analytical upper bounds for american option prices american options require numerical methods namely lattice models to provide accurate price estimates the computations can become expensive when more than one state variable is involved analytical upper bounds can therefore provide a useful guideline for how high american values can reach in this paper we derive analytical closed form upper bounds for american option prices under stochastic interest rates stochastic volatility and jumps where american option prices are difficult to compute with accuracy in a stochastic volatility model heston 1993 and scott 1997 that has two random factors we demonstrate that the upper bound only takes a very small fraction of the time that the american option needs to compute

option bounds with finite revision opportunities this article generalizes the single period linear programming bounds on option prices by allowing for a finite number of revision opportunities it is shown that in an incomplete market the bounds on option prices can be derived using a modified binomial option pricing model tighter bounds are developed under more restrictive assumptions on probabilities and risk aversion for this case the upper bounds are shown to coincide with the upper bounds derived by perrakis while the lower bounds are shown to be tighter in 1984 perrakis and ryan 6 derived upper and lower bounds on european option prices in discrete time and under modest assumptions on preferences and

upper and lower bounds of put and call option value stochastic dominance approach applying stochastic dominance rules with borrowing and lending at the risk free interest rate we derive upper and lower values for an option price for all unconstrained utility functions and alternatively for concave utility functions the derivation of these bounds is quite general and fits any kind of stock price distribution as long as it is characterized by a nonnegative beta transaction costs and taxes can be easily incorporated in the model presented here since investors are not required to revise their portfolios continuously the price that is paid for this generalization is that a range of values rather than a unique value is obtained in the last decade there has been an increasing interest in the options market by both academicians and practitioners the most well known valuation models are the black scholes 4 model the jump stochastic process model see cox and ross 6 the binomial model see cox ross and rubinstein 7 rendleman and bartler 19 and sharpe 22 and rubinstein s discrete model 21 recently perrakis and ryan 18 using rubinstein s approach have derived upper and lower bounds for option prices the relative pricing theory of contingent claims differs in the continuous time and discrete time models in a continuous time framework the instantaneous expected rate of return of the option and that of the underlying stock must follow a certain market equilibrium condition in this case the equilibrium condition is easily determined by a continuous hedging strategy in the discrete time case there is no hedging strategy to provide a simple relationship between the option and the stock price however for a given value distribution of the stock the value distribution of the option is uniquely determined by the option exercise price and this suggests some possible relationships between the stock and option values

democracy and macroeconomic performance in underdeveloped countries an empirical analysis in this study the author examines how inflation and economic growth differ in more and less democratic regimes and in new and mature democracies the analysis is based on a panel research design featuring annual data from a large sample of underdeveloped countries and two way fixed effects regression analysis the author s central finding is that more democratic countries have higher inflation and slower growth than less democratic countries inflation apparently is higher than more democratic countries mainly because they have higher fiscal deficits and faster wage growth this higher inflation marginally reduces economic growth in these countries the author also finds that new and mature democracies do not have significantly different inflation and growth rates the findings suggest that unrestrained political participation and the resulting demands placed on state officials undermine democratic performance

option pricing when the variance changes randomly theory estimation and an application in this paper we examine the pricing of european call options on stocks that have vari ance rates that change randomly we study continuous time diffusion processes for the stock return and the standard deviation parameter and we find that one must use the stock and two options to form a riskless hedge the riskless hedge does not lead to a unique option pricing function because the random standard deviation is not a traded security one must appeal to an equilibrium asset pricing model to derive a unique option pricing function in general the option price depends on the risk premium associated with the random standard deviation we find that the problem can be simplified by assuming that volatility risk can be diversified away and that changes in volatility are uncorrelated with the stock return the resulting solution is an integral ofthe black scholes formula and the distribution function for the variance of the stock price we show that accurate option prices can be computed via monte carlo simulations and we apply the model to a set of actual prices

fixed investment and economic growth new results on causality this study re examines the issue of causality between investment shares and economic growth a methodology is applied based on arellano and bond 1991 and holtz eakin newey and rosen 1988 to quinquennial panel data on growth and investment shares for the post war period and shows that contrary to previous results in the literature causality between fixed investment and growth runs in both directions investment shares granger cause growth rates and growth rates granger cause investment shares granger causality from investment shares to growth rates is found to be negative the result is in contrast with a capital fundamentalist view which sees fixed investment as the key to long run growth but is fully consistent with the predictions of solow type growth models

on option pricing bounds the purpose of this article is to compare the perrakis and ryan bounds of option prices in a single period model with option bounds derived using linear programming it is shown that the upper bounds are identical but that the lower bounds are different a comparison of these bounds together with merton s bounds and the black scholes prices in a lognormal securities market is presented the black scholes 1 option pricing model is preference free its simplicity derives from the continuous trading assumption which enables a portfolio of stock and bonds to be constructed so as to replicate the payouts of the option in an incomplete market with only finite opportunities to revise portfolios no preference free option price can be constructed 3 6 for this case preferencedependent prices can be established rather than place restrictive assumptions on preferences perrakis and ryan pr 5 have recently derived upper and lower bounds for a single and multiple period call option price the development of these bounds is based on the single price law and arbitrage arguments and requires modest assumptions on preferences the bounds exist as equilibrium values given a consensus on stock price distributions in this article we shall develop bounds for option prices based on primitive prices in incomplete markets and compare these bounds to the single period bounds derived by perrakis and ryan towards this goal we first review the pricing approach for primitive securities and proceed to re express the pr bounds as derived from their arbitrage portfolios then using linear programming bounds on option prices are derived linear programming approaches for obtaining relationships among option prices have been investigated garman 2 for example established an algebra for evaluating hedge portfolios using this algebra a one period linear program can be established that provides a way to search for arbitrage opportunities over an infinite number of portfolio strategies one of the features of the algebra is that only one linear program need be solved to determine if riskless arbitrage strategies can be established by investigating the dual of the linear program garman obtained necessary and sufficient conditions for rational option pricing in a one period setting these bounds were shown to be consistent with the bounds determined by merton 4 unlike garman s approach the linear programming approach presented here places constraints on time preferences risk aversion and state probabilities under specific sets of assumptions linear programs are formulated where the objective function to be optimized is the call price minimization and maximi

can raising interest rates increase inflation abstract when the government balances its budget through income taxes a positive shock to the central bank s interest rate setting rule may increase inflation

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

government spending and budget deficits in the industrial economies fiscal policy nouriel roubini and jeffrey sachs this paper examines the evolution of the size of government and of budget deficits in oecd economies we highlight the rapid increase in government spending in the 1970s the sharp rise in budget deficits and public debt after 1973 and the reversal in these trends in the 1980s the increase in the size of government was associated in part with the slowdown in growth after 1973 but also reflected gradual adjustment of the ratio of spending to output towards a long run target which depends on political and institutional characteristics of the economy the political orientation of the government the degree of wage indexation and the degree of stability of the political system such factors also explain the size of budget deficits when faced with an adverse shock subsequent deficit reduction requires a measure of political consensus we note that such consensus is hard to achieve in multi party coalitions in consequence countries with such a political structure tended in consequence countries with such a political structure tended toin consequence countries with such a political structure tended to experience much more rapid increases in their debt gnp ratios

low inflation pass through and the pricing power of firms abstract recently there has been a significant decline in the degree to which firms pass through changes in costs to prices a decline that is frequently characterized as a reduction in the pricing power of firms the decline appears to be associated with the decline in inflation in many countries the decline has important implications for monetary policy because it affects both forecasts of inflation and the effects of changes in monetary policy on inflation some have argued that the decline in pricing power helped to keep inflation low in the face of apparently strong demand pressures in the united states in the late 1990s this paper puts forth the view that the decline in pass through or pricing power is due to the low inflation environment that has recently been achieved in many countries first a microeconomic model of price setting is used to show that lower pass through is caused by lower perceived persistence of cost changes evidence is then presented showing that inflation is positively correlated with persistence of inflation suggesting that the low inflation itself has caused the low pass through an economy wide model consistent with the micromodel is then presented to illustrate how such changes in pricing power affect output and inflation dynamics in favorable ways but can disappear quickly if monetary policy and expectations change

options on the minimum or the maximum of two risky assets analysis and applications this paper provides analytical formulas for european put and call options on the minimum or the maximum of two risky assets the properties of these formulas are discussed in detail options on the minimum or the maximum of two risky assets are useful to price a wide variety of contingent claims of interest to financial economists applications discussed in this paper include the valuation of foreign currency debt option bonds compensation plans risk sharing contracts secured debt and growth opportunities involving mutually exclusive investments

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

option bounds in discrete time extensions and the pricing of the american put in a recent paper perrakis and ryan 1984 upper and lower bounds on european option prices were derived in discrete time these bounds were based on an extension of the discrete time derivation of black scholes pricing first presented in the work of black and scholes 1973 the bounds are functions of the stock and exercise prices the riskless rate of interest the time to maturity and the entire distribution of stock returns in other words they need more information than black scholes for their computation and the derived results are weaker on the other hand they are significantly more general in their assumptions insofar as they do not rely on the continuous time riskless hedge of the original black scholes derivations or on the assumption of a binomial distribution of stock returns used in cox ross and rubinstein 1979 and rendleman and bartter 1979 for this reason they are likely to be particularly useful in valuing options on assets for which the black scholes methodology is clearly this paper generalizes and tightens the discrete time bounds for european options and develops similar bounds for american puts the stock return has a distribution with a finite range and is subject to the restriction that the stock be nonnegative beta the bounds are derived from arbitrage portfolios using the stock the option and the riskless asset they converge to the previous ones when the range coincides with the nonnegative real line and they both become equal to the binomial option model under a two state stock return upper and lower bounds for the american put are derived recursively by the same method with arbitrage portfolios involving the stock the riskless asset and american and european puts an example is provided with a trinomial return distribution part of this research was done while i was a visiting professor 1983 84 ecole superieure de commerce et d administration des entreprises reims france i wish to thank peter ryan albert madansky and a referee of this journal for helpful advice and comment while retaining all responsibility for any remaining errors or omissions 1 note however that this is also true of other blackscholes generalizations such as merton 1976

clean development investments an incentive compatible cge modeling framework the clean development mechanism established under the kyoto protocol allows industrialized annex i countries to offset part of their domestic emissions by investing in emissions reduction projects in developing non annex i countries computable general equilibrium analysis of the clean development mechanism s impacts so far mimics the clean development mechanism as a sector emissions trading scheme thereby overstating its potential to save climate change mitigation costs this study develops a novel approach that represents the clean development mechanism more realistically by compensating clean development mechanism implementing sectors for additional abatement cost and by endogenizing clean development mechanism credits as a function of investment compared with previous representations the proposed approach is more consistent in its incentive structure and investment characteristics at the sector level an empirical application of the new methodology demonstrates that the economy wide cost savings from the clean development mechanism tend to be lower than suggested by conventional modeling approaches while clean development mechanism implementing sectors do not lose in output

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

an analytic approximation for the american put price black and scholes 1 derived the pricing equation for a european put when the stock price follows geometric brownian motion for this same case merton 5 derived the pricing equation for an american put with infinite time to maturity brennan and schwartz 2 rubinstein and cox 7 and parkinson 6 have developed numerical solutions for the price of an american put numerical solutions are expensive and do not provide much intuition naturally an analytic solution would be much preferred unfortunately pricing the american put requires solving a formidable and presumably intractable boundary value problem

semi parametric upper bounds for option prices and expected payoffs abstract upper bounds on the expected payoff of call and put options are derived these bounds depend only on the mean and variance of the terminal stock price and not on its entire distribution so they are termed semi parametric a corollary of this result is a set of upper bounds for option prices obtained by the risk neutral valuation approach of cox and ross as an example these bounds are shown to obtain across both lognormal diffusions and mixed diffusion jump processes for any given data set we present an illustrative example that suggests these bounds may be of considerable practical value

does the dynamic time consistency model of inflation explain cross country differences in inflations dynamics dynamic time consistency models of monetary policy imply that the size of the inflationary response to price shocks and the persistence of inflation is inversely related to factors that enhance the central bank s ability to commit to low average inflation hence these models predict that the dynamics of inflation vary over time and across countries in response to changes in measures of political support for low inflation we find support for this hypothesis in data fromeighteen oecd countries over the period 1961 94 however political variables account for only a small fraction of the variation in inflation dynamics across countries 2004 elsevier ltd all rights reserved

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

political instability political freedom and inflation using a dynamic panel data approach we estimate the impact of the political and institutional factors on inflation estimation results show that a lower degree of political instability generates lower inflation only for developed and low inflation countries however when political freedom is taken into account political instability appears to be influential on inflation also for developing countries and turns out to be significant only for high inflation countries such findings emphasize the inflation reducing effects of political stability depending on democratic political structure

option pricing bounds in discrete time upper and lower bounds are derived for call options traded at discrete intervals these bounds are independent of assumptions on the stock price distribution other than a restriction satisfied by the stock being non negative beta the development of the bounds relies on the single price law and arbitrage arguments both single period and multiperiod results are produced and put option bounds follow by extension the bounds exist as equilibrium values given a consensus on stock price distribution they are also valid for empirical studies being adjustable for dividends and commissions following the impetus of the black scholes pricing model the majority of option analyses have been in continuous time such approaches have relied on the formation of perfect riskless hedges involving the option its underlying security and a riskless asset since the hedge must be continuously revised and maintained while actual trading opportunities are discrete this crucial assumption limits the accuracy and applicability of the black scholes and related formulae in fact the black scholes formula can only be considered as a valid approximation to the discrete time solution merton 8 p 663 while the closeness of that approximation has not been ascertained in general 1 earlier discrete models such as boness 3 and samuelson 12 have been succeeded by those of brennan 5 cox et al 6 and rubinstein 11 in which distributional restrictions are imposed on share returns usually the discrete formula converges to the black scholes expression under appropriate limit conditions using the rubinstein 11 approach we derive upper and lower bounds for option prices with both a general price distribution and discrete trading opportunities the bounds are functions of the share and exercise prices the riskless rate of interest the distribution of the share price change per period and the number of periods of expiration of the option the lower bound is tighter than that of merton 7 derived from more general arbitrage considerations while being less exact than the results already mentioned for restricted distributions

tight bounds on american option prices in contrast to the constant exercise boundary assumed by broadie and detemple 1996 broadie m detemple j 1996 american option valuation new bounds approximations and comparison of existing methods review of financial studies 9 1211 1250 we use an exponential function to approximate the early exercise boundary then we obtain lower bounds for american option prices and the optimal exercise boundary which improve the bounds of broadie and detemple 1996 with the tight lower bound for the optimal exercise boundary we further derive a tight upper bound for the american option price using the early exercise premium integral of kim 1990 kim i j 1990 the analytic valuation of american options review of financial studies 3 547 572 the numerical results show that our lower and upper bounds are very tight and can improve the pricing errors of the lower bound and upper bound of broadie and detemple 1996 by 83 0 and 87 5 respectively the tightness of our upper bounds is comparable to some best accurate efficient methods in the literature for pricing american options moreover the results also indicate that the hedge ratios deltas and gammas of our bounds are close to the accurate values of american options

explaining fiscal policies and inflation in developing countries abstract in this paper we investigate empirically the determinants of inflation seigniorage and fiscal deficits in developing countries we first test the optimal taxation theory of inflation for a group of 21 lcds we find that the implications of this theory are rejected for all these countries we then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies we deal with some of the implications of a credibility and reputation model and of a strategic government behavior model we find that the data support the most important predictions of the political economy view of fiscal policy our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage inflation government borrowing and fiscal deficits we end by discussing directions for future research

option pricing when the variance is changing the monte carlo method is used to solve for the price of a call when the variance is changing stochastically

the effect of peru s cdm investments on households welfare an econometric approach abstract the clean development mechanism cdm under the kyoto protocol has two main objectives reducing emissions of greenhouse gases ghgs and contributing to sustainable development sd in developing countries the empirical evidence indicates that the first goal has been fulfilled however the literature mostly provides ex ante evidence regarding the second goal this paper contributes to the literature by assessing the ex post quantitative effect that cdm projects have had on sd employment and monetary welfare in peru a country ranked among the most important cdm investment host countries worldwide the econometric model estimates the direct and indirect effects of the cdm projects investments on peruvian households monetary welfare for 2011 2015 our results suggest that cdm investments had a slight effect on household consumption expenditure and had no effect neither on employment nor in poverty alleviation our findings suggest the need to strengthen cdm s institutional framework by identifying key development definitions and indicators

institutional causes macroeconomic symptoms volatility crises and growth countries that have pursued distortionary macroeconomic policies including high inflation large budget deficits and misaligned exchange rates appear to have suffered more macroeconomic volatility and also grown more slowly during the postwar period does this reflect the causal effect of these macroeconomic policies on economic outcomes one reason to suspect that the answer may be no is that countries pursuing poor macroeconomic policies also have weak institutions including political institutions that do not constrain politicians and political elites ineffective enforcement of property rights for investors widespread corruption and a high degree of political instability this paper documents that countries that inherited more extractive institutions from their colonial past were more likely to experience high volatility and economic crises during the postwar period more specifically societies where european colonists faced high mortality rates more than 100 years ago are much more volatile and prone to crises based on our previous work we interpret this relationship as due to the causal effect of institutions on economic outcomes europeans did not settle and were more likely to set up extractive institutions in areas where they faced high mortality once we control for the effect of institutions macroeconomic policies appear to have only a minor impact on volatility and crises this suggests that distortionary macroeconomic policies are more likely to be symptoms of underlying institutional problems rather than the main causes of economic

the effects of economic freedom regulatory quality and taxation on the level of per capita real income a preliminary analysis for oecd nations and non g8 oecd nations this study of the impact of economic freedom regulatory quality and the relative burden of taxation on the level of per capita real income gdp among oecd nations over the period 2003 to 2007 adopts a modified version of the overall economic freedom index computed by the heritage foundation 2013 one with the fiscal freedom and business freedom indices removed this study then provides panel least squares fixed effects estimates for five linear specifications models each nation during this time frame can be regarded either as a nation per se or as a de facto economic region within the oecd the analysis first focuses upon all of the oecd nations and then as a robustness test subsequently focuses only on non g8 oecd member nations the estimations in this study all provide strong empirical support for the three central hypotheses proffered here namely 1 the higher the overall degree of economic freedom the higher the per capita real income gdp level 2 the higher the level of regulatory qua

can the clean development mechanism cdm deliver abstract the paper investigates whether the clean development mechanism cdm under the kyoto protocol has played a significant role in the development of rural communities specifically investigating uptake of small scale renewable energy projects the investigation involved an assessment of 500 registered small scale cdm projects under the kyoto protocol in terms of their potential impact on the envisaged sustainable development goals for rural communities five case studies from the indian subcontinent were also examined the paper concludes that the cdm in its current state and design has typically failed to deliver the promised benefits with regard to development objectives in rural areas successful projects were found to have had good community involvement and such projects were typically managed by cooperative ventures rather than money making corporations the paper puts forward a new framework for the assessment of such benefits in the hope that future projects can be better assessed in this regard the key problem however remains on how to deal with the inherent contradiction between development and sustainability

options on the maximum or the minimum of several assets using an intuitive approach that also provides new intuition concerning the black and scholes equation this paper extends the results of johnson and stulz to the pricing of options on the minimum or the maximum of several risky assets

an exact bond option formula this paper derives a closed form solution for european options on pure discount bonds assuming a mean reverting gaussian interest rate model as in vasicek 8 the formula is extended to european options on discount bond portfolios

option values under stochastic volatility theory and empirical estimates abstract this paper numerically solves the call option valuation problem given a fairly general continuous stochastic process for return volatility statistical estimators for volatility process parameters are derived and parameter estimates are calculated for several individual stocks and indices the resulting estimated option values do not differ dramatically from black scholes values in most cases although there is some evidence that for longer maturity index options black scholes overvalues out of the money calls in relation to in the money calls

cluster sample methods in applied econometrics inference methods that recognize the clustering of individual observations have been available for more than 25 years brent moulton 1990 caught the attention of economists when he demonstrated the serious biases that can result in estimating the effects of aggregate explanatory variables on individual specific response variables the source of the downward bias in the usual ordinary least squares ols standard errors is the presence of an unobserved state level effect in the error term more recently john pepper 2002 showed how accounting for multi level clustering can have dramatic effects on t statistics while adjusting for clustering is much more common than it was 10 years ago inference methods robust to cluster correlation are not used routinely across all relevant settings in this paper i provide an overview of applications of cluster sample methods both to cluster samples and to panel data sets

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

estimates of the variance of u s inflation based upon the arch model it is generally agreed that the unpredictability of future inflation is a major component of the welfare loss associated with inflation perfectly predicted inflation might induce some costs through institutional rigidities governmental interference and transaction costs but in the long run these should be rather minimal as these institutions adopt various forms of indexing when inflation is unpredictable risk averse economic agents will incur a loss even if prices and quantities are perfectly flexible in all markets inflation is a measure of the relative price of goods today and goods tomorrow thus uncertainty in tomorrow s price impairs the efficiency of today s allocation decisions friedman in his nobel lecture 8 argues convincingly that higher variability of inflation would lead to decreased output ceteris paribus he then conjectures that higher rates of inflation are generally associated with higher variability of inflation and presumably greater uncertainty about future rates if this is true then higher rates of inflation would also be associated with low levels of output which implies a positively sloped phillips curve this paper uses a new statistical technique arch to estimate the conditional mean and variance of inflation from u s time series data the main finding is that the variance of inflation in the seventies was only slightly greater than in the sixties

the price effect of tariff liberalization measuring the impact on household welfare abstract trade policy literature has for many years emphasized open policies positive impact on economic growth and development while these results generally hold when measured on averages empirical evidence suggests that trade liberalization is unlikely to produce beneficial results across all households this study adds to the literature by providing an analysis of the distributive effects of tariff liberalization in mexico the paper examines the effect of tariff liberalization from the perspective of households both as consumers and factor owners allowing for imperfect domestic price transmission the results indicate the overall positive effect of tariff liberalization masks significant differences in the distribution of gains both across income levels and across geographic regions richer households are found to have gained relatively more urban areas as well as mexican states closest to the united states border are also found to be larger beneficiaries while southernmost states have been largely bypassed by the effects of tariff liberalization those results can be explained not only in relation to the different endowments of the households but also by the diverse effects on local prices that has resulted from mexican trade liberalization

generalized analytical upper bounds for american option prices this paper generalizes and tightens chen and yeh s 2002 analytical upper bounds for american options under stochastic interest rates stochastic volatility and jumps where american option prices are difficult to compute with accuracy we first generalize theorem 1 of chen and yeh 2002 and apply it to derive a tighter upper bound for american calls when the interest rate is greater than the dividend yield our upper bounds are not only tight but also converge to accurate american call option prices when the dividend yield or strike price is small or when volatility is large we then propose a general theorem that can be applied to derive upper bounds for american options whose payoffs depend on several risky assets as a demonstration we utilize our general theorem to derive upper bounds for american exchange options and american maximum options on two risky assets

political variables in cross country growth analysis the recent boom in cross country growth analysis has renewed the empirical interest in political sources of economic growth a large number of studies have tested political variables in growth regressions and a very heterogenous set of variables has been proposed to measure economically relevant differences in the political systems of countries this paper distinguishes five categories of relevant political variables democracy government stability political violence policy volatility and subjective perception of politics for each of these categories the specification testing method and results of the most relevant studies are presented and are critically discussed the paper concludes that measures of democracy are least successful and measures of policy volatility and subjective perception of politics most successful as explanatory variables in cross country growth regressions

central bank independence economic freedom and inflation rates william a luksetich measures of central bank independence combine many attributes that may or may not affect inflation central bank attributes are chosen as a result of political calculations over the distribution of resources between competing interest groups simultaneity bias results from regressions of central bank independence or of economic and political freedom on inflation or growth our estimates demonstrate the connections between economic and political freedom and central bank attributes that lead to inflation countries showing high degrees of economic freedom adopt structures that lead to lower inflation those that show high degrees of political freedom do not adopt inflation reducing institutional structures jel e0 e5 i introduction the relationship between inflation rates and central bank independence from political control has been the subject of a number of recent studies generally these studies provide evidence that greater central bank cb independence is associated with lower inflation rates banaian et al 1983 1995 1997 burdekin and willett 1991 masciandaro and spinelli 1993 alesina and summers 1993 this relationship appears to be weaker when developing countries are included in the analysis cukierman 1992 all of these draw rather strong conclusions about the importance of cb independence as a force constraining the political system from using the monetary system to achieve political goals that are likely to be hostile to price stability supporting evidence is not strong however and the indices used to measure cb independence are far from perfect moreover even if the cb independence measures were accurate they may simply be proxies for political and economic freedoms that are the more important checks on political manipulations of the economic system others question the evidence and draw different conclusions lohmann 1994 1997 and posen 1993 1995 1997 argue that the correlation between inflation and central bank independence is spurious lohmann argues that the federalist nature of the german government and its frequent use of coalitions in forming governments limit the number of threats to bundesbank independence posen 1995 finds that political support for independence comes from the financial sector if they effectively lobby for price stability an independent central bank tends to accompany that lobbying miller 1998 provides a framework for understanding the behavior of various interest groups in controlling the rate at which governments inflate their currencies cukierman s 1992 gb independence indices have been widely used in empirical studies to assess the effects of cb independence on inflation rates 1 the term of office of the head of a cb which we will call the central banker is one measure of bank independence he assigns a ranking of 1 if the term of office too is greater than eight years 0 75 if the too is great than or equal to six years and less than or equal to eight years 0 50 if the too is equal to five years 0 25 if it equals four years and 0 if it is less than four years he does this for numerous measure of bank independence since the publication of cukierman s index nearly all the aforementioned researchers have either used these individual rankings or a weighted average of these rankings in their efforts to determine the importance of cb independence on inflation rates in this article we extend the research in this area in three ways first the use of a multipoint ranking of central bank attributes imposes restrictions on the marginal impact of changing structures or attributes of the cb law that have no a priori basis moreover the weights within the aggregate cukierman index are quite arbitrary and do not hold up under any reasonable degree of scrutiny see banaian et al 1998 hereafter referred to as bbw constructing dummy variables for each of the classifications would be more appropriate than using the classification scheme cukierman devised as a continuous variable