governmental behavior in representative democracy a synthesis of the theoretical literature what is the impact of bureaucratic behaviors on tax rates what is preferable a bureaucrat or a partisan politician does a flypaper effect occur when lobby groups influence public policies this article tries to answer these questions by analyzing and comparing six different models of public choice 1 the median voter model 2 the leviathan model 3 the slack maximizing model 4 a general model of bureaucracy 5 the partisan politicians model and 6 a general model of lobbying among several results it is shown that the median voter s income and tax share almost always play a significant role in the design of the public good tax package even if the government does not explicitly try to maximize the median voter s utility the article also provides a synthesis of the positive analysis of the flypaper effect

a shadow rate new keynesian model abstract we propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate empirically we document the shadow rate s resemblance to an overall financial conditions index various private interest rates the fed s balance sheet and the taylor rule theoretically we demonstrate the impact of unconventional policies such as qe and lending facilities on the economy is identical to that of a negative shadow rate making the latter a useful summary statistic for these policies our model generates the data consistent result a negative supply shock is always contractionary it also salvages the new keynesian model from the zero lower bound induced structural break

financial intermediation and endogenous growth an endogenous growth model with multiple assets is developed agents who face random future liquidity needs accumulate capital and a liquid but unproductive asset the effects of introducing financial intermediation into this environment are considered conditions are provided under which the introduction of intermediaries shifts the composition of savings toward capital causing intermediation to be growth promoting in addition intermediaries generally reduce socially unnecessary capital liquidation again tending to promote growth

negative interest rate policy and the yield curve we evaluate the implications of the ecb s negative interest rate policy nirp on the yield curve to capture various shapes of the short end of the yield curve induced by the nirp we introduce two policy indicators which summarize the immediate and longer horizon future monetary policy stances we find the four nirp events lowered the short term interest rate by the same amount the impact is dampened at longer maturities for the first two event dates due to lack of forward guidance in contrast in the last two dates forward guidance drives the largest effects in two years

is quantity theory still alive this paper investigates whether the quantity theory of money is still alive we argue that it is but that the slippage is not negligible for countries with low inflation the relationship between average inflation and the growth rate of money is tenuous at best a correction for variation in output growth and the opportunity cost of money using theory implied elasticities helps explain the slippage for the period since 1990 inflation targeting at low rates of inflation makes it harder to establish the long run relationship between monetary growth and inflation

money and growth an alternative approach this paper takes an alternative approach to the topic of money and growth by developing a model in which the effects of sustained capital accumulation on an evolving system of payments in addition to the conventional effects of sustained inflation on growth are examined while the effects of inflation on growth are small the effects of growth on the monetary system are substantial the results are consistent with ideas about money and growth contained in work that predates that of james tobin and miguel sidrauski as well as with evidence that money and asset demands vary systematically within economies as they develop copyright 1994 by american economic association

term premia and inflation uncertainty empirical evidence from an international panel dataset this paper provides cross country empirical evidence on bond risk premia i construct a panel of zero coupon nominal government bond yields spanning ten industrialized countries and nearly two decades i hence compute forward rates and then use two different methods to decompose these forward rates into expected future short term interest rates and term premiums the first method uses an affine term structure model with macroeconomic variables as unspanned risk factors the second method uses surveys i find that term premium estimates declined across countries over the sample period especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks during the recent financial crisis term premiums have remained flat and even declined further in some countries perhaps reflecting the effects of quantitative easing actions by many central banks

on the superneutrality of money in a stochastic dynamic macroeconomic model abstract this paper explores the robustness of the superneutrality of money result to the introduction of uncertainty while qualitatively superneutrality fails to obtain in our model quantitatively the observed tobin effect is insignificant the equilibrium time paths of real variables are nearly unaffected by changes in the money growth rule we argue that our conclusions reinforce the theoretical case for superneutrality

global effective lower bound and unconventional monetary policy abstract in a standard open economy new keynesian model the effective lower bound causes anomalies output and terms of trade respond to a supply shock in the opposite direction compared to normal times we introduce a tractable framework to accommodate for unconventional monetary policy in our model these anomalies disappear we allow unconventional policy to be partially active and asymmetric between countries empirically we find the us euro area and uk have implemented a considerable amount of unconventional monetary policy the us follows the historical taylor rule whereas the others have done less compared to normal times

optimal monetary policy and economic growth abstract a question at the center of many analyses of optimal monetary policy is why do central banks never implement the friedman rule to the list of answers to this question we add neoclassical production specifically the tobin effect as one possible explanation to that end we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money we assume a production function with a knowledge externality romer style that nests economies with endogenous growth ak form and those with no long run growth the diamond model the tobin effect is shown to be always operative under crra preferences a mild degree of social increasing returns is sufficient but not necessary for some positive inflation to dominate zero inflation and for the friedman rule to be sub optimal irrespective of the degree of risk aversion

evaluating central banks tool kit past present and future abstract we develop a structural dsge model to systematically study the principal tools of unconventional monetary policy quantitative easing qe forward guidance and negative interest rate policy nirp as well as the interactions between them to generate the same output response the requisite nirp and forward guidance interventions are twice as large as a conventional policy shock which seems implausible in practice in contrast qe via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound quantitatively qe1 qe3 can account for two thirds of the observed decline in the shadow federal funds rate in spite of its usefulness qe does not come without cost a large balance sheet has consequences for different normalization plans the efficacy of nirp and the effective lower bound on the policy rate

federal reserve interest rate targeting rational expectations and the term structure abstract the amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved indeed spreads between certain long and short rates appear unrelated to future changes in the short rate contrary to the rational expectations hypothesis of the term structure this paper estimates a daily model of federal reserve interest rate targeting behavior which accompanied by the maintained hypothesis of rational expectations explains the varying predictive ability of the yield curve and elucidates the link between fed policy and the term structure

fiscal illusion at the local level empirical evidence for the flemish municipalities fiscal illusion refers to a systematically biased perception of fiscal parameters due to demand side error ignorance or supply side abusive behaviour as such it is a component of a more general tax choice framework

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

the median voter model across levels of government the median voter model provides a method of aggregating individual voter s demands to obtain community demand although higher level governments are often assumed to be less responsive to voters than lower level governments it remains an open question whether or not the median voter model which has been found to apply to the lowest tier of the federalist system extends to higher level governments we use the cox specification test to find that the ad hoc model dominates the median model for counties and states the county results are sensitive to the time periods budgetary structure and degree of urbanization

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

monetary policy expectations at the zero lower bound we show that conventional dynamic term structure models dtsms estimated on recent u s data severely violate the zero lower bound zlb on nominal interest rates and deliver poor forecasts of future short rates in contrast shadow rate dtsms account for the zlb by construction capture the resulting distributional asymmetry of future short rates and achieve good forecast performance these models provide more accurate estimates of the most likely path for future monetary policy including the timing of policy liftoff from the zlb and the pace of subsequent policy tightening we also demonstrate the benefits of including macroeconomic factors in a shadow rate dtsm when yields are constrained near the zlb

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

term premia and inflation uncertainty empirical evidence from an international panel dataset comment term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small sample bias we show that accounting for this bias alters the conclusions about the trend cycle and macroeconomic determinants of the term premia estimated in wright 2011 his term premium estimates are essentially acyclical and often just parallel the secular trend in longterm interest rates in contrast bias corrected term premia show pronounced countercyclical behavior consistent with theoretical and empirical arguments about movements in risk premia jel e31 e43 e52 g12 h63 in an important recent paper wright 2011 presents a new international interest rate dataset and estimates term premia in far ahead forward rates using an affine gaussian dynamic term structure model dtsm as well as a survey based method he then relates these empirical term premia to macroeconomic conditions notably inflation uncertainty in particular he shows that the marked secular decline in estimated forward term premia across countries is correlated with decreases in measures of uncertainty around forecasts of future inflation in this comment we demonstrate that his model based term premium estimates are distorted by smallsample bias in the estimated model parameters accounting for this bias changes the behavior of the resulting term premium estimates in terms of their trend and cyclical behavior in an affine gaussian dtsm bond yields are determined by a small number of risk factors and the dynamic evolution of these risk factors follows a gaussian vector autoregression var if the risk factors in such a model are observable and if the model is maximally flexible i e if it has no parameter restrictions beyond those required for identification we know from joslin singleton and zhu 2011 that the maximum likelihood estimates of the var parameters can be found by

tiebout bias on the demand for local public goods abstract empirical work estimating the demand for local public goods has been based upon the median voter model it has generally proceeded with little consideration given to the possibility of tiebout type migration emphasized in the property value literature in this paper we raise the question of how valid the typical cross section demand estimation procedures are when possible tiebout like migration among jurisdictions is taken into account we find that such procedures are not in fact consistent with a model in which people vote with their feet as well as with ballots we also show that if a full tiebout equilibrium has been achieved in a set of communities there is a simple and obvious way to estimate demands for local public goods which is different from the median voter approach this technique has not to our knowledge been used in existing studies and moreover has some practical as well as theoretical advantages if the workings of the tiebout process are not taken into account more is involved than just impracticality we show that the estimated effects of personal characteristics will generally be biased and that that direction of the bias can usually be determined

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

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

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

the flypaper effect and other anomalies abstract i develop a model in which income both in its own right and as a proxy for other socioeconomic characteristics is an input in the production function for local public services the most obvious example is education though there are other applications as well the comparative statics results from this model yield the following results 1 the observed flypaper effect the tendency for local government to spend a higher fraction of unrestricted grants than income of residents may be due at least in part to the fact that own income but not grants is a substitute for purchased inputs in the technology hence the propensity to spend on purchased inputs out of own income is lower than out of grants 2 the income elasticity of demand for public sector output may be higher than the observed income elasticity of demand for purchased inputs 3 equalization of educational opportunity via wealth neutrality as suggested by feldstein requires major changes in education finance once we recognice the distinction between purchased inputs and output

bureaucracy and the publicness of local public goods a reply to gonzalez folsom and mehay readers of the literature on bureaucracy will recall that three years ago gonzalez and mehay 1985 published an empirical piece utilizing a slack maximizing model of bureaucratic behavior which concluded that local public goods are really private goods my own article wyckoff 1988a reached the same conclusion using theoretical means the effect of bureaucracy i argued is to bias our results toward the conclusion that local public goods are public in nature so the empirical results showing the opposite cannot be blamed on bureaucracy now in a surprising comment on my paper gonzalez folsom and mehay 1988 gfm assert that i made methodological errors in the process of establishing my result not content with my agreement with their conclusions gfm demand that i reach these results using their methodology gfm insist that i ignore four special cases in my paper each one of these special cases is discussed below in general i find little merit in their arguments each special case is either obviously unrealistic or relates to a question completely different from those discussed in my paper first of all gfm argue that i fail to note that the voter s tax share t is likely to vary with city population n when this correlation is incorporated into my model they say the reverse of my results could occur but there is a fundamental error in allowing t to vary with n the issue in this paper is not whether large cities spend more than small cities nobody disputes this but whether local public goods are public goods or not what we want to know is whether two people can enjoy a public service just as easily as one by including tax considerations in the calculations as they have done gfm confuse crowding effects with changes in spending caused by changes in tax burdens when t is allowed to vary with n we no longer have a measure of the crowding parameter but a composite which cannot answer the question we originally asked an analogy may help clarify gfm s error gfm s approach is equivalent to suggesting that since wealthy people have larger homes and hence larger tax

regime shifts in a dynamic term structure model of u s treasury bond yields this article develops and empirically implements an arbitrage free dynamic term structure model with priced factor and regime shift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities this model gives closed form solutions for zero coupon bond prices an analytic representation of the likelihood function for bond yields and a natural decomposition of expected excess returns to components corresponding to regime shift and factor risks using monthly data on u s treasury zero coupon bond yields we show a critical role of priced state dependent regime shift risks in capturing the time variations in expected excess returns and document notable differences in the behaviors of the factor risk component of the expected returns across high and low volatility regimes additionally the state dependence of the regime switching probabilities is shown to capture an interesting asymmetry in the cyclical behavior of interest rates the shapes of the term structure of volatility of bond yield changes are also very different across regimes with the well known hump being largely a low volatility regime phenomenon jel g12 this article develops and empirically implements an arbitrage free dynamic term structure model dtsm with priced factor and regimeshift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities agents are assumed to know both the current state of the economy and the regime they are currently in this leads to regime dependent risk neutral pricing and an equilibrium term structure that reflects the risks of both changes in the state and shifts in regimes

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

information in the term structure of yield curve volatility using a novel no arbitrage model and extensive second moment data we decompose conditional volatility of u s treasury yields into volatilities of short rate expectations and term premia short rate expectations become more volatile than premia before recessions and during asset market distress correlation between shocks to premia and shocks to short rate expectations is close to zero on average and varies with the monetary policy stance while treasuries are nearly unexposed to variance shocks investors pay a premium for hedging variance risk with derivatives we illustrate the dynamics of the yield volatility components during and after the financial crisis

liquidity preference and financial intermediation we examine the characteristics of optimal monetary policies in a general equilibrium model with incomplete markets markets are incomplete because of uninsured preference uncertainty and because productive capital is traded infrequently rational individuals are willing to hold a liquid asset money at a premium monetary policy interacts with existing flnancial institutions to determine this premium as well as the level of precautionary holdings we show that inflation is expansionary and that the optimal inflation rate is positive if there is no operative banking system the tobin effect otherwise efficiency requires that money be undominated in its rate of retum the friedman rule we analyse the preference for liquidity and evaluate the effects of monetary policy in a framework where individuals optimize and goods and asset markets are competitive liquidity needs of individuals and characteristics of assets are consequences of the structure of preferences technology and information equilibrium is compatible with diiferences in the rates of retum on assets differing in liquidity with divergences between household savings and aggregate investment in productive capital and distortion of household consumption plans we examine how these quantities are determined in altemative financial environments the extent to which monetary or interest rate policies are effective and desirable and the relative efficiency of altemative instruments which serve private liquidity needs we find that monetary policy is effective and infiation is expansionary if the consumption plans of individuals are constrained by the lack of liquidity at the same time such expansion can be welfare inferior intermediation which allows liquid assets to be issued against productive investment is both feasible and desirable unlike infiation intermediation achieves welfare enhancing expansion this allows a comparison of the tobin effect tobin 1965 and the friedman mle friedman 1969 in a general equilibrium model cmdely speaking the first indicates that infiation is desirable while the other claims that defiation is the difference as we show depends on the degree of intermediation money and productive capital are simultaneously held by individuals even when money has a lower rate of retum this is due to the fact that money is liquid it can be used to pay for goods at any time and in all states of nature capital on the other

a bureaucratic theory of flypaper effects abstract one well documented pattern in local public finance is that in comparison with what is spent out of residents private income a disproportionate amount of lump sum intergovernmental aid is used to increase expenditures rather than to reduce local taxes this paper shows how a bureaucratic model of the type suggested by niskanen bureaucracy and representative government aldine atherton chicago 1971 can be used to explain this behavior an empirical test of the model using 115 small governments in michigan suggests that this bureaucratic model explains capital expenditures well while operating expenditures appear to be better explained by the standard median voter model

asset markets and equilibrium processes the failure of the asset market to be complete causes serial dependence in output and prices which is suboptimal we consider an economy with white noise shocks when the asset market is complete an optimal competitive allocation inherits this strong stationarity when the asset market is only sequentially complete prices and output necessarily display serial dependence at equilibrium the further incompleteness of a monetary economy explains co movements in real and nominal variables

the median voter hypothesis evidence from general purpose local governments the median voter hypothesis mvh represents a much used as well as much criticized tool in the hands of public finance economists to evaluate the mvh this paper applies the cox specification test using data from general purpose municipal governments the cox test allows for possible simultaneous rejection of the mvh and all tested models thus providing stricter criteria than applied to date in empirical mvh analyses the test results reveal that the mvh is appropriate for explaining the aggregate behavior of municipal governments but not specific services further the single service and single tax base assumptions are not critical to the empirical mvh performance

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

the effects of grants in aid on state and local expenditures abstract this paper develops econometric methods to estimate the effect of the piecewise linear budget constraints created by grant formulas in which the subsidy rate is not constant over expenditures e g closed end grants the methods are applied to the afdc program the results show that because of the kinked nature of the grant formula 1 the present federal formula actually increases cross state inequality in afdc benefits 2 several subsidy rates in the formula actually reduce benefits and 3 the so called flypaper effect disappears

financial intermediation and price level control abstract because currency and deposits are not perfect substitutes in all transactions there are simplified financial systems in which control of the supply of currency is sufficient to control the price level most important in a currency supply approach price level control does not imply control of financial intermediation thus price level goals never have to be weighed against the availability of credit to finance real activity

financial structure and economic activity a recent development in economic science is the attempt to integrate monetary theory with the theory of general economic equilibrium this work takes as its starting point the idea that money cannot have value in standard general equilibrium models in these too much trade can be accomplished in centralized markets see robert clower 1969 1971 frank hahn 1973 or neil wallace 1980 thus to decentralize or break up the structure either exchange must be made costly or there must be restrictions on who can trade with whom and thus such choicetheoretic models offer the intriguing possibility that real and monetary phenomena can be understood as intimately related this paper continues in the relatively brief choice theoretic tradition motivated by real and monetary phenomena associated economic development and growth 1 to be noted first is simon kuznets seminal work on national income 1971 in a cross section study of fifty seven countries in 1958 kuznets shows that the share of the agricultural sector including forestry fishing and hunting in gross domestic product is inversely correlated with gross domestic product per capita the share of the industrial sector including transportation and communication is closely and positively associated with per capita product the share of the service sector tends to be positively but weakly associated with per capita product but the share of banking insurance and real estate shows a striking rise as one shifts from lowto higher income countries moreover the evidence suggests that the ratio of industrial prices to agricultural prices is perhaps lower the higher is per capita income though the evidence on relative prices for the service sector is inconsistent turning to long time series for thirteen developed and four less developed countries kuznets finds dramatic evidence for a decline of the agricultural sector and a rise in the industrial sector with per capita income at least in developed countries again results for the service sector are mixed but canada france and the united states are positive exceptions the share of a transport communication subsector rises quite consistently turning next to shares of sectors in the labor force kuznets finds both on a cross sectional and secular basis that all the above movements are at least mirrored and in many cases amplified in particular both components of the share of the service sector services and commerce rise substantially with gross domestic product per capita 2 to be noted second is the extensive work of raymond goldsmith on financial structure and financial intermediation for the united states goldsmith 1958 finds that the activity of intermediaries as measured by their share in national assets in tangible assets and in all claims has shown a substantial rise from 1860 to 1952 similarly goldsmith 1969 finds that the ratio of financial institutions assets to gross national product rises substantially from 1860 to 1963 in both developed and less developed countries including switzerland great britain the united states japan argentina and india related the number of households with savings accounts the number with life insurance policies and the number with stock ownership expressed as percents of the population are all low for less developed countries relative to developed countries and professor of economics carnegie mellon university graduate school of industrial administration schenley park pittsburgh pa 15213 this paper was motivated by a conversation with thomas sargent and has been aided by helpful comments from robert barro robert e lucas jr dan peled kenneth singleton and neil wallace financial support from the national science foundation the alfred p sloan foundation and the peterkin symposium on foundations of monetary policy and government finance at rice university and research assistance from pramerudee townsend are all gratefully acknowledged i alone assume full responsibility for any errors and for the views expressed here

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

the elusive flypaper effect abstract the flypaper effect is the common empirical result that lump sum intergovernmental grants stimulate more local government spending than increases in private income which are theoretically equivalent in this paper four of the best known explanations of the flypaper effect are tested using data from michigan school districts none of these explanations are confirmed by the data the cause of the flypaper effect is likely to be much more deeply rooted in the nature of local decision making than is currently recognized

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

testing bureaucratic influence on local school expenditures by comparing survey and expenditure data previous empirical studies of bureaucratic power have employed testing procedures that are sensitive only to complete bureaucratic power in which the bureaucrat is able to force an all or nothing choice on his legislative sponsor this paper suggests a test for incomplete bureaucratic power in which micro based survey estimates of the cost elasticity of demand and marginal propensity to spend out of lump sum aid are compared with estimates of these same parameters taken from governmental expenditure studies empirical tests with 205 non smsa school districts in michigan yield results that are consistent with incomplete bureaucratic power copyright 1991 by mit press

monetary policy uncertainty and economic fluctuations uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles to investigate this link we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators the data favors a model with two volatility factors that capture shortterm and long term monetary policy uncertainty increases in either of them lead higher unemployment rates but they interact with ination in opposite directions