injecting rational bubbles this paper proves two theorems about economies with a finite number of infinitely lived agents who trade a complete set of one period arrow securities and several infinitely lived securities at each date subject to short sales constraints the first theorem in the paper considers an equilibrium to an economy of this kind it proves that there exists another economy with perturbed short sales constraints in which there is an allocation equivalent equilibrium in which asset prices have a bubble the second theorem extends to the result to the case in short sales constraints are endogenously determined in the sense of alvarez and jermann efficiency equilibrium and asset pricing with risk of default econometrica 68 2000 775 797

macroeconomic effects of precautionary demand for oil summary we evaluate the macroeconomic effects of shocks specific to the oil market which mainly reflect fluctuations in precautionary demand for oil driven by uncertainty about future supplies a two stage identification procedure is used first daily changes in the futures spot price spread proxy for precautionary demand shocks and the path of oil prices is estimated this information is then exploited to restrict the oil price response in a vector autoregression impulse responses suggest that such shocks reduce output and raise prices historical decomposition shows that they contributed significantly to the us recessions in the 1990s and in the early 2000s but not to the most recent slump copyright 2014 john wiley sons ltd

forward looking information in var models and the price puzzle abstract with a view to addressing the major disadvantage of the var model namely the inadequate description of the central bank reaction function we propose a var specification that proves successful in solving the price puzzle featuring in monetary vars for the us this specification consists in augmenting a standard var with two forward looking variables the federal funds futures rate or alternatively a money market forward rate reflecting monetary policy expectations and a composite leading indicator of economic activity these two variables appear to effectively control for the information set that the federal reserve may use in monetary policy decision making with this modification theory consistent responses to monetary policy shocks are obtained

the role of investment specific technological change in the business cycle this is a quantitative investigation of the importance of technological change speci c to new investment goods for postwar us aggregate uctuations a growth model that incorporates this form of technological change is calibrated to us data and simulated using the relative price of new equipment to identify the process driving investmentspeci c technology shocks the analysis suggests that this form of technological change is the source of about 30 of output uctuations 2000 elsevier science b v all rights reserved

the fed and the stock market an identification based on intraday futures data this article develops a new identification procedure to estimate the contemporaneous relation between monetary policy and the stock market within a vector autoregression var framework the approach combines high frequency data from the futures market with the var methodology to circumvent exclusion restrictions and achieve identification our analysis casts doubt on var models imposing a recursive structure between innovations in policy rates and stock returns we find that a tightening in policy rates has a negative impact on stock prices and that the federal reserve fed has responded significantly to movements in the stock market estimates are robust to various model specifications

optimal bankruptcy code a fresh start for some abstract what is the optimal consumer bankruptcy law i answer this question using an incomplete markets life cycle model with a planner who can choose state contingent bankruptcy costs i develop two main theoretical characterizations first whenever debt discharge is allowed it should occur without cost second bankruptcy should always be allowed for highly indebted households quantitatively the optimal policy can generate a welfare gain as large as 11 6 however attractive informal default asymmetric information and moral hazard can reduce the welfare gain to as little as 0 7

are interest rate options important for the assessment of interest rate risk abstract fixed income options contain substantial information on the price of interest rate volatility risk in this paper we ask if those options will also provide information related to other moments of the objective distribution of interest rates based on dynamic term structure models within the class of affine models we find that interest rate options are useful for the identification of interest rate quantiles two three factor models are adopted and their adequacy to estimate value at risk of zero coupon bonds is tested we find significant difference on the quantitative assessment of risk when options are or not included in the estimation process of each of these dynamic models statistical backtests indicate that bond estimated risk is clearly more adequate when options are adopted although not yet completely satisfactory

how do u s stock returns respond differently to oil price shocks pre crisis within the financial crisis and post crisis abstract we use a long time series of daily data for 682 firms over a period from january 1990 to december 2012 each firm includes 5 772 daily observations our sample involves a total of 3 936 504 observations to investigate how u s stock returns respond differently to oil price shocks prior to during and after a financial crisis we provide evidence that u s stock returns in turn respond positively to the changes in oil prices during and after such a crisis we use firm level data to find that positive and negative oil price shocks have asymmetric effects on stock returns during the crisis and after the crisis then we examine whether the effect of an oil price shock on stock returns varies across oil intensive industries within the crisis and post crisis our results indicate that stock returns in response to oil price shocks across industries are heterogeneous and the stock returns of some energy intensive manufacturing industries respond more positively to oil price shocks compared with less energy intensive manufacturing industries we use total assets total revenue and the number of employees as proxy variables to measure each firm s size and then examine whether oil price shocks affect stock returns differently across firm sizes we find that big firms are the most strongly and negatively influenced by an oil price shock prior to the crisis on the other hand our results indicate that an oil price shock in the post financial crisis period is positively amplified in the case of medium sized firms

reconciling narrative monetary policy disturbances with structural var model shocks structural var studies disagree with narrative accounts about the history of monetary policy disturbances we investigate whether employing the narrative monetary shocks as a proxy variable in a var model aligns both shock series we find that it does not

the impact of fomc statements on the volatility of asset prices this article examines the impact of federal open market committee fomc statements on asset prices statements are found to have a much more pronounced impact on the volatility of asset prices than interest rate surprises they influence primarily stock returns intermediate and long term yields whereas short term rates are driven both by statements and by interest rate surprises we also find that the regime shift of may 1999 has improved the effectiveness of monetary policy as reflected in an overall reduction in market volatility during the most recent regime in addition markets are equally well prepared for the upcoming rate decision in both regimes but the process of adjustment depends on whether a statement was issued in the old regime or not when a statement is issued price adjustments are very similar across both periods whereas if no statement is issued then the rate of adjustment towards the new value is more gradual and occurs throughout the entire intermeeting period

daily monetary policy shocks and new home sales abstract the conventional notion of a monetary policy shock as a surprise change in the fed funds rate is misspecified the primary news for market participants is not what the fed just did but is instead new information about the fed s future intentions revisions in these anticipations show up instantaneously in long term mortgage rates home sales do not respond until much later this paper attributes this delay and hence much of the hump shaped response of economic activity to monetary policy to cross sectional heterogeneity in search times this framework allows one in principle to measure policy impacts at the daily frequency

the expectations hypothesis of the term structure of interest rates and monetary policy some evidence from asian countries abstractthis article outlines a panel data approach to modelling the term structure of interest rates in the short and in the long run we find robust evidence supporting the expectations hypothesis of the term structure ehts for a small sample of asian emerging markets furthermore we detect some relevant differences in the transmission mechanism of monetary policy and the existence of a mccallum 2005 rule no exogeneity of monetary policy to the yield curve in some countries finally we document the influence of an international global factor i e a time varying global risk premium on the yield curve while local country specific factors are not statistically significant

total factor productivity and the measurement of technological change tfp is interpreted in the literature in different mutually contradictory ways changes in tfp are shown to measure not technological change only the super normal returns to investing in such change returns that exceed the full opportunity cost of the activity thus in the limit technological change can proceed with unchanged tfp measuring the effects of technological change instead requires counterfactual estimates reasons why changes in tfp are imperfect measures of super normal returns are also studied reasons connected with the timing of output responses the treatment of r d in the national accounts the omission of resource inputs and two types of aggregation la productivite totale des facteurs et la mesure du changement technologique la productivite totale des facteurs ptf est interpretee dans la litterature de manieres differentes et mutuellement contradictoires on montre que les changements dans la ptf ne mesurent pas le changement technologique mais seulement les rendements supra normaux sur les investissements dans de tels changements des rendements qui depassent le plein cout d opportunite de cette activite donc a la limite le changement technologique peut proceder sans que la ptf change mesurer les effets du changement technique reclame des evaluations d hypotheses de rechange les raisons pour lesquelles les changements dans la ptf sont des mesures imparfaites des rendements supra normaux sont aussi etudiees raisons connectees avec la reponse des niveaux de production le traitement de la r d dans les comptes nationaux l omission des intrants de ressources et deux types d agregation

no bubble condition model free tests in housing markets we test for the existence of housing bubbles associated with a failure of the transversality condition that requires the present value of payments occurring infinitely far in the future to be zero the most prominent such bubble is the classic rational bubble we study housing markets in the united kingdom and singapore where residential property ownership takes the form of either leaseholds or freeholds leaseholds are finite maturity pre paid and tradeable ownership contracts with maturities often exceeding 700 years freeholds are infinite maturity ownership contracts the price difference between leaseholds with extremely long maturities and freeholds reflects the present value of a claim to the freehold after leasehold expiry and is thus a direct empirical measure of the transversality condition we estimate this price difference and find no evidence of failures of the transversality condition in housing markets in the u k and singapore even during periods when a sizable bubble was regularly thought to be present

international interest rates and us monetary policy announcements evidence from hong kong and singapore this paper investigates the responses of market interest rates to us monetary policy announcements for the us and two emerging economies hong kong and singapore which are similar on many respects but have experienced opposite exchange rate regimes in the last twenty years our results based on market expectations extracted from federal fund futures rates document that fomc announcements significantly affect the term structure of interest rate in the us and both asian countries further international interest rate differentials around fomc meeting dates tend to be negative for short maturities with the impact gradually dissipating as bond maturity increases finally for the case of singapore we find that domestic interest rates react to both external and domestic monetary policy announcements with a magnitude that is larger over the full bond maturity spectrum for domestic announcements these results are robust to time varying futures risk premia and alternative measures of interest rates expectations

interest rates and equity extraction during the housing boom credit record panel data from 1999 2010 indicates that the likelihood of home equity extraction borrowing on average about 40 000 against one s home peaked in 2003 when mortgage rates reached historic lows we estimate a 27 percent rise in extraction in response to a 100 basis point rate decline and that house price growth amplifies this relationship differential responses to interest rates and home price appreciation by borrower age and credit score provide new evidence of financial frictions finally equity extractions are associated with higher default risk consistent with the use of borrowed funds for consumption or illiquid investment

household debt and monetary policy revealing the cash flow channel we study the effect of monetary policy on spending when households hold debt with variable interest rates when interest rates on outstanding loans vary with the short term market interest rate monetary policy has a direct and immediate effect on households expenses and disposable income if households are borrowing constrained they will respond to a shock to disposable income by adjusting their spending as a result a monetary policy induced interest rate change leads to a larger change in consumption than what is predicted by the elasticity of intertemporal substitution we examine this cash flow channel of monetary policy using administrative data on swedish households we estimate a strong and statistically significant response in spending to changes in interest expenses more specifically we estimate a marginal propensity to consume including durable consumption that is around unity or even higher in response to monetary policy induced changes in interest expenses for example highly indebted households with adjustable rate mortgages reduce consumption growth by several percentage points more in response to a one percentage point increase in the household interest rate than households with little debt or fixed rate mortgages our findings imply that monetary policy will have a stronger effect on real economic activity when households are highly indebted and have adjustable rate mortgages jel classification d14 e21 e52 g11

using private forecasts to estimate the effects of monetary policy i develop a methodology that uses the forecasts of market participants and of policy makers to estimate the effects of monetary policy on output and inflation my approach has advantages over the standard practice of fitting a vector autoregression to the data i apply my methodology to data on output interest rates and prices i find that even using the federal reserve board s greenbook forecasts to control for the policy maker s information set prices rise initially in response to a monetary contraction this finding undermines the standard justification for including an index of commodity prices in vars

us monetary policy and international bond markets this paper analyzes how u s monetary policy affects the pricing of dollar denominated sovereign debt we document that yields on dollar denominated sovereign bonds are highly responsive to u s monetary policy surprises during both the conventional and unconventional policy regimes and that the passthrough of unconventional policy to foreign bond yields is on balance comparable to that of conventional policy in addition a conventional u s monetary easing tightening leads to a significant narrowing widening of credit spreads on sovereign bonds issued by countries with a speculative grade credit rating but has no effect on the corresponding weighted average of bilateral exchange rates for a basket of currencies from the same set of risky countries this indicates that an unanticipated tightening of u s monetary policy widens credit spreads on risky sovereign debt directly through the financial channel as opposed to indirectly through the exchange rate channel during the unconventional policy regime yields on both investment and speculative grade sovereign bonds move one to one with policy induced fluctuations in yields on comparable u s treasuries we also examine whether the response of sovereign credit spreads to us monetary policy differs between policy easings and tightenings and find no evidence of such asymmetry

financial intermediary capital we propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households that is have a collateralization advantage intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth the net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity such as investment and financing the accumulation of net worth of intermediaries is slow relative to that of the corporate sector the model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch namely their severity their protractedness and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns the model captures the tentative and halting nature of recoveries from crises

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

a unified measure of fed monetary policy shocks abstract we develop a u s monetary policy shock series that stably bridges periods of conventional and unconventional policymaking is largely unpredictable and contains no significant central bank information effect we attribute differences between our measure and often used alternatives to our econometric procedure a partial least squares approach and our using the full maturity spectrum of interest rates in estimating the shock we find that shocks to our monetary policy series have particularly large effects on maturities in the middle of the term structure and produce conventionally signed impulse responses of output and inflation

externalities technological complementarities and sustained economic growth externalities as conventionally defined miss many of the spillovers that are both causes and consequences of the technological changes that underlie economic growth we introduce a much wider concept called technological complementarities new general purpose technologies gpts rejuvenate the growth process by creating technological complementarities which are adequately measured neither by total factor productivity tfp nor by externalities there would be major gains from technological change even if the returns on capital invested in innovation never exceeded the returns on investing in existing technologies so that there were neither externalities nor positive changes in tfp

delphic and odyssean monetary policy shocks evidence from the euro area abstract what drives the reaction of financial markets to central bank communication on the days of policy decisions we highlight the role of two factors that we identify from high frequency monetary surprises news on future macroeconomic conditions delphic shocks and news on future monetary policy shocks odyssean shocks these two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations they also have a different impact on macroeconomic outcomes so that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve

on measuring the effects of fiscal policy in recessions we do not have a good measure of the effects of fiscal policy in a recession because the methods that we use to estimate the effects of fiscal policy both those using the observed outcomes following different policies in aggregate data and those studying counterfactuals in fitted model economies almost entirely ignore the state of the economy and estimate the government multiplier which is presumably a weighted average of the one we care about the multiplier in a recession and one we care less about the multiplier in an expansion notable exceptions to this general claim sug gest this difference is potentially large our lack of knowledge stems significantly from the focus on linear dynamics vector autoregressions and linearized or close to linear dynamic stochastic general equilibrium dsge models our lack of knowledge also reflects a lack of data deep recessions are few and nonlinearities hard to measure the lack of statistical power in the estimation of nonlinear models using aggregate data can be addressed by exploiting estimates of partial equilibrium responses in disaggregated data microeconomic estimates of the partial equilibrium causal effects of a policy can discipline the causal channels inherent in any dsge model of the general equilibrium effects of policy microeconomic studies can also provide measures of the dependence of the effects of a policy on the states of different agents which is a key component of the dependence of the general equilibrium effects of fiscal policy on the state of the

external effects in u s procyclical productivity abstract in this paper we highlight a new dimension of the aggregate procyclical productivity phenomenon we show that estimates of the degree of returns to scale are larger for manufacturing as a whole than for two digit industries since this difference must be due to factors that are only internalized at the most aggregate level we term it an external effect this result rules out explanations based on own input variation such as true increasing returns and unmeasured factor utilization tied to own activity as the sole explanations for aggregate procyclical productivity we explore several potential explanations of this external effect

futures prices as risk adjusted forecasts of monetary policy many researchers have used federal funds futures rates as measures of financial markets expectations of future monetary policy however to the extent that federal funds futures reflect risk premia these measures require some adjustment in this paper we document that excess returns on federal funds futures have been positive on average and strongly countercyclical in particular excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business cycle indicators such as treasury yield spreads and corporate bond spreads excess returns on eurodollar futures display similar patterns we document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy we also show that risk premia matter for some futures based measures of monetary policy shocks used in the literature

monetary news in the united states and business cycles in emerging economies abstract this paper identifies anticipated news and unanticipated surprise shocks to the u s fed funds rate using fed funds futures contracts and assesses their propagation to emerging economies anticipated shocks are identified as the expected change in the fed funds rate orthogonal to expected u s business cycle conditions while unanticipated shocks are the one step ahead forecast error anticipated shocks explain around half of the narrative series of u s monetary policy shocks to identify the effects of both shocks i estimate a panel var using a sample of emerging economies an anticipated 25 basis points contractionary u s interest rate shock induces a fall of 0 5 in gdp from its trend two quarters before the shock materializes both anticipated and unanticipated changes in the u s interest rate cause significant and quantitatively similar effects the increase of the u s baa corporate spread in response to both shocks significantly exacerbates the response of emerging economies after accounting for anticipation u s interest rate shocks explain 14 of business cycle fluctuations in emerging economies

monetary policy transmission in the united kingdom a high frequency identification approach abstract this paper investigates the impact of monetary policy shocks on macroeconomic and financial variables in the united kingdom using a new series of high frequency monetary policy surprises employing our surprises as an instrument in a monthly svar over the uk s inflation targeting period we show that a monetary policy tightening induces a decline in economic activity and in cpi an appreciation of the pound a reduction in bank credit and a significant increase in mortgage and corporate bond spreads uk monetary policy also affects foreign credit spreads consistent with the extensive presence of large international players in the uk financial intermediation sector we finally propose a novel test of overidentifying restrictions which exploits the availability of the narrative series of monetary policy shocks constructed by cloyne and hurtgen 2016 and find that our high frequency monetary policy surprises are not significantly affected by non monetary news

taylor rules mccallum rules and the term structure of interest rates abstract recent empirical research shows that a reasonable characterization of federal funds rate targeting behavior is that the change in the target rate depends on the maturity structure of interest rates and exhibits little dependence on lagged target rates see for example cochrane and piazzesi 2002 the fed and interest rates a high frequency identification american economic review 92 90 95 the result echoes the policy rule used by mccallum 1994a monetary policy and the term structure of interest rates nber working paper no 4938 to rationalize the empirical failure of the expectations hypothesis applied to the term structure of interest rates that is rather than forward rates acting as unbiased predictors of future short rates the historical evidence suggests that the correlation between forward rates and future short rates is surprisingly low mccallum showed that a desire by the monetary authority to adjust short rates in response to exogenous shocks to the term premiums imbedded in long rates i e yield curve smoothing along with a desire for smoothing interest rates across time can generate term structures that account for the puzzling regression results of fama and bliss 1987 the information in long maturity forward rates the american economic review 77 680 392 mccallum also clearly pointed out that this reduced form approach to the policy rule although naturally forward looking needed to be studied further in the context of other response functions such as the now standard taylor 1993 discretion versus policy rules in practice carnegie rochester conference series on public policy 39 195 214 rule we explore both the robustness of mccallum s result to endogenous models of the term premium and also its connections to the taylor rule we model the term premium endogenously using two different models in the class of affine term structure models studied in duffie and kan 1996 a yield factor model of interest rates mathematical finance 57 405 443 a stochastic volatility model and a stochastic price of risk model we then solve for equilibrium term structures in environments in which interest rate targeting follows a rule such as the one suggested by mccallum i e the mccallum rule we demonstrate that mccallum s original result generalizes in a natural way to this broader class of models to understand the connection to the taylor rule we then consider two structural macroeconomic models which have reduced forms that correspond to the two affine models and provide a macroeconomic interpretation of abstract state variables as in ang and piazzessi 2003 a no arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables journal of monetary economics 50 745 787 moreover such structural models allow us to interpret the parameters of the term structure model in terms of the parameters governing preferences technologies and policy rules we show how a monetary policy rule will manifest itself in the equilibrium asset pricing kernel and hence the equilibrium term structure we then show how this policy can be implemented with an interest rate targeting rule this provides us with a set of restrictions under which the taylor and mccallum rules are equivalent in the sense if implementing the same monetary policy we conclude with some numerical examples that explore the quantitative link between these two models of monetary policy

the effect of liquidity constraints on consumption a cross sectional analysis this paper examines the effect of liquidity constraints on consumption expenditures using a single year cross section data set a reduced form equation for consumption is estimated on high saving households by the tobit procedure to account for the selectivity bias since high saving households are not likely to be liquidity constrained the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross section data when the reduced form equation is used to predict desired consumption the gap between desired consumption and measured consumption is most evident for young households

the first industrial revolution a guided tour for growth economists it is routine for growth economists to appeal to the british industrial revolution as motivation for their papers this overview draws implications from this important experience for how economists think about growth empirical growth economics and policy based on recent historical research the update it provides may also help to improve the plausibility of future economic interpretations of early industrialization technological change is of course central to the years 1760 1830 a period to which thomas ashton 1948 attached the label first industrial revolution thus it is not surprising that new growth models of the endogenous innovation variety are much more helpful for the analysis of this period than those that envisage endogenous growth without explicit reference to total factor productivity tfp growth crafts 1995 it follows that it is important to consider britain s social capability for growth i e the impact of institutions and policy choices on tfp growth rather than simply focusing on investment in human and physical capital

returns to scale concept estimation and analysis of japan s turbulent 1964 88 economy there is policy interest in factoring productivity growth into technical progress and returns to scale components our approach uses exact index number methods to reduce the parameters that must be estimated and allows us to exploit the cross sectional dimension of plant level panel data we show that the same equation can also be used to estimate harberger scale economies and technical progress indicators that require fewer assumptions estimates of the elasticity of scale for japanese establishments in three major industries over 1964 88 are presented our study spans the high growth era of the 1960s two oil shocks and other exogenous shocks il y a interet en politique publique a identifier les composantes de la croissance de la productivite attribuables au progres technique et aux rendements a l echelle l approche utilise les methodes des nombres indices exacts pour reduire les parametres qui doivent etres estimes et pouvoir exploiter la dimension transversale des donnees de panel au niveau de l etablissement on montre que la meme equation peut etre utilisee pour estimer les indicateurs d economies d echelle et de progres technique a la harberger lesquels necessitent un plus petit nombre de postulats on presente des evaluations de l elasticite d echelle pour des etablissements japonais dans trois industries importantes entre 1964 et 1988 l etude couvre la periode de forte croissance des annees 1960 celle des deux chocs petroliers et d autres chocs exogenes

can monetary policy influence long term interest rates it depends i introduction a stated goal of u s monetary policy is to maintain full employment in the u s economy 1 to do so however means the federal reserve must be capable of stabilizing aggregate demand particularly the historically volatile category of investment spending as this form of spending is highly sensitive to long term interest rates one implication of the full employment goal for u s monetary policy is that the federal reserve should be able to influence long term interest rates an important question then is whether u s monetary policy actually has any meaningful influence over long term interest rates a number of studies in recent years have examined this question but have come to different conclusions some studies show monetary policy has a sizeable and statistically significant effect on long term interest rates whereas others show the opposite the uncertainty created by this lack of consensus makes it difficult for the federal reserve to determine its impact on long term interest rates it is our objective in this paper to shed new empirical light on this murky relationship between monetary policy and long term interest rates we do so by looking at monetary policy innovations to the monetary base in an estimated vector autoregression var to see how monetary policy shocks impact the entire term structure of u s treasury interest rates 2 other studies that have used vars to examine this relationship have relied on innovations to the federal funds rate as their measure of monetary policy shocks berument and froyen 2006 berument and froyen 2009 edelberg and marshall 1996 evans and marshall 1998 this approach has become problematic as the federal funds rate has grown to be more predictable in recent times and thus less capable of generating monetary policy surprises in estimated vars our approach does not have this problem our study also has richer results than found in previous studies because we identify shocks to the money multiplier and real money demand in addition to the policy shock to the monetary base this allows us to examine the effect of all three monetary shocks on long term interest rates a final improvement that our study brings to this literature is that it uses long run identifying restrictions previous studies rely on short run contemporaneous restrictions that constrain the short run dynamics of the var our long run restrictions avoid this issue while at the same time imposing long run monetary neutrality on the monetary shocks for these reasons our study provides a fresh take on the relationship between monetary policy and long term interest rates using this approach we find that contrary to what the previous var studies show the federal reserve can meaningfully influence the entire term structure of interest rates we also find however that federal reserve can do so only if it maintains its inflation fighting credibility the rest of the paper proceeds as follows first we review previous findings on this issue and use them to help motivate our study second we outline the empirical methods we use to estimate the relationship between monetary policy shocks and long term interest rates third we discuss our data and construction of endogenous variables fourth we report our findings and examine how the results change over sub periods fifth the robustness of our findings are checked by examining how important the faust and leeper 1997 critique is to our identification strategy finally we conclude by discussing the implications for monetary policy ii previous findings motivating this study over the past decade there has been a spate of studies on the relationship between monetary policy and long term interest rates the methods and findings from this empirical research can be grouped into two categories on one hand there have been a number of studies using single equation models with daily data that find unanticipated changes in the federal funds rate can have a statistically significant and sizeable effect on long term interest rates beechey 2007 berument and froyen 2009 cochrane and piazzesi 2002 ellingsten and soderstrom 2003 ellingsen soderstrom and masseng 2004 gurkaynak sack and swanson 2005 kuttner 2001 poole et al

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

international coordination of fiscal policy in limiting economies we examine the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero we show that these policies converge if countries raise revenues through lump sum taxation however if there are unremovable domestic distortions such as distorting taxes there can be gains to coordination even when a single country s policy cannot affect world prices these results differ from the received wisdom in the optimal tariff literature the key distinction is that contrary to the tariff literature the spending decisions of governments are explicitly modeled

gpt driven endogenous growth seven years after helpman s 1998 book on general purpose technologies gpts there is a dearth of subsequent models early models employed technically complex dynamic optimising techniques which limited further development we present a model in which sustained growth is driven by a succession of gpts that is technically simpler than the early models yet captures stylised facts that were omitted from them ours has diminishing returns to inputs and endogenous incremental technological changes from r d interrupted by the occasional introduction of new gpts gpts are themselves developed endogenously with payoffs that are subject to uncertainty in magnitude and timing

asset bubbles and credit constraints we provide a theory of rational stock price bubbles in production economies with infinitely lived agents firms meet stochastic investment opportunities and face endogenous credit constraints they are not fully committed to repaying debt credit constraints are derived from incentive constraints in optimal contracts which ensure default never occurs in equilibrium stock price bubbles can emerge through a positive feedback loop mechanism and cannot be ruled out by transversality conditions these bubbles command a liquidity premium and raise investment by raising the debt limit their collapse leads to a recession and a stock market crash

the determinants of future u s monetary policy high frequency evidence this paper examines the determinants of future u s monetary policy by studying the relationship between a predictor of the future direction of monetary policy and a pertinent information set specifically we investigate the impact of the surprise component of an array of macro economic announcements upon federal funds futures rates this investigation is conducted using high frequency intraday data in order to examine the exact timing of rate reactions to announcements in doing this we find that non farm payrolls and civilian unemployment announcements play a dominant role in determining future monetary policy moreover we document evidence that shows that the release of such information is rapidly incorporated into rates particularly when considering federal funds futures contracts traded via an electronic trading platform as opposed to an open auction trading platform

high frequency identification of monetary non neutrality the information effect we present estimates of monetary non neutrality based on evidence from high frequency responses of real interest rates expected inflation and expected output growth our identifying assumption is that unexpected changes in interest rates in a 30 minute window surrounding scheduled federal reserve announcements arise from news about monetary policy in response to an interest rate hike nominal and real interest rates increase roughly one for one several years out into the term structure while the response of expected inflation is small at the same time forecasts about output growth also increase the opposite of what standard models imply about a monetary tightening to explain these facts we build a model in which fed announcements affect beliefs not only about monetary policy but also about other economic fundamentals our model implies that these information effects play an important role in the overall causal effect of monetary policy shocks on output

semiparametric estimates of monetary policy effects string theory revisited we develop flexible semiparametric time series methods for the estimation of the causal effect of monetary policy on macroeconomic aggregates our estimator captures the average causal response to discrete policy interventions in a macrodynamic setting without the need for assumptions about the process generating macroeconomic outcomes the proposed estimation strategy based on propensity score weighting easily accommodates asymmetric and nonlinear responses using this estimator we show that monetary tightening has clear effects on the yield curve and on economic activity monetary accommodation however appears to generate less pronounced responses from both estimates for recent financial crisis years display a similarly dampened response to monetary accommodation

rational asset pricing bubbles this paper provides a fairly systematic study of general economic conditions under which rational asset pricing bubbles may arise in an intertemporal competitive equilibrium framework our main results are concerned with nonexistence of asset pricing bubbles in those economies these results imply that the conditions under which bubbles are possible including some well known examples of monetary equilibria are relatively fragile this paper is concerned with the conditions under which asset prices in an intertemporal competitive equilibrium are equal to the present value of the streams of future dividends to which each asset represents a claim according to a central result of the theory of finance this is very generally true in the case of economies with trading at only a finite sequence of dates as long as there are no restrictions upon transactions other than that associated with possible incom pleteness of the set of securities that are traded the result is sometimes called the fundamental theorem of asset pricing here we consider the extent to which such a result continues to be valid in the case of trading over an infinite horizon it has often been observed in the econometric literature on asset pricing bubbles that it is possible in principle for the price of a perpetuity and the dividends on that security to satisfy at all times a present value relation for one period holding returns while the security s price nonetheless does not equal the present value of the stream of dividends expected over the infinite future in such a case the price of the perpetuity is said to involve a bubble component 2 joint stochastic processes for which this component is nonzero are sometimes argued to characterize existing assets for a recent example see froot and obstfeld 1991 but such an inference depends upon aspects of the stochastic

the relation between price and marginal cost in u s industry an examination of data on output and labor input reveals that some u s industries have marginal cost well below price the conclusion rests on the finding that cyclical variations in labor input are small compared with variations in output in booms firms produce substantially more output and sell it for a price that exceeds the costs of the added inputs the paper documents the disparity between price and marginal cost where marginal cost is estimated from annual variations in cost it considers a variety of explanations of the findings that are consistent with competition but none is found to be completely plausible

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

u s economic growth at the industry level the u s economy has expanded rapidly in recent years with total factor productivity the source of growth most closely identified with technological gains rising sharply since the mid 1990 s see e g bureau of labor statistics 1999 william gullickson and michael j harper 1999 mun s ho et al 1999 daniel e sichel 1999 this strong aggregate performance and the well documented explosion of investment in computers and other high tech equipment have led many to believe that the united states has experienced a permanent technology led growth revival it is essential however to disaggregate estimates of economic growth to the industry level to understand the new trends in the u s economy productivity growth the ability to produce more outputs from the same inputs differs widely among industries for the economy as a whole negative productivity growth in one industry can offset positive productivity growth in another and jorgenson 1990 shows that a measure of productivity based solely on aggregate data is valid only under very stringent conditions we avoid the limitations of an aggregate measure of productivity by decomposing u s growth across industries for the period 1958 1996 by breaking down the u s economy into 37 industries 35 private industries private households and general government we identify the contribution of each industry to aggregate productivity growth this enables us to isolate the underlying sources of gains in productivity and provides a better understanding of the forces driving the u s economy economy wide productivity from an aggregate production function increased 0 45 percent per year during 1958 1996 while methodology developed by evsey domar 1961 for aggregating over industries yields an aggregate estimate of 0 48 percent over the same period however industry productivity growth ranged from 1 98 percent in electronic and electric equipment to 20 52 percent in government enterprises highlighting fundamental differences in technology and productivity growth across industries these results show that the aggregate production function provides a reasonable estimate of productivity trends over long periods but also masks important differences among industries

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

intangible capital relative asset shortages and bubbles abstract purely technological factors can be a fundamental force behind the emergence of asset price bubbles in developed economies we analyze an economy in which the production technology utilizes both physical and intangible capital where the latter cannot be used as collateral for borrowing technological change in the form of increased importance of intangible capital in production sharpens the borrowing constraints of entrepreneurs leading to a scarcity of high yield assets relative to low yield ones this can create the conditions for asset bubbles additionally due to the financial frictions standard dynamic efficiency tests are not valid and bubbles are not pareto improving

the root cause of economic growth under capitalism drawing on historical and other empirical evidence this paper provides a causal explanation of a central question why sustained per capita growth occurs in capitalist economies i e in what way capitalism differs from the market that gives it this property it describes an endogenous economic logic that is based on the institutional characteristics of capitalist firms in the non financial sector especially the flexibility of the inputs that they can call upon and of the size of the market that they can supply this perspective naturally generates a realistic theoretical account not only of the source of economic growth but also of the evolution of market structure the forces that produce divergence in for example profit rates a starting point for explaining price setting and a language for describing firms economic power it draws on previous traditions especially those based on the works of marx and schumpeter but differs from them in important respects copyright the author 2011 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

does the new economy measure up to the great inventions of the past abstract during the four years 1995 99 u s productivity growth experienced a strong revival and achieved growth rates exceeding that of the golden age of 1913 72 accordingly many observers have declared the new economy to be an industrial revolution even more important than the second industrial revolution of 1860 1900 which made the golden age of productivity growth possible this paper dissects the recent productivity revival subtracts out a cyclical component and concludes that there is no revival of the productivity growth trend in the 88 percent of the private economy lying outside of the durables manufacturing sector the paper explains this surprising finding by pointing to limitations in computers and the internet in comparison with the great inventions of the past

the fed and interest rates a high frequency identification we measure monetary policy shocks as changes in the fed funds target rate that surprise bond markets in daily data these shock series avoid the omitted variable time varying parameter and orthogonalization problem of monthly vars and do not impose the expectations hypothesis we find surprisingly large and persistent responses of bond yields to these shocks 10 year rates rise as much as 8 10 of a percent to a one percent target shock the usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response this abstract was borrowed from another version of this item

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

identifying vars based on high frequency futures data abstract using the prices of federal funds futures contracts we measure the impact of the surprise component of federal reserve policy decisions on the expected future trajectory of interest rates we show how this information can be used to identify the effects of a monetary policy shock in a standard var this alternative approach to identification is quite different and we argue more plausible than the conventional identifying restrictions we find that a usual recursive identification of the model is rejected as is any identification that insists on a monetary policy shock having an exactly zero effect on prices contemporaneously we nevertheless agree with the conclusion of much of the var literature that only a small fraction of the variance of output can be attributed to monetary policy shocks

monetary policy predictability in the euro area an international comparison we evaluate the ability of market participants to anticipate monetary policy decisions in 14 countries first by looking at both the magnitude and volatility of changes in the money market rates we show that the days of policy meetings are special days for financial markets second we find that the predictability of federal reserve fed bank of england and european central bank ecb is fully comparable finally an econometric analysis of the ability of market participants to incorporate in the current short term interest rates the expected policy changes shows that in the euro area and in other countries policy decisions are anticipated well in advance

channels of us monetary policy spillovers to international bond markets abstract we show significant us monetary policy mp spillovers to international bond markets our methodology identifies us mp shocks as the change in short term treasury yields around federal open market committee meetings and traces their effects on international bond yields using panel regressions we emphasize three main results first us mp spillovers to long term yields have increased substantially after the 2007 2009 global financial crisis second spillovers are large compared with the effects of other events and at least as large as the effects of domestic mp after 2008 third spillovers work through different channels concentrated in risk neutral rates expectations of future mp rates for developed countries but predominantly on term premia in emerging markets in interpreting these findings we provide evidence consistent with an exchange rate channel according to which foreign central banks face a trade off between narrowing mp rate differentials or experiencing currency movements against the us dollar developed countries adjust in a manner consistent with freely floating regimes responding partially with risk neutral rates and partially through currency adjustments instead emerging countries display patterns consistent with foreign exchange interventions which cushion the response of exchange rates but reinforce capital flows and their effects in bond yields through movements in term premia our results suggest that the endogenous effects of currency interventions on long term yields should be added into the standard cost benefit analysis of such policies

optimal lending contracts and firm dynamics we develop a general model of lending in the presence of endogenous borrowing constraints borrowing constraints arise because borrowers face limited liability and debt repayment cannot be perfectly enforced in the model the dynamics of debt are closely linked with the dynamics of borrowing constraints in fact borrowing constraints must satisfy a dynamic consistency requirement the value of outstanding debt restricts current access to short term capital but is itself determined by future access to credit this dynamic consistency is not guaranteed in models of exogenous borrowing constraints where the ability to raise short term capital is limited by some prespecified function of debt we characterize the optimal default free contract which minimizes borrowing constraints at all histories and derive implications for firm growth survival leverage and debt maturity the model is qualitatively consistent with stylized facts on the growth and survival of firms comparative statics with respect to technology and default constraints are derived borrowing constraints are an important determinant of firm growth and survival 1 such constraints may arise in connection to the financing of investment opportunities faced by firms or temporary liquidity needs such as those required to survive a recession this paper develops a theory of endogenous borrowing constraints and studies its implications for firm dynamics in our model debt is constrained by the firm s limited liability and option to default a lending contract specifies an initial loan size future financing and a repayment schedule the choice of these variables in turn determines future growth the firm s future borrowing capacity and its ability and willingness to repay hence borrowing constraints and firm dynamics are jointly determined we study this dynamic design problem our model builds on thomas and worral s 1994 model of foreign direct investment at time zero a risk neutral borrower firm or entrepreneur has a project which requires a fixed initial set up cost every period the project yields revenues that increase with the amount of 1 there is considerable evidence suggesting that financing constraints are important determinants of firm dynamics gertler and gilchrist 1994 argue that liquidity constraints may explain why small manufacturing firms respond more to a tightening of monetary policy than do larger manufacturing firms perez quiros and timmermann 2000 show that in recessions smaller firms are more sensitive to the worsening of credit market conditions as measured by higher interest rates and default premia evans and jovanovic 1989 show that the liquidity constraints are essential in the decision to become an entrepreneur fazzari hubbard and petersen 1988 among others view financial constraints as an explanation for the dynamic behaviour of aggregate investment and cabral and mata 1996 are able to fit reasonably well the size distribution of portuguese manufacturing firms by estimating a simple model of financing constraints for surveys see hubbard 1998 and stein 2003

international monetary policy surprise spillovers abstract this is the first paper to examine international monetary surprise spillovers and to estimate the response of security prices to monetary and nonmonetary surprises monetary surprises have a slope effect on the domestic yield curve short maturity yields adjust much more than longer maturity yields these results are similar to other studies the following results are new us monetary surprises spill over and affect australian yields and equity returns australian monetary surprises do not spill over to the us nonmonetary surprises are much more important than monetary policy surprises in explaining longer maturity yield changes and equity returns

identification in macroeconomics abstract this paper discusses empirical approaches macroeconomists use to answer questions like what does monetary policy do how large are the effects of fiscal stimulus what caused the great recession why do some countries grow faster than others identification of causal effects plays two roles in this process in certain cases progress can be made using the direct approach of identifying plausibly exogenous variation in a policy and using this variation to assess the effect of the policy however external validity concerns limit what can be learned in this way carefully identified causal effects estimates can also be used as moments in a structural moment matching exercise we use the term identified moments as a short hand for estimates of responses to identified structural shocks or what applied microeconomists would call causal effects we argue that such identified moments are often powerful diagnostic tools for distinguishing between important classes of models and thereby learning

an empirical analysis of stock and bond market liquidity this article explores cross market liquidity dynamics by estimating a vector autoregressive model for liquidity bid ask spread and depth returns volatility and order flow in the stock and treasury bond markets innovations to stock and bond market liquidity and volatility are significantly correlated implying that common factors drive liquidity and volatility in these markets volatility shocks are informative in predicting shifts in liquidity during crisis periods monetary expansions are associated with increased liquidity moreover money flows to government bond funds forecast bond market liquidity the results establish a link between macro liquidity or money flows and micro or transactions liquidity a number of important theorems in finance rely on the ability of investors to trade any amount of a security without affecting the price however there exist several frictions 1 such as trading costs short sale restrictions and circuit breakers that impact price formation the influence of market imperfections on security pricing has long been recognized liquidity in particular has attracted a lot of attention from traders regulators

asset shortages liquidity and speculative bubbles abstract we study the effect of asset shortages on liquidity in economies with limited enforcement of debt contracts we establish that under a suitable assumption in terms of gains from trade liquidity does not dry up and trading volumes do not disappear as credit conditions worsen the equilibrium outcome becomes arbitrarily close to a purely speculative equilibrium and bubbles occur in the limit the result applies to incomplete markets and more generally to equilibria where collateral constraints interfere with the additivity of the payoff pricing functional

poverty human development and growth an emerging consensus this paper considers several issues relevant to the debate on the extent to which poverty or development progress in general should be measured by income or by a broader set of objectives issues covered here are practical implications of the two approaches for poverty reduction efforts the impact of growth on basic social indicators and how national achievement on social indicators is best measured sri lanka and pakistan countries often cited in this debate are used as examples

intertemporal distortions in the second best we consider a very general class of public nance problems that encompasses ramsey models of optimal taxation as well as economies with limited commitment private information and political economy frictions we identify a su cient condition to rule out permanent intertemporal distortions at the optimum if there exists an admissible allocation that converges to the rst best steady state then all intertemporal distortions are temporary in the second best we analyze a series of applications to illustrate the signi cance of this result

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

market based measures of monetary policy expectations a number of recent articles have used different financial market instruments to measure near term expectations of the federal funds rate and the high frequency changes in these instruments around federal open market committee announcements to measure monetary policy shocks this article evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy all of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered among financial market instruments we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months for longer horizons the predictive power of many of the instruments we consider is very similar in addition we present evidence that monetary policy shocks computed using the current month federal funds futures contract are influenced by changes in the timing of policy actions tha

expectations bond yields and monetary policy through explicitly incorporating analysts forecasts as observable factors in a dynamic arbitrage free model of the yield curve this research proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities an empirical examination reveals that survey expectations about inflation output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields estimates from a forward looking monetary policy rule suggest that the central bank exhibits a preemptive response to inflationary expectations while accommodating output growth and monetary policy expectations forecasted gdp growth plays a significant role in explaining time variation in the market prices of risk the sensitivity of long yields is linked to the persistence of expected inflation under the risk neutral measure models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

general equilibrium wariness and efficient bubbles abstract wary consumers overlook gains but not losses in remote sets of dates or states as preferences are upper but not lower mackey semi continuous bewley s 1972 4 result on existence of equilibrium whose prices are not necessarily countably additive holds wariness is related to lack of myopia and to ambiguity aversion and therefore to bewley s 1986 6 work on knightian uncertainty wary infinite lived agents have weaker transversality conditions allowing them to be creditors at infinity and for bubbles to occur in positive net supply assets completing the markets there are efficient allocations that can only be implemented with asset bubbles