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

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

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

federal borrowing and short term interest rates this paper is an empirical study of the effects of federal government borrowing on short term interest rates it is often taken for granted that increases in federal borrowing cause higher short term rates but little empirical support exists for this assumption in fact this paper demonstrates that federal borrowing is a relatively unimportant and insignificant determinant of short term rates an implication of this result is that financial crowding out effects of government deficit spending may not be overly large postulates about interest rate behavior are the driving force behind many hypotheses of the crowding out literature however these interest rate effects have received relatively little direct attention in this literature this is surprising since as a general rule the stronger the interest rate effect is the stronger the crowding out effect will be an empirical determination of the size of the deficit spending interest rate effect gives some empirical content to the crowding out controversy in section ii of this paper the relationship between federal borrowing interest rates and crowding out is discussed and a loanable funds model of short term interest rates is developed in section iii the regression model is generated and tested the essential result is that variation in three month treasury bill rates is caused by expected inflation changes in the monetary base and by changes in the level of economic activity there is no statistically significant relation between short term interest rates and federal borrowing in section iv additional regression tests are performed which confirm the results in section iii and the problem of simultaneous equation bias is discussed the final part of the paper is a discussion of some implications of the results reported in sections iii and iv

survey evidence on the willingness of u s consumers to pay for automotive fuel economy abstract prospect theory holds that human beings faced with a risky bet will tend to value potential losses about twice as much as potential gains previous research has demonstrated that prospect theory could be sufficient to explain an energy paradox in the market for automotive fuel economy this paper analyzes data from questions added to four commercial multi client surveys of 1000 u s households each in 2004 2011 2012 and 2013 households were asked about willingness to pay for future fuel savings as well as the annual fuel savings necessary to justify a given upfront payment payback periods inferred from household responses are generally consistent over time and across different formulations of questions mean calculated payback periods are about 3 years but there is substantial dispersion among individual responses the calculated payback periods do not appear to be correlated with the attributes of respondents respondents were able to quantitatively describe their uncertainty about both vehicle fuel economy and future fuel prices simulation of loss averse behavior based on respondents stated uncertainty illustrates how loss aversion could lead consumers to substantially undervalue future fuel savings relative to their expected value

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

interest rates and budget deficits cross country evidence from the period 1924 1938 abstract this paper examines the question of whether budget deficits raise nominal interest rates the empirical analyses make use of cross country data from 16 countries covering the period 1924 1938 contrary to some recent studies by e g evans it turns out that budget deficits affect nominal rates positively and thus the ricardian equivalence proposition can be questioned

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

when do households invest in solar photovoltaics an application of prospect theory abstract while investments in renewable energy sources res are incentivized around the world the policy tools that do so are still poorly understood leading to costly misadjustments in many cases as a case study the deployment dynamics of residential solar photovoltaics pv invoked by the german feed in tariff legislation are investigated here we report a model showing that the question of when people invest in residential pv systems is found to be not only determined by profitability but also by profitability s change compared to the status quo this finding is interpreted in the light of loss aversion a concept developed in kahneman and tversky s prospect theory the model is able to reproduce most of the dynamics of the uptake with only a few financial and behavioral assumptions

the lucas critique and the volcker deflation this paper examines in light of the lucas critique the behavior of the phillips curve and of the term structure of interest rates after october 1979 it starts with an informal account of the policy change and then discusses how we might expect these two relations to shift after such a change it finds little evidence of a direct effect of the policy change on the phillips curve at least until 1982 it finds substantial evidence of a direct effect on term structure this abstract was borrowed from another version of this item

expected inflation and interest rates in a multi asset model a note this paper analyzes the effect of expected inflation on nominal interest rates in a theoretical model with money and two different bond types the inclusion of three assets instead of the usual two causes the effect of expected inflation on the interest rates to deviate from unity depending on the sizes of the wealth and interest rate effects on the various asset demands the effect of expected inflation could even be negative several special cases are also considered and the implications for the interpretation of empirical results are discussed the profession has shown a continuing strong interest in the effect of expected inflation on interest rates both from a theoretical and an empirical perspective fisher s 6 original hypothesis was that there should be a one forone effect so that expected inflation has no effect on the ex ante real interest rate numerous researchers have failed to find that strong an empirical effect on nominal rates however and some have expressed puzzlement over this empirical result the empirical literature includes 1 2 3 5 6 10 13 14 and numerous others theoretical models generally consider a short run situation in which the real rate of return on financial assets is free to deviate from the marginal product of capital the simplest possible such macro model with is lm and vertical aggregate supply curve equations generates the fisher result that dr dir the effect of expected inflation r on the nominal interest rate r equals unity but there are several possible modifications to this model which can drive the value of dr dir either up or down first the mundell 12 effect states that the presence of a real balance effect

on interest rates inflationary expectations and tax rates abstract this paper provides new evidence on the relationship between inflation and the rate of interest for the united states during the 1953 1984 period the results indicate that contrary to most previous studies the fisher hypothesis is inverted which means that it is the real rate of interest rather than the nominal rate that moves inversely to the rate of inflation however this is the case only during periods of relatively stable inflation rates and moderate regulatory change over longer periods when factors are more volatile the inverted fisher hypothesis is rejected

the differing effects of pre and post 1981 federal budget deficits on tax adjusted real interest rates this paper employs an estimating equation relating tax adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre and post 1981 federal budget deficits on ex ante and ex post real tax adjusted short term interest rates over the period 1961 1 1992 2 the results for the 1961 1 1992 2 period taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential gdp occurring in 1981 1 indicate that the ratio of both the nipa deficit and the cyclically adjusted deficit to potential gdp have a significant effect on ex ante and ex post real tax adjusted interest rates for the post 1981 period but no significant effect before 1981

budget deficits and interest rates in the united states in this paper an attempt has been made to reexamine the effect of budget deficits in the united states on interest rates unlike the previous studies which use only one definition of the dependent variable we have used all three namely the nominal and the ex post and the ex ante real interest rate further unlike previous studies we considered both short term and long term interest rates our results provide absolutely no support for the proposition that federal deficits affect interest rates and thus contradict the recent findings by cebula 1987 and kolluri and giannaros 1987 finally the paper provides some further support for the inverted fisher hypothesis proposed by carmichael and stebbing 1983

are adults better behaved than children age experience and the endowment effect we find that large increases in age do not reduce the endowment effect supporting the hypothesis that people have reference dependent preferences which are not changed by repeated experience getting and giving up goods

incorporating reference price effects into a theory of consumer choice although there has been a good deal of research on incorporating the effects of reference price formation into empirical models of consumer buying behavior little formal theoretical work had been undertaken to date this paper incorporates reference price effects into the traditional economic theory of consumer choice and examines the effects of reference price formation on the results of the traditional theory its marketing implications and the implications for empirical models which examine the effects of reference price formation on actual consumer behavior several implications of the theoretical model are empirically tested using weekly retail egg sales data from southern california this analysis indicates that reference price formation does have significant effects on consumer behavior furthermore these effects are asymmetric with consumers two and a half times more responsive to egg price increases that are in excess of the reference price than they are to comparable egg price decreases

the fisher hypothesis a critique of recent results and some new evidence the fisher hypothesis 5 that nominal interest rates should respond point for point to changes in the expected inflation rate while theoretically appealing has had limited success in explaining actual interest rate movements most empirical work has shown that net after tax nominal interest rates are not as sensitive to changes in expected inflation as the hypothesis suggests they should be more troublesome still are the results of two recent studies carmichael and stebbing 3 4 hereafter cs and amsler 1 turn the fisher hypothesis on its head by demonstrating that net nominal yields on financial assets do not respond at all to changes in the expected inflation rate rather the net real yield on these assets falls point for point with increases in the expected inflation rate

federal deficits and the real rate of interest in the united states a note this brief note provides strong empirical evidence that federal govern ment deficits can indeed have a positive and significant impact upon short term interest rates the findings in this paper thereby establish another mechanism for the transmission of crowding out this study differs from most other studies in the adoption of two particular procedures first unlike most although not all other related studies the rate of interest is expressed as a real rate this is done in simple fashion by subtracting the inflation rate of the gnp deflator from the nominal rate of interest taken to be the 3 month t bill rate second also unlike most although not all other related studies the deficit is expressed in real terms and then divided by the real gnp level expressing the deficit in this ratio form enables us to judge the deficit relative to the size of the economy which must finance it no previous related study to date has adopted both of these procedures and most studies of this topic have adopted neither procedure

an empirical analysis of the macroeconomic effects of government debt evidence from canada 1989 an empirical analysis of the macroeconomic effects of government debt evidence from canada applied economics vol 21 no 1 pp 113 124

budget deficits short term real interest rates and the specification of expected inflation an empirical investigation the purpose of this paper is to illustrate whether empirical estimates of the effects of budget deficits on short term real interest rates are sensitive to the choice of the expected inflation variable survey data on expected inflation and the rational expectations method described by mishkin 1981 are used to construct two measures of the short term real interest rate results for two previous studies on this deficit interest rate relationship are re estimated using these measures of expected inflation and the interest rate variables additional results reported in this paper further indicate that empirical estimates of the interest rate effects of budget deficits are sensitive to the choice of the expected inflation variable in addition to the choice of the inflation variable a number of other robustness tests are included we are able to conclude that 1 increases in budget deficits do not generally raise short term real interest rates and 2 short term real interest rates are not independent of

domestic and international financial market responses to federal deficit announcements abstract this study examines the response of domestic and international financial variables to announced changes in federal deficit projections over the 1981 1994 period as observed in earlier studies rates on us treasury securities responded positively to announced increases in federal deficit projections new evidence shows that deficit effects are transmitted internationally with foreign long term interest rates also increasing in response to announced increases in us deficit projections the exchange value of the dollar tends to be positively related to announced changes in deficit projections but that result appears to be related to the degree of insulation of foreign financial markets from us financial markets finally the price of gold responded positively to announced changes in deficit projections taken together the results suggest that higher projected deficits raise real interest rates in part because of an increase in an inflation risk premium

real interest rates anticipated inflation and unanticipated money a multi country study a bstractin this paper we examine real interest rate behavior in canada west germany the united states and the united kingdom using a model that yields a semi reduced form equation linking the real interest rate to monetary growth shocks anticipated inflation and expected inflation variance the estimator used in our analysis accommodates regressors from other regressions ensuring that accurate inferences are obtained in all countries we find that increases in anticipated inflation initially dampen real interest rates in addition a significant and negative relationship between unanticipated money shocks and real interest across all countries is discovered inflation variance typically exhibits little explanatory power

a large scale test of the effects of time discounting risk aversion loss aversion and present bias on household adoption of energy efficient technologies abstract this paper empirically and jointly analyses the relations between standard time discounting risk aversion loss aversion and present bias and household stated adoption of low to high stake energy efficiency technologies eets light emitting diodes leds energy efficient appliances and retrofit measures the analysis relies on a large representative sample drawn from eight european union countries preferences over time risk and losses were elicited and jointly estimated from participant choices in incentivized context free multiple price list experiments the findings from econometrically estimating eet adoption equations provide some support for the hypothesis that individuals who are more loss averse or more risk averse or who exhibit a lower time discount factor are less likely to have adopted eets yet some of the results significance levels and effect sizes appeared sensitive to the addition of covariates which may be an indication of bad controls finally omitting one or several of the parameters capturing preferences over time risk and losses when estimating the eet adoption equations did not appear to cause omitted variable bias

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

the role of the budget deficit during the rise in the dollar exchange rate from 1979 1985 the u s dollar appreciated in value over 40 from early 1979 until it peaked in february 1985 also during this period the u s federal government budget deficit grew from 16b to 200b according to hakkio and higgins 15 it is high u s interest rates and foreign capital inflows into the u s that provide the linkage between these two events there is a considerable debate in the literature as to the precise influence of budget deficits upon these various linkages evans 10 for example suggests that large deficits did not cause the rise in the dollar also there are numerous studies refuting the association between deficits and interest rates see evans 11 and hoelscher 16 for example on the other hand plosser 25 reports a positive association between government spending and interest rates and hoelscher 17 reports a positive association between deficits and long term rates this paper uses an open economy vector autoregression var model to investigate these linkages finding that after controlling for the influence of money inflation the dollar and the trade deficit there is indeed causality running from deficits to long term interest rates the model also identifies a relationship between long rates and the dollar value thus verifying the linkage albeit indirect of budget deficits and the dollar value a second concern is that large budget deficits may have led to an accommodative monetary policy causing excessive money growth rates at times for example from 1982 07 1983 09 ml growth averaged 13 and when the dollar value peaked in 1985 ml was growing at about 12 2 a number of authors have examined this issue yet collectively they have not arrived at a uniform conclusion ahking and miller 1 provide a summary of these studies the majority of these studies suffer from at least one of two faults that i attempt to correct in this paper in particular they either suffer from exogeneity problems stemming from single equation models or they suffer from omitted variable bias due to the exclusion of international variables variance decompositions generated from an open economy var indicate that deficits explain more of the variance of the forecast error of money growth than any other variable the results also verify that deficits affect inflation only through their influence on the money supply

forecasting federal budget deficits how reliable are us congressional budget office projections us congressional budget office cbo forecasts of nominal government expenditure revenue and deficits as well as nominal gross national product are examined for their reliablity critics contend

budget deficits and interest rates a fresh perspective we extend the literature on budget deficits and interest rates in three ways we examine both advanced and emerging economies and for the first time a large emerging market panel explore interactions to explain some of the heterogeneity in the literature and apply system gmm there is overall a highly significant positive effect of budget deficits on interest rates but the effect depends on interaction terms and is only significant under one of several conditions deficits are high mostly domestically financed or interact with high domestic debt financial openness is low interest rates are liberalized or financial depth is low

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

ftt power a global model of the power sector with induced technological change and natural resource depletion abstract this work introduces a model of future technology transformations for the power sector ftt power a representation of global power systems based on market competition induced technological change itc and natural resource use and depletion it is the first component of a family of sectoral bottom up models of technology designed for integration into the global macroeconometric model e3mg itc occurs as a result of technological learning produced by cumulative investment and leads to highly nonlinear irreversible and path dependent technological transitions the model uses a dynamic coupled set of logistic differential equations as opposed to traditional bottom up energy models based on systems optimisation such differential equations offer an appropriate treatment of the times and structure of change involved in sectoral technology transformations as well as a much reduced computational load resource use and depletion are represented by local cost supply curves which give rise to different regional energy landscapes the model is explored for a single global region using two simple scenarios a baseline and a mitigation case where the price of carbon is gradually increased while a constant price of carbon leads to a stagnant system mitigation produces successive technology transitions leading towards the gradual decarbonisation of the global power sector

how basic are behavioral biases evidence from capuchin monkey trading behavior behavioral economics has demonstrated systematic decision making biases in both lab and field data do these biases extend across contexts cultures or even species we investigate this question by introducing fiat currency and trade to a colony of capuchin monkeys and recovering their preferences over a range of goods and gambles we show that capuchins react rationally to both price and wealth shocks but display several hallmark biases when faced with gambles including reference dependence and loss aversion given our capuchins inexperience with money and trade these results suggest that loss aversion extends beyond humans and may be innate rather than learned

economic and var shocks what can go wrong this paper discusses the problem of invertibility between the economic shocks in a dynamic equilibrium model and the corresponding var innovations we present an algebraic check of invertibility based on the model fundamentals and we find the identification scheme that recovers the economic shocks from the var innovations when the model is invertible we illustrate our results with a model of the great depression proposed by christiano motto and rostagno 2003 jel e00 e32 c32

does the fisher effect apply in australia the fisher hypothesis claims that changes in the expected inflation rate will be fully reflected in nominal interest rates and hence that real interest rates will remain constant over time evidence with australian data from 1965 to 1990 suggests that the fisher effect does not hold in the long run analysis is performed using recently developed econometric techniques which take account of possible nonstationarity in the date attention is also given to the effects of financial market deregulation on interest rates

real interest rates expected inflation and the inflation uncertainty premium abstract two index linked bond prices can be used to measure current ex ante real interest rates and expected inflation these values can then be substituted into a nominal bond price equation to solve for the inflation uncertainty premium

the measurement and significance of the cyclically adjusted federal budget and debt this paper summarizes new measures of the cyclically adjusted federal budget and federal debt and explores the relationship of these measures of fiscal policy to macroeconomic variables during the last quarter century the first part of the paper discusses the construction of the new measures the second part presents regression evidence suggesting that the cyclically adjusted debt is related to nominal gnp interest rates and the private stock of fixed capital

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

the budget deficit and the arbitrage pricing theory abstract non linear sur techniques are used to demonstrate that the budget deficit is a priced factor in the arbitrage pricing theory the results also indicate that unexpected increases in the deficit lower stock prices

the long run relationship between interest rates and inflation some cross country evidence abstract this paper analyzes the effect of anticipated inflation on nominal interest rates paying special attention to the stability of this relationship over various regimes these regimes are analyzed to find out whether the inflation forecastability proposition recently advanced by barsky explains the observed poor performance of the fisher equation with historical data the analyses make use of the so called threshold and digression models and data from 11 western countries for 1875 1984 the main result of this paper is that the forecastability proposition does not explain the weakness of the anticipated inflation effect on interest rates rather various institutional factors seem to be of more importance

in search of homo economicus behavioral experiments in 15 small scale societies we can summarize our results as follows first the canonical model is not supported in any society studied second there is considerably more behavioral variability across groups than had been found in previous cross cultural research and the canonical model fails in a wider variety of ways than in previous experiments third group level differences in economic organization and the degree of market integration explain a substantial portion of the behavioral variation across societies the higher the degree of market integration and the higher the payoffs to cooperation the greater the level of cooperation in experimental games fourth individual level economic and demographic variables do not explain behavior either within or across groups fifth behavior in the experiments is generally consistent with economic patterns of everyday life in these societies

a cointegrating approach to budget deficits and long term interest rates a cointegrating approach is undertaken in this study to determine if there is a long run equilibrium relationship between budget deficits and long term interest rates for the united states and nine european countries the cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables the cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries which would seem to appeal to the view of budget deficits having a positive impact on long term interest rates the hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one

fiscal deficits financial fragility and the effectiveness of government policies recent developments in the euro area highlighted the interactions between fiscal policy sovereign debt and financial fragility we introduce asset choice and sovereign debt holdings in banks portfolios in an otherwise standard macroeconomic model with financial frictions to emphasize a new crowding out mechanism through reduced private access to credit when leverage constrained banks accumulate sovereign debt when banks are substantially invested in sovereign debt the effectiveness of fiscal stimuli is impaired because deficit financed fiscal expansions through this channel crowd out private demand this channel also significantly reduces the gains from fiscal policy when interest rates are at the zero lower bound

interest rates inflation expectations and the inverted fisher hypothesis abstract the purpose of this paper is to reexamine for the u s the statistical validity of the inverted fisher hypothesis as proposed by carmichael and stebbing 1983 this is done using a new data set on expected inflation reported by lahiri et al 1988 and by estimating augmented versions of the hypothesis by incorporating the role of uncertainty about expected inflation as measured by its variance and higher order moments our results support the hypothesis for the entire sample period 1968 iv 1985 iv as well as for the two sub periods this result sharply differs from that of barth and bradley 1988 who reported that the hypothesis did not hold for the second sub period further unlike them we do not find any evidence of a structural break between the two periods

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

modelling the effectiveness of climate policies how important is loss aversion by consumers abstracts reliable decarbonisation policies can only be developed with a thorough understanding of how consumers choose between energy technologies current energy models assume optimal consumer decisions which may result in expectations of the effectiveness of climate policies that are far too optimistic prospect theory on the other hand aims to model real life choices based on empirical observations that losses have a relatively larger influence on decisions than gains relative to a reference point here we show for the first time how loss aversion can be included into a global energy model with high spatial resolution using heating technology uptake as a case study we simulate the future heating technology diffusion for 59 world regions covering the globe with and without the consideration of loss aversion we find that ignoring the implications of loss aversion overestimates the market uptake of renewables in individual countries as well as on the global level as a consequence loss aversion results in higher projected co2 emissions by households and the need for much stronger policy instruments for achieving decarbonisation targets in the case of residential heating a carbon tax of 200 tco2 is projected to reduce overall emission levels to a similar extent than a carbon tax of 100 tco2 without the consideration of loss aversion even for similar degrees of decarbonisation accounting for loss aversion implies substantial changes in the underlying technology composition technology choices become subject to a conservative shift towards low carbon technologies which are relatively less efficient but already more established in local markets

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

monetary policy shocks and financial conditions a monte carlo experiment abstract the effects of monetary policy shocks on financial conditions are often estimated by appealing to recursive vector autoregressions vars we assess the ability of this class of vars to recover the true effects of a monetary policy shock via a monte carlo experiment in which the data generating process is a dynamic stochastic general equilibrium dsge model featuring macro finance interactions and estimated with u s quarterly data our dsge model predicts a negative and significant reaction of financial conditions to an unexpected monetary policy tightening we point out that such reaction is just overlooked by recursive vars moreover we show that cholesky vars may substantially underestimate the welfare costs due to macroeconomic fluctuations

renewable heating perspectives and the impact of policy instruments in the light of the eu directive for renewable energy 2009 28 ec this paper deals with the question how various policy instruments could impact the development of renewable heating technologies the paper applies the simulation model invert ee lab for the building related heat demand in selected european countries austria lithuania and united kingdom the resulting scenarios up to 2030 are compared to res heat targets from literature stakeholder consultation processes and the targets in the national renewable energy action plans submitted by eu member states in 2010 the results demonstrate that use obligations for renewable heating can be effective in achieving res heat market growth however in order to attain a balanced technology mix and more ambitious targets policy packages are required combining use obligations with economic incentives and accompanying measures technology specific conclusions are derived moreover conclusions indicate that the action plans are not always consistent with policy measures in place or under discussion

is a military really a luxury good an international panel study of ldcs this paper introduces country specific fixed effects into a theoretical and empirical model of military expenditure contrary to the existing literature the model indicates that the share of military expenditure decreases with a country s income

the fisher hypothesis a multi country analysis this paper tests whether the fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates the empirical evidence supports the hypothesis that there is a one to one relationship between the interest rate and inflation for more than half of the countries under study

balance of trade announcements and asset prices influence on equity prices exchange rates and interest rates abstract this paper examines the informational impact of traded balance announcements on asset prices including equities currrencies long and short term debt instruments and financial futures this study finds that in the 1980s prior to the 1985 plaza agreement for international economic cooperation information in trade balance announcements seem to have influenced only interest rates however in the 1985 1987 period such announcements also influenced stock prices and currency values these influences intensity further in the 1987 1988 period thus asset prices are sensitive to news in trade balance announcements and this sensitivity seems to have increased significantly in recent years with important implications for asset pricing models and economic policy formulation jel f30

why real interest rates were so low in the 1970 s the economic turmoil of the 1970 s resulted in record postwar increases in inflation unemployment and nominal interest rates yet it was declines that were hardest to explain the average real value of a share of common stock plummeted productivity growth evaporated real interest rates measured as the spread between nominal interest rates and the inflation rate turned negative see table 1 over the past decade an explosion has occurred in the amount of attention paid to the relationship between nominal and thus real interest rates and expected inflation rates a good deal of this effort has been directed toward empirical analysis of the fisher neutrality hypothesis that nominal rates respond one for one with expected inflation rates most empirical tests of the fisher hypothesis have been bivariate interest rates were regressed on a constant and on actual or expected inflation measures estimates of the impact of inflation on interest rates in these and even in extended models are often significantly below one are often statistically imprecise and tend to be unstable over time the middle column of table i reflects this the coefficient of inflation on nominal interest rates there drops from 0 78 to 0 59 in the latter 1970 s another branch of work on nominal interest rates has concentrated on the institutional impediments to the fisher hypothesis robert mundell and james tobin demonstrate that nominal rates change by a smaller amount than the expected inflation rate does when a real balance effect exists and money pays no interest michael darby and martin feldstein on the other hand argue that nominal rates should exhibit a greater thanunity response to expected inflation due to the nature of u s income tax laws 2 here i estimate the relation between interest rates expected inflation and real forces such estimates are required for evaluating the effects of inflation on saving investment the distribution of income and the redistribution of wealth to generate estimates of the net impact of these various factors on interest rates and to avoid the identification and simultaneity problems masked but not often remedied by instrumental variables techniques i employ only exogenous regressors to buttress the argument i examine the individual links in the chain which are summarized in the reduced form the novel aspect of the model presented in section i is its addition of aggregate supply shocks to the determination of interest rates i trace the reduction in the supply of complementary factor inputs in the 1970 s to a decline in the demand for capital and therefore in real interest rates the inclusion of this supply force along with expected inflation allows one to distinguish between two offsetting effects on interest rates the depressing effect on real rates through lower investment demand and the elevating effect on nominal rates of higher expected inflation the results in section ii not only strongly support the economic and statistical importance of supply shocks on real interest rates but also resolve some longstanding interest rate puzzles allowing for the impact of factor supply produces a significant estimated response to expected inflation for a sample that ends prior to late 1960 s the magnitude assistant professor school of business administration university of california berkeley i would like to thank george akerlof robert j gordon robert a meyer joe peek janet yellen the members of the economic analysis and policy seminar at berkeley participants at the nber conference on inflation and financial markets and anonymous referees for helpful comments data resources supplied data and computational services financial support was provided by the berkeley program in finance and nsf grant ses8109093 linda pacheco supplied able research assistance errors of omission or commission are my responsibility see william gibson david pyle john carlson and thomas cargill and robert meyer 2maurice levi and john makin derive the reducedform effect of expected inflation on nominal interest rates as a function of the structural parameters

monetary policy bond returns and debt dynamics abstract using the government s intertemporal budget constraint we quantify the contribution of returns paid on the u s government s debt portfolio to the evolution of the debt to gdp ratio we show that announcements of unconventional monetary policy measures by the federal reserve between 2008 iv and 2012 as a part of macroeconomic stabilization were associated with a sizable increase in returns and debt to gdp ratios and contributed to fiscal imbalances we use the federal reserve s portfolio composition as a proxy for unconventional monetary policy measures and show that it is significantly related to future bond returns and fiscal balances

a new approach in analyzing the effect of deficit announcements of interest rates using alternative methods the authors find less support than previous authors for significant interest rate responses to deficit announcements the main results are that interest rates respond only 40 percent of the time to deficit announcements and when they do respond the impact is only temporary lasting between one to six days and involving a 0 25 basis point response per percentage change in the deficit copyright 1994 by ohio state university press

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

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

effects of us interest rates and news on the daily interest rates of a highly indebted emerging economy evidence from turkey it has been widely demonstrated that asset prices react sensitively to macroeconomic news releases both in the industrialized countries and emerging markets however there are contradicting results on the effects of changes in interest rates of industrialized countries on asset prices of emerging markets in heavily indebted economies in addition to these factors political news and announcements from international institutions that may increase or decrease concerns about debt sustainability can affect asset prices as well this potential notwithstanding there has been relatively limited empirical work on the effects of such variables the objective of this study is to quantify the impact of all of these factors on interest rates of a highly indebted emerging economy using daily post crisis data of the turkish economy we show that both good and bad political news international monetary fund announcements and european union related news significantly affected secondary market government securities yi

monetary deregulation and inverting the inverted fisher effect abstract we find evidence that deregulation allowing interest payments on checkable deposits decreased increased the sensitivity of the real nominal rate of interest to expected inflation our results provide further confirmation of the inverted fisher effect

co integration error correction and the fisher effect 1989 co integration error correction and the fisher effect applied economics vol 21 no 12 pp 1611 1620

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

the relationship between interest rates and inflation during the prewar period abstract this study examines the relationship between interest rates and inflation during the prewar period the results of all empirical analyses are clearly at variance with the fisher hypothesis while supporting the inverted fisher hypothesis proposed by carmichael and stebbing 1983 this result gives rise to some serious doubts on the overall performance of the former hypothesis

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

evidence of the fisher effect from u k indexed bonds newly available data from the u k market for indexed securities are used to test the fisher hypothesis for monthly observations of interest rates at 14 maturities the hypothesis that the after tax nominal interest rate is a constant plus anticipated inflation proves to be a reasonable approximation of reality for longer maturities the coefficients on the expected rate of inflation are approximately equal to one the mundell tobin effect is in evidence for shorter maturities the inverted fisher effect is in evidence for shorter maturities the inverted fisher effect is decisively rejected the evidence suggests that past difficulties encountered in trying to prove the fisher effect have been due to the lack of a direct measure of inflation expectations and real interest rates copyright 1992 by mit press

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

deficit announcements and interest rates despite the fact that the most theoretical analyses with the notable exception of the ricardian equivalence approach indicate that increased deficits cause interest rates to rise the empirical evidence is at best inconclusive 1 in this note the relationship between interest rates and deficits is examined with the announcement effect methodology which has not previously been used in this context we find evidence of a positive relationship between unanticipated announcements of the projected federal government deficit and interest rates in an efficient market information about any determinant of interest rates should be quickly incorporated into observed rates thus when information about the size of the deficits is released a relatively quick impact on interest rates can be anticipated more specifically if an increase in the deficit is in fact associated with higher interest rates then an unanticipated announcement of a larger deficit should lead to a response in financial markets which increases interest rates this paper provides evidence on the announcement effects of information on the deficit the advantage of the announcement effect approach is that it precludes the necessity of specifying a structural model for interest rates 2 projections of current and future federal government deficits are made on a regular basis by both the office of managementand budget omb and the congressional budget office cbo and receive wide attention in the financial press these projections provide data that are related to the change in interest rate on government securities from the day before the announcement to the end of the announcement day the macroeconomic hypothesis underlying this investigation is simply that an increase in the current or future deficit leads to an increase in yields on government securities in anticipation of higher levels of debt financing in a rational expectations framework an announcement of higher future deficits will lead to a current increase in interest rates in anticipation of future financing thus the examination of announcement effects enables us to substantiate a relationship between interest rates and deficits without encountering the econometric problems of reduced form modeling section i begins with a description of the data this is followed by a discussion of the methodology in section ii section iii presents the empirical results this is followed by our conclusions in section iv