cyclical analysis of key us aggregates during a period of macroeconomic stability 1953 1965 the cyclical response patterns of major financial and macroeconomic aggregates to money shocks in the us economy is estimated the data set is limited to the 1953 1965 period the nature of this temporal window is rare in us economic history growth was stable and noninflationary and there was a marked absence of major downturns inflationary expectations and supply shocks these facts permit a more reliable portrayal of the dynamics associated with conventional monetarism than would otherwise be the case instead of a formal structural model the methodology employs a four variable vector autoregression variables are chosen according to the traditional is lm model and include money the index of industrial production the cpi and various interest rates while the method is a theoretical the variables accord with accepted orthodoxy and the results allow theoretically plausible interpretation significant patterns of persistence are found in major macrofinance aggregates over the period money shocks p

malawi s agricultural development a success story abstract at a time when attention was focused on africa s poor agricultural performance malawi demonstrated a capacity not only to feed itself but to produce a surplus for export during the periods covered in this paper its agricultural growth exceeded that of most african countries and compared favorably with success stories on the continent this research focuses on malawi s recent performance with particular attention on trends in the provision of essential agro support services credit extension and farmer training and input supply and marketing trends in these services are examined first at the national level and then at the district level while overall trends indicate substantial progress district level data reveal extensive unevenness moreover at the farm level census data on farmer training and technology utilization show fewer benefits to female operators and smaller farmers important elements of developmentally oriented infrastructure and services have been put in place and are functioning better than in most african countries this is important in terms of longer term agricultural development prospects there is ample evidence however that malawi s progress has not spread across different segments of the farm population or agriculture development districts both the unevenness and overall progress have been heavily influenced by donor support

food insecurity poverty and the malawian starter pack fresh start or false start abstract chronic food insecurity and chronic poverty are closely related in malawi since independence in 1964 national food security has been a key policy objective however until the 1990s less emphasis was placed on the household dimensions of food security and its links with chronic poverty in the last decade a number of initiatives have been used in malawi to tackle the issue of household food insecurity one of the most controversial has been the starter pack programme launched in 1998 initially consisting of a free handout of packs of improved maize seed legumes and fertiliser to every small holder farm household in malawi the scheme under donor pressure was subsequently scaled down to become a form of targeted social safety net programme this paper analyses the strengths and weakness of both the original programme and its scaled down version and assesses the reason for the considerable opposition to the programme from malawi s donor community although starter pack is no longer operative in malawi the malawian experience is used to derive lessons for other countries where household food insecurity is an important dimension of chronic poverty

inflation variability and the turkish economy the present paper investigates the effects of inflation variability on the level of economic activity in turkey during 1981 3 1989 12 by employing a seven variable vector autoregressive var model including the money supply interest rate real exchange rate price level a measure of inflation variability output and the trade balance the empirical findings indicate that while the output the money supply and the real exchange rate respond negatively to a shock to inflation variability the trade balance and the interest rate respond positively the responses are usually significant at the initial stages and they level off after six months

bounds for the correlations of expected inflation with real and nominal interest rates abstract this paper derives bounds for the correlations of the unobservable expected rate of inflation with nominal and expected real interest rates for quarterly u s data from 1955 to 1990 the bounds suggest that expected changes in cpi inflation have a weak positive correlation with changes in the nominal t bill yield and a strong negative correlation with expected changes in the real t bill yield

idiosyncratic variation of treasury bill yields i document a dramatic increase in the importance of two types of variation in treasury bill yields beginning in the early 1980s the first is idiosyncratic variation in individual short maturity less than three months bill yields the second is a common component in treasury bill yields that is not shared by yields on other instruments such as short maturity privately issued instruments or longer maturity treasury notes and bonds some evidence suggests the first type reflects increased market segmentation these results have important implications for the calibration and testing of no arbitrage term structure models and interpreting tests of the expectations hypothesis united states treasury bill yields play a central role in economists efforts to understand the behavior of financial markets the focus on treasury bills is driven by the belief that bill yields can be viewed as benchmarks from which yields on other debt instruments are derived for example in no arbitrage models of the default free term structure the stochastic properties of the hypothetical instantaneous interest rate determine bond prices researchers often construct and evaluate these models using short maturity bill yields as proxies for instantaneous interest rates similarly bill yields are frequently used to test the expectations hypothesis of the term structure 2 economists standard pricing models for default risky securities also view treasury yields as building blocks in such models yields on default risky securities depend at least in part on the yields of default free securities and the underlying stochastic default process therefore yields on treasury bills have been used in studies of the effects of monetary policy on the business cycle not because bills are intrinsically critical to the economy but because

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

optimal financial policy and firm valuation since the classic work of miller and modigliani 1961 laid down the principles for the valuation of firms under conditions of certainty some two decades ago academic interest in the problem of valuing the individual firm has waned yet in addition to the obvious importance of this problem for security analysts investors and acquirers of corporations the issue of firm valuation is fundamental to much of the theory of corporate finance what determines the risk of the firm how the rate of return required by investors may be inferred from capital market data the influence of financing policy on firm value and other issues of central concern to the theory of financial management this almost total neglect of firm valuation is attributable perhaps to the overwhelming influence of the research programme initiated by the development of the capital asset pricing model only three years after the publication of the above mentioned paper by miller and modigliani in its primary form the capital asset pricing model is a statement about the equilibrium rates of return on securities rather than about the equilibrium values of securities it is straightforward to transform the model into a statement about the dependence of current equilibrium values upon an exogenously specified distribution of end of period values however in this form the model is inherently unsatisfactory since it fails to take account of the fact that in reality the distribution of end of period firm values is not exogenously given but is determined as part of a subsequent capital market equilibrium attempts to iterate the single period capital asset pricing model over several periods in order to avoid the need to take the distribution future security values as exogenous have been unsuccessful for the most part since not being able to derive they have been forced to assume both the requisite normality of the distribution of subsequent security prices and the legitimacy of ignoring endogenously determined shifts in the individual investor s investment

the equilibrium fed funds rate and the indicator properties of term structure spreads i introduction interest rate spreads figure prominently in the economics literature as monetary policy indicators for instance while some writers have focused on the predictive power of the spread between the six month commercial paper rate and the six month treasury bill rate others have emphasized spreads between short and long term interest rates 1 this paper follows the latter tradition my analysis is motivated by the work of bernanke and blinder 1992 who compare the difference between the federal funds rate and the ten year government bond rate with other interest rate spreads and find it to be a particularly useful predictor of future economic activity the rationale for using term structure spreads as monetary policy indicators is relatively straightforward 2 when assessing the stance of monetary policy it is not just the level of the federal funds rate that matters but how it relates to some implicit notion of equilibrium interest rates this insight is not new and can be found in the seminal work of wicksell 1898 xxv who wrote that it is not a high or low rate of interest in the absolute sense which must be regarded as influencing demand the causative factor is the current rate on loans as compared with what i shall be calling the natural rate of interest the direct empirical implementation of the wicksellian insight is however obviously hampered by the fact that the natural rate of interest is not an observable variable as suggested by laurent 1988 and bernanke and blinder 1992 the slope of the term structure is often used as a proxy for the spread between a short term interest rate and its unobservable equilibrium level thus the yield curve steepens as short term interest rates are perceived to be below their equilibrium levels i follow a more direct approach to measuring the stance of monetary policy instead of using the slope of the term structure as a proxy for the gap between observed and equilibrium federal funds rates i introduce a model based method to constructing a measure of the level of the equilibrium funds rate as described below this equilibrium rate is calculated for the real sectors of the economy conditional on the observed rate of inflation thus the equilibrium rate is constructed to be independent of the inflation objectives of monetary policy and the implied difference between actual and equilibrium rates the funds rate spread constitutes my monetary policy indicator this paper provides an overview of the proposed methodology and compares the funds rate spread with traditional indicators of the monetary policy stance ii a model based measure of the spread i rely on the estimated structure of a macroeconometric model to measure the equilibrium federal funds rate the theoretical framework is the mit penn ssrc mps model which is housed at the federal reserve board this is a large scale quarterly model of the u s economy it consists of more than 100 behavioral equations about 200 identities and over 100 exogenous variables in its theoretical foundations the long run properties of the model are akin to a neoclassical growth model whereas the dynamic structure is essentially keynesian 3 the approach used in this paper is a departure from the traditional literature in at least two dimensions first i use an explicit theoretic framework to compute the equilibrium measure as opposed to the empirically based approach of using long term interest rates second by focusing on the equilibrium level of the federal funds rate i have a more direct way to gauge the stance of monetary policy the equilibria analyzed here correspond to intermediate run dynamics a time frame that seems most relevant for the conduct of monetary policy conceptually the equilibrium notion i explore is a simple one for a given position of the mps model s is block the equilibrium federal funds rate is defined as the one consistent with unemployment at its natural rate after all lags in the model have fully worked through

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

revealed preference of the federal reserve using inverse control theory to interpret the policy equation of a vector autoregression how close is observed federal reserve policy to policy that would be optimal in the control theory sense the question is addressed by using an inverse control methodology federal reserve policy is characterized by a feedback equation for either changes in the interest rate or money stock optimal policy is characterized by solution of the ricatti equation parameters are estimated that characterize the relative importance to the federal reserve of stabilizing output inflation interest rates and money growth the period of study is 1947 through 1992 evidence is uncovered that policy is optimal within distinct regimes

measuring the agency cost of debt we adapt a contingent claims model of the firm to reflect the incentive effects of the capital structure and thereby to measure the agency costs of debt an underlying model of the firm and the stochastic features of its product market are analyzed and an optimal operating policy is chosen we identify the change in operating policy created by leverage and value this change the model determines the value of the firm and its associated liabilities incorporating the agency consequences of debt the optimal capital structure for a firm is now widely regarded to be determined by a broad range of factors including a mix of tax effects the various agency problems associated with different securities and the various costs of issuing securities including the costs created by adverse selection while the existence of a theoretical optimum has been demonstrated in a variety of papers a less explored area has been the construction of detailed models that enable us to measure each of the relevant factors for a particular company and thereby to determine the actual optimal mix for that firm this gap in our understanding is particularly glaring in the case of agency costs in order to allow a careful modelling of strategic relations the parameters of most agency models are either so simplified that it is impossible to associate them with measurable parameters of a real world case or else the models simply abstract from certain critical factors such as a robust measure of price risk that must be incorporated into any real application for example although we now understand that sinking funds dividend restrictions and other bond covenants help to resolve the conflict of interest between bondholders and equity we do not yet have much in the way of models with which to determine the optimal parameters of these very covenants contingent claims models can provide a consistent framework for multiperiod valuation that properly accounts for risk but they usually abstract from the agency factors entering capital structure decisions when using a contingent claims model to value a firm s securities it is common to take the value of the firm itself as governed by an exogenously defined stochastic process the value of the firm s securities are then derived from this underlying value and as merton 1974 points out in his paper on the pricing of risky debt the modigliani miller theorem obtains so that the value of the firm is independent of the value and the type of debt in order to apply the contingent claims techniques to a setting in which agency problems are central some adaptation is necessary in this paper we

evaluating the impact of world bank structural adjustment lending 1980 87 this article attempts to evaluate the world bank s programme aid in the form of structural adjustment loans with emphasis on the distinction between the influence of programme finance and the influence of the policy conditions attached to this finance the rate of return on world bank programme aid measured in terms of the impact of gdp growth rates is found to have been disappointing the study also identifies a negative correlation between structural adjustment loans and investment it was also found that the bank programme aid s strongest beneficial effect has been on the balance of payments current account both via the stimulation of exports and via the curbing of imports

the effectiveness of structural adjustment lending initial evidence from malawi abstract the world bank s new programs of structural adjustment lending are likely to prove most effective with those governments which demonstrate shared ideals in their approach to economic adjustment and policy reform malawi has long been regarded as a country placing great reliance on the market in resource allocation showing restraint in public sector expansion and retaining a strong export orientation the balance of payments difficulties and the deterioration in economic circumstances which began in 1980 did not arise solely from external shocks but the structural adjustment lending programs introduced in 1981 as a means of easing the painful reform process found root in a fertile and responsive policy environment this paper chronicles the first two sals to malawi reviewing in particular the specific policy reforms advocated and required by the bank the extent of their implementation and the provisional effects on the malawi economy

modelling the impact of world bank policy based lending the case of malawi s agricultural sector this article uses a multi market agricultural pricing model to analyse the impact of the world bank s three structural adjustment loans sals to malawi on the smallholder agricultural sector three price policy scenarios are simulated on the model representing zero partial and full compliance with the bank s sal price policy conditionality these scenarios are analysed in terms of their impact on the government budget smallholder real incomes maize production exportable cash crop production and the balance of payments critiques of the bank s programme and the government and bank bargaining strategies are assessed in the light of the modelling results

an empirical investigation into the international real interest rate linkages linear dynamic stochastic processes are derived for the ex ante real interest rates from those followed by the ex post real rates under the identifying assumption of rational expectations the technique is used to study instantaneous and lagged effects of u s ex ante real rates on a number of oecd ex ante real rates the author finds significant contemporaneous correlations between ex ante real rates in the long run however real rates seem to be insulated

money supply announcements and interest rates does monetary policy matter abstract most current explanations of the effect of money supply announcements on the rate of interest center on central bank policy this paper analyzes a flexible price macroeconomic model where present and future monetary policy have no influence on either interest rates or real output but monetary data signal information about real economic activity which influences both short and long term real rates of interest the magnitude of the interest rate response is shown to depend on the difference in the income elasticities of currency and deposit demand and the relative size of monetary and real disturbances to the economy

money output and the expected real interest rate this paper tests the exclusion of lagged growth rates of money and output from regression equations with serially correlated disturbances for the expected real interest rate the authors empirical approach is an extension of the empirical strategies of eugene f fama 1975 and frederic s mishkin 1981 which invoke the orthogonality of the inflation forecast error to predetermined regressors under the maintained hypothesis of rational expectations they discuss the implications of their tests for simple real business cycle models copyright 1991 by mit press

the impact of agricultural liberalisation on food security in malawi abstract the donor supported structural adjustment programmes have not impacted favourably on livelihoods food security and the general welfare of the poor in malawi this resulted from the prescription of wrong policy packages and limited attention to poverty alleviation policies policies have tended to concentrate on promoting market and price mechanisms less on addressing production constraints and non economic barriers to broad based economic growth there are losers and winners as a result of policy reforms in agricultural produce marketing the losers are mainly the smallholder farmers in the category of net food buyers low income or wage earners in urban and semi urban areas and smallholder farmers in remote areas the winners are smallholder farmers in the category of net food sellers private traders institutional traders and the state marketing agency the paper analyses the impact of pricing policy and market deregulation on the state marketing organisation and on the private marketing system highlighting the lessons to be learned and making recommendations on how to improve the food security situation at the household level

measures to assist the least developed countries the case of malawi abstract many of the national measures introduced by the malawi government following the un conference on least developed countries 1981 accord with the substantial new program of action snpa agreed to at the conference these include improving the performance of the productive sectors especially agriculture and strengthening key institutions but demand management policies for financial stabilization as part of world bank imf loans with level funding for development expenditure and cuts in recurrent expenditure do not provide the basis for an snpa the international community has failed to fulfil its commitments in the snpa since aid to malawi has fallen lessons of this experience are drawn for other least developed countries

narrative and var approaches to monetary policy common identification problems abstract romer and romer romer c d romer d h 1989 does monetary policy matter a new test in the spirit of friedman and schwartz in blanchard o j fischer s eds nber macroeconomics annual 1989 mit press cambridge ma pp 121 170 romer c d romer d h 1994 monetary policy matters journal of monetary economics 34 75 88 adopted a narrative approach to address the identification problems in time series models of monetary policy based on federal reserve documents the romers created a dummy variable equal to one in periods when the federal reserve contracted in response to perceived inflationary pressures this paper shows 1 the dummy variable is predictable from past macroeconomic variables reflecting the endogenous response of policy to the economy 2 unpredictable changes in the dummy do not generate dynamic responses that look like the effects of monetary policy the identification problems that plague time series models also afflict the narrative approach

u turns and full circles two decades of agricultural reform in malawi 1981 2000 abstract this paper traces the evolution of malawi s agricultural policy over the past two decades during this period the world bank has played a key role in shaping policy reform through its adjustment loans three distinct reform phases can be identified 1981 87 when policy was dominated by the dogmatism of the world bank s pricist and state minimalist policies 1988 94 when a more flexible position was taken by both the bank and the malawi government both of whom acknowledged the structuralist critique of earlier policies and 1994 to the present when the reform process in agriculture became more politicized and a schism developed between the bank and the government this latter period is used to illustrate some of the unresolved policy issues pertaining to similar low income agrarian economies

reserves announcements and interest rates does monetary policy matter the author provides evidence on the perceived existence of strong liquidity effect the analysis is based on the response of the term structure of interest rates to the weekly federal reserve announcements of bank reserves during the post october 1979 period it is shown that unanticipated changes in the mix between borrowed and nonborrowed reserves cause expected real interest rates to change after the announcement because they provide information about a future change in the supply of money a precise model is developed and tested during subperiods of nonborrowed and borrowed reserves targeting by the fed

structural change in malawi since independence consequences of a development strategy based on large scale agriculture abstract this paper investigates the nature of the structural change which has occured in the malawian economy since independence and identifies key policies pursued by the government which it is argued have been decisive in shaping this development the salient feature of structural change is shown to be the rapid growth of large scale agriculture associated with an equally rapid transfer of labour into wage employment and a decline in the importance of peasant production the implications of these changes for living standards and future development and policy are considered

the privatization of agricultural trading in malawi abstract this paper examines the privatization of smallholder agricultural output marketing in malawi despite problems with implementing the privatization program including serious disruptions in the supply of maize the staple food the move toward greater private sector involvement in agricultural marketing has been successful nonetheless several medium term development issues e g food security and buyer and seller of last resort functions need to be addressed in the context of relations between the marketing parastatal admarc and the private sector before the policy change can be regarded as fully successful

strategic analysis of contingent claims traditional contingent claims analysis provides an elegant and complete model of the financing of the dynamic firm but has difficulty fitting the observations in the market recent work in corporate finance suggests this is because of its failure to model financial distress realistically we survey recent efforts to address this issue by deriving valuation formulae from the analysis of non cooperative equilibria in extensive form games we illustrate how a simple static bankruptcy model can be incorporated in a dynamic game we then show how to find the continuous time equivalent of this game this we use to find closed form bond formulae in special cases and to exploit efficient numerical techniques generally

money income and dynamic lag patterns in traditional vector autoregression var models a fixed lag length is imposed on all variables and across all observation periods this practice however is prone to potential model misspecifications more specifically underparameterization due to too short lag lengths results in estimation bias while overparameterization due to too long lag lengths results in a loss of degrees of freedom and thus estimation efficiency the significance of such problems can be exemplified by recent results of money income causality tests based on conventional var methodology the empirical relationship between money and income during the postwar period has long been found fragile by litterman and weiss 7 and sims 8 recently friedman and kuttner 3 argued that since the late 1970s monetary aggregates have ceased to predict real income in a four lag var system including an interest rate variable further by extending the sample period from 1985 to 1988 they 4 weakened stock and watson s 9 statistical support for money income causality the robustness of friedman and kuttner s findings however has been questioned for example thoma 10 documented subsample instability in causality statistics particularly in the 1980s becketti and morris 1 argued for longer lag lengths in the vars webb 11 further suggested that two lag lengths one for the dependent variable and another for all independent variables be considered in each equation the objective of this paper is to provide some explanations for these puzzles first the marginal significance levels or p values of money income granger causality tests are shown to vary remarkably over subsamples as well as different lag specifications second as an extension to the standard var estimation strategy a lag selection procedure is applied to determine the optimal lag structure that can vary across both variables and observation periods the empirical results suggest that previous findings on the collapse of the money income causal relationship is attributable to lag length misspecification especially for money the rest of the paper is organized as follows the next section discusses temporal instability in causality test statistics section iii outlines a new lag selection method and section iv presents

money and output under alternative exchange rate regimes in the usa abstract economic theory suggests that the effects of money on output will depend on the exchange rate regime this paper examines the relationship between money and output under fixed and flexible exchange rates in the usa johansen s maximum likelihood estimation method is utilized to test for cointegration in a system consisting of money the interest rate prices the trade balance and output during 1959 1971 and 1973 1990 with the exchange rate included in the analysis fo the second period the results indicate that the variables are cointegrated suggesting the existence of long run equilibrium relationships between the domestic and external variables vaiance decompositions reveal a much larger role for money in explaining forecast error vaiance of output during the flexible exchange rate period money and the interest rate explain a substantial proportion of the variances of the trade balance and the exchange rate this suggests that effects on the exchange rate and trade balance are an important component of the transmission mechanism of monetary policy jel f41

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

consumer confidence and economic fluctuations if consumers become pessimistic about the state of the economy can there be a slowdown in output even if their pessimism is not based on economic fundamentals recent macroeconomic models show the answer is yes if there are strategic complementarities and multiple equilibria we investigate the link between consumer confidence and economic fluctuations using vector autoregressions in all models after controlling for economic fundamentals the hypothesis that consumer sentiment does not cause gnp in the granger sense can be rejected variance decompositions suggest that consumer sentiment accounts for between 13 and 26 percent of the innovation variance of gnp

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

financial market variables do not predict real activity i introduction the past decade has seen an extensive empirical reassessment of the information content of financial market variables believed to be sensitive to monetary policy particularly provocative are papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates this paper reviews important methodological pitfalls in these studies we then show that none of the commonly employed indicators of monetary policy contain incremental information useful in forecasting real economic activity as measured by industrial production two conclusions are possible either monetary policy innovations have no significant real effects or we collectively have failed in our efforts to measure monetary policy the money income causality literature spawned by christopher sims in the 1970s has broadened in recent years to encompass a diverse set of measures of monetary policy more comprehensive and sophisticated empirical assessment strategies and a richer array of explanations for observed correlations between financial market variables and economic activity early contributors to this literature such as stock and watson 1989 friedman and kuttner 1992 and bernanke and blinder 1992 present evidence that particular interest rates and spreads not only dominate monetary aggregates as predictors of economic performance but are remarkably powerful predictors stock and watson 1989 and friedman and kuttner 1992 demonstrate that the spread between the interest rates on commercial paper and treasury bills is highly significant in explaining movements in real activity while bernanke and blinder 1992 made an equally convincing case for the federal funds rate these conclusions are qualified however in subsequent work both bernanke 1990 and stock and watson 1993 for example point out that the predictive power of the paper bill spread and interest rates more generally weakened during the second half of the 1980s and the early 1990s the results reported in these and related papers form the empirical core of the debate over the relative merits of various interest rates spreads and monetary aggregates as indicators of the stance of monetary policy subsequent empirical work has seen a shift from atheoretical to structural vector autoregressions strongin 1992 gordon and leeper 1994 and bernanke and mihov 1995 for example focus on more refined measures of monetary policy derived from explicit models of the reserve market and central bank operating procedures these papers address concerns that go beyond discriminating among variables on the basis of predictive power they grapple directly with the fundamentally difficult issue of identifying monetary policy shocks by positing and estimating structural models that take the form of identified vars the usefulness of these efforts as well as earlier efforts to measure monetary policy is in turn questioned by rudebusch 1996 who finds that the studies econometric results are fragile and at odds with other evidence on the nature of the fed s reaction function and monetary policy surprises the first part of our paper illustrates some of the methodological pitfalls common in the literature cited above and complements recent work by bernanke 1990 hess and porter 1993 thoma and gray 1995 rudebusch 1996 and emery 1996 we begin by demonstrating the advantages of rolling recursive regression techniques that directly and comprehensively address the question of sample sensitivity these techniques are used to illustrate the extreme sensitivity to sample period of the causality statistics and variance decompositions commonly used to assess the explanatory power of financial market variables indeed in the applications under review here such in sample measures of fit are sometimes heavily influenced by individual monthly observations

zero leverage and the value in waiting to have debt abstract this paper documents that the real option to have debt motivates some firms to remain debt free even when standard trade off theory predicts that these firms should have leverage the real option has a first order effect similar to the effect of bankruptcy costs in addressing the zero leverage puzzle the observation that many firms seemingly forgo sizable debt benefits by remaining debt free the debt free firms value includes the option whose value is derived from future debt benefits and hedging bankruptcy costs this paper proposes an optimal timing model for having debt and finds support for the model s predictions through calibrations and simulations

monetary shocks and the nominal interest rate this paper reconsiders the effects of monetary shocks on the nominal interest rate in a standard macroeconomic model it is determined that when the policy objective is controlling the money stock money supply shocks generate a situation of excess demand for money the positive relationship between nominal interest rates and monetary innovations in the united states following the 1979 change in regime is thus not puzzling but perfectly consistent with standard theory nominal interest rate decreases are possible only when fine tuning rules are adopted copyright 1992 by the london school of economics and political science

domestic currency appreciation and foreign capital inflows what comes first chile 1977 1982 abstract the purpose of this paper is to find granger causality relations between the real exchange rate the inflow of foreign capital interest rate arbitrage and the terms of trade in a representative indebted developing country chile this is done for a time period in which chile went from an unprecedented expansion 1977 1981 to a severe recession 1982 the paper confronts two competing hypotheses that purport to explain such behavior hypothesis one claims that causality went from the real exchange rate affected by nominal exchange rate policy to capital inflows in what could be termed a current account deficit induced demand for foreign funds hypothesis two posits a causality that ran the other way from capital inflows to the real exchange rate in which case the exogenous inflows of foreign money implied a current account deficit special attention is paid to the role played by two other related factors interest rate arbitrage and terms of trade variations by applying innovation accounting techniques based on estimated vector autoregressions support is found for the second of these hypotheses thus the real issue in chile and in many other currently indebted latin american countries should be the timing and extent of the capital account liberalization process carried out during the period

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

interest rates and the channels of monetary transmission some sectoral estimates abstract we estimate a small sectoral var model of the uk macroeconomy this model is then used to simulate the effects of an exogenous monetary policy shock upon asset prices bank balance sheet variables and final target variables activity and prices for the personal and corporate sectors significant sectoral differences are found among the channels of monetary transmission in addition the use of sectoral data facilitates the identification of distinct money and credit channels in the transmission of monetary policy these results contrast with the ambiguous findings on the roles of money and credit in the literature to date

cash flow shortage as an endogenous bankruptcy reason abstract this paper develops a simple model for a leveraged firm and endogenizes the firm s bankruptcy point by assuming that equity issuance is costly equity issuance costs reflect the difficulties in issuing new equity for firms that are close to financial distress the resulting model captures cash flow shortage as a reason to go bankrupt though the equity value is positive i analyze the optimal bankruptcy point as well as corporate bond prices and yield spreads for various levels of equity issuance costs in order to study the impact of different liquidity constraints finally i discuss the consequences on optimal capital structure

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

incorporation and exclusion the life cycle of malawi s refugee assistance program abstract the dynamics of institutional relationships in assistance provision to 1 2 million mozambican refugees in malawi are examined three phases are identified an innovative model of assistance delivery integrating refugees and hosts in a development orientated program was established in the early phases this avoided the parallel structures of orthodox relief operations within the context of its political economy the government of malawi successfully mediated competing interests incrementally the host government lost autonomy this is explained in terms of pressures to internationalize and diversify the program and the adoption of a conventional relief model focusing only on refugees and emergency assistance with extensive repatriation the program is winding down the lessons learned are discussed

financial structure and aggregate economic activity an overview this paper surveys literature that explores the possible links between the financial system and aggregate economic behavior the survey is in two parts the first reviews the traditional work and the second discusses new research copyright 1988 by ohio state university press

an empirical analysis of oil price shocks in the interwar period i introduction post world war ii experience demonstrates that disturbances to aggregate supply are important determinants of aggregate economic performance a casual glance at the post 1970 data strongly suggests a correlation between shocks to the price of oil and recession hamilton 1983 formally demonstrates that this correlation arises from what appears to be a causal link that runs from oil price increases to reduced economic activity the sequence of oil price increases followed by recession characterizes every post world war ii economic downturn in the u s with the exception of 1960 61 other research confirms the critical role of supply shocks in explaining post world war ii macroeconomic performance burbidge and harrison 1984 employ vector autoregressions vars to examine the impact of oil price shocks over the 1962 82 period for several countries they conclude that these shocks played a large role in deepening the recessions of the 1970s with the impact on the 1973 74 recession much greater than that of 1979 80 tatom 1988 estimates the impact of the 1979 80 increase in the relative price of oil and reports that this shock reduced the amount of output that could be produced with available labor and capital by 5 7 percent thoma 1992 re examines the work of litterman and weiss 1985 and finds that the ex ante real interest rate is not exogenous to supply shocks contrary to what is reported in litterman and weiss using annual data over the 1948 82 period loungani 1986 shows that any correlation between an index of the dispersion of unemployment across industries and the aggregate unemployment rate is due to the dispersion index s collinearity with oil price shocks once this collinearity is accounted for the dispersion index has no explanatory power to account for movements in the aggregate unemployment rate while the evidence for the causal link between supply shocks and output appears most dramatic for the post 1970 data hamilton 1983 argues that the entire post war period be treated as a continuous whole the enduring regularity of the oil price shock recession relation in this period leads to a natural question is there any evidence that oil price shocks either positive or negative played any role in the cyclical fluctuations and secular expansion of the 1920s and the great depression figure 1 presents a plot of the relative price of oil defined precisely in section ii for the 1921 1 1938 6 period we observe a number of sharp movements in the relative price of oil that suggest an assessment of the empirical impact of oil price shocks during the interwar period is warranted accordingly we investigate the effects of oil price shocks during the interwar period within the context of a small macroeconomic model 1 the empirical framework is a var model that consists of output the price level the monetary base the m2 money multiplier the commercial paper rate government spending a financial intermediation variable and a measure of oil price shocks these are variables frequently found in small macroeconomic models monthly data for the period 1924 2 1938 6 are used to specify and estimate the model we evaluate the impact of oil price shocks on prices and output through computation of variance decompositions the standard errors reported are generated through monte carlo simulations historical decompositions for the 1929 9 1938 6 period are also computed so we can specifically examine the effects of oil price shocks over the sample period that includes the great depression we chose the var modeling approach because there is little agreement on the appropriate structural model and var estimation places few restrictions on the way in which the system s variables interact in the specification and estimation of the model all variables are treated as jointly determined no a priori assumptions are made about the exogeneity of any of the system s variables at this stage of analysis

what is a liquidity crisis abstract this paper investigates the role of liquidity it is argued that the firm holds money as a guarantee of solvency to its contractual partners by holding liquid assets the firm is able to increase the efficiency of its contracts variations in the opportunity cost of holding money cause variations in the firm s demand for money and consequent variations in the frequency of contract failures this mechanism is suggested as an alternative explanation of the observed relationship between money income and interest rates

international transmission of aggregate shocks under fixed and flexible exchange rate regimes united kingdom france and germany 1959 to 1985 abstract this paper analyzes the transmission of aggregate shocks between the usa and three major european economies the uk france and germany under fixed and flexible exchange rate regimes using time series techniques short run linkages are investigated in the context of vector autoregression models while long run relations are analyzed by testing for cointegration empirical findings indicate that flexible exchange rates have not in general completely insulated domestic economies from foreign shocks and that the degree of insulation and interdependence across exchange rate regimes and over the long and short runs differs substantially across the european countries

interest rate innovations and the business cycle abstract recent evidence from vector autoregressions points towards the importance of interest rate innovations in explaining output variations we show that this evidence supports an interpretation of business cycles based on nominal contractual rigidities rather than cotinuous market clearing

debt valuation renegotiation and optimal dividend policy the valuation of debt and equity reorganization boundaries and firm s optimal dividend policies are studied in a framework where we model strategic interactions between debt holders and equity holders in a game theoretic setting which can accommodate varying bargaining powers to the two claimants two formulations of reorganization are presented debt equity swaps and strategic debt service resulting from negotiated debt service reductions we study the effects of bond covenants on payout policies and distinguish liquidity induced defaults from strategic defaults we derive optimal equity issuance and payout policies the debt capacity of the firm and the optimal capital structure are characterized

perspectives and problems of development in sub saharan africa this paper analyzes the initial conditions for development facing post colonial african nations outlines alternative development strategies followed by different groups of countries and assesses the consequences for growth and poverty alleviation on the basis of this diagnosis the paper outlines a number of policy priorities for the future including greater research extension and infrastructure support for smallholder agriculture an improvement in the overall structure of incentives in favor of agriculture a more realistic urban formal sector wage structure to reduce rural urban migration and foster a more internationally competitive manufacturing sector and greater emphasis on surplus generation through government budgets and parastatal enterprises

term structures of credit spreads with incomplete accounting information we study the implications of imperfect information for term structures of credit spreads on corporate bonds we suppose that bond investors cannot observe the issuer s assets directly and receive instead only periodic and imperfect accounting reports for a setting in which the assets of the firm are a geometric brownian motion until informed equityholders optimally liquidate we derive the conditional distribution of the assets given accounting data and survivorship contrary to the perfect information case there exists a default arrival intensity process that intensity is calculated in terms of the conditional distribution of assets credit yield spreads are characterized in terms of accounting information generalizations are provided

pricing policies in africa with special reference to agricultural development in malawi abstract microeconomic policy in the controlled market economy of malawi rests upon three fundamental balances these are the food export balance the rural urban income linkage and the domestic donor contribution to development capital there are therefore six major domestic polarities food and exports rural and urban domestic and donor within the microeconomic system any change in one will necessitate changes in the other five or the triplex becomes unbalanced this is the rigidity in the capacity of small economies to adjust

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

green gold burley tobacco smallholder agriculture and poverty alleviation in malawi abstract the abolition in 1990 of the estate monopoly on cultivation of burley tobacco is expected to play an important role in reducing poverty among smallholders in malawi a nationwide survey in 1993 shows that smallholder households cultivating burley also grow more hybrid maize use more fertilizer and are more food secure but resource poor households particularly those headed by women face land and labor constraints on burley adoption burley and hybrid maize increase the demand for hired labor but not enough to absorb the growth in the rural labor force broad based poverty alleviation requires technology and programs targeted at the majority of smallholders with holdings of 0 5 hectares or less

the dynamic behavior of business loans and the prime rate abstract the purpose of this research is to determine the relevant variables channels of influence and dynamics characterizing the business loan market to achieve this goal the statistical approach of vector autoregressive time series analysis popularized by sims 1980 1981 and litterman 1979 is applied to a group of variables suggested by the portfolio and liability allocation problems of a representative bank and a representative business firm the variance and historical decomposition analyses suggest that innovations in the level of business inventories and commercial bank financial assets are the most important casual variables in the business loan market

the relative importance of foreign and domestic disturbances for aggregate fluctuations in the open economy switzerland 1964 1981 abstract this paper studies whether the advent of floating exchange rates served to insulate switzerland from economic shocks of foreign origin it estimates a vector autoregression comprising four swiss and three world aggregate time series and interprets the results in terms of the properties of the vector moving average representation implied by the estimates the chief finding is that foreign shocks explain most of the systematic variation of the swiss variables in both regimes

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

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices