can learning affect exchange rate behavior the case of the dollar in the early 1980 s this paper demonstrates that a change in parameters of the money market that is not immediately understood will affect the behavior of exchange rate forecast errors while the market is learning the analysis is applied to the behavior of u s dollar german mark forecast errors during the early 1980 s when the market appeared to systematically underpredict the strength of the dollar consistent with this observation empirical estimates of implied forecast errors based upon bayesian learning suggest that forecast errors would have been on average negative during the period as the market came to realize the increase in u s money demand

uncertainty and optimal taxation in defense of commodity taxes abstract this paper re examines the theory of optimal commodity taxation in the presence of a linear income tax under wage uncertainty there are two categories of goods the consumption levels in one group are committed to before the resolution of uncertainty and those of the other after the paper i characterizes the structure of the optimal commodity taxes in view of the insurance they provide against random wage movements ii proves that optimal taxation requires a mix of differential commodity taxes and a uniform lump sum tax and iii demonstrates that the post uncertainty goods should face a positive tax rate which is higher than the tax rate on the pre committed goods

rules for a lender of last resort an historical perspective abstract the federal reserve was established in 1913 to be a lender of last resort paul warburg its principal architect had in mind that a u s central bank would follow bagehot s strictures to lend freely at a penalty rate in the face of a scramble for high powered money yet the federal reserve act never spelled out how the fed was supposed to act as an llr this omission came to the fore in the great contraction 1929 to 1933 when the fed failed to prevent four banking panics which turned a serious recession into the great contraction reforms in the 1930s corrected some of the fed s failures but clamped down on financial activity for 40 years the financial crisis problem returned in the 1970s with financial liberalization the fed abandoned bagehot s strictures and adopted the too big to fail doctrine and creative ambiguity this policy shift contributed to moral hazard and created new threats to financial stability with the rise of the shadow banking system the subprime mortgage crisis prompted the fed to take unprecedented llr activities which have opened up a pandora s box of perils the fed has moved away from rules based policy in its llr function

the great appreciation the great depreciation and the purchasing power parity hypothesis abstract although there has been much recent work on purchasing power parity ppp neither univariate nor panel methods have produced strong rejections of unit roots in us dollar real exchange rates for industrialized countries during the post 1973 period we investigate the hypothesis that these non rejections can be explained by one episode the large appreciation and depreciation of the dollar in the 1980s by developing unit root tests which account for this event and maintain long run ppp using panel methods we can strongly reject the unit root null for those countries that adhere to the typical pattern of the dollar s rise and fall

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

model uncertainty and exchange rate volatility this article proposes an explanation for shifts in the volatility of exchange rate returns agents are uncertain about the true data generating model and deal with this uncertainty by making inference on the models and their parameters approach i call model learning model learning may lead agents to focus excessively on a subset of fundamental variables consequently exchange rate volatility is determined by the dynamics of these fundamentals and changes as agents alter models i investigate the empirical relevance of model learning and find that the change in volatility of gbp usd in 1993 was triggered by a shift between models

on the desirability of taxing capital income in optimal social insurance abstract this paper analyzes optimal linear taxes on labor income and savings in a two period life cycle model with ex ante identical households endogenous leisure demands in both periods and general processes of skill shocks over the life cycle we demonstrate that the atkinson stiglitz theorem breaks down under risk capital taxes are employed besides labor income taxes for two distinct reasons i capital taxes reduce labor supply distortions on second period labor supply since second period labor supply and saving are substitutes ii capital taxes insure first period income risk although this benefit is partially off set because first period labor supply and saving are complements our results imply that retirement saving should not be actuarially fair

trend fundamentals and exchange rate dynamics we estimate a multivariate unobserved components stochastic volatility model to explain the dynamics of a panel of six exchange rates against the us dollar the empirical model is based on the assumption that both countries monetary policy strategies may be well described by taylor rules with a time varying inflation target a time varying natural rate of unemployment and interest rate smoothing the estimates closely track major movements along with important time series properties of real and nominal exchange rates across all currencies considered the model generally outperforms a benchmark model that does not account for changes in trend inflation and trend unemployment authors abstract

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

exchange rate pass through exchange rate volatility and exchange rate disconnect abstract this paper explores the hypothesis that high volatility of real and nominal exchange rates may be due to the fact that local currency pricing eliminates the pass through from changes in exchange rates to consumer prices exchange rates may be highly volatile because in a sense they have little effect on macroeconomic variables the paper shows the ingredients necessary to construct such an explanation for exchange rate volatility in addition to the presence of local currency pricing we need a incomplete international financial markets b a structure of international pricing and product distribution such that wealth effects of exchange rate changes are minimized and c stochastic deviations from uncovered interest rate parity together it is shown that these elements can produce exchange rate volatility that is much higher than shocks to economic fundamentals and disconnected from the rest of the economy in the sense that the volatility of all other macroeconomic aggregates are of the same order as that of fundamentals

rational speculation and exchange rates abstract models of exchange rates have typically failed to produce results consistent with the key fact that real and nominal exchange rates move in ways not closely connected to current or past macroeconomic variables models that rely on the same shocks to drive fluctuations in macroeconomic variables and exchange rates typically imply counterfactually strong co movements between them we develop a model in which new information leads agents to change their rational beliefs about risk premia on foreign exchange markets these changes in risk premia work through asset markets to cause real and nominal exchange rates to change without corresponding changes in gdp productivity money supplies and other key macro variables

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

us shocks and global exchange rate configurations many academics and observers emphasize that a sharp us dollar depreciation is inevitable for returning the burgeoning us current account deficit to more sustainable levels how may such a us dollar adjustment occur and what may it imply for global exchange rate configurations the paper focuses on the role of us specific economic shocks in the adjustment process and finds that such us shocks have historically exerted a remarkably heterogeneous effect across currencies it shows that this heterogeneity is not only due to policy choices of inflexible exchange rate regimes or to monetary policy but to an important extent is explained by market forces in particular the degree of financial integration foremost in portfolio investment though not by trade this helps explain why it has been in particular the euro and its predecessor currencies as well as other european currencies that have contributed the bulk to the adjustment of the us dollar effective exchange rate over the past 25 years while other flexible currencies have been much less responsive to us shocks the results suggest that currency flexibility is a necessary but not a sufficient condition for achieving a more balanced contribution across currencies to an adjustment of global exchange rate configurations exchange rates are responsive to foreign shocks only to the extent that market mechanisms are in place that make this transmission work which requires in particular that countries have well developed financial markets and are financially integrated these findings have implications for an unwinding of global imbalances and for monetary policy choices and financial market policies in emerging market economies marcel fratzscher

new evidence on the forward premium puzzle the forward premium anomaly exchange rate changes are negatively related to interest rate differentials is one of the most robust puzzles in financial economics we recast the underlying parity relation in terms of lagged forward interest rate differentials documenting a reversal of the anomalous sign on the coefficient in the traditional specification we show that this novel evidence is consistent with recent empirical models of exchange rates that imply exchange rate changes depend on two key variables the interest rate differential and the magnitude of the deviation of the current exchange rate from that implied by purchasing power parity

new estimates of the canadian money stock 1871 1967 in this paper the authors construct historical data series beginning in 1871 for canadian m1 m2 and monetary base the new series are at a monthly frequency and use the bank of canada s definition of the monetary aggregates institutional and reporting changes however make perfect backwards extrapolation of the bank s series impossible there are only end of month data rather than average weekly since january 1994 daily data and the authors cannot precisely match savings accounts at chartered banks and trust companies that are included in the modern monetary aggregates their adjustments for these changes and their impact on the aggregates are documented

a re assessment of the relationship between real exchange rates and real interest rates 1974 1990 abstract this paper uses cointegration techniques and error correction models to re examine the link between real exchange rates and real interest rate differentials the results show that real exchange rates and real interest rates are nonstationary however they are not cointegrated with each other on the other hand the dynamic models indicate that there might be a long run relationship between these variables but this cannot be verified the final conclusion is that there is little empirical evidence in support of a systematic relationship and this result is robust across exchange rates time periods and measures of expected inflation

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

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

changing monetary policy rules learning and real exchange rate dynamics when the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the taylor rule the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries this paper examines the implications of these taylor rule fundamentals for real exchange rate determination because the true parameters in central bank policy rules are unknown to the public and change over time the model is presented in the context of a least squares learning environment this simple learning model captures the volatility and the major swings in the real deutschemark euro dollar exchange rate from 1976 to 2007

the great depression versus the great recession in the u s how fiscal monetary and financial polices compare abstract this study reviews the financial distress that triggered and amplified the financial crises of the great depression and great recession and compares macroeconomic and financial policy responses shadow banking funded the build up of the financial excesses that preceded both the quicker and forceful response of monetary and fiscal policy during the great recession and stronger action to restore market functionality mitigated the downturn and aided recovery nevertheless actions to address the mortgage debt overhang were slower post depression reforms focused on preventing deposit runs and post great recession reforms on preventing runs on bank debt and shadow banks while boosting capital buffers

the monetary exchange rate model as a long run phenomenon abstract pure time series based tests fail to find empirical support for monetary exchange rate models in this paper we apply pooled time series estimation on a forward looking monetary model resulting in parameter estimates which are in compliance with the underlying theory based on a panel version of the engle and granger engle r f granger c w j 1987 co integration and error correction representation estimation and testing econometrica 55 251 276 two step procedure we find that the residuals of the panel based estimated monetary model are stationary this indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

a stochastic dominance analysis of yen carry trades abstract yen carry trades have made headline news for over a decade we examine the profitability of such trades for the period 2001 2009 yen carry trades generated high mean returns and sharpe ratios prior to the recent financial crisis they continued to outperform major stock markets for the full sample period given the non normality of carry trade returns we apply non parametric tests based on stochastic dominance sd to evaluate whether the high returns of yen carry trades are compatible with risk as reflected in returns on us and global stock market indices we apply a general test for sd developed recently by linton maasoumi and whang 2005 to six currencies as well as portfolios of these currencies for a large class of risk averse investors profits from yen carry trades cannot be attributed to risks

taylor rules and the deutschmark dollar real exchange rate we explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate the interest rate rule in conjunction with some standard assumptions implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials the weights are functions of the parameters of the interest rate rule an initial look at german data yields some support for the model

monetary intervention mitigated banking panics during the great depression quasi experimental evidence from a federal reserve district border 1929 1933 the federal reserve act divided mississippi between the 6th atlanta and 8th st louis districts during the great depression these districts policies differed atlanta championed monetary activism and the extension of aid to ailing banks st louis eschewed expansionary initiatives during a banking crisis in 1930 atlanta expedited lending to banks in need st louis did not outcomes differed across districts in atlanta banks survived at higher rates lending continued at higher levels commerce contracted less and recovery began earlier these patterns indicate that central bank intervention influenced bank health credit availability and business activity

the central banking role of clearinghouse associations most of this clearinghouse currency was illegal but no one thought of prosecuting or interfering with its issuers as practically all of it bore the words payable only through the clearing house its holders could not demand payment for it in cash in plain language it was an inconvertible paper money issued without the sanction of law yet necessitated by conditions for which our banking laws did not provide when banks were being run upon and legal money had disappeared in hoards in default of any legal means of relief it worked effectively and doubtlessly prevented multitudes of bankruptcies which otherwise would have occurred andrew 1908b p 516

uncertainty optimal taxation and the direct versus indirect tax controversy this paper examines how the presence of uncertainty affects the design of tax policy when both indirect taxes and a general income tax are available to the government there are two categories of goods the consumption levels in one group are committed to before the resolution of uncertainty and those of the other after the paper proves that contrary to a b atkinson and j e stiglitz s 1976 result differential commodity taxation remains a useful instrument of optimal tax policy even if preferences are separable between labor and produced goods copyright 1995 by royal economic society

optimally uniform commodity taxes taste differences and lump sum grants abstract optimal commodity taxes for an economy with many households should be at a uniform proportional rate under certain conditions these include i linear and parallel engel curves with intercepts dependent on household composition ii separability between goods and labour and iii optimal demogrants

uniform taxation and consumer preferences abstract diamond and mirrlees american economic review 1971 61 8 27 and 261 278 showed that the first order conditions for the ramsey tax problem do not necessarily characterize tax optima researchers have since become cautious in using the first order conditions this paper establishes the validity of a version of the first order conditions using them to determine when uniform taxation is optimal we show deaton s review of economic studies 1979 46 391 405 conditions to be sufficient but not necessary for our problem we also give a necessary and sufficient condition for uniform taxation to be optimal in terms of the wage compensated supply of labor and a closed form representation for preferences

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

optimal taxes and the structure of preferences if optimal tax theory is to be the basis for calculating tax rates a close understanding is required of the relationship between the structure of preferences and the configuration of optimal tax rates otherwise hypotheses chosen by the econometrician for practical convenience may completely determine the results independently of measurement this paper explores the relationship between various types of separability particularly weak and implicit separability and optimal tax rates in the various models discussed in the literature the use of distance functions and the antonelli matrix provides a significant unification of previously disparate results in the final analysis optimal tax theory should be the basis for actual calculation of tax rates although recently there have been great advances in theoretical results and in our understanding of their meaning we are still some way from a working knowledge of whether uniform commodity taxes are in practice optimal or if not which commodities should be discriminated against present theoretical formulae do not yield clear cut results except in special cases and it has recently become clear that optimal rates depend crucially on the detailed structure of consumer preferences for example atkinson and stiglitz 3 show that with an optimal nonlinear income tax discriminatory commodity taxes are only necessary to the extent that individual commodities are not weakly separable from leisure more recently deaton 6 has shown that a similar result holds for what is perhaps the most interesting of the standard models that where there are many consumers and only a linear income tax and proportional commodity taxes are allowed in this case separability between goods and leisure together with linear engel curves for goods removes the need for differential commodity taxation in consequence nothing can be learned about commodity taxes from consumer demand studies in which commodity demands are explained conditionally on total expenditure and commodity prices and which assume linear engel curves all such studies require separability from leisure as a maintained hypothesis and so are consistent with uniform commodity taxation these results suggest that the prospects for meaningful empirical calculations of tax rates are bleak econometricians estimating commodity demand and labor supply equations make generous use of separability assumptions to enable estimation at all in consequence it is likely that empirically calculated tax rates based on econometric estimates of parameters will be determined in structure not by the measurements actually made but by arbitrary untested and even unconscious hypotheses chosen by the econometrician for practical convenience to remedy this situation and as a prelude to fruitful empirical work it is necessary to have a more explicit understanding of how preference structure affects optimal tax rates such is the object of this paper three different

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

revisiting the coyne affair a singular event that changed the course of canadian monetary history the coyne affair occurred during the 1959 61 period and led to the resignation of the governor eventually major reforms of the bank of canada act were enacted archival and empirical evidence is used to assess the performance of monetary policy throughout the 1950s in doing so a real time data set is constructed for both canada and the us that permits the estimation of a reaction function i find that while the case against james coyne is not proven there was a brief period when monetary policy was excessively tight and this may well have worsened an already weak economic environment l affaire coyne a eu lieu au cours de la periode 1959 61 et a conduit a la demission du gouverneur de la banque du canada eventuellement des reformes majeures a la loi sur la banque du canada ont ete mises en uvre on utilise des documents d archives et des resultats empiriques pour evaluer la performance de la politique monetaire dans les annees 1950 ce faisant on construit une base de donnees en temps reel pour le canada et les etats unis qui permet de faire l estimation d une fonction de reaction on decouvre que meme si l argumentation developpee contre coyne n est pas prouvee il y a eu une courte periode durant laquelle la politique monetaire a ete excessivement restrictive et que cela peut fort bien avoir entraine la deterioration d une economie deja affaiblie

optimal wage and income taxation with wage uncertainty optimal taxation in a two period model with human capital investment and second period wage uncertainty is analyzed a proportional tax on wages dominates lump sum taxation and the socially optimal level of human capital exceeds that which individuals choose a tax on interest income may raise welfare by encouraging investment in human capital the interest income tax reduces the difference between returns to physical and human capital from individuals inability to reduce human capital risk through diversification a positive interest income tax rate may therefore be optimal even with an optimal wage tax by encouraging m ore investment in human capital copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

taylor rules and the canadian us equilibrium exchange rate abstract this paper identifies the canadian us equilibrium exchange rate based on a simple structural model of the real exchange rate in which monetary policy follows a taylor rule interest rate reaction function the exchange rate is explained by relative output and inflation as observable variables and by unobserved equilibrium rates as well as unobserved transitory components in output and the exchange rate using canadian data over 1974 2009 we jointly estimate the unobserved components and the structural parameters using the kalman filter and bayesian technique we find that canada s equilibrium exchange rate evolves smoothly and follows a trend depreciation the transitory component is found to be very persistent but much more volatile than the equilibrium rate resulting in few but prolonged periods of currency misalignments

who supports the ecb evidence from eurobarometer survey data this paper contributes empirically to the long debated issue of the legitimacy of the european central bank ecb with regard to european polities using micro level data from the eurobarometer survey we shed light on the socio demographic determinants of public opinion support for the ecb we find that people with higher level of education and income and centre to right wing political orientation tend to support the ecb as well as people with optimistic expectations on the economic situation by contrast the unemployed tend to distrust the ecb the policy relevance of such results is important for ecb s communication strategy with the general public

the uncovered interest parity puzzle exchange rate forecasting and taylor rules abstract recent research has found that the taylor rule fundamentals have power to forecast changes in u s dollar exchange rates out of sample our work casts some doubt on that claim however we find strong evidence of a related in sample anomaly when we include u s inflation in the well known uncovered interest parity regression of the change in the exchange rate on the interest rate differential we find that the inflation variable is highly significant and the interest rate differential is not specifically high u s inflation in one month forecasts dollar appreciation in the subsequent month we introduce a model in which a taylor rule determines monetary policy but in which not only monetary shocks but also liquidity shocks drive nominal interest rates this model can potentially account for the empirical findings

exchange rate regimes and shifts in inflation persistence does nothing else matter this paper reexamines the findings of george s alogoskoufis and ron smith 1991 who argue that sharp increases in inflation persistence can be attributed to changes in the exchange rate regime using long time series data from the united kingdom the united states canada and sweden the authors suggest that these authors emphasis on a post 1967 shift in inflation persistence is misplaced and that there are other equally good candidates to account for changes in inflation persistence such as wars oil price shocks and central bank reforms this conclusion is supported by recently developed tests that allow for multiple structural shifts at unknown dates

where s the risk the forward premium bias the carry trade premium and risk reversals in general equilibrium abstract this paper builds a two country dynamic stochastic general equilibrium macro model to understand three empirical facts about international currency returns they are the downward forward premium bias the carry trade return and the long run risk reversal cross country heterogeneity in unit root productivity levels generates the systematic risk priced into currency returns the risk can be magnified through monetary policy both a complete markets and an incomplete markets model are qualitatively consistent with these facts quantitatively the incomplete markets model performs better

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

financial panics the seasonality of the nominal interest rate and the founding of the fed after the founding of the fed in 1914 the frequency of financial panics and the size of the seasonal movements in nominal interest ratesboth declined substantially this paper establishes that the fed by carrying out the seasonal open market policy that eliminated the seasonal in nominal interest rates caused the decrease in the frequency of panics since seasonal movements are anticipated and financial panics are probably real events the results show that an anticipated monetary policy had real effects on the economy copyright 1986 by american economic association

taylor rules and exchange rate predictability in emerging economies abstract this study demonstrates the relationship between exchange rate determination and an endogenous monetary policy represented by taylor rules we fill a gap in the literature by focusing on a group of fifteen emerging economies that adopted free floating exchange rates and inflation targeting beginning in the mid 1990s because of the limited span of the time series which is a common obstacle to studying emerging economies we employ panel data regressions to produce more efficient estimates following the recent literature we use a robust set of out of sample statistics incorporating bootstrapped and asymptotic distributions for the diebold mariano statistic the clark and west statistic and theil s u ratio by evaluating different specifications for the taylor rule exchange rate model based on their out of sample performances we find that a present value forward looking specification shows strong evidence of exchange rate predictability

the importance of rules based monetary policy in practice abstract this paper draws on several actual policy experiences of the author to demonstrate why it is important to have a rules based monetary policy these experiences show that policy rules provide a needed steady as you go strategy and serve as an insurance against excessive intervention they also show why in practice one must consider rules based policy in the broader policy context in which the federal reserve operates

the evolution of monetary policy rules abstract this article examines the evolutionary forces involved in the development of monetary policy rules over time considering in particular how these relate to proposals made by milton friedman and walter bagehot the lines between money and credit and between monetary and fiscal policy are given special focus

the estimation of prewar gross national product methodology and new evidence the paper develops new methodology for the estimation of prewar gnp taps previously unused data sources and develops new estimates for the periods 1869 1908 and 1869 1928 primary among the new data sources are direct measures of output in the transportation communications and construction sectors and estimates of the consumer price index new measures of real gnp nominal gnp and the gnp deflator are developed the new estimates of real gnp are as volatile on average over the business cycle as the traditional kuznets kendrick series but dampen the amplitude of some cycles while raising the amplitude of others the new estimates of the gnp deflator are distinctly less volatile than the traditional series and in fact no more volatile than those in the postwar period

out of sample exchange rate predictability with taylor rule fundamentals abstract an extensive literature that studied the performance of empirical exchange rate models following meese and rogoff s meese r a rogoff k 1983a empirical exchange rate models of the seventies do they fit out of sample journal of international economics 14 3 24 seminal paper has not convincingly found evidence of out of sample exchange rate predictability this paper extends the conventional set of models of exchange rate determination by investigating predictability of models that incorporate taylor rule fundamentals we find evidence of short term predictability for 11 out of 12 currencies vis a vis the u s dollar over the post bretton woods float with the strongest evidence coming from specifications that incorporate heterogeneous coefficients and interest rate smoothing the evidence of predictability is much stronger with taylor rule models than with conventional interest rate purchasing power parity or monetary models

uncertainty and optimally uniform commodity taxes this paper examines the implications of uncertainty for the structure of optimal commodity taxes in the presence of a linear income tax consumers face uncertain income and commit to consumption of some goods before the resolution of uncertainty and to others after preferences are separable between labor and consumption goods we prove that optimal commodity taxes are i uniform within the category of noncommitted goods if their subutility is logarithmic ii uniform within the two categories if both subutilities are logarithmic and iii nonzero across categories with the tax rate on precommitted goods being lower than the tax rate on noncommitted goods starting with atkinson and stiglitz 1976 a number of economists have argued that under certain restrictions on preferences e g logarithmic a linear income tax is a sufficient tool for optimal tax policy see atkinson 1977 deaton 1979 and deaton and stern 1986 recently cremer and gahvari 1995a showed that these results do not carry to an economy in which individuals face wage uncertainty in models with uncertainty taxation is useful for the insurance it provides if consumption takes place both before and after the resolution of uncertainty commodity taxes will have different insurance properties depending on when consumption occurs this property makes differential tax treatment of these two types of goods optimal cremer and gahvari 1995a divided commodities into two categories the consumption levels in one category are committed to before the resolution of uncertainty and those in the other after their study pinpoints a fundamental difference between these categories of goods that calls for their tax treatment to be different however their analysis leaves open the question of the uniformity of tax rates within each category the main aim of the current paper is to address this question we shall examine the type of preferences for which the tax rates within each category have to be uniform in this way we will build a bridge between the results of cremer and gahvari 1995a and the literature on uniform taxation in the presence of a linear

the term structure of forward exchange premiums and the forecastability of spot exchange rates correcting the errors we develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and