the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

approximate factor structures interpretations and implications for empirical tests this paper provides some new insights about approximate factor structures as defined by chamberlain and rothschild 2 and their implications for empirical tests first we show that any economy that satisfies an approximate factor structure can be transformed in a manner that does not alter the characteristics of investor portfolios into an economy that satisfies an exact factor structure as defined by ross 9 second we show that principal components analysis represents just one of many methods of forming groups of well diversified portfolios with no idiosyncratic risk in large samples correct factor loadings will be obtained by regressing security returns on any group of these portfolios our interpretations of the chamberlain and rothschild results also provide additional insights into the testability of the arbitrage pricing theory we show that securities cannot be repackaged to hide factors in the manner suggested by shanken 10 without the variance of some of the repackaged securities approaching infinity in large economies

multivariate tests of the zero beta capm abstract a cross sectional regression test csrt of the capm is developed and its connection to the hotelling t2 test of multivariate statistical analysis is explored algebraic relations between the csrt the likehood ratio test and the langrange multiplier test are derived and a useful small sample bound on the distribution function of the csrt is obtained an application of the csrt suggests that the crsp equally weighted index is inefficient but that the inefficiency is not explained by a firm size effect from february to december

do online homework tools improve student results in principles of microeconomics courses recent technological advances in education have made it possible for instructors to use new tools in their attempt to enhance student interest and improve understanding of economic principles a substantial body of economic education literature has examined the effectiveness of these tools in influencing student performance generally these studies compare student performance between a control group and a test group in the last decade or so these new tools have tended to focus on different aspects of computer technology and whether or not use of the technology enhances student learning along these lines agarwal and day 1998 found that use of the internet in economics instruction had a positive effect on student learning as measured by improvement in the test of understanding in college economics tuce scores in both graduate and undergraduate economics courses similarly sosin et al 2004 suggest that tuce scores of students in classes using extensive technology showed a small but significant improvement over those students in classes using little technology this paper contributes to and extends the literature by reporting the results of an empirical study investigating the effect on student learning of an online homework tool aplia compared to the more traditional instructor assigned and graded homework do online homework tools improve student results in principles of microeconomics courses

stable factors in security returns identification using cross validation recent papers in financial research focus on identifying a stable factor structure for security returns the likelihood ratio test typically is used to determine the number of factors from exploratory factor analysis models in this article we consider the use of cross validation to identify a stable factor structure in security returns when applied to actual stock return data cross validation identifies a smaller number of stable factors than the likelihood ratio test in groups of 30 60 randomly selected securities cross validation suggests one dominant factor whereas the likelihood ratio test identifies from four to six factors furthermore when groups are designed to highlight industry or size effects the discovery of more than one dominant factor is problematic even if there are multiple economic factors generating stock returns they may be difficult to disentangle if the underlying factors tend to be correlated

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

budget deficits inflation risk and asset prices abstract kitchen examines how us budget deficit news affects asset prices and concludes that news of lower deficits reduces the inflation risk premium this paper constructs narrative histories of several deficit reduction laws to identify when markets learned that deficits would fall it then estimates a multi factor model that allows the inflation risk premium to vary following news of deficit reductions the results indicate that there is a large and statistically significant drop in the factor price associated with inflation following news that budget deficits would decline

domestic and international financial market responses to federal deficit announcements abstract this study examines the response of domestic and international financial variables to announced changes in federal deficit projections over the 1981 1994 period as observed in earlier studies rates on us treasury securities responded positively to announced increases in federal deficit projections new evidence shows that deficit effects are transmitted internationally with foreign long term interest rates also increasing in response to announced increases in us deficit projections the exchange value of the dollar tends to be positively related to announced changes in deficit projections but that result appears to be related to the degree of insulation of foreign financial markets from us financial markets finally the price of gold responded positively to announced changes in deficit projections taken together the results suggest that higher projected deficits raise real interest rates in part because of an increase in an inflation risk premium

the international transmission and effects of fiscal policies in recent years the world economy has been subject to large and unsyncronized changes in fiscal policies high and volatile real rates of tnterest large fluctuations in real exchange rates and significant variations in private sector spending this paper reviews some of the key facts characterizing the effects of fiscal policies during the first half of the 1980s and provides a simple analytical framework suitable for the interpretation of these facts the analytical framework builds on a two country model of the world economy which is applied to the analysis of the transmission and effects of various changes in the time profile of taxes and of government spending generally the predictions of the model concerning the relation among the intercountry patterns of consumption long and short term real rates of interest real exchange rates and fiscal policies are consistent with the stylized facts this abstract was borrowed from another version of this item

classroom experiments is more more studies have demonstrated that classroom experiments have a positive effect on student achievement in economics courses questions remain regarding the appropriate number of experiments in the current study we attempt to determine whether more intensive use of classroom experiments is associated with greater student achievement our data contains variation in the number of experiments administered in a principles of microeconomics course we find that participation in classroom experiments has a positive but diminishing marginal benefit on students final course scores we also find that classroom experiments can bridge some achievement gaps between older and younger students between whites and minorities

factor pricing in a finite economy abstract prior theoretical derivations of the arbitrage pricing theory apt bound an aggregate measure of the deviation of mean asset returns from that predicted by a linear pricing equation it is conceivable given this bound that some assets might be badly mispriced by the model in this paper a more intuitive derivation of the factor pricing equation is presented which describes the deviation on an asset by asset basis the deviation is shown to be small for assets in a realistic finite economy and is arbitrarily close to zero for those assets with arbitrarily small size relative to aggregate wealth it follows that the linear pricing equation provides a good approximation for the mean returns of all traded assets

divisia moments of greek consumption abstract greek consumption data 1951 1984 are used to compute divisia moments quantity variances tend to exceed price variances and the price quantity covariance is mostly negative in periods of high inflation the price variance increases while both the price quantity correlation and the income flexibility decrease

technology improves learning in large principles of economics classes using our wits much recent innovation in teaching economics has focused on active learning strategies and on the use of technology at the same time budget realities make large lecture classes a fact of life for principles of economics courses at many universities unfortunately neither active learning strategies nor teaching with technology tend to work well in large classes active learning is difficult to facilitate with many students and learning with technology in economics has been limited for the most part to classes small enough to fit in computer labs we have developed a system that uses handheld devices and wireless technology to facilitate interactive learning in large classes by putting technology in the hands of the students during class the wireless interactive teaching system wits consists of handspring visors a hand held pda equipped with wireless capabilities a laptop server a wireless access point and projector and proprietary software this intranet uses the 802 11b wireless standard wits allows students to trade in markets play standard economics games prisoner s dilemma public goods 2 2 matrix etc take multiple choice quizzes and communicate with the instructor during class see http lshta vt edu index html for a sample exercise and instructional material we report the results of a controlled experiment to test the impact of wits facilitated active learning exercises our study differs from previous work in three important ways first use of the wits system allows us to implement experiments in larger classes than previous studies using hand run exercises second we measure learning using exam scores rather than the test of understanding in college economics tuce so that improved results are understandable in terms of students grades the metric that students and universities use to evaluate performance finally to isolate whether changes in learning are from substituting experiment based material for standard lectures or whether gains are the result of active learning the control class held parallel research days where students discussed the same experiment students in the wits class earned final grades that averaged 3 2 points higher than the control class though impact varies by gender and class level the impact on learning is highest for freshmen and women groups that often struggle with introductory economics and lowest for male seniors who in our sample tend to be engineering majors satisfying a general education requirement teaching evaluations are also significantly higher in the experimental class

estimation of unobserved expected monthly inflation using kalman filtering hamilton developed a technique for estimating financial market expectations of inflation based on the observed time series properties of interest rates and inflation the technique is based on a state space representation derived from an underlying vector autoregressive process of the expected real interest rate and the expected inflation rate on lagged expectations and lagged values of the observed treasury bill rate and the actual inflation rate this article extends this work in two ways first we use monthly data since the quarterly data used by hamilton may obscure many interesting movements especially for determining the role of inflationary expectations in stock price movements and this is one of our primary interests second we employ an alternative method developed by burmeister and wall for estimating the parameters of the model and this method leads to a different identification proof both approaches share the use of the kalman filter to estimate the unobserved variables in this case e

the relation between narrative and money market indicators of monetary policy this paper studies the relation between narrative based indicators of monetary policy and widely used money market indicators of monetary policy three principal findings emerge first changes in monetary policy as measured by the narrative based policy indices are associated with persistent changes in the levels of m2 and the monetary base in contrast changes in the narrative policy indicators lead to transitory changes in short term interest rates nonborrowed reserves and the spread between the six month commercial paper rate and the three month treasury bill rate third these findings are generally robust across different narrative based policy indices

some empirical tests of the theory of arbitrage pricing we estimate the parameters of ross s arbitrage pricing theory apt using daily return data during the 1963 78 period we compare the evidence on the apt and the capital asset pricing model capm as implemented by market indices and find that the apt performs well the theory is further supported in that estimated expected returns depend on estimated factor loadings and variables such as own variance and firm size do not contribute additional explanatory power to that of the factor loadings

a simple approach to arbitrage pricing theory the following sections are included introductionarbitrage pricingdiscussionreferencesdiscussion notes on the arbitrage pricing theorypure arbitrage pricing theoryapproximate arbitrage and the aptapproximate factor modelsthe competitive equilibrium version of the aptconclusionnotereferences this abstract was borrowed from another version of this item

divisia moments of australian consumption abstract quarterly australian consumption data 1959 1978 are used to compute divisia price and quantity indexes together with divisia variances and covariances the quantity variances tend to exceed the price variances and the price quantity covariances are mostly negative estimates of the income flexibility are also presented

inflation and relative prices a system wide approach abstract the paper introduces a system wide model for the analysis of the effects of inflation on relative prices this enables the identification of those commodities whose relative prices are distorted by inflation the model provides measures of the natural rate of relative price variability which is associated with zero inflation and the inflation rate which minimizes relative price variability an illustrative application with australian data is provided

divisia moments of u s consumption 1929 1982 abstract using u s consumption data for 1929 to 1982 divisia price and volume indexes are computed as well as divisia variances and covariances the quantity variances tend to be larger than the price variances and the majority of the price quantity covariances is negative

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

arbitrage pricing theory as a restricted nonlinear multivariate regression model iterated nonlinear seemingly unrelated regression estimates by replacing the unknown random factors of factor analysis with observed macroeconomic variables the arbitrage pricing theory apt is recast as a multivariate nonlinear regression model with across equation restrictions an explicit theoretical justification for the inclusion of an arbitrary well diversified market index is given using monthly returns on 70 stocks iterated nonlinear seemingly unrelated regression techniques are employed to obtain joint estimates of asset sensitivities and their associated apt risk prices without the assumption of normally distributed errors these estimators are strongly consistent and asymptotically normal with the additional assumption of normal errors they are also full information maximum likelihood estimators classical asymptotic nonlinear nested hypothesis tests are supportive of the apt with measured macroeconomic factors

an explicit bound on individual assets deviations from apt pricing in a finite economy abstract ross s arbitrage pricing theory apt is a tractible and reasonable alternative to the mean variance model nonetheless understanding of the theory has been obscured by the complexity of the sequence economy models used for motivation by contrast we give a simple and direct derivation of the apt in a finite economy using an explicit bound on the deviations from apt prices across assets a coarse calculation shows that theoretical deviations from apt pricing are negligible in our economy

yes the apt is testable the arbitrage pricing theory apt has been proposed as an alternative to the meanvariance capital asset pricing model capm this paper considers the testability of the apt and points out the irrelevance for testing of the approximation error we refute shanken s objections including his assertion that roll s critique of the capm is applicable to the apt we also explain the testability of the apt on subsets and we explore the relationship between the apt and the capm the arbitrage pricing theory apt has been the subject of extensive research efforts since it was introduced by ross 36 37 the research has included theoretical papers and a growing empirical literature 2 nonetheless there seems to be some confusion in the literature about the relation between the theoretical underpinnings of the apt and its empirical tests this paper is an attempt to alleviate the confusion to illustrate the issues and to provide a focus section i of this paper is devoted to examining and refuting some points raised in shanken 40 which considers the testability of the apt the underlying premise of the apt is that asset returns ri are generated by a factor model of the form

the impact of classroom experiments on the learning of economics an empirical investigation i introduction in economics experimental research is still less common than in the natural sciences therefore it is not surprising that economists also make much less use of experiments for teaching purposes yet intuitively it is by no means clear that confronting a group of students with rules and incentives and observing what happens has a lower marginal impact on learning than demonstrating what happens when you put some chemicals together in a test tube however fels 1993 365 and deyoung 1993 348 49 recently called on those who actually use classroom experiments to provide evidence of the impact on students learning of economics this paper provides some limited evidence section ii describes the method used to evaluate the impact of classroom experiments section iii describes the experiment and offers some hints for those who want to try it section iv provides the results ii method a first indication that experiments might be useful as a teaching tool comes from isaac and walker s 1991 experiment they found that those with experience in the experiment behave differently from those without presumably due to some reflection on the problem the approach of this study is more straightforward and not confined to those who actually take part in the experiment our hypothesis is that merely following the experiment and its outcome also has an impact on learning seven instructors teaching courses in environmental economics or public finance were asked to give their usual lecture on the tragedy of the commons afterwards the control group about half of the students filled out a multiple choice test on that topic as an incentive to put some thought into that task in each course one of those students with no mistakes won a book on environmental economics namely beckenbach 1991 worth 26 80 german marks 1 the questions are reported in section iv the same questions were answered by the other students following the classroom experiment iii the experiment the experiment itself which takes only five to ten minutes was a simple take some game of which a more general account is given by mitter 1986 it involves five students who volunteer before the rules are explained in order to give the participants a chance to clarify remaining open points the experimenter should not forget to mention that tabular data for table i omitted on average the volunteers will not be worse off or might even carry off a small profit but that nevertheless they need to have some change in their pockets because there might be losers each receives two cards with the stylized picture of one cow on one card and five on the other the rules are explained roughly as follows imagine you are peasants using a common field every one of you has to decide how many cattle to keep on the commons one cow or five cows if you give me the card which shows one cow you receive one german mark if you give me the card which shows five cows you receive five marks however for every five cow card i receive every one of you gets one mark less for example if two of you put five cows on the common those two will each receive three marks i e five minus two for the others the payoff is one mark minus two marks which means they have to pay one mark now you can calculate for yourself what the payoffs for other constellations will be please make your decision secretly the participants were placed at some distance from each other and it was ensured that they could not communicate immediately after the experiment the payments were made and the experiment was repeated once with a different group of students five cows is the dominant strategy but the collective payoff would be greater if no one played it this method of demonstrating the commons dilemma is less complicated than the procedures reported in powers 1987 and tsai 1993