subjective interest rate uncertainty and the macroeconomy a cross country analysis abstract we ask whether uncertainty about interest rates is important for economic activity the effects of interest rate uncertainty on the economy are examined through the lens of a small var where the assumption that uncertainty can affect real activity contemporaneously but not vice versa is indeed in line with the data our measure of uncertainty stems from professional forecasts of short and long term interest rates and accounts for both disagreement among forecasters and the perceived variability of future aggregate shocks studying a panel of countries we find that subjective interest rate uncertainty has large negative and persistent effects on the economy

who do we tip and why an empirical investigation an important question about social norms is whether they are created to increase welfare this is addressed by examining the characteristics of tipped and non tipped occupations tipping prevalence is negatively correlated with worker s income and consumer s monitoring ability and positively with consumer s income and closeness between the worker and the consumer the results refute a common belief that tipping exists to improve economic efficiency by lowering monitoring costs tipping however is more prevalent when consumers feel empathy and compassion for workers and want to show gratitude for good service suggesting that tipping might increase welfare if welfare includes psychological utility

macroeconomic uncertainty through the lens of professional forecasters abstractwe analyze the evolution of macroeconomic uncertainty in the united states based on the forecast errors of consensus survey forecasts of various economic indicators comprehensive information contained in the survey forecasts enables us to capture a real time measure of uncertainty surrounding subjective forecasts in a simple framework we jointly model and estimate macroeconomic common and indicator specific uncertainties of four indicators using a factor stochastic volatility model our macroeconomic uncertainty estimates have three major spikes has three major spikes aligned with the 1973 1975 1980 and 2007 2009 recessions while other recessions were characterized by increases in indicator specific uncertainties we also show that the selection of data vintages affects the estimates and relative size of jumps in estimated uncertainty series finally our macroeconomic uncertainty has a persistent negative impact on real economic activity rather than producing wait and see dynamics

more is better but fair is fair tipping in dictator and ultimatum games abstract this paper examines allocators willingness to reward and punish their paired recipients recipients only compete in a skill testing contest the outcome of which determines the size of the surplus in the dictator game allocators reward skillful recipients but punish unskillful ones only modestly the punishment effect is mitigated by the belief held by some allocators that effort is the appropriate measure of deservingness the ultimatum game extension reveals offerers ability to adapt to the strategic environment offers to skillful recipients in the ultimatum game however are shown to be motivated by a taste for fairness and not strategic considerations journal of economic literature classification numbers c70 c91 d63

how trading institutions affect financial market performance some laboratory evidence i introduction trading institutions vary considerably across contemporary financial markets 1 but most can be classified into one of two basic types the continuous double auction da allows traders to submit public offers to buy or to sell and to accept other traders offers at any moment in time the double auction institution offers immediacy but non uniform transaction prices the other basic trading institution the clearinghouse ch gathers offers and clears them at a unified price at a pre specified time it sacrifices immediacy for uniform transaction prices 2 the two types of institutions have co existed and evolved for centuries but now are emerging in new electronic versions market participants and policy makers would like to know which institution or variant or combination is most efficient but theoretical and empirical work to date provides little guidance this paper reports on a series of laboratory asset markets experiments designed to compare variants of the double auction and clearinghouse trading institutions the markets are small usually with eight or nine traders but the traders are profit motivated and experienced with the trading institutions the traded asset has uncertain market value and traders receive useful but inconclusive private information they can only learn the asset s true value during the course of trade laboratory markets offer several advantages for empirical study of financial market institutions first private information is observable even controllable in the laboratory and therefore the investigator can directly measure market efficiency 3 second the complexity of the environment can be varied systematically in the laboratory and its effects on market performance can be separated from the effects of the market institution and other forces finally the market institution itself is controllable in the laboratory so it is possible to make valid causal inferences on how the market institution shapes market performance i begin with a survey of relevant literature and other preliminaries in the rest of this section section ii outlines the laboratory procedures the creation of trading environments of varying complexity the electronic implementation of the clearinghouse and double auction trading institutions the computation of theoretical benchmark prices and allocations and the measurement of market performance section iii collects the results following an illustrative account of a double auction trading period and a clearinghouse trading period i use descriptive statistics to summarize market performance in each of the thirty nine experiments the main conclusions are based on statistical comparisons of market performance across alternative market institutions the clearinghouse institution does surprisingly well it delivers greater market depth than the double auction discovers prices at least as efficiently and produces final allocations almost as efficient as the double auction the main institutional variants examined in this paper concern the amount of information made public regarding order placement orderflow the data suggest that public display of the orderflow enhances double auction efficiency but may impair clearinghouse efficiency a study of trading volume shows higher volume in the double auction in both institutions volume increases when important private news arrives and when the trading period is about to end the paper concludes with a brief summary and discussion of the results a companion paper friedman 1991 considers the effects of awarding various privileges to some but not all traders copeland and friedman 1987 1991 provide useful background information on laboratory procedures and computerized double auction markets instructions for the current experiments are available on request the need for empirical work a skeptic might argue that empirical work is unnecessary the mere fact that the double auction and clearinghouse institutions both persist in major financial markets implies that both are highly efficient because a more efficient institution would displace less efficient institutions

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

testing a discrete switching disequilibrium model of the uk labour market this paper develops a test procedure for serial correlation for discrete switching disequilibrium models which include both an endogenous price adjustment equation and lagged dependent variables the tests are applied to a model of the u k labor market and the model is respecified in the light of the test results

dynamic effects of monetary policy shocks on macroeconomic volatility we use a simple new keynesian model with firm specific capital non zero steady state inflation long run risks and epstein zin preferences to study the volatility implications of a monetary policy shock an unexpected increase in the policy rate by 150 basis points causes output and inflation volatility to rise around 10 above their steady state standard deviations var based empirical results support the model implications that contractionary shocks increase volatility the volatility effects of the shock are driven by agents concern about the in ability of the monetary authority to reverse deviations from the policy rule and the results are re enforced by the presence of non zero trend inflation

optimal monetary policy in a model of money and credit we investigate the extent to which monetary policy can enhance the functioning of the private credit system specifically we characterize the optimal return on money in the presence of credit arrangements there is a dual role for credit it allows buyers to trade without fiat money and also permits them to borrow against future income however not all traders have access to credit as a result there is a social role for fiat money because it allows agents to self insure against the risk of not being able to use credit in some transactions we consider a nonlinear monetary mechanism that is designed to enhance the credit system an active monetary policy is sufficient for relaxing credit constraints finally we characterize the optimal monetary policy and show that it necessarily entails a positive inflation rate

the stochastic volatility in mean model empirical evidence from international stock markets in this paper we present an exact maximum likelihood treatment for the estimation of a stochastic volatility in mean svm model based on monte carlo simulation methods the svm model incorporates the unobserved volatility as an explanatory variable in the mean equation the same extension is developed elsewhere for autoregressive conditional heteroscedastic arch models known as the arch in mean arch m model the estimation of arch models is relatively easy compared with that of the stochastic volatility sv model however efficient monte carlo simulation methods for sv models have been developed to overcome some of these problems the details of modifications required for estimating the volatility in mean effect are presented in this paper together with a monte carlo study to investigate the finite sample properties of the svm estimators taking these developments of estimation methods into account we regard sv and svm models as practical alternatives to their arch counterparts and therefore it is of interest to study and compare the two classes of volatility models we present an empirical study of the intertemporal relationship between stock index returns and their volatility for the united kingdom the united states and japan this phenomenon has been discussed in the financial economic literature but has proved hard to find empirically we provide evidence of a negative but weak relationship between returns and contemporaneous volatility which is indirect evidence of a positive relation between the expected components of the return and the volatility process copyright 2002 john wiley sons ltd

measuring uncertainty and its impact on the economy we propose a new framework for measuring uncertainty and its effects on the economy based on a large var model with errors whose stochastic volatility is driven by two common unobservable factors representing aggregate macroeconomic and financial uncertainty the uncertainty measures can also influence the levels of the variables so that contrary to most existing measures ours reflect changes in both the conditional mean and volatility of the variables and their impact on the economy can be assessed within the same framework moreover identification of the uncertainty shocks is simplified with respect to standard var based analysis in line with the favar approach and with heteroskedasticity based identification finally the model which is also applicable in other contexts is estimated with a new bayesian algorithm which is computationally efficient and allows for jointly modeling many variables while previous var models with stochastic volatility could only handle a handful of variables empirically we apply the method to estimate uncertainty and its effects using us data finding that there is indeed substantial commonality in uncertainty sizable effects of uncertainty on key macroeconomic and financial variables with responses in line with economic theory

incentives and service quality in the restaurant industry the tipping service puzzle tipping is a significant economic activity tips in the us food industry alone amount to about 42 billion annually that was claimed to improve service quality and increase economic efficiency because it gives incentives to provide excellent service and therefore allows to avoid costly monitoring of workers the article suggests that this common wisdom might be wrong a simple model shows formally that tips can improve service only if they are sensitive enough to service quality empirical evidence suggests that tips are hardly affected by service quality nevertheless rankings of service quality by customers are very high the co existence of these two findings is denoted the tipping service puzzle and several possible explanations for it are offered

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

technology shocks in the new keynesian model in the new keynesian model preference cost push and monetary shocks all compete with the real business cycle model s technology shock in driving aggregate fluctuations a version of this model estimated via maximum likelihood points to these other shocks as being more important for explaining the behavior of output inflation and interest rates in the postwar u s data these results weaken the links between the current generation of new keynesian models and the real business cycle models from which they were originally derived they also suggest that federal reserve officials have often faced difficult trade offs in conducting monetary policy

information aggregation in a noisy rational expectations economy abstract this paper analyzes a general equilibrium model of a competitive security market in which traders possess independent pieces of information about the return of a risky asset each trader conditions his estimate of the return both on his own private source of information and price which in equilibrium serves as a noisy aggregator of the total information observed by all traders a closed form characterization of the rational expectations equilibrium is presented a counter example to the existence of fully revealing equilibrium is developed

the impact of the volatility of monetary policy shocks this paper studies the impact of the volatility of monetary policy using a structural vector auroregression svar model enriched along two dimensions first it allows for time varying variance of monetary policy shocks via a stochastic volatility specification second it allows a dynamic interaction between the level of the endogenous variables in the var and the time varying volatility the analysis establishes that the nominal interest rate output growth and inflation fall in reaction to an increase in the volatility of monetary policy the analysis also develops a dynamic stochastic general equilibrium model enriched with stochastic volatility to monetary policy that generates similar responses and provides a theoretical underpinning of these findings

optimal monetary and fiscal policy with a zero bound on nominal interest rates i characterize optimal monetary and fiscal policy in a stochastic new keynesian model when nominal interest rates may occasionally hit the zero lower bound the benevolent policymaker controls the short term nominal interest rate and the level of government spending under discretionary policy accounting for fiscal stabilization policy eliminates to a large extent the welfare losses associated with the presence of the zero bound under commitment the gains associated with the use of the fiscal policy tool remain modest even though fiscal stabilization policy is part of the optimal policy mix

long memory economic policy uncertainty and forecasting us inflation a bayesian varfima approach abstractwe compare inflation forecasts of a vector autoregressive fractionally integrated moving average varfima model against standard forecasting models u s inflation forecasts improve when controlling for persistence and economic policy uncertainty epu importantly the varfima model comprising of inflation and epu outperforms commonly used inflation forecast models

informed speculation with imperfect competition competitive rational expectations models have the unsatisfactory property dubbed the schizophrenia problem by hellwig that each trader takes the equilibrium price as given despite the fact that he influences that price an examination of information aggregation in a non competitive rational expectations model using a nash equilibrium in demand functions shows that the schizophrenia problem is avoided by having each trader take into account the effect his demand has on the equilibrium price given a distribution of private information across traders prices reveal less information than in the competition equilibrium and prices no longer become fully informative in the limit as noise trading vanishes or as traders become risk neutral with small traders the model may become one of monopolistic competition not perfect competition in contrast to the competitive model a reasonable model of endogenous acquisition of costly private information is obtained even when traders are risk neutral

economics and identity this paper considers how identity a person s sense of self affects economic outcomes we incorporate the psychology and sociology of identity into an economic model of behavior in the utility function we propose identity is associated with different social categories and how people in these categories should behave we then construct a simple game theoretic model showing how identity can affect individual interactions the paper adapts these models to gender discrimination in the workplace the economics of poverty and social exclusion and the household division of labor in each case the inclusion of identity substantively changes conclusions of previous economic analysis

minimum wages and tipped servers tips allow restaurants to pay servers lower wages as more servers are hired each serves fewer meals and earns less in tips as a result restaurants must pay a higher wage this gives them monopsony power over wages over some range a higher minimum wage should increase employment empirically we found the full reverse c monopsony pattern of employment for restaurants with employment first going up and then down as the minimum wage is increased

is there an effect of policy related uncertainty on inflation evidence from the united states under trump this study bridges the existing literature on the macroeconomic effects of policy related uncertainty and the literature on inflation dynamics and provide fresh insights on the impacts of policy re

social norms and emission tax multiple equilibria in adopting pollution abatement device the effect of social norm is addressed in an adoption game where an emission tax is used to motivate oligopolistic firms to adopt a pollution abatement device we ask if the intrinsic motivation from social norm alone can motivate firms to participate in adoption the multiple equilibria in the adoption game indicates two possibilities this intrinsic motivation may or may not enhance adoption the existing literature on equilibrium selection further suggests that the most likely outcome is that it cannot enhance adoption next by keeping the assumption of symmetry we show that if cooperation is an option for firms then the presence of two coordination effects social norm on adoption and cooperation benefits on output will result in the existence of asymmetric adoptions

do people tip because of psychological or strategic motivations an empirical analysis of restaurant tipping one of the most interesting and central questions about tipping is why people tip the two major potential reasons are strategic behaviour aimed to ensure good future service and social psychological motivations data on tipping behaviour suggests that there is no positive effect of patronage frequency on the sensitivity of tips to service quality this implies that people tip only because of social and psychological motivations and not because of strategic reasons and future service considerations

a new approach to identifying the real effects of uncertainty shocks this article introduces the use of the sign restrictions methodology to identify uncertainty shocks we apply our methodology to a class of vector autoregression models with stochastic volatility t

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

the collapse of the fixed exchange rate regime with sticky wages and imperfect substitutability between domestic and foreign bonds abstract the paper extends the recent literature on balance of payments crises by allowing real effects to be connected with them the collapse of the fixed exchange rate regime and the dynamics associated with this regime shift are studied in addition the effects of a fiscal expansion under the fixed exchange rate regime are studied taking into account the fact that the viability of the regime is policy dependent

is there an interest rate speculation relationship evidence from g7 in the pre and post 2008 crisis abstractthe article revisits the is lm macroeconomic model by incorporating speculation into the investment function the discussion is supported empirically by using data from the g7 countries to examine the different interest rate regimes in the pre and post 2008 financial crisis the estimation of an anchor interest rate provides a reference rate for the g7 countries the empirical study is extended to examine if the three quantitative easing qe episodes in the u s are growth promoting the article concludes that the maintenance of a high and stable interest rate policy is needed for sustainable growth in the g7 countries

do people tip strategically to improve future service theory and evidence a central question about tipping is whether people tip strategically to improve future service or only because tipping is a social norm i present a theoretical model that incorporates psychological utility associated with tipping because it is a social norm and allows tipping to be motivated also by future service considerations the model predicts that if future service is a reason for tipping the sensitivity of tips to service quality should be higher for repeating customers than for non repeating ones surveys of 597 restaurant customers are analysed and suggest that future service is not a reason for tipping une question centrale a propos des pourboires est la suivante est ce que les gens donnent des pourboires strategiquement pour ameliorer la qualite du service ou est ce que le pourboire est simplement une norme sociale l auteur presente un modele theorique qui incorpore a la fois l utilite psychologique associee au pourboire parce que c est une norme sociale et prend en compte que le pourboire peut etre motive aussi par des l intention d ameliorer la qualite future du service le modele predit que si la qualite future du service est la raison pour donner des pourboires la sensibilite des pourboires a la qualite du service devrait etre plus grande pour les clients reguliers que pour les clients occasionnels des enquetes aupres de 597 clients de restaurants suggerent que la qualite future du service n est pas la raison pour laquelle on donne des pourboires

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

the us monetary performance prior to the 2008 crisis this article uses a structural vector autoregressive svar approach to study the different shocks to the monetary performance in the two decades of the us economy prior to the 2008 financial crisis by using the federal fund rate as a measure of change in the monetary policy this study shows that interest rate expectation is informative about the future movement of federal fund rate and the anticipated monetary policy should be one of the crucial reasons in causing monetary and financial deterioration in the us economy this article discusses a possible conjecture of a low interest rate trap when a persistent and prolonged low interest rate regime led to financial instability

do tips increase workers income this paper constructs a model of service providers who compete in service and labor markets simultaneously to analyze the effects of tipping on hourly wages and total tip inclusive hourly worker compensation an increase in the tipping rate reduces hourly wages total worker compensation increases at different rates depending on the market structure market coverage and employment level with the exception of price taking competitive service providers where the tip inclusive hourly income declines with the tipping rate the paper develops an index of effective tipping that measures the net percentage change in total hourly worker compensation associated with each tipping rate this paper was accepted by john list behavioral economics

two illustrations of the quantity theory of money breakdowns and revivals by extending his data we document the instability of low frequency regression coefficients that lucas 1980 used to express the quantity theory of money we impute the differences in these regression coefficients to differences in monetary policies across periods a dsge model estimated over a subsample like lucas s implies values of the regression coefficients that confirm lucas s results for his sample period but perturbing monetary policy rule parameters away from the values estimated over lucas s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample jel c51 e23 e31 e43 e51 e52 robert e lucas jr 1980 used near unit slopes of univariate regressions of moving averages of inflation and interest rates on money growth for the united states for the period 1953 1977 to illustrate two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest lucas said that those two quantity theoretic propositions

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

the stochastic volatility in mean model with time varying parameters an application to inflation modeling this article generalizes the popular stochastic volatility in mean model to allow for time varying parameters in the conditional mean the estimation of this extension is nontrival since the volatility appears in both the conditional mean and the conditional variance and its coefficient in the former is time varying we develop an efficient markov chain monte carlo algorithm based on band and sparse matrix algorithms instead of the kalman filter to estimate this more general variant the methodology is illustrated with an application that involves u s u k and germany inflation the estimation results show substantial time variation in the coefficient associated with the volatility highlighting the empirical relevance of the proposed extension moreover in a pseudo out of sample forecasting exercise the proposed variant also forecasts better than various standard benchmarks

risk aversion market liquidity and price efficiency a model of a noncompetitive speculative market is analyzed in which privately informed traders and market makers are risk averse market liquidity is found to be nonmonotonic in the number of informed traders their degree of risk aversion and the precision of their information it is also shown that increased liquidity trading leads to reduced price efficiency and that under endogenous information acquisition market liquidity may also be nonmonotonic in the variance of liquidity trades article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies