optimal monetary policy in an economy with inflation persistence abstract this paper studies optimal monetary policy in a model where inflation is persistent two types of price setters are assumed to exist one acts rationally given calvo type constraints on price setting the other type sets prices according to a rule of thumb this results in a phillips curve with both a forward looking term and a backward looking term the phillips curve nests a standard purely forward looking phillips curve as well as a standard purely backward looking phillips curve as special cases a cost push supply shock is derived from microfoundations by adding a time varying income tax and by making the elasticity of substitution between goods stochastic a central bank loss function for this model is derived from a second order taylor approximation of the household s welfare function optimal monetary policy for different relative values of the forward and backward looking terms is then analyzed for both the commitment case and the case of discretion

the new zealand approach to rules and discretion in monetary policy abstract the legislative framework under which the reserve bank of new zealand operates was changed in 1989 to one providing for a tightly constructed target rule with discretion over instrument choice the rationale for the change rests on the idea that damage to long run growth would follow if monetary policy were to pay active attention to the short run output and employment consequences of monetary policy actions the rule now in place thus prohibits monetary policy from active consideration of output and employment as objectives in their own right initial results provide tentative evidence of the benefits of the approach

short term inflation expectations evidence from a monthly survey note the assumption that economic agents have rational expectations is commonplace in studies of macroeconomic policy and asset market behavior research examining observable expectations from surveys however has generally found that the data reject the rational expectations hypothesis friedman 1980 reports that forecasts of long term interest rates from surveys of financial market participants are not rational figlewski and wachtel 1981 note that most investigators of the livingston survey data on economists inf lation expectations conclude that these data do not conform to the rational expectations hypothesis british survey data on the inflation expectations of consumers analyzed by evans and gulamani 1984 and on the inflation expectations of business firms examined by pesaran 1985 also appear inconsistent with rational expectations the failure of survey data to pass tests of rationality have led researchers such as mishkin 1983 to question the usefulness of survey data to proxy expectations this paper examines a different source of expectations data namely the surveys of money market participants conducted by money market services inc mms data from the mms surveys have been widely used in studies of how asset prices respond to unanticipated changes in economic variables recent papers by urich and wachtel 1984 pearce and roley 1985 and smirlock 1986 employ the median predicted inflation rate from the mms survey to construct a measure of the unexpected component of inflation announcements

bank regulation and risk taking incentives an international comparison of bank risk abstract this paper uses a panel database of 251 banks in 36 countries to analyze the impact of bank regulation on bank charter value and risk taking after controlling for deposit insurance and for the quality of a country s contracting environment the results indicate that regulatory restrictions increase banks risk taking incentives by reducing their charter value banks in countries with stricter regulation have a lower charter value which increases their incentives to follow risky policies these results corroborate a negative relation between regulatory restrictions and the stability of a banking system deposit insurance has a positive influence on bank charter value mitigating the risk shifting incentives it creates this positive influence disappears when we control for the possible endogeneity of deposit insurance

optimal monetary policy in a small open economy with home bias we analyze optimal monetary policy in a small open economy characterized by home bias in consumption peculiar to our framework is the application of a ramseytype analysis to a model of the recent open economy new keynesian literature we show that home bias in consumption is a su cient condition for inducing the monetary policy maker of an open economy to deviate from a strategy of strict markup stabilization and contemplate some optimal degree of exchange rate stabilization we focus on the optimal setting of policy both in the case of rms setting prices one period in advance and in a gradual fashion subject to adjustment costs while the rst setup allows us to analytically highlight home bias as an independent source of equilibrium

charter value risk taking and systemic risk in banking before and after the global financial crisis of 2007 2008 we investigate how bank charter value affects risk for a sample of oecd banks by using standalone and systemic risk measures before during and after the global financial crisis of 2007 2008 prio

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

renewable resource management with stochastic recharge and environmental threats abstract exploitation diminishes the capacity of renewable resources to withstand environmental stress increasing their vulnerability to extreme conditions that may trigger abrupt changes the onset of such events depends on the coincidence of extreme environmental conditions and on the resource state determining its resilience when the former is uncertain and the latter evolves stochastically the uncertainty regarding the event occurrence is the result of the combined effect of these two uncertain components we study optimal management in this setting the environmental threat renders the single period discount factor policy dependent and as a result the compound discount factor becomes history dependent existence of an optimal markovian deterministic stationary policy is established and the optimal state process is shown to converge to a steady state distribution

expectations as a source of macroeconomic persistence evidence from survey expectations in a dynamic macro model abstract embedding survey expectations in a standard dsge model helps to identify key slope parameters in standard relationships dramatically reduces the need for lagged dependent variables often motivated by price indexation and habit formation and obviates the need for autocorrelated structural shocks in the key equations formal statistical tests demonstrate that much of the persistence in aggregate data is better accounted for by slow moving expectations rather than by habits indexation and autocorrelated structural shocks

testing the rationality of inflation forecasts from survey data another look at the src expected price change data this paper develops a unified econometric approach for testing the rationality of expectations from survey data series the paper employs the estimation techniques of hansen 1982 and eichenbaum hansen and singleton 1982 to conduct tests of unbiasedness efficiency and orthogonality for the src expected price change data in contrast to the existing literature the analysis takes careful account of serial correlation and conditional heteroskedasticity in the disturbance terms the results do not reject the properties of unbiasedness efficiency or othogonality for this survey data series copyright 1989 by mit press

price dynamics and production lags this paper provides a new explanation of why inflation is sluggish in response to aggregate demand shocks and why aggregate output changes as result of such shocks we argue that these phenomena are related to lags between inputs and outputs in the production process production lags for short the broad intuition is that production activities in a modern economy are interconnected through complex input output relations with production lags within individual firms and that it takes considerable time for cost and price changes to penetrate the entire input output system our analysis provides a rationale for a prolonged inverse relation between inflation and unemployment the paper suggests that the interaction of inflation persistence and unemployment persistence may offer a possible explanation of high and prolonged european unemployment this abstract was borrowed from another version of this item

household versus economist forecasts of inflation a reassessment note in a recent article in this journal gramlich 1983 concluded that the mean inflation forecasts from the university of michigan survey research center src surveys of households were in the years 1956 1980 more accurate and more rational than the mean inflation forecasts from livingston s philadelphia inquirer surveys of professional economists these paradoxical elndings have proved robust with respect to improvements in testing procedures bryan and gavin 1986a 1 986b the purpose of this note is not to cast doubt on the result themselves but to urge caution in their interpretation with respect to forecast accuracy we show that while the average forecast from the src is indeed more accurate than the average forecast from the livingston survey the forecast of a typical household is much less accurate than that of a typical economist the apparent superiority of the src survey is entirely due to its larger

are bank shareholders enemies of regulators or a potential source of market discipline abstract in moral hazard models bank shareholders have incentives to transfer wealth from the deposit insurer that is maximize put option value by pursuing riskier strategies for safe banks with large charter value however the risk taking incentive is outweighed by the possibility of losing charter value focusing on the relationship between tobin s q and an ex ante measure of the failure probability this paper develops a semi parametric model for estimating the critical level of bank risk at which put option value starts outweighing charter value from these estimates we infer the prevalence of moral hazard examining publicly held bank holding companies bhc during the tumultuous 1986 1992 period we find that shareholders risk taking incentives were confined to a small fraction of highly risky institutions furthermore our analysis shows that the inflection point at which banks begin to tilt in favor of moral hazard increased substantially in 1993 2005 these findings are encouraging to bank regulators and legislators because they indicate that tighter capital rules and more rigorous supervision introduced by several legislative initiatives in the 1990s have helped squeeze a lot of the moral hazard incentives out of the banking system

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

diversification in banking is noninterest income the answer this paper assesses potential diversification benefits in the u s banking industry from the steady shift toward activities that generate fee income trading revenue and other types of noninterest income in the aggregate declining volatility of net operating revenue reflects reduced volatility of net interest income not diversification benefits from noninterest income which is quite volatile and increasingly correlated with net interest income at the bank level greater reliance on noninterest income particularly trading revenue is associated with lower risk adjusted profits and higher risk this suggests few obvious diversification benefits from the ongoing shift toward noninterest income

reconciling the wage curve and the phillips curve the wage curve is the negative relationship that links wage levels to the unemployment rate it fits accurately with modern non competitive labour market models but goes against a phillips curve modelling because the latter ties wage growth to the unemployment rate in this article we present a comprehensive review of these non competitive models highlighting recent contributions that try to eliminate the possible gap that exists between the concepts of the wage curve on the one hand and the phillips curve on the other copyright blackwell publishers ltd 2005

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

evaluating an estimated new keynesian small open economy model abstract this paper estimates and tests a new keynesian small open economy model in the tradition of christiano et al 2005 nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 1 45 and smets and wouters 2003 an estimated stochastic dynamic general equilibrium model of the euro area journal of the european economic association 1 5 1123 1175 using bayesian estimation techniques on swedish data to account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank s instrument rule a key equation in the model the uncovered interest rate parity uip condition is well known to be rejected empirically therefore we explore the consequences of modifying the uip condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate the results show that the modification increases the persistence in the real exchange rate and that this model has an empirical advantage compared with the standard uip specification

pareto improving water management over space and time the honolulu case we model welfare gains from efficient allocation of groundwater over space and time relative to the status quo policy of financial cost recovery in order to promote political feasibility an intertemporal compensation plan is devised that renders the reform pareto improving gainers from the reform finance the compensation in proportion to their benefits through a block pricing scheme for the honolulu case only 7 of the 441 million in gains to winners is needed to compensate losers from the reform future winners from the reform also repay the deficit created by the compensation package much as state and local governments finance capital improvements copyright 2009 oxford university press

average inflation targeting the analysis of this paper demonstrates that when the phillips curve has forward looking components a goal for average inflation i e targeting a j period average of one period inflation rates will cause inflation expectations to change in a way that improves the short run trade off faced by the monetary policymaker average inflation targeting is thus an example of a modified loss function which when implemented in a discretionary fashion results in more efficient outcomes from the standpoint of the true social objective inflation targeting under commitment than the discretionary pursuit of the true objective itself in purely forward looking models average inflation targeting is dominated by price level targeting but we also demonstrate in a micro founded model where the phillips curve has both forward and backward looking components that there are cases when the average inflation target provides more efficient outcomes than both ordinary one period inflation targeting and price level targeting

the genesis of inflation and the costs of disinflation this essay asks how high inflation arises and why it is costly to eliminate specifically the paper discusses the roles of price rigidity and credibility problems in explaining the costs of disinflation the puzzle of persistent inflation triggered by onetime macroeconomic shocks and the case for returning to adaptive expectations in theories of inflation this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

the economics of conjunctive groundwater management with stochastic surface supplies abstract groundwater management with stochastic surface flows and artificial recharge is considered theoretical analysis characterizes the decision rules and establishes conditions for convergence of socially optimal and common property withdrawals and pumping lifts to limiting probability distributions an empirical application to kern county california finds that optimal withdrawals are generally increasing in hydraulic head and decreasing in surface flows however nonmonotone behavior is observed in some instances artificial recharge is not observed in the limiting distribution due to an interaction of several factors optimal management implies relatively small gains over unregulated groundwater use when preferences are risk neutral

price level targeting vs inflation targeting a free lunch price level targeting without base drift and inflation targeting with base drift are compared under commitment and discretion with persistence in unemployment price level targeting is often said to imply more short run inflation variability and thereby more employment variability than inflation targeting counter to this conventional wisdom under discretion a price level target results in lower inflation variability than an inflation target if unemployment is at least moderately persistent a price level target also eliminates the inflation bias under discretion and as is well known reduces long term price variability society may be better off assigning a price level target to the central bank even if its preferences correspond to inflation targeting a price level target thus appears to have more advantages than commonly acknowledged

a quantitative comparison of sticky price and sticky information models of price setting i estimate sticky price and sticky information models of price setting for the united states via maximum likelihood techniques reaching several conclusions first the sticky price model fits best and captures inflation dynamics as well as reduced form equations once hybrid behavior is allowed second the importance of hybrid behavior in sticky price models is potentially consistent with a role for some information imperfections such as sticky information as a complement to nominal price rigidities finally the favorable results herein for the hybrid sticky price model when evaluated by statistics that summarize the relative fit of different models is consistent with the existing literature that is both supportive and dismissive of such models as this literature has largely ignored fit in evaluating such models many previous studies have focused on ancillary issues such as the standard errors associated with certain parameters or granger causality tests that may not provide much information about sticky price models

how important is precommitment for monetary policy we quantify the welfare differential between precommitment and discretionary monetary policy in three estimated models of the u s economy by calculating the permanent deviation of inflation from target that in welfare terms is equivalent to moving from discretion to precommitment using a range of reasonable central bank preference parameters this inflation equivalent ranges from 0 05 to 3 6 percentage points with a mid point of either 0 15 or 1 1 5 percentage points depending on the model in addition to the degree of forward looking behavior we show that the existence of transmission lags and or information lags is crucial for determining the welfare gain from precommitment

rainwater harvesting and groundwater conservation when endogenous heterogeneity matters in this paper we focus on resource conservation in a model of decentralized management of groundwater and rainwater we show that a conservation policy may have opposite effects on the level of the resource depending on the outcome of the decentralized management more precisely we consider identical farmers who can use two water resources groundwater and or rainwater and we study the symmetric and asymmetric feedback stationary nash equilibria of the dynamic game we show that a subsidy on the use of rainwater may increase the level of the aquifer at the symmetric equilibrium whereas it decreases the level of the aquifer at the asymmetric equilibrium this suggests that the usual focus on interior symmetric equilibria in dynamic games may provide misleading policy implications

an analysis of storage capacity reallocation impacts on the irrigation sector significant attention has been given to the improvement of environmental flows in recent years an important factor to reduce the opportunity cost of flood creation needed for the environment is the access to storage capacity reallocating storage capacity from agriculture to environment however may have important impacts on irrigation water prices and the vitality of irrigation enterprises in this paper the long term impacts of storage capacity reallocation on the agricultural sector are analysed it is shown that a reduction in storage capacity for irrigation water will reduce water prices for each level of dam content and shift the distribution of dam content to the left as a result the value of the irrigation sector is reduced the impact on average water price is however indeterminate implying that results from previous empirical studies may be valid only locally and that sensitivity analysis is important to show the robustness of empirical results

estimating intertemporal preferences for natural resource allocation in this article we show how the degree of risk aversion discounting and preference for intertemporal substitution for a natural resource manager can be structurally estimated within a recursive utility framework we focus on the management of a reservoir in california and test the data for consistency with a recursive utility model specification versus standard time additive separability the results show that the data are consistent with a risk averse manager with recursive preferences the data also reject time additive separability with or without risk aversion such as the standard constant relative risk aversion utility model the improvement in model fit when recursive preferences are used is notable natural resource management problems are typically stochastic and dynamic in nature by virtue of the characteristics of the underlying physical or biological processes that govern the evolution of the resource this has been the reason for a number of empirical applications of dynamic programming within the natural resource literature as chronicled by williams however the tendency of researchers to use risk neutral expected net present value epv objective functions when modeling natural resource problems has caused policy makers to be somewhat skeptical of the real world relevance of resource economics analysis 1 given the uncertainty facing the decision maker in each period of the planning horizon due to the realization of stochastic shocks we would expect risk aversion and intertemporal substitution to feature prominently in the characterization of intertemporal preferences

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

caviar conditional autoregressive value at risk by regression quantiles value at risk var has become the standard measure of market risk employed by financial institutions for both internal and regulatory purposes var is defined as the value that a portfolio will lose with a given probability over a certain time horizon usually one or ten days despite its conceptual simplicity its measurement is a very challenging statistical problem and none of the methodologies developed so far give satisfactory solutions interpreting the var as the quantile of future portfolio values conditional on current information we propose a new approach to quantile estimation which does not require any of the extreme assumptions invoked by existing methodologies such as normality or i i d returns the conditional autoregressive value at risk or caviar model moves the focus of attention from the distribution of returns directly to the behavior of the quantile we specify the evolution of the quantile over time using a special type of autoregressive process and use the regression quantile framework introduced by koenker and bassett to determine the unknown parameters since the objective function is not differentiable we use a differential evolutionary genetic algorithm for the numerical optimization utilizing the criterion that each period the probability of exceeding the var must be independent of all the past information we introduce a new test of model adequacy the dynamic quantile test applications to simulated and real data provide empirical support to this methodology and illustrate the ability of these algorithms to adapt to new risk environments

inflation output variance trade offs and optimal monetary policy the author estimates the inflation output gap variance trade off faced by monetary policymakers in the united states for policymakers who care about deviations of inflation around target and output around potential the estimated trade off represents the optimal policy frontier given the structure of the economy policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier the author finds that the variance trade off becomes quite severe when the standard deviation of inflation or output drops much below 2 percent this suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability copyright 1997 by ohio state university press

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

is inflation sticky abstract new keynesian sticky price models predict that monetary policy can affect real variables however they also predict that inflation can be reduced without depressing output or employment in fact bringing down inflation is costly presenting a challenge to the new keynesian model two departures from the new keynesian model predict costly disinflation one assumes sticky inflation rather than sticky prices while the other assumes less than perfectly rational expectations taking into account information from surveys of inflation expectations i find the evidence suggests that inflation is not sticky and that inflation expectations are less than perfectly rational

menu costs and the neutrality of money a model of endogenous price adjustment under money growth is presented firms follow s s pricing policies and price revisions are imperfectly synchronized in the aggregate price stickiness disappears and money is neutral the connection between firm price adjustment and relative price variability in the presence of monetary growth is also investigated the results contrast with those obtained in models with exogenous fixed timing of price adjustment

price level versus inflation targeting abstract this paper shows that price level targeting outperforms inflation targeting in the standard new keynesian model under the assumption that the central bank is forced to operate in an environment characterized by discretion in the benchmark case with no persistence in the shocks the commitment solution can be fully replicated intuitively price level targeting introduces history dependence and a stationary level of prices both of which are prominent features of the commitment solution

speed limit policies the output gap and optimal monetary policy in a standard new keynesian model a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal timeless perspective precommitment policy by stabilizing output gap changes the central bank imparts inertia into output and inflation that is absent under pure discretion even a fully optimizing i e non myopic central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting this abstract was borrowed from another version of this item

real and nominal propagation of nominal shocks the role of real and nominal propagation mechanisms in generating persistent real effects of nominal shocks is analysed analytically in a fully specified intertemporal general equilibrium model while neither a real propagation mechanism capital acccumulation with one period nominal contracts nor nominal propagation staggered nominal contracts in the absence of any real propagation can generate plausible impulse responses with strong persistence it is shown that the two mechanisms interact so as to strengthen persistence possibly unit roots and generate more plausible impulse responses

risk taking behavior of banks under regulation abstract this paper analyzes the value maximization of regulated banks within a moral hazard framework in the model regulators monitor both the capital ratio and the asset portfolio and banks simultaneously select the optimum capital ratio and asset portfolio a key assumption is that a bank cannot expect a positive put option value once it is classified as risky by regulators the optimum values of the two variables depend on investment opportunities and charter values as well as regulatory parameters the model that explicitly incorporates regulation can explain various phenomena that are seemingly inconsistent with the predictions of moral hazard models for example a positive relationship between the capital ratio and the riskiness of the asset portfolio a particularly interesting result is that a larger charter value results in a higher risk interior solution

a general equilibrium analysis of conjunctive ground and surface water use with an application to morocco groundwater resources gw account for nearly 30 of the world s sustainable water supplies yet this resource which is fraught with externalities has largely been left unregulated the economic literature on gw is predominantly of a partial equilibrium type we analyze gw regulation in a general equilibrium setting focusing on the stabilization value of gw under natural drought and economic rural urban water transfer shocks a general equilibrium approach allows evaluating direct and indirect effects of gw regulation on agriculture and nonagriculture sectors and extends the scope for water policy the analysis is applied to morocco by extending an existing computable general equilibrium cge model to include ground and surface water sw resources we study effects of i an increase in gw extraction cost e g as a result of prolonged extraction beyond natural recharge that lowers the aquifer s water table ii a transfer of sw from rural irrigation to urban domestic use and iii a reduction of water availability due to severe drought we estimate the value of gw and assess the direct partial equilibrium and indirect general equilibrium impacts we find that gw plays a critical role in mitigating the negative effects of these types of shocks

income distributional effects of using market based instruments for managing common property resources in this article the authors show the trade offs between efficiency and equity that arise from the application of market based instruments to a heterogenous population of agents drawing from a natural resource pool using the example of groundwater they find that there are overall losses in allocative efficiency when the centralized planner is constrained by equity considerations and that the distribution of gains or losses to management becomes skewed asymmetrically across agents these results demonstrate the importance of considering both efficiency gains and disparities in distributional inequity when designing policy instruments that create winners and losers with potentially serious sociopolitical ramifications

monetary policy and welfare in a small open economy this paper analyzes optimal monetary policy in a small open economy featuring monopolistic competition and nominal rigidities it shows that the utility based loss function for this economy can be written as a quadratic expression of domestic inflation output gap and real exchange rate the presence of an internal monopolistic distortion and a terms of trade externality drives optimal policy away from domestic inflation targeting and affects the optimal level of exchange rate volatility when domestic and foreign goods are close substitutes for each other the optimal policy rule implies lower real exchange rate volatility than a domestic inflation targeting regime the reverse is true when the elasticity of substitution between goods is low

what factors drive systemic risk during international financial crises abstract we analyze the determinants of the contribution of international banks to both global and local systemic risk during prominent financial crises we find no empirical evidence supporting conjectures that bank size leverage non interest income or the quality of the bank s credit portfolio are persistent determinants of systemic risk across financial crises in contrast our results show that global systemic risk in particular is predominantly driven by characteristics of the regulatory regime we also confirm for the subprime crisis that the banks contribution to moderately bad tail events in the past predicts the financial sector s crash risk

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

efficiency and formation of expectations evidence from the european investment survey the european commission conducts an annual survey regarding planned and realized business fixed investment across various manufacturing sectors in euroland in this study we investigate the predictive content of survey based expectations on investment in addition we empirically test the rationality of respondents both in a time series as well as in a panel context according to our results based on pooling the data efficiency is rejected since expectations are biased predictors of actual outcomes furthermore expectations revisions are found to be correlated with components of the information set known at the time of decision making finally our results qualify regressive expectations as the mechanism that more adequately describes the formation of expectations

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

capital shortfall a new approach to ranking and regulating systemic risks the financial crisis of 2007 2009 has given way to the sovereign debt crisis of 2010 2012 yet many of the banking issues remain the same we discuss a method to estimate the capital that a financial firm would need to raise if we have another financial crisis this measure of capital shortfall is based on publicly available information but is conceptually similar to the stress tests conducted by us and european regulators we argue that this measure summarizes the major characteristics of systemic risk and provides a reliable interpretation of the past and current financial crises

current issues in the economics of groundwater resource management the issue of groundwater management remains a practical concern in many regions throughout the world while water managers continue to grapple with the question of how to manage this resource in this article we attempt to bring the most advanced and appropriate tools to bear on the issue of resource allocation involving groundwater our objective is to demonstrate the state of the art in the literature on ways to think about this complex resource and to deal with the important economic issues emanating from its complexity we present the conceptual framework within which economists examine the elements interacting in the management of groundwater resources indicate why the role of the market is limited with respect to the price of this very complex resource and point to the mechanisms that can pull competitive groundwater price and quality graded quantity of groundwater in line with their equilibrium levels in particular we critically review economic models of groundwater use examine the potential for groundwater management discuss the difficulties encountered in the estimation of the relevant control variables of such models and identify the advantages and limitations of the instruments devised for the efficient use allocation of this resource finally we argue that devised regulatory schemes usually ignore the information and knowledge needed for their implementation and we suggest a core of conditions necessary for successful groundwater management reforms

deregulation and bank financial policy the standard view that banks can value maximize by exploiting non risk rated deposit insurance ignores the potential loss of a valuable bank charter due to insolvency recognition of this effect changes the bank s optimal financial policy and can induce extreme risk averting as well as risk taking behavior however as the value of the bank charter falls the risk taking strategy is more apt to dominate therefore current deregulation of the banking industry by easing entry and devaluing charters holds the potential for increases in the incidence of insolvency unless offsetting policies are instituted

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

competitive versus efficient extraction of a common property resource the groundwater case abstract in this paper socially optimal and private extraction of a common property aquifer are compared open loop equilibrium and feedback equilibrium in linear strategies have been computed to characterize private extraction the use of these two equilibrium concepts allows us to distinguish between cost and strategic externalities as long as the open loop solution captures only the cost externality and the feedback solution captures both the results show that strategic behaviour increases the overexploitation of the aquifer compared to the open loop solution however if the groundwater storage capacity is large the difference between the socially optimal and private extraction the latter characterized by a feedback equilibrium is negligible

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

uncovering the hit list for small inflation targeters a bayesian structural analysis we estimate underlying structural macroeconomic policy objectives of three of the earliest explicit inflation targeters within the context of a small open economy dynamic stochastic general equilibrium model we assume central banks set policy optimally such that we can reverse engineer policy objectives from observed time series data joint tests of the posterior distributions of these policy preference parameters suggest that the central banks are very similar in their overall objective none of the central banks show a concern for stabilizing the real exchange rate all three central banks share a concern for minimizing the volatility in the change in the nominal interest rate we also show that the resulting optimal policy rule responds to exchange rate movements even in the case where the central banks do not explicitly care about exchange rate stabilization this result is also corroborated by results from an alternative simple rule characterization and estimation of central bank behavior these last two findings point to the pitfalls of making inferences from the level of ad hoc simple rules about what central banks may care about

banking market structure and financial stability evidence from the texas real estate crisis in the 1980s abstract this paper examines the relationship between banking market structure and financial stability using data on thrifts a type of banking institution specializing in residential mortgage lending i test two related hypotheses first competition reduces franchise value second reduced franchise value induces risk taking testing the second hypothesis exploits predictions that when hit by an exogenous shock the slope of risk with respect to franchise value becomes more negative because thrifts adopt bang bang strategies and choose minimal or maximal risk using the texas real estate collapse in the 1980s as a natural experiment i find evidence supporting both hypotheses

a happy half way house medium term inflation targeting in new zealand abstract the 2002 policy targets agreement pta between the government and central bank of new zealand asks the central bank to target inflation over the medium term rather than over an annual target delegating such a medium term objective to the central bank shifts inflation targeting towards a halfway house between inflation targeting and price level targeting we show empirically that this helps time consistent policy approximate the first best commitment policy even when the government asks the central bank to weight output stabilisation differently to society we estimate the new zealand economy with a small open economy dsge model and show that the happiest halfway house is located around a two year averaging horizon at most which leads to mild improvements in monetary policy efficiency

adjusting to climate change implications of increased variability and asymmetric adjustment costs for investment in water reserves abstract in this paper we study the determination of optimal water storage capacity in a region taking into account that the supply of the resource the flow into the reserve is uncertain that a measure of the uncertainty the variance is likely to increase with climate change that building capacity is costly and that the development of water resources may entail alsoenvironmental costs we find that water storage capacity in the long run ispositivelyrelated to increases in uncertainty if the marginal benefit of water withdrawal isconvexand that for the case of costly reversibility of investment a range of inaction for investment appears and the stability of water storage capacity with respect to changes in variance increases

union wage settlements during a disinflation this paper examines the role of union wage contracts in the persistence of inflation and the implication of these contracts for the problem of disinflation in the united states a quantitative model of overlapping con tracts explicitly oriented toward the major union sector is developed the model takes account of expectations of future wage price and employment conditions as in more aggregated models that have been used in macroeconomic research in addition the distribution of workers according to contract length as well as deferred wage increases and escalator clauses are explicitly used in the model the main aim of the model is to determine the constraints which these contracts impose on disinflation paths the model indicates that the maximum speed of disinflation is extremely slow in the early phases if a rise in unemployment is to be avoided but increases considerably before the new lower rate of inflation is reached the disinflation path is considerably slower than that observed after hyperinflation periods however the existence of a path of inflation reduction raises questions about whether the institution of union wage con tracts is really the direct cause of costly disinflations or whether their influence works indirectly by raising credibility problems about a monetary disinflation this abstract was borrowed from another version of this item

measuring the dynamic efficiency costs of regulators preferences municipal water utilities in the arid west evidence suggests that municipal water utility administrators in the western us price water significantly below its marginal cost and in so doing inefficiently exploit aquifer stocks and induce social surplus losses this paper empirically identifies the objective function of those managers measures the deadweight losses resulting from their price discounting decisions and recovers the efficient water pricing policy function from counterfactual experiments in doing so the estimation uses a continuous butconstrained control version of a nested fixed point algorithm in order to measure the important intertemporal consequences of groundwater pricing decisions

bank income structure and risk an empirical analysis of european banks the purpose of this paper is to investigate the relationship between bank risk and product diversification in the changing structure of the european banking industry based on a broad set of european banks for the period 1996 2002 our study first shows that banks expanding into non interest income activities present higher risk and higher insolvency risk than banks which mainly supply loans however considering size effects and splitting non interest activities into both trading activities and commission and fee activities we show that the positive link with risk is mostly accurate for small banks and essentially driven by commission and fee activities a higher share of trading activities is never associated with higher risk and for small banks it implies in some cases lower asset and default risks

charter value minimum bank capital requirement and deposit insurance pricing in equilibrium abstract this paper shows that leaving insolvent banks with large enough charter values open can be optimal and derives normative bank closure reorganization policies based on the liquidation value of assets and the charter value the charter value of a bank is broadly defined as the value that would be foregone due to a closure our simulations of risk taking show that an optimal forbearance for an insolvent bank with a large enough charter value alleviates the moral hazard problem this is because increasing the risk raises the probability of losing the charter value although it generates a moral hazard gain

strategic behavior and efficiency in the common property extraction of groundwater groundwater has always been regarded as a common property resource where entry is restricted by land ownership and private exploitation is inefficient in 1980 gisser and sanchez presented a first estimation of this inefficiency cornparing socially optimal exploitation with private competitive exploitation using a model with linear water demand average extraction cost independent of the rate of extraction and linearly decreasing with respect to the water table level they characterized the private exploitation of the aquifer assuming that farmers are myopic and choose their rate of extraction to maximize their current profits whereas optimal exploitation is obtained by maximizing the present value of the stream of aggregate profits their results show that if the storage capacity of the aquifer is relatively large the difference between the two systems is so small that it can be ignored for practical consideration this result has been called the gisser sanchez rule by nieswiadomy 1985 and it has and important policy implication regulation of the resource does not seem justified since the profits it brings are not very high 1

optimal groundwater extraction under uncertainty and a spatial stock externality we introduce a model that incorporates two important elements to estimating welfare gains from groundwater management stochasticity and a spatial stock externality we estimate welfare gains resulting from optimal management under uncertainty as well as a gradual stock externality that produces the dynamics of a large aquifer being slowly exhausted this groundwater model imposes an important aspect of a depletable natural resource without the extreme assumption of complete exhaustion that is necessary in a traditional single cell bathtub model of groundwater extraction using dynamic programming we incorporate and compare stochasticity for both an independent and identically distributed as well as a markov chain process for annual rainfall we find that the spatial depletion of the aquifer is significant to welfare gains for a parameterization of a section of the ogallala aquifer in kansas ranging from 2 9 to 3 01 which is larger than those found previously over the region surprisingly the inclusion of stochasticity in rainfall increases welfare gains only slightly

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

the determinants of u s banks international activities abstract this paper develops a model and structural dynamic estimation of bank behavior to map the relationship between u s banks choices of foreign banking activities and bank and foreign market traits this estimation framework is applied to a unique bank level dataset compiled from regulatory sources covering u s banks foreign activities in 83 host markets over the 2003 2013 period bank traits are better able to explain the evolving patterns of foreign banking than host market characteristics after controlling for these traits the post financial crisis period shows a structural shift away from cross border claims towards foreign affiliate activities structural estimates of foreign market entry costs and regulatory attitudes towards risk are derived simulation exercises confirm the strong impact of banks and regulators risk stance on bank profits and portfolio composition

monetary policy rules and the indicator properties of asset prices abstract we investigate relationships between asset prices and inflation in a modern keynesian model in which monetary policy controls inflation by manipulating the federal funds rate the indicator properties of asset prices are quite sensitive to the monetary policy rule including the asset prices themselves in the reaction function can invert the sense of the indicator properties targeting the asset prices is tantamount to targeting the real interest rate when all of the weight in the reaction function is placed on asset prices the real rate converges so rapidly that policy loses control of inflation

does inequality lead to greater efficiency in the use of local commons the role of strategic investments in capacity abstract this paper examines how inequality in access to credit affects the strategic behavior of users of a common resource in their investment and extraction decisions a dynamic two stage game is developed in which agents choose the level of sunk investment in capacity and the consequent extraction path the results show that agents invest in excess capacity except when inequality is very high the relation between inequality and efficiency in resource extraction is found to be non monotonic with the steady state resource stock being closest to the optimal level when either inequality is very high or very low

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

assessing the lucas critique in monetary policy models empirical estimates of monetary policy rules suggest that the behavior of u s monetary policymakers changed during the past few decades however for that same time period statistical analyses of lagged representations of the economy such as vars often have not rejected the null of structural stability these two sets of empirical results appear to contradict the lucas critique this paper reconciles these results with the lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward looking macroeconomic specifications to policy shifts

models of inflation expectations formation a comparison of household and economist forecasts comment in the third section of his paper models of inflation expectations formation a comparison of household and economist forecasts gramlich 1983 presents statistics suggesting that two survey measures of inflation expectations are biased and inefficient in this comment we show that the main results presented in his table 1 are generated using a misspecified model when the specification error is corrected we find that the michigan survey of household inflation expectations passes the standard tests for unbiasedness and weak tests for efficiency 1 however there remains doubt about the properties of the inflation expectation series derived from the livingston survey of professional economists 2 the particular results we review were presumably generated from ordinary leastsquares ols estimation of the following equation equation 2 in gramlich