inconsistent voting behaviour in the fomc this article uses transcript data to examine determinants of inconsistent voting behaviour in the federal open market committee fomc in the period 1989 2008 inconsistent voting behaviour occurs

the market value of outstanding government debt 1919 1975 abstract several new series on the market value of outstanding government debt are reported and their methods of construction described the new series on federal debt are compared with other existing estimates and are shown to be markedly superior to them

monetary policy signaling and movements in the term structure of interest rates this paper examines how various monetary policy signals such as repo rate changes inflation reports speeches and minutes from monetary policy meetings affect the term structure of interest rates we find that unexpected movements in the short end of the yield curve are mainly driven by unexpected changes in the repo rate however published inflation reports and speeches also have some impact on short rates speeches are found to be a more important determinant for the longer end of the term structure our conclusion is that central bank communication is an essential part of the conduct of monetary policy

the relative yields on taxable and tax exempt debt a valuation model for corporate tax liabilities is developed and used to derive a relationship for the relative yields of taxable and tax exempt debt the model incorporates both the incomplete tax loss offset of the u s corporate tax code and the resulting probabilistic marginal tax rate the relationship is then tested using regression analysis the results are both positive and strong copyright 1986 by ohio state university press

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

the sustainability of government deficits implications of the present value borrowing constraint this paper introduces a new methodology for evaluating the sustainability of fiscal policy the new methodology is distinguished from most existing tests in two important respects first it allows for stochastic real interest rates and second it is both necessary and sufficient results from the application of the new test suggest that recent fiscal policy in the united states has not been sustainable the paper contrasts its findings with those of james d hamilton and marjorie a flavin 1986 copyright 1989 by ohio state university press

outsiders at the bank of england s mpc the monetary policy committee mpc of the bank of england which was established in may 1997 consists of five internal and four external members we study the voting record and show that insiders dissent rarely and typically for higher rather than lower rates whereas outsiders dissent more often prefer lower rates and disagree with the majority when economic growth slows moreover their dissents forecast future interest rate changes we show that a model in which outsiders dislike output below potential more than output above replicates the observed voting pattern well

first impressions matter signalling as a source of policy dynamics we provide the first direct empirical support for the importance of signalling in monetary policy by testing two key predictions from a novel structural model first all policymaker types should become less tough on inflation over time and secondly types that weigh output more should have a more pronounced shift voting data from the bank of england s monetary policy committee strongly support both predictions counterfactual results indicate signalling has a substantial impact on interest rates over the business cycle and improves the committee designer s welfare implications for committee design include allowing regular member turnover and transparency regarding publishing individual votes

monetary policy committees and interest rate setting abstract this paper shows that it is preferable for monetary policy to be conducted by a committee instead of a single policy maker if there is uncertainty about potential output we examine three decision procedures an optimal procedure averaging and voting and find that the latter is the appropriate way to reach decisions if policy makers are not equally skilled finally we demonstrate that efficient decision procedures reduce the persistence of shocks

the dissent voting behaviour of central bankers what do we really know we examine the determinants of the dissent in central bank boards voting records about monetary policy rates in the czech republic hungary sweden the uk and the us in contrast to previous studies we consider 25 different macroeconomic financial institutional psychological or preference related factors jointly and use bayesian model averaging bma to formally assess the attendant model uncertainty we find that the rate of dissent is between 5 and 20 for the examined central banks our results suggest that most of the examined regressors including factors that capture the effects of inflation and output are not robust determinants of voting dissent this result suggests that unobserved characteristics of central bankers and different communication strategies drive the dissent rather than the level of macroeconomic uncertainty

preferred habitat taxable tax exempt yield spreads and cycles in property liability insurance several theories seek to explain the spread between the yields on taxable and tax exempt bonds of comparable maturity this paper reconsiders the market segmentation theory by focusing on property and liability insurance companies plics plics can provide evidence on the market segmentation theory both because they are major participants in the market for longer term tax exempt bonds and because of their industry s pronounced profit cycle which causes wide variations in plics need fortax shields if investors have preferred habitats as per the market segmentation theory their preferences should cause plics purchases and sales of tax exempts to have different impacts on taxable tax exempts yield spreads at different maturities this paper finds strong evidence of market segmentation during the 1972 84 period when the industry experienced two extremely pronounced cycles and weaker evidence of market segmentation during the 1959 71 and 1985 89 periods copyright 1992 by ohio state university press

the capital gains and losses on u s government debt 1942 1987 the capital gains and losses on u s treasury securities are calculated and reported on a quarterly basis over the 1942 87 period these data are then used to calculate an adjusted measure of the federal budget deficit for the years 1975 87 whereas the rising trend in interest rates over the 1975 81 period substantially reduced the federal deficit this study shows that the reversal of that trend over the 1981 86 period contributed even more greatly to an increase in the deficit also calculated and reported are holding period rates of return on overall marketable treasury debt providing a contrast to existing interest rate series copyright 1989 by mit press

testing the positive theory of government finance researchers characterizing optimal tax policies for dynamic economies have reasoned that tax rates should follow a random walk we conduct a frequency domain examination of u s tax rates and reject the hypothesis that the first difference in the series is white noise the source of the rejection is pronounced activity of tax changes at an eight year cycle regression analysis confirms the finding that there is a cyclical component to tax changes corresponding to changes in political party administration the results suggest that the positive theory of government finance needs to be refined to incorporate features of political equilibrium

a simulation study of the interactive effects of taxes and inflation on the relative price of land recent experience in the united states with high and variable inflation has led to an outpouring of research concerning inflation s impact on the relative prices of real and financial assets with the exception of three recent papers feldstein 1980a rose 1986a alston 1986 the impact of inflation on the relative price of land has been neglected land is usually eliminated from economic models of the tax system so that the effects of inflation s complex interaction with the income tax system on firm financing and valuation of capital can be highlighted in this paper we take the opposite approach the effects of inflation on corporate financing of capital are suppressed by allowing only bond financing in order to highlight the effects of inflation and tax rate changes on the relative price of land

default risk yield spreads and time to maturity this paper extends the default model of yield spreads for bonds by showing that in gen eral they are a complex function of maturity and in particular are not always monotoni cally increasing contrary to what one traditional view suggests our results may help explain the apparently conflicting empirical results found in the literature

publicity of debate and the incentive to dissent evidence from the us federal reserve transparency in committee decision making may have clear benefits by making members more accountable to outside observers we consider one potential cost the possibility that publishing records of deliberations will make members more reluctant to offer dissenting opinions we construct a model that compares incentives for members with career concerns to voice dissent when deliberations occur in public or in private we test the model using an original dataset based on deliberations of the federal reserve s federal open market committee asking whether the fomc s 1993 decision to begin releasing transcripts of its meetings has altered incentives for dissent we find evidence that this is indeed the case there has been much recent discussion of the advantages of transparency in agency relationships both in and outside of government while research has attempted to model this issue theoretically there has been less progress with empirical tests a problem due no doubt in large part to the fact that it is difficult to make before and after comparisons of a shift in transparency often no data are available on an agent s actions prior to the establishment of transparency in this article we focus on one specific type of transparency publishing verbatim transcripts of committee meetings and one specific reason why this type of transparency might not be desirable the possibility that the quality of deliberation on a committee will suffer if the deliberations take place in public we develop a theoretical model that helps to identify the potential costs of this type of transparency and we then test the model empirically using an original dataset on deliberations of the federal reserve s federal open market committee fomc our dataset is unique in that it records views expressed by policymakers at fomc meetings and not just their official votes our empirical tests focus in particular on the observed effect of the institutional change that occurred in 1993 when the fomc decided to begin releasing transcripts of its meetings after a delay of five years transparency is a particularly relevant issue in monetary policy because it is commonly argued that when central banks take actions such as publishing macroeconomic forecasts revealing individual votes on monetary policy committees or releasing minutes of meetings this will lead to improved economic outcomes while simultaneously facilitating democratic accountability 1

a decade of dissent explaining the dissent voting behavior of bank of england mpc members we examine the dissent voting record of the bank of england monetary policy committee contrary to findings in the fomc literature for example havrilesky and schweitzer in the political economy of american monetary policy pp 197 210 1990 chappell et al in q j econ 108 1 185 218 1993 the effects of members career backgrounds and the political channel of appointment on voting behavior are negligible reflecting the distinct institutional constraints and incentives associated with uk monetary policy our findings also suggest that literature which characterizes voting behavior as being predominantly determined by members internal or external status is overly simplistic this view is supported by econometric results appertaining to the introduction of member specific fixed effects which account for possible unobserved heterogeneity

the policy choices and reaction functions of bank of england mpc members the results of an econometric exercise are presented showing that monetary policy committee mpc members appointed from outside the ranks of bank of england staff outsiders react differently to forecasts of inflation and output than those appointed from within the bank insiders all results are reinforced by the well established findings that compared with outsiders insiders choose higher interest rates are more likely to vote as a bloc and feature on the winning side of policy decisions more frequently on the basis of these results it is argued that the current mpc framework is biased toward the policy choices of insiders

the pricing of short term debt and the miller hypothesis a note in 1977 miller 2 challenged conventional wisdom concerning the gain from corporate leverage introducing an equilibrium model of the municipal and corporate debt markets and arguing that the effective personal tax rate on equity is negligible miller concluded that the relevant marginal tax rate operating across the two markets would be the corporate rate and as a result the marginal value of the tax shield to an individual firm would be zero the purpose of this paper is to present additional evidence regarding implied marginal tax rates on interest income taxable and tax free money market funds are compared making it possible to avoid difficulties in previous studies involving long term bond yields the results support the miller hypothesis when these short term rates are compared when there is little term structure impact and when risk differences are small observed returns on taxable and tax free investments imply a tax rate almost exactly equal to the corporate rate

is the budget deficit too large yes specifically we find that recent spending and taxing policies of the government if continued violate the government s intertemporal budget constraint as a result government spending must be reduced and or tax revenues must be increased these conclusions are based on tests of whether government spending and revenue are cointegrated in addition to examining real spending and revenue we also normalize these variables by real gnp and population for a growing economy these normalized measures are perhaps more pertinent we also test and find support for the hypothesis that deficits have become a problem only in recent years

intra day arbitrage opportunities in foreign exchange and eurocurrency markets we have two primary objectives in this study first we examine the frequency of attaining simultaneous equilibrium on spot and forward foreign exchange markets and on domestic and foreign securities markets second we measure the profitability of covered interest arbitrage and one way arbitrage our empirical analysis has been conducted using real time quotations the empirical results indicate that a the markets are efficient in the sense that profit opportunities from traditional covered interest arbitrage are rarely available and b the frequency of attaining simultaneous market equilibrium is surprisingly low thus opening the door for one way arbitrage the role of transaction costs in explaining the deviation of the actual forward price from the interest parity forward price has been studied extensively based on covered interest arbitrage frenkel and levich 1975 1977 have shown that the interest parity line is bound by a neutral band defined as

municipal bond liquidity and default risk this paper examines the pricing of municipal bonds i use three distinct complementary approaches to decompose municipal bond spreads into default and liquidity components and find that default risk accounts for 74 to 84 of the average spread after adjusting for tax exempt status the first approach estimates the liquidity component using transaction data the second measures the default component with credit default swap data and the third is a quasi natural experiment that estimates changes in default risk around pre refunding events the price of default risk is high given the rare incidence of municipal default and implies a high risk premium

does central bank communication signal future monetary policy in a post crisis era the case of the ecb abstract we examine the european central bank s ad hoc communication and explore how it informs future monetary policy decisions using the rich dataset of the inter meeting verbal communication by the members of the european central bank s governing council between 2008 and 2016 we construct a measure of communication evaluating its inclination towards easing tightening or maintaining the monetary policy stance we find that this measure provides useful additional information about future monetary policy decisions even when we control for market based interest rate expectations and lagged decisions our results also suggest that in particular communication related to conventional measures and or by the ecb president explain the future ecb rate changes well all aforementioned results hold also in the environment of the zero lower bound overall these results point to the importance of transparent communication in understanding the future course of monetary policy

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

on the limitations of government borrowing a framework for empiricaltesting this paper seeks to distinguish empirically between two views on the limitations of government borrowing according to one view nothing precludes the government from running a permanent budget deficit paying interest due on the growing debt load simply by issuing new debt an alternative perspective holds that creditors would be unwilling to purchase government debt unless the government made a credible commitment to balance its budget in present value terms we show that distinguishing between these possibilities is mathematically equivalent to testing whether a continuing currency inflation might be fueled by speculation alone or is instead driven solely by economic fundamentals empirical tests which have been developed for this economic question lead us to conclude that postwar u s deficits are largely consistent with the proposition that the government budget must be balanced in present value terms this abstract was borrowed from another version of this item

is the mpc s voting record informative about future uk monetary policy it is shown that the voting record of the monetary policy committee of the bank of england helps predict future policy rate changes this result is robust to the inclusion of market participants expectations as measured by the slope of the term structure of money market rates and interest rate futures moreover expectations seem to adjust to the information contained in the voting record which suggests that publishing the minutes of mpc meetings increases the transparency of monetary policy

central bank communication and monetary policy a survey of theory and evidence over the last two decades communication has become an increasingly important aspect of monetary policy these real world developments have spawned a huge new scholarly literature on central bank communication mostly empirical and almost all of it written in this decade we survey this ever growing literature the evidence suggests that communication can be an important and powerful part of the central bank s toolkit since it has the ability to move financial markets to enhance the predictability of monetary policy decisions and potentially to help achieve central banks macroeconomic objectives however the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy

marginal tax rates evidence from nontaxable corporate bonds a note this study offers an alternative method of calculating marginal personal tax rates through the pairing of nontaxable industrial development and pollution control and taxable corporate bonds this procedure is shown to produce matched bond pairs that are comparable two hundred pairs of bonds are examined from the second quarter of 1973 through the second quarter of 1983 testing of the marginal tax rate relationships indicates that the marginal personal tax rate is less than the corporate statutory tax rate the examination of the relative pricing of taxable and nontaxable bonds provides an estimate of the marginal tax rates of bondholders who are indifferent between taxable and nontaxable bonds see for example gordon and malkiel 1 trczinka 6 and skelton 4 typically these implied marginal tax rates are calculated by comparing yield indices of taxable corporate bonds and nontaxable municipal bonds a potential problem with this method pointed out by trczinka 6 is that municipal and corporate bonds may not be of the same risk requiring some adjustment in the calculation another problem with this method is that the bond yield indices are computed from a sample of outstanding bonds introducing a potential yield to maturity bias associated with discount bonds skelton 4 an alternative procedure for calculating implied marginal tax rates is employed in this paper which avoids the problems of differential risks and the potential yield to maturity bias for discount bonds implied tax rates are calculated from pairs of newly issued bonds where each pair consists of one nontaxable corporate bond a tax exempt industrial development or pollution control bond and one taxable corporate bond 1 since only newly issued bonds are used in the computations the bias associated with capital gains and losses is avoided this study is organized into the following sections section i describes the data and the collection procedure the resultant implied marginal rates are presented in section ii summarizing and concluding remarks are provided in section iii

term structure effects on default risk premia and the relationship of default risky tax exempt yields to risk free taxable yields a note abstract the behavior of the default risk premium on bonds has caught the attention of many researchers some researchers have analyzed how default risk premia may vary with maturity it has been suggested that default risk premia are independent of maturity however recent research by rodriguez 1988 shows this to not hold for nonpar taxable bonds this research shows that the shape of the underlying term structure affects default risk premia for even par bonds in a systematic way furthermore the maturity dependent variation in equilibrium tax rates has a strong impact upon default risk premia behavior where equilibrium tax rates are derived from comparisons of taxable and tax exempt bonds the inclusion of the shape of the underlying term structure also has very important implications for the relation between taxexempt yields and taxable yields the slope and intercept terms of the relation between taxexempt and taxable yields are clearly dependent upon maturity a fact which has not been recognized before

was the tax exempt bond market inefficient or were future expected tax rates negative this paper shows that the sharp narrowing with maturity of the spread between taxable and tax exempt yields leaves room for tax arbitrage at times tax exempt forward rates have exceeded taxable forward rates at such times only expectations of higher taxes on treasury than on municipal bonds would eliminate profit opportunities the authors develop the idea of forward tax rates and compute forward tax rates for 1955 through 1984 they also outline tax arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the municipal bond futures contract and show the potential profits the municipal yield curve has been upward sloping for the entire postwar period even at times when taxable yield curves were humped or downward sloping thus the spread in yields between taxable and tax free bonds narrows dramatically with increasing maturity this paper focuses on the term structure of the spread in yields between taxable and tax exempt bonds we show that the sharp narrowing of the spread with maturity leaves room for some apparently unexploited tax arbitrage at times the narrowing has been so dramatic that taxexempt forward rates have exceeded taxable forward rates in other words only expectations of negative future tax rates on treasury interest or the expectations of a reversal in the relative taxability of treasury and municipal bonds would eliminate profit opportunities this situation makes little sense if the markets are well arbitraged three theories of the relationship between the yields on taxable and taxexempt bonds have attracted attention 2 miller 8 asserts that the corporate tax rate determines the yield spread between taxable and tax exempt debt in the

market segmentation and the term structure of municipal yields an issue of considerable controversy in recent years is whether segmentation exists in the municipal bond market the presence of market segmentation suggests that securities can be subdivided into distinct groups according to some characteristic and there exists a lack of substitution between these groups on the part of borrowers and or investors 1 4 8 hendershott and kidwell 4 for example found evidence that market segmentation affected yields between regionally and nationally marketed municipal bond issues others contend that the municipal bond market is relatively efficient and no permanent segmentation effects can exist 2 9 most recently campbell 2 examined possible segmentation resulting from the large acquisitions of municipal securities by commercial banks and found that bank demand for municipal securities had no significant influence on the yield spreads between municipal bonds which differed in default risk term to maturity and tax treatment this is consistent with the argument that the combination of progressive personal income tax rates and fixed corporate income tax rates induces corporations to issue an amount of debt such that the marginal investor in taxable and tax exempt securities pays taxes at the full corporate rate 9 if segmentation does not exist two peculiar features of the term structure of municipal yields cannot be fully explained for one municipal yields have almost always increased monotonically with maturity this is true both for market averages of similarly rated municipal securities and for reoffering yields on individual serial

relative risk in municipal and corporate debt the yields of municipal bonds and corporate bonds are often compared the ratios of municipal bond yields to corporate bond yields are thought by many to be indicative of the marginal tax bracket of the marginal holder of the bonds if for example the ratio is 60 the implication is that an investor in the fortypercent tax bracket will be indifferent between the fully taxed corporate and the fully tax exempt municipal this assumes that the two bonds are currently selling at par such comparisons have attracted increased attention since the publication of merton miller s seminal debt and taxes in this work miller indirectly suggests that the marginal tax bracket at work across tax exempt and taxable bonds is equal to the corporate tax rate while the ratio of yields seems to indicate that this is true for short term bonds the yields of long term taxexempts seem too high relative to long term taxables to confirm miller s hypothesis implicit in these comparisons and the conclusions drawn from them is the tenuous notion that the compared bonds are identical except for the taxability of the coupon for example some authors have questioned whether municipals and corporates are equally risky see trzcinka 1982 the purpose of this paper is to present preliminary evidence on the relative riskiness of the two classes of bonds

transparency and trust the case of the european central bank abstractwe examine how the transparency of the european central bank s monetary policy affects the amount of trust that the citizens of the european union have in this institution we use nearly half a million individual responses from the european commission s eurobarometer survey from 2000 to 2011 and estimate probit regressions with sample selection we find that transparency exerts a non linear effect on trust transparency increases trust but only up to a certain point too much transparency harms trust this result is robust to controlling for a number of macroeconomic conditions financial stability transparency measures and economic and socio demographic characteristics of respondents including examining respondents in european union countries that do not use the euro and addressing clustering issues

marginal stockholder tax effects and ex dividend day price behavior evidence from taxable versus nontaxable closed end funds almost all research on the movement of stock prices on ex dividend days has found that prices decline by less than the dividend though this is consistent with tax effects several papers have argued that this phenomenon could be caused by market microstructure effects in this paper we make use of a natural experiment that provides support for the tax explanations of ex dividend behavior some closed end funds have taxable and some have nontaxable dividend distributions both types are subject to taxes on capital gains the implication of this for ex dividendday price behavior is very different between these two types of funds if taxes matter this paper demonstrates that the direction of ex dividendday price behavior is consistent with a tax explanation and that ex dividend day price behavior changes as theory would suggest with changes in the tax law

dissent in monetary policy decisions voting records indicate that dissents in monetary policy committees are frequent and predictability regressions show that they help forecast future policy decisions in order to study whether the latter relation is causal we construct a model of committee decision making and dissent where members decisions are not a function of past dissents the model is estimated using voting data from the bank of england and the riksbank stochastic simulations show that the decision making frictions in our

tax management and investment strategies of property liability insurers abstract the tax reform act tra of 1986 reduced the incentives for institutional investors to participate in the tax exempt bond market this paper develops a model of profit maximization incorporating the tra provisions applicable to property liability pl insurers the theory predicts that pl insurers will use underwriting losses to shelter taxable investment income and invest the balance of their portfolios in tax favored securities our empirical evidence reveals that insurers continued to invest in tax exempts following the tra suggesting that implicit tax rates are low enough to attract insurers into the long term tax exempt market however insurers reduced the proportions of income derived from tax exempt interest and dividends following the tra

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

one way arbitrage foreign exchange and securities markets a note theorem in the case of traders with exogenous needs to acquire foreign currency recently deardorff 3 coitned the phrase one way arbitrage to describe the behavior of those traders and showed that it probably precludes round trip covered interest arbitrage from breaking even deardorff s analysis focuses on the conditions under which in the presence of transaction costs there would be both spot and forward transactions on the foreign exchange markets at equilibrium in this paper we extend the analysis to derive the conditions under which transactions would exist in both the home and foreign securities markets and we generalize the results to the case of transactions in all markets

banks firms and the relative pricing of tax exempt and taxable bonds abstract the traditional analysis of the relative pricing of tax exempt and taxable debt is a habitat theory of the term structure of interest rates in the traditional analysis the preferences of investors for particular maturities of debt lead to unique pricing relations at every point on the yield curve which are indicative of investor marginal tax brackets recent work by fama 1977 suggests that banks are potential arbitrageurs across tax exempt and taxable bond markets which force a particular equilibrium on the pricing of short term bonds miller 1977 suggests that the choice of debt or equity financing by firms in the aggregate forces a similar equilibrium on the pricing of all tax exempt and taxable bonds this paper exploits the institution of regulation q and its effects on the banking system to bring evidence to bear on the predictions of these three models

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

too little too late interest rate setting and the costs of consensus abstract central banks have been criticised for changing interest rates too little too late this pattern arises if policymakers are uncertain about the optimal level of interest rates and is exacerbated if decisions are taken by consensus rather than a vote

a model of covered interest arbitrage under market segmentation existing models of covered interest arbitrage typically assume market participants have equal capital and foreign exchange market access this paper derives sufficient conditions for the existence of neutral interest parity forward price bands when capital markets are segmented and exchange rates are dually quoted all forward price intervals are completely characterized in terms of simultaneous two way and one way arbitrage flow possibilities the parameters of the no arbitrage price region are shown to be established on the basis of relative advantage with respect to the set of available arbitrage strategies copyright 1991 by ohio state university press

the default rate experience on high yield corporate debt recent 1978 83 net returns on high yield low rated debt have been impressive averaging 490 to 580 basis points above the long term government bond index but low rated junk bonds pose a risk of default not present in the higher rated segment of the bond market the authors divided the par value of defaulting debt by total low rated straight debt outstanding to arrive at an estimate of the default rate for high yield bonds excluding johns manville which had the only defaulting debt rated investment grade just prior to the default date for the 1974 84 period this averaged 1 52 per cent or 152 basis points annually year to year variations in the rate were substantial furthermore default experience differed across various industry segments railroads and reits were particularly vulnerable to default in the past although they are unlikely to represent a large portion of future defaults retailer electronic computer airline and oil and gas defaults have become more common in recent years losses from default are actually lower than the default rate alone implies defaulted bonds traded on average at 41 per cent of par shortly after default after accounting for the bonds retained value and the loss of interest the average reduction in return to the investor who had purchased the bonds at par would have been in the range of 96 to 100 basis points annually

the resiliency of the high yield bond market the ltv default this paper investigates the resiliency of the new issue high yield bond market by examining the changes in implied default rates of such bonds before and after the largest high yield bond default i e the ltv bankruptcy specifically the paper compares implied default probabilities of high yield bonds during the post ltv period calculated from actual new issue yields with instrumental default probabilities calculated on the assumption that the default had not occurred a comparison of these probabilities reveals that the market s perception of default on the hjgh risk segment of the bond market increased significantly after the ltv bankruptcy however the effect was transitory lasting only six months thus the market was resilient to a major default in recent years high yield debt has become a significant segment of the corporate bond market the main source of the growth has come from new issues of high yield corporate bonds rather than an increase in fallen angels 1 the driving force behind this new breed of high yield debt growth has been its use as a means to tap the capital markets to finance increasingly common leveraged buyouts hostile takeovers and major corporate restructurings the market acceptance of high yield bonds was further enhanced by empirical evidence that net returns on a diversified portfolio of low grade bonds exceeded those on highgrade bonds while the volatility of their monthly returns was no greater 2 the frenzied pace of growth in the high yield debt market however has been accompanied by increasing concerns from various quarters 3 critics have char

the effect of fomc votes on financial markets this paper shows that since votes of members of the federal open market committee have been included in press statements stock prices increase after the announcement when votes are unanimous but f

taxable vs tax exempt bonds a note on the effect of uncertain taxable income for an investor to be indifferent between a municipal security and say a corporate security of equal risk the following would need to hold for par value bonds rte r 1 t where rte the yield on the municipal security r the yield on the corporate security and t the marginal tax rate of the investor if rte were greater than r 1 t rational investors would invest in municipal securities if it were less they would invest in corporates

bond returns liquidity and missing data this paper examines holding period returns to constant duration portfolios of u s govern ment notes and bonds and measures the return premium generated by liquidity differences in bonds the approach compares constant duration portfolios constructed in two distinct ways one using only bonds issued in the most recent treasury auction one using all other bonds comparisons of the resulting series are made meaningful by choosing narrow du ration ranges in the portfolio formation procedure this in turn induces a missing data problem in the created time series parameters of return distributions are therefore estimated employing a maximum likelihood framework that explicitly accounts for the missing data it is estimated that recently issued bonds are priced to return a premium of around 55 basis points per annum over otherwise equivalent instruments

does the law of one price hold in international financial markets evidence from tick data abstract this paper investigates the validity of the law of one price lop in international financial markets by examining the frequency size and duration of inter market price differentials for borrowing and lending services one way arbitrage using a unique data set for three major capital and foreign exchange markets that covers a period of more than seven months at tick frequency we find that the lop holds on average but numerous economically significant violations of the lop arise the duration of these violations is high enough to make it worthwhile searching for one way arbitrage opportunities in order to minimize borrowing costs and or maximize earnings on given funds we also document that such opportunities decline with the pace of the market and increase with market volatility

the reaction of asset markets to swiss national bank communication abstract in this paper we analyze high frequency movements in swiss asset markets in reaction to real time communication by the swiss national bank our analysis of central bank communication encompasses monetary policy announcements speeches and interviews we examine the reactions of the currency market the bond market and the stock exchange the evidence suggests that speeches and interviews along with monetary policy announcements engender a significant price reaction this paper sheds light on the relevance of communications other than monetary policy announcements

dispersed communication by central bank committees and the predictability of monetary policy decisions the paper asks whether members of central bank decision making committees should communicate with the public in a collegial manner by conveying the consensus or majority view of the committee or in an individualistic way by providing the diversity of views among the committee members it finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly this effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market s prediction errors of fomc policy decisions moreover more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates these findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication

federal reserve communications and newswire coverage in this article we explore the determinants of newswire coverage of federal reserve fed communications our sample covers all 344 forward looking communications made in the period may 1999 to may 2004 we find first that there is a higher likelihood of newswire coverage for monetary policy reports and speeches by chairman greenspan than for testimony and speeches by other fed members furthermore communications with an explicit monetary policy inclination or tone different from the current interest rate path are particularly likely to be covered however the release of important macroeconomic news reduces the likelihood of newswire coverage second speeches by regional fed presidents are relatively less likely to be reported than speeches by board members nevertheless newswire coverage of fed president speeches is more likely if central bank communication is stale finally our results indicate that ben bernanke played a distinguished role even before his chairmanship

transactions costs and covered interest arbitrage theory and evidence the extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored it is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets the swap market or either of the two relevant securities markets this reconciles the theory with the data which show spreads of no more than a few basis points however the empirical results have no direct bearing on the conventional market efficiency hypothesis

the effect of central bank transparency on exchange rate volatility abstract the increase in central bank transparency has been one of the main developments in central banking in the past two decades this leads to the question of the effect of central bank transparency on the volatility of exchange rates according to theoretical considerations more information could lead to either more precise forecasts or more noise trading this raises the need for an empirical estimation of the relationship the present study shows that the effect of central bank transparency on exchange rate volatility depends on a country s development while there is no effect of central bank transparency in the full sample and for developing countries transparency increases exchange rate fluctuations in developed countries

default risk cannot explain the muni puzzle evidence from municipal bonds that are secured by u s treasury obligations fama 1977 and miller 1977 predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax exempt bonds empirical evidence shows that long term tax exempt yields are higher than theory predicts two popular explanations for this empirical puzzle are that relative to taxable bonds municipal bonds bear more default risk and include costly call options i study u s government secured municipal bond yields which are effectively default free and nonmalleable these municipal yields display the same tendency to be too high i conclude that differential default risk and call options do not explain the municipal bond puzzle article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tax subsidized underpricing the market for build america bonds build america bonds babs were issued by municipalities for 20 months as a part of the 2009 fiscal package unlike traditional tax exempt municipals babs are taxable to the holder but the treasury rebates 35 of the coupon to the issuer the stated purpose was to provide municipalities access to a more liquid market including foreign tax exempt and tax deferred investors we find babs do not exhibit greater liquidity than traditional municipals babs are more underpriced initially particularly for interdealer trades babs also show a substitution from underwriter fees toward more underpricing suggesting that the underpricing is a strategic response to the tax subsidy

tax distortions and bond issue pricing abstract original issue premium oip bonds are the norm in the us tax exempt market but very rare in the taxable market a tax subsidy helps explain this disparity unlike bonds issued at par or discount the price of oip bonds can fall and yet remain above par providing secondary market buyers with more tax exempt coupon and less taxable market discount gain the subsidy for oip bonds explains additional previously undocumented empirical facts in a calibration exercise the subsidy s expected cost to the u s treasury is estimated at 1 7 billion per year

a simple model of the taxable and tax exempt yield curves i examine the anomalous behavior of the taxable and tax exempt yield curves long municipal yields appear too high relative to the equivalent after tax yield that can be earned in treasury or corporate bonds i discuss existing explanations of the problem and propose a simple model that relates the yields of taxable bonds to the yield curve for par tax exempts the ratio of the tax exempt yield to the taxable yield increases with maturity in the model so it is consistent with observed phenomena such as inverted yield curves for taxables and contemporaneous rising yield curves for tax exempts statistical and descriptive comparisons between the yields predicted by the model and observed yields on par bonds that the model has some promise in explaining the apparent anomalies in the behaviors of the two yield curves article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

tax induced intra year patterns in bonds yields the ratio of the yields on short term tax exempt and taxable bonds exhibits a sawtooth pattern that is consistent with the impacts of tax deferments from dates on which interest payments are received to dates on which the resulting tax payments are paid the effect of the tax deferment at turns of calendar years does not differ appreciably from the effect at the turn of any other tax quarter investors with tax payment schedules that differ from that of the investor that is indifferent between investing in taxable and tax exempt bolnds may benefit from tax related timing strategies for investing in these bonds issuers may benefit from tax related timing strategies for scheduling interest payments

optimal linear contracts under common agency and uncertain central bank preferences we analyze the effects of imperfectly known central banker s preferences on optimal linear contracts offered by the government and an interest group these effects depend on the type of uncertainty faced by the principals when the central bank s output target is uncertain the results by campoy and negrete public choice 137 197 206 2008 under perfectly known preferences obtain uncertainty about the central banker s degree of conservatism or about its degree of selfishness has a multiplicative impact on the principals instruments in the agent s best response function this may generate an inflation bias independently of the type of contract offered by the interest group

tax rate uncertainty and the sensitivity of consumption to income in an overlapping generations model abstract a well documented feature of u s data is that the aggregate consumption is a smoother process than income an overlapping generations model with a time nonseparable utility function is developed to characterize the effect of income tax uncertainty on the degree of consumption smoothness the model predicts that an increased tax uncertainty combined with tax financed production externality makes the aggregate consumption smoother for a plausible range of intertemporal substitution in consumption a calibration experiment indicates that the observed long term smoothness of aggregate consumption is consistent with the model s predicted consumption process