budget deficits stability and the monetary dynamics of hyperinflation hyperinflationary processes usually occur in countries with extremely large budget deficits in models of inflationary finance with rational expectations e g buiter 1987 large budget deficits cannot lead to hyperinflation the purpose of this paper is to reconcile the standard theoretical model with the stylized facts it shows that by introducing a lag in the adjustment of the money market into the standard inflationary finance model large budget deficits are indeed the main reason for hyperinflation the paper also provides an explanation for the ineffectiveness of moderate reductions in the deficit in reducing inflation and argues that fiscal lags can be destabilizing copyright 1989 by ohio state university press

conservative traders natural selection and market efficiency abstract this paper examines the impact of conservative traders on market efficiency in an evolutionary model of a commodity futures market this paper shows that the long run market outcome is informationally efficient as long as in every period there is a positive probability that entering traders are more conservative than their predecessors conservative traders are those who correctly predict the spot price with a positive probability and more importantly who in their mistakes err on the side of caution and rarely overpredict the spot price as buyers and underpredict the spot price as sellers this result does not require entry of traders with better information than their predecessors

a money demand equation for brazil abstract the estimates for the money demand equation reported below are based on quarterly time series for brazil for the 1966 i 1979 iv period they show that the long run income elasticity of the demand for money is roughly unitary and the rate of interest does affect the demand for money exclusion of the latter variable therefore leads to biased estimates of the coefficients of the money demand equation the empirical evidence also points out that the rate of inflation affects the demand for money only to the extent that it is necessary to change nominal cash balances to adjust cash holdings to their desired level either nominal interest rates capture the expected inflation rates or goods inventories are not an important alternative to holding money in brazil

inflation growth and wage policy a brazilian perspective abstract a growth inflation model based on recent brazilian experience is developed the paper focuses on brazilian compulsory wage policy in order to analyse current stabilization policy issues in this context it is argued that orthodox stabilization policies as exemplified by an autonomous reduction in the rate of monetary growth implies both a temporary and a permanent decrease in output growth if the wage formula as in brazil provides for lagged price indexation the idea of promoting stabilization through full wage indexation is also examined

a dynamic generalisation of the almost ideal demand system abstract this paper proposes and estimates on annual time series u k data 1900 1980 a dynamic generalisation of the almost ideal demand system the results support the proposed generalisation and point to the dynamic aids as a potentially useful tool in future applications

money inflation and output in romania 1992 2000 abstract money inflation and output are tested for stationarity and found to be integrated of order one we apply the johansen procedure for cointegration to test for the rank of the matrix of cointegration relations one to test for the weak exogeneity of output accepted inflation rejected and money rejected we interpret the unique cointegrating relationship as an extended cagan money demand function we then estimate error correction mechanisms which explain the short run movements of real money and inflation the evidence suggests that in the period considered including the sub sample between the liberalization shocks inflation was largely a monetary phenomenon

are risky assets substitutes for monetary assets i introduction financial innovation over the past couple of decades has enhanced the liquidity of many financial assets particularly noncapital certain risky assets further financial assets previously not regarded as monetary assets such as mutual funds and particularly money market mutual funds now provide monetary services such as liquidity and transactions services l given the increased liquidity of such funds the question arises as to whether risky assets are substitutes for capital certain monetary assets if noncapital certain assets are indeed substitutes for capital certain assets and are also being used for transactions purposes then agents may be treating risky assets as money although this issue has been addressed in the united states in the context of the addition of bond funds to m2 by for example duca 1995 no such research has yet been conducted in the united kingdom including risky assets in the analysis contradicts the work of ando and shell 1975 spencer 1986 appendix i pp 184 93 and spencer 1994 broadly they argue that since some nonrisky assets provide monetary services and probability also liquidity individuals would not hold risky assets for these purposes 2 in contrast hicks 1935 states that falling transaction costs and rising wealth encourages individuals to increase the proportion of risky assets in portfolio holdings most studies generally assume that risky assets fail to provide significant monetary services and for example have been excluded from the asset demand analysis of barr and cuthbertson 1991a drake fleissig and swofford 1997 and money demand studies such as taylor 1987 belongia and chrystal 1991 drake and chrystal 1994 and drake 1996 alternatively barr and cuthbertson 1991b use only risky assets in their asset demand system analysis the degree of substitution between risky assets and capital certain assets is an empirical issue while noncapital certain risky assets mutual funds and other financial assets may well be becoming closer substitutes for what people are using as money they are in no way perfect substitutes for the highly liquid cash assets to evaluate the role of noncapital certain assets we construct a noncapital certain risky divisia aggregate consisting of equities government bonds and unit trusts the divisia index allows for less than perfect substitution between assets and weights component assets according to their differing degrees of moneyness which may vary over time due to many factors for example financial innovation see barnett 1980 this methodology has been widely applied to monetary aggregation and money demand studies in a number of countries as in belongia 1996 drake 1996 drake and chrystal 1997 and anderson jones and nesmith 1997 to determine whether risky assets are substitutes for capital certain assets we use two other divisia aggregates constructed from traditional measures of money the first of these is an aggregate of highly liquid zero yield cash assets given that the component assets all have zero own rates of return however divisia aggregation is equivalent in this case to simple summation the second aggregate is a divisia aggregate of interest bearing capital certain assets including risky assets complicates the analysis because the degree of risk aversion will affect the estimates of substitution between capital certain and noncapital certain assets thus we also analyze how different degrees of risk aversion affect the results the substitution relationship between assets is estimated from an asymptotically ideal model aim the choice of an aim is in line with the recommendation of barnett fisher and serletis 1992 that flexible systems of demand equations should be used that allow for nonlinear optimizing behavior by economic agents furthermore this paper can be seen as an extension of the recent application of this model to u

a monetary approach to the crawling peg system theory and evidence this paper develops and estimates a model of the joint determination of the exchange rate international reserves and the rate of inflation under a crawling peg system the framework presented which is an extension of previous work on the monetary approach generates short run deviations from purchasing power parity that occur simultaneously with movements in both international reserves and the exchange rate the model is estimated by full information maximum likelihood on the basis of quarterly data for brazil

inflationary inertia in a wage price spiral model abstract this paper examines theoretical issues of inflationary inertia by use of a wage price spiral model in which wage and price decisions are staggered it is shown that within such a framework inflation is inertial in the following sense a monetary disinflation cannot immediately succeed and the rate of inflation declines gradually it is also shown that from another aspect of inflationary inertia which is the effect of cost shocks inflation is less inertia even in a wage price spiral model a temporary cost shock has no continuing effect on the rate of inflation only permanent changes in costs have an inertial effect and they raise the rate of inflation in consecutive periods as well

an analysis of substitution bias in measuring inflation 1959 851 we analyze the substitution bias in laspeyres type price indexes such as the cpi using 1959 1985 nipa consumption data for 101 commodities we employ two methodological approaches to calculation of the bias first we construct the tightest theoretical bounds on the col by applying nonparametric methods using algorithms developed by afriat and by varian second following diewert we construct superlative price index formulas namely tomqvist and fisher s ideal indexes under a chain as well as a fixed base specification homothetic preferences are found to be consistent with the data and sensitivity tests indicate that this result is not vacuous if the hypothesis of homotheticity is maintained the col bias has upper and lower limits of 0 22 and 0 14 percent per year respectively using the superlative indexes as the measure of the col the bias is about 0 18 percent per year for the period 1959 85 this estimate is somewhat larger than found in earlier studies our use of more disaggregated data is found to be responsible for part of the difference with the size of the estimated bias directly related to the extent of the aggregation

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

an experiment on the pure theory of consumer s behaviour by checking whether consumer demand satisfies the axioms of revealed preference one can test the empirical validity of the neoclassical theory of consumer behaviour however applying the axioms to actual consumer purchase data is difficult if not impossible since it poses serious problems of both a methodological and a practical nature after commenting on the few existing empirical studies in this field we summarise the results from an experimental approach to revealed preference theory data were obtained through a controlled experiment that involved real consumption of the goods chosen we find that most subjects violated the axioms

a semi nonparametric approach to the demand for uk monetary assets we estimate an asymptotically ideal model of the demand for uk personal sector monetary assets we use data that are consistent with utility maximizing behaviour and find that uk monetary assets are generally substitutes in use the estimated elasticities of substitution during the 1980s and the early 1990s indicate that a relatively broad monetary aggregate should be used in economic studies the results also suggest that any policy based on interest or user cost elasticities of substitution between financial assets should be based on the morishima elasticities as the allen uzawa calculation can give misleading results

indexation and inflationary inertia brazil 1964 1985 some governments facing high rates of inflation have adopted wage and exchange rate indexation in an attempt to offset the costs to workers and exporters but indexation based on past values of inflation is considered to be a powerful source of current and future inflation that undermines fiscal and monetary stringency designed to reduce inflation brazil indexed wages and the exchange rate for more than twenty years the authors derive a transfer function and estimate time varying parameters to allow for the changes in indexing policy over the period the authors find that the increased frequency of wage and exchange rate adjustment amplified the effect of past inflation and made it less sensitive to monetary and fiscal policies and more vulnerable to domestic agricultural supply shocks indexing did not eliminate the effectiveness of monetary policy however which retained a significant effect throughout the indexation period

evolution and market competition abstract profit maximization is the usual prerequisite for achievement of a perfectly competitive equilibrium however for a long time it has been though that this principle of profit maximization can be replaced by natural selection in an evolutionary model of an industry where firms outputs are chosen randomly where entry occurs with no motivation and where exit occurs when a firm s wealth becomes negative this paper shows that the industry converges in probability to a perfectly competitive equilibrium as each firm gets infinitesimally small relative to the market as the entry cost gets sufficiently small and as time gets sufficiently large journal of economic literature classification numbers d21 d41 l10

tests of microeconomic foundations of a north american common currency area the movement of some members of the european union towards a common currency area is likely to spark interest in other possible common currency areas one such area of interest is a north american common currency area in this paper some results from tests of microeconomic foundations of a north american common currency area are presented these results can be viewed as favourable for the formation of a north american common currency area jel classification f33 f36 tests des fondements micro economiques d une union monetaire en amerique du nord le deplacement de certains membres de l union europeenne vers une monnaie commune va vraisemblablement susciter de l interet pour ce genre d arrangement dans d autres parties du monde un de ces autres lieux ou il y a un interet pour une union monetaire est l amerique du nord dans ce texte on presente certains resultats de tests des fondements micro economiques d une zone monetaire commune en amerique du nord ces resultats peuvent etre consideres comme favorables a la formation d une union monetaire nord americaine

monetary integration and currency substitution in the ems the case for a european monetary aggregate abstract this paper examines the phenomenon of cross currency substitution and the validity of monetary aggregation within the european monetary system using non parametric methods which exploit the relationship between intergroup substitution and separability the separability property is tested using the methodology developed by varian the nonparametric approach to demand analysis econometrica 50 945 974 1982 nonparametric tests of consumer behaviour review of economic studies 51 99 110 1983 and is violated in the case of most european countries suggesting that the hypothesis of zero currency substitution which forms the basis of national monetary aggregation should be rejected the results do however validate the use of monetary aggregates for the ems as a whole and i use a standard parametric demand for money approach to compare the performance of an ems divisia index with that of simple sum aggregates during the 1980s and 1990s

risky monetary aggregates for the uk and us abstract we extend the scope of monetary aggregation beyond capital certain assets that make up central bank data sets and identify groups of assets that form monetary aggregates composed of both capital certain and risky capital uncertain assets we construct monetary aggregates for the us and uk using a superlative index and relax a key assumption of the consumption capital asset pricing model ccapm a one year planning horizon by using forecasted returns on risky assets our new risky monetary aggregates perform well in var tests we recommended exploring risky assets as providers of liquidity services in future research on this topic

public sector layoffs credibility and the dynamics of inflation in a simple macromodel abstract the impact of public sector layoffs is analyzed in a simple perfect foresight model that incorporates the main elements of the conflict between adjustment and the pursuit of long run efficiency permanent layoffs are normally welfare improving even when they give rise to a lengthy phase of high unemployment the transitional problems are much more acute however when doubts exist about the permanency of the layoffs self fulfilling failure is frequently an equilibrium when it is known that a return of inflation to its previous level will provoke the government to reverse the reform moreover reform may be most difficult to sustain precisely when it promises the greatest benefits

information diversity and market behavior the paper addresses two major issues raised by information diversity in a speculative market first we analyze what property of an investor s information leads to an expected speculative profit and show that independence is more important than accuracy second we consider whether the market price must become fully efficient in the sense that every investor s information is accurately discounted when traders use it rationally as an information source we prove that for any information structure there is a unique equilibrium weighting of investor beliefs at which the price is fully efficient and also every trader s expected profit is zero except for special structures however this equilibrium need not be attained in finite time much of modern capital market theory depends heavily on the assumption that investors know the expected values variances and covariances of asset returns although the assumption of homogeneous expectations is a conventional one and necessary for many theoretical results it is not one which can be offered with much confidence real world investors have access to differing information and may also disagree on the correct interpretation of widely held information when asset returns are assumed to be governed by a known probability distribution many features of trading in real world markets are eliminated from consideration there is no role for information gathering and no way for an investor to profit from having superior information indeed this term has no real meaning since all relevant information is contained in the known returns distribution speculative trading is also hard to explain without divergence of opinion a speculator who thought the market price impounded all available information would never trade against it with heterogeneous information we lose some of the neat results of standard capital market theory but new questions can be addressed about how information diversity among investors affects the markets in which they participate one issue concerns the impact of informational differences on investor profits investors who are better informed than others or are better able to evaluate widely held information should be able to earn higher returns all effort devoted to security analysis and market research depends on the belief that this is so but what makes one investor s information superior to another s beyond the circular observation that those investors with consistent profits must be better informed than those with losses do investors with inferior information however measured continually lose money until they are squeezed out of the market or can an

non parametric tests of consumer behaviour the neoclassical model of consumer behaviour postulates that a consumer s choice behaviour can be described as deriving from utility maximization subject to a budget constraint one is then naturally led to ask what this model implies about observed behaviour this question has been addressed from two quite distinct approaches the first approach originating in the work of slutsky 1915 and antonelli 1886 derives necessary and sufficient conditions involving the derivatives of the demand functions the second approach originating in the work of samuelson 1938 1947 1948 derives algebraic conditions on the demand functions implied by maximizing behaviour

inflation and imported input prices in some inflationary latin american economies this paper first updates to 1980 the estimates of the harberger inflation model for argentina brazil chile colombia and uruguay and shows that all the hypotheses of this model hold and the reaction to monetary growth is fairly rapid an aggregate supply function including imported inputs is then hypothesized following recent theoretical work this yields two testable propositions on the reduced form estimates of inflation a the relation between inflation and monetary growth should be less than proportional and the income coefficient should be insignificant contrary to the harberger model and b inflation should be a weighted average of monetary growth and imported inflation assuming the underlying aggregate production function is homogenous of degree zero in prices tests on the same data base support both hypotheses these results also explain the similar results of many of the previous estimates of the harberger inflation equation which included the rate of devaluation in an ad hoc fashion

the genetics of investment biases abstract for a long list of investment biases including lack of diversification excessive trading and the disposition effect we find that genetic differences explain up to 45 of the remaining variation across individual investors after controlling for observable individual characteristics the evidence is consistent with a view that investment biases are manifestations of innate and evolutionary ancient features of human behavior we find that work experience with finance reduces genetic predispositions to investment biases finally we find that even genetically identical investors who grew up in the same family environment often differ substantially in their investment behaviors due to individual specific experiences or events

the dynamics of optimal gradual stabilizations inflation inertia may be quite tenacious because of the simultaneous interaction between policy actions and inflationary expectations under imperfect credibility this result is particularly relevant for understanding some of the failed efforts to stabilize inflation in south america this article deals with the issue of inertia in the framework of imperfect information about the type of the policymaker and extends the existing models to an infinite horizon because policymakers do not have perfect control of inflation a frivolous stabilizer may deviate from the policies of a serious stabilizer without necessarily being unmasked immediately when the difference in the ability of strong and weak policymakers to control inflation is large unexpected inflation may be persistently negative for quite a while thus causing reduced economic activity and giving the indication that credibility is low if the policymaker persists with the stabilization this pattern gradually disappears as his reputation rises but before this final stage the serious policymaker has to compromise his inflation objective in view of adverse expectation about this type and pay the cost of imperfect credibility

the time series behavior of brazilian real gross domestic product 1947 87 an analysis of interventions abstract the evolution of brazilian real gross domestic product in the post world war ii period has been far from stable some of this instability is almost certainly due to the impact of external shocks in this paper we examine three such shocks or interventions which seem to have had particularly pronounced impacts on the brazilian economy these are the political upheavals and attendant economic reforms of the early 1960s and the oil shocks of 1973 and 1979 we build a time series model which permits the analysis of interventions for annual brazilian real gross domestic product and use this model to estimate the impact of these interventions

bounding an economic monetary aggregate under nonhomothetic preferences we construct nonparametric bounds on true quantity indexes for the realistic case of nonhomothetic preferences these bounds do not require assumptions about the form of the underlying aggregator function we construct these bounds using monetary assets that meet necessary conditions for the existence of an aggregate we find that a tornqvist index of these monetary assets falls within the nonparametric bounds on true quantity indexes almost all of the time whereas a simple sum of these monetary assets falls outside these bounds more than one third of the time

the dynamics of chronic inflation in brazil 1968 1985 this article develops an error correction model with the aim of analyzing the behavior of prices during a period of chronic inflation in brazil the degree of inflationary inertia is estimated and tests for the importance of disequilibria in the domestic money foreign goods labor and domestic goods markets on inflation are carried out

nonparametric demand analysis of u k personal sector decisions on consumption leisure and monetary assets a reappraisal this paper utilizes a new data set to test for utility maximizing behavior and weakly separable subutility functions in the context of a utility function comprising durables nondurables services leisure and monetary asset holdings for the u k personal sector all the data sets analyzed demonstrated consistency with respect to utility maximizing behavior the weak separability results prove to be relatively invariant to the degree of aggregation over goods but highly sensitive to the assump tion made regarding the representative consumer per household scaling of the data produced a utility function that is weakly separable in goods services and leisure and in monetary assets

revisiting the inertial inflation hypothesis for brazil abstract inflation has been a major problem of the brazilian economy in the early eighties the inertial inflation approach became very influential in brazil according to this approach the inflation rate has a path determined by its own past it is persistent shocks aside today s inflation equals last period s rate of inflation the purpose of this paper is to reevaluate the inertial inflation hypothesis from an empirical perspective after briefly mentioning the theoretical ideas behind the inertial approach the inflationary persistence inertia is empirically evaluated using time series techniques the results show that there is inertia however its importance is not large similar analyses are also carried out for argentina and germany the argentinean results are analogous to those found for brazil while the inflationary persistence found for germany is almost nil

relationship between inflation rate and inflation uncertainty abstract to shed further light on the possible link between inflation rate and inflation uncertainty the paper explores the relationship for us monthly inflation over 1926 to 1992 with various arfima garch type models it found that the inflation affected its uncertainty weakly negatively whereas the uncertainty affected the inflation insignificantly the results were robust to the high inflation period of the 1970s and the volatile period of 1929 to 1945 it supports engle s result that a high rate of inflation does not necessarily imply a high variance of inflation unlike friedman s view that a high rate of inflation leads to a high variance of inflation

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

a non parametric analysis of personal sector decisions on consumption liquid assets and leisure this paper uses the non parametric techniques developed by varian i982 i983 and afriat i967 1973 from the theory of revealed preference see samuelson 1947 to address a number of questions of interest to those who model the determination of consumption liquid assets and leisure hours 1 the primary assumption underlying much work in this area whether it deals with highly aggregated categories such as the consumption of non durables or relatively disaggregated categories such as the consumption of energy products or food is that demand functions for consumer goods are consistent with the hypothesis that they are derived from the maximisation of a well behaved utility function subject to a relevant budget constraint the absence of liquid assets or leisure from such studies involves the implicit assumption of weak separability between consumption goods and these other goods the parametric approach then assumes a particular functional form for either the utility function indirect utility function or cost function and estimates the parameters that best describe the data however as varian i983 points out when it comes to testing hypotheses in such a framework it is always a joint hypothesis comprising both the restrictions and the choice of functional form which is being tested 2 to avoid this problem varian developed the nonparametric revealed preference approach to provide algebraic conditions which are imposed by maximising behaviour on a set of data with a finite number of observations this non parametric approach is exploited here in several ways there have been a number of studies using a parametric approach at a fairly disaggregated level to the determinants of consumers expenditure see for example deaton i974 anderson and blundell i982 and ray i984 for applications using

inflationary rigidities and orthodox stabilization policies lessons from latin america orthodox stabilization programs in latin american countries have been notoriously unsuccessful in combating inflation despite the imposition of stringent cuts in government deficits in most cases inflation came down only slowly and temporarily with concomitant declines in growth and employment the bolivian program one of the only latin american successes is contrasted with those of argentina brazil chile and mexico the problems of dealing with chronic inflation are compared with those of hyperinflationary countries and the influence of price and wage rigidities expectations and credibility is explored the study shows that fiscal restraint is a necessary but not sufficient condition for success and that sound management of nominal variables the exchange rate and money supply are also necessary the critical role of credibility is linked with price and wage rigidities in the chronic inflation countries whereas the unsuitability of hyperinflation is seen to increase the credibility of and thus the potential for successful stabilization programs

modeling inflation in australia this article develops an empirically constant data coherent error correction model for inflation in australia the level of consumer prices is a markup over domestic and import costs with adjustments for dynamics and relative aggregate demand we address issues of cointegration general to specific modeling dynamic specification model evaluation and testing parameter constancy forecasting and exogeneity we also test this model against existing models of australian prices this model encompasses but is not encompassed by the existing models

do the asean countries and taiwan form a common currency area abstract common currency areas and asian common currency areas in particular are highly topical and somewhat controversial areas for research we explore the hypothesis that the members of the association of southeast asian nations meet necessary conditions for forming a common currency area and whether taiwan appears a natural member of such an area we test data on the asean countries and taiwan for consistency with a common currency area we produce the first evidence that these five asean countries and the asean countries plus taiwan meet the microeconomic criteria to form a common currency area

generic existence of completely revealing equilibria for economies with uncertainty when prices convey information conditions which imply the existence of strict rational expectations equilibria for most static pure exchange economies where prices convey information about the state of the world are analyzed information is aggregated and transmitted by prices because agents have different initial information and maximize the conditional expectation of state dependent utility functions major results state that if with probability one agents characteristics do not vary too much as the state of the world varies then generically there exist equilibrium price functions which reveal all initial information more precisely if the support of the image measure is contained in a compact c1 manifold satisfying some technical conditions which is of sufficiently low dimension relative to the number of commodities then existence of completely revealing equilibria is generic any economy satisfying these assumptions can be approximated by a sequence of economies which also obey these assumptions and have completely revealing equilibrium price functions slight perturbations do not destroy the existence property

exchange rate rules black market premia and fiscal deficits the bolivian hyperinflation with dual exchange rates where a managed official exchange rate co exists with a floating black market rate a given budget deficit may be consistent with many different inflation rates rather than two which is the normal result in closed economy systems further all these inflation equilibria are saddle point stable a policy of adjusting the official exchange rate towards the black market rate may cause the economy to converge to a high inflation saddle point stable equilibrium where money inflation elasticity exceeds unity the analytics are motivated and illustrated by the bolivian hyperinflation of 1984 1985

a policy game approach to the high inflation equilibrium abstract the high inflation equilibrium hie refers to a steady state solution where inflation is higher than the one which maximizes seigniorage i e inflation is on the falling segment of the laffer curve it has been claimed that the hie can be stable when the adjustment of expectation is fast however adjustment is fast because inflation is high so the argument is circular in this paper we rationalize the hie using the policy game approach which distinguishes between discretionary and precommitment regimes we expand and demonstrate rigorously using a technique developed by obstfeld barro s suggestion that a hie may result from a discretionary regime we show that this is not possible under precommitment in addition we demonstrate that a hie may result from non fiscal factors such as the motivation to reduce unemployment in a discretionary regime we conclude with a simple diagrammatic exposition of the difference between our approach and the previous one

fiscal discipline and the choice of a nominal anchor in stabilization abstract the conventional wisdom is that exchange rate based stabilizations induce more fiscal discipline than money based programs the latin american experience does not support this view among the major stabilization programs implemented since 1960 the mean increase in the primary balance to gdp ratio was 3 2 percentage points under money based programs as opposed to only 0 2 percentage points under exchange rate based programs we present a model where fiscal policy is set by an optimizing but non benevolent government that replicates this stylized fact if the policy maker is impatient a money based stabilization provides more discipline and higher welfare for the representative agent than does an exchange rate based stabilization

tax evasion inflation and stabilization abstract this paper focuses on the public resort to tax evasion in developing countries as an adjustment tactic during economic downturn we show using a theoretical model of intertemporal consumption that tax compliance declines when current income declines expectations about future income improve or inflation rises we then apply the model empirically to the cases of argentina brazil and chile three countries which have long experience with tax evasion and inflation over the last 40 years and find confirmation

inertial inflation indexation and price stickiness evidence from brazil abstract this paper evaluates the inertial inflation hypothesis for brazil the hypothesis posits that indexation created a feedback mechanism such that one time supply shocks were fully transmitted into permanent changes in inflation a theoretical model is used to show that this outcome is based on the assumption of perfect price flexibility however with price stickiness indexation does not produce inertial inflation the degree of inertia is then compared for two periods one without indexation 1945 1963 and one with indexation 1969 1985 finally vector autoregressive representations are estimated for the latter period allowing for price stickiness the empirical results do not support the hypothesis

competitive banks and the inflation tax abstract the purpose of this note is to show that the presence of a competitive banking sector has important quantitative implications for the revenue maximizing rate of inflation

dynamic structural models and the high ination period in brazil modelling the monetary system in this paper we develop a linear structural dynamic econometric model for the high ination period in brazil the main goal is to obtain a parsimonious model that accounts for a complex dynamic present in the monetary system during the period describing therelationships among output ination rate interest rates and real money we start the analysis after the cruzado plan cast in 1986 following a progressive strategy in deriving the econometric model the results show that we can identify a long run money demand equation and the model describes parsimoniously and in detail the relationship among the variables despite all the instability present in the second half of the 1980 s in brazil with special attention to the role played by nominal wage ination in determining the dynamics observed in price ination

an introduction to the theory of rational expectations under asymmetric information every good economics textbook contains the cliche that market prices provide signals which facilitate the allocation of resources to their best use in a world not subject to random shocks consumers and producers when faced with competitive prices need look no further than their own preferences or production technology to be able to make a decision they need give no thought to the tastes endowments or technology of other agents however in a world subject to random shocks this is no longer the case agents are faced with the problem of forecasting future states of nature and more importantly of forecasting the impact of these states on the actions of other agents rational expectations theories provide a model of how agents make those forecasts in a world subject to random shocks it will be the case that agents acquire or at least attempt to acquire information about the future realization of the shocks it will in general be the case that different agents have access to different information the fact that information is dispersed throughout the economy has the potential to cause a misallocation of resources relative to what would be the case if all agents knew everything an efficient allocation of resources will in general require the transfer of information from consumers who have some information about their future demands to producers who can take current actions to mitigate avoidable scarcities or surpluses though many classical and neo classical writers emphasize the informational role of prices the standard marshallian or walrasian model of competitive equilibrium does not involve prices transferring information across traders the purpose of this paper is to show that rational expectations models are radically different from walrasian models in an economy where traders have diverse information this is demonstrated by showing that unlike what occurs in a walrasian equilibrium of an economy with heterogeneous information if there is a complete set of insurance markets and utility is additively separable over time then there exists a rational expectations equilibrium which gives consumers the same allocation as if each consumer has access to all of the economy s information this implies that under the above assumptions a central planner with all the economy s information could not pareto dominate the competitive allocation achieved when traders have diverse information and rational expectations this paper makes no attempt to survey the literature on rational expectations the reader is referred to shiller 1978 barro 1981 for a survey of macroeconomics and rational expectations and radner 1980 for a survey of the microeconomics and mathematical theory of rational expectations this paper will however try to outline the evolution of the rational expectations concept from a notion of optimal forecasting to a virtually complete departure from the walrasian model of equilibrium the rest of this section is devoted to a discussion of pre rational expectations ideas

approximating the effective protection coefficient without reference to technological data when proposals for reform of tariff or subsidy policies are made attempts to predict the effect on incentives are frequently hampered by the need for input output technical data this article develops and illustrates the use of a methodology for approximating effective protection coefficients epcs when such data are unavailable or outdated it derives the equations which approximate the epc from statistical analysis of a cross section of existing epc studies for four agricultural commodities corn cotton rice and wheat informational requirements for computing approximations include the nominal protection coefficients on output and tradable inputs and readily available macroeconomic data these approximation equations perform well in an out of sample test

inflation in argentina stop and go since the austral plan the austral plan launched in 1985 was argentina s most recent stabilization strategy for reducing high inflation a heterodox program it combined orthodox components tight fiscal policy and monetary restraint with less conventional wage and price controls the austral plan failed to bring inflation down on a sustained basis but it provided useful lessons about the design of heterodox stabilization programs the difficulties of sustaining this type of effort and the consequences of failure

market efficiency and natural selection in a commodity futures market while the literature usually justifies informational efficiency in the context of rationality this article shows informational efficiency by applying the evolutionary idea of natural selection in a dynamic futures market speculators are assumed to merely act upon their predetermined trading types buyer or seller their predetermined fractions of wealth allocated for speculation and their inherent abilities to predict the spot price reflected in their distributions of prediction errors with respect to the spot price this article shows that the proportion of time that the futures price equals the spot price converges to one with probability 1 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a novel market efficiency index for energy futures and their term structure risk premiums abstract this paper proposes a novel futures market efficiency index which aggregates the efficiencies of futures contracts across their term structure spanning from one month to 12 months the index measures the ability for price discovery of a long term futures contract on its nearby short term contract consistently across its terms the index uses a recently developed futures market efficiency test which accounts for heteroscedastic prices and time varying risk premiums it simultaneously estimates the term premiums of futures providing valuable information for the investor the proposed index is employed to investigate the efficiencies of four major energy commodities namely crude oil natural gas heating oil and gasoil during the sample period 1990 2016 numerical results indicate that the market efficiencies vary across terms and across energy commodities gasoil futures traded on the intercontinental exchange ice are the most efficient and natural gas futures are the least efficient in prices the spillover dynamics of market risk information across futures markets are investigated using conditionally heteroscedastic common factors chcfs extracted for each commodity using the estimated term premiums there exist significant delayed contemporaneous and potential information spillovers among term premiums of the energy commodities in our sample our findings are robust and they can help investors to optimally diversify their portfolios

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

inflation dynamics and food prices in ethiopia during the global food crisis ethiopia experienced an unprecedented increase in inflation among the highest in africa using monthly data over the past decade we estimate models of inflation to identify the importance of the factors contributing to cpi inflation and three of its major components cereal prices food prices and non food prices our main finding is that movements in international food and goods prices measured in domestic currency determined the long run evolution of domestic prices in the short run agricultural supply shocks affected food inflation causing large deviations from long run price trends monetary policy seems to have accommodated price shocks but money supply growth affected short run non food price inflation our results suggest that when analyzing inflation in developing economies with a large food share in consumer prices world food prices and domestic agricultural production should be considered omitting these factors can lead to biased results and misguided policy decisions

fiscal discipline and the choice of exchange rate regime conventional wisdom claims that fixed exchange rates provide more fiscal discipline than do flexible rates but the recent experiences in europe the record of sub saharan countries in the 1980s and the history of stabilization attempts in latin america cast empirical doubts on this wisdom to explore this puzzle we present a standard intertemporal model with perfect capital mobility and price flexibility in which fiscal policy is endogenously determined by a maximizing fiscal authority

public sector price increases credibility and welfare abstract this paper examines the dynamics of inflation and unemployment when the government increases public sector prices and wage indexation prevents the labor market from clearing in the short run credible reforms are virtually certain to be immediately deflationary and welfare improving even when the labor market clears very slowly temporary price increases however usually produce higher inflation after a short period of time and often reduce welfare when higher inflation provokes the government to reverse the reform there exist multiple self fulfilling equilibria

relative prices in the uk personal sector money demand function nonparametric demand analysis is used in order to establish admissible monetary aggregates and also to establish a potential role for relative prices in the money demand function a conventional money demand specification is then contrasted with a money demand function which contains the relative prices of durables nondurables and services as additional regressors evidence from long run cointegration analysis short run error correction models and nonnested testing all confirm a role for relative prices in the u k personal sector s money demand function copyright 1996 by royal economic society