another look at the spending response to the 2001 income tax rebates this article revisits the spending response to the 2001 us tax rebates by focussing on two key aspects of how tax policy researchers use the consumer expenditure survey cex these two attributes which are often overlooked are as follows the measures used for consumption and the outlier criteria applied to the data first i reproduce the results in johnson et al 2006 which using the cex concluded that households immediately spent 20 40 of their rebates on nondurable consumption goods then i show how making two changes both of which are relied upon in the literature affects their results these adjustments reduce the estimated magnitude of the rebate s impact by as much as 100

consumer response to the reagan tax cuts abstract this paper uses micro data from the consumer expenditure survey to estimate the response of household consumption to the second and third phases of the reagan tax cuts since these phases were pre announced they allow for an unusually clean test of the canonical life cycle permanent income model consumption is found to be excessively sensitive to the tax cuts counter to the model liquidity constraints and other standard explanations do not appear to explain this excess sensitivity the consumption response is larger than previously estimated for tax refunds and more concentrated in nondurables these differences have important implications for the structure of tax changes in particular for choosing between varying withholding rates versus varying lumpy final tax payments and refunds

efficiency analysis for exogenously fixed inputs and outputs we evaluate by means of mathematical programming formulations the relative technical and scale efficiencies of decision making units dmus when some of the inputs or outputs are exogenously fixed and beyond the discretionary control of dmu managers this approach further develops the work on efficiency evaluation and on estimation of efficient production frontiers known as data envelopment analysis dea we also employ the model to provide efficient input and output targets for dmu managers in a way that specifically accounts for the fixed nature of some of the inputs or outputs we illustrate the approach using real data for a network of fast food restaurants

measuring hospital performance a non parametric approach abstract in this paper a technique for assessing the relative performance of firms is introduced and applied to a sample of hospitals in california hospitals are compared on the basis of their relative technical efficiency the reference technology is constructed from observed outputs and inputs including physicians using programming techniques and efficiency is assessed relative to the frontier of the technology using measures similar to those suggested by farrell the technique used here imposes no prespecified functional form allows for multiple outputs and inputs allowing for differences in case mix and yields information on the productive performance of individual hospitals this technique can also be used to determine whether different types of hospitals use different technologies our results although illustrative rather than definitive suggest that ownership affects efficiency as measured here public and nfp hospitals have different best practice frontiers and public hospitals appear to use relatively fewer resources these results could reflect differences in quality of care by ownership

some models for estimating technical and scale inefficiencies in data envelopment analysis in management contexts mathematical programming is usually used to evaluate a collection of possible alternative courses of action en route to selecting one which is best in this capacity mathematical programming serves as a planning aid to management data envelopment analysis reverses this role and employs mathematical programming to obtain ex post facto evaluations of the relative efficiency of management accomplishments however they may have been planned or executed mathematical programming is thereby extended for use as a tool for control and evaluation of past accomplishments as well as a tool to aid in planning future activities the ccr ratio form introduced by charnes cooper and rhodes as part of their data envelopment analysis approach comprehends both technical and scale inefficiencies via the optimal value of the ratio form as obtained directly from the data without requiring a priori specification of weights and or explicit delineation of assumed functional forms of relations between inputs and outputs a separation into technical and scale efficiencies is accomplished by the methods developed in this paper without altering the latter conditions for use of dea directly on observational data technical inefficiencies are identified with failures to achieve best possible output levels and or usage of excessive amounts of inputs methods for identifying and correcting the magnitudes of these inefficiencies as supplied in prior work are illustrated in the present paper a new separate variable is introduced which makes it possible to determine whether operations were conducted in regions of increasing constant or decreasing returns to scale in multiple input and multiple output situations the results are discussed and related not only to classical single output economics but also to more modern versions of economics which are identified with contestable market theories

consumer response to tax rebates many households received income tax rebates in 2001 of 300 or 600 these rebates represented advance payments of the tax cut from the new 10 percent tax bracket based on a survey of a representative sample of households this paper finds that only 22 percent of households receiving the rebate would spent it instead they would either save it or use it to pay off debt this very low rate of spending represents a striking break with past behavior which would have suggested a much higher rate of spending the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand this abstract was borrowed from another version of this item

some unsolved problems in data envelopment analysis a survey abstract the present study is a survey of a set of inherent characteristics and unsolved problems in current dea models we will focus on what types of local characteristics the dea estimated technology exhibits in relation to non jointness of a multi output multi input production no indicators are currently available telling the analysts whether or not the structure in data supports the existence of a joint technology if the estimated ccr technology has a sparse facet structure in the sense that few facets are active for output vectors in certain cones of the output space then the multi output multi input ccr technology is possibly locally non joint another important field of research relates to the inclusion of explicit distributional assumptions as part of the dea model specification and to the extension of the dea estimation from an estimation of a deterministic frontier towards an estimation of a stochastic frontier some recent results will be compared finally measures of scale economies from parametric models and dea models will be compared

household expenditure and the income tax rebates of 2001 using questions expressly added to the consumer expenditure survey we estimate the change in consumption expenditures caused by the 2001 federal income tax rebates and test the permanent income hypothesis we exploit the unique randomized timing of rebate receipt across households households spent 20 to 40 percent of their rebates on nondurable goods during the three month period in which their rebates arrived and roughly two thirds of their rebates cumulatively during this period and the subsequent three month period the implied effects on aggregate consumption demand are substantial consistent with liquidity constraints responses are larger for households with low liquid wealth or low income

the reaction of household consumption to predictable changes in social security taxes the key implication of rational expectations and the basic life cycle permanent income hypothesis that predictable changes in income have no effect on the growth rate of consumption expenditures is examined this implication is important for understanding the effectiveness and optimal timing of fiscal policy the causes and propagation of business cycles and the effects of income fluctuations on the growth rate of the economy using household level consumption data from the consumer expenditure survey whether expenditures on nondurable goods increase contemporaneously with predictable changes in social security tax withholding is tested it is found that households do change their consumption expenditures in response to the predictable fluctuations in income induced by the social security tax system

complementarities and coordination implications for governance mode and performance of multiproduct firms we explore the fit between a firm s product portfolio strategy and its governance mode with respect to complementary activities that underlie its product offering we view firm s governance choice through the lens of orchestrating complementary activities that entail multiple interrelated and often simultaneously occurring transactions our key premise is that a broader product portfolio while offering benefits through the bundle of complementary activities raises the coordination costs for firms making integration of complementary activities a preferred mode of governance we find strong support for our arguments in the context of the u s healthcare industry hospitals with a narrow service portfolio are more likely to have contracts with physicians as external service providers and hospitals with a broad service portfolio are more likely to employ their own physicians moreover hospitals that deviate from this fit based relationship suffer a significant penalty in terms of their financial performa

price cap regulation incentives and quality the case of brazilian telecommunications abstract this paper reviews the incentive properties of yardstick schemes with special reference to quality performance and to the economic foundations and practical applications of data envelopment analysis dea the core of the paper is related to the construction of synthetic relative efficiency scores for quality which were obtained for brazilian local telephony over the period 1998 2002 the telecommunications industry in brazil has been characterized by the recent implementation of price cap regulation the evidence indicates substantial quality underperformance with some improvements towards the end of the period the efficiency scores obtained based on the flexible dea approach suggest that adjustment factors should be used in the productivity offset of the price cap rule so as to provide premiums for superior quality performance in terms of lower x factors the dea based yardstick procedure can provide a practical alternative to monitoring a series of specific quality indicators in terms of a set of penalties for underperformance the composite quality indicators do not rule out the identification of optimal adjustments recommended for individual indicators

consumption and income some simple excercises with panel data this paper reports on the performance of simple versions of the rational expectations permanent income hypothesis of hall 1978 and the error correction approach of davidson et al 1978 in explaining nondurable consumption expenditure from austrian panel data paying particular attention to the characterization of nondurability we examine the parameter restrictions implied by the respective models and then select favoured dynamic consumption income relationship our findings suggest that the models receive limited support only for the narrowest category of nondurables food consumed at home particularly for broader categories the strength of model rejections and the complex dynamic paths observed imply that the models provide an inadequate description of consumption at the micro level

estimating most productive scale size using data envelopment analysis abstract the relation between the most productive scale size mpss for paparticular input and output mixes and returns to scale for multiple inputs multiple outputs situations is explicitly developed this relation is then employed to extend the applications of data envelopment analysis dea introduced by charnes cooper and rhodes ccr to the estimation of most productive scale sizes for convex production possibility sets it is then shown that in addition to productive inefficiencies at the actual scale size the ccr efficiency measure also reflects any inefficiencies due to divergence from the most productive scale size two illustrations of the practical applications of these results to the estimation of most productive scale sizes and returns to scale for hospitals and stem electric generation plants are also provided emphasize the advantage of this method in examining specific segments of the efficient production surface

technical efficiency and economies of scale in state owned enterprises the hellenic telecommunications organisation abstract in this paper we propose methodologies for assessing the relative efficiency of state owned enterprises that operate under monopolistic conditions irrespective of the ownership structure private or public monopolistic operation is often given unclear conflicting operating objectives by their principals or regulators and thus efficiency should be assessed using alternative objectives such as cost production and revenue on the methodological side the paper employs parametric functional forms using ordinary least squares and goal programming methods of estimation a secondary estimation stage was also pursued with the input output variables of the models being corrected for technical inefficiency the methodology was applied to examine the technical efficiency and economies of scale of the hellenic telecommunications organisation over the period 1971 1993

the public accounting industry production function abstract a translog function is specified to represent the relation between revenue and human resource inputs in public accounting firms estimation of the model using a balanced panel of annual data for 64 large cpa firms for the period 1995 1999 indicates that increasing returns to scale prevail in the public accounting industry justifying recent merger and acquisition activities among accounting firms average marginal revenue product of partners increased monotonically from 1995 to 1998 decreased slightly in 1999 and was about nine times that of other professionals during 1995 1999 the public accounting industry exhibited continuing improvement in productivity over the 5 years

testing efficiency hypotheses in joint production a parametric approach n recent years a great deal of research has been directed to the modelling and measurement of technical and allocative efficiency in production with few exceptions this research has been restricted to single product firms however recent developments in duality theory have facilitated the extension of this research to multi product firms the main purpose of this paper is to develop a model of the multiproduct firm in which the possibilities of both technical and allocative inefficiency are incorporated in an econometrically useful way the first model we develop includes a nonneutral2 type of technical inefficiency and three distinguishable types of allocative inefficiency output mix input mix and scale each type of inefficiency is costly to the firm in the sense that each causes a reduction in profit beneath the maximum value attainable under full efficiency the cost of each type of inefficiency depends on the magnitude of the inefficiency and the structure of the underlying production technology in the second model we develop technical inefficiency remains nonneutral but allocative inefficiency is not generally decomposable into output mix input mix and scale components however both technical and allocative inefficiency remain costly to the firm the cost of each type of inefficiency depending on its magnitude and the structure of the underlying production technology we model the technology of a competitive profit maximizing multi product firm with the dual profit function this enables us to use hotelling s lemma to generate a system of profit maximizing output supply and input demand equations these equations are then modified to allow for the possibility of technical and three types of allocative inefficiency a virtue of using the profit function to represent production technology is that it permits a straightforward comparison of maximum profit under full efficiency with actual profit and with the profit that would result from any combination of the four types of inefficiency this enables us to allocate the cost of inefficiency to each of four components our model of inefficiency is parametric and is embedded in a generalized leontief profit function although any flexible specification of the profit function can be used the model is developed in sections ii iv estimation of the model is considered in section v an empirical example designed to illustrate the workings of the model is discussed in section vi section vii concludes

a data envelopment analytic model for assessing the relative efficiency of the selling function abstract this paper presents a data envelopment analytic model for assessing the relative efficieny of sales units that simultaneously incorporates multiple sales outcomes controllable and uncontrollable resources and environmental factors the model enables comparisons among a reference set of sales units engaged in selling the same product service by deriving a single summary measure of relative sales efficiency in addition it provides insights into modifications that are necessary in order to enhance relative efficiency of an individual sales unit conditions when the sales unit has additional control over resources are explored and the effects on relative efficiency are examined an illustration of the model in the context of sales units from a sample of insurance companies demonstrates the critical features of the model

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

piecewise loglinear estimation of efficient production surfaces linear programming formulations for piecewise loglinear estimation of efficient production surfaces are derived from a set of basic properties postulated for the underlying production possibility sets unlike the piecewise linear model of banker charnes and cooper banker r d a charnes w w cooper 1984 models for the estimation of technical and scale inefficiencies in data envelopment analysis management sci 30 september 1078 1092 this approach permits the identification of increasing marginal products and estimation of the classical s shaped production functions methods are also provided for estimating technical inefficiencies and other production characteristics such as rates of substitution and transformation marginal products returns to scale and most productive scale sizes on the basis of observed production data the results of a simulation study are reported to illustrate the usefulness of this estimation method in empirical applications when there are a priori reasons to expect increasing marginal products in some regions of the production function a modified model is provided to extend this analysis to the situation of non competing outputs addressed by the bi extremal model of banker charnes cooper and schinnar banker r d a charnes w w cooper a schinnar 1981 a bi extremal principle for frontier estimation and efficiency evaluation management sci 27 december 1370 1382

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

further evidence of excess sensitivity of consumption nonseparability among goods and heterogeneity across households the standard theoretical framework for analysing households intertemporal decisions is the life cycle permanent income model among its implications testing the model allows to analyse the response of consumption to fiscal policy however the empirical literature with microdata has yielded mixed results this article examines the sensitivity of the results to the assumption of separability among goods and of homogeneity across households for that purpose we test a rational expectations permanent income model with household data drawn from the spanish family expenditure survey this survey contains detailed information on total expenditure and the income presents large exogenous quarterly changes due to an institutional feature the article shows that assuming separability among commodities biases the test against the model when separability is not imposed we show that the rejection of the model depends on heterogeneity across households in terms of their members being unemployed or not for those

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

using dea to evaluate 29 canadian textile companies considering returns to scale in this research we use data envelopment analysis dea to evaluate the performance of 29 canadian textile companies in 1994 using the charnes cooper and rodes ccr model in dea we first obtain the results of efficiency scores and returns to scale of 29 canadian textile companies we then focus on the returns to scale to examine the possibility of utilizing the inefficient inputs by either further expansion or vertical integration we develop a mathematical model to consider the trade off between reducing and not reducing the input surplus we use the cone ratio model to find the optimal level of vertical utilization the computational results are based on real data from the canadian textile companies

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

economic efficiency and frontier techniques abstract most of the literature related to the measurement of economic efficiency has based its analysis either on parametric or on non parametric frontier methods the choice of estimation method has been an issue of debate with some researchers preferring the parametric and others the non parametric approach the aim of this paper is to provide a critical and detailed review of both core frontier methods in our opinion no approach is strictly preferable to any other moreover a careful consideration of their main advantages and disadvantages of the data set utilized and of the intrinsic characteristics of the framework under analysis will help us in the correct implementation of these techniques recent developments in frontier techniques and economic efficiency measurement such as bayesian techniques bootstrapping duality theory and the analysis of sampling asymptotic properties are also considered in this paper

a comparative application of data envelopment analysis and translog methods an illustrative study of hospital production this paper compares inferences about hospital cost and production correspondences from two different estimation models 1 the econometric modeling of the translog cost function and 2 the application of data envelopment analysis dea while there are numerous examples of the application of each approach to empirical data this paper provides insights into the relative strengths of the estimation methods by applying both models to the same data the translog results suggest that constant reruns are operant whereas the dea results suggest that both increasing and decreasing returns to scale may be observed in different segments of the production correspondence in turn suggesting that the translog model may be averaging diametrically opposite behavior on the other hand by examining the rate of output transformation both models agree that patient days devoted to care of children are more resource intensive than those devoted to adults or to the elderly in addition we compare estimates of technical efficiencies of individual hospitals obtained from the two methods the dea estimates are found to be highly related to the capacity utilization but no such relationship was found for the translog estimates this comparative application of different estimation models to the same data to obtain inferences about the nature of underlying cost and production correspondences sheds interesting light on the strengths of each approach and suggests the need for additional research comparing estimation models using real as well as simulated data

a multiple output multiple input model of the hospital industry in north carolina 1983 a multiple output multiple input model of the hospital industry in north carolina applied economics vol 15 no 3 pp 341 352

a two stage translog marginal cost pricing approach for floridian hospital outputs since the passage of the affordable care act aca of 2010 issues still remain regarding the mandated purchase of insurance to ensure more universal coverage one such issue is the pricing of these insurance packages and whether or not the reimbursements will cover necessary services therefore policy concerns exist that increasing the number of insured individuals may not curtail costs conversely providers may not wish to treat patients covered by excessively frugal plans such as medicaid hence the trade offs between access and cost control in this article we present findings from a cost function and a productivity approach to determine the marginal cost of providing inpatient hospital care for hospitals operating in florida during 2005 using these methodological approaches we are able to use the marginal rate of transformation to determine the relative marginal costs while controlling for hospital technical and allocative inefficiency our work differs from earlier articles as we avoid the greene problem for cross sectional models through a two step approach by including both reimbursement rates under conditions of hospital efficiency we can ascertain payment schemes that should at least in theory cover necessary costs for patient care without leading to excessive input usage

measuring production efficiency of acute hospitals in scotland 1991 94 validity issues in data envelopment analysis data envelopment analysis is a potentially useful technique for measuring production efficiency and is being increasingly applied to health care services as with other areas however some fundamental concerns need to be addressed before data envelopment analysis can be accepted widely as a routine tool these include issues of validity and specification error this paper suggests a broad framework for assessing validity which should be developed further and gives illustrative examples of the problems in a real application within health care data from 75 scottish acute hospitals for three years from 1991 94 are analysed internal validity is assessed by examining the effect on the results obtained of the choice of inputs and outputs selected for analysis external validity is assessed by examining differences in the results obtained from the data for each of the three years in both cases it is concluded that there is a disturbing lack of concordance between the different results obtained caution mu

estimating total factor productivity growth in singapore at sectoral level using data envelopment analysis trends in total factor productivity growth tfpg are examined in the ten major sectors of singapore data are drawn from the yearbook of statistics singapore various issues and economic survey of singapore series ranging from the year 1985 to 2000 due to the heterogeneous characteristic of each sector and non availability of reliable input price data this study uses a non parametric frontier methodology known as data envelopment analysis dea to obtain the malmquist productivity index at the sectoral level the results can help singapore identify the best practice sector and laggards in three aspects efficiency change technical change and tfpg which is the qualitative productivity improvements needed for long term economic growth the three sets of productivity estimates are adjusted for effects of inflation and business cycles so that they are more reliable for policy implications this exercise will provide a platform for more detailed study on the determinants of tfp growth in different s

assessing the technical and allocative efficiency of hospital operations in greece and its resource allocation implications abstract in this paper we seek to develop a research framework concerning the assessment of the efficiency of public sector hospital operations public hospitals are increasingly under pressure to improve their operations both in terms of resources they use and also in terms of the quantity and quality of their outcomes the assessment of efficiency entails both the notions of technical and allocative efficiency as they yield complementary information about the management effectiveness of individual hospitals technical efficiency has a diagnostic purpose as it yields comparative information about the effectiveness with which individual units convert their input resources into outputs on the other hand allocative efficiency has a planning orientation since the objective of the assessment is to gauge efficiency improvements by means of resource reallocation a linear programming based model is proposed for assessing allocative efficiency in the light of uncertainty about the prices of input factors the empirical part of the paper is based on data from greek public hospitals results and policy implications are discussed based on data from 98 general hospitals based on information from 1992 it was found that significant inefficiencies are present in the operations of greek hospitals that account approximately for 100 mecu in 1992 prices

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