the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

the divergence of bank lending rates from policy rates after the financial crisis the role of bank funding costs abstract after the global financial crisis policy rates were cut to near zero levels yet bank lending rates did not fall as much as the decline in policy rates would have suggested if the crisis represents a structural break in the relationship between monetary policy and lending rates how should central banks view the post crisis transmission this poses a major puzzle for monetary policymakers using a new weighted average cost of liabilities to measure banks effective funding costs we show a model of interest rate pass through with dynamic panel data methods solves this puzzle and has many other advantages over traditional approaches it confirms central banks should focus on the cost and composition of bank liabilities as many are now doing to better understand and steer the dynamics of lending rates

interest rate pass through monetary policy rules and macroeconomic stability abstract in this paper we analyze equilibrium determinacy in a sticky price model in which the pass through from policy rates to retail interest rates is sluggish and potentially incomplete in addition we empirically characterize and compare the interest rate pass through process in the euro area and the u s we find that if the pass through is incomplete in the long run the standard taylor principle is insufficient to guarantee equilibrium determinacy our empirical analysis indicates that this result might be particularly relevant for bank based financial systems as for instance that in the euro area

debt maturity and the international financial architecture this paper presents a theory of the maturity of international sovereign debt and derives its implications for the reform of the international financial architecture the analysis is based on a model in which the need to roll over external debt disciplines the policies of debtor countries but makes them vulnerable to unwarranted debt crises due to bad shocks the paper presents a welfare analysis of several measures that have been discussed in recent debates such as international lending in last resort or the establishment of a mechanism for suspending payments on the external debt of crisis countries jel f34 o19

interest rate pass through and monetary transmission evidence from individual financial institutions retail rates official interest rate changes should influence short rates on money market instruments and retail products such as deposit accounts and mortgages but complete pass through is often taken for granted this paper provides a theoretical and econometric framework for assessing the evidence for this assumption using seventeen years of monthly data for rates on thirteen deposit and mortgage products offered by individual uk financial institutions the methodology allows for asymmetries and non linearities in adjustment and the results show that the speed of adjustment in retail rates depends on whether the perceived gap between retail and base rates is widening or narrowing

intriguing pendula founding metaphors in the analysis of economic fluctuations the paper is an inquiry into the definition of the early econometric programme namely into the discussions which frisch and schumpeter held in the early 1930s about the most suitable model for representing innovations change and equilibrium in economics the argument and its framework are briefly presented in the first section the 1931 correspondence between the two founders of the econometric society is discussed in the second section it provides a magnificent example of the importance of rhetorics in economics of the heuristic role of constitutive metaphors in a research programme and of the difficulties in defining the most suitable mathematical formalism for dealing with cycles and structural change the third section presents the conclusion of the story the bifurcation between the resulting contributions made by frisch propagation problems and impulse problems in dynamic economics pp 171 205 in koch k ed economic essays in honour of gustav cassel london frank cass 1933 and schumpeter business cycles new york mcgraw 1939 and the posthumous volume history of economic analysis london routledge 1954 finally the fourth section presents an alternative epilogue highlighting some of the hidden implications of these verbal accounts of pendula as the founding metaphor for business cycles the paper is based upon as yet unpublished papers that were found in frisch s collections oslo university library and frisch s rommet at the institute of economics and schumpeter s collection harvard university

fiscal consequences for mexico of adopting the dollar dollarization implies a reduction in the menu of assets available to the government and to the private sector in managing risk whatever the gains from dollarization the costs of reducing the asset menu need to be weighed against them this paper presents models one a simple generalization of a well known model of tax smoothing by ba1ao in which these costs are explicit along the way it suggests that there is likely to be no reduction in interest costs to the government from dollarization recently economists have been paying increasing attention to a dynamic general equilibrium approach to the theory of the price level that is often called the fiscal theory of the price level or ftpl this way of thinking emphasizes the role of fiscal and monetary policy in determining the risk and return properties of government liabilities it is particularly useful in analyzing proposals for large scale institutional changes that imply shifts in monetary and fiscal policies when dollarization is considered from this perspective some disadvantages are brought to light that may not be so apparent from other points of view section 1 below lays out the main ideas of ftpl section 2 displays a model that extends an earlier one of barro s to argue that optimal fiscal policy will use surprise inflation to achieve lower deadweight tax loss than would otherwise be possible section 3 considers the composition of government liabilities along the lines of the theory of corporate finance asking if dollarization will reduce the cost of funds section 4 presents annual estimates of the unanticipated returns to holders of u s government debt to show that these are substantial and are to some extent timed to match legitimate periods of fiscal stress as the optimality theory of section 2 would suggest section s discusses the lendel of last resort function and its connection to these fiscal issues section 6 briefly discusses some alternatives to pure dollarization in our concluding section 7 we sum up finding much to worry about in the prospect of dollarization

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

how stable are corporate capital structures leverage cross sections more than a few years apart differ markedly with similarities evaporating as the time between them lengthens many firms have high and low leverage at different times but few keep debt to assets ratios consistently above 0 500 capital structure stability is the exception not the rule occurs primarily at low leverage and is virtually always temporary with many firms abandoning low leverage during the post war boom industry median leverage varies widely over time target leverage models that place little or no weight on maintaining a particular ratio do a good job replicating the substantial instability of the actual leverage cross section

cointegration in panel data with structural breaks and cross section dependence summary the power of standard panel cointegration statistics may be affected by misspecification errors if structural breaks in the parameters generating the process are not considered in addition the presence of cross section dependence among the panel units can distort the empirical size of the statistics we therefore design a testing procedure that allows for both structural breaks and cross section dependence when testing the null hypothesis of no cointegration the paper proposes test statistics that can be used when one or both features are present we illustrate our proposal by analysing the pass through of import prices on a sample of european countries copyright 2013 john wiley sons ltd

macroprudential and monetary policies the need to dance the tango in harmony abstract considering a sample of 37 emerging and advanced economies from 2000q1 to 2014q4 we empirically assess how effective macroprudential policies are in curbing domestic credit growth and whether their effectiveness is affected by monetary policy conditions we obtain three important results first our findings suggest in line with previous research that an overall tightening in macroprudential policies is associated with a reduction in credit growth second we show that a restrictive monetary policy enhances the impact of macroprudential tightening on credit growth third our results seem to suggest that monetary policy helps to reduce the transmission delay of macroprudential policy actions consequently our results confirm the need for coordination between the two policies

how do anticipated changes to short term market rates influence banks retail interest rates evidence from the four major euro area economies in this paper we argue that banks anticipate short term market rates when setting interest rates on loans and deposits in order to include anticipated rates in an empirical model we use two methods to forecast market rates a level slope curvature model and a principal components model before including them in a model of retail rate adjustment for four retail rates in four major euro area economies using both aggregate data and data from individual french banks we find a significant role for forecasts of market rates in determining retail rates alternative specifications with futures information yield comparable results

the interest rate pass through in the euro area during the sovereign debt crisis abstract we investigate the pass through of monetary policy to bank lending rates in the euro area during the sovereign debt crisis in comparison to the pre crisis period we make the following contributions first we use a factor augmented vector autoregression which allows us to assess the responses of a large number of country specific interest rates and spreads second we analyze the effects of monetary policy on the components of the interest rate pass through which reflect banks funding risk including sovereign risk and markups charged by banks over funding costs third we not only consider conventional but also unconventional monetary policy we find that while the transmission of conventional monetary policy to bank lending rates has not changed with the crisis the composition of the pass through has changed specifically expansionary conventional monetary policy lowered sovereign risk in peripheral countries and longer term bank funding risk in peripheral and core countries during the crisis but has been unable to lower banks markups this was not or not as much the case prior to the crisis unconventional monetary policy helped decreasing lending rates mainly due to large shocks rather than a strong propagation

money as stock abstract the fiscal theory determines the price level from the value of nominal government debt as a claim to government primary surpluses just as private stock is valued as a claim to corporate profits valuation equations are not constraints so this theory does not mistreat the government s intertemporal budget constraint i anchor the analysis in a simple cash in advance model when money demand falls to zero i show that the price level can still be determined by the government debt valuation equation

international business cycles world region and country specific factors the paper investigates the common dynamic properties of business cycle fluctuations across countries regions and the world we employ a bayesian dynamic latent factor model to estimate common components in macroeconomic aggregates output consumption and investment in a 60 country sample covering seven regions of the world the results indicate that a common world factor is an important source of volatility for aggregates in most countries providing evidence for a world business cycle we find that region specific factors play only a minor role in explaining fluctuations in economic activity we also document similarities and differences across regions countries and aggregates jel f41 e32 c11 c32

the elusive concept of innovation for schumpeter marschak and the early econometricians abstract the modern concept of innovation is a crucial part of the analysis of capitalism as an adaptive system and it is due to schumpeter consequently schumpeter s role as a prophet of innovation has been rightly emphasized this paper contributes to that history presenting some of the difficulties schumpeter suffered as a formal representation of innovation was proposed by his fellow econometricians as proved by the case of one of such dialogs that with jacob marschak at the time the director of the cowles commission and vice president and then president of the econometric society it is shown how schumpeter elaborated his concepts of endogenous innovation and of industrial mutation as contrasted to the mechanical view of his fellow econometricians finally the paper emphasizes the changes of the concept of randomness through the debate

inefficient foreign borrowing a dual and common agency perspective studying the implications of uncoordinated borrowing the paper first looks at whether and when countries borrow too much in the aggregate it then revisits the original sin debate analyzing whether and when equity portfolio investment international portfolio diversification domestic currency denomination and longer maturities enhance borrowing countries access to international lending the paper thereby relates a country s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings their location the extent of control rights held by political authorities and the interests of dominant domestic political forces

imperfect competition in bank retail markets deposit and loan rate dynamics and incomplete pass through this paper examines determinants of pass through from the market interest rate to bank retail deposit and loan rates a dynamic adjustment cost model with imperfect competition implies that these rates depend on own lagged values and on lagged current and expected future values of the security rate greater competition in retail markets reduces the impact of lagged and expected rates on current retail rates while raising the effect of the current security rate yielding greater pass through these results have important implications for both the specifications used in empirical work and biases introduced into estimates of pass through effects

competition transmission and bank pricing policies evidence from belgian loan and deposit markets abstract this paper addresses the pass through from market interest rates to retail bank interest rates the paper advocates a heterogeneous approach and applies it to the belgian banking market a substantial proportion of the heterogeneity in bank pricing policies can be explained by the bank lending channel and the relative market power hypothesis the results also suggest that the long term pass through is typically less than one for one rejecting the completeness hypothesis while there is no convincing evidence for asymmetry in retail rates large deviations from equilibrium mark ups are faster reduced than small deviations overall conditions for corporate loans are more competitive compared to consumer loans demand and savings deposits have by far the most rigid prices

harnessing windfall revenues optimal policies for resource rich developing economies a windfall of natural resource revenue or foreign aid faces government with choices of how to manage public debt investment and the distribution of funds for consumption particularly if the windfall is both anticipated and temporary we show that the permanent income hypothesis prescription of an ever lasting increase in consumption financed by borrowing ahead of the windfall and then accumulating a sovereign wealth fund swf is not optimal for capital scarce developing economies such countries should accumulate public and private capital to accelerate their development and only if the windfall is large relative to initial foreign debt is it optimal to build a swf the optimal time profile of consumption is biased towards the near future as compared to the permanent income hypothesis outcomes depend on instruments available to government we study cases where the government can make lump sum transfers to consumers where such transfers are impossible so optimal policy involves cutting distortionary taxation in order to raise investment and wages and where ricardian consumers can borrow against future revenues in which case the policy response to possible over consumption is a high level of investment in infrastructure

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

presidential address does finance benefit society academics view of the benefits of finance vastly exceeds societal perception this dissonance is at least partly explained by an underappreciation by academia of how without proper rules finance can easily degenerate into a rent seeking activity i outline what finance academics can do from a research point of view and from an educational point of view to promote good finance and minimize the bad

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

presidential address debt and money financial constraints and sovereign finance economic analyses of corporate finance money and sovereign debt are largely considered separately i introduce a novel corporate finance framing of sovereign finance based on the analogy between fiat liabilities for sovereigns and equity for corporations the analysis focuses on financial constraints at the country level making explicit the trade offs involved in relying on domestic versus foreign currency debt to finance investments or government expenditures this framing provides new insights into issues ranging from the costs and benefits of inflation optimal foreign exchange reserves and sovereign debt restructuring

public debt and growth heterogeneity and non linearity we study the long run relationship between public debt and growth in a large panel of countries our analysis builds on theoretical arguments and data considerations in modelling the debt growth relationship as heterogeneous across countries we investigate the debt growth nexus adopting linear and non linear specifications employing novel methods and diagnostics from the time series literature adapted for use in the panel we find some support for a negative relationship between public debt and long run growth across countries but no evidence for a similar let alone common debt threshold within countries

prospective deficits and the asian currency crisis this paper argues that a principal cause of the 1997 asian currency crisis was large prospective deficits associated with implicit bailout guarantees to failing banking systems the expectation that these future deficits would be at least partially financed by seigniorage revenues or an inflation tax on outstanding nominal debt led to a collapse of the fixed exchange rate regimes in asia we articulate this view using a simple model whose key feature is that a speculative attack is inevitable once the present value of future government deficits rises we present empirical evidence in support of the key assumptions underlying our interpretation of the crisis