent are business cycles propelled by external shocks how have post 1946 cycles differed from earlier cycles and what are the major factors that contribute to business cycles they extend their investigation in some areas as far back as 1875 to afford a deeper understanding of both economic history and the most recent economic fluctuations seven papers address specific aspects of economic activity consumption investment inventory change fiscal policy monetary behavior open economy and the labor market five papers focus on aggregate economic activity in a number of cases the papers present findings that challenge widely accepted models and assumptions in addition to its substantive findings the american business cycle includes an appendix containing both the first published history of the nber business cycle dating chronology and many previously unpublished historical data series

the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

erratum to why has u s inflation become harder to forecast the article journal of money credit and banking supplement to vol 39 no 1 february 2007 contains errors in figures 2 4 and tables 4 5 associated with a coding error in our program for estimating the uc sv model we thank ling hu of platinum grove asset management for finding this error and bringing it to our attention the corrected uc sv rows for tables 4 and 5 are given below corrected versions of figures 2 4 and corrected replication files can be found at http www princeton edu mwatson

in or out centralization by majority vote we present a positive theory of centralization of political decisions voters choose centralization or decentralization depending on their forecast of the political organization that will favor the policies they prefer we study the induced preferences for centralization as well results of different forms of referenda

real time density forecasts from bayesian vector autoregressions with stochastic volatility central banks and other forecasters are increasingly interested in various aspects of density forecasts however recent sharp changes in macroeconomic volatility including the great moderation and the more recent sharp rise in volatility associated with increased variation in energy prices and the deep global recession pose significant challenges to density forecasting accordingly this paper examines with real time data density forecasts of u s gdp growth unemployment inflation and the federal funds rate from bayesian vector autoregression bvar models with stochastic volatility the results indicate that adding stochastic volatility to bvars materially improves the real time accuracy of density forecasts this article has supplementary material online

is there an energy efficiency gap many analysts have argued that energy efficiency investments offer an enormous win win opportunity to both reduce negative externalities and save money this overview paper presents a simple model of investment in energy using capital stock with two types of market failures first uninternalized externalities from energy consumption and second forces such as imperfect information that cause consumers and firms not to exploit privately profitable energy efficiency investments the model clarifies that only if the second type of market failure cannot be addressed directly through mechanisms such as information provision energy efficiency subsidies and standards may be merited this chapter therefore reviews the empirical work on the magnitude of profitable unexploited energy efficiency investments a literature which frequently does not meet modern standards for credibly estimating the net present value of energy cost savings and often leaves other benefits and costs unmeasured these problems notwithstanding recent empirical work in a variety of contexts implies that on average the magnitude of profitable unexploited investment opportunities is much smaller than engineering accounting studies suggest finally there is tremendous opportunity and need for policy relevant research that utilizes randomized controlled trials and quasi experimental techniques to estimate the returns to energy efficiency investments and the welfare effects of energy efficiency programs

an economic model of representative democracy this paper develops an approach to the study of democratic policy making where politicians are selected by the people from those citizens who present themselves as candidates for public office the approach has a number of attractive features first it is a conceptualization of a pure form of representative democracy in which government is by as well as of the people second the model is analytically tractable being able to handle multidimensional issue and policy spaces very naturally third it provides a vehicle for answering normative questions about the performance of representative democracy

federal reserve information during the great moderation using data from the period 1970 1991 romer and romer 2000 showed that that federal reserve forecasts of inflation and output were superior to those provided by commercial forecasters in this paper we show that this superior forecasting performance deteriorated after 1991 over the decade 1992 2001 the superior forecast accuracy of the fed held only over a very short time horizon and was limited to its forecasts of inflation in addition the performance of both the fed and the commercial forecasters in predicting inflation and output relative to that of naive benchmark models dropped remarkably during this period jel e58 e31

unemployment and productivity in the long run the role of macroeconomic volatility abstract this paper presents a new empirical regularity between the volatility of productivity growth and long run unemployment for a given level of long run productivity growth a theoretical framework based on asymmetric real wage rigidities is shown to have the potential to rationalize this finding the model tends to fit u s long run unemployment better than a specification based on long run productivity growth only especially during the great moderation and the great recession

the identification of preferences from equilibrium prices under uncertainty the competitive equilibrium correspondence which associates equilibrium prices of commodities and assets with allocations of endowments identifies the preferences and beliefs of individuals under uncertainty this is the case even if the asset market is incomplete

on the low frequency relationship between public deficits and inflation summary we estimate the low frequency relationship between fiscal deficits and inflation and pay special attention to its potential time variation by estimating a time varying vector autoregression model for us data from 1900 to 2011 we find the strongest relationship neither in times of crisis nor in times of high public deficits but from the mid 1960s up to 1980 employing a structural decomposition of the low frequency relationship and further narrative evidence we interpret our results such that the low frequency relationship between fiscal deficits and inflation is strongly related to the conduct of monetary policy and its interaction with fiscal policy after world war ii copyright 2015 john wiley sons ltd

idiosyncratic risk and financial policy in economies subject to uninsurable idiosyncratic risks competitive equilibrium allocations are constrained inefficient reallocations of assets support pareto superior allocations this is the case even if the asset market for the allocation of aggregate risks is complete

inflation persistence the nairu and the great recession the rate of inflation fell far less over the period 2007 2013 than in the period 1979 1985 despite similar large increases in the unemployment rate this paper asks why possible explanations include a change in the persistence of inflation changes in nairu and other shocks a change in the persistence of inflation with inflation more anchored in the period 2007 2013 than in the period 1979 1985 is found to be important the level and change in the nairu cannot be precisely estimated but the data suggest an increase of nearly 1 percentage point since 2007

term structure inflation and real activity this paper estimates an internally consistent structural model that imposes cross sectional restrictions on the dynamics of the term structure of interest rates inflation and output growth distinct from previous term structure settings this model introduces both time varying central tendencies and a stochastic conditional mean of output growth the estimation of the model which is based on u s data over a 1960 to 2005 sample period provides reliable estimates for the implicit term structures of real interest rates expected inflation rates and inflation risk premia as well as for expectations of macroeconomic variables the model has better out of sample forecasting properties than a number of alternative models and it contradicts the puzzling evidence that during the great moderation in inflation subsequent to the mid 1980s the forecasting ability of structural models deteriorated with respect to atheoretic statistical models

distributional and efficiency impacts of increased us gasoline taxes we examine the impacts of increased us gasoline taxes in a model that links the markets for new used and scrapped vehicles and recognizes the consider able heterogeneity among households and cars household choice parameters derive from an estimation procedure that integrates individual choices for car ownership and miles traveled we find that each cent per gallon increase in the price of gasoline reduces the equilibrium gasoline consumption by about 0 2

wage indexation and time consistency note this note presents a simple model where the decision on the degree of wage indexation is taken by a large agent such as the government the optimal degree of indexing is shown to depend on the variance of real shocks and on the inflations bias of the government due to the incentive to raise employment above the market clearing level wage indexation will be low if real shocks are large and if the government is inflation averse the ability of monetary policy to offset monetary disturbances makes them irrelevant to the determination of the optimal degree of indexing copyright 1994 by ohio state university press

is quantity theory still alive this paper investigates whether the quantity theory of money is still alive we argue that it is but that the slippage is not negligible for countries with low inflation the relationship between average inflation and the growth rate of money is tenuous at best a correction for variation in output growth and the opportunity cost of money using theory implied elasticities helps explain the slippage for the period since 1990 inflation targeting at low rates of inflation makes it harder to establish the long run relationship between monetary growth and inflation

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

monetary fiscal policy interaction and fiscal inflation a tale of three countries abstract we study the impact of the interaction between fiscal and monetary policy on the low frequency relationship between the fiscal stance and inflation using cross country data from 1965 to 1999 in a first step we contrast the monetary fiscal narrative for germany the u s and italy with evidence obtained from simple regression models and a time varying var we find that the low frequency relationship between the fiscal stance and inflation is low during periods of an independent central bank and responsible fiscal policy and more pronounced in times of non responsible fiscal policy and accommodative monetary authorities in a second step we use an estimated dsge model to interpret the low frequency measure structurally and to illustrate the mechanisms through which fiscal actions affect inflation in the long run the findings from the dsge model suggest that switches in the monetary fiscal policy interaction and accompanying variations in the propagation of structural shocks can well account for changes in the low frequency relationship between the fiscal stance and inflation

time aggregation and the relationship between inflation and money growth using panel data for 99 countries we confirm that the measured elasticity of prices with respect to money is higher and closer to unity the higher is money growth and the longer the time horizon over which the data are averaged we propose two explanations in one the true model of inflation involves a lagged response to money growth in the other there is negative correlation between shocks to inflation and money growth our empirical results can be explained if high money growth countries have i shorter lags or ii less negative correlation when compared to countries with low money growth

measuring price level uncertainty and instability in the united states 1850 2012 abstract we measure price level uncertainty and instability in the united states over the period 1850 to 2012 major outbreaks of price level uncertainty and instability occur both before and after world war ii alternating with three price level moderations one near the turn of the twentieth century another under bretton woods and a third in the 1990s there is no evidence that the price level was systematically more stable or less uncertain before or after world war ii moderations sometimes involved links to gold but the experience of the 1990s proves that a well managed fiat regime can achieve the same outcome

on the sources of macroeconomic stability in the euro area in the mid 1990s the euro area experienced a change in macroeconomic volatility around the same time at business cycle frequencies the correlation between inflation and money growth changed markedly turning from positive to negative distinguishing the periods pre and post 1994 we estimate a dynamic stochastic general equilibrium model with money for the euro area the model accounts for the salient facts we then perform several counterfactual exercises to assess the drivers of these phenomena the moderation of real variables was essentially due to relatively smaller shocks to investment wage markups and preferences the apparent lack of evidence for the quantity theory of money in the short run and the changes in the volatility of nominal variables resulted primarily from a more anti inflationary and gradual monetary policy

what central bankers need to know about forecasting oil prices central banks routinely use short horizon forecasts of the quarterly price of oil in assessing the global and domestic economic outlook we address a number of econometric issues specific to the construction of quarterly oil price forecasts in the united states and abroad we show that quarterly forecasts of the real price of oil from suitably designed vector autoregressive models estimated on monthly data generate the most accurate real time forecasts overall among a wide range of methods including quarterly averages of forecasts based on monthly oil futures prices no change forecasts and forecasts based on regression models estimated on quarterly data

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

money and output friedman and schwartz revisited more than fifty years ago friedman and schwartz examined historical data for the united states and found evidence of pro cyclical movements in the money stock which led corresponding movements in output we find similar correlations in more recent data these appear most clearly when divisia monetary aggregates are used in place of the federal reserve s official simple sum measures when we use information in divisia money to estimate a structural vector autoregression identified monetary policy shocks appear to have large and persistent effects on output and prices with a lag that has lengthened considerably since the early 1980s

energy subsidies and policy commitment in political equilibrium abstract because non renewable energy subsidies affect incentives for investing in energy saving technologies they entail a classic investment hold up problem once investment has taken place policymakers will tend to overuse them for distributional reasons which will in turn depress investment by forward looking agents reforming energy subsidies thus requires overcoming a policy commitment problem in this paper we show that even when commitment is feasible it may fail to materialize in a political equilibrium due to politicians re election incentives in particular it will be those politicians who are comparatively less favorable to energy subsidies who may fail to commit to phase them out

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

measuring the level and uncertainty of trend inflation abstract firmly anchored inflation expectations are widely viewed as playing a central role for the conduct of monetary policy this paper presents estimates of trend inflation based on information contained in monthly data on realized inflation survey expectations and the term structure of interest rates in order to assess whether inflation expectations are anchored a timevarying volatility of trend shocks is estimated as well while there is some commonality in inflation and survey based estimates of trend inflation yield based trend estimates embed a highly persistent component orthogonal to trend inflation trimmed mean inflation rates and survey forecasts are most indicative of trend inflation

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

indeterminacy and learning an analysis of monetary policy in the great inflation abstract the great inflation of the 1970s can be understood as the result of equilibrium indeterminacy in which loose monetary policy engendered excess volatility in macroeconomic aggregates and prices the federal reserve inadvertently pursued policies that were not anti inflationary enough because it did not fully understand the economic environment it was operating in specifically it had imperfect knowledge about the structure of the economy and was subject to data misperceptions the combination of learning about the economy and the use of mis measured data resulted in policies which the federal reserve believed to be optimal but when implemented led to equilibrium indeterminacy

time inconsistency in environmental policy tax earmarking as a commitment solution tax earmarking imposes a constraint on government policymaking and may be desirable if i t solves a time inconsistency problem in tax policy in a two period economy in which the policy decisions regarding taxes public goods provision and pollution abatement are taken by a majority elected individual we show how the time inc onsistency problem in environmental policy arises we demonstrate that the commitment equilibrium under no earmarking rules cannot be as fully implemented as a no commitment equilibrium under earmarking rules however th e earmarking rules do act as a partial commitment mechanism

the impact of the volatility of monetary policy shocks this paper studies the impact of the volatility of monetary policy using a structural vector auroregression svar model enriched along two dimensions first it allows for time varying variance of monetary policy shocks via a stochastic volatility specification second it allows a dynamic interaction between the level of the endogenous variables in the var and the time varying volatility the analysis establishes that the nominal interest rate output growth and inflation fall in reaction to an increase in the volatility of monetary policy the analysis also develops a dynamic stochastic general equilibrium model enriched with stochastic volatility to monetary policy that generates similar responses and provides a theoretical underpinning of these findings

welfare effects of financial innovation in incomplete markets economies with several consumption goods abstract we show that in almost every incomplete markets economy with more than one consumption good and with sufficiently many uninsured states of nature at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset making for example all agents worse off this result demonstrates that the examples given by hart on the optimality of equilibrium when the market structure is incomplete j econ theory11 1975 418 443 and others are actually general phenomena and is in sharp contrast to the intuition that innovation since it expands financial opportunities should benefit all agents journal of economic literature classification numbers d52 d60 g10

how cynical can an incumbent be strategic policy in a model of government spending abstract when parties with different preferences compete for election strategic manipulation of state variables for electoral purposes can occur even with rational voters this paper presents a model in which government resources can be used productivity for the benefit of everybody or unproductively for the benefit of the ruling party s constituency a government more inclined to unproductive spending may choose to collect public resources inefficiently in order to produce the importance of spending decisions in the election the model highlights the strategic role of policy decisions that affect incentives and constraints faced by future governments and their impact on election results

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

should speculators be taxed a number of economists have supported the taxation of speculation in financial markets we examine the welfare economics of such a tax in a model of a financial market where some agents have superior information and others have a hedging motive we show that a tax on speculators may actually increase speculative profits this occurs if the speculators benefit from less informative prices offsets the cost of the tax the effect on the welfare of other agents depends on how information revelation changes risk sharing opportunities it is possible for the introduction of a tax to cause a pareto improvement copyright 2000 by university of chicago press

explaining the great moderation it is not the shocks this paper shows that the explanation of the decline in the volatility of gdp growth since the mid eighties is not the decline in the volatility of exogenous shocks but rather a change in their propagation mechanism

on the welfare cost of inflation and the recent behavior of money demand post 1980 u s data trace out a stable long run money demand relationship of cagan s semi log form between the m1 income ratio and the nominal interest rate with an interest semi elasticity of 1 79 integrating under this money demand curve yields estimates of the welfare cost of modest departures from friedman s zero nominal interest rate rule for the optimum quantity of money that are quite small the results suggest that the federal reserve s current policy which generates low but still positive rates of inflation provides an adequate approximation in welfare terms to the alternative of moving all the way to the friedman rule jel e31 e41 e52

a century of inflation forecasts abstract we investigate inflation predictability in the united states across the monetary regimes of the twentieth century the forecasts based on money growth and output growth were significantly more accurate than the forecasts based on past inflation only during the regimes associated with neither a clear nominal anchor nor a credible commitment to fight inflation these include the years from the outbreak of world war ii in 1939 to the implementation of the bretton woods agreements in 1951 and from nixon s closure of the gold window in 1971 to the end of volcker s disinflation in 1983

anonymity and optimality of competitive equilibria when markets are incomplete abstract we study the optimality or efficiency of competitive equilibria in a standard two period economy where markets are incomplete statistical information about consumers preferences and endowments is known to a social planner but the planner cannot observe consumers types directly a competitive equilibrium is anonymous constrained optimal if the social planner cannot pareto improve upon the equilibrium allocation by intervening in asset markets with any asset trade rule satisfying anonymity in some cases a competitive equilibrium is robustly anonymous constrained optimal whereas it is known that competitive equilibria are generically constrained suboptimal for the case of completely observable types journal of economic literature classification numbers d52 d82 h21

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

renewables and climate change mitigation irreversible energy investment under uncertainty and portfolio effects abstract ongoing negotiations under the unfccc center around the possibilities for stabilization of greenhouse gases at a safe level new energy technologies are assumed to make major contributions to this goal however in the light of scientific uncertainty e g about climate sensitivity feedback effects etc market uncertainty e g fuel price volatility technological uncertainty e g availability of renewable technology socio economic uncertainty e g development of different macroeconomic factors and policy uncertainty e g about commitment to specific targets and stability of co2 prices it is difficult to assess the importance of different technologies in achieving robust long term climate risk mitigation one example currently debated in this context is biomass based energy which can be used to produce both carbon neutral electricity and at the same time offer the possibility of negative emissions by capturing carbon from biomass combustion at the conversion facility and permanently storing it in this study we analyze the impact of uncertainty on investment decision making at the plant level in a real options valuation framework and then use the ggi scenario database iiasa 2009 as a point of departure for deriving optimal technology portfolios across different socio economic scenarios for a range of stabilization targets focusing in particular on the new low emission targets using alternative risk measures

the great moderation in the united kingdom we use a bayesian time varying parameters structural var with stochastic volatility for gdp deflator inflation real gdp growth a 3 month nominal rate and the rate of growth of m4 to investigate the underlying causes of the great moderation in the united kingdom our evidence points toward a dominant role played by good luck in fostering the more stable macroeconomic environment of the last two decades results from counterfactual simulations in particular show that i bringing the monetary policy committee back in time would only have had a limited impact on the great inflation episode at the cost of lower output growth ii imposing the 1970s monetary rule over the entire sample period would have made almost no difference in terms of inflation and output growth outcomes and iii the great inflation was due to a dominant extent to large demand non policy shocks and to a lesser extent especially in 1973 and 1979 to supply shocks

the disadvantage of tying their hands on the political economy of policy commitments incumbents are more likely to be re elected if they have a comparative advantage in the eyes of voters on some central issue this paper argues that incumbents have an incentive to avoid reforms that reduce the government s role in deciding these issues in order to increase their chances of re election this point is illustrated in the context of the choice of an exchange rate regime in an economy characterized by an inflation bias a flexible exchange rate allows the government to use monetary policy as a stabilization tool while fixed exchange rates remove the inflation bias of the economy on the one hand it is shown that a more inflation averse government may refrain from choosing fixed exchange rates in order to capitalize on the inflationary reputation of its opponent this incentive is contrasted with the opposite incentive to tie the hands of the future government should be incumbent be defeated on the other hand it is shown that electoral considerations may reinforce the incentive of the more inflationary government to tie its own hands with fixed exchange rates

mind the gap a monetarist view of the open economy phillips curve abstract in many countries inflation has become less responsive to domestic factors and more responsive to global factors over the past decades we introduce money and credit into the workhorse open economy new keynesian model with this framework we show that i an efficient forecast of domestic inflation is based solely on domestic and foreign slack and ii global liquidity global money as well as global credit is tied to global slack in equilibrium then motivated by the theory we evaluate empirically the performance of open economy phillips curve based forecasts constructed using global liquidity measures such as g7 credit growth and g7 money supply growth instead of global slack as predictive regressors using 50 years of quarterly u s data we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly measured indicators of global slack that global liquidity proxies for

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

monetary facts revisited abstract this paper uses data from 46 economies over the post war period to revisit two key monetary facts i the link between money growth and inflation and ii the link between credit growth and financial crises the analysis reveals that the former has weakened over time while the latter has become stronger this suggests that there is an inverse relationship between the two monetary facts the money inflation link is weak and the credit crisis nexus is strong when inflation is low and financial systems are liberalised while the reverse holds true in environments of high inflation and less liberalised financial systems

sources of inefficiency in a representative democracy a dynamic analysis this paper studies the efficiency of policy choice in representative democracies it extends the citizen candidate model of democratic policy making to a dynamic environment equilibrium policy choices are shown to be efficient in the sense that in each period conditional on future policies being selected through the democratic process there exists no alternative current policy choices which can raise the expected utilities of all citizens however policies that would be declared efficient by standard economic criteria are not necessarily adopted in political equilibrium the paper argues that these divergencies are legitimately viewed as politicalfailures

the taxation of trades in assets when the asset market is incomplete there typically exist taxes on trades in assets that are pareto improving this fiscal policy is anonymous it is fully and correctly anticipated by traders and it results in ex post pareto optimal allocations as such it improves over previously proposed constrained interventions

endogenous money or sticky prices abstract what explains the correlations between nominal and real variables in the postwar us data are these correlations indicative of significant nominal rigidity or do they simply reflect the particular way that monetary policymakers react to developments in the real economy to answer these questions this paper uses maximum likelihood to estimate a model of endogenous money this model allows but does not require nominal prices to be sticky the results show that nominal price rigidity over and above endogenous money plays a role in accounting for key features of the data

estimating the evolution of money s role in the u s monetary business cycle we assess money s role in the post wwii u s business cycle by employing both fixed coefficient and rolling window bayesian estimations of a structural model of the business cycle with money our empirical evidence favors a specification with drifting parameters for money consumption nonseparability and the federal reserve s reaction to nominal money growth the role of money is estimated to have been important during the 1970s and declined afterward the omission of money produces severely distorted impulse response functions relative to the model with money money is found to be important in replicating the u s output volatility during the great inflation

evolving u s monetary policy and the decline of inflation predictability based on a structural var with time varying parameters and stochastic volatility for the post wwii u s we document a negative correlation between the evolution of the long run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component using an estimated sticky price model we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability jel e37 e52 e58

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

inflation as a global phenomenon some implications for inflation modeling and forecasting abstract we model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open economy new keynesian model we evaluate the performance of inflation forecasts based on the single equation forecasting specification implied by the model exploiting the spatial pattern of international linkages underpinning global inflation we find that incorporating cross country interactions yields significantly more accurate forecasts of local inflation for a diverse group of 14 advanced countries including the u s than either a simple autoregressive model or a standard closed economy phillips curve based forecasting model we argue that modeling the temporal dimension but not the cross country spillovers of inflation does limit a model s explanatory power in sample and its pseudo out of sample forecasting performance moreover we also show that global inflation without domestic slack often contributes the most to achieve the gains on forecasting accuracy observed during our sample period 1984 q1 2015 q1 this observation according to theory is crucially related to the flattening of the phillips curve during this time period of increased globalization

earmarked taxation and political competition abstract although tax earmarking constitutes a voluntary constraint for government s policymaking it is widely used in the real world this paper investigates the electoral dimension of earmarking in a model of political competition with ideological parties its main contribution is to derive new insights on the relationship between earmarking and parties probability of winning the elections we find that the electoral pressure may favor the existence of tax earmarking equilibria but that it sometimes creates a tendency against earmarked taxation even when as shown by brett and keen 2000 brett c keen m 2000 political uncertainty and the earmarking of environmental taxes journal of public econonomics 75 315 340 incumbent governments have strong incentives to use earmarking rules to constrain future policymakers

two illustrations of the quantity theory of money breakdowns and revivals by extending his data we document the instability of low frequency regression coefficients that lucas 1980 used to express the quantity theory of money we impute the differences in these regression coefficients to differences in monetary policies across periods a dsge model estimated over a subsample like lucas s implies values of the regression coefficients that confirm lucas s results for his sample period but perturbing monetary policy rule parameters away from the values estimated over lucas s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample jel c51 e23 e31 e43 e51 e52 robert e lucas jr 1980 used near unit slopes of univariate regressions of moving averages of inflation and interest rates on money growth for the united states for the period 1953 1977 to illustrate two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest lucas said that those two quantity theoretic propositions

the incredible volcker disinflation abstract the reduction in inflation that occurred in the early 1980s when the federal reserve was headed by paul volcker is arguably the most widely discussed and visible macroeconomic event of the last 50 years of u s history inflation had been dramatically rising but under volcker the fed first contained and then reversed this process using a simple modern macroeconomic model we argue that the real effects of the volcker disinflation were mainly due to its imperfect credibility in our view the observed upward volatility and subsequent stubborn elevation of long term interest rates during the disinflation are key indicators of that imperfect credibility studying transcripts of the federal open market committee recently released to the public we find to our surprise that volcker and other fomc members likewise regarded the long term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy drawing from the transcripts and other contemporary sources we consider the interplay of monetary targets operating procedures and credibility during the volcker disinflation

federal reserve policy viewed through a money supply lens abstract federal reserve nonborrowed reserve supply systematically responded to changes in inflation and in the output gap over the period 1969 2000 while the feedback from output gap is always negative the response of money supply to changes in inflation varies considerably across time nonborrowed reserves decreased with inflation in the post 1979 period and increased in the pre 1979 period applying a standard macro model the estimated reaction functions are shown to ensure equilibrium determinacy viewed through the money supply lens federal reserve policy substantially changed over time but has never allowed for endogenous fluctuations which contrasts conclusions drawn from federal funds rate analyses

a model of political competition with citizen candidates the authors develop a model of electoral competition in which citizens choose whether or not to run as candidates a winner implements her favorite policy the equilibrium number of candidates depends negatively on the cost of running and positively on the benefits of winning for some parameter values all equilibria under plurality rule have exactly two candidates whose positions are distinct two candidate elections are more likely under plurality rule than under a runoff system the candidates positions are less differentiated under a runoff system there exist equilibria under both systems in which some candidates have no chance of winning

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations