product differentiation and oligopoly in international markets the case of the u s automobile industry this paper develops and estimates a model of the u s automobile industry on the demand side a discrete choice model is adopted that is estimated using micro data from the consumer expenditure survey the estimation results are used in conjunction with population weights to derive aggregate demand on the supply side the automobile industry is modelled as an oligopoly with product differentiation equilibrium is characterized by the first order conditions of the profit maximizing firms the estimation results are used in counterfactual simulations to investigate two trade policy issues the effects of the ver and exchange rate pass through

international real interest rate equalization a multivariate time series approach this paper investigates the dynamic behaviour of monthly ex post real interest rates from several countries over the period 1980 to 1991 it is found that real interest rates are stationary over this period and that deviations from real interest parity are significant in the short run but disappear in the long run the latter evidence is established using the concept of co dependent time series proposed by gourieroux and peaucelle 1989 for the analysis of multivariate stationary time series

testing the long run implications of the neoclassical growth model abstract the long run implications of the one factor neoclassical growth model are tested by investigating the cointegrating relations between the log of output consumption and investment and the real interest rate with the exceptions of austria and the united kingdom the evidence for the united states and to a lesser extent for canada japan and the federal republic of germany is favorable to the neoclassical growth model a simple extension to a multicountry setting proved however to be unsuccessful national outputs nor consumption series are driven by just one common stochastic trend

environmental and economic effects of the copenhagen pledges and more ambitious emission reduction targets abstract a multi region multi sector dynamic computable general equilibrium model is applied to explore the economic and welfare effects of the pledges submitted by developed countries annex i countries and major developing non annex i countries for 2020 under the copenhagen accord in addition to analyzing scenarios reflecting the upper and lower bounds of the copenhagen pledges one additional policy scenario where annex i countries as a group reduce co 2 emissions by 30 in 2020 compared to 1990 levels and where major non annex i countries reduce co 2 emissions 15 below baseline is also analyzed economic effects are measured as changes in gdp compared to baseline and welfare effects are measured via the equivalent variation assuming that countries with emission targets may trade certificates average reductions in gdp for countries with targets range between 0 1 and 0 7 in 2020 for the policy scenarios while the gdp losses are larger for major non annex i countries with emission targets compared to annex i countries this is not the case for the changes in welfare with the exception of mexico the welfare losses for the major non annex i regions as a percentage of projected gdp in 2020 are lower than for the large annex i countries

jump diffusion processes and the term structure of interest rates the authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump diffusion processes even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes the traditional theory is not consistent under jump diffusion processes it is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion a number of continuous time asset pricing models have been derived under stochastic diffusion processes with continuous sample paths see e g black and scholes 2 merton 21 breeden 3 and cox ingersoll and ross 8 however recent empirical studies see e g brown and dybvig 4 feinstone 10 and jarrow and rosenfeld 17 suggest that the underlying processes may follow

referenda under oath herein we explore whether a solemn oath can eliminate hypothetical bias in a voting referenda a popular elicitation mechanism promoted in non market valuation exercises for its incentive compatibility properties first we reject the null hypothesis that a hypothetical bias does not exist second we observe that people who sign an oath are significantly less likely to vote for the public good in a hypothetical referenda we complement this evidence with a self reported measure of honesty which confirms that the oath increases truthfulness in answers this result opens interesting avenues for improving the elicitation of preferences in the lab and beyond

detecting periodically collapsing bubbles a markov switching unit root test this paper addresses the problem of testing for the presence of a stochastic bubble in a time series in the case that the bubble is periodically collapsing so that the asset price keeps returning to the level implied by the market fundamentals as this is essentially a problem of identifying the collapsing periods from the expanding ones we propose using a generalization of the dickey fuller test procedure which makes use of the class of markov regime switching models the potential of the new methodology is illustrated via simulation and an empirical example is given copyright 1999 john wiley sons ltd

a note on nonstationarity structural breaks and the fisher effect abstract we find empirical evidence that inflation nominal and real interest rates in the us are trend stationary with a structural break in both the unconditional mean and the drift rate of a deterministic trend which occurs shortly after the change in operating procedures of the fed in september 1979 this finding casts some doubts on cointegration tests of the long run fisher effect conducted in recent studies since the results of these tests can be affected by the existence of common structural breaks in the series we propose an alternative test of the fisher effect based on a var representation in appropriately detrended variables we find strong support for the fisher effect both in the medium term and in the long term

induced value tests of the referendum voting mechanism abstract an induced value laboratory experiment is conducted testing the incentive compatibility of the referendum voting mechanism for eliciting willingness to pay for public goods although errors were observed at the individual level aggregate results suggest incentive compatibility in both hypothetical and real referenda

purchasing power parity in the long run a cointegration approach this paper utilizes cointegration analysis to examine purchasing power parity relationships over a long time horizon the results indicate that the exchange rate is cointegrated strongly with the wholesale price index ratio and somewhat weakly with the consumer price index ratio the cointegrating coefficient between the exchange rate and the price ratio is close to one when cointegration is confirmed the hypothesis that the real exchange rate follows a random walk is rejected in most cases finally a new test for common trends finds no such common trends in exchange rates or price ratios copyright 1990 by ohio state university press

nonlinear mean reversion in the short term interest rate using a new bayesian method for the analysis of diffusion processes this article finds that the nonlinear drift in interest rates found in a number of previous studies can be confirmed only under prior distributions that are best described as informative the assumption of stationarity which is common in the literature represents a nontrivial prior belief about the shape of the drift function this belief and the use of flat priors contribute strongly to the finding of nonlinear mean reversion implementation of an approximate jeffreys prior results in virtually no evidence for mean reversion in interest rates unless stationarity is assumed finally the article documents that nonlinear drift is primarily a feature of daily rather than monthly data and that these data contain a transitory element that is not reflected in the volatility of longermaturity yields the drift of the short term interest rate is an important determinant of a wide variety of asset prices both inside and outside the boundaries of what is often called fixed income while volatilities may be estimated relatively accurately using high frequency observations of the short rate the short rate s extreme persistence makes identifying the true shape of the drift function a particularly elusive goal if our goal is merely to fit prices then the difficulty in estimating a drift function can be avoided by backing out implied drifts using a no arbitrage approach such as hull and white 1990 or heath jarrow and morton 1992 these methods bypass the true distribution entirely focusing on solving for the risk neutral drift function that is consistent with the cross section of bond prices if our goal however is to learn from prices and to be able to assess theories such as the expectations hypothesis that link short and long rates then estimating the drift function under the true measure is unavoidable in several recent articles a variety of sophisticated econometric techniques have been brought to bear on the problem in particular

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

stationary properties of the real interest rate and the per capita consumption growth rate empirical evidence for theoretical arguments many economic theories connecting the real interest rate and the per capita consumption growth rate require that both rates evolve together over time this article investigates whether these rates present similar stationary behaviour for the seven most industrialized countries over the 1957 2005 period the analysis relies on the unit root tests developed by elliott et al 1996 and lopez 2006 to look for stationary or regime wise stationary behaviour respectively furthermore the final break selection uses bai and perron s 2003 method the results show for all the countries considered that both rates are either stationary or regime wise stationary with the same number of breaks and mostly with corresponding dates the results hold whether the rates are calculated annually or quarterly

the term structure of euro interest rates and rational expectations abstract this paper analyzes the short end of the maturity spectrum of euro interest rates using recent monthly data the data for the euro franc and euro dm interest rates support the rational expectations hypothesis whereas those true for euro dollar interest rates do not this result is explained by the different approaches used to conduct monetary policy in the usa switzerland and west germany

protection and trade liberalization under incomplete market integration this paper is methodological in that it examines how incomplete market development and integration of a country s agricultural economy affect established measures of protection and comparative advantage agricultural economists have made path breaking contributions to the study of market and trade integration by developing and transition countries a structural approach followed by many authors parameterizes transaction costs created by market imperfections as a price wedge or ban this approach then analyzes the implications of other distortions or policy reforms on agents decisions in the presence of these market imperfections de janvry fafchamps and sadoulet our paper belongs to this stream of research we provide a measure of the shadow price of nontraded goods and of importable goods for which the world price cannot be used as a reference price because of the goods large natural protection in the latter case a large price differential exists which is created by transportation other transaction costs or trade barriers preventing trade from taking place when market equilibrium falls within the price band created between the exportable price and the higher importable price the importable price overstates the actual protection received by producers similar problems arise for nontraded intermediate goods or in domestic factor markets what is the opportunity cost or shadow price of these resources and factors in the absence

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

on the fisher effect abstract we use post war quarterly data for belgium canada denmark france germany greece ireland japan the netherlands the united kingdom and the united states to examine the fisherian link between inflation and short term nominal interest rates in doing so we apply the king and watson 1997 methodology paying particular attention to the integration and cointegration properties of the variables since meaningful fisher effect tests critically depend on such properties we conclude that the data are generally rejecting the fisher effect

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

evidence of nonlinear mean reversion in the real interest rate this article utilizes tests for a unit root that have power against nonlinear alternatives to provide empirical evidence on the time series properties of the ex post real interest rate in the g7 countries we find that the unit root hypothesis can be rejected in the presence of a nonlinear alternative motivated by theoretical literature on optimal monetary policy rules this represents a reversal of the results obtained using standard linear unit root and cointegration tests tests for linearity reject this hypothesis for canada france italy and japan for which we estimate nonlinear models capturing the dynamics of the interest rate for these countries ex post real interest rates follow a nonlinear model characterized by mean reversion and provide statistical evidence for the fisher effect

nonparametric nonlinear cotrending analysis with an application to interest and inflation in the united states given the assumption that the components of a vector time series are stationary around nonlinear deterministic time trends nonlinear cotrending is the phenomenon that one or more linear combinations of the time series are stationary around a linear trend or a constant hence the series have common nonlinear deterministic time trends in this article i develop nonparametric tests for nonlinear cotrending and i derive nonparametric estimators of the cotrending vectors i apply this approach to the federal funds rate and the consumer price index inflation rate in the united states using monthly data to analyze the price puzzle

are oil shocks permanent or temporary panel data evidence from crude oil and ngl production in 60 countries this paper examines the unit root properties of crude oil production for 60 countries employing a range of panel data unit root tests for the period 1971 to 2003 the study first employs a number of panel data tests that do not accommodate structural breaks and then proceeds to apply the lagrange multiplier lm panel unit root test with one structural break the results of the panel data tests without a structural break are inconclusive with at best mixed support for joint stationarity the findings from the lm panel unit root test with a structural break however are conclusive suggesting that for a world panel and smaller regional based panels crude oil and ngl production are jointly stationary

decisiveness attitude expression and symbolic responses in contingent valuation surveys abstract despite suggestions that respondents to contingent valuation studies often follow alternate models of individual decision making few theoretical models have been developed the paper presents a theoretical model of symbolic and attitude expressive contingent valuation responses drawing on relevant contributions in psychology and political science it is argued that the highly symbolic and emotional nature of many environmental issues often activates the need for individuals to express their attitudes and values which when coupled with a perceived non decisiveness of individual questionnaire responses can result in value expressive considerations dominating some cvm responses at the expense of the desired outcome appraisal economic tradeoffs the implications for some topical issues in cvm are explored

the influence of fomc member characteristics on the monetary policy decision making process abstract this paper provides new empirical evidence on a monetary policy committee with heterogeneous members whose decisions affect the efficacy of monetary policy it thereby provides a link between the literature on monetary policy committees and central bank monetary policy implementation through monetary rules using a novel dataset of the idiosyncratic characteristics of fomc members over the period from august 1979 to february 2014 the empirical findings show that characteristics such as education age and to a lesser extent work experience are not important in understanding the fomc decision making process instead the results point to the importance of time spent within the federal reserve system tenure on the fomc itself and the influence of the chair in shaping the decision making process the results are expected to have implications for the capacity of economic agents as well as various markets in the economy to more readily interpret public monetary policy information that reaches them this makes the monetary policy decision process less noisy and thus enhances the capability of agents and markets to attach the correct weight to this information

ex ante evaluation of eu ets during 2013 2030 eu internal abatement abstract this study investigates co 2 emission reduction within the eu resulting from the emissions trading scheme ets up to 2030 this is performed by constructing a baseline scenario without the ets and assessing the impacts of the ets as currently designed the results indicate that the ets will start to impact emissions primarily after 2025 due to the prevalence of a sizable allowance surplus the impact of approved i e back loading and 2 2 linear reduction factor lrf and proposed i e market stability reserve msr policy interventions and the inclusion of aviation could accelerate the exhaustion of surplus and increase emission reductions during the investigated period however these measures would be insufficient to restore the scarcity of allowances and the corresponding carbon price before the start of ets phase iv and the effectiveness of eu internal abatement cannot be guaranteed until 2023 the effectiveness could be further reduced in the case of the economic shocks or the exclusion of international aviation to restore the scarcity of allowances other reform options are necessary this paper extends the reasoning for the early removal of the back loaded 900 mtonne allowances by 2020 and broadening the scope of ets to other sectors with potential high demand for allowances

the method of endogenous gridpoints with occasionally binding constraints among endogenous variables we show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently we present the method for a consumer problem with occasionally binding collateral constraints and non separable utility in durable and non durable consumption this problem allows for a joint analysis of durable and non durable consumption in models with uninsurable income risk which is important to understand patterns of consumption saving and collateralized debt we illustrate the algorithm and its efficiency by calibrating the model to us data

is there a world real interest rate abstract this study uses panel data techniques to estimate a common component to the ex post real interest rates of nine countries with liberal capital markets over the past 16 years we show that the residuals from such a regression have almost no serial correlation and that each country s real interest rate is highly correlated with the estimated world real interest rate the primary exception to these findings is the behavior of the us real interest rate which exhibits large and persistent deviations from the estimated world real interest rate although it is still highly correlated with the world real interest rate

multivariate cointegration analysis and the long run validity of ppp this paper tests the long run validity of ppp using johansen s multivariate cointegration methodology on exchange rates and domestic and foreign price levels monthly data covering the recent flexible exchange rate period of the dm vis a vis 15 currencies le ad to the following conclusion ppp seems to hold in the long run for s ix european currencies the pound lira norwegian krone schilling escudo and peseta however ppp has to be rejected for the united states and the canadian dollar as well as for the belgian franc and the danish krone nevertheless the authors analysis is more favorable to ppp as a long run property of exchange rates than the recent work applying the engle granger regression methodology copyright 1993 by mit press

twin sons of different mothers the long and the short of the twin deficits debate i introduction the relationship between the government budget deficit and the current account deficit has been a contentious subject in empirical macroeconomics for at least the past 20 yr papers have variously found a positive link no link and three recent pieces even find a negative link between the two there are however some things that almost all these studies have in common for example they ignore the possibility of structural breaks in the series when examining their time series properties most previous studies treat the variables under study as being integrated of order 1 which is to say as having a unit root this is a hard assumption to square with the fact that the variables are measured as fractions of gross domestic product gdp and have over the last half century at least shown no inclination toward typical unit root behavior by contrast in three recent pieces corsetti and muller 2006 kim and roubini 2008 muller 2006 the two series are simply treated as pure stationary processes without any pretesting which obviously conflicts with results from the traditional unit root tests in this article we show that both the budget deficit and the current account deficit are stationary around an occasionally shifting mean which is to say that they have structural breaks but are stationary after allowing for those breaks since it is well known that traditional unit root tests have little power when the underlying data contain structural breaks this explains the puzzling finding that the budget deficit and the current account deficit expressed as fractions of gdp test out as i 1 series in practice our findings also cast doubt on the validity of assuming the two series are purely stationary processes given our framework a simple test for the existence of a long run equilibrium relationship between budget and current account deficits is to compare the number and timing of their structural shifts we find that the two series are not closely related either in their number of breaks or in their timing of structural shifts we thus conclude that over the long run genetically the deficits are not twins another factor that existing studies have in common is their treatment of the error structure of the model as homoskedastic despite relatively clear visual evidence of volatility clustering conditional heteroskedasticity in least squares residuals when we consider the short run dynamics of the demeaned variables through a vector autoregression var analysis we show that the error covariance of this var model is significantly conditionally heteroskedastic and go on to specifically account for this phenomenon with a var generalized autoregressive conditional heteroskedasticity garch model we consider a trivariate model that also includes the real interest rate here we find a significant and sizeable positive short run effect of budget deficit innovations on the current account deficit in both the impulse response functions and the variance decompositions of the model our answer to the question of the paternity of the two deficits thus depends on the horizon studied each series has structural breaks that are largely independent of each other so they are not twins at all over the long run however once we allow for these secular shifts the short run dynamics reveal a very strong family resemblance indeed the rest of the article is organized as follows in section ii we review some of the existing empirical literature section iii discusses the time series properties of the data and presents our results about the long run evidence on the twin deficits question section iv sets out our var garch model and presents our results on short run twin deficits behavior section v is a brief conclusion ii an overview of the empirical literature the relationship between current account deficits and government budget deficits has been a subject of extensive study

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

inflation stationarity during latin american inflation insights from unit root and structural break analysis inflation stationarity has important theoretical and policy implications yet most of the literature has focused on low inflation countries this article investigates inflation stationarity in brazil argentina chile mexico and bolivia during a hyperinflationary period from 1980 to 2004 we test for structural breaks in inflation discuss the breaks in terms of changes in monetary regimes and test if accounting for these structural breaks changes the nonstationarity results for those nations that fail the traditional augmented dickey fuller adf test for inflation all five are found to have inflation rates that are i 0 once the structural breaks analysis is incorporated into our unit root tests

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

volatility regimes asymmetric basis effects and forecasting performance an empirical investigation of the wti crude oil futures market abstract this study employs a flexible regime switching egarch model with student t distributed error terms to investigate whether volatility regimes and basis affect the behavior of crude oil futures returns including the conditional mean variance skewness kurtosis as well as the extent of heavy tailedness the study also examines whether volatility regimes and asymmetric basis effects can improve the forecasting accuracy the main merit of the empirical model is that the basis effect is allowed to be asymmetric and to vary across volatility regimes empirical results suggest that the conditional mean and variance respond to the basis asymmetrically and nonlinearly and that the responses of transition probabilities to the basis are symmetric furthermore the conditional higher moments are sensitive to the absolute value of basis and the heavy tailed characteristic can be greatly alleviated by taking into account the asymmetric basis effects and regime switches finally the regime switches and asymmetric basis effects play decisive roles in forecasting return volatility and tail distribution

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

time varying equilibrium real rates and monetary policy analysis abstract we show how a positive correlation between the equilibrium real interest rate err and trend growth matters for two widely debated issues in monetary policy first a simple taylor rule is more robust to uncertainty about the trend growth rate than suggested by some analyses of the increase in u s inflation during the 1970s because the policy mistake made when measuring the change in trend growth gets offset by the accompanying mistake in measuring the change in the err second ignoring this correlation when estimating policy rules results in coefficients that exaggerate both the degree of interest rate smoothing and the strength of the monetary authority s response to inflation

high and volatile real interest rates where does the fed fit in the federal reserve s new procedures for the conduct of monetary policy introduced on october 6 1979 have been the subject not only of considerable academic and political interest but also of intense debate b friedman 1982 roley 1982 walsh 1982 1984 mascaro and meltzer 1983 among others the fed s new operating procedures generally are perceived to have resulted in abnormally high and volatile real interest rates and thus to have contributed to if not been totally responsible for the deepest recession in postwar history in this paper we address the following question was the advent of the increased volatility and level of the real rate of interest concurrent with the fed s october 1979 change in operating procedures that is was the real rate of interest high and more volatile immediately after the october 1979 change in policy procedures in which case we might infer a connection between the fed s change in policy procedures and the increased volatility and level of the real rate or did the real rate become high and more volatile some time following the policy change which might lead us to conclude that the increased volatility and the increased level of the real rate was connected to some other event s occurring after the october 1979 policy change

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

congressional influence on u s monetary policy abstract congressional influence is generally discounted or ignored in political models of federal reserve behavior here i show that changes in the leadership of the senate banking committee are significantly correlated with monetary base growth more liberal committee leaders are associated with significantly higher base growth other factors held constant the result is shown to hold across several econometric specifications and different definitions of the congressional preference variable

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

aggregation bias compositional change and the border effect borders affect the composition not only the level of interregional trade in disaggregated u s commodity flow data border effects vary substantially across commodities substantial border induced compositional change suggests the possibility that standard estimates suffer from aggregation bias arising from endogenous industry location patterns and the presence of zero observations in commodity level trade adjusting for these effects reduces the estimate of the aggregate border effect from 20 9 to 5 7 jel classification f14 f15 biais d agregation changement de composition et effet de frontieres les frontieres affectent la composition et pas seulement le volume de commerce inter regional une analyse des donnees desagregees des flux de commerce de biens des etats unis montre que l effet de frontieres varie substantiellement selon les biens le changement de composition du commerce engendre par les frontieres suggere la possibilite que les estimations usuelles souffrent d un biais d agregation resultant des patterns de localisation industrielle endogenes et de la presence d observations nulles dans le commerce de certains biens un ajustement pour tenir compte de ces effets suggere que les effets de frontieres passent de 20 9 a 5 7

accounting for the changing role of family income in determining college entry in this paper i analyze the determinants of college enrolment and the changes in these determinants over time i propose a quantitative life cycle model with college enrolment altruistic parents provide financial support to their children using counterfactual experiments i find that 24 percent of all households are financially constrained in their college decision constraints become more severe over time i show that my model is consistent with a narrow college enrolment gap between students from rich and poor families as previously reported in the empirical literature the estimation of enrolment gaps is a popular reduced form approach for measuring the fraction of constrained households my results suggest that these reduced form estimates are misleading and that a structural model of parental transfers is needed to correctly identify constrained households further i show that parental transfers are an important driver behind the changing role of family income as a determinant of college entry a fact that is well documented for the us economy

government spending interest rates prices and budget deficits in the united kingdom 1701 1918 abstract the british data from the early 1700s through wwi provide an unmatched opportunity for studying temporary changes in government purchases temporary increases which appeared mainly as wartime spending raised long term interest rates but significantly increased the growth rates of money and prices only during suspensions of the gold standard 1797 1821 and 1914 1918 temporary changes in military spending accounted for the bulk of budget deficits over the sample of more than 200 years i found only two major non war deficits one associated with compensation payments to slaveowners in 1835 1936 and the other with a dispute over the income tax in 1909 1910 interest rates did not react much to these exogenous deficits

political regime change and the real interest rate the effect of changes in policy regimes on real interest rates has important implications for financial and economic theory there is little current evidence that policy regime changes have any impact on the level of real interest rates we use large political changes as our measure of policy regime changes changes in presidential administration are more significantly correlated with real rate changes than are changes in the federal reserve chair or the mean shift points identified by garcia and perron 1996 using time series methods we also show that change of party control of congress is a significant factor explaining real rates we argue that theoretical models built on the assumptions of constant or policy invariant real interest rates are at variance with the empirical evidence

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

incentive compatibility tests of choice experiment value elicitation questions abstract this paper uses laboratory experiments with induced values to address fundamental issues related to the incentive compatibility of choice experiment value elicitation questions in particular we compare two versus three option choice sets and the effect of using alternative provision rules including one where the outcome is influenced by both participant and regulator votes we find the overall proportion of choices that are inconsistent with induced preferences is rather low however there are more deviations from induced preferences for two option choice sets and for alternatives to a simple plurality vote implementation rule a multinomial probit analysis of choices in tandem with a mixed logit welfare analysis suggests there is a statistically significant but modest degree of bias towards selecting the status quo option

contingent valuation controversies and evidence contingent valuation cv has become one of the most widely used non market valuation techniques cv s prominence is due to its flexibility and ability to estimate total value including passive use value its use and the inclusion of passive use value in benefit cost analyses and environ mental litigation are the subject of a contentious debate this paper discusses key areas of the debate over cv and the validity of passive use value we conclude that many of the alleged problems with cv can be resolved by careful study design and implementation we further conclude that claims that empirical cv findings are theoretically inconsistent are not generally supported by the literature the debate over cv however has clarified several key issues related to nonmarket valuation and can provide useful guidance both to cv practitioners and the users of cv results

monetary policy and interest rates abstract in the eighties u s interest rates have been characterized by high volatility often related to the fed changes in operating procedure a semiparametric estimator for heteroskedasticity and the diagnostic provided by the bounded influence estimator are applied to a short term interest rate equation attempts to model changes in operating procedure by means of exogenous dummy variables are not satisfactory heteroskedasticity is detected and corrected by gls and the chosen semiparametric estimator the estimates are compared by means of bounded influence regressions which reveal that the semiparametric estimates improve upon gls since the latter does not fully correct for heteroskedasticity

dynamics of real interest differentials an empirical investigation abstract linear dynamic stochastic processes are derived for the ex ente real interest differentials from those followed by the ex post processes under the assumption of rational expectations the technique is used to test the equality of ex ante real rates between u s and a number of oecd countries the evidence against the short run equality of ex ante real rates is overwhelming in the long run the rates are co integrated but not always equal it takes approximately six months for the differentials to converge to their long run values

congressional oversight committee influence on u s monetary policy revisited abstract grier 1991 shows that monetary policy is influenced by congress in that increases in the liberality of the senate banking committee leadership are significantly positively correlated with monetary base growth chopin cole and ellis 1996 claim that the house leadership statistically dominates the senate leadership for predicting money growth but that the direction of the effect is perverse a more liberal house leadership is associated with a lower rate of base growth in this paper i show that chopin cole and ellis s claims are unfounded properly measured both house and senate leadership have a significant positive effect on base growth over grier s 1991 original sample in later periods money growth regressions are not sufficiently stable to support hypothesis tests

the time varying behaviour of real interest rates a re evaluation of the recent evidence a time varying parameter model with markov switching conditional heteroscedasticity is employed to investigate two sources of shifts in real interest rates 1 shifts in the coefficients relating the ex ante real rate to the nominal rate the inflation rate and a supply shock variable and 2 unconditional shifts in the variance of the stochastic process the results underscore the importance of modelling continual change in the ex ante real rate in terms of other economic variables rather than relying on a statistical characterization that permits only a limited number of discrete jumps in the mean of the process copyright 1999 john wiley sons ltd

the synthesis of bottom up and top down approaches to climate policy modeling electric power technologies and the cost of limiting us co2 emissions abstract in the us the bulk of co 2 abatement induced by carbon taxes comes from electric power this paper incorporates technology detail into the electricity sector of a computable general equilibrium model of the us economy to characterize electric power s technological margins of adjustment to carbon taxes and to elucidate their general equilibrium effects compared to the top down production function representation of the electricity sector the technology rich hybrid specification produces less abatement at a higher welfare cost suggesting that bottom up models do not necessarily generate lower costs of abatement than top down models this result is shown to be sensitive to the elasticity with which technologies generating capacities adjust to relative prices

testing for real effects of monetary policy regime shifts the rational expectations revolution in macroeconomics has forced economists to think about macroeconomic policy in terms of alternative policy rules or regimes huizinga and mishkin 1986 for example have argued recently that monetary policy has important effects on the ex ante real rate of interest and as evidence they cite apparent changes in the stochastic properties of the real rate coinciding with major shifts in monetary policy regimes more specifically they claim that in the post war period the real rate process in the united states shifted in october 1979 the month the fed changed operating procedures and in october 1982 when the fed deemphasized monetary aggregates mishkin 1986 has argued that these results suggest monetary policy not fiscal deficits bears responsibility for high u s real interest rates in the early 1980s because an understanding of the impact of monetary policy shifts on real interest rates is important for many issues in macroeconomics suggested methods for detecting real rate shifts deserve careful scrutiny the method employed by huizinga and mishkin 1986 tests for shifts in a projection equation of the expost real rate on a set of information variables such as the nominal interest rate and past inflation this projection equation approach is straightforward to apply and therefore potentially of use in testing a variety of macroeconomic hypotheses such as the neutrality of money for the projection equation approach to be valid it is desirable that it exhibit shifts if and only if the true real rate generating process has shifted the purpose of this paper is to show that changes in the real rate process while sufficient to

structural breaks in international tourism demand are they caused by crises or disasters it is recognised that the tourism industry is vulnerable to some form of crises or disaster however despite the attention given to the nature and consequences of tourism crises and disasters there is a gap in the literature regarding the ex post detection of these events in this article we estimate both the number and date of structural breaks in international tourism arrival series for 25 countries and madeira island using the bai and perron 1998 structural break test we compare the date of tourism crises and disasters to the dating of these structural breaks we observe that tourism crises and disasters are largely consistent with the dates of breaks therefore this method allows us to solve a gap in the tourism industry related to the correct allocation of negative shocks in international tourism arrival demand to crisis or disaster phenomena

the environmental consequences of trade evidence from subnational trade flows abstract the debate over the environmental consequences of free trade is not only quite heated but also entails significant policy ramifications recently cross sectional analysis at the country level has made use of exogenous determinants of trade to identify the causal effect of trade on the environment finding moderate evidence of a beneficial impact of expanded trade on environmental quality given the stakes involved we revisit this finding using subnational data on trade flows across us states and several measures of pollution not only does the analysis shed further light on the debate at the international level but also addresses a heretofore unexamined question does greater inter regional commerce at the subnational level harm the environment our findings are striking providing further evidence against a negative environmental impact of trade for the majority of measures analyzed however several sources of heterogeneity arise that are noteworthy

experimental evidence on deliberate misrepresentation in referendum contingent valuation the paper presents an experiment on deliberate misrepresentation in referendum contingent valuation rcv surveys the experiment consists in inducing willingness to pay wtp for a credible laboratory public good with an uncertain cost and asking subjects to vote in an advisory referendum on the provision of that good without knowing the actual provision rule only half the participants voted truthfully but their decision whether to reveal truthfully was not related to the size of the willingness to pay a second experiment shows that this last result may be due to the advisory nature of the provision rule

does government ideology matter in monetary policy a panel data analysis for oecd countries this paper examines whether government ideology has influenced monetary policy in oecd countries we use quarterly data in the 1980 1 2005 4 period and exclude emu countries our taylor rule specification focuses on the interactions of a new time variant index of central bank independence with government ideology the results show that leftist governments have somewhat lower short term nominal interest rates than rightwing governments when central bank independence is low in contrast short term nominal interest rates are higher under leftist governments when central bank independence is high the effect is more pronounced when exchange rates are flexible our findings are compatible with the view that leftist governments in an attempt to deflect blame of their traditional constituencies have pushed market oriented policies by delegating monetary policy to conservative central bankers

the eu 20 20 2020 targets an overview of the emf22 assessment three computable general equilibrium models are used to estimate the economic implications of a stylized version of eu climate policy if implemented at the lowest possible cost the 20 emissions reduction would lead to a welfare loss of 0 5 2 0 by 2020 second best policies increase costs a policy with two carbon prices one for the ets one for the non ets could increase costs by up to 50 a policy with 28 carbon prices one for the ets one each for each member state could increase costs by another 40 the renewables standard could raise the costs of emissions reduction by 90 overall the inefficiencies in policy lead to a cost that is 100 125 too high the models differ greatly in the detail of their results the ets non ets split may have a negligible impact on welfare while the renewables standard may even improve welfare the models agree however that the distortions introduced by total eu package imply a substantial welfare loss over and above the costs needed to meet the climate target the marginal total and excess costs reported here are notably higher than those in the impact assessment of the european commission

black swans before the black swan evidence from international libor ois spreads abstract the libor ois spread is a closely monitored indicator of the financial health of economy previous research has used this spread to identify and anticipate abrupt changes in financial markets taylor and williams 2009 refer to the drastic increase in the us libor ois spread on august 7th 2007 as a black swan in the money market in this paper rather than rely on visual observations of black swans we estimate them using bai and perron s 1998 procedure we estimate structural breaks granger causality tests and innovation accounting in international libor ois spreads and a cds index to better understand their dynamics during the recent crisis our results reveal that black swans appeared in smaller economies prior to that in large ones during the financial crisis in addition we find that only shocks to the us libor ois spread has any statistically significant effects after 30 days

some evidence on the international inequality of real interest rates abstract this paper undertakes econometric tests of the hypothesis that ex ante real interest rates are equal across countries with highly integrated capital markets the issue is of practical importance because the violation of real rate equality is a necessary condition for monetary policy to influence the open economy through the real interest rate channel although an empirical literature concerning real rate equality already exists previous investigators have focused on pre tax real rates this paper contributes to the literature by attempting to incorporate the effects of taxation into the analysis

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

modeling the dynamics of chinese spot interest rates using the daily data of chinese 7 day repo rates from january 1 1997 to december 31 2008 this paper tests a variety of popular spot rate models including single factor diffusion garch markov regime switching and jump diffusion models we document that chinese spot rates are subject to both market forces and administrative forces garch regime switching and jump diffusion models capture some important features of the dynamics of chinese spot rates but all models under study are overwhelmingly rejected we further explore possible sources of model misspecification using diagnostic tests

regime non stationarity in the us uk real exchange rate abstract using a markov switching extension of the adf regression we find evidence that the us uk real exchange rate is stationary in periods when it is in a low volatility regime and nonstationary when it is in a high volatility regime

sensitivity of modeling results to technological and regional details the case of italy s carbon mitigation policy model differences in technological and geographical scales are common but their contributions to uncertainties have not been systematically quantified in the climate policy literature this paper carries out a systematic assessment on the sensitivity of computable general equilibrium models to technological and geographical scales in evaluating the economic impacts of carbon mitigation policies in particular we examine the impacts of sub national details and technological details of power generation on the estimate of carbon price and economic cost taking italy as an example we find that the estimation for carbon price and the economic cost of a de carbonization pathway by means of a model with technological and regional details can be lower than a model without such details by up to 40 additionally the effect of representing regional details appears to be far more important than the effect of representing the details of electricity technology in both the estimated carbon prices and the estimated economic impacts our results for italy highlight the importance of modeling uncertainties of these two key assumptions which should be appropriately acknowledged when applying cge models for policy impact assessment our conclusions can be generalized to different countries and policy scenarios not in terms of absolute numbers but in terms of economic explanations in particular intra national trade and the sub national sectoral technological specialization are important variables for understanding the economic dynamics behind these outcomes

does realism matter in contingent valuation surveys the importance of stressing the realism or policy relevance of a contingent valuation cv survey is commonly recognized by cv researchers this paper focuses on the relationship between the probability that a subject s response will result in real consequences and the subject s accurate reporting of willingness to pay results from experiments support the argument that efforts to make contingent valuation surveys real are important however our results also suggest that the connection between the survey and the likelihood of a payment must be rather powerful before surveys generate accurate reporting of willingness to pay for a public good

political institutions and international patterns of agricultural protection this paper analyzes the influence of political systems and rights in patterns of agricultural protection across commodities countries and over time four political systems and a qualitative index of political rights account for differences in political institutions the analysis incorporates the effects of development of constraints on tax collection feasibility and of comparative advantages and terms of trade pluralistic systems are associated with higher agricultural protection levels although in a nonlinear fashion access to pluralism appears to be important although further democratization partly dissipates protection copyright 1994 by mit press

a markov model of switching regime arch in this article i present a new approach to model more realistically the variability of financial time series i develop a markov arch model that incorporates the features of both hamilton s switching regime model and engle s autoregressive conditional heteroscedasticity arch model to examine the issue of volatility persistence in the monthly excess returns of the three month treasury bill the issue can be resolved by taking into account occasional shifts in the asymptotic variance of the markov arch process that cause the spurious persistence of the volatility process i identify two periods during which there is a regime shift the 1974 2 1974 8 period associated with the oil shock and the 1979 9 1982 8 period associated with the federal reserve s policy change the variance approached asymptotically in these two episodes is more than 10 times as high as the asymptotic variance for the remainder of the sample i conclude that regime shifts have a greater impact on the properties of the data and i ca

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

categorical aggregation and international trade a comment the central issue of the literature on intra industry trade iit is the extent to which iit is a substantive phenomenon or a statistical artefact due to aggregation greenaway and milner hereafter gm have recently proposed an adjusted index of iit to shed new light on categorical aggregation and they contrast this index with the widely adopted procedure of disaggregating the standard iit index the contrast is a false one gm s disaggregated treatment of the standard index is not the method adopted by the cited earlier studies while gm s adjusted index is the one which these writers did in fact use the usual definition of iit is xj m2 i xj amj where xj and mj are exports and imports of thejth industry for comparability this is conventionally stated as a percentage of total trade

inflation presidents fed chairs and regime shifts in the u s real interest rate several recent papers agree on the existence of significant regime shifts in the u s real interest rate but disagree on the proximate causes of the shifts caporale and grier 2000 point to large political changes as correlates while rapach and wohar 2004 show that real rate breaks are correlated with inflation regime shifts and argue that the inflation regime changes cause the real rate shifts in this paper we show that controlling for the timing of changes in the inflation regime dummy variables representing either party change in the presidency or change in the identity of the fed chair are still strongly significant for explaining real interest rate fluctuations when we control for a fixed coefficient linear relationship between inflation and the real rate we find two real rate regime shifts that line up almost exactly with the accessions of paul volcker and alan greenspan even if we first let inflation regime switches explain the real rate and then look for regime shifts in the residuals we find almost exactly the same two breaks these results imply that fed chairs sometimes differ with respect to their preferred equilibrium real interest rate

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

quantifying regional economic impacts of co2 intensity targets in china we acknowledge the support of the ministry of science and technology of china through the institute for energy environment and economy at tsinghua university and the support from graduate school of tsinghua university which is supporting zhang da s doctoral research as a 22 visiting scholar at the massachusetts institute of technology we are also grateful for the support provided by rio tinto china and social science key research program from national social science foundation china of grant no 09 zd029 we further acknowledge the support of eni s p a icf international and shell founding sponsors of the china energy and climate project for supporting this model development work we would further like to thank dr john reilly dr sergey paltsev dr kyung min nam dr henry chen paul kishimoto and tianyu qi at joint program on the science and policy of global change and participants in the annual meeting of china energy and climate project and ecomod 2012 conference for helpful comments and discussion 23

unit root properties of crude oil spot and futures prices in this article we examine whether wti and brent crude oil spot and futures prices at 1 3 and 6 months to maturity contain a unit root with one and two structural breaks employing weekly data over the period 1991 2004 to realise this objective we employ lagrange multiplier lm unit root tests with one and two endogenous structural breaks proposed by lee and strazicich 2003 minimum lagrange multiplier unit root test with two structural breaks review of economics and statistics 85 1082 1089 2004 minimum lm unit root test with one structural break working paper no 04 17 department of economics appalachian state university we find that each of the oil price series can be characterised as a random walk process and that the endogenous structural breaks are significant and meaningful in terms of events that have impacted on world oil markets

endogenous tariff formation the case of mercosur mercosur appears as an interesting case study for analyzing the determinants of exceptions in regional trade agreements its member countries argentina brazil paraguay and uruguay intended to make mercosur a full customs union by january 1995 this goal turned out to be too ambitious and the protocol of ouro preto and other agreements signed in december 1994 led to a hybrid solution overall out of a total of 9 119 tariff lines around 30 percent are subject in at least one member country to either external deviations from the common external tariff or internal deviations from free trade thus an important set of holes remains under the existing agreement leading some authors to consider mercosur an incomplete customs union this article compares the results of the theoretical literature on endogenous tariff formation with evidence from mercosur the results show that mercosur common external tariff and member countries deviations from it and from internal free trade can be explained by sector or industry lobbying as predicted by the endogenous tariff literature if a viable political economy is a key to success then mercosur is here to stay

real interest rates and macroeconomic activity while standard discussions of the transmission mechanism of monetary policy tend to assume a strong and negative link between real interest rates and real macroeconomic activity and this appears to some extent to be borne out by simulation of large scale macroeconometric models the empirical evidence suggests that the link between real interest rates and macroeconomic aggregates such as consumption and investment is in fact somewhat tenuous the weak link between interest rates and aggregate consumption may be explained at a theoretical level while the apparently weak link between interest rates and investment is more puzzling although it may be related to neglect of issues such as uncertainty and the irreversibility of investment in empirical studies similarly evidence on the link between real interest rates and economic growth is mixed and this may be related to non linearities in the relationship the survey highlights the need for further research in this area

extracting inflation expectations and inflation risk premia from the term structure a joint model of the uk nominal and real yield curves abstract this paper analyses the uk interest rate term structure over the period since october 1992 when the united kingdom adopted an explicit inflation target using an affine term structure model estimated using both government bond yields and survey data the model imposes no arbitrage restrictions across nominal and real yields which enables interest rates to be decomposed into expected real policy rates expected inflation real term premia and inflation risk premia the model is used to shed light on major developments over the period including the impact of bank of england independence and the low real bond yield conundrum

competing commitments technocracy and democracy in the design of monetary institutions in this article i refine and expand the agenda for research on monetary institutions first i evaluate the analyses and research designs presented in this special issue of international organization out of this evaluation several ideas about how to produce a third generation of research on this topic emerge specific ideas include how to create a better synthesis with certain branches of economics such as information economics broaden the welfare criteria on which institutional choices are made deepen the analyses of coalitional and other political processes on which the choice of institutions are based and strengthen the tests that are offered in support of these choices in the second part of this article i explore questions of how popular sovereignty over economic policy and institutional choice are achieved i show that the institutional regimes proposed in the special issue are in a sense democratic as long as the public s perceived consensus about economic policies and macroeconomic outcomes is real however if as new work suggests there is genuine dissensus about policy and macroeconomic objectives it is no longer clear that the regimes proposed in the special issue are democratic in the conclusion i briefly discuss a possible crisis of imagination in institutional design