theoretical approaches to monetary disinflation abstract during the 1980s many countries adopted tight monetary policies to reduce high inflation rates which were the legacy of the 1970s as inflation threatens to rise at the beginning of this decade this paper provides a survey of the 1980s literature which sought to provide theoretical understandings of how monetary disinflation is achieved four models are presented monetarist neo keynesian new classical and post keynesian each model s explanation of the recession which accompanies the monetary disinflation is outlined as well as possible policy measures to reduce the extent of the recession and to hasten the return to full employment

instability of the u s money demand function this paper surveys the two major episodes of instability of the u s money demand function known respectively as the mystery of missing money and the great velocity decline it also assesses the recent literature on open economy money demand models and their usefulness in explaining the puzzling behavior of money demand manifested shortly after the transition to floating exchange rates copyright 1991 by blackwell publishers ltd

price independent welfare prescriptions and population size abstract this note investigates the extension of roberts price independent welfare prescriptions to alternatives in which population size and composition can vary we show that ethically unsatisfactory orderings result suppose that a single person is to be added to a population that is unaffected in utility terms either all such additions must be regarded as bad or some expansions in which the added person s life is not worth living must be ranked as social improvements journal of economic literature classification number d63

tips from tips the informational content of treasury inflation protected security prices treasury inflation protected securities tips are frequently thought of as risk free real bonds using no arbitrage term structure models we show that tips yields exceeded risk free real yields by as much as 100 basis points when tips were first issued and up to 300 basis points during the 2007 2008 financial crisis this spread predominantly reflects the poorer liquidity of tips relative to nominal treasury securities other factors including the indexation lag and the embedded deflation protection in tips play a much smaller role ignoring this spread also significantly distorts the informational content of tips break even inflation a widely used proxy for expected inflation

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

federal reserve operating procedures a survey and evaluation of the historical record since october 1979 comment william poole has produced another thoughtful and thought provoking paper two major conclusions emerge from his work first the instability of growth in m1b since october 1979 can be attributed largely to a reluctance by the federal reserve to permit wide enough swings in the federal funds rate second to correct this problem and to promote greater stability in financial markets and the economy the fed ought to replace lagged with contemporaneous reserve accounting and reform the discount window they should then begin to hit a nonborrowed base or reserves target that grows at a steady rate i will organize my comments around these two conclusions i will not comment directly on the other excellent paper in this session by ralph c bryant i will refer to some of bryant s empirical work though in my discussion of the poole paper poole attributes the continued extensive volatility of m1b growth since october 1979 to efforts by the federal reserve to smooth interest rates he concedes that the fed really has let go the federal funds rate to a very considerable extent but he believes that variability in m1b growth over tonger periods is due primarily to the important role accorded interest rates in federal reserve policy making italics mine he cites four reasons for believing that the post october 1979 targeting procedures qualitatively are not very different from the federal funds targeting procedure followed earlier of the four the most interesting and empirically verifiable is that in nearly one third of the weeks since october 1979 the federal funds rate has averaged within 100 basis points of either the bottom or the top of the widened target range during these weeks the constraint on the funds rate might have prevented the fed from hitting its nonborrowed reserves target poole in fact accepts this view uncritically

structural changes and the us money demand function previous literature on the stability of the us money demand function suggests mixed results in this article we study the stability of the money demand function from the standpoint of structural changes in the function we first investigate if a stable money demand function can be found for the us for the period from the first quarter of 1959 to the fourth quarter of 2000 the results show that a stable long run money demand function does not exist for the sample period under consideration we then estimate unknown structural break points in the variables of the money demand function using bai and perron s 1998 method and test if there is a stable relationship in each sub sample period of the break points the results show that a stable relationship exists for each sub sample period the estimated income elasticity and interest rate semi elasticity are relatively smaller than ball s 2001 estimates but consistent with his argument

evolution population growth and history dependence abstract we consider an evolutionary model with mutations which incorporates stochastic population growth we provide a complete characterization of the effects of population growth on the evolution of play in particular we show that if the rate of population growth is at least logarithmic the stochastic process describing play converges only one equilibrium will be played from a certain point forward if in addition the rate of mutation is taken to zero the probability that the equilibrium selected is the first equilibrium played approaches one thus population growth generates history dependence the contingency of equilibrium selection on historical conditions journal of economic literature classification numbers c72 c73 o33

income wealth and household demand for deposits theories of the demand for money typically predict that the quantity of money demanded will increase when a the rate of return paid on money if any increases b the rates of return paid on alternative assets decrease or c the scale of operations as measured by income wealth spending or permanent income of the relevant economic actor firm household or nation increases regarding c the choice of the most useful measure of scale involves the guidance of two competing but overlapping concepts of money s role transactions models going back at least to irving fisher 1911 are based on the idea of money as an inventory that bridges the gap created by nonsynchronous receipts and expenditures for economic actors of a given scale the optimal inventory should be determined by the opportunity cost of money holding the pattern of receipts and expenditures and the technology of money management given these factors that inventory should increase as the scale as measured by the rate of receipts or expenditures rises portfolio models going back at least to john m keynes 1930 and popularized by milton friedman 1956 are based on the analogy between asset holding and budgetary decisions by consumers the portfolio manager faces a menu of alternative assets with various risk and return characteristics and a given net worth the optimal holding of money or any asset depends upon this wealth constraint the characteristics of the menu items and his or her preferences an increase in wealth should in general lead to an increase in money holding the magnitude of which depends upon the relative superiority of money as a portfolio component such theories suggest that a measure of wealth is the single most useful scale variable although the rate of transactions may enter indirectly as a determinant of the otherwise unmeasured marginal return to money estimated demand schedules should presumably be based on the most useful scale variable and some policy issues depend on the choice 1 this choice has been addressed a number of times by studies exploiting time series data table 1 summarizes the results of six regressions from three studies which have approached the question in a nearly uniform way in equation i alan meltzer 1963 uses wealth as the scale variable for aggregate data with great success the addition of an income measure in ii yields no appreciable increase in explanatory power an equation with income only not shown is very similar to i the fit is very slightly poorer in iii charles lieberman 1977 uses debits to demand deposits as a measure of transactions the addition of a wealth measure in iv yields little additional explanatory power in v robert rasche 1987 uses gnp velocity in a first difference regression adding wealth in vi yields no significant improvement meltzer interprets his results as evidence of the superiority of a portfolio approach lieberman interprets his results as evidence of the superiority of the transactions approach produced by a more useful measure of transactions rasche favors the use of transactions velocity

equivalent expenditure functions and expenditure dependent equivalence scales abstract this paper presents and investigates a new class of equivalent expenditure functions that is a generalization of the one that corresponds to exact independent of base equivalence scales it provides less restrictive household demands especially for children s goods and has associated equivalence scales that may depend on expenditure we show that under certain conditions equivalent expenditure functions and the associated expenditure dependent equivalence scales can be uniquely estimated from demand data we estimate them using canadian data and find that the resulting scales are both plausible and expenditure dependent the estimated equivalence scales for households with children decline significantly as expenditure increases

explaining all three alternative voting outcomes abstract a theory is developed to explain all possible three alternative single profile pairwise and positional voting outcomes this includes all preference aggregation paradoxes cycles conflict between the borda and condorcet winners differences among positional outcomes e g the plurality and antiplurality methods and differences among procedures using these outcomes e g runoffs kemeny s rule and copeland s method it is shown how to identify interpret and construct all profiles supporting each paradox among new conclusions it is shown why a standard for the field the condorcet winner is seriously flawed journal of economic literature classification numbers d72 d71

another look at long run money demand abstract this paper investigates the long run demand for m1 in the postwar united states previous studies based on data ending in the late 1980s are inconclusive about the parameters of postwar money demand this paper obtains precise estimates of these parameters by extending the data through 1996 the income elasticity of money demand is approximately 0 5 and the interest semi elasticity is approximately 0 05 these parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period a caveat is that the analysis assumes there is no trend in money demand resulting from technological change

the equal absolute sacrifice principle revisited abstract we summarize the literature on equal absolute sacrifice income taxes and make some extensions we adapt the utilitarian equal sacrifice criterion to a wide class of rank dependent social welfare functions and find that liabilities depend on both income and position in the distribution we investigate whether such taxes need be progressive using a combination of analytics and simulation and in the process uncover tax functions not previously recognized as equating sacrifices finally out of horizontal equity considerations a new concept of the equal treatment of equals by an income tax emerges with implications for future work whose significance is discussed

social welfare and interpersonal utility comparisons in applied policy research it is a fair generalization to say that most applied policy analysis during the past half century has been conducted according to compensation principles a policy change has been thought potentially desirable if the sum over all individuals of the subjective money value of the change is positive whether winners should compensate losers is a separate issue left to politicians this paradigm is expedient because it is unconcerned about whether in the absence of full compensation the policy change is good or bad and because the pareto principle upon which it rests is very weak it suggests that welfare economics has achieved the status of a value weak science the only problem remaining would be to refine the measures of an individual s money equivalent of an economic change hallam unfortunately the compensation test has proved to be an inadequate analytical tool its inadequacy does not arise from the oftenmentioned difficulties with utility change measurement uncertainty or preference reversals rather it arises from a failure to fully address questions that policy makers ask to which framework should one turn if as is likely compensation is very costly or if it alters resource allocations stiglitz p 31 runge and myers even if compensation is costless and nondistorting how should one think about the desirability of compensation itself to answer these questions satisfactorily one must appeal to social welfare functionals and to the interpersonal and ethical information the functionals incorporate in the following a social welfare approach to applied policy research is outlined and some issues in implementation are discussed

birth date dependent population ethics critical level principles abstract this paper investigates birth date dependent principles for social evaluation in an intertemporal framework in which population size may vary we weaken the strong pareto principle in order to allow individuals birth dates to matter in establishing a social ordering using the axiomindependence of the utilities of the dead we characterize population principles with a recursive structure if the individual substitution principle and an individual intertemporal equivalence axiom are added birth date dependent generalizations of the critical level generalized utilitarian principles result stationarity leads to the special case of geometric discounting journal of economic literatureclassification numbers d63 d71

social criteria for evaluating population change abstract many applications of economic analysis require social evaluations of alternatives involving different numbers of people in this paper we use the tools of social choice theory to provide an axiomatic formulation of this problem it yields a class of social criteria called critical level generalized utilitarianism this class and its implications are compared with other criteria and are found to yield intuitively appealing results

the search for a stable money demand function a survey of the post 1973 literature phe question of whether the demnand function for money is stable is one of the most important recurring issues in the theory and application of macroeconomic policy what is being sought in a stable demand function is a set of necessary conditions for money to exert a predictable influence on the economy so that the central bank s control of the money supply can be a useful instrument of economic policy as such the notion of a stable demand function appears to involve three key elements e g john t boorman 1976 p 317 and david e w laidler 1977 pp 34 35 first the demand for money relation should be highly predictable in a statistical sense as measured by the usual goodness of fit statistics precision of estimated coefficients and presumably its ability to forecast accurately out of sample second a stable demand function for money has relatively few arguments a relationship that requires knowledge about a large number of variables in order to pin it down is in effect not predictable finally the variables that appear as arguments in the function should represent significant links to spending and economic activity in the real sector in sum a stable demand function for money means that the quantity of money is predictably related to a small set of key variables linking money to the real sector of the economy the importance of a stable money demand function for monetary policy can be illustrated with the standard is lm model in which interest rates and gnp are the endogenous variables in this context a stable demand function for money translates into a well defined relationship between money interest rates and gnp

cointegration and structural change an application to the u s demand for money wankeun oh i perform the cointegration tests for the trivariate model of real monetary aggregates real personal income and short term interest rate i find the existence of a long run relationship among these three variables to check the stability of a long run money demand relationship i implement a rank constancy test and cusum test the test results show that real mi is relatively more stable than other aggregates but structural change occurred during the 1970s and early 1980s this is consistent with prior research on money demand jel e41 i introduction incorporating structural change when performing tests on the properties of stochastic processes is important because structural breaks may cause misspecification problems most tests of structural change consider the stability of the parameters over time tests for structural breaks and parameter stability have been studied extensively a partial list includes chow 1966 brown et al 1975 harvey and collier 1977 king 1987 ploberger et al 1989 in the context of unit root processes perron 1989 showed that the presence of a one time change in the level or slope of the trend function can severely distort the results of unit root tests and it is natural to ask how structural change can distort the results of cointegration tests 1 traditional tests of parameter stability ask if the parameters of the model are constant in contrast quintos 1993 proposed a test for stability of the long run relationship s in a cointegrating regression the test is based on johansen s 1988 framework and the test statistic is simply the weighted sum of the likelihood ratio test as given in johansen 1988 quintos s rank test is very different from the traditional cusum and chow tests for parameter stability because her rank test checks for stability of the cointegrating relationship between variables in other words the rank test checks whether cointegration holds for the full period the traditional cusum and chow tests assume that cointegration holds for the full period or does not hold for the full period and tests simply whether the cointegration vector changes for example if there is cointegration from 1960 1990 between revenues and expenditures with cointegrating vector 1 1 then the cusum and chow tests check whether the cointegra ting vector 1 1 is stable throughout the period the rank constancy test checks whether the cointegration rank is stable throughout the period not whether the cointegrating vector is stable at 1 1 in other words the rank test will check whether for example there is cointegration from 1960 1980 and no cointegration from 1980 onward the chow and cusum tests are not designed to check for this the structural stability of money demand relationships has been the issue of a substantial number of empirical studies 2 in general structural stability means stability of the underlying behavioral equations 3 this term includes parameter stability and stability of functional form friedman s 1990 research on the money demand function assumes that a long run equilibrium relationship exists between real money balances real income or real wealth and the opportunity cost of holding real money balances recently there has been strong evidence of cointegration between real income real money balances and a nominal interest rate for instance engle and granger 1987 dickey et al 1991 hafer and jansen 1991 hoffman and rasche 1991 mehra 1993 miller 1991 fischer and nicoletti 1993 and baba et al 1992 report on cointegration among variables in u s aggregate money demand jain and moon 1994 report on cointegration in u s sectoral money demand yashiv 1994 and engsted 1993 on money demand in a high inflation country and hoffman et al 1995 report on international money demand comparison this article asks if long run money demand relationship is stable and if so for which measure of money is it stable over time

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

intergenerational transfers of public sector jobs a shred of evidence on nepotism the attractiveness of public sector jobs in italy may induce parents working in this sector to use their positions and the network of relationships to favor their sons daughters in gaining access to public sector jobs we verify whether children of public employees effectively enjoy an advantage estimating a model of the probability of working in the public sector controlling for individual characteristics and labor market conditions we show that if the father is a public employee the probability of his child working in the same sector is increased by a huge 44 this advantage is larger for low ability individuals stayers and southern italian residents we interpret these findings as evidence of nepotism in public employment

the value of limited altruism abstract discounting the utilities of future people or giving smaller weights to groups other than one s own is often criticized on the grounds that the resulting objective function differs from the ethically appropriate one this paper investigates the consequences of changes in the discount rate and weights when they are moved toward the warranted ones using the utilitarian value function it is shown that except in restrictive special cases those moves do not necessarily lead to social improvements we suggest that limitations to altruism are better captured by maximizing the appropriate value function subject to lower bounds on some utilities journal of economic literature classification numbers d63 d71

aggregating sets of von neumann morgenstern utilities we analyze the aggregation problem without the assumption that individuals and society have fully determined and observable preferences more precisely we endow individuals ans society with sets of possible von neumann morgenstern utility functions over lotteries we generalize the classical neutrality assumption to this setting and characterize the class of neutral social welfare function this class turns out to be considerably broader for indeterminate than for determinate utilities where it basically reduces to utilitarianism in particular aggregation rules may differ by the relationship between individual and social indeterminacy we characterize several subclasses of neutral aggregation rules and show that utilitarian rules are those that yield the least indeterminate social utilities although they still fail to systematically yield a determinate social utility

financial innovation new assets and the behavior of money demand abstract two fundamental changes in us banking regulations have affected the behavior of money demand m1 the first authorized checkable deposit accounts paying explicit interest rates the second allowed these rates to be market determined the theoretical literature does not directly address the impact of these events suggesting that they are primarily an empirical issue however the empirical literature has yet to agree on the impact of financial innovation on money demand for example several studies report an increase in the elasticity of money demand several others report a decline this paper uses a lancaster type choice model to analyze formally the expected impact of these two changes on the demand for money the model derives specific conditions under which i the demand for money increases as new assets are introduced and ii the impact of either the introduction of new assets or the elimination of interest rate restrictions on the elasticity of money demand

is there a role for commodity prices in the design of monetary policy some empirical the consumer price index in the united states follows a non trend stationary stochastic process that describes the index as drifting randomly upward without bound monetarists have long pointed to similar properties in the time series of monetary aggregates as the source of this incipient inflation their solution to this problem is close adherence by the central bank to targets for a monetary or reserve aggregate that correspond to slow and steady monetary growth with any periods of excessive monetary growth subsequently offset this would produce monetary series that are trend stationary if the demand for money is reasonably stable price series would also become trend stationary and for properly chosen targets the price level would be bounded with a mean inflation rate of zero

short run money demand abstract the conventional wisdom holds that the short run demand for money is unstable this paper challenges the conventional view by finding a stable demand for m1 in u s data from 1959 through 1993 the approach follows previous work in interpreting long run money demand as a cointegrating relation and it uses goldfeld s partial adjustment model to interpret short run dynamics the key innovation is the choice of the interest rate in the money demand function most previous work uses a short term market rate but this paper uses the average return on near monies the savings accounts and money market mutual funds that are close substitutes for m1 this choice helps rationalize the behavior of money demand in particular the increase in the volatility of velocity after 1980 is explained by increased volatility in the returns on near monies

money and economic activity revisited abstract recent literature has concluded that money no longer plays a fundamental role in determining us economic activity especially when post 1982 data are included in the analysis we re examine the issue using annual and quarterly data sets ranging back to the civil war cointegration tests show that an equilibrium relationship holds between money and income in all data samples of 35 years or longer but frequently fails to hold for many shorter samples however when the normal monetary lags are explicitly imposed a cointegrating relationship is frequently captured even in quite short samples examining the issue in a standard five variable var model we find that money is the most important variable in explaining real output for the full 1874 1993 as well as 1952 1993 periods even allowing for interest rate effects finally using monthly data over the troublesome 1983 1994 sample we show that when appropriate adjustments are made to capture recent structural changes such as the growing importance of the international economy on us output money still granger causes economic activity

monetary policy lessons of recent inflation and disinflation by 1975 most economists agreed that the money demand function in the united states was reasonably stable and could serve as a reliable basis for the formulation of monetary policy those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of m1 velocity of about three percent per year with deviations of only a few tenths of a percent experience with rising money growth and rising inflation through 1980 only confirmed monetarist views as figure 1 shows all this had changed by 1986 with disinflation in the 1980s m1 velocity departed convincingly from its 1953 79 trend the money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all consequently the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the standard money demand function some authors including i believe benjamin friedman conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities in contrast my working hypothesis is that the money demand continues to be a stable function of relatively few variables but that the interest elasticity of money demand is substantially higher than previously thought others have sought money demand explanations in terms of regime shifts but that literature will not be discussed here events have not been kind to keynesian monetary policy positions either keynesians tend to concentrate on interest rates especially real interest rates as the best guide to the effects of monetary policy on the economy the real rate is discussed

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

rational choice with status quo bias abstract motivated by the empirical findings concerning the importance of one s current situation on her choice behavior the main objective of this paper is to propose a rational choice theory that allows for the presence of a status quo bias and that incorporates the standard choice theory as a special case we follow a revealed preference approach and obtain two nested models of rational choice that allow phenomena like the status quo bias and the endowment effect and that are applicable in any choice situation to which the standard static choice model applies

stability of money demand function revisited in china as china s economic reforms have undergone significant structural changes after 1979 it has been rather difficult to formulate a stable money demand function over the period following that year while previous literature on the long run relationship of money demand in china shows the existence of stable money demand this article revisits the stability of the china money demand function over the period after 1979 to employ the unit root tests and the cointegration tests with structural break the empirical evidence demonstrates that economic and financial deregulation did affect the stability of demand for money in china over the period 1977 to 2002 moreover the estimated long run income and interest elasticity are respectively 1 01 1 11 and 0 14 0 08 using the real m1 m2 equation in addition real income and the interest rate are found to be weakly exogenous we overall do find structural breakpoints mainly in 1980 and 1993 and they look to match clearly with corresponding critical financia

inefficiencies in a model of spatial networks formation with positive externalities abstract in this paper we make an exploratory use of computational techniques genetic algorithms and monte carlo simulations to compute efficient and emergent networks in a spatialized version of the connections model of jackson and wolinski jackson m o wolinski a 1996 a strategic model of social and economic networks journal of economic theory 71 44 74 this approach allows us to observe and discuss inefficiencies that arise in a strategic network formation context with imperfectly link mediated positive externalities to connections and spatial link costs our results highlight that depending on the strength of the externalities emergent and efficient networks may share several structural properties nevertheless emergent networks are insufficiently dense and should be more structured around central agents

dynamic inconsistency and self control a planner doer interpretation we show that gul and pesendorfer s econometrica 69 2001 1403 representation result for preferences with temptation and self control can be reexpressed in terms of a costly intrapersonal conflict between a planner and doer as in thaler and shefrin j political econ 89 1981 392 and psychologists standard view of self control problems

social welfare of alternative controlled price policies recent developments in social welfare analysis provide insights into the selection of price policies in the presen t paper a ces social welfare function and a weighted average of utilitarian and leximin rules are used to identify optimal producer prices in an economy where government is the price setter and agents are risk averse the analysis distinguishes between the interests of commercial producers peasant producers consumers and taxpayers a n application to zimbabwe indicates that a maize producer price in the low medium to medium portion of the historical range would be social ly optimal if egalitarian preferences are moderate this outcome is somewhat insensitive to group weighting schemes and to interpersonal utility correspondences copyright 1993 by mit press

the kaldor compensation test and rational choice abstract it is well known that the kaldor compensation test can be inconsistent in the sense that it leads to contradictory or cyclical recommendations in some situations this paper shows that there is a close relationship between the consistency of this test and the rationalizability of choices from given utility possibilities sets this observation suggests that if the kaldor test is consistent social decisions can be made using a social welfare ordering in the first place therefore the information assumptions embodied in some social welfare ordering have to be accepted if the kaldor test is to be applied consistently

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

an evolutionary approach to pre play communication we add a round of pre play communication to a finite two player game played by a population of players pre play communication is cheap talk in the sense that it does not directly enter the payoffs the paper characterizes the set of strategies that are stable with respect to a stochastic dynamic adaptive process periodically players have an opportunity to change their strategy with a strategy that is more successful against the current population any strategy that weakly improves upon the current poorest performer in the population enters with positive probability when there is no conflict of interest between the players only the efficient outcome is stable with respect to these dynamics for general games the set of stable payoffs is typically large every efficient payoff recurs infinitely often

a dynamic model of equilibrium selection in signaling markets in his work on signaling spence proposed a dynamic model of a market in which a buyer revises prices in light of experience and in which sellers with private information about their types choose utility maximizing signals given these prices we follow spence s suggestion of introducing perturbations into the resulting dynamic process in a broad class of markets our model selects a separating equilibrium outcome if and only if the equilibrium outcome satisfies a version of the undefeated equilibrium concept whereas a pooling equilibrium outcome is selected if and only if the equilibrium outcome is both undefeated and satisfiesd1

evolution and long run equilibria in coordination games with summary statistic payoff technologies abstract this note applies the evolutionary dynamic of kandori mailath and rob econometrica61 1993 29 65 to class coordination games that the entire population plays simultaneously in these games payoffs and best replies are determined by a symmary statistic of the population strategy profile as in crawford econometrica63 1995 103 144 a simple characterization of the set of long run equilibria analogous to the one given by kandori mailath and rob for random pairing is provided journal of economic literatureclassification number c79

the response of interest rates to the federal reserve s weekly money announcements the puzzle of anticipated money abstract researchers using the survey conducted by money market services inc have found that the anticipated component in the federal reserve s weekly money supply announcement is negatively correlated with the post announcement change in market yields we prove that eliminating a downward bias in the measure of anticipated money can in theory eliminate this puzzle but that improving the efficiency of an already unbiased measure cannot we find using canadian as well as u s interest rate data that correcting the downward bias in the survey measure reduces but does not eliminate the role of anticipated money

evolution with changing mutation rates this article considers the robustness of long run equilibria when mutation rates are not assumed to be constant over time particular attention is paid to the case where mutation rates decline to zero in the limit it is found that if behavior is ergodic then it corresponds to the long run equilibrium for the game however conditions for ergodicity become increasingly restrictive as population size increases journal of economic literatureclassification number 72

evolution in games with endogenous mistake probabilities abstract j bergin and b lipman econometrica 64 1996 943 956 show that the selection effect from the random mutations in the adaptive population dynamics in m kandori g mailath and r rob econometrica 61 1993 29 56 and p young econometrica 61 1993 57 84 is due to restrictions on how these mutation rates vary across population states we here model mutation rates as endogenously determined mistake probabilities by assuming that players with some effort can control the probability of implementing the intended strategy this is shown to corroborate the results in kandori mailath rob 1993 and under certain regularity conditions those in young 1993 journal of economic literature classification number c72

rationalizing choice with multi self models this paper studies a class of multi self decision making models proposed in economics psychology and marketing in this class choices arise from the set dependent aggregation of a collection of utility functions where the aggregation procedure satises some simple properties we propose a method for characterizing the extent of irrationality in a choice behavior and use this measure to provide a lower bound on the set of choice behaviors that can be rationalized with n utility functions under an additional assumption scale invariance we show that generically at most ve reasons are needed for every mistake

asset markets as an equilibrium selection mechanism coordination failure game form auctions and tacit communication abstract in this paper we explore the possibility that asset markets provide a means of tacit communication which may allow subjects to coordinate on the payoff dominant equilibrium in an underlying coordination game we find that the existence of a market price for the right to play does communicate information about the equilibrium selection problem specifically behavior never converged to the efficient outcome when subjects were endowed with the right to participate but always converged to the efficient outcome when subjects purchased the right to participate journal of economic literature classification numbers c720 g120

learning mixed equilibria we study learning processes for finite strategic form games in which players use the history of past play to forecast play in the current period in a generalization of fictitious play we assume only that players asymptotically choose best responses to the historical frequencies of opponents past play this implies that if the stage game strategies converge the limit is a nash equilibrium in the basic model plays seems unlikely to converge to a mixed strategy equilibrium but such convergence is natural when the stage game is perturbed in the manner of harsanyi s purification theorem journal of economic literature classification number c72

identification and estimation of money demand in most natural sciences physics chemistry biology theories are validated by controlled experiment however in other natural sciences astronomy meteorology and in most social sciences including economics the data are characteristically generated not by experiment but by measurement of uncontrolled systems in economics theories take the form of restrictions on the models assumed to generate the data and statistical methods replace experimental controls in testing these restrictions and here is the difficulty in economics particularly macroeconomics the theory used to derive tests ordinarily does not generate a complete specification of which variables are to be held constant when statistical tests are performed on the relation between the dependent variable and the independent variables of primary interest accordingly in such cases there will be a set of often very different candidate regression based tests each of which has equal status with the others since each is based on a different projection of the same underlying multivariate model except in the unlikely event that the explanatory variables are mutually orthogonal the conditional regression coefficients which generally form the basis for the test statistic will depend on the conditioning set we conclude from this that if a theory which does not generate a complete specification of the regression test is nonetheless to have testable implications these implications must be robust over the permissible alternative specifications if the restrictions indicated by the theory are satisfied in some projections but not in others that have an equal claim to represent implications of the theory one cannot conclude that the theory has been confirmed the fact that the observable implications of valid theories must obtain over a broad but usually incompletely specified set of regressions rather than for a single regression introduces a large and unavoidable element of imprecision into hypothesis testing in macroeconomics generally it appears to be appropriate to weaken the statistical criterion for rejecting theories consider for example the theory of money demand which will engage our attention in this paper the tobin baumol square root formula implies that the elasticity of money demand with respect to the interest rate is exactly one half but which interest rate should wealth be held constant inflation in view of such uncertainties it would be inappropriate to insist in a literal minded fashion on rejecting the tobin baumol model if in some regression the measured interest elasticity differed from one half by more than two standard deviations and only then obviously a more flexible approach is called for the practice has been to conclude that the statistical evidence is consistent with the tobin baumol model as long as the interest rate coefficient is negative if it is negative and significant or negative and insignificantly different from minus one half that would provide somewhat stronger confirmation but a positive coefficient particularly a significantly positive coefficient would be viewed as raising questions about the validity of the theory in macroeconomics generally as in the money demand application the typical response to specification uncertainty has been to regard a theory as supported if the signs of the estimated coefficients agree with those expected from theory and as disconfirmed otherwise there is no theoretical justification for this procedure but it seems to be a reasonable course to follow the point that economic theory ordinarily generates incompletely specified statistical university of california santa barbara we have received helpful comments from andrew abel robert clower michael darby robert engle stephen goldfeld david laidler edward leamer robert lucas frederic mishkin and edward prescott thomas hall provided able research assistance

the stability of long run money demand in the united states a new approach abstract in this paper we search for cointegration relation and determine the location of the changes in the long run money demand in the us we use the same data set as the previous studies and find that there are two regime changes