pitfalls of a minimax approach to model uncertainty i it does not always keep the normative analysis of decision making distinct from its descriptive analysis losing sight of the fact that these methods are appealing shortcut approximations not improvements on decision making based on the savage axioms ii in all the existing applications to monetary policy it analyzes uncertainty about relatively unimportant aspects of models while making strong but actually uncertain assumptions about other more important aspects

effects of a hybrid price stock dependent demand on the optimal solutions of a deteriorating inventory system and trade credit policy on re manufactured product abstract this study contributes to formulate a deteriorating inventory model with a hybrid price stock dependent demand with credit for units in stock period in the presence of trade credit policy by using the discounted cash flow approach on re manufactured products in real life the demand function is not always constant or linear or nonlinear the demand rate of any items goes up and down in the real market due to the sum of two different types of demand this study observes that the demand is depending on price and stock of the product time value of money and trade credit policy the objective of this study is to find optimum cycle time optimum selling price and present profit of all future cash flows the model starts with mathematical formulating and thereafter studies the necessary and sufficient conditions for obtaining the unique optimal solution the theoretical solution procedure and case examples have studied for validation of this model moreover the sensitivity analysis is expressed out with respect to main parameters and managerial application is obtained this study uses the different demand functions of a simple pricing inventory system to find out the maximum profit on re manufactured products

can unspanned stochastic volatility models explain the cross section of bond volatilities in fixed income markets volatility is unspanned if volatility risk cannot be hedged with bonds we first show that all affine term structure models with state space m n m can be drift normalized and show when the standard variance normalization can be obtained using this normalization we find conditions for a wide class of affine term structure models to exhibit unspanned stochastic volatility usv we show that the usv conditions restrict both the mean reversions of risk factors and the cross section of conditional yield volatilities the restrictions imply that previously studied affine usv models are unlikely to be able to generate the observed cross section of yield volatilities however more general usv models can match the cross section of bond volatilities this paper was accepted by wei xiong finance

methods for robust control robust control allows policymakers to formulate policies that guard against model misspecification the principal tools used to solve robust control problems are state space methods see hansen l p sargent t j 2008 robustness princeton university press giordani p soderlind p 2004 solution of macromodels with hansen sargent robust policies some extensions journal of economic dynamics and control 28 12 2367 2397 in this paper we show that the structural form methods developed by dennis 2007 optimal policy rules in rational expectations models new solution algorithms macroeconomic dynamics 11 1 31 55 to solve control problems with rational expectations can also be applied to robust control problems with the advantage that they bypass the task often onerous of having to express the reference model in state space form in addition we show how to implement two different timing assumptions with distinct implications for the robust policy and the economy we apply our methods to a new keynesian dynamic stochastic general equilibrium model and find that robustness has important effects on policy and the economy

why gaussian macro finance term structure models are nearly unconstrained factor vars this paper explores the impact of simultaneously enforcing the no arbitrage structure of a gaussian macro nance term structure model mtsm and accommodating measurement errors on bond yield through ltering on the maximum likelihood estimates of the model implied conditional distributions of the macro risk factors and bond yields for the typical yield curves and macro variables studied in this literature the estimated joint distribution within a canonical mtsm is nearly identical to the estimate from an economic model free factor vector autoregression factor var even when measurement errors are large it follows that a canonical mtsm does not oer any new insights into economic questions regarding the historical distribution of the macro risk factors and yields over and above what is learned from a factor var in particular the discipline of a canonical mtsm is empirically inconsequential for analyses of impulse response functions of bond yields and macro factors or empirical studies of term premiums these results are rotation invariant and therefore apply to many of the specications of risk factors in the literature in deriving these results we develop a new canonical form for mtsms that is particularly revealing about the nature of the over identifying restrictions implied by mtsms relative to yield based factor models

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

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

robust monetary rules under unstructured model uncertainty abstract this paper revisits a widely adopted approach to robust decision making developed by hansen and sargent 2003 hansen and sargent 2008 henceforth hs and applies it to monetary policy design in the face of model uncertainty we pay particular attention to two issues first we distinguish three possible forms of the implied game between malign nature and the policymaker in the hs procedure each leading to a different robust and approximating equilibria second we impose the zero lower bound zlb constraint on the nominal interest rate we show that the zlb constraint has serious consequences for a policymaker pursuing hs type robustness especially when accompanied by an inability to commit

monetary policy uncertainty and the response of the yield curve to policy shocks this paper studies the non linear response of the term structure of interest rates to monetary policy shocks and presents a new stylized fact we show that uncertainty about monetary policy changes the way the term structure responds to monetary policy a policy tightening leads to a significantly smaller increase in long term bond yields if policy uncertainty is high at the time of the shock we also look at the decomposition of bond yields into expectations about future policy and the term premium the weaker response of yields is driven by the fall in term premia which fall even more if uncertainty about policy is high these findings are robust to the measurement of monetary policy uncertainty the definition of the monetary policy shock and to changing the model specification conditional on a monetary policy shock higher uncertainty about monetary policy tends to make yields of longer maturities relatively more attractive as a consequence investors demand even lower term premia this intuition is supported by long term monetary pol icy disagreement which leads to opposite effects with term premia increasing even more after a policy shock

solution of macromodels with hansen sargent robust policies some extensions abstract we summarize some methods useful in formulating and solving hansen sargent robust control problems and suggest extensions to discretion and simple rules matlab octave and gauss software is provided we illustrate these extensions with applications to the term structure of interest rates the time inconsistency of optimal monetary policy the effects of expectations on the variances of inflation and output and on whether central banks should make their forecasts public

an eoq model for perishable products with fixed shelf life under stochastic demand conditions abstract the paper presents a mathematical stochastic model for perishable open dating foods including shortage and outdating costs the demand fluctuations have been taken into account modeling them through a normal distribution and their impact on the storage time has been studied considering the stochastic nature of such a parameter in turn the quantification of perished products has been also addressed determining the probability for a product of remaining in stock beyond the end of its shelf life on the basis of such premises the optimal set of parameters that minimize the total unit cost has been determined a numerical application and a sensitivity analysis show the practical applicability of the proposed model in the context of warehouse management underlining managerial insights

predictability in financial markets what do survey expectations tell us abstract there is widespread evidence of excess return predictability in financial markets for the foreign exchange market a number of studies have documented that the predictability of excess returns is closely related to the predictability of expectational errors of excess returns in this paper we investigate the link between the predictability of excess returns and expectational errors in a much broader set of financial markets using data on survey expectations of market participants in the stock market the foreign exchange market the bond market and money markets in various countries the results are striking first in markets where there is significant excess return predictability expectational errors of excess returns are predictable as well with the same sign and often even with similar magnitude this is the case for foreign exchange stock and bond markets second in the only market where excess returns are generally not predictable the money market expectational errors are not predictable either these findings suggest that an explanation for the predictability of excess returns must be closely linked to an explanation for the predictability of expectational errors

monetary policy shifts and the term structure we estimate the effect of shifts in monetary policy using the term structure of interest rates in our no arbitrage model the short rate follows a version of the taylor s 1993 discretion versus policy rules in practice carnegie rochester conference series on public policy 39 195 214 rule where the coefficients on the output gap and inflation vary over time the monetary policy loading on the output gap has averaged around 0 4 and has not changed very much over time the overall response of the yield curve to output gap components is relatively small in contrast the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2 4 in 1983 long term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads

simple monetary policy rules and exchange rate uncertainty abstract we analyze the performance and robustness of some common simple rules for monetary policy in a new keynesian open economy model under different assumptions about the exchange rate model adding the exchange rate to an optimized taylor rule that responds to cpi inflation gives only small improvements in terms of economic stability in most model configurations the taylor rule is also slightly more robust to uncertainty about the exchange rate model than are rules that respond to the rate of exchange rate depreciation our results thus indicate that the taylor rule is sufficient to stabilize a small open economy also under exchange rate model uncertainty

a note on optimal replenishment policies for non instantaneous deteriorating items with price and stock sensitive demand under permissible delay in payment abstract soni 2013 int j prod econ 146 1 259 268 proposed optimal replenishment policies for non instantaneous deteriorating items i e the product starts deteriorating after a period of no deterioration with price and stock sensitive demand with a stock dependent demand it is desirable to have non zero ending inventory due to potential profit resulting from the increased demand however soni 2013 int j prod econ 146 1 259 268 treated those ending inventory as fresh stocks to go through another period of non deterioration again additionally he assumed for simplicity that the replenishment cycle time t must be longer than the period of non deterioration t d i e t t d in reality one should consider all possible replenishment cycle time to maximize the profit in this note we complement the shortcomings of his model by i selling those ending inventory as salvages and ii considering all possible replenishment cycle time which may be shorter than the period of non deterioration with these modifications the repeatability of the replenishment cycle is ensured and the applicability of soni s model is strengthened the numerical examples indicate that the global optimal solution is indeed possible in the case of t t d

robust control with commitment a modification to hansen sargent i examine the hansen and sargent 2003 robust control of forward looking models journal of monetary economics 50 581 604 formulation of the robust stackelberg problem and show that their method of constructing the approximating equilibrium is generally invalid i then turn to the hansen and sargent 2007 robustness manuscript version dated march 22 2007 treatment which responding to the problems raised in this paper changes subtly but importantly how the robust stackelberg problem is formulated in the context of hansen and sargent 2007 robustness manuscript version dated march 22 2007 i prove first that their method for obtaining the approximating equilibrium is now equivalent to the one developed in this paper and second that the worst case specification errors are not subject to a time consistency problem in the context of the erceg et al 2000 optimal monetary policy with staggered wage and price contracts journal of monetary economics 46 281 313 sticky wage sticky price model i find that a robust central bank will fear primarily that the supply side of its approximating model is misspecified and that robustness affects importantly central bank promises about future policy

model uncertainty and delegation a case for friedman s k percent money growth rule model uncertainty affects the monetary policy delegation problem if there is uncertainty with regards to the determination of the delegated objective variables the central bank will want robustness against potential model misspecifications we show that with plausible degree of model uncertainty delegation of the friedman rule of increasing the money stock by k percent to the central bank will outperform commitment to the social loss function flexible inflation targeting the reason is that the price paid for robustness under flexible inflation targeting outweighs the inefficiency of money growth targeting imperfect control of money growth does not change this conclusion

robust monetary policy with the cost channel recent research argues that model uncertainty leads the central bank to adjust interest rates stronger to exogenous disturbances than under certainty this paper investigates whether the introduction of a cost channel of monetary transmission whose presence is empirically supported changes the impact of model uncertainty on interest rate setting the model is simple enough to facilitate an analytical solution i find that the presence of the cost channel dampens the effect of model uncertainty on interest rate setting and can offset the activist policy stance a richer model that allows for persistent supply and demand shocks corroborates these findings

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

inflation output variance trade offs and optimal monetary policy the author estimates the inflation output gap variance trade off faced by monetary policymakers in the united states for policymakers who care about deviations of inflation around target and output around potential the estimated trade off represents the optimal policy frontier given the structure of the economy policymakers can do no better than to attain weighted variances of inflation and output that lie on the frontier the author finds that the variance trade off becomes quite severe when the standard deviation of inflation or output drops much below 2 percent this suggests that approximately balanced responses to policy goals are consistent with reasonable preferences over inflation and output variability copyright 1997 by ohio state university press

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

imperfect credibility and robust monetary policy this paper studies the behavior of a central bank that seeks to conduct policy optimally while having imperfect credibility and harboring doubts about its model taking the smets wouters model as the central bank s approximating model the paper s main ndings are as follows first a central bank s credibility can have large consequences for how policy responds to shocks second central banks that have low credibility can bene t from a desire for robustness because this desire motivates the central bank to follow through on policy announcements that would otherwise not be time consistent third even relatively small departures from perfect credibility can produce important declines in policy performance finally as a technical contribution the paper develops a numerical procedure to solve the decision problem facing an imperfectly credible policymaker that seeks robustness

inflation expectations real rates and risk premia evidence from inflation swaps this paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short term real interest rate expected inflation inflation s central tendency and four volatility factors that follow garch processes we derive analytical solutions for nominal bond yields yields on inflation indexed bonds that have an indexation lag and the term structure of expected inflation unlike prior studies the model s parameters are estimated using data on inflation swap rates as well as nominal yields and survey forecasts of inflation the volatility state variables fully determine bonds time varying risk premia and allow for stochastic volatility and correlation between bond yields yet they have small effects on the cross section of nominal yields allowing for time varying volatility is particularly important for real interest rate and expected inflation processes but long horizon real and inflation risk premia are relatively stable

robust control of forward looking models abstract this paper shows how to formulate and compute robust ramsey aka stackelberg plans for linear models with forward looking private agents the leader and the followers share a common approximating model and both have preferences for robust decision rules because both doubt the model since their preferences differ the leader s and followers decision rules are fragile to different misspecifications of the approximating model we define a stackelberg equilibrium with robust decision makers in which the leader and follower have different worst case models despite sharing a common approximating model to compute a stackelberg equilibrium we formulate a bellman equation that is associated with an artificial single agent robust control problem the artificial bellman equation contains a description of implementability constraints that include euler equations that describe the worst case analysis of the followers as an example the paper analyzes a model of a monopoly facing a competitive fringe

robust monetary policy in a small open economy abstract we study how a central bank in a small open economy should conduct monetary policy if it fears that its model is misspecified using a new keynesian model of a small open economy we solve analytically for the optimal robust policy rule and the equilibrium dynamics and we separately analyze the consequences of central bank robustness against misspecification concerning the determination of inflation output and the exchange rate we show that an increase in the preference for robustness makes the central bank respond more aggressively or more cautiously to shocks depending on the type of shock and the source of misspecification

an inventory system with demand dependent on both time and price assuming backlogged shortages abstract in this work we analyze an inventory model for items whose demand is a bivariate function of price and time it is supposed that the demand rate multiplicatively combines the effects of a time power function and a price logit function the aim is to maximize the profit per time unit assuming that the inventory cost per time unit is the sum of the holding shortage ordering and purchasing costs an algorithm is developed to find the optimal price the optimal lot size and the optimal replenishment cycle several numerical examples are introduced to illustrate the solution procedure

why do term structures in different currencies co move abstract yield curve fluctuations across different currencies are highly correlated this paper investigates this phenomenon by exploring the channels through which macroeconomic shocks are transmitted across borders macroeconomic shocks affect current and expected future short term rates as central banks react to changing economic environments investors could also respond to these shocks by altering their required compensation for risk macroeconomic shocks thus influence bond yields both through a policy channel and through a risk compensation channel using data from the us the uk and germany we find that world inflation and us yield level together explain over two thirds of the covariance of yields at all maturities further these effects operate largely through the risk compensation channel for long term bonds

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

three types of robust ramsey problems in a linear quadratic framework abstract this paper studies robust ramsey policy problems in a general discrete time linear quadratic framework when the ramsey planner faces three types of ambiguity this framework includes both exogenous and endogenous state variables in addition the equilibrium system from the private sector contains both backward looking and forward looking dynamics we provide recursive characterizations and algorithms to solve for robust policy we apply our method to a basic new keynesian model of optimal monetary policy with persistent cost push shocks we find that i all three types of ambiguity make optimal monetary policy more history dependent but with different reasons for each type and ii they deliver qualitatively different initial responses of inflation and the output gap following a cost push shock

robust monetary policy with the consumption wealth channel abstract this paper studies how the central bank s concerns about model uncertainty affect the design of monetary policy in the presence of wealth effects if all exogenous disturbances are white noises increasing the preference for robustness or the size of wealth effects implies more aggressive policy responses to cost shocks under persistent shocks numerical simulations show that increasing the preference for robustness continues to imply more aggressive responses to cost shocks by contrast stronger wealth effects lead to less aggressive responses dampening the effect of model uncertainty on interest rate dynamics

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

structural analysis of manufacturer pricing in the presence of a strategic retailer consumer goods manufacturers usually sell their brands to consumers through common independent retailers theoretical research on such channel structures has analyzed the optimal behavior of channel members under alternative assumptions of manufacturer retailer interaction vertical strategic interaction research in empirical industrial organization has focused on analyzing the competitive interactions between manufacturers horizontal strategic interaction decision support systems have made various assumptions about retailer pricing rules e g constant markup category profit maximization the appropriateness of such assumptions about strategic behavior for any specific market however is an empirical question this paper therefore empirically infers 1 the vertical strategic interaction vsi between manufacturers and retailer 2 the horizontal strategic interaction hsi between manufacturers simultaneously with the vsi and 3 the pricing rule used by a retailer the approach is particularly appealing because it can be used with widely available scanner data where there is no information on wholesale prices researchers usually have no access to wholesale prices even manufacturers who have access to their own wholesale prices usually have limited information on competitors wholesale prices in the absence of wholesale prices we derive formulae for wholesale prices using game theoretic solution techniques under the specific assumptions of vertical and horizontal strategic interaction and retailer pricing rules we then embed the formulae for wholesale prices into the estimation equations while our empirical illustration is using scanner data without wholesale prices the model itself can be applied when wholesale prices are available early research on the inference of hsi among manufacturers in setting wholesale prices using scanner data e g kadiyali et al 1996 1999 made the simplifying assumption that retailers charge a constant margin this assumption enabled them to infer wholesale prices and analyze competitive interactions between manufacturers in this paper we show that this model is econometrically identical to a model that measures retail price coordination across brands hence the inferred cooperation among manufacturers could be exaggerated by the coordinated pricing category management done by the retailer we find empirical support for this argument this highlights the need to properly model and infer vsi simultaneously to accurately estimate the hsi when using data at the retail level functional forms of demand have been evaluated in terms of the fit of the model to sales data but recent theoretical research on channels lee and staelin 1997 tyagi 1999 has shown that the functional form has serious implications for strategic behavior such as retail passthrough while the logit and linear model implies equilibrium passthrough of less than 100 lee and staelin call this vertical strategic substitute vss the multiplicative model implies optimal passthrough of greater than 100 vertical strategic complement vsc because passthrough rates on promotions have been found to be below or above 100 chevalier and curhan 1976 armstrong 1991 we empirically test the appropriateness of the logit vss and the multiplicative vsc functional form for the data we perform our analysis in the yogurt and peanut butter categories for the two biggest stores in a local market we found that the vss implications of the logit fit the data better than the multiplicative model we also find that for both categories the best fitting model is one in which 1 the retailer maximizes category profits 2 the vsi is manufacturer stackelberg and 3 manufacturer pricing hsi is tacitly collusive the fact that the retailer maximizes category profits is consistent with theoretical expectations the inference that the vsi is manufacturer stackelberg reflects the institutional reality of the timing of the game retailers set their retail prices after manufacturers set their wholesale prices note that in the stores and product categories that we analyze the two manufacturers own the dominant brands with combined market shares of about 82 in the yogurt market and 65 in the peanut butter market the result is also consistent with a balance of power argument in the literature the finding that manufacturer pricing is tacitly collusive is consistent with the argument that firms involved in long term competition in concentrated markets can achieve tacit collusion managers use decision support systems for promotion planning that routinely make assumptions about vsi hsi and the functional form the results from our analysis are of substantive import in judging the appropriateness of assumptions made in such decision support systems

optimal ordering and pricing policy for demand functions that are separable into price and inventory age abstract we formulate and analyze two models for determining the optimal pricing order quantity and replenishment period for items whose demand function is separable into components of price and inventory age the first model assumes a multiplicative demand function we provide conditions which are satisfied by most common price dependent demand functions to reduce the three variable profit maximization problem into a single variable problem which can be solved using an efficient line search method next we show that a genuine additive model cannot exist and instead suggest and analyze a pseudo additive model however this model is more limited than the multiplicative model in its ability to incorporate various combinations of price and inventory age effects and reduction of the maximization problem into a single variable problem is more complicated except in the case of a linear price effect which is further analyzed for both models we show that the optimal solution satisfies the first order condition for equilibrium under a monopoly with a modification that includes inventory holding costs we solve numerical examples to illustrate the solution procedures

price level versus inflation targeting under model uncertainty the purpose of this paper is to make a quantitative contribution to the in ation vs price level targeting debate it considers a policymaker that can set policy either through an in ation targeting rule or a price level targeting rule to minimize a quadratic loss function using the actual projection model of the bank of canada totem the paper flnds that price level targeting dominates in ation targeting signiflcantly although it can lead to much more volatile in ation than in ation targeting depending on the weight assigned to output gap stabilization in the loss function the price level targeting rule is also found to mimic the full commitment solution quite well but there is an important difierence the full commitment solution does not require stationarity in the price level the paper then analyzes the extent to which the results are sensitive to hansen and sargent 2004 model uncertainty the paper flnds the price level targeting rule to be robust its performance deteriorates slower than the in ation targeting rule and the absolute decline in performance is small in magnitude

core and crust consumer prices and the term structure of interest rates we propose a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation core food and energy these dynamics combine together to produce a measure of expected total inflation that investors use to price nominal treasuries this framework captures different frequencies in inflation fluctuations shocks to core are more persistent and less volatile than shocks to food and especially energy the crust we find that a common structure of latent factors determines and predicts the term structure of yields and inflation our model outperforms popular benchmarks e g arma var and random walk specifications and it is at par with the survey of professional forecasters in forecasting inflation moreover we estimate real rates that agree with inflationindexed bond yields after adjusting for the liquidity premium in these bonds finally inflation and real rate risk premia show a declining pattern consistent with the changing nature of inflation and real rate risks

monetary policy and the natural rate of interest it is most important for monetary policy to be able to track the unobserved natural rate of interest in environments in which that rate takes big and sustained swings away from its long run equilibrium to establish this fact we study two models one is a standard new keynesian model in the other government bonds provide liquidity and deficit financed spending shocks cause large and persistent movements in the natural rate because they create extra liquidity policy rules that cannot make the policy rate track the natural rate perform poorly in both of these models but they are especially bad in the second model households would give up half of a percent of their onsumption each period to have a rule that could track the natural rate even in the standard model households would give up a quarter of a percent of consumption to obtain such a rule first difference rules perform quite well in this environment and they do not require any information about the natural rate of interest model uncertainty is perhaps the main reason why it is difficult to track the natural rate when model uncertainty is taken into account the

dissecting long term bund yields in the run up to the ecb s public sector purchase programme abstract in the run up to the ecb s public sector purchase programme in march 2015 german government bond yields declined significantly using an affine term structure model we provide evidence that the yield declines are almost fully attributable to a decline in the term premium as opposed to the expectations component this speaks in favour of a portfolio re balancing channel being at work rather than a policy rate signalling channel the result proves robust against changing the number of factors in the model the estimation sample and the estimation approach

restrictions on risk prices in dynamic term structure models restrictions on the risk pricing in dynamic term structure models dtsms tighten the link between cross sectional and time series variation of interest rates and make absence of arbitrage useful for inference about expectations this article presents a new econometric framework for estimation of affine gaussian dtsms under restrictions on risk prices which addresses the issues of a large model space and of model uncertainty using a bayesian approach a simulation study demonstrates the good performance of the proposed method data for u s treasury yields calls for tight restrictions on risk pricing only level risk is priced and only changes in the slope affect term premia incorporating the restrictions changes the model implied short rate expectations and term premia interest rate persistence is higher than in a maximally flexible model hence expectations of future short rates are more variable restrictions on risk prices help resolve the puzzle of implausibly stable short rate expectations in th

an elasticity approach to the newsvendor with price sensitive demand we introduce a measure of elasticity of stochastic demand called the elasticity of the lost sales rate which offers a unifying perspective on the well known newsvendor with pricing problem this new concept provides a framework to characterize structural results for coordinated and uncoordinated pricing and inventory strategies concavity and submodularity of the profit function as well as sensitivity properties of the optimal inventory and price policies are characterized by monotonicity conditions or bounds on the elasticity of the lost sales rate these elasticity conditions are satisfied by most relevant demand models in the marketing and operations literature our results unify and complement previous work on price setting newsvendor models and provide a new tool for researchers modeling stochastic price sensitive demand in other contexts

the term structure of policy rules abstract a formula is derived that links the coefficients of the monetary policy rule for the short term interest rate to the coefficients of the implied affine equations for long term interest rates the formula predicts that an increase in the coefficients in the monetary policy rule will lead to an increase in the coefficients in the affine equations empirical evidence for such a prediction is provided the curve of the response coefficients by maturity is also predicted by the formula the formula s predictive accuracy and its closed form make it a useful tool for studying the policy implications of embedding no arbitrage affine theories into macro models

the relationship between forecast dispersion and forecast uncertainty evidence from a survey data arch model this paper examines empirically the relationship between measures of forecast dispersion and forecast uncertainty from data on inflation expectations from the livingston survey series and the survey research center src survey series because the survey series do not provide probabilistic forecasts of inflation we derive measures of inflation uncertainty by modelling the conditional variance of the inflation forecast errors from the survey series as an autoregressive conditional heteroscedastic arch process the analysis is complicated by the fact that the overlap of forecast horizons for the survey series does not preclude the model s disturbance terms from displaying autocorrelation and also places a restriction on the specification for the arch measures of inflation uncertainty we estimate the model using hansen s 1982 generalized method of moments gmm procedure to account for the presence of serial correlation and conditional heteroscedasticity in the disturbance terms the results generally support the hypothesis that the measures of forecast dispersion across survey respondents are positively and statistically significantly associated with the measures of inflation uncertainty however the appropriateness of using forecast dispersion measures as proxies for inflation uncertainty is sensitive to the choice of the survey series

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

canonical term structure models with observable factors and the dynamics of bond risk premia we derive a canonical representation for the no arbitrage discrete time term structure models with both observable and unobservable state variables popularized by ang and piazzesi 2003 we conduct a specification analysis based on this canonical representation and we analyze how alternative parameterizations affect estimated risk premia impulse response functions and variance decompositions we find a trade off between the need to obtain parsimonious parameterizations and the ability of the models to match observed patterns of variation in risk premia we also find that more richly parameterized models uncover a greater influence of macroeconomic fundamentals on the long end of the yield curve

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

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

international capital markets and foreign exchange risk author s brennan michael j xia yihong abstract the relation between the volatilities of pricing kernels associated with di erent currencies and the volatility of the exchange rate between the currencies is derived under the assumption of integrated capital markets and the volatilities of the pricing kernels are related to the foreign exchange risk premium time series of pricing kernel volatilities are estimated from panel data on bond yields for five major currencies using a parsimonious term structure model that allows for time varying pricing kernel volatilities the resulting estimates are used to test hypotheses about the relation between the volatilities of the pricing kernels in di erent currencies and the volatility of the exchange rate as predicted time variation in foreign exchange risk premia is found to be related to time variation in both the volatility of the pricing kernels and the volatility of exchange rates the estimated pricing kernel volatilities can account for the forward premium puzzle in an average sense across exchange rates

how robustness can lower the cost of discretion model uncertainty has the potential to change importantly how monetary policy is conducted making it an issue that central banks cannot ignore using a standard new keynesian business cycle model this paper analyzes the behavior of a central bank that conducts policy under discretion while fearing that its model is misspecified the main results are as follows first policy performance can be improved if the discretionary central bank implements a robust policy this important result is obtained because the central bank s desire for robustness directs it to assertively stabilize inflation thereby mitigating the stabilization bias associated with discretionary policymaking second the central bank s fear of model misspecification leads it to forecast future outcomes under the belief that inflation in particular will be persistent and have large unconditional variance raising the probability of extreme outcomes private agents however anticipating the policy response make decisions under the belief that inflation will be more closely stabilized that is more tightly distributed than under rational expectations finally as a technical contribution the paper shows how to solve with robustness an important class of linear quadratic decision problems

optimal policy for an inventory system with backlogging and all units discounts application to the composite lot size model this paper examines an inventory model with full backlogging and all units quantity discounts the practical scenario of a salesperson offering compensation to a client so as not to lose the sale is considered the cost of a backorder thus includes both a fixed cost and a further cost which is proportional to the length of time the said backorder exists a first algorithm is developed to determine the optimal policy while some extensions to this algorithm are obtained that include additional conditions on the model in particular the well known composite lot size model developed by tersine is solved incorporating a new stockout cost and a new all units discount numerical examples are provided to illustrate the application of the algorithms

optimal replenishment policies for non instantaneous deteriorating items with price and stock sensitive demand under permissible delay in payment abstract this study is motivated by the paper of chang et al international journal of production economics 123 2010 62 68 we extend their inventory model from two aspects 1 the demand rate as multivariate function of price and level of inventory 2 delay in payment is permissible under these assumptions we first formulated a mathematical model and then some useful theoretical results have been derived to characterize the optimal solutions for non zero and zero ending inventory system numerical examples are presented to illustrate the theoretical results the sensitivity analysis of a suitable example is performed and some managerial insights are proposed our analysis revels that it is more beneficial to keep higher inventory level hoping to stimulate more demand even if it results in non zero ending inventory

model uncertainty and intertemporal tax smoothing in this paper we examine how model uncertainty due to the preference for robustness rb aects optimal taxation and the evolution of debt in the barro tax smoothing model 1979 we rst study how the government spending shocks are absorbed in the short run by varying taxes or through debt under rb furthermore we show that introducing rb improves the model s predictions by generating i the observed relative volatility of the changes in tax rates to government spending ii the observed comovement between government decits and spending and iii more consistent behavior of government budget decits in the us economy finally we show that rb can also improve the model s predictions in the presence of multiple shocks

the asian financial crisis and international reserve accumulation a robust control approach abstract standard macroeconomic models have difficulties accounting for the surge in international reserves of asian countries in the aftermath of the asian financial crisis of 1997 we propose precautionary demand for saving generated by model uncertainty as an important driver of this phenomenon using korean data we estimate a simple permanent income model augmented with model uncertainty find a structural break at the point of the asian financial crisis and identify a rise in concern for model misspecification which is distinct from an increase in income volatility the post crisis concern for model misspecification implies a reasonable detection error probability we also show that learning serves as an additional powerful amplification mechanism in our framework

the term structure of inflation expectations we use information in the term structure of survey based forecasts of inflation to estimate a factor hidden in the nominal yield curve we construct a model that accommodates forecasts over multiple horizons from multiple surveys and treasury real and nominal yields by allowing for differences between risk neutral subjective and objective probability measures we establish that model based inflation expectations are driven by inflation output and one latent factor we find that this factor affects inflation expectations at all horizons but has almost no effect on the nominal yields that is the latent factor is hidden we show that this hidden factor is not related to either current and past inflation or the standard set of macro variables studied in the literature consistent with the theoretical property of a hidden factor our model outperforms a standard macro finance model in its forecasting of inflation and yields

a multivariate latent factor decomposition of international bond yield spreads a factor analysis of long term bond spreads is performed by decomposing international interest rate spreads into national and global factors the factors are latent and are assumed to have garch type specifications as well as exhibiting serial dependence an indirect estimator is used to compute estimates of the unknown parameters the sampling performance of this estimator is investigated and compared with an alternative direct estimator based on the kalman predictor the factor model is applied to weekly data on long bond spreads between five countries australia japan germany canada and the uk and the usa over the period 1991 to 1999 the resulting factor decomposition is used to examine the international investor s optimal portfolio decision in a mean variance framework copyright 2000 john wiley sons ltd

a high frequency assessment of the ecb securities markets programme policy impact studies often suffer from endogeneity problems consider the case of the european central bank ecb securities markets programme if eurosystem interventions were triggered by sudden and strong price deteriorations looking at daily price changes may bias downward the correlation between yields and the amounts of bonds purchased simple regressions of daily changes in yields on quantities often give insignificant or even positive coefficients and therefore suggest that securities markets programme smp interventions have been ineffective or worse counterproductive we use high frequency data on purchases of the ecb securities markets programme and sovereign bond quotes to address the simultaneity and endogeneity issues we propose a vector autoregressive var framework estimated at several frequencies to better measure the smp impact and its persistence our results show that smp interventions have been effective in reducing yields of government bonds for the countries under the program

robust permanent income and pricing i suppose there exists an extremely powerful and if i may so speak malignant being whose whole endeavours are directed toward deceiving me rene descartes meditations ii 1

consensus and uncertainty in economic prediction we define consensus as the degree of agreement among point predictions aimed at the same target by different individuals and uncertainty as the diffuseness of the corresponding probability distributions this distinction is made operational with the aid of the nber asa survey data on matched point and probabilistic forecasts of inflation and the rate of change in gross national product the means of the two sets of forecasts agree closely standard deviations of point forecasts tend to understate uncertainty as measured by standard deviations of the predictive probability distributions however these measures of consensus and uncertainty are on the whole positively correlated there is evidence that expectations of higher inflation generate greater uncertainty about inflation tests also favor the hypothesis that a rise in inflation uncertainty has adverse effects on real growth

three types of ambiguity for each of three types of ambiguity we compute a robust ramsey plan and an associated worst case probability model ex post ambiguity of type i implies endogenously distorted homogeneous beliefs while ambiguities of types ii and iii imply distorted heterogeneous beliefs martingales characterize alternative probability specications and clarify distinctions among the three types of ambiguity we use recursive formulations of ramsey problems to impose local predictability of commitment multipliers directly to reduce the dimension of the state in a recursive formulation we transform the commitment multiplier to accommodate the heterogeneous beliefs that arise with ambiguity of types ii and iii our formulations facilitate comparisons of the consequences of these alternative types of ambiguity

the interest rate effects of government bond purchases away from the lower bound abstract i analyze the recent experience of unconventional monetary policy in sweden to study the interest rate transmission mechanisms of government bond purchases when interest rates are away from the lower bound using dynamic term structure models and event study regressions i find that government bond purchases have important portfolio balance and signaling effects the signaling channel operates mainly by lowering short rate expectations in the intermediate segment of the yield curve while the portfolio balance channel is effective in lowering longer maturity term premia in addition i find that target interest rate policy and government bond purchases operate in different segments of the yield curve this suggests that a combination of the two policies can be used to lower interest rates across the whole maturity spectrum making monetary policy more expansionary

a robust hansen sargent prediction formula this paper derives a formula for the optimal forecast of a discounted sum of future values of a random variable where optimal is defined in terms of the minimized h norm of the forecast error this problem reflects a preference for robustness in the presence of unstructured model uncertainty the paper shows that revisions of a robust forecast are more sensitive to new information and discusses the relevance of this result to previous findings of excess sensitivity of consumption and asset prices to new information 2001 elsevier science b v all rights reserved

the age specific burdens of short run fluctuations in government spending abstract we study the impact of government spending shocks on the distribution of income and wealth between cohorts and the associated welfare effects in a dynamic stochastic overlapping generations model with two types of households ricardian households and rule of thumb consumers we demonstrate that an unexpected increase in government spending decreases income and wealth inequality in contrast to the conventional wisdom that the financing of government expenditures by debt rather than taxes especially burdens young generations we find that debt financing also harms ricardian households during retirement the crucial element in our analysis is a wealth effect that results from the decline in the price of capital due to higher government debt

value of disruption information in an eoq environment abstract we consider an infinite horizon continuous review inventory model with deterministic stationary demand where supply is subject to disruption the supply process alternates between two states randomly one in which it functions normally on period and one in which it is disrupted off period in this setting we seek the value of disruption information which enables the buyer to place disruption orders at the beginning of off periods utilizing renewal theory we derive the total expected cost and characterize the optimal regular order up to level together with the order up to level for disruption orders we also conduct an extensive numerical analysis and compare the results with the model with no opportunity of disruption orders we observe that if the shortage cost is relatively high and the disruption risk is significant in terms of duration and or frequency placing a disruption order reduces the expected total cost significantly

robustly optimal instrument rules and robust control an equivalence result giannoni and woodford 2003a 2003b and hansen and sargent 2003 2004 have recently developed different notions of robust policy and both approaches have been applied in the context of optimal monetary policy in this note i demonstrate that both approaches lead to exactly the same implicit instrument rule for the policy maker in a standard forward looking new keynesian model despite the equivalence of the policy rules the two approaches predict different macroeconomic behavior because of difference assumptions about the formation of expectations

estimating nominal interest rate expectations overnight indexed swaps and the term structure abstract no arbitrage dynamic term structure models dtsms have regularly been used to estimate interest rate expectations and term premia but are beset by empirical challenges i propose augmenting dtsms with overnight indexed swap ois rates to better estimate the decomposition along the term structure at daily frequencies a gaussian affine dtsm augmented with 3 to 24 month ois rates generates estimates of us expectations that closely correspond to survey implied measures out to a 10 year horizon and are more stable across sub samples compared to existing models in addition i provide narrative evidence in the form of an event study around us unconventional monetary policy announcements to further exemplify the benefits from ois augmentation

the role of uncertainty in the term structure of interest rates a garch atsm approach this article examines the roles of uncertainties regarding various macro variables in determining risk premiums of bond yields we develop a multivariate garch var to quantify uncertainties regarding inflation real activities and monetary policy as time varying conditional variances we jointly estimate the multivariate garch and no arbitrage bond pricing equations using a maximum likelihood method the results indicate that the inflation uncertainty is the largest contributor to the dynamics of long term yields since the 1980s while the monetary policy uncertainty also plays noticeable roles