efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

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

optimal simple rules in re models with risk sensitive preferences abstract this paper provides a useful method to solve optimal simple rules under risk sensitive preference in macromodels with forward looking behavior an application to a new keynesian model with lagged dynamics is offered and risk sensitive preference is found to amplify the policy responses

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

optimal constrained interest rate rules we show that if policymakers compute the optimal unconstrained interest rate rule within a taylor type class they may be led to rules that generate indeterminacy and or instability under learning this problem is compounded by uncertainty about structural parameters since an optimal rule that is determinate and stable under learning for one calibration may be indeterminate or unstable under learning under a different calibration we advocate a procedure in which policymakers restrict attention to rules constrained to lie in the determinate learnable region for all plausible calibrations and that minimize the expected loss computed using structural parameter priors subject to this constraint

does resorting to online dispute resolution promote agreements experimental evidence abstract this paper presents an experiment performed to test the properties of an innovative bargaining mechanism called automated negotiation used to resolve disputes arising from internet based transactions the main result shows that the settlement rule tends to chill bargaining as it creates incentives for individuals to misrepresent their true valuations which implies that automated negotiation is not able to promote agreements however this perverse effect depends strongly on the conflict situation when the threat that a disagreement occurs is more credible the strategic effect is reduced since defendants are more interested in maximizing the efficiency of a settlement than their own expected profit the implications of these results are then used to discuss the potential role of public regulation and reputation mechanisms in cyberspace

income velocity and the variability of money growth evidence from less developed countries this paper examines whether the variability of money growth caused changes in income velocity of money in 30 less developed countries time series data show year to year variations in income velocity of money in these countries for the 1961 1990 period empirical results based on causality but complemented by variance decomposition tests show that money growth is the most important determinant in explaining the variability in income velocity in at least 20 of the 30 developing countries examined in this study in addition the causality results show that inflation rate granger causes income velocity of money in 21 countries but the variance decomposition results show inflation rate to be relatively more important in explaining the variability of velocity in eight countries similarly while real income granger causes velocity of money in 18 countries the results of the variance decomposition tests show real income to be relatively more important as a determinant of income velocity in two countries over

imperfect price discrimination and welfare we develop a model in which a monopolist uses differences across consumers in their valuation of time to imperfectly price discriminate though it is customary to analyse price discrimination problems by the calculus of variations after postulating a continuum of types we assume a finite number of types and exploit the geometry and duality of the contract set and the structure of the programming specification we analyse in detail the qualitative properties of the model s solution and show by construction that our results exhaust the implications of the model for equilibrium contract pairs we show that imperfect discrimination is not bounded in welfare terms between perfect discrimination and single price monopoly and that the deadweight loss consumer surplus and output comparisons between single price monopoly and imperfect discrimination are ambiguous

an equilibrium model of bond pricing and a test of market efficiency in two previous and related papers 3 4 the authors have reported the results of estimating a particular equilibrium model of bond pricing using quarterly data on canadian government bonds for the period 1964 to 1979 this paper reports the results of applying a similar model to the pricing of u s government bonds for the period 1958 1979 using data from the crsp government bond file the paper also extends the previous empirical analysis by evaluating the ability of the pricing model to detect underpriced and overpriced bonds the data reveal a strong relation between price prediction errors and subsequent bond returns

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

exchange rate volatility and u s monetary policy an arch application this paper examines the effect of shifts in u s monetary policy regimes on the stochastic process that generates foreign exchange rates to account for the observed behavior of the data record the author models nominal dollar exchange rates as univariate autoregressive conditional heteroskedastic processes he then tests the stability of this process across u s monetary policy regimes for four of the currencies in the sample accounting for regime shifts improves the fit of the model regime shifts also appear to diminish the degree of persistence of variance making it less likely that exchange rates are integrated in variance copyright 1989 by ohio state university press

the differing effects of pre and post 1981 federal budget deficits on tax adjusted real interest rates this paper employs an estimating equation relating tax adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre and post 1981 federal budget deficits on ex ante and ex post real tax adjusted short term interest rates over the period 1961 1 1992 2 the results for the 1961 1 1992 2 period taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential gdp occurring in 1981 1 indicate that the ratio of both the nipa deficit and the cyclically adjusted deficit to potential gdp have a significant effect on ex ante and ex post real tax adjusted interest rates for the post 1981 period but no significant effect before 1981

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

some international evidence on the quantity theory of money this paper develops a two equation model of money interest rates and inflation based on the simple quantity theory an d fisher s hypothesis about nominal interest rates the model has both within equation and cross equation restrictions that are tested on long run average cross country data covering the period 1962 88 the major finding is that the restrictions cannot be easily rejected and this suggests that the behavior of interest rates and inflation in a major part of the postwar period can be understood in terms of classical monetary forces copyright 1993 by ohio state university press

bad and good news about the sealed bid mechanism some experimental results this paper surveys a set of experiments conducted by roy radner and myself 1989 and peter linhart radner and myself 1989a b all of which were conducted to investigate the properties of the sealed bid mechanism a mechanism used to structure bargaining under situations of incomplete information what we find is both bad news and good news for the mechanism the bad news is that the behavior of subjects seems quite sensitive to the parameters of the prior distribution of types used and the number of rounds over which the experiment is run as such prior distributions become more skewed in a sense to be defined below and the number of rounds in the experiment are increased to 75 bidder behavior becomes less linear such movements have a regular pattern however and this phenomenon is remarkably consistent the good news is that such behavioral shifts do not seem to interfere with the efficiency of the mechanism this is of course important for the acceptance of the mechanism in the real world since if efficiency were to change dramatically as we change the parameters of the environment adoption would have to proceed on a case by case basis the fact that our results imply robustness of efficiencies indicates that at least on a practical level the sealed bid mechanism may be a viable way to structure bargaining in many large scale economic organizations i the sealed bid mechanism

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

the information advantage in two person bargaining with incomplete information abstract the sealed bid k double auction is a mechanism used to structure bilateral bargaining under two sided incomplete information in the process of testing whether or not the observed bid and ask functions are in agreement with the bayesian linear equilibrium solution under asymmetric information conditions we find a strong information disparity effect the trader favored by the information disparity whether buyer or seller receives a significantly larger share of the realized gains from trade than that predicted by the theory a reinforcement based learning model is formulated and tested it accounts successfully for most of the variability in the round to round individual decisions

local robustness analysis theory and application this paper develops a general framework for conducting local robustness analysis by local robustness we refer to the calculation of control solutions that are optimal against the least favorable model among models close to an initial baseline we provide nash and stackelberg equilibrium characterizations of the choice of control we apply this abstract formulation to a class of discrete time control problems this analysis is conducted using frequency domain methods and is shown to involve certain fundamental limits to the efficacy of controls in such environments finally we discuss some implications of our results for monetary policy

the link between monetary uncertainty and gnp some direct estimates mascaro and meltzer 1983 have implied but not tested the proposition that increased uncertainty about monetary policy will reduce real income this proposition is tested directly by adding a kalman filter estimate of monetary uncertainty to a st louis type gnp equation the results indicate that increased uncertainty about monetary policy has long run negative effects on both the level and growth rate of gnp

federal deficits and the real rate of interest in the united states a note this brief note provides strong empirical evidence that federal govern ment deficits can indeed have a positive and significant impact upon short term interest rates the findings in this paper thereby establish another mechanism for the transmission of crowding out this study differs from most other studies in the adoption of two particular procedures first unlike most although not all other related studies the rate of interest is expressed as a real rate this is done in simple fashion by subtracting the inflation rate of the gnp deflator from the nominal rate of interest taken to be the 3 month t bill rate second also unlike most although not all other related studies the deficit is expressed in real terms and then divided by the real gnp level expressing the deficit in this ratio form enables us to judge the deficit relative to the size of the economy which must finance it no previous related study to date has adopted both of these procedures and most studies of this topic have adopted neither procedure

the effects of inflation and real wages on employment this paper considers the effects of inflation on employment the absence of index linked loans and the possibility that errors are committed in times of inflation lead to a higher probability of bankruptcy during inflation if firms care about bankruptcy this implies a lower level of employment empirical results confirming this are presented and suggest that higher inflation has substantially contributed to the fall in employment in the united kingdom the authors also demonstrate that a negative real wage elasticity is not robust to changes in specification copyright 1987 by the review of economic studies limited

simple versus optimal rules as guides to policy this paper compares the performance of different policy rules our comparisons focus on simple feedback rules versus rules which are optimal given knowledge of the correct economic structure and the appropriate loss function for the policymaker first we compare rule performance when the correct model is not known second we compare rule performance with respect to the frequency specific behavior for variables of interest taken as a whole our results indicate how the case for a model specific optimal rule can break down when one relaxes the assumption that the true model is known as well as the assumption that the appropriate loss function is known links are made to the literature on monetary policy

the velocity of us m2 in the 1990s some further evidence this paper investigates the behaviour of m2 velocity in recent years with special emphasis on the post 1989 period unlike previous studies in this area m2 velocity is analysed in the context of a small vector autoregressive var model which includes income prices interest rates and money growth volatility the hypothesis of a structural shift in m2 velocity associated with the post 1989 period is rejected by the var model this suggests that the unusual behaviour of m2 velocity since 1989 may be traced to the variability in its determinants rather than to a shift in the process generating velocity variance decompositions indicate that real income and the short term opportunity cost of m2 are the most important determinants of m2 velocity the long term opportunity cost of m2 and the return on equities also have significant impacts on m2 velocity

monetary variability and real output abstract utilizing engel s econometrica 1982 50 987 1008 autoregressive conditional heteroskedasticity arch model to consistently parameterize the conditional variance of money growth i find an inverse relationship between monetary variability and real output this provides some additional evidence in favor of friedman s journal of political economy 1977 85 451 472 famous conjecture

the determinants of the treasury security yield curve investors security demands and two points on the yield curve are jointly determined using a disaggregated structural model of the u s treasury securities market the empirical results indicate that the structural model is capable of accurately explaining treasury yields and that changes in a variety of nonyield variables affect the yield curve among these nonyield variables are treasury security supplies which are found to have significant but somewhat volatile impacts depending on investors wealth flows the within sample predictions from the structural model are also compared to those of a naive model most empirical studies of the term structure of interest rates have relied on single equation models of interest rate determination to identify the underlying determinants of long term bond yields the methodologies used in these studies may be grouped into two broad classifications first researchers have frequently specified yield curve relationships based predominately on the expectations hypothesis associated with hicks 23 and lutz 26 and found that current and past short term interest rates provide accurate within sample forecasts of longterm interest rates see for example meiselman 28 wood 54 and dobson sutch and vanderford 8 within this framework modigliani and sutch 33 34 and modigliani and shiller 32 have additionally examined the potential effects resulting from changes in relative asset supplies due to the market segmentation effects suggested by culbertson 7 and risk premiums as a whole the empirical research using the expectations hypothesis as a starting point indicates that nonyield variables are not significant determinants of longterm bond yields furthermore in tests involving the significance of lagged changes in short term interest rates hamburger and latta 21 and elliott and baier 11 among others have found that only contemporaneous changes in shortterm interest rates significantly influence changes in long term bond yields second other researchers have used unrestricted reduced form equations based on loanable funds or liquidity preference theories of interest rate determination see for example okun 35 scott 48 sargent 46 pierson 39 feldstein and

agents as empirical macroeconomists thomas j sargent s contribution to economics thomas j sargent has fundamentally changed and in the words of art rolnick who interviewed him in 2010 irrevocably transformed the field of macroeconomics whether as sole author as co author with collaborators as an author influenced by others or as a teacher of the profession influencing others this paper is about his contribution to our field the nobel memorial prize to thomas j sargent and christopher a sims has been awarded for the empirical research on cause and effect in the macroeconomy or more broadly for macroeconometrics one often likes to distinguish between theorists on the one hand and empiricists and econometricians on the other thomas j sargent holds a unique position in between a key theme in a large part of his work has been to put the agents in his model on equal footing with the econometrician who is observing data from the model i e to assume that agents are themselves empirical macroeconomists or macroeconometricians in this paper i use this theme to examine his work and his contributions to the study of economics

a constitution for solving asymmetric externality games externalities such as pollution represent an important class of social problems that can be resolved by political institutions this work investigated two key questions raised by these situations what is the effect of using a given political institution such as simple majority rule to resolve externalities more important are there constitutionally prescribed institutions that will generate appropriate outcomes we developed a model in which citizens benefit asymmetrically from producing an externality any one citizen s production however imposes an equal cost on all citizens in this technology a pollution charge chosen by majority rule generally leads to suboptimal outcomes we show that an alternative institution is optimal a citizen whom we call the setter volunteers to select the charge if his choice is approved unanimously the charge is enacted otherwise everyone produces the constitutional mechanism is such that the correct setter is induced to volunteer the resulting allocation maximizes net social benefits as a result of the uniform and linear nature of the externality cost this optimal allocation is obtained without making strong assumptions about the information held by citizens specifically attaining the optimal allocation is not dependent on citizens knowing the production benefits or actions of others

bargaining under incomplete information this paper presents and analyzes a bargaining model of bilateral monopoly under uncertainty under the bargaining rule proposed the buyer and the seller each submit sealed offers that determine whether the good in question is sold and the transfer price the nash equilibrium solution of this bargaining game implies an offer strategy of each party that is monotonic in its own reservation price and depends on its assessment of the opponent s reservation price issues of relative bargaining advantage and efficiency are examined for a number of special cases finally we discuss the appropriateness of the nash solution concept

domestic and international financial market responses to federal deficit announcements abstract this study examines the response of domestic and international financial variables to announced changes in federal deficit projections over the 1981 1994 period as observed in earlier studies rates on us treasury securities responded positively to announced increases in federal deficit projections new evidence shows that deficit effects are transmitted internationally with foreign long term interest rates also increasing in response to announced increases in us deficit projections the exchange value of the dollar tends to be positively related to announced changes in deficit projections but that result appears to be related to the degree of insulation of foreign financial markets from us financial markets finally the price of gold responded positively to announced changes in deficit projections taken together the results suggest that higher projected deficits raise real interest rates in part because of an increase in an inflation risk premium

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

optimal monetary policy and model selection in a real time learning environment abstract we investigate how real time parameter learning optimal policies and the volatility of exogenous shocks affect the policymakers ability to distinguish across competing models of the economy the detection speed of model misspecification depends only on the relative volatility of supply and demand shocks

reputational and nonreputational policies under partial information abstract this paper analyses the effect of partial information on optimal policy design for stochastic macroeconomic models incorporating forward looking expectations the main theoretical result is that reputational and nonreputational policies are certainty equivalent as has previously been conjectured and it is also shown that the welfare loss does not necessarily increase with decreasing information of particular additional interest in the analysis of reputational policy design is the issue of sustainability and it is shown using an example that weak sustainability may be information dependent

monetary policy under misspecified expectations abstract this paper examines policy rule choices for a central bank that faces uncertainty about the process of expectation formations by economic agents the economy contains both rule of thumb agents who base their expectations on recent observations and agents who have rational expectations the central bank is uncertain about the fraction of the rule of thumb agents i find that when the economy is more forward looking the central bank responds more aggressively to inflation and output but the uncertainty averse central bank evaluates policies by the performance in the worst case in my economy the worst case is when a large fraction of agents are backward looking therefore the best policy for the uncertainty averse central bank involves moderate responses this minimax rule agrees more closely with empirically estimated less responsive taylor rules the paper also uncovers the importance of expectation formations on optimal policy choices

the relation between money growth variability and the variability of money about target abstract an increase in the speed at which the fed returns the money stock to its targeted path following a stochastic shock can cause a lower variance of money about the targeted level while causing a greater variance of the growth rate of the money stock

learning and the monetary policy strategy of the european central bank abstract this paper examines the welfare implications of alternative inflation targeting proposals for the monetary policy of the european central bank we assume that policy makers have to learn the laws of motion of inflation in an economy characterized by stickiness in domestic price setting behavior and subjected to recurring shocks to productivity exports and foreign price we find that a switch from an asymmetric inflation targeting strategy to an symmetric makes little difference in welfare payoffs but it comes at a cost of much higher interest rate variability we also find that there are practically no welfare gains from switching from an inflation targeting strategy based on the harmonized index of consumer prices hicp to a strategy based on the domestic price component of the hicp

dynamic games and the time inconsistency of optimal policy in open economies it has been argued that the bretton woods system of pegged but adjustable exchange rates set up after world war ii was designed specifically to prevent the manipulation of exchange rates in pursuit of national macroeconomic objectives see r cooper so it is perhaps no coincidence that the ending of pegged rates has led to the re emergence of theories and policies involving such manipulation before the war when inflation was low and unemployment high in the major industrialised nations this involved competitive depreciation as countries tried to gain employment in the late 1970 s and early 1980 s however countries like the uk and the us have embarked on policies of competitive appreciation in order to cut inflation regarded as the first priority sharp movements in exchange rates however constitute a threat to orderly trade and stimulate protectionism as bergsten 1981 argues this abstract was borrowed from another version of this item

on the accuracy of time series interest rate and survey forecasts of inflation there has been much work examining and evaluating different methodologies in forecasting inflation for example fama 1975 1977 develops an interest rate model to predict the 1 monthahead rate of inflation using the cpi fama and gibbons 1982 1984 modify the interest rate model to account for a nonconstant real rate of interest and compare it to a univariate timeseries forecasting model and to the livingston forecasts carlson 1977a 1977b and others also analyze the consensus forecasts from the livingston survey pertaining to multiperiod forecasts of inflation pearce 1979 considered the livingston survey and time series forecasts our purpose in this paper is to investigate further the relative forecasting ability of three different methodologies in contrast to previous studies that have generally used the cpi to measure inflation our analysis uses the implicit gnp deflator this modification is motivated largely by the fact that calculations of the cpi inflat n rate often are distorted greatly by changes in relative prices e g blinder 1980 fischer 1981 this paper compares the accuracy of three different inflation forecasting procedures these include a univariate time series model an interest rate model based on the methodology of fama and gibbons and the median forecasts derived from the american statistical association national bureau of economic research survey the evidence presented is based on ex ante forecasts of quarterly inflation rates using the gnp deflator for the period 1970 11984 11 based on the evidence presented the general conclusion is that the survey forecasts provide the most accurate inflation forecasts

spectral welfare cost functions if preferences are not time separable economic agents care not only about the magnitude of fluctuations in consumption but also about the persistence and other temporal characteristics of those fluctuations this paper extends and develops the theory of spectral utility functions which measure utility frequency by frequency to illustrate the interaction between consumption volatility and time non separable preferences to highlight the economic implications of the interaction spectral welfare cost functions are developed to provide a quantitative measure of the importance to economic agents of the temporal delivery of consumption volatility

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

an industry equilibrium analysis of downstream vertical integration this paper investigates the effect of product substitutability on nash equilibrium distribution structures in a duopoly where each manufacturer distributes its goods through a single exclusive retailer which may be either a franchised outlet or a factory store static linear demand and cost functions are assumed and a number of rules about players expectations of competitors behavior are examined it is found that for most specifications product substitutability does influence the equilibrium distribution structure for low degrees of substitutability each manufacturer will distribute its product through a company store for more highly competitive goods manufacturers will be more likely to use a decentralized distribution system this article was originally published in marketing science volume 2 issue 2 pages 161 191 in 1983

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

robustly optimal monetary policy with near rational expectations the paper considers optimal monetary stabilization policy in a forward look ing model when the central bank recognizes that private sector expectations need not be precisely model consistent and wishes to choose a policy that will be as good as possible in the case of any beliefs that are close enough to model consistency it is found that commitment continues to be important for optimal policy that the optimal long run inflation target is unaffected by the degree of potential distortion of beliefs and that optimal policy is even more history dependent than if rational expectations are assumed jel c62 d84 el 3 e31 e32 e52 an extensive literature has considered the optimal conduct of monetary policy under the assumption of rational or model consistent expectations this literature has found that it is quite important to take account of the effects of the systematic and hence predictable compo nent of monetary policy on expectations for example it is found quite generally that an optimal policy commitment differs from the policy that would be chosen through a sequential optimiza tion procedure with no advance commitment of future policy it is also found quite generally that optimal policy is history dependent a function of past conditions that no longer affect the degree to which it would be possible to achieve stabilization aims from the present time onward 1 both of these conclusions depend critically however on the idea that an advance commitment of future policy should change people s expectations at earlier dates this may lead to the fear that analyses that assume rational expectations re exaggerate the degree to which a policy authority can rely upon private sector expectations to be shaped by its policy commitments in precisely the way that it expects them to be what if the relation between what a central bank plans to do and what the public will expect to happen is not quite so predictable might both the case for advance commitment of policy and the case for history dependent policy be considerably weakened under a more skeptical view of the precision with which the public s expectations can be predicted one way of relaxing the assumption of rational expectations is to model agents as forecasting using an econometric model the coefficients of which they must estimate using data observed prior to some date sampling error will then result in forecasts that depart somewhat from pre cise consistency with the analyst s model 2 however selecting a monetary policy rule on the basis of its performance under a specific model of learning runs the risk of exaggerating the degree to which the policy analyst can predict and hence exploit the forecasting errors that result from a particular way of extrapolating from past observations one might even conclude

communication commitment and growth abstract we study the effect on the growth of an economy of alternative financing opportunities in a stochastic growth model with incentive constraints efficient accumulation mechanisms are designed and computed for economies that differ in their incentive structure we show that when borrowing is subject to information constraints there is a computable efficient transfer mechanism that does not affect capital accumulation and investment patterns even though consumption patterns and the distribution of wealth are affected in contrast enforcement constraints can severely reduce the outside financing opportunities and affect investment patters and economic growth we adapt numerical algorithms for obtaining numerical solutions of these models

is a military really a luxury good an international panel study of ldcs this paper introduces country specific fixed effects into a theoretical and empirical model of military expenditure contrary to the existing literature the model indicates that the share of military expenditure decreases with a country s income

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

equilibria of the sealed bid mechanism for bargaining with incomplete information we study the nash equilibria of the sealed bid bargaining mechanism with incomplete information a nonzero sum game for the case of uniform priors we describe two uncountably numerous families of equilibria the first has differentiable strategies in the second the strategies are step functions the efficiencies of these equilibria range from second best to zero for independent nonuniform priors we show that a similar situation obtains these results seem discouraging with regard to using the sealed bid mechanism in practice the mechanism might be salvaged however if bargainers turn out to confine themselves to linear strategy equilibria

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

national debt savings and real interest rates in a neoclassical model with endogenous labour supply and knowledge based growth in this paper the interest rate effect of government deficit financing in neoclassical model with endogenous labour supply and knowledge based growth is examined it is shown that government deficits do not raise interest rates if consumption and leisure are good substitutes and there is a large spillover effect in knowledge creation jel classification e13 e60 h60 dette nationale epargnes et taux d interet reels dans un modele neo classique ou la croissance est fondcle sur la connaissance et l offre de travail endogmne ce memoire examine les effets sur le taux d interet du financement d un deficit gouvernemental dans un modele neo classique ou la croissance est fondee sur la connaissance et l offre de travail endogene on montre que les d6ficits gouvernementaux ne font pas croitre les taux d interet si la consommation et le loisir sont des biens substituts et qu il y a des effets extemes importants qui decoulent de la production de la connaissance

the dynamics of risk sensitive allocations abstract this paper describes pareto optimal allocations when agents have risk sensitive preferences as formulated by hansen and sargent ieee trans automat control 40 5 1995 968 971 necessary and sufficient conditions are given for the existence and stability of steady states at which pareto weights are time invariant when all agents are risk sensitive with the same power reward function there is a unique interior steady state which is stable when the power is positive and unstable when the power is negative when there is at least one agent with time additive preferences eventually all risk sensitive agents have zero pareto weights

velocity effects of anticipated and unanticipated money growth and its variability the purpose of this paper is to empirically test the relationship between velocity growth and anticipated and unanticipated money growth and its variability in particular by decomposing actual monetary growth into anticipated and unanticipated components the study investigates whether knowledge of past variability of anticipated and unanticipated monetary growth improves the prediction of future velocity growth beyond predictions that are based on past velocity growth alone this is the empirical definition of granger causality comparasions are made in all tests among simple sum and divisia aggregates of m1 m2 m3 and l and with spindt s monetary velocity mq aggregate

velocity and the variability of money growth evidence from granger causality tests note economists and policy makers were caught off guard by the behavior of the income velocity of money in 1982 the velocity of m1 which had grown at a 3 3 percent average annual rate from 1970 1981 fezl by 4 4 percent in 1982 in the fourth quarter of 1982 the decline was 12 6 percent at an annual rate the 1982 decline in velocity significantly reduced nominal gnp growth and may have helped cause the fall in real gnp the 1982 episode has generated quite a bit of controversy the decline in velocity is important not only for its possible relation to real gnp but also because it has led some economists to seriously question monetarism monetarists believe that there is a predictable link between money growth and nominal gnp growth when velocity declined in 1982 that link appeared to have weakened seemingly undermining the monetarist beliefs in fact robert gordon 1983 has called the 1982 episode the velocity recession and the demise of monetarism milton friedman 1984 has stated that the decline in velocity does not undermine monetarism at all he believes that velocity fell because of the extreme volatility of money growth following the announced change in federal reserve operating procedures in october 1979 figure 1 shows the income velocity of m1 v and the standard deviation of current and seven lags of m1 growth s a large increase in the volatility of money growth in 1980 precedes the decline in velocity in 1982 based on this friedman states that the 1982 episode strengthens not weakens the case for the monetarist proposition of a constant growth rule of the money supply this paper uses the granger causality method to test friedman s hypothesis that the volatility of money growth causes velocity to change we conclude that friedman is correct i e the volatility of money measured by the standard deviation of money growth causes velocity in the granger sense in the next section we review some of the recent explanations offered by economists for the 1982 decline in velocity the concluding section presents our results of the granger tests of friedman s hypothesis

robust optimal policy in a forward looking model with parameter and shock uncertainty this paper characterizes a robust optimal policy rule in a simple forward looking model when the policymaker faces uncertainty about model parameters and shock processes we show that the robust optimal policy rule is likely to involve a stronger response of the interest rate to fluctuations in inflation and the output gap than is the case in the absence of uncertainty thus parameter uncertainty alone does not necessarily justify a small response of monetary policy to perturbations however uncertainty may amplify the degree of super inertia required by optimal monetary policy we finally discuss the sensitivity of the results to alternative assumptions copyright 2007 john wiley sons ltd

classifying monetary economics fields and methods from past to future we propose a simple yet sufficiently encompassing classification scheme of monetary economics it comprises three fundamental fields and six recent areas that expand within and across these fields the elements of our scheme are not found together and in their mutual relationships in earlier studies of the relevant literature neither is this an attempt to produce a relatively complete systematization our intention in taking stock is not finality or exhaustiveness we rather suggest a viewpoint and a possible ordering of the accumulating knowledge our hope is to stimulate an improved understanding of the evolving nature and internal consistency of monetary economics at large

bundling decisions by a multiproduct monopolist with incomplete information this paper analyzes bundling decisions of a rnultiproduct monopolist facing uncertain demand the monopolist sells his products using an auction mechanism and the market is analyzed as a game with incomplete information in which the buyers as well as the seller are strategic agents with a small number of buyers a profit maximizing seller will bundle all his output this makes buyers uniformly worse off compared to the case where the same monopolist does not bundle in the sense that any buyer is worse off regardless of his demand for the monopolist s outputs with a larger number of buyers the seller will have a tendency to unbundle his output and high demand buyers are worse off than they would be if the monopolist bundled his output low demand buyers on the other hand are always better off when the monopolist unbundles his output regardless of the number of competing buyers despite the fact that high demand buyers are the typical purchasers of the monopolist s output the net effect of increasing the number of buyers is greater market efficiency since bundling creates market inefficiencies both ex post and ex ante

interest rates and monetary policy uncertainty abstract this paper analyzes a model in which optimizing households are uncertain about monetary policy and learn about it over time in this model the variance of changes in nominal and ex post real interest rates increases with the variance of the household s predictive distribution over money growth a positive relation between unexpected changes in nominal interest rates and the money stock results from monetary policy uncertainty finally if money growth covaries negatively with real wealth an increase in monetary policy uncertainty increases the expected real rate of interest and decreases the nominal rate of interest

new evidence on deficits and interest rates it is generally assumed on theoretical grounds that increases in government borrowing cause interest rates to rise 1 but empirical support for this proposition has been weak at best several recent papers have uncovered no strong relationship between deficits and short terrn interest rates however the research reported here indicates that although the relationship between deficits and short terrn interest rates may be tenuous there is strong evidence that larger deficits are associated with higher long terrn interest rates much of the debate about whether there is a strong relationship between federal borrowing and interest rates concerns the crowding out question this controversy centers on the direct and indirect eilffects of government fiscal actions on private spending these effects have been well documented in the theoretical literature e g buiter 1977 carlson and spencer 1975 blinder and solow 1973 many of the crowding out effects studied in this literature depend on the connection between government borrowing and high interest rates friedman 1978 meyer 1975 silber 1970 this is called short run indirect crowding out and may occur when increases in government spending and borrowing cause interest rates to rise which then may cause private spending to be reduced buiter 1977 pp 310 13

the impact of money on short term interest rates this study reviews empirical evidence from four research methods related to the impact of money on short term nominal rates the studies consistently fail to find evidence supporting the much hypothesized short term negative relationship between money and nominal rates since at least april 1975 reasons for the absence of a negative relationship include the tendency of financial markets to anticipate corrective action by the fed whenever ml deviates from targeted growth ranges and a rapid adjustment of inflationary expectations to changes in money growth

a markov model of switching regime arch in this article i present a new approach to model more realistically the variability of financial time series i develop a markov arch model that incorporates the features of both hamilton s switching regime model and engle s autoregressive conditional heteroscedasticity arch model to examine the issue of volatility persistence in the monthly excess returns of the three month treasury bill the issue can be resolved by taking into account occasional shifts in the asymptotic variance of the markov arch process that cause the spurious persistence of the volatility process i identify two periods during which there is a regime shift the 1974 2 1974 8 period associated with the oil shock and the 1979 9 1982 8 period associated with the federal reserve s policy change the variance approached asymptotically in these two episodes is more than 10 times as high as the asymptotic variance for the remainder of the sample i conclude that regime shifts have a greater impact on the properties of the data and i ca

informational diversity over time and the optimality of monetary equilibria abstract the temporal realizations of a random state variable in an overlapping generations model create an informational diversity between members of different generations and require a reexamination of the optimality that competitive equilibria might display in such an environment using an optimality criterion that reflects this informational diversity we prove the optimality of competitive equilibrium in a model with a fixed stock of fiat money a single spot market and good endowments that follow a markov process the need for an optimality criterion that incorporates informational diversity is further motivated by studying the same model with the operation of complete contingent commodities markets

adoption externalities as public goods abstract a public good problem arises naturally in situations characterized by positive externalities or negative externalities for positive externalities agents furnish a public good by taking an action similarly for negative externalities agents furnish a public good by not taking an action we examine these externalities in a binary choice problem i e adoption externalities in each case there is a potential role for government intervention even when equilibrium transfers are not allowed since one equilibrium pareto dominates all others we analyze the positive and normative features of equilibria in these models and we explore the possibility of useful government intervention

interest rate variability and economic performance some international evidence using data for short term and long term interest rates across a major group of industrial countries his paper studies the impact of interest rate variability on the cyclical behaviour of real output and the price level in these countries theory predicts that the increased variability of the interest rate stemming from a rise in the level of uncertainty has a negaive impact on he ouput demanded and supplied and in turn an ambiguous impact on the price level the empirical evidence is generally consistent with this prediction next the investigation attempts to shed some light on major sources of uncertainty underlying the interest rate variability focus in on he variability of monetary growth the exchange rate and the energy price some evidence on he relative contribution of these sources of uncertainty of the variability of the interest rate and in turn to the cyclical behaviour of real output and the price level across countries is provided

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

interest rate variability and economic performance further evidence evans 1984 argues that a policy induced rise in unanticipated interest rate volatility in 1980 82 substantially and significantly reduced output in the u s economy he concludes that stabilizing interest rates is probably sensible monetary policy p 204 a second hypothesis that increased volatility of money growth has contributed to stagnation is rejected by evans this comment raises some questions about the strength of evans s conclusions and about the implicit channels of influence for his results evans s conclusion that only past unanticipated volatility affects output is theoretically and empirically weak anticipated changes in volatility are shown to have similar effects on output second evans implies that in barro s 1981 output model the channel of the interest rate volatility effect on the economy is through an unanticipated decline in aggregate demand the price level effect of such an unanticipated reduction in aggregate demand is tested in barro s price equation in examining these issues an alternative measure of money

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

long and short term interest rates in a risky world abstract the paper develops and tests a general equilibrium model in which variability or risk affects the choice of portfolios our measures of variability include only the variability of unanticipated growth in monetary and non monetary aggregates and our tests use data ending with the change in federal reserve procedures in october 1979 we find that increased variability of unanticipated money growth raises demands for debt and money and reduces the demand for real capital interest rates on both short and long term debt rise by a risk premium we estimate the size of the risk premium before and after the october 1979 change and we show that the change in federal reserve procedures moved the economy to a less efficient point

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

money growth volatility and the macroeconomy this study analyzes the effects of variability in money growth on the macroeconomy for the period 1961 1 1984 4 within the context of a vector autoregressive model that contains variables typically included in a small macro model variance decompositions and historical decompositions are used to assess the impact of money growth variability the variance decompositions suggest substantial effects of money growth variability on the long term interest rate output and the price level historical decompositions for 1979 4 1984 4 suggest substantial effects of money growth variability on the interest rate and output but smaller effects on the price level are found copyright 1988 by ohio state university press

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

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices