inflation and the fiscal limit abstract we use a rational expectations framework to assess the implications of rising debt in an environment with a fiscal limit the fiscal limit is defined as the point where the government no longer has the ability to finance higher debt levels by increasing taxes so either an adjustment to fiscal spending or monetary policy must occur to stabilize debt we give households a joint probability distribution over the various policy adjustments that may occur as well as over the timing of when the fiscal limit is hit one policy option that stabilizes debt is a passive monetary policy which generates a burst of inflation that devalues the existing nominal debt stock the probability of this outcome places upward pressure on inflation expectations and poses a substantial challenge to a central bank pursuing an inflation target the distribution of outcomes for the path of future inflation has a fat right tail revealing that only a small set of outcomes imply dire inflationary scenarios avoiding these scenarios however requires the fiscal authority to renege on some share of future promised transfers

the rotten kid theorem meets the samaritan s dilemma a familiar result in the economic theory of the family is becker s rotten kid theorem this theorem states that altruism by a family member will lead other selfish members to act efficiently from the family viewpoint we extend becker s one period model to two periods and show that parental altruism can result in an inefficiency known in other contexts as the samaritan s dilemma implications of this for transfer arrangements within the family and for the ricardian equivalence theorem are drawn

testing for the long run relationship between nominal interest rates and inflation using cointegration techniques 1989 testing for the long run relationship between nominal interest rates and inflation using cointegration techniques applied economics vol 21 no 4 pp 439 447

cointegration and the us term structure abstract using the maximum likelihood analysis of cointegration developed by johansen 1988 1991 we test the cointegration implications of the expectations hypothesis of the term structure on a sample of us pure discount yields by using this approach we are able to analyze systems of more than two interest rates simultaneously as opposed to most previous studies which examine interest rates only in pairs one of the main results is that for the period 1952 1987 the cointegration implications generally seem to hold

testing the stationarity of interest rates using a sur approach abstract using data on average yields to maturity of german bonds with different time to maturity it is shown that the time series contain a unit root if the standard augmented dickey fuller test is applied separately to each series to improve the power of the test we carried out a recently developed approach estimating the regressions for each time to maturity jointly using a seemingly unrelated regressions approach

nonstationary term premia and cointegration of the term structure this paper proposes a model of the term structure with nonstationary term premia which exhibit a factor structure this explains the common empirical finding of a cointegrating rank smaller than the one predicted by the rational expectations hypothesis of the term structure an application to german interest rate data yields easily interpretable results

stock market downswing and the stability of european monetary union money demand this article analyzes the question whether money demand in the euro area underwent a structural change in the end of 2001 when m3 money growth started to considerably overshoot the reference value set by the european central bank it is found that conventional specifications of money demand have in fact become unstable whereas specifications that are augmented with equity returns and volatility remain stable using such an augmented specification it turns out that the high m3 growth rates have not led to excess liquidity and thus do not pose a measurable threat to price stability

was there a peso problem in the u s term structure of interest rates 1979 1982 during the period following october 1979 through 1982 the u s federal reserve allowed interest rates to fluctuate widely in contrast to its previous policy of targeting these rates in the 1970s the policy was abandoned in 1982 in favor of an operating procedure that reduced the variation in interest rates this paper implements an estimation method to identify from the term structure of eurodollar returns the market s beliefs that the federal reserve may revert to interest rate targeting the model is not rejected and gives plausible estimates of the probability of a switch in monetary regimes copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

are german money market rates well behaved abstract we test the expectations hypothesis eh of the term structure of interest rates for the german money market at the short end of the maturity spectrum using a variety of metrics and on balance we argue that the results tend to broadly support the hypothesis we utilise monthly data on pure discount bonds with a maturity from 1 to 12 months over the period of 1976 to 1993 the var methodology is used to forecast future interest rates which under the eh results in a set of cross equation restrictions as well as tests based on the correspondence between the best forecast referred to as the theoretical spread and the actual spread the var methodology allows explicit consideration of potential non stationarity in the data as do our tests based on the cointegration literature we also perform more conventional tests based on applying the rational expectations re hypothesis in a single equation framework our relatively favourable results for the eh are in sharp contrast to those found in studies using us data and this we attribute in part to the policy of sustained credible monetary targeting by the bundesbank

estate and gift taxes and incentives for inter vivos giving in the us abstract this paper describes the current estate and gift tax rules that apply to intergenerational transfers in the us it summarizes the incentives for inter vivos giving gifts from a donor to a recipient while the donor is alive as a strategy for reducing estate tax liability it shows that the current level of intergenerational transfers is much lower than the level that would be implied by simple models of dynastic utility maximization moreover even among elderly households with net worth in excess of 2 5 million roughly four times the net worth at which us households became liable for estate tax in 1995 only about 45 take advantage of the opportunity for tax free inter vivos giving cross sectional regressions using the 1995 survey of consumer finances suggest that transfers rise with household net worth possibly reflecting the impact of progressive estate taxes households with a preponderance of their net worth in illiquid forms such as a private business are less likely to make transfers than their equally wealthy counterparts with more liquid wealth those with substantial unrealized capital gains for whom the benefits of basis step up at death under the income tax are greatest are less likely to make large inter vivos transfers than similarly wealthy households with higher basis assets

transfer behavior in the health and retirement study measurement and the redistribution of resources within the family recent work by a number of economists has opened a debate about the role played by intergenerational transfers using the new health and retirement study hrs we are better able to address the issues involved contrary to the current literature on bequests we do not find that parents give transfers equally to all children rather we find that in the case of inter vivos transfers respondents give greaterfinancial assistance to their less well off children than to their children with higher incomes financial transfers to elderly parents are also found to be negatively related to the potential recipient s income these results hold both for the incidence of transfers and for the amounts in addition we allow for unobserved differences across families by estimating fixed effect models and find our results to be robust to these specifications a comparison of the hrs transfer data to other survey data demonstrates that the hrs is potentially quite useful for research on transfer behavior

intergenerational transfers and liquidity constraints a growing body of evidence indicates that liquidity constraints could affect a substantial proportion of u s consumers but little is known about why these constraints might exist an important but little explored issue is the relationship between inter vivos intergenerational transfers and liquidity constraints these transfers can ease borrowing constraints empirical transfer patterns match those predicted from a model in which transfers are allocated to liquidity constrained consumers in particular the distinction between current and permanent incomes of potential recipients is a key aspect of private transfer behavior the findings have important implications for our understanding of consumer behavior

alcohol consumption and human capital a retrospective study of the literature grossman proposed an individual s health can be viewed as one aspect of their human capital following this line of thought a number of recent papers have reported a positive impact of alcohol consumption on earnings the rationale for the existence of such a relationship is the positive impact of alcohol on physical and mental health we conduct a meta analysis to determine whether such factors as the estimation technique the presence of ex drinkers in the sample possible sample selection bias and publication bias may all contribute to these findings an additional suggestion for the positive relationship between alcohol and wages is the presence of a common set of personality traits that determines drinking behaviour and also leads to higher earnings we examine this relationship by reviewing the literature that investigates if the personality influencing aspects of alcohol consumption influences measures of human capital we also survey the significant body of research that has examined how alcohol consumption has been found to influence educational outcomes and the work force participation of problem drinkers

the morning after alcohol misuse and employment problems using a rich recent and nationally representative longitudinal survey specifically designed to examine alcohol use and associated problems we investigate the effects of alcohol misuse on a series of understudied and perhaps less common employment problems such problems include being fired or laid off from a job sustained unemployment and conflicts with a supervisor and or co worker after controlling for time invariant omitted variables via fixed effects estimation we find evidence that three measures of alcohol misuse are significantly related to employment problems the results offer new information on the potential adverse labour market effects of alcohol misuse and shed light on potential mechanisms through which alcohol misuse may impact intensive labour supply and or wages

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

compensatory inter vivos gifts parents transfer motives are important for understanding e g macroeconomics income re distribution savings and public finance using data from six biennial waves of the health and retirement study 1992 2002 we estimate censored regression models with nested multilevel error components first we interpret our findings that inter vivos transfers from parents to children are gifts rather than temporary help to overcome liquidity constraints second inter vivos gifts are compensatory in the sense that lifetime poorer children will receive higher transfers than their lifetime richer siblings third inter vivos gifts do not however make up the entire difference in lifetime incomes copyright 2009 john wiley sons ltd

inter vivos transfers and intergenerational exchange the surge of interest in intergenerational transfers in the past decade has sparked a debate over the motivation for them are transfers given out of altruism or part of an exchange while each motive is probably at work to some extent we know little about whether one motive predominates the question is relevant for issues concerning public income redistribution and inequality in the family but despite its importance empirical evidence about motives is scarce because of limited data we investigate a new data set the national survey of families and households which remedies many of the shortcomings of other data sets containing private transfer information we find that empirical patterns for inter vivos transfers i e transfers between living persons are more consistent with exchange than altruism

were price changes during the great depression anticipated abstract this paper reassesses whether the large swings in prices during the 1930 s were anticipated we argue that uncertainty about monetary fiscal and exchange rate policies induced systematic differences between the rate of price change expected by economic agents at the time and the time series forecasts of inflation our analysis of nominal interest rates and ex post inflation strongly supports this view in fact our results suggest that the deflation of the early depression years and the inflation that followed were both largely unanticipated

the timing and division of parental transfers to children abstract we find parents divide various assets differently among children inter vivos transfers cash gifts and co residence are made preferentially to poorer children in contrast transfers made at death insurance benefits and wills are awarded to children irrespective of income differences

the fisher effect and the term structure of interest rates tests of cointegration the literature on the fisher effect has ignored the potential relationship between inflation and long term interest rates using an expectations model of the term structure of interest rates the authors establish the conditions under which innovations in short term inflation will be transmitted to long term as well as short term interest rates cointegration tests find support for both the fisher effect and the expectations theory of the term structure copyright 1993 by mit press

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

are real gdp levels nonstationary evidence from panel data tests potential nonstationarity of important macroeconomic variables and unit root tests are now a standard procedure in empirical analyses while there are many findings of unit roots in macroeconomic variables using the popular augmented dickey and fuller 1979 test this test has low power against near unit root alternatives recently panel data procedures have been proposed as an avenue to increased power this paper applies panel unit root tests to international real gdp and real gdp per capita data the results overwhelmingly indicate that international real gdp and real gdp per capita levels are nonstationary

plugging the welfare gap the role of kinship transfers in south africa what are the empirical patterns and significance of private non market transfers between family members living in separate households answers to such a question should aid policymakers in designin

inter vivos transfers and intended bequests abstract empirical work on intergenerational transfers has focused on distinguishing between altruistic and exchange motivated behavior however these two models are unable to explain the strong tendency for inter vivos transfers to be negatively related to the income of the recipient while bequests bear no relationship to income this paper presents a new framework for analyzing transfers from parents to children that is more consistent with observed behavior than are the altruistic and exchange models alone in particular the model developed here predicts differing behavior with respect to inter vivos transfers and bequests due to liquidity constraints and uncertainty about the recipient s permanent income the empirical work uses data from the health and retirement study and the asset and health dynamics study the patterns observed in these data are consistent with earlier findings that inter vivos transfers go disproportionately to less well off children while bequests are divided equally across children further the results support the predictions of the model in that differences in inter vivos transfers arise from differences in current income while differences in bequests result when indicators of the children s permanent incomes differ

moving back home insurance against labor market risk this paper demonstrates that the option to move in and out of the parental home is a valuable insurance channel against labor market risk which facilitates the pursuit of jobs with the potential for high earnings growth using monthly panel data i document an empirical relationship among coresidence individual labor market events and subsequent earnings growth i estimate the parameters of a dynamic game between youths and parents to show that the option to live at home can account for features of aggregate data for low skilled young workers small consumption responses to shocks high labor elasticities and low savings rates

mean reversion in interest rates new evidence from a panel of oecd countries previous studies show that the standard univariate unit root tests cannot reject the hypothesis that interest rates follow integrated processes in this paper the authors pool interest rate data of twelve oecd countries and implement a multivariate test it is found that the unit root hypothesis can be decisively rejected copyright 1996 by ohio state university press

another look at yield spreads the role of liquidity liquidity plays an important role in explaining how banks determine their allocation of funds this paper examines whether this fact can explain yield spreads and the term structure of interest rates the paper models banks demand for liquidity in a manner similar to that used to study household need for liquidity namely by using a cash in advance type model the paper finds that the shadow price of the cash in advance constraint plays an important role in determining yield spreads the empirical part of the paper shows that the expectations hypothesis might be salvaged under the maintained hypothesis concerning the liquidity premium and risk premium

do drinkers earn less theoretical work by becker and others on human capital led initially to empirical research on the determinates of earnings interest in human capital has now spread to other areas especially health this movement is in conjunction with societal concerns regarding the role of diet and environmental factors on human well being and performance following becker 1 and grossman 9 economists expect to find a significant relationship between health and earnings health aspects of human capital have been extensively explored since the early work of grossman 9 10 good health is both beyond the control of the individual exogenous as a result of genetic factors and random events and controllable endogenous through the regulation of activities such as smoking drinking eating exercise and other informed choices this study examines the relation between earnings and drinking curiously little rigorous empirical work has been done on the relation between earnings and drinking irving fisher s claim to the contrary 1 there is little evidence that prohibition led to substantial if any productivity increases although it is established that excessive drinking leads to poor health the empirical evidence regarding earnings and drinking is mixed and inconclusive according to the u s government abusive drinkers earn less in their biennial reports to congress the national institute on alcohol abuse and alcoholism niaaa estimates the economic cost to society of alcohol abuse approximately half of this cost arises from the estimated loss in earnings productivity due to abusive drinking 2 their approach consists of estimating a wage equation which includes human capital variables as well as a dichotomous abusive drinking variable and quantity of alcohol consumed 3 berger and leigh 3 used a sample selection model to test whether drinkers earned more or less than nondrinkers they divided their sample from the 1972 73 quality of employment survey into two categories drinkers and nondrinkers using a sample selection correction estimator hedonic wage regressions for each category and by sex were estimated they found that drinkers moderate and abusive combined earned more than nondrinkers comparisons were then made between wages from each regression with demographic and human capital variables set at

efficiency testing revisited a foreign exchange market with bayesian learning abstract the paper re examines the efficiency hypothesis in the foreign exchange market the traditional efficiency testing equations are reviewed and a more general model is developed that incorporates bayesian revisions of devaluation expectations a number of properties regarding the pattern of the coefficients in efficiency testing equations are established the empirical estimation of the model by using data from the emerging foreign exchange market in greece confirms the properties of the theoretical model

macroeconomic sources of risk in the term structure we develop a new way of modeling time variation in term premia based on the stochastic discount factor model of asset pricing the joint distribution of excess u s bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate garch with conditional covariances in the mean to capture the term premia by testing the assumption of no arbitrage we derive a specification test of our model we estimate the contribution made to the term premia at different maturities through real and nominal sources of risk from the estimated term premia we recover the term structure of interest rates and examine how it varies through time finally we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time varying term premium

on real interest rate dynamics and regime switching abstract we find evidence of regime switching dynamics in the usa and the uk real interest rates over the period 1881 2003 for the uk there is a regime in which the real interest rate displays a relatively stronger mean reversion and a regime in which it displays a relatively weaker mean reversion the former regime is characterized by a relatively larger error in the estimation of the reversion parameter and higher volatility for the usa the two regimes differ in volatility the probability of transition from one regime to another is found to be significantly related to the inflation rate regime and to the political regime the results highlight the importance of regime switching in the dynamics of the real interest rate as well as the role of inflation and political regimes in explaining this switching

drinking and academic performance in high school i investigate the extent to which negative alcohol use coefficients in grade point average regressions reflect unobserved heterogeneity rather than direct effects of drinking using 2001 and 2003 youth risk behaviour survey data on high school students results illustrate that omitted factors are quite important drinking coefficient magnitudes fall substantially in regressions that control for risk and time preference mental health self esteem and consumption of other addictive substances moreover the impact of binge drinking is negligible for students who are less risk averse heavily discount the future or use other drugs however effects that remain significant after accounting for unobserved heterogeneity and are relatively large for risk averse future oriented and drug free students suggest that binge drinking might slightly worsen academic performance consistent with this the relationship between grades and drinking without binging is small and insignificant on the extensive margin and posi

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

term structure of interest rates and the expectation hypothesis the euro area abstract this paper investigates the informational content of the yield curve in the european market using data on the italian term structures according to the expectation hypothesis theory eht the current forward rate equals the future short rate plus a constant risk premium that is time invariant but maturity dependent this theory has been widely tested in the empirical literature providing various findings according to the country where it has been applied and to the segment of the yield curve examined or the period under study the standard approach to test the eht uses the regression techniques assuming data on spot rates and their first differences to be stationary recently an increasing number of studies evidenced the non stationarity of interest rates time series and some tests of the eht are formulated using term spread and forward spot spread which are stationary a new strand of literature suggests to investigate the eht using a restricted var framework in this paper following jondeau e ricart r 1999 the expectations hypothesis of the term structure tests on us german french and uk euro rates journal of international money and finance 18 725 750 ghazali n a low s w 2002 the expectations hypothesis in emerging financial markets the case of malaysia applied economics 34 1147 1156 and seo b 2003 non linear mean reversion in the term structure of interest rates journal of economic dynamics and control 27 2243 2265 we test if the expectation hypothesis holds using cointegration and error correction analysis for the period under study results suggest that the long and short term interest rates are cointegrated and therefore subject to a long equilibrium path providing evidence that the eht holds for the italian and the european market

what do you expect imperfect policy credibility and tests of the expectations hypothesis abstract the expectations hypothesis of the term structure of interest rates describes a conventional view of the transmission mechanism of monetary policy where bond rates reflect current and expected movements in the policy controlled rate however empirical rejections of the expectations hypothesis are commonplace and lead many to question this description of policy transmission this paper argues that failure to account for imperfect policy credibility may explain empirical rejections empirical rejections may occur even when changing anticipations of future short rates are the primary source of variation in bond rates and the standard term structure transmission channel remains valid

markov switching models rational expectations and the term structure of interest rates in order to evaluate the efficiency of the monetary transmission mechanism we develop the formulas for testing rational expectations theory in the term structure of interest rates with var models of stochastically switching regimes in which all the parameters are regime dependent these formulas are obtained for the strict version of rational expectations as well as for the case where measurement errors are assumed in the expectations relationship they are extensible to other contexts that involve variables linked by rational expectations behaviours the testing procedure is implemented on interest rates of the spanish inter bank money market measurement errors must be assumed to find signs favourable to the theory

bequest behavior and the effect of heirs earnings testing the altruistic model of bequests that parents transfer resources to children because of altruistic concern is a reasonable a priori assumption however economic theories of altruistic transfers have produced many counterintuitive conclusions and consequently much debate when applied to bequests these theories predict that inheritances will compensate for earnings differences between siblings as well as between parents and children this paper tests these implications using a new data set centered on federal estate tax returns little support can be found for an altruistic theory of bequests this finding has implications for macroeconomic policy government transfer programs and inequality copyright 1996 by american economic association

dynamic aspects of family transfers parents transfer a great deal to their adult children and we have rich theoretical models providing a framework for these transfers however both the models and existing empirical work typically examine behavior in the cross section to date we know little about the dynamic aspects of family transfers here i examine transfers over a span of 17 years and find substantial changes in recipiency over time and a strong negative correlation between transfers and transitory income i also find that events such as job loss and divorce are strong predictors of parental transfers and although rare are typically associated with larger transfers than income alone might predict finally transfers are distributed unequally across siblings and perhaps surprisingly the distribution of transfers becomes even more unequal when examined over an extended period of time than in any single year the evidence presented here thus suggests that dynamic analyses can provide insights into behavior that are impossible to obtain in a static context

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

the cost of equality unequal bequests and tax avoidance abstract for altruistic parents desiring to bequeath their wealth to their children estate taxes can be costly in utility terms the most straightforward way to reduce the tax burden is through inter vivos transfers taking full advantage of potential tax free giving often requires that parents differentiate between children in the amounts transferred this unequal giving contrasts sharply with the presumed desire to make equal bequests this paper examines the extent to which wealthy parents take advantage of tax free giving and whether the desire to spend down an estate is sufficient to induce unequal giving i find that while wealthy parents do appear to make early bequests they rarely do so to the extent permitted by law and thus forego a substantial amount of tax savings

the expectations hypothesis of the term structure the uk interbank market using a high quality weekly data set the author provides several tests of the expectations hypothesis using the vector autoregression and cointegration methodologies for several maturities between one week and twelve months for the u k interbank market on the basis of the johansen cointegration analysis there appears to be a break in the term structure when both the six month and twelve month maturities are included as a pair the latter may be due to either the presence of liquidity constraints or market segmentation or a time varying term premium all of which would invalidate the assumptions underlying the expectations hypothesis the author provides some tentative explanations of these diverse results copyright 1996 by royal economic society

the revival of the expectations hypothesis of the us term structure of interest rates abstract us interest rate data from 1987 to 1995 show a substantial predictive power of the spread for the short rate in line with the expectations hypothesis the estimation of a mccallum policy reaction model supports our conjecture that this striking result can be attributed to the adoption of the spread as an indicator for us monetary policy since the late eighties 1997 elsevier science s a

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

bequests as signals an explanation for the equal division puzzle in the united states more than two thirds of decedents with multichild families divide their estates exactly equally among their children in contrast gifts given before death are usually unequal these findings challenge the validity of existing theories regarding the determination of intergenerational transfers in this paper we develop a theory that accounts for this puzzle based on the notion that the division of bequests provides a signal about a parent s altruistic preferences the theory can also explain the norm of unigeniture which prevails in other societies

parental and public transfers to young women and their children this paper presents estimates of how an increase in welfare benefits for the welfare eligible affects the provision of parental support in the form of both financial transfers and shared residence based on an overlapping generations framework incorporating game theoretic interactions among parents their adult children and the government the empirical results obtained from two longitudinal data sets indicate that the parents view a dollar of income earned by their daughters as equivalent to a dollar increase in welfare benefits however there exists only a small trade off between the generosity of government aid and the incidence of parental aid data are for the united states and are from the national longitudinal survey of young women for 1968 1984 and the national longitudinal survey of youth for 1979 1984 excerpt

a tale of two effects abstract this paper investigates the relationship between nominal interest rates and prices using nearly two centuries of data from ten industrial countries both a positive relationship between interest rates and price levels that is a positive gibson effect and a negative relationship between interest rates and subsequent price changes that is a negative fama fisher effect prevailed until world war i we propose a simple explanation wherein this doubly paradoxical juxtaposition of effects arises when money is supplied inelastically and prices are flexible this double paradox disappeared after world war ii when economies became mostly characterized by elastic money and sticky prices during that period a positive fama fisher effect emerged while the gibson effect largely dissipated

a fresh look at the rotten kid theorem and other household mysteries gary becker s rotten kid theorem asserts that if all family members receive gifts of money income from a benevolent household member then even if the household head does not precommit to an incentive plan for family members it will be in the interest of selfish family members to maximize total family income i show by examples that the rotten kid theorem is not true without assuming transferable utility i find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a rotten kid theorem while restrictive these conditions still allow one to apply the strong conclusions of the rotten kid theorem in an interesting class of examples

trust and social collateral this paper builds a theory of trust based on informal contract enforcement in social networks in our model network connections between individuals can be used as social collateral to secure informal borrowing we define network based trust as the largest amount one agent can borrow from another agent and derive a reduced form expression for this quantity which we then use in three applications 1 we predict that dense networks generate bonding social capital that allows transacting valuable assets whereas loose networks create bridging social capital that improves access to cheap favors such as information 2 for job recommendation networks we show that strong ties between employers and trusted recommenders reduce asymmetric information about the quality of job candidates 3 using data from peru we show empirically that network based trust predicts informal borrowing and we structurally estimate and test our model

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

near unit roots and the predictive power of yield spreads for changes in long term interest rates the ability of yield spreads to predict changes in long term interest rates implied by the expectations hypothesis is usually rejected it is suggested that this rejection is often caused by high persistence in the spread when standard inference is employed instead the asymptotically valid method of cavanagh et al 1995 is applied to monthly u s data from 1952 1 1991 2 the persistence of the spreads seems to have varied over time and in subsample analysis the expectations hypothesis cannot be rejected at the long end of the maturity spectrum

does alcohol consumption reduce human capital accumulation evidence from the college alcohol study it is often conjectured that a significant cost of youthful drinking is the future labour market consequences of having accumulated a lower stock of human capital while several studies have investigated the effect of youthful drinking on the quantity of human capital stock accumulated measured by years of education completed or high school graduation this paper investigates the effect of alcohol consumption on the quality of human capital stock accumulated as measured by college students gpa using data from the harvard school of public health s college alcohol study the indirect effect of the quantity of alcohol consumed on gpa is estimated through hours spent studying as well as the direct effect results show that the net total effect of alcohol consumption on gpa is negative for the sample of college students and that the main effect is via a reduction in the hours spent studying this finding confirms that high levels of alcohol consumption have an overall negative consequence for academic achie

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

revisiting the expectations hypothesis of the term structure of interest rates the expectations hypothesis of the term structure has been decisively rejected in a large empirical literature that spans several decades in this paper using a newly constructed dataset of synthetic zero coupon bond yields we show that evidence against the expectations hypothesis is substantially weaker in data generated after the widespread publicity of its failure these results are consistent with the idea that asset pricing anomalies tend to disappear once they are widely recognized

motives for private income transfers private income transfers are becoming increasingly recognized as a key aspect of the u s economy the majority of private income transfers occur inter vivos i e between living persons but very little is known about this type of transfer behavior this paper tests alternative hypotheses concerning motivation for inter vivos transfers two motives are considered altruism and exchange evidence presented here casts doubt on the altruistic model of transfer behavior observed patterns for inter vivos transfers are more consistent with exchange related motives this finding has important implications for the effects of public transfer programs on the distribution of economic well being

inflation real short term interest rates and the term structure of interest rates a regime switching approach this study explores the implications of the expectations hypothesis by examining the implied term premium in conjunction with an explicit description of processes generating both inflation and short term real interest rates it models inflation and short term real interest rates using a technique that allows for changes in regimes and generates future forecasts of inflation and real interest rates the hypothesis is that persistent shifts in the term premium under the expectations hypothesis might come from forecast errors by econometricians if regime shifts are omitted shifts which are however observed by the agents this study examines whether persistent shifts in the term premium can be eliminated after taking into account the regime shifts in the processes for inflation and real interest rates the results indicate that there still exists persistence in the term premium however the implied term premium generated from regime switching models shows less persistence than those from arima models

unit roots and persistence in the nominal interest rate a confirmatory analysis applied to the oecd this paper investigates the stochastic properties of long term and short term nominal interest rates for the oecd over the post war era for that purpose we employ univariate unit root tests as well as panel unit root and stationarity tests that explicitly allow for cross sectional dependence overall we find overwhelming evidence that the nominal interest rate contains a unit root which may be driven by a stochastic common factor the computation of half lives through impulse response functions also points to a high degree of persistence this has important implications for the cointegration analysis of the fisher equation the uncovered interest parity and the term structure jel classification

an analysis of inflation and interest rates new panel unit root results in the presence of structural breaks abstract this paper investigates the order of integration of inflation and interest rates in a panel of 19 countries the results show that once multiple endogenous breaks are allowed for and appropriate critical values are used the series appear to be i 0

the expectations hypothesis of the term structure tests on us german french and uk euro rates abstract this paper tests the expectations hypothesis of the term structure on us german french and uk euro rates three tests are examined the first is based on forward rates and the other two are based on the interest rates spread first we show that the sign puzzle highlighted by campbell and shiller campbell j y shiller r j 1991 yield spreads and interest rate movements a bird s eye view review of economic studies 58 495 514 for us data does not arise in the cases of french and uk short term rates second we propose tests for the expectations hypothesis based on error correction models with these tests the sign puzzle disappears but the country puzzle remains

real interest rates and inflation an ex ante empirical analysis we develop a method of measuring ex ante real interest rates using prices of index and nominal bonds employing this method and newly available data we directly test the fisher hypothesis that the real rate of interest is independent of inflation expectations we find a negative correlation between ex ante real interest rates and expected inflation this contradicts the fisher hypothesis but is consistent with the theories of mundell and tobin darby and feldstein and stulz we also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty

parental altruism and inter vivos transfers theory and evidence this paper uses psid data on the extended family to test whether inter vivos transfers from parents to children are motivated by altruism specifically the paper tests whether an increase by one dollar in the income of parents actively making transfers to a child coupled with a one dollar reduction in that child s income results in the parents increasing their transfer to the child by one dollar this restriction on parental and child transfer income derivatives is derived for the standard altruism model augmented to include uncertainty and liquidity constraints these additional elements pin down the timing of inter vivos transfers the method used to estimate income transfer derivatives takes into account unobserved heterogeneity across families in the degree of altruism the findings strongly reject the altruism hypothesis redistributing one dollar from a recipient child to donor parents leads to less than a 13 cent increase in the parents transfer to the child far less than the one dollar increas

kinship incentives and evolution we analyze how family ties affect incentives with focus on the strategic interaction between two mutually altruistic siblings the siblings exert effort to produce output under uncertainty and they may transfer output to each other with equally altruistic siblings their equilibrium effort is non monotonic in the common degree of altruism and it depends on the harshness of the environment we define a notion of local evolutionary stability of degrees of sibling altruism and show that this degree is lower than the kinship relatedness factor numerical simulations show how family ties vary with the environment and how this a ects economic outcomes

alcoholism work and income this article reports on an empirical analysis of the relationships between alcoholism and income and working we show that the relationships between alcoholism and labor market success have important age or life cycle dimensions we present evidence that alcoholism may affect income more by restricting labor market participation than by affecting the wages of workers finally we demonstrate that the effects of alcoholism on earnings depend on the extent to which one controls for other covariates associated with alcoholism as such we suggest that there may be important indirect as well as direct effects of alcoholism on labor market success

parental problem drinking and adult children s labor market outcomes current estimates of the societal costs of alcoholism do not consider the impact of parental drinking on children this paper analyzes the consequences of parental problem drinking on children s labor market outcomes in adulthood using the nlsy79 i show that having a problem drinking parent is associated with longer periods out of the labor force lengthier unemployment and lower wages in particular for male respondents increased probabilities of experiencing health problems and abusing alcohol are speculative forces behind these effects while causality cannot be determined due to imprecise iv estimates the paper calls for further investigation of the intergeneration costs of problem drinking

endogenous term premia and anomalies in the term structure of interest rates explaining the predictability smile abstract numerous studies have documented a predictability smile in the post war term structure of interest rates spreads between long rates and short rates predict subsequent movements in short rates provided the long horizon is less than three months or greater than two years but not for intermediate maturities proposed explanations of the smile involve interest rate smoothing by the fed time varying risk premia peso problems and measurement error we show that despite their highly restrictive nature some parameterizations of the cox ingersoll ross cir and chen scott cs models of the term structure can account for the predictability smile cir and cs parameterizations which are consistent with the smile regularity are inconsistent with other features of the data however

human development and alcohol abuse in adolescence the aim of this article is to analyse the development of human capital in adolescents as represented by their state of health and educational attainment when this capital is affected by the abusive consumption of alcohol measured by grams of ethanol to that end we adopt a theoretical framework derived from the model of rational addiction the model of health demand and the model of schooling demand which is then estimated by using data drawn from the spanish national survey on drug use in the school population 1996 1998 2000 results confirm that higher alcohol consumption leads to worse health states and lower academic efficiency among adolescents which suggests the need to implement effective policies aimed at reducing alcohol abuse among this population group

uncertain lifetime consumption and dissaving in retirement this paper asks whether the continued accumulation or mild dissaving observed among the retired can be explained by uncertain lifetime in the absence of annuities after an initial period influenced by borrowing constraints under constant relative risk aversion uncertain lifetime depresses consumption by a proportion increasing with age if the elasticity of intertemporal substitution in consumption is small illustrative computations based on actual income and survival data show that plausible elasticities are sufficiently small to give this effect the reduction in consumption is large enough to explain much of the lack of decumulation by the elderly

do expected shifts in inflation affect estimates of the long run fisher relation recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run a finding at odds with many theoretical models this article shows that these results can be deceptive when the process followed by inflation shifts infrequently we characterize the shifts in inflation by a markov switching model based upon this model s forecasts we reexamine the long run relationship between nominal interest rates and inflation interestingly we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one

real risk inflation risk and the term structure i present a model for the term structures of nominal and real interest rates in the uk that incorporates markov switching and allows for non neutralities nonlinear dynamics and flexibility in the dynamics of the risk premia the model is used to assess how accurately the term structure reflects changing expectations of future yields and inflation i find that variations in inflation expected over the next two to three years are very accurately reflected by current yields over longer horizons the term structures closely track changing expectations regarding future nominal and real yields but not future inflation

the term structure of interest rates and regime shifts some empirical results abstract a test of the expectations theory of the term structure in the framework of a regime switching var model for a change in the short rate and the short long spread with euro us and euro swiss franc rate data points to the importance of uncertainty about the procedures of monetary policy for the rejection of the expectations theory in the us case whereas in the swiss case a time varying term premium also seems to be relevant

alcohol and earnings does drinking yield a wage premium this paper examines the relationship between alcohol consumption and earnings for prime age males wage differentials for non moderate and heavy drinkers are estimated using a polychotomous choice model which accounts for the endogenous relationship be tween drinking and earnings we find that moderate alcohol consumption leads to increased earnings relative to abstention however heavy drinking leads to reduced earnings relative to moderate drinking heavy drinkers possess flatter age earnings profiles and attain lower returns for higher education than non and moderate drinkers these results are in contrast to previous research on substance abuse which finds no earnings drop off for heavy users

choosing between gifts and bequests how taxes affect the timing of wealth transfers abstract a number of theories have been advanced to explain the size and timing of intergenerational transfers one factor only recently explored is the effects of taxes and in particular the estate tax on such transfers this paper represents the first attempt to explore how capital gains and gift taxes in addition to the estate tax interact to influence incentives in the timing of transfers using estate tax data and exploiting variations in state inheritance gift and capital gains tax rates this paper finds taxes to be an important consideration in the choice between gifts and bequests in particular each of capital gains and gift taxes are found to be important determinants of the timing of transfers these findings are robust to a number of specifications that control for borrowing charitable bequests marital status and the portfolio composition of wealth transfers

the treasury yield curve as a cointegrated system this paper examines the temporal relationship between interest rates on treasury securities ranging in maturity from three months to 30 years we find strong empirical support that the seven treasury rates selected are cointegrated a conclusion that is insensitive to the normalization chosen in particular the hypothesis of noncointegration is rejeeted decisively regardless of the rate selected as the dependent variable in the cointegrating equation to determine whether this information can be used to improve forecasts of treasury rates the seven rates are forecasted with a corresponding erroreorrection model that is shown to outperform an augmented var model that ignores the cointegration of the rates the results are consistent with the belief that arbitrage limits the extent to which rates on different maturities of a given security diverge in addition the results confirm the appropriateness of imposing a common stochastic process for interest rates in equilibrium models of the term structure

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

an empirical analysis of nonstationarity in a panel of interest rates with factors this paper studies nonstationarities in a panel of canadian and us interest rates of different maturities and risk we focus on methods which model the cross sectional dependence within the panel as a linear dynamic factor model and decompose our data into common and idiosyncratic components that we analyze in turn our results suggest the presence of a single nonstationary factor in our panel since some of the idiosyncratic components are stationary we conclude that these series are cointegrated finally the dominant factors can be interpreted as level and slope factors as in the term structure literature copyright 2007 john wiley sons ltd

term structure anomalies term premium or peso problem abstract the goal of this paper is to develop a test for the relative importance of the time varying term premium and the peso problem for rejection of the expectation hypothesis of the term structure ehts our reasoning is based on a term structure model that allows for both phenomena simultaneously if we assume that only one regime is observed ex post we can estimate all the information we need to evaluate distortions generated by both hypotheses we can also test the presence of a peso problem firstly we find that a peso problem might explain rejection of the ehts in germany and the united kingdom after the european exchange rate crisis secondly we show that this explanation appears inappropriate to explain the ehts failure in the united states