short selling and the price discovery process we show that stock prices are more accurate when short sellers are more active first in a large panel of nyse listed stocks intraday informational efficiency of prices improves with greater shorting flow second at monthly and annual horizons more shorting flow accelerates the incorporation of public information into prices third greater shorting flow reduces post earnings announcement drift for negative earnings surprises fourth short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values these results are robust to various econometric specifications and their magnitude is economically meaningful the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

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

energy consumption at business cycle horizons the case of the united states in this paper we propose a simple extension to a keynesian type macro model by augmenting it with energy consumption we show the relationship between energy consumption and output in a macroeconomic setting and ask the question do permanent shocks dominate changes in energy consumption and output at business cycle horizons for the united states to achieve the goal of this paper we undertake a variance decomposition analysis of shocks based on a common trend and common cycle framework within a vector error correction model our main finding is that permanent shocks explain the bulk of the variations in energy consumption and output at business cycle horizons for the united states

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

common persistence in conditional variances since the introduction of the autoregressive conditional heteroskedastic arch model in engle 1982 numerous applications of this modeling strategy have already appeared a common finding in many of these studies with high frequency financial or monetary data concerns the presence of an approximate unit root in the autoregressive polynomial in the univariate time series representation for the conditional second order moments of the process as in the so called integrated generalized arch igarch class of models proposed in engle and bollerslev 1986 in the igarch models shocks to the conditional variance are persistent in the sense that they remain important for forecasts of all horizons this idea is readily extended to a multivariate framework even though many time series may exhibit persistence in variance it is likely that several different variables share the same common long run component in that situation the variables are naturally defined to be co persistent in variance and the co persistent linear combination is interpretable as a long run relationship conditions for co persistence to occur in the multivariate linear garch model are presented these conditions parallel the conditions for linear co integration in the mean as developed by engle and granger 1987 the presence of co persistence has important implications for asset pricing relationships and in optimal portfolio allocation decisions an empirical example relating to the time series properties of nominal u s dollar exchange rates for the deutschemark and the british pound provides a simple illustration of the ideas

policy watch medicare public policies are often made without much recourse to economic reasoning economists are sometimes unaware of what is happening in the world of public affairs as a result both the quality of public decision making and the role that economists play in it are less than optimal this feature contains short articles on topics that are currently on the agendas of policymakers thus illustrating the role of economic analysis in illuminating current debates suggestions for future columns and comments on past ones should be sent to daniel weinberg c o journal of economic perspectives hhes division bureau of the census department of commerce washington d c 20233

a floor and ceiling model of us output abstract building on previous nonlinear time series models we further examine the form of nonlinearity in us output we develop a model of us output that allows for floor and ceiling effects to alter the dynamics of output growth the model estimated on post korean war quarterly data displays features similar to nonlinear trade cycle models of the 1940s and 1950s thus as predicted by many of the earlier theoretical models our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process we also find important asymmetries in the responses of output to positive and negative shocks this history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of real business cycle theory

monetary policy and exchange rate volatility in a small open economy we lay out a small open economy version of the calvo sticky price model and show how the equilibrium dynamics can be reduced to a simple representation in domestic inflation and the output gap we use the resulting framework to analyse the macroeconomic implications of three alternative rulebased policy regimes for the small open economy domestic inflation and cpi based taylor rules and an exchange rate peg we show that a key difference among these regimes lies in the relative amount of exchange rate volatility that they entail we also discuss a special case for which domestic inflation targeting constitutes the optimal policy and where a simple second order approximation to the utility of the representative consumer can be derived and used to evaluate the welfare losses associated with the suboptimal rules

measuring the business cycle effects of permanent and transitory shocks in cointegrated time series abstract this paper proposes a statistical framework to evaluate the contribution of permanent and transitory shocks to the cyclical fluctuations of cointegrated variables an empirical application with us macroeconomic data reveals that transitory shocks are responsible for most of the variability at the business cycle frequencies

an unobserved components model that yields business and medium run cycles we generalize the unobserved components uc model to allow the permanent component to have different dynamics than the transitory components when decomposing u s economic activity using a multivariate uc model of log output consumption and investment we find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components our approach provides an alternative explanation for the growth cycles identified by comin and gertler 2006 that is related to the cyclical movements in technology in a framework consistent with the beveridge and nelson 1981 decomposition

permanent and transitory movements in labor income an explanation for excess smoothness in consumption many have argued that if labor income is difference stationary the permanent income hypothesis predicts that consumption should be relatively volatile in u s aggregate data labor income is well characterized as having a unit root however consumption turns out to be relatively smooth this anomaly is known as deaton s paradox i resolve deaton s paradox by providing decompositions of labor income into permanent and transitory components these preserve the univariate dynamic properties of labor income however when agents distinguish permanent and transitory movements in their labor income as the rational expectations hypothesis asserts they should the permanent income hypothesis correctly predicts the observed smoothness in consumption

do auctions and forced divestitures increase competition evidence for retail gasoline markets to foster competition governments can intervene by auctioning licenses to operate or by imposing divestitures the dutch government has done exactly that organizing auctions to redistribute tenancy rights for highway gasoline stations and imposing divestitures of such stations on the four major companies we evaluate this policy experiment and find that the auctioning of licenses without an obligation to divest has no discernible effect on prices an obligation to divest lowers prices by 1 3 2 3 at divested sites moreover prices decrease by 0 9 1 2 at sites nearby this suggests that the observed price decreases are at least partly due to competitive spillovers

multivariate detrending under common trend restrictions implications for business cycle research abstract this paper outlines a methodology to detrend multiple time series under common trend restrictions the same filters used to construct the estimated trend in univariate exercises are shown to be appropriate in multivariate studies with a single common trend however to estimate the common trend in the multivariate case the filter is applied to a linear combination of series rather than to each series individually an empirical example and simulation exercises illustrate the implications of common trend detrending for measurement of business cycle properties

relative price variability inflation and the allocative efficiency of the price system abstract this paper develops a theory of the relationship between aggregate and relative price variability based on the inability of people even in a rational world to identify permanent changes in relative demands whether caused by real or by monetary variability and relative productivities as soon as they occur the theory implies that the variance of the rate of inflation and the variance of relative price change are positively related although expectations are rational and markets always clear production decisions respond sluggishly to changes in relative prices temporary shocks to relative demands cause prolonged changes in the structure of production available information is used so as to maximize the efficiency of the price system however this efficiency decreases when any of the underlying variances increases this decrease is more pronounced when the production lag is longer

when do auctions ensure the welfare maximizing allocation of scarce inputs we determine when an unfettered auction will ensure the welfare maximizing allocation of a scarce input that enhances product quality and may reduce production costs a supplier values the input for this use value and for its foreclosure value because once the input is acquired it is unavailable to rivals an unfettered auction often ensures the welfare maximizing allocation of an input increment however it can fail to do so when the input would increase relatively rapidly the competitive position of a rival with a moderate competitive disadvantage bidder handicapping that ensures auctions generate welfare maximizing input allocations differ from standard handicapping policies

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

the u s current account a long and short run empirical perspective the persistence of the u s current account deficit is thought to be one of america s foremost economic problems an omen of a decline in u s economic hegemony that seems even more foreboding in the wake of plans for europe 1992 the u s current account balance began its sustained decline in the third quarter of 1982 having earlier hovered anywhere from an annualized surplus high of 22 2 billion to a deficit low of 26 64 billion between 1973 and 1982 beginning in the third quarter of 1982 the u s current account balance registered an annualized deficit of 29 billion this would be but one of many yet one of the smallest steps down the road to the triple digit deficits that have endured throughout the 1980s and remain today is the persistence of the current account deficit now in its eighth year an indication of a trend which fiscal prudence exchange rate intervention increases in u s competitiveness or demand stimulus abroad cannot suspend in the long run these issues are investigated by using the more recent work on unit roots and cointegration applications that have not yet been made regarding trade issues and trade related data granger causality tests are also used to investigate the short run causes of the current account deficit

measuring financial cycles in a model based analysis empirical evidence for the united states and the euro area we adopt an unobserved components time series model to extract financial cycles for the united states and the five largest euro area countries over the period 1970 2014 we find that financial cycles can parsimoniously be estimated by house prices and total credit or the credit to gdp ratio we show that these medium term cycles are longer and have larger amplitudes than business cycles and that their length and amplitude vary over time and across countries

some consequences of temporal aggregation in empirical analysis i derive the generating mechanism of a temporally aggregated process when the disaggregated one belongs to the vector autoregressive integrated moving average class i then study the effects of temporal aggregation on a set of characteristics of usual interest such as exogeneity causality cointegration and common features an empirical example with canadian interest rates illustrates the main issues

is political popularity a random walk this paper tets for nonstationarity in the political popularity of uk parties and governments within the context of an economic model which predicts that party support is an arima 0 1 1 process the hypothesis is rejected for the government s popularity but the results for individual party support are less clear out

trade integration and business cycle convergence is the relation robust across time and space in this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959 2003 most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects our estimates using both fixed and random effects methodologies suggest that trade intensity and the business cycle correlation are positively related to one another however detailed investigation shows that this relationship exists mainly for the european countries

effects of tax reform on labor supply investment and saving the u s tax system received two major overhauls during the 1980s the tax cuts of 1981 and the tax reform act of 1986 supporters of both reforms argued that major changes in tax policy could boost saving investment labor supply and entrepreneurship eventually it was argued such changes could reverse the slowdown in economic growth that began in the early 1970s and spur improvements in american living standards the aim of this paper is to assess whether the goals of increased labor supply and capital formation were achieved

detrending and business cycle facts a user s guide this note argues that it is hardly the case that the profession is fully aware that the application of di erent filters to the data leads to di erent outcomes and that we have enough evidence to claim that these di erences are unimportant to evaluate the fit models to the data 1998 elsevier science b v all rights reserved jel classification b41 e32

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

the new uk monetary arrangements a view from the literature this paper considers the likely operating characteristics of the new uk monetary arrangements introduced in may 1997 the paper first argues that the time inconsistency of policy is not an issue provided the bank of england is properly independent however the current inflation remit from the chancellor to the bank specifies a numerical target for the inflation rate but does not specify how quickly deviations from the target are to be corrected it is thus an incomplete contract and there is a danger that the bank may choose to stabilise inflation at the cost of excessively volatile movements in output or vice versa we estimate the optimal policy frontier for the uk economy and show that in practice it is close to rectangular consequently all the bank needs to assume is that the government s preferences are reasonable in order to know approximately where to locate on this frontier the incompleteness of the remit therefore need not be a cause for concern

cream skimming incentives for efficiency and payment system reform proposals of health care systems in several countries have advocated variations of a risk adjustment capitation system these proposals face a serious objection incentives to risk selection are prevalent in the system by now considerable literature has been devoted to finding ways of mitigating if not eliminating this problem while at the same time preserving incentives to efficiency we contribute to this debate presenting a transfer system that under some circumstances attains both provider efficiency and no risk selection the transfer system extends typical linear payment systems it can be interpreted as a fixed transfer in the beginning of the period plus an ex post fund at the end of the period the novelty rests in the way contributions to this fund are defined

global factors and trend inflation abstract we develop an empirical model to study the influence of global factors in driving trend inflation and the inflation gap we apply our model to 7 developed economies and 21 emerging market economies our results suggest that while global factors can have a sizeable influence on the inflation gap they play only a marginal role in driving trend inflation much of the influence of global factors in the inflation gap may be reflecting commodity price shocks finally we find the effect of global factors to be greater in our sample of emerging market economies relative to the developed economies there is some evidence which suggest propagation mechanisms which may reflect institutional structures or policy choices can explain the greater role for global factors in driving trend inflation in emerging market economies

cyclical fluctuations in strike durations canadian data on strikes between 1946 and 1983 are used to estimate linear regression models for the logarithm of completed duration a thorough investigation of the influence of the business cycle reveals strong support for the hypothesis that strike durations are countercyclical the cyclical effect is shown to be robust to both the choice of cyclical variable and the econometric specification and the magnitude of the effect is quite substantial experimentation with different representations of the cycle reveals that it is difficult to improve on a simple formulation involving a single continuous variable

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

a measure of the u s output gap abstract an autoregressive distributed lag regression of the unemployment rate on output growth is structurally stable over the 1890 1986 period inverting this equation yields a measure of the output gap which is not subject to the spurious detrending problem

the term structure of currency carry trade risk premia we nd that average returns to currency carry trades decrease signicantly as the maturity of the foreign bonds increases because investment currencies tend to have small local bond term premia the downward term structure of carry trade risk premia is informative about the temporal nature of risks that investors face in currency markets we show that long maturity currency risk premia only depend on the domestic and foreign permanent components of the pricing kernels since transitory currency risk is automatically hedged by interest rate risk for long maturity bonds our

the meaning of internal balance thirty years on in his nobel prize lecture meade advocated allocating demand management policies to pursuing price stability reformed wage fixing institutions to achieving full employment and foreign exchange policies to maintaining balance of payments equilibrium but with respect to the first he advocated a target for nominal income rather than the price level i evaluate meade s programme with the benefit of hindsight and in the light of experience with inflation targets i also discuss some of the issues associated with the application of flexible inflation targets as well as the extent to which financial stability considerations should affect the conduct of monetary policy

canadian economic growth random walk or just a walk this paper analyses the role of shocks in canadian economic growth since 1870 it uses a nonparametric technique to evaluate the degree of presistence of an innnovation in long run gnp it is found that a one percent shock to canadian gnp changes the long run forecast of this variable by appproximately the same amount which is characteristic of a random walk process it is also shown that in important periods of canadian economic growth its gnp evolved as a random walk with constant drift with the exception of the period 1929 42 no evidence of business cycles is found these results lead to the conclusion that movements and oscillations in the gnp of canada since 1870 have been primarily driven by the accumulation of shocks rather than by cyclical movements

an economic perspective on auctions the recent spectrum auctions in europe have shown that serious problems can wise in auctions where multiple complementary objects are being sold such as blocks of radio spectrum that will subsequently be used by the wining bidders to compete against each other in downstream markets other important instances of such situations include take off and landing slots at airports and rights for electricity and gas transmission t i first review some of the theory describing multi object auctions i i next outline the importance of strategic effects arising in auctions that are followed by competition between the bidders and the tension arising between various goals such as efficiency and revenue maximization although more flexible auction formats can have virtues particularly in taking into account complementarities they can also be manipulated by bidders to build market power to the detriment of consumers we next apply these insights to the recent european umts licence auctions finally we draw the main conclusions and policy implications

why is consumption so smooth for thirty years it has been accepted that consumption is smooth because permanent income is smoother than measured income this paper considers the evidence for the contrary position that permanent income is in fact less smooth than measured income so that the smoothness of consumption cannot be straightforwardly explained by permanent income theory the paper argues that in postwar u s quarterly data consumption is smooth because it responds with a lag to changes in income

computation of the beveridge nelson decomposition in the case of cointegrated systems with i 0 variables abstract this paper shows how the result of arino and newbold economics letters 61 1998 37 for the multivariate bn decomposition in the cointegrated case can be extended when i 0 variables are considered in the vec model an application of the extended procedure to the spanish peseta french franc real exchange rate is also provided

the beveridge nelson decomposition of economic time series another economical computational method abstract this note describes a simple and an economical computational procedure for generating the permanent cyclical decomposition of economic time series proposed by beveridge and nelson 1981 our procedure is a more complete alternative than the method suggested by cuddington and winters 1987

a survey of some recent econometric methods this survey is written mainly for the applied economist though we hope that the specialist econometrician will find something of interest too our aim has been to try to bring the applied worker as up to date as possible and in the process to improve the quality of applied work by providing access to the latest ideas in econometrics we have tried to describe and explain in a relatively non technical way the main developments that have taken place in the last ten years partly for reasons of space the survey is by no means exhaustive but it does cover a wide range of topics in both time series and cross section analysis among the subjects covered are the followoing the nature of data including integrated and fractionally integrated data four estimation methods maximum likelihood method of moments m estimators and non parametric estimation inference with stationary and integrated regressors a comparison of various model evaluation principles the formulation of models including dynamic specification cointegration and conditional expectations in mean and variance copyright 1989 by royal economic society

are shocks to tourism transitory at business cycle horizons the goal of this article is to propose a theoretical framework based on a macro model that can be used to examine the relative importance of permanent and transitory shocks in explaining variations in tourist expenditure and gross domestic product gdp at business cycle horizons we estimate the model for australia our findings reveal a common trend and common cycle relationship among tourist expenditure and gdp and the variance decomposition analysis of shocks reveals that at business cycle horizons permanent shocks explain the bulk of the variations in output while transitory shocks explain the bulk of the variations in tourist expenditure

money output and inflation in the longer term major industrial countries 1880 2001 i introduction the empirical role of money growth in the macroeconomy has been studied by many researchers using different data and methods the most prominent studies focusing on the quantity theory of money are those of friedman and schwartz 1963 1982 using data averaged over the phases of the business cycle in order to capture longer run movements with u s and u k data back to 1867 the study by mccandless and weber 2001 is a representative example for a different approach for 110 countries in the post wwii period longer run growth rates are approximated by growth of a variable over a 30 year period average growth rates 1 the problem with phase averaging is that it does not deal with possible nonstationarity of the data 2 the problem with growth averages over long periods while informative to a degree is that they have limitations too it is impossible to assess the timing of movements in these variables 3 in the frequency domain the long run is associated with frequency zero which in our terminology is the long run trend previous studies in the frequency domain on the long run neutrality of money at zero frequency include the studies of lucas 1980 and geweke 1986 the theory of spectral analysis provides a rigorous framework for extracting specific frequency bands from the data instead of considering only frequency zero stock and watson 1998 applied the band pass filter of baxter and king 1999 to extract cycles frequency bands for u s data and focused on the business cycle and on mostly the post wwii period christiano and fitzgerald 2003 proposed an improved band pass filter and provided an application to the longer run relation of money and inflation for bands of 8 20 years and 20 40 years in the united states from 1900 to 1997 4 the usefulness of monetary aggregates for conducting monetary policy has been seriously called into question because of the instability of money demand a prominent empirical study is that of estrella and mishkin 1997 recent mainstream new keynesian models have no explicit role for money woodford 2008 a contrasting view is that the longer term role of money is still of relevance for monetary policy the european central bank explicitly emphasizes a supporting role that monetary aggregates should play in order to provide an anchor for inflation expectations hafer haslag and jones 2007 issing 2006 king 2002 nelson 2003 christiano motto and rostagno 2007 provided a theoretical new keynesian model where inflation expectations lose their anchor unless money is monitored and reacted to also beck and wieland 2008 presented a new keynesian model where cross checking with money growth movements improves inflation control similarly assenmacher wesche and gerlach 2006 2007 found a significant role for a low frequency low pass filtered component of money in the empirical new keynesian phillips curve equation 5 in the spirit of friedman 1961 we use long time spans so that our results are unlikely to be because of a specific policy rule in place in a given period we have 122 years of annual data from 1880 to 2001 before the introduction of the euro in 2002 we have real gross domestic product gdp money and consumer price indices cpis with no gaps for 11 industrialized countries 6 the countries included in our study differ in such terms as their institutions fiscal and monetary policies and economic growth rates nonetheless at least in peace time they were similar in generally having comparatively free markets in which prices and interest rates were determined our aim is to apply analytic methods that are free from economic and statistical models as much as possible in order to explore empirical regularities or stylized facts in the data also the focus of our research is the longer run we employ band pass filters to pick out cycles from each time series that last 8 40 years that is the longer term component

forecasting output gaps in the g 7 countries the role of correlated innovations and structural breaks trend gdp and output gaps play an important role in fiscal and monetary policy formulation often including the need for forecasts in this article we focus on forecasting trend gdp and output gaps with beveridge nelson trend cycle decompositions trend cycle decompositions and investigate how these are affected by assumptions concerning correlated innovations and structural breaks we evaluate expanding window one step ahead forecasts indirectly for the g 7 countries on the basis of real gdp growth rate forecasts we find that correlated innovations affect real gdp growth rate forecasts positively while allowing for structural breaks works for some countries but not for all in the face of uncertainty the evidence supports that in making forecasts of trends and output gap policy makers should focus on allowing for the correlation of shocks as an order of priority higher than unknown structural breaks

on the credit to gdp gap and spurious medium term cycles abstract i provide empirical evidence suggesting that the credit to gdp gap is subject to spurious medium term cycles i e artificial boom bust cycles with a maximum duration of around 40 years

examining trends of criteria air pollutants are the effects of governmental intervention transitory despite its growth in other areas of economics time series econometric methods have not beenwidespread in the area of environmental andresource economics we illustrate one use oftime series methods by examining the time pathof us nitrogen oxide nox emission dataover the period 1900 1994 the analysishighlights that proper time series methods canaid in optimal regulatory policy as well asdeveloping empirical verification of theoriesput forth to explain economic phenomena inaddition several interesting results emerge first we find that the emissions seriescontains both a permanent and random component second if one attributed all of the emissionsreductions to regulatory policy interventionanalysis suggests that the 1970 clean air act caa did not merely have transitory effects but permanently influenced the noxemission path in terms of total regulatoryimpact an upper bound on the emissions saveddue to the 1970 caa is in the range of27 48

verifiable offers and the relationship between auctions and multilateral negotiations we use the experimental method to compare second price auctions with verifiable multilateral negotiations in which the sole buyer can credibly reveal to sellers the best price offer he currently holds despite the two institutions seeming equivalence we find that prices are lower in verifiable multilateral negotiations than in second price auctions the difference occurs because low cost sellers in negotiations often submit initial offers below the second lowest cost we also compare the two institutions to previously studied first price auctions and multilateral negotiations with non verifiable offers second price auctions yield the highest prices followed in order by verifiable negotiations non verifiable negotiations and first price auctions one of the more interesting facets of voluntary exchange is how changes in the strategic environment lead to differences in transaction outcomes for example the pioneering experimental work in chamberlin 1948 and smith 1962 illustrates that changing the nature of the information available to participants can dramatically influence the price and efficiency of an exchange process with this insight in mind in this article we use the experimental method to examine and compare four exchange mechanisms in a procurement setting in which a buyer faces several sellers that have privately known production costs the first two institutions are the first price auction and the second price auction these well known auction formats and their outcome equivalent variants the dutch auction and the english auction are used extensively to allocate products as varied as flowers art produce fish government securities and mineral rights 1 several governments have recently used auctions to allocate such valuable resources as radio spectra electric power and pollution rights 2 the second two institutions are variants of the multilateral negotiations introduced in thomas and wilson 2002 in this common exchange mechanism a buyer solicits price offers from multiple sellers and then he elicits more favourable offers by playing the sellers off one another until he accepts one of the offers or breaks off the negotiations among other settings multilateral negotiations are

auctions markets and spectrum ownership comment on moreton and spiller abstract in their empirical study of the personal communications service auctions patrick s moreton and pablo t spiller have shown that the bidder behavior is consistent with most economists conceptions of competitive markets moreton and spiller also presented evidence that firms competing in these auctions were able to aggregate licenses thus offering some vindication for those economic theorists who championed simultaneous multiple round auctions on these issues their study brings new data to bear on important questions about auction design and public policy moreton and spiller however do not examine the costs of the secondary market in reallocating license blocks and its relationship to the exposure problem develop a specific model of government regulation or consider the effects of block size on bidding behavior these omissions limit the inferences and conclusions they claim for their study

auction format and auction sequence in multi item multi unit auctions an experimental study we experimentally study the effect of auction format sealed bid versus closed clock versus open clock and auction sequence simultaneous versus sequential on bidding behaviour and auction outcomes in auctions of multiple related multi unit items prominent field applications are the sale of emission permits fishing rights and electricity we find that when auctioning simultaneously clock auctions outperform sealed bid auctions in terms of efficiency and revenues this advantage disappears when the items are auctioned sequentially in addition auctioning sequentially has positive effects on total revenues across all auction formats resulting from fiercer competition on the item auctioned first

time series decomposition and measurement of business cycles trends and growth cycles abstract a study of business cycles does not require trend estimation and elimination but a study of growth cycles does major cyclical slowdowns and speedups deserve to be analyzed but the needed time series decomposition presents difficult problems mainly because trends and cycles influence each other we compare cyclical movements in levels deviations from trend and smoothed growth rates for both the quarterly real gdp and the monthly u s coincident index using the phase average trend pat then we compare alternative trend estimates deterministic and stochastic linear and nonlinear and the corresponding series of deviations from these trends we discuss how the resulting estimates differ for u s growth cycles in the post world war ii period the results of pat show great similarity to the results obtained with the hodrick prescott local linear trend band pass filtering methods

is cyclical real gnp really more persistent than the trend using an observed components decomposition to estimate permanent and temporary components of us real gnp campbell and mankiw 1987 found that the estimated temporary component displays greater persistence than the estimated permanent component this suggests that attempts to estimate separate permanent and temporary components in real gnp are unlikely to succeed this finding is re examined here using a longer real gnp series and a different decomposition which guarantees that the estimated temporary component will be stationary the resulting estimates of permanent and temporary output suggests that the temporary component displays no persistence and that the permanent component exhibits almost precisely the persistence of a random walk with drift cyclical real gnp is not more persistent than the trend

dutch disease real effective exchange rate misalignments and their effect on gdp growth in eu abstract in this article we study the impact of real effective exchange rate misalignments based on determinants including different types of foreign capital inflows on gdp growth in the eu for this analysis we use a panel of 27 eu countries for the period 1994 2012 with annual frequency core countries have been only slightly undervalued from the crisis onwards while the periphery was overvalued however the gap for the periphery has reduced in the last two years as regards the new member states these were overvalued for the entire time span the results seem to be generally driven by the inflows of bank loans the misalignments are associated with lower long run growth the exchange rate volatilities are not robust in affecting gdp growth while spillovers and global factors seem to matter in all the specifications both in the short and long run

is the phillips curve still alive evidence from the euro area abstract we estimate the phillips curve for the euro area and its five largest economies over 1985 2017 using an unobserved component model for inflation and unemployment inflation expectations are modeled as the trend component of annualized hicp inflation we have three results first the relationship between unemployment and inflation is negative and significant in the euro area germany france and the netherlands second the phillips curve slope is heterogeneous across countries third the slope has not changed significantly since the global financial crisis

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

let s take a break trends and cycles in us real gdp abstract trend cycle decompositions for us real gdp such as the unobserved components models the beveridge nelson decomposition the hodrick prescott filter and others yield very different cycles which bear little resemblance to the nber chronology ascribes much movements to the trend leaving little to the cycle and some imply a negative correlation between the noise to the cycle and the trend we argue that these features are artifacts created by the neglect of a change in the slope of the trend function once this is accounted for all methods yield the same cycle with a trend that is non stochastic except for a few periods around 1973 the cycle is more important in magnitude than previously reported and it accords well with the nber chronology our results are corroborated using an alternative trend cycle decomposition based on a generalized unobserved components models with errors having a mixture of normals distribution for both the slope of the trend function and the cyclical component

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

analysis of us real gnp and unemployment interactions abstract instead of the more common unemployment rate the time series data of the level of us unemployment is used together with us real gnp and later also with the us money stock to identify a bivariate and trivariate structural model the model is then used to examine the interaction of the unemployment level with the real gnp in the business cycle frequencies the commonly perceived okun s law is shown to disappear in the trivariate model

implementing a market based spectrum policy abstract the spectrum auctions were a step toward the herzel coase vision of a flexible and efficient market for spectrum this article examines what remains to be done spectrum must be unbundled from broadcast and transmission facilities the commoditization of spectrum will facilitate standardization price discovery and open access to diverse users a liquid secondary spectrum market will lower transactions and entry cost making telecommunications markets contestable auctions should be used to elicit a supply of spectrum from licensees as well as to allocate it to new users in closing the spectrum commons congress granted use to a privileged few unbundled spectrum property rights commoditization and open markets will give the public access to this public resource

are supply shocks important for real exchange rates a fresh view from the frequency domain abstract this paper re examines the role of supply shocks for real exchange rate fluctuations and contributes by exploiting insights from the frequency domain perspective in contrast to the existing literature our empirical findings point towards an important role played by supply productivity shocks in driving us real effective exchange rate fluctuations at low frequencies while real demand shocks matter mostly at high and medium frequencies in addition we propose an approach to structurally decompose the persistence of the real exchange rate and find that supply shocks explain up to half of its persistence

pitfalls in testing for explosive bubbles in asset prices a number of studies e g robert j shiller 1981 olivier j blanchard and mark watson 1982 kenneth d west 1988 have argued that dividend and stock price data are not consistent with the market fundamentals hypothesis in which prices are given by the present discounted values of expected dividends these results have often been construed as evidence for the existence of bubbles or fads related arguments have been made with respect to gold bonds and foreign exchange a major problem with such arguments e g james hamilton and charles whiteman 1985 is that apparent evidence for bubbles can be reinterpreted in terms of market fundamentals that are unobserved by the researcher behzad t diba and herschel i grossman 1984 1988b and hamilton and whiteman 1985 have recommended the alternative strategy of testing for rational bubbles by investigating the stationarity properties of asset prices and observable fundamentals 1 in essence the argument for equities is that if stock prices are not more explosive than dividends then it can be concluded that rational bubbles are not present since they would generate an explosive component to stock prices 2 using unit root tests autocorrelation patterns and cointegration tests to implement this procedure diba and grossman 1988b p 529 state that the analysis supports the conclusion that stock prices do not contain explosive rational bubbles this paper shows that the above battery of tests is in fact unable to detect an important class of rational bubbles the point is demonstrated by constructing rational bubbles that appear to be stationary when unitroot tests are applied even though they are explosive in the relevant sense simulations show that when such bubbles are present stock prices will not appear to be more explosive than dividends on the basis of these tests even though the bubbles are substantial in magnitude and volatility the presence of rational bubbles in actual stock prices thus remains an open question

emerging market business cycles learning about the trend abstract emerging market business cycles feature a higher variability of consumption relative to output and a strongly countercyclical trade balance an equilibrium business cycle model in which agents learn to distinguish between the permanent and transitory components of total factor productivity shocks using the kalman filter accounts for these features calibrated to mexico the model accounts for the behavior of consumption and the trade balance for a wide range of variability and persistence of permanent shocks relative to transitory shocks estimation for mexico and canada suggests more severe informational frictions in emerging markets than in developed economies

income risk the tax benefit system and the demand for children because children represent an irreversible commitment parents might hedge against higher income risk by having fewer children we show that under plausible assumptions recent increases in income risk might have reduced prudent parents desired fertility responses to this via the tax benefit system are considered introducing an expected revenue neutral transfer cum child benefit system under proportional taxation which lets the government share the household s income risk increases desired fertility for parents who would choose to have small families in this system s absence pound for pound the targeted child benefit enhances fertility more than the lump sum transfer

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

the effect of discounting on policy choices in inflation targeting regimes very similar for a wide range of preferences of the monetary authority with respect to inflation and output stability we show that when the authority discounts the future outcomes become more sensitive to its preferences and that it is important to take the discount rate into account when examining the question of how the authority s remit should be specified this article addresses a significant result concerning the current uk monetary arrangements derived by bean 1998 he first argues that these arrangements are likely to ensure that the monetary policy committee does not target excess output and so does not face a credibility problem the main result of bean s paper is that if there is no credibility problem the variances of inflation and output obtained by a policy maker are largely independent of its preferences as a result it does not matter that the inflation remit does not specify the relative weight that the bank of england should place on output volatility vis a vis inflation volatility this finding is obtained under the assumption that the authority does not discount the future the purpose of the present article is to show that bean s result is not robust to the relaxation of this assumption with discounting policy outcomes do depend significantly on policy maker preferences the article also shows that this effect of discounting remains true when bean s model is extended to include both forward looking behaviour and effects of exchange rate changes in an open economy in practice current arrangements do little to ensure that planning horizons are long in the uk members of the monetary policy committee are appointed for a term of three years and so the average remaining term of existing members is one and a half years

license auctions when winning bids are financed through debt we study an auction where two licenses to operate on a new market are sold and winning bidders finance their bids on the debt market higher bids imply higher debts which affects product market competition when debt induces firms to compete more aggressively retail prices are lower than in a model without debt as are auction revenues when debt induces firms to compete less aggressively retail prices are higher than in a model without debt and the effect on auction revenues is ambiguous net firm profits are always higher than in a model without debt due to endogenous credit rationing

world crude oil and natural gas a demand and supply model abstract this paper examines world markets for crude oil and natural gas over the period 1918 1999 it analyzes the time series properties of output and prices and estimates demand and supply elasticities during 1918 1973 and 1973 1999 oil and gas prices were stable during the first period they became volatile afterwards reflecting deep changes in the market structure following the oil shock in 1973 demand price elasticities were too low however demand income elasticities were high supply price elasticities were also too low the elasticity estimates help to explain the market power of the oil producers and price volatility in response to shocks and corroborate elasticity estimates in energy studies

estimating long run economic equilibria with stochastic trends an asymptotic theory is provided to analyze a menu of currently existing estimators of cointegrated systems we study in detail the single equation ecm seecm approach of hendry our theoretical results lead to prescriptions for empirical work such as specifying seecm s nonlinearly and including lagged equilibrium relationships rather than lagged differences of the dependent variable as covariates simulations support these prescriptions and point to problems of overfitting not encountered in the semiparametric approach of phillips and hansen 1990

unemployment and infant health times series evidence from the state of tennessee this is the first study that decomposes unemployment into its structural and cyclical components and investigates their impact on income distribution controlling for the influence of inflation increases in structural unemployment have a substantial

the prebisch singer hypothesis a reappraisal independent of stationarity hypotheses time series behaviour of the relative price of primary commodities raul prebisch i950 and hans singer i950 believed that the long term trend of primary commodity prices was negative the latter in an interesting discussion of the above quandary pp 482 3 viewed rises in primary commodity prices as purely temporary sources of surplus that offered short lived opportunities to increase industrial investment these opportunities were missed by private investors who instead increased primary sector investment in such circumstances because all private activity tends to be governed by the price