battese coelli estimator with endogenous regressors abstract we provide a framework for dealing with the endogeneity problem in the battese coelli estimator for productive efficiency measurement

the changing relationship between aggregate price and output the british experience over the past two and a half decades great britain has exhibited the most noticeable increase in inflation variability among the ten major noncommunist industrialized countries in addition there has been an apparent worsening in the output inflation tradeoff this paper attempts to identify and empirically assess possible causes of the deterioration in the british output inflation tradeoff in the context of a new classical type model supply side shocks can cause an increase in the inflation rate and a decrease in real output and it is estimatedthat such shocks interacted with inflation variability to reduce real output roughly 3 3 percent between the period 1957 1968 and the period 1969 1980 also contributing to the deterioration in the output inflation tradeoff it is estimated that the decline in the natural rate of real output due to inflation variability as hypothesized by milton friedman amounted to about 2 3 to 2 5 percent between these two subperiods this abstract was borrowed from another version of this item

optimal monopolist pricing under demand uncertainty in dynamic markets we examine pricing policy for a monopolist facing uncertain demand in a market characterized by dynamics on the demand side such as diffusion or saturation effects and or on the cost side experience curve effects our model explicitly incorporates the impact of demand uncertainty and thus allows us to analyze the implications of uncertainty on the optimal price path by contrasting the stochastic policy with the corresponding deterministic policy we begin with an analysis of the general model and then focus on several special cases based on well known demand specifications to gain more specific insights and to suggest directional guidelines for dynamic pricing decisions in an uncertain environment in general the interaction among uncertainty demand and or cost dynamics and firm s discount rate thus farsighted firms operating under dynamic market conditions with high demand uncertainty such as high tech companies with innovative products for consumer or industrial markets should attach partic

the meta taylor rule we characterise u s monetary policy within a generalized taylor rule framework that accommodates uncertainties about the duration of policy regimes and the specification of the rule in addition to the standard parameter and stochastic uncertainties inherent in traditional taylor rule analysis our approach involves estimation and inference based on taylor rules obtained through standard linear regression methods but combined using bayesian model averaging techniques employing data that were available in real time the estimated version of the meta taylor rule provides a flexible but compelling characterisation of monetary policy in the united states over the last forty years

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

exchange rate predictability in a changing world an expanding literature articulates the view that taylor rules are helpful in predicting exchange rates in a changing world however taylor rule parameters may be subject to structural instabilities for example in the aftermath of the global financial crisis this paper forecasts exchange rates using taylor rules with time varying parameters tvp estimated by bayesian methods focusing on the data from the crisis we improve upon the random walk for at least half and for as many as seven out of 10 of the currencies considered results are stronger when we allow the tvp of the taylor rules to differ between countries

a note on merton s optimum consumption and portfolio rules in a continuous time model in the paper optimum consumption and portfolio rules in a continuous time model by r c merton j econ theory 3 1971 373 413 solutions obtained in cases when marginal utility at zero consumption is finite are not feasible while they do satisfy the hamilton jacobi bellman equations they do not represent appropriate value functions because the boundary behavior near zero wealth is not satisfactorily dealt with in this note we specify the boundary behavior and characterize optimal solutions journal of economic literature classification numbers 022 213

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

monetary policy regime shifts new evidence from time varying interest rate rules i introduction interest rate policies are complex decisions they rely on a multitude of indicators and models and are by nature associated to events not always captured by relatively simple econometric tools nonetheless there is now a widespread consensus that the class of simple policy rules examined by recent microfounded models of the economy generates stabilization properties that are very close to those of optimal feedback rules woodford 2003 feedback rules nowadays are customary tools for monetary policy analysis furthermore rule based policymaking is generally accepted as the reference framework of monetary policy strategies bank of england 1999 european central bank 2004 monetary policy reaction functions summarize the importance that policymakers attach to policy objectives as well as their views on the structure of the economy traditionally those functions are estimated as constant parameters policy rules this is a plausible simplification but a number of reasons suggest that rules should allow for instability and parameter variation over time constant parameter reaction functions might blur the role played by various real world factors 1 model uncertainty 2 conflicting objectives 3 shifting preferences on policymakers choices and 4 nonlinearities in particular reduced form policy models that do not allow for shifts and asymmetries in behavioral relationships could produce misleading results dynamic stochastic general equilibrium dsge models represent one potentially promising way of overcoming these problems this increasingly popular approach is based on microfounded descriptions of the economy recent studies also provide novel techniques to estimate and evaluate linearized dsge models using bayesian methods del negro et al 2007 the bayesian framework represents a natural setup to account for model and parameter uncertainty however the dsge approach imposes a large number of restrictions on the data in the specific context of interest rate rules its ability to generate qualitative and robust assessments on monetary policy conduct appears problematic this article provides some new evidence on interest rate policies in five large economies united states united kingdom germany france and italy through the implementation of a time varying parameters approach tvp henceforth we estimate policy rules as summarized by simple reaction functions defined in terms of expected inflation and output gaps in contrast with most existing analyses we employ a tvp methodology based on the kalman filter algorithm to estimate our instrument rules in practice we allow the policy rules coefficients to vary over time what we obtain are estimates of the state vector for each observation in our sample these estimates can then describe the evolution of monetary policy over time moreover we evaluate the conditional variance of interest rates implied by our tvp methodology a host of factors may cause shifts in the estimated parameters of monetary policy reaction functions some of them may be due to institutional reforms like the introduction of inflation targets or the move to an exchange rate peg or a fixed exchange rate in estimating reaction functions defined in terms of final policy objectives one aims at capturing the relative emphasis placed by policymakers on the attainment of output and inflation targets over time such emphasis might evolve therefore one needs to model the observer s view on the likelihood that these shifts are smooth transitions or abrupt regime changes by allowing the weights of the policy rule to vary only gradually we are able to identify relevant shifts in policy conduct regardless of their exact configuration as argued at length in the next section our approach is better suited than conventional fixed parameter techniques to deal with lucas critique and more in general with the issue of structural change

estimation of a forward looking monetary policy rule a time varying parameter model using ex post data abstract in this paper we consider estimation of a time varying parameter model for a forward looking monetary policy rule by employing ex post data a heckman type 1976 the common structure of statistical models of truncation sample selection and limited dependent variables and a simple estimator for such models annals of economic and social measurement 5 475 492 two step procedure is employed in order to deal with endogeneity in the regressors this allows us to econometrically take into account changing degrees of uncertainty associated with the fed s forecasts of future inflation and gdp gap when estimating the model even though such uncertainty does not enter the model directly we achieve efficiency in estimation by employing the standardized prediction errors for inflation and gdp gap as bias correction terms in the second step regression we note that no other empirical literature on monetary policy deals with this important issue our empirical results also reveal new aspects not found in the literature previously that is the history of the fed s conduct of monetary policy since the early 1970s can in general be divided into three subperiods the 1970s the 1980s and the 1990s the conventional division of the sample into pre volcker and volcker greenspan periods could mislead the empirical assessment of monetary policy

uncovering long term relationships between oil prices and the economy a time varying cointegration analysis abstract establishing the relation between oil price movements and macroeconomic performance is of great importance for firms and policymakers alike prior studies established this relation using the assumption that the long run relation is intertemporally constant however there is much recent evidence demonstrating that this assumption may not hold in practice to address this issue and go beyond the restrictive time invariant environment we employ the use of the time varying cointegration framework of bierens and martins 2010 we present evidence of the long run oil economy relation evolving over the 1974 2015 period with major events such as the gulf war and the financialisation of commodity markets proving to be driving forces across the u s european and g7 economies considered

limited liability and the modern corporation in theory and in practice the catastrophic consequences of a lack of public control over the operations of large private corporations have been thrown into sharp relief by two major events in the recent past the global financial crisis and the deepwater horizon oil spill in the gulf of mexico while these events obviously differ in scope and nature they nevertheless turn the spotlight on a fundamental problem of contemporary capitalism an economic system that facilitates the privatisation of gains in the hands of ever smaller elites while also socialising risk losses in an anarchic manner to the detriment of the many is not politically viable in the long run this is the case in particular if a core element of this system s legitimacy is its claim to promote democracy at home and around the world based on principles of transparency and accountability both the global financial crisis and the deepwater horizon oil spill have already attained the status of watershed events mainly because the social economic and environmental risks inflicted by private actors on very large groups of people were extraordinary and the causes of failure to manage these risks were systemic rather than accidental at the heart of the systemic nature of these watershed failures lies the gradual evolution of the modern corporation into organisations with the power to re shape in their favour a changing and varied history of precarious balancing acts between public and private interests in advanced capitalist economies from its beginnings capitalism has been defined by the primacy of economic over political organisation most famously encapsulated in adam smith s metaphor of the invisible hand much later albert hirschman s insightful account of how the interests gradually came to outweigh the passions hirschman 1977 provides a detailed analysis of such early legitimisation patterns according to which the pursuit of individual freedom and economic selforganisation would be the driving force of political pacification and collective civilisation yet from the beginning such high expectations were curbed by warnings of potential conflicts between private and public interests if the former became too powerful thus adam smith himself pointed out that t o widen the market and to narrow the competition is always the interest of the dealers to widen the market may frequently be agreeable to the interest of the public but to narrow the competition must always be against it and can serve only to enable the dealers by raising their profits above what they naturally would be to levy for their own benefit an absurd tax on the rest

optimal portfolio choice under loss aversion this paper analyzes the optimal investment strategy for loss averse investors assuming a complete market and general ito processes for the asset prices the loss averse investor follows a partial portfolio insurance strategy when the investor s planning horizon is short less than 5 years he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility the empirical section of the paper estimates the level of loss aversion implied by historical u s stock market data using a representative agent model we find that loss aversion and risk aversion cannot be disentangled empirically

retirement saving with contribution payments and labor income as a benchmark for investments abstract in this paper we study the retirement saving problem from the point of view of a plan sponsor who makes contribution payments for the future retirement of an employee the plan sponsor considers the employee s labor income as investment benchmark in order to ensure the continuation of consumption habits after retirement we demonstrate that the demand for risky assets increases at low wealth levels due to the contribution payments we quantify the demand for hedging against changes in wage growth and find that it is relatively small we show that downside risk measures increase risk taking at both low and high levels of wealth

limited liability and multinational enterprises a case for reform in the context of corporate groups the legal principles of limited liability and corporate separation can lead to injustice in cases of harmto involuntary creditors by externalising risks that ought to be internalised by the enterprise as the better risk taker the avoidance of responsibility can be achieved by interposing a separate legal entity between the victims and the ultimate controller of the group be it a parent company or its controlling shareholders the resulting lack of legal responsibility could be remedied in a number of ways ranging from adaptations of existing exceptions to the doctrine of limited liability to outright abolition of limited liability preference is given to a statutory principle of enterprise liability for the controlling entity the implications of these doctrines are also discussed in relation to the choice of jurisdiction in which to bring a legal action

u s monetary policy surprises identification with shifts and rotations in the term structure we develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve the model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks a latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks the approach offers informational advantages over event studies results from the u s term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock rather than differing reactions to the same policy shock

explicit solution of a general consumption portfolio problem with subsistence consumption and bankruptcy this paper solves a general continuous time single agent consumption and portfolio decision problem with subsistence consumption in closed form the analysis allows for general continuously differentiable concave utility functions the model takes into consideration that consumption must be no smaller than a given subsistence rate and that bankruptcy can occur thus the paper generalizes the results of karatzas lehoczky sethi and shreve 1986

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

changes in federal reserve preferences abstract using a model of optimizing central bank behavior i estimate the dynamic behavior of preferences which are captured by the relative weight put on stabilizing inflation versus minimizing the output gap unlike previous work i let this parameter vary continuously over time there is a drastic but steady rise in the weight on inflation around the appointment of paul volcker however i find variation in preferences throughout the sample period the results suggest that preference changes have been more complex than typically assumed in the literature the estimated preference series is used to perform counterfactual experiments and to construct a new measure of monetary shocks

merton s portfolio problem including market frictions a closed form formula supporting the shadow price approach abstract this paper formulates a portfolio optimization in a friction market as a suitable stochastic control problem with hyperbolic absolute risk aversion utility functions under a specific functional form of the amount of wealth invested in the risky asset inspired by the merton optimal dynamics the state variable is the amount of wealth invested in the risky asset while the control variable is the share rate this formulation has two advantages first it provides a portfolio where the optimality is obtained by minimizing the probability of large changes in the portfolio composition with consequently low frictions while allowing for an explicit solution to the optimal control problem second with this formulation it can be proven that this optimal solution is the optimal solution of the frictionless merton problem for corrected price dynamics the corrected dynamics shows that the market friction increases the risk premium by an additional term that is an elementary function of the risk associated with the market frictions as well the price of the risk which also depends on the risk aversion of the investor in addition the corrected dynamics supports the existence of a shadow price in friction markets as already shown in kallsen and muhle karbe 2010 finally an empirical analysis to assess the model performance is illustrated on five minute data of four major traded stocks three market indexes and four exchange rates including the bitcoin usd rate

bad luck bad policy and learning a markov switching approach to understanding postwar u s macroeconomic dynamics abstract this paper evaluates the role of monetary policy in understanding the u s post war macroeconomic fluctuations we construct a medium size dsge model in which the central bank through a real time learning process can make mistakes in estimating key elasticities between macroeconomic aggregates and the central banks objectives may change over time the model also features time varying volatilities of non policy shocks we find that misperceptions of the persistence of inflation and the slope of the phillips curve could affect optimal monetary policy decision making therefore their accurate prediction is key for achieving successful monetary policy outcomes in addition we argue that the monetary policy shift geared toward inflation stabilization in the late 1970s changed the composition of output making the marginal efficiency of investment shock that proxies for the functioning of the financial sector the most important contributor to the business cycle

rational expectations supply shocks and the stability of the inflation output tradeoff some time series evidence for the united kingdom 1957 1977 abstract the lucas 1973 supply curve is modified to incorporate both specific and aggregate supply shocks in addition to demand shocks a time series test of the rational expectation natural rate renr hypothesis is derived monthly data for the united kingdom 1957 1977 are split into periods based on a moving variance procedure utilizing zellner palm transfer functions it is shown that a significant reduction in the short run inflation output tradeoff is associated with an increase in the variance of the unanticipated price level this provides evidence in favor of the renr hypothesis moreover the worsened tradeoff is shown to have been caused by higher supply side rather than demand side volatility

optimal consumption and portfolio policies when asset prices follow a diffusion process abstract we consider a consumption portfolio problem in continuous time under uncertainty a martingale technique is employed to characterize optimal consumption portfolio policies when there exist nonnegativity constraints on consumption and on final wealth we also provide a way to compute and verify optimal policies our verification theorem for optimal policies involves a linear partial differential equation unlike the nonlinear partial differential equation of dynamic programming the relationship between our approach and dynamic programming is discussed we demonstrate our technique by explicitly computing optimal policies in a series of examples in particular we solve the optimal consumption portfolio problem for hyperbolic absolute risk aversion utility functions when the asset prices follow a geometric brownian motion the optimal policies in this case are no longer linear when nonnegativity constraints on consumption and on final wealth are included by these examples one can see that our approach is much easier than the dynamic programming approach

limited liability shareholder rights and the problem of corporate irresponsibility there has long been a tendency to see the corporate legal form as presently constituted as economically determined as the more or less inevitable product of the demands of advanced technology and economic efficiency through an examination of its historical emergence focusing in particular on the introduction of general limited liability and the development of the modern doctrine of separate corporate personality this paper takes issue with this view arguing that the corporate legal form was and is in large part a political construct developed to accommodate and protect the rentier investor it is moreover a construct which institutionalises irresponsibility against this backdrop different ways of trying to resolve the problem of corporate irresponsibility are explored the key the paper suggests is to be found in decoupling the privilege of limited liability from rights of control

indexing the income tax code monetary fiscal interaction and the great moderation abstract this paper considers the consequences of automatically indexing the us federal income tax code to inflation indexation implemented during the 1981 federal tax overhaul and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard new keynesian models with a generalized progressive labor income tax additionally fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply side disturbances together these results support a fiscal extension to the good policy hypothesis of the great moderation and encourage further indexation of the united states tax code

the time varying effect of monetary policy on stock returns we find that a surprise increase on the federal funds rate has five times stronger and statistically significant effects on stock returns during 2000 2007 versus statistically insignificant effects during 1989 2000 these differences are not apparent in the bond markets

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

the lucas hypothesis on the phillips curve further international evidence abstract this paper is a further attempt to test the lucas hypothesis on the phillips curve by making cross country comparisons that hypothesis posits that nominal shocks affect real aggregates only if individuals mistake them for what they are not movements in real variables the existence of a trade off between output and inflation is conditional on economic agents misinterpreting the price movements they observe countries with widely fluctuating exogenous shocks will have a more vertical phillips curve as their inhabitants sharpen their instrumental to differentiate between real and nominal shocks hence cross country comparisons provide fertile grounds to test this hypothesis if it holds true we should find a positive correlation between phillips curve slopes and the standard deviations of the exogenous shocks the evidence presented here confirms lucas s findings

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

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

the impact of renewable energies on eex day ahead electricity prices in this paper we analyze the impact of renewable energies wind and photovoltaic on the formation of day ahead electricity prices at eex we give an overview of the policy decisions concerning the promotion of renewable energy sources in germany and discuss their consequences on day ahead prices an analysis of electricity spot prices reveals that the introduction of renewable energies enhances extreme price changes in the frame of a dynamic fundamental model we show that there has been a continuous electricity price adaption process to market fundamentals furthermore the fundamental drivers of prices differ among hours with different load profiles our results imply that renewable energies decrease market spot prices and have implications on the traditional fuel mix for electricity production however the prices for the final consumers increased overall because they must pay in addition the feed in tariffs for the promotion of renewable energy

the evolution of u s monetary policy 2000 2007 abstract a vector autoregression with time varying parameters is used to characterize changes in federal reserve policy that occurred from 2000 through 2007 and describe how they affected the performance of the u s economy declining coefficients in the model s estimated policy rule point to a shift in the fed s emphasis away from stabilizing inflation over this period more importantly however the fed held the federal funds rate persistently below the values prescribed by this rule under this more discretionary policy inflation overshot its target and the funds rate followed a path reminiscent of the stop go pattern that characterized fed behavior prior to 1979

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

optimal saving under poisson uncertainty abstract this paper studies optimal saving and investment behaviour of a household that can either invest in a riskless or a risky saving technology when risk results from a poisson process the focus is on behaviour of households in a general equilibrium setup poisson processes are introduced since they allow us to understand and model endogenous cycles jointly with long run growth it turns out that a very simple intuitive and tractable characterization of equilibrium is possible journal of economic literature classification numbers c61 o33 o41

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

impatience impoverishment and risk abstract a stochastic growth theory model is presented in which the less well off are impatient to consume but are also relatively less risk averse they can therefore maintain their consumption rates without eventually becoming impoverished unlike in the certainty case