the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

cointegration tests of the fisher hypothesis with variable trends in the world real interest rate after seventy years the fisher hypothesis has proven to be one of the most durable and influential theories in economics yet after years of debate and testing the empirical accuracy of the proposition remains in question the fisher hypothesis simply states that a one point increase in inflation leads to a one point increase in the nominal interest rate leaving real interest rates unchanged this relationship does not rule out the possibility of other variables influencing the real interest rate or variable trends in the real interest rate arising from sources other than inflation this paper merges the literature on real interest rate parity with tests of the fisher hypothesis to control for variable trends in the real interest rate

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

a respecified tax adjusted fisher relation how much will a 1 increase in expected inflation increase nominal interest rates irving fisher s famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation darby and feldstein correcting the fisher equation for taxation predict a nominal interest rate increase of 1 1 t where t is the marginal tax rate i e if t 3 then a 1 increase in expected inflation should cause a 1 4 rise in interest rates empirical evidence however suggests that the rise in interest rates is much smaller than the darby feldstein prediction estimates are around 9 varying mostly between 5 and 1 15 which is much closer to fisher s original prediction it is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates in this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the fisher equation two important aspects of the u s tax code historic cost depreciation and the lower tax rate on capital gains our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax our corrected fisher equation predicts a 1 12 nominal interest rate increase rather than the 1 4 increase implied by the darby feldstein model the our model closes about 56 of the gap between theory and empirical evidence the remainder could be closed by additional refinements in the model or better empirical modeling

the purchasing power of money and nominal interest rates a re examination while it has been known for some time that under uncertainty the original version of the fisher hypothesis is not precisely correct empirical researchers have largely ignored this fact such an omission has possibly resulted in erroneous conclusions concerning other hypotheses most notably the impact of prices on the real economy this paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates empirical tests based on both the livingston survey data and data from time series forecasting models provide support for the fisher effect and the hypothesis that only covariance risk is priced in the treasury bill market one of the basic hypotheses concerning rationality in financial markets is based on statements generally attributed to fisher 18 fisher argued that the nominal or money rate of return on an asset should compensate an investor for his or her required real rate of return and changes in the purchasing power of money for the uncertainty case fisher replaced known purchasing power changes with the expected inflation rate whereas the fisher relationship under certainty is well defined his basic theorem under uncertainty is not precise as fama 15 has argued it is changes in the purchasing power of money not the inflation rate that should concern investors under uncertainty the expected value of one is not by jensen s inequality the inverse of the expected value of the other moreover fama and farber 16 grauer and litzenberger 20 and benninga and protopapadakis 3 have shown that when investors are risk averse the fisher relationship will generally not hold even after adjustment has been made for the distinction between purchasing power changes and the inflation rate in particular these authors show that an adjustment must be made for the fact that the real rate of return on nominal bonds is random while these issues have been discussed in the theoretical literature they have largely been ignored in the empirical work on this topic given the fact that nominal rates do not seem to adjust as rapidly to price changes as fisher hypothesized numerous empirical researchers have expanded the basic fisher model in an attempt to explain this empirical anomaly these extensions include the incorporation of a inflation rate variability and the growth in real output

the effect of fiscal policy on the short run relation between nominal interest rates and inflation this paper presents a simple empirical model of the relation between the inflation rate and the nominal interest rate we show that previous results found in the literature may be attributed to specification error and that there are natural explanations for the observed signs of previous fisher equation estimates our results show that fiscal policy shocks may generate short run negative correlations between changes in inflation and changes in the nominal interest rates these results illustrate the difficulty in discussing the relation between inflation and nominal interest rates without conditioning the analysis with specific assumptions on the course of the economy

evidence on the varying effect of expected inflation on interest rates boskin michael j mark gertler and charles taylor the impact of inflation on u s productivity and international competitiveness washington d c national planning association 1980 carlton dennis w the disruptive effect of inflation on the organization of markets in robert e hall ed inflation causes and effects chicago the university of chicago press 1982 fama eugene short term interest rates as predictors of inflation american economic review 65 june 1975 269 282 freund william c and paul b manchester productivity and inflation in john d hogan ed dimensions of productivity research vol i houston american productivity center 1980 53 71 geweke john richard meese and warren t dent comparing alternative tests of causality in temporal systems analytic results and experimental evidence journal of econometrics 21 feb 1983 161 194 granger c w j investigating causal relations by econometric models and cross spectral methods econometrica 37 july 1969 424 438 guilkey david k and michael k salemi small sample properties of three tests for granger causal ordering in a bivariate stochastic system this review 64 nov 1982 668 680 houthakker hendrik s growth and inflation analysis by industry brookings papers on economic a ctivity 1979 241 256 hsiao cheng autoregressive modelling and money income causality detection journal of monetary economics 7 1981 85 106 autoregressive modeling and causal ordering of economic variables journal of economic dynamics and control 4 1982 243 259 jarrett j peter and jack g selody the productivity inflation nexus in canada 1963 1979 this review 64 aug 1982 361 367 kendrick john w and elliot s grossman productivity in the united states trends and cycles baltimore the johns hopkins university press 1980 sims christopher a money income and causality american economic review 62 sept 1972 540 552 u s department of commerce bureau of economic analysis the national income and product accounts of the united states 1929 76 statistical tables washington d c superintendent of documents 1981 u s department of labor bureau of labor statistics tables headed industry analytical ratios for the business sector all persons indexes 1977 100 and basic industry data for the business sector all persons printout dated april 27 1983

nature of transfers income tax function and empirical estimation of elasticity of taxable income for brazil abstractthis article aims to estimate the elasticity of taxable income eti taking into account the nature of transfers and their use as a redistribution package involving cash and in kind transfers to households in brazil our contributions are twofold first we provide a simple model with balanced budget government that reveals the role played by cash and in kind transfers on the labour supply and income tax revenues thereof next in order to estimate eti in the presence of cash and in kind transfers brazilian population surveys pesquisa nacional por amostra de domicilios pnad are used to explore a limited tax reform that was implemented between 1997 and 1998 this reform only affected the higher income tax bracket our findings suggest that in kind cash transfers are positively negatively associated with reported taxable income and precise estimation of eti requires estimates of both types of transfers last we estimate the eti for brazil in the range from 0 4 to 1 3 not different fro

tax effects versus budget effects on labor supply this paper analyzes the effects on labor supply of parallel changes in taxes and public spending of various types a number of important recent developments in the labor supply behavior of households are highlighted by such a study of various types of budget effects rather than isolated tax effects this comes out in particular when considering cross substitution effects on labor supply of changes in public spending on goods and services or of the subsidization of goods and services provided by private markets moreover the income effects of tax changes are often mitigated or possibly even removed by the income effects of the accompanying expenditure changes

an analysis of growth of u s farmland prices 1963 82 increases in expected inflation or real growth in net rental income to land have been proposed as alternative explanations of the dramatic real growth in u s farmland prices in the 1970s in this paper the effect of inflation is shown to be theoretically ambiguous an empirical analysis using u s and international farmland prices suggests that most of the real land price growth can be explained by real growth in net rental income to land increases in expected inflation have had a negative effect on real land prices but the effect of inflation has been comparatively small

out of space regulation and technical change in communications satellites regulatory practices by the federal communications commission fcc have the effect of rationing the use of a particular resource required for communications satellite technology the electromagnetic spectrum spectrum or the airwaves is the medium over which communications signals such as tv telephone and radar travel federal government allocation of spectrum among competing services has long been implemented to mitigate the interference that can arise between nearby signals hence for instance the assignment of radio stations to unique regions along the am and fm dials that government regulation can and probably does fail to allocate spectrum efficiently for all the usual economic reasons has been attested to criticized and in turn the subject of proposed reformation in an economics literature both historic radio spectrum regulation inspired coase s theorem and growing including work which dates from harvey levin 1971 and references cited therein to most recently stanley besen et al 1984 left unaddressed however have been the implications of inefficient spectrum regulation for the pace and direction of technical change specifically the problems of static resource misallocation may be compounded by inefficiency in induced innovation v kerry smith 1974 1975 koji okuguchi 1975 wesley magat 1976 if fcc allocations incorrectly signal the true economic scarcity of spectrum innovation to augment spectrum and other inputs on the basis of relative scarcity may be misdirected and the overall rate of r d spending may be distorted accordingly the effect of government regulation on innovation in communications satellite technology merits particular attention for several reasons first a recent fcc ruling will increase the cost of future satellites by requiring them to operate at fcc mandated minimum levels of intensity of spectrum use on top of rationed quantities of spectrum see federal register 1983 para 69 second unlike other uses of spectrum there is a large public sector component to satellite r d spending that is also likely to be affected by fcc regulation undertaken by nasa current research expenditures on advanced communications satellite technology have been justified in large part by a perceived need to develop methods that use spectrum more intensively see nasa 1984 and u s congress house 1984 third and again distinguishing satellites from other users of spectrum the inherently global nature of satellite technology renders satellite spectrum allocations a contentious international issue in particular developing countries not currently using satellite technology have expressed serious concern about future spectrum availability in response technical change economizing on spectrum is frequently endorsed by regulators and moral suasion is accordingly brought to bear on industry as an appropriate solution see fcc 1985 and u s congress 1982 1 this paper proceeds as follows section i tailors a model of induced innovation de

interest rates and inflation in the frequency domain new evidence abstract we employ new data on interest rates from the tax free sector to test the fisher hypothesis tax free rates permit a test without determining the appropriate marginal tax rate to assign to investors we use band spectral estimation

tax rate effects on interest rates abstract this paper investigates empirically the effects of personal and corporate taxes on taxable interest rates the results suggest that the effective tax rate of marginal investors in the treasury bill market is that of households as opposed to that of tax exempt institutions or corporations

estimating the fisher effect and the stochastic money growth process this paper demonstrates that a change in the stochastic process generating money can alter the relationships between money and inflation and between inflation and interest rates the extent to which inflation is forecastable is shown to depend significantly on the extent to which money is forecastable thus the greater the persistence and forecastability of money the greater the likelihood of observing a statistically significant fisher effect us data over the 1953 86 period are used to demonstrate that instability in the fisher effect coincides with changes in the stochastic process generating money there is a significantly stronger fisher effect during a subsample in which money and hence inflation are more predictable

the fisher hypothesis revisited new evidence the nominal interest rate is examined with the is lm model incorporating the fisher hypothesis eight different interest rates are considered for different sample periods ending in 1993 when the livingston survey data are used the coefficients for the expected inflation rate real quantity of money and government spending are significant in most cases when the adaptive expectations model is applied the coefficients for real quantity of money and government spending are insignificant in most cases the fisher hypothesis only holds for the federal funds rate or the aaa bond rate the linear form regression can be rejected at the 1 level in favour of the box cox general functional form

government deficits capital flows and interest rates 1988 government deficits capital flows and interest rates applied economics vol 20 no 6 pp 753 765

interest rates income taxes and anticipated inflation some new evidence abstract this paper re examines the effect of taxes on the fisher hypothesis using a procedure first proposed by peek and using data through the 1980s and a new data set on expected inflation for the us the tax adjusted hypothesis is rejected in favor of the no tax adjusted hypothesis for the period 1968 iv to 1979 iv for the full sample both hypotheses are accepted these results are thus quite different from those reported by peek a brief discussion of the factors responsible for these differences is provided

family labor supply with taxes over the period 1960 1983 the proportion of federal tax revenue raised by taxation of labor supply has risen from 57 77 percent in this paper we specify and estimate a model of family labor supply which treats both federal and state taxation husbands and wives labor supply are treated jointly rather than in aseparate manner as in previous research a method to calculate the virtual wage for nonworking spouses is used within a utility maximizing framework to treat correctly the joint family labor supply decision joint family efforts are found to be important the efficiency cost deadweight loss of labor taxation is estimated to be 29 6 of tax revenue raised the effect of the new 10 deduction to ease the marriage tax for working spouses leads to a prediction of 3 8 increase in wives labor supply and a 9 decrease in husbands labor supply overall taxes paid are predicted to decrease by 3 4 this abstract was borrowed from another version of this item

income inequality government expenditures and growth this paper investigates the relationship between income inequality and growth by utilizing the recently published deininger squire data set most of the recent empirical growth literature suggests a negative relationship between inequality and growth on the basis of reduced form growth equations this is also found in the author s study some effort is made to discuss the argument behind the perceived negative relationship between inequality and growth according to the fiscal policy approach a high level of income inequality leads to a higher demand for redistribution which in turn affects growth through resource allocation out of investment or through incentive distorting taxes needed to fund the redistribution it is suggested that the last mentioned relationship between government expenditure and growth is more likely to be non linear positive with small amounts and negative with large amounts such a relationship however is only found for public goods thus government expenditure on law and ord

the postwar stability of the fisher effect most research concerning the fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation recently attention has shifted to the stability of that response according to previous estimates the impact of anticipated inflation on interest rates varies substantially over time by extending a standard model to include tax and aggregate supply shock effects we are able to reduce such instability considerably our results also reveal that increased foreign demand for bonds lowers the interest rate

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

does industrial diversity always reduce unemployment evidence from the great depression and after a portfolio model of employment predicts that cities with more diversified employment opportunities should experience lower unemployment rates than less diversired cities empirical analysis of the diversity unemployment relationship using census data support the portfolio theory for the years 1950 1960 and 1970 during the early months of the great depression however industrially more diversired cities experienced higher rather than lower rates of unemployment by combining the portfolio model of employment with the lucas phelps islands model the anomalous effect of diversity in 1931 is explained as the result of employers diffculty of distinguishing real from nominal shocks i introduction the high unemployment of the 1930s continues to engage the imaginations of economists and economic historians although a large and impressive literature now covers most aspects of the great depression few studies discuss geographic variations 1 variations in unemployment across cities are nonetheless of interest the cross sectional variation in unemployment makes it possible to study the effect of industrial diversity on unemployment industrial diversity is the evenness with which employment is distributed across industries within a city suppose that a nation s employment is divided into say twenty industries a city is defined to be perfectly specialized when all employment is concentrated in a single industry and perfectly diversified when each of the twenty industries employs an equal share of the city s labor force recent empirical work by simon 1988 and diamond and simon 1990 shows that during the late 1970s and early 1980s cities with more diversified employment opportunities experienced lower rates of unemployment the results from the 1970s and 1980s raised the possibility that some part of the extremely high unemployment of the 1930s could be explained by the low degree of industrial diversity in many american cities indeed in the 1930s articles by mclaughlin 1930 and tress 1938 suggested the possibility of an inverse relationship between diversity and unemployment 2 we tested the relationship between unemployment and industrial diversity at the onset of the great depression in 1930 and 1931 we found much to our surprise that industrially more diverse cities experienced higher rates of unemployment in 1931 the surprising effect of employment diversity on unemployment in 1931 led us to speculate that the effects of diversity might differ under different macroeconomic conditions specifically we hypothesize that industrial diversity has two effects industrial diversity normally reduces unemployment through what we call a portfolio effect we argue that the anomalous effects of diversity on unemployment at the onset of the depression could have resulted if diversity of employment opportunities slowed essential wage adjustments required as a result of the massive decline in aggregate demand during normal periods the portfolio effect dominates and diversity reduces unemployment the magnitude of the great depression could have caused the wageadjustment effect to dwarf the portfolio effect thus reversing the normally inverse relationship between diversity and unemployment ii diversity and unemployment the portfolio effect the risk reducing property of diversity is well known to economists conroy 1975 first applied portfolio analysis to local labor markets simon 1988 developed a simple heuristic theory of the portfolio effect of industrial diversity imagine a multi industry world where only real shocks affect the demand price of firms all output is assumed to be sold in the national market the real shocks are assumed to be equivalent to observations on a random variable with zero mean independently and identically distributed across industries the shocks may be temporary or permanent although the distribution of shocks is known the duration of any particular shock is not

relative price changes as aggregate supply shocks this paper proposes a theory of supply shocks or shifts in the short run phillips curve based on relative price changes and frictions in nominal price adjustment when price adjustment is costly firms adjust to large shocks but not to small shocks and so large shocks have disproportionate effects on the price level therefore aggregate inflation depends on the distribution of relative price changes inflation rises when the distribution is skewed to the right and falls when the distribution is skewed to the left we show that this theoretical result explains a large fraction of movements in postwar u s inflation moreover our model suggests measures of supply shocks that perform better than traditional measures such as the relative prices of food and energy

the fisher effect in a signal extraction framework the recent brazilian experience abstract this paper derives a signal extraction framework for examining all testable implications of the fisher equation the signal is the net of taxes nominal interest rate which under the fisher model equals inflation expectation plus the real rate assumed to be constant or a constant plus a martingale difference all alternative linear models can be represented as noise added to the signal the international and brazilian literature are briefly reviewed and the empirical tests reinterpreted in the signal extraction framework the model is tested with brazilian data for the period 1973 1990 using interest rate data on non indexed certificates of deposit from a sample of major brazilian banks the framework detects little noise i e the fisher equation seems to reasonably fit the brazilian evidence this result carries the policy implication that the government cannot have the burden of financing its fiscal deficits ameliorated by issuing non indexed debt in periods when inflation is escalating given the large fluctuations observed in ex post real rates in brazil the reasonable success of the fisher equation also implies the existence of large inflation forecast errors which suggest the need for further research on how agents form inflation expectations when inflation escalates rapidly as it did in the late 1980s in brazil price indices lag behind true inflation this generates a fisher effect even for indexed securities the empirical evidence also corroborates the existence of this fisher effect for indexed securities

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

inflation targeting and core inflation this paper examines the interaction of core inflation and inflation targeting as a monetary policy regime interest in core inflation has grown because of inflation targeting core inflation is defined in numerous ways giving rise to many potential measures this paper defines core inflation as the best forecaster of inflation a cross country study finds before the start of inflation targeting but not after core inflation differs between non inflation targeters and inflation targeters through conditional regressions inflation expectations as measured by core inflation have not changed with the advent of inflation targeting nor do they differ from non targeters jel classification e52 and e31 cible de maitrise de l inflation et inflation sous jacente ce texte examine l interaction entre l inflation sous jacente et l utilisation de cibles de maitrise de l inflation dans un regime de politique monetaire l interet pour l inflation sous jacente a crua proportion que l utilisation de cibles a cru l inflation sous jacente est definie de bien des manieres et se prete a plusieurs mesures potentielles ce texte la definit comme le meilleur predicteur de l inflation une etude transversale de plusieurs pays revele que l inflation sous jacente differe entre les pays qui ont des cibles et ceux qui n en n ont pas avant qu on commence a cibler mais pas apres via des regressions conditionnelles on montre que les anticipations d inflation telles que mesurees par l inflation sous jacente n ont pas change avec l arrivee du ciblage et qu elles ne different pas de celles des pays qui ne ciblent pas

more flexible use of survey data on expectations in macroeconomic models a flexible procedure is proposed whereby both the random and systematic errors in measurement of survey data on inflation expectations can be appropriately handled when these surveys are used in the estimation of macroeconomic models during the period 1952 1980 livingston s two expectations series and the src series systematically underestimated inflation expectations by nearly 25 the asa nber survey however does not exhibit such underestimation thus the use of the livingston or src data as an unbiased measure of the true expectations of inflation would result in overestimation of the fisher effect and the ex ante real interest rate

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

the adjustment of the real interest rate to inflation this paper reports tests of carmichael and stebbing s 1983 inverted fisher hypothesis that it is the real rather than the nominal interest rate which adjusts to changes in the expected inflation rate unlike the earlier analysis the results presented here are based on a properly specified estimating equation derived from a short run open economy macro model the results support the inverted fisher hypothesis in the short run but indicate that there is some overshooting of the real interest rate so that after four quarters about 75 of the effect of an expected inflation change is reflected in real rates while the remainder leads to an increase in the nominal rate

on the marginal cost of public funds and the optimal provision of public goods abstract this paper argues that in models with heterogeneous agents the concept of the marginal cost of public funds mcpf will only be useful if it is compared with an analogous concept for the benefit side the mcpf does not assume a unique value and is not particularly illuminating in and out of itself also gone is the benchmark status of mcpf 1 turning to the provision of public goods using a mechanism design approach the paper constructs a two stage proof for kaplow s kaplow l 1996 the optimal supply of public goods and the distortionary cost of taxation national tax journal 49 513 533 proposition concerning the irrelevance of labor supply and distributional concerns in public good provision this highlights the two fundamental ingredients for his result first the provision of public goods per se when it satisfies the samuelson s rule is only potentially pareto improving second the actual pareto improvement will materialize when or if one reforms the income tax structure if the reform is not forthcoming the decision on public goods provision must rely on redistributional concerns finally the paper generalizes broadway and keen s boadway r keen m 1993 public goods self selection and optimal income taxation international economic review 34 463 478 result to a model with many types of agents many private goods and without making any assumptions regarding which self selection constraints are or are not binding

weighted median inflation is this core inflation this paper investigates core inflation defined as the best predictor of inflation i compare forecasts obtained using the mean weighted median trimmed mean and less food and energy inflation rates for the consumer price index and the personal consumption expenditure deflator for the current u s monetary policy regime another issue addressed is that of the systematic bias that exists due to the differences in means of these measures i test whether correcting for this bias can lead to better inflation forecasts this paper finds that adjusting for bias improves forecasting and that the weighted median is a better forecaster than the alternative measures and thus is a good measure of core inflation

tax rates government expenditures and labor supply clarifying the record a central claim of supply side economics is that in general equilibrium the income effect of a change in the income tax rate washes out and only the substitution effect remains in the words of ehrenberg and smith 1985 there would be a substitution effect with no overall income effect and labor supply would increase the aggregate supply of labor curve then must be upward sloping p 160 emphasis in the original although there has been a substantial literature on this subject the literature is sometimes confused in this paper a simple model is used to sort through the literature correct mistaken assertions derive a new result and collect earlier results in a compact way

the effect of federal deficits and debt on the tax adjusted short term real interest rate the stock versus flow effect of the federal debt deficit on a real interest rate is examined in a reduced form equation the evidence shows a positive and significant linkage between the federal debt and an ex post tax adjusted short term real interest rate

expectations surprises and treasury bill rates 1960 82 changes in six month bill rates over semiannual periods in the 1960s and 1970s are successfully related to expected changes and to surprises the latter include unanticipated changes in expected inflation in the growth of industrial production and base money and in inflation uncertainty estimation of the basic equation through the middle of 1983 does not suggest any change in structure moreover the equation explains 60 percent of the extraordinarily high level of real rates since late 1980 largely owing to an excess of unexpected net increases in anticipated inflation over actual increases our estimates provide some support for the expectations theory there appears to be information content in six month forward rates while this content is swamped by the impact of surprises in equations explaining rate changes in terms of forward rates alone the content is clear when proxies for the surprises are included in the equations the height and volatility of interest rates in the early 1980s spectacularly exceeded that of the past half century various researchers have attributed this to the sharp increase and decline in inflation the special characteristics of recent monetary the monetarist experiment and fiscal the structural deficit policies and mysterious or unidentified forces see clarida and friedman 1982 and makin and tanzi 1983 the present paper estimates the relationship between the six month treasury bill rate and its determinants in the 1960s and 1970s the purpose is to test various hypotheses regarding interest rate determination and to determine whether this relationship was altered markedly in the early 1980s the short term bill rate is chosen for investigation for two reasons first the yield on a short term instrument is independent of longer term expectations regarding inflation output growth and fiscal and monetary policies longerterm yields should depend heavily on such variables while reasonably accurate measures of expectations over say a six month horizon can probably be deduced are in fact available from survey data longer term expectations are both more uncertain and vary more widely across market participants second analysis of a short term bill rate allows an easy test of the expectations theory of interest rates recent studies by shiller campbell and schoenholtz 1983 and by mankiw and summers 1983 suggest that observed interest rate movements are unrelated to expected changes in rates extracted from the term structure of short term rates calling into question the validity of the expectations theory but see fama 1983 for an alternative view the six month bill rate is analyzed because it meshes best with the livingston survey data

the effects of inflation and income taxes on interest rates some new evidence this paper reexamines the empirical relation between inflation and interest rates concentrating on the tax effect proposed by darby and feldstein using the random walk intercept model relative responses of taxable yields and tax exempt yields to expected infla tion are estimated the results show that for the sample period 1953 1982 the nominal yields on treasury bills rise at a rate greater than one for one with expected inflation while the nominal yields on default free municipal bonds rise approximately one for one with expected inflation thus the tax adjusted fisher hypothesis by darby and feldstein is empirically supported the components of treasury bills are also extracted and their variances are compared it is shown that variation of expected inflation is not overwhelmingly larger than that of the after tax real rate therefore on an after tax basis changes in the real rate explain a substantial portion of changes in the nominal rate of interest

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

progressive taxation redistribution and labor supply the analysis of the effect of progression on labor supply is extended to a model with many consumers the condition for progression to increase labor supply given constant aggregate tax revenue is derived and shown to depend on the income effects resulting from redistribution it is then shown that the optimal linear income tax schedule involves a degree of progression which on the margin does reduce labor supply