stabilization policy a reconsideration i introduction in 1936 keynes s general theory explained how fiscal and monetary policy could be used to end depressions since that time no developed country has ever seen a downturn on the scale of the 1930s the general theory was not just a how to book on the avoidance of depressions it was an argument for stabilization policy itself the years since the general theory have seen a revolt against keynesian economics in a revisionist mode milton friedman argued that countercyclical policy cannot affect the average level of unemployment and output robert lucas and thomas sargent 1979 went further contending that it is not only impossible to increase average output it is also impossible to stabilize it more recently lucas 1987 2003 has argued that policies to stabilize output even if effective would yield negligible welfare gains thus stabilization policy should not be a macroeconomic priority lucas s conclusion notwithstanding stabilization policy has long been an explicit or implicit objective of monetary policy in most industrial countries even including those countries with inflation targets the volatility of output has in fact declined in most major industrial countries since the mid 1980s and monetary policy arguably deserves at least partial credit see bernanke 2004 mirroring practice monetary policy research commonly takes it as given that along with price stability stabilization policy the minimization of squared deviations of output around potential is an appropriate policy objective see for example clarida et al 1999 in this article we explore the economic rationale for stabilization as a policy goal concluding that it does in fact deserve high policy priority we survey a large body of literature that critiques the validity of key assumptions in lucas s argument we also offer suggestive evidence that stabilization policy can significantly reduce average levels of unemployment by providing stimulus to demand in circumstances where unemployment is high but underutilization of labor and capital does little to lower inflation a monetary policy that vigorously fights high unemployment should however also be complemented by a policy that equally vigorously fights inflation when it rises above a modest target level the federal reserve act thus wisely enunciated price stability and maximum employment as twin goals for monetary policy ii the case against stabilization policy macroeconomic analysis typically assumes that social welfare depends negatively on both inflation above a modest target level here assumed zero and unemployment above some minimum socially efficient level for example a standard social welfare function is the discounted sum of period losses l sub t of the form see among others barro and gordon 1983 pp 592 93 1 l sub t a u sub t 1 k u sup 2 b pi sup 2 sub t where u sub t and pi sub t are the unemployment and inflation rates in period t and u sup is the natural rate of unemployment the coefficient k is positive reflecting the desirability of unemployment below the natural rate because real economies deviate in many respects from perfect competition the natural rate of unemployment is likely to exceed the socially optimal unemployment rate for example with monopolistic competition goods are underproduced because they are priced above marginal cost so potential output is inefficiently low and equilibrium unemployment is too high standard macroeconomic analysis additionally assumes that inflation is determined by an expectations augmented accelerationist phillips curve of the form 2 pi sub t pi sup e sub t f u sub t u sup epsilon sub t where pi sup e sub t is the expected inflation rate at time t with expectations formed at t 1 and epsilon sub t captures supply shocks to the phillips curve at t

money still makes the world go round the zonal view many leading monetary economists have come to regard the monetary aggregates as obsolete measures of the monetary policy stance this critique has led some to view money as having lost its central role in the conduct of monetary policy we say to those advocating excising money from monetary policy not so fast to better understand the potential role for money we develop a zonal view of monetary policy which reflects the historical regularity for the relative informativeness of the quantitative measures of monetary policy such as the monetary aggregates and real interest rates to depend on the inflation zone in which a central bank finds itself the zones range from high inflation zone 1 to deep deflation zone 5 with intermediate zones of moderate inflation zone 2 low inflation zone 3 and low deflation zone 4 we find considerable support for this view in the historical data which stretches back to the 19 th century seen from this perspective the past experience of central banks casts doubt on the singular importance often attributed to the short term real interest rate as an indicator of the stance of monetary policy this applies especially in the current low inflation environment in which many central banks find themselves the zonal view has far reaching implications for monetary policy frameworks for the analytical efforts to understand the monetary policy transmission mechanism and for central bank communication strategies this paper was prepared for the 21 st congress of the european economic association held in vienna on august 27 2006 the views expressed in the paper are solely those of the authors

portfolio rebalancing and the turn of the year effect this paper finds that for the 1935 1986 period the market s risk return relation does not have a january seasonal the findings differ from those of other studies due to the use of value weighted rather than equally weighted portfolios inferences are sensitive to the weighting procedure because of the small firm return patterns in january in particular even in those januaries for which the market return is negative small firm returns are positive and they are more positive the higher is beta this is consistent with the portfolio rebalancing explanation of the turn of the year effect since at least 1926 the average return on small firms in january has been unusually high a phenomenon known as the turn of the year effect in this paper we present new evidence regarding the risk return characteristics of small firms in january we find that for small firms there is a positively sloped riskreturn relation in both up and down markets this pattern is difficult to reconcile with the belief that the high return on small firms in january is equilibrium compensation for risk bearing we show how these patterns in small firms returns have led others to conclude that the market s risk return relation has a january seasonal in particular rozeff and kinney 21 and tinic and west 22 23 among others using equally weighted portfolios formed on the basis of historical betas have found a steeper slope for the capm s risk return relation in january than in other months we demonstrate that this pattern exists only for small firms consequently statistical inferences about the risk return relation are heavily dependent upon whether equally weighted or value weighted portfolio returns are used in the estimation we show that for 1935 86 when monthly cross sectional regressions are estimated using value weighted portfolio returns there is no more of a statistically significant difference in the estimated return to risk bearing in january than in the other eleven months of the year the notion that there is a january seasonal in the capm s risk return relation for the us has rapidly become accepted knowledge for example corhay hawawini and michel 6 accept this conclusion and investigate whether other

u k financial market returns 1955 2000 we present and analyze new monthly index series for u k financial assets covering equities bonds bills and inflation the data are consistent with the crsp ibbotson series for the united states we use our indices to estimate equity and bond premia and to make international comparisons especially with the united states germany and japan we illustrate potential uses of the new series by investigating stock market seasonality inflation linked bonds real dividend growth rates and the small firm effect while some of our findings resemble u s results we also report differences between u k and u s stock market behavior copyright 2001 by university of chicago press

financial factors in the great depression eginning with irving fisher 1933 and john maynard keynes 1931 b 1963 macroeconomists have argued that financial markets were important sources and propagators of decline during the great depression turning points during the depression often coincided with or were preceded by dramatic events in financial markets stock market collapse waves of bankruptcy and bank failure and contractions in the money stock but the mechanism through which financial factors contributed to the depression has been a source of controversy as has been the relative importance of financial factors in explaining the origins and persistence of the depression this essay reviews the literature on the role of financial factors in the depression and draws some lessons that have more general relevance for the study of the depression and for macroeconomics i argue that much of the recent progress that has been made in understanding some of the most important and puzzling aspects of financial real links in the depression followed a paradigm shift in economics a central neglected theoretical piece of the story for financial factors was the allocative effects of imperfections in capital markets which can imply links between disruptions in financial markets and subsequent economic activity also the increasing emphasis on learning and path dependence in economics has helped to explain why financial shocks during the 1930s were so severe and why policy makers failed to prevent the depression

the political economy of the euro crisis this article introduces the special issue on the political economy of the euro crisis which aims to improve our understanding of the causes consequences and implications of the highly unusual nature of this crisis a financial crisis among developed countries within a supranational monetary union the article provides a brief chronology of the crisis discusses its underlying causes and reviews the ways in which comparative and international political economy can help us understand the crisis the article then discusses the individual and collective contributions of the articles in the special issue and discusses possible future research paths on the political economy of the euro crisis we conclude with a brief discussion of how a political economy perspective informs our understanding of the long term prospects for the eurozone and european integration

risk return and equilibrium a revisit this paper reports the results of tests of the major implications of the two parameter capital asset pricing model the findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935 82 these nonlinearities cannot be ascribed to previously documented anomalies related to firm size or january seasonality moreover the test results appear to be sensitive to the choice of the proxy for the market portfolio

does schooling cause growth a number of economists find that growth and schooling are highly correlated across countries a model is examined in which the ability to build on the human capital of one s elders plays an important role in linking growth to schooling the model is calibrated to quantify the strength of the effect of schooling on growth by using evidence from the labor literature on mincerian returns to education the upshot is that the impact of schooling on growth explains less than one third of the empirical cross country relationship the ability of reverse causality to explain this empirical relationship is also investigated

could stable money have averted the great contraction i introduction although over fifty years have elapsed since the onset of the great contraction controversy still swirls about the factors responsible for its depth and long duration a basic issue is the hypothesis due to friedman and schwartz 1963 that the great contraction would have been attenuated had the federal reserve not allowed the money stock to decline although the validity of the hypothesis has been a subject of much debate there is little empirical evidence directly addressing it a direct test of the friedman and schwartz hypothesis requires simulating the behavior of output under a counterfactual policy of stable money that approach was adopted by warburton 1966 friedman 1960 and modigliani 1969 none of whom constructed a model of the economy on the basis of which to conduct his test recently mccallum 1990 has used simulations from a macro model to show that his base rule with feedback would have avoided the severe decline in nominal income that occurred between 1929 and 1933 1 the extent to which his rule would have improved the behavior of nominal income depends on the value of the feedback coefficient mccallum s simulations however do not address the issue considered here of how a stable money rule would have performed in this paper we present simulations that focus on the stable money counterfactual our model is based on mccallum s but we use a more general framework than his that a estimates separate relations for output and the price level and b places no prior restrictions on the feedback from output and the price level to money our stable money counterfactual does not change the long term rate of money growth from that actually experienced and thus involves only short run changes in the behavior of the money supply we assume that dynamics embedded in the output and price relation are not especially sensitive to this type of policy change we simulate two variants of milton friedman s 1960 constant money growth rule the first a strong form of the rule assumes that the fed could quickly offset changes in the money multiplier by changes in high powered money and thus keep the money stock on the constant growth rate path in each quarter the second a weaker form of the rule assumes that the money multiplier is observed with a one quarter lag and the fed can only set the expected rate of growth of money conditional on last period information equal to the constant rate our basic simulation is derived from a model estimated for the 1921 1 1941 4 interwar period the results of this simulation buttress the views of friedman and schwartz had a constant money growth rule with an annual rate equal to the average 1921 41 rate of 2 95 percent been followed throughout the interwar period the great contraction would have been avoided real output would have declined from 1929 3 to 1933 1 but the order of magnitude of the cumulative change 11 1 to 21 6 percent and the annual rate of change 3 3 to 6 6 percent when the actual cumulative change was 36 2 percent and the annual rate of change was 12 1 percent would have been comparable to other recessions in the nineteenth and twentieth centuries in the basic simulation we assume that the output and price relations remained stable over the entire interwar period the extraordinary economic conditions of the great contraction could have arguably shifted the output and price relations thus we also present an alternative simulation that uses estimates of these relations based on the 1920s data this simulation shows that a constant money growth rule with an annual rate equal to the 1921 29 average of 3 29 percent would have prevented even a mild recession during the great contraction period section ii contains a brief survey of the continuing debate over the cause and propagation mechanism of the great contraction and its implications for the stable money hypothesis

call option pricing and the turn of the year historically common stocks have had larger returns and variability of returns around the turn of the year and january the authors find that call option prices reflect these historical patterns ex ante that is the higher return variability is anticipated and incorporated into the prices of call options whose trade date and expiration date fall on opposite sides of a turn of the year period these results suggest that both the turn of the year and the january phenomena are widely anticipated by financial markets before the fact copyright 1989 by the university of chicago

international liquidity in a multipolar world today s global monetary and financial system to a remarkable extent continues to rely on the u s dollar for international liquidity this reflects the currency s historic role the liquidity of american financial markets and the absence of alternatives but with the emergence of emerging markets the capacity of the united states to provide safe assets will be outstripped by the growth of international transactions it is thus likely that other large economies presumably europe and china will eventually join the united states as sources of international liquidity and that other currencies will come to share the dollar s reserve currency status

international aspects of the great depression and the crisis of 2007 similarities differences and lessons we focus on two international aspects of the great depression financial crises and international trade and try to discern lessons for the current economic crisis both downturns featured global banking crises which were generated by boom slump macroeconomic cycles during both crises world trade collapsed faster than world incomes and the trade decline was highly synchronized across countries during the depression income losses and rises in trade barriers explain trade s collapse owing to vertical specialization and more intense trade in durables today s trade collapse is due to uncertainty and small shocks to trade costs hitting international supply chains so far the global economy has avoided the global trade wars and banking collapses of the depression perhaps owing to improved policy even so the global economy remains susceptible to large shocks owing to financial innovation and technological

politics institutions and trade lessons of the interwar era recent studies cast doubt on the value added of international trade agreements and institutions using a new data set that consists of about 35 000 observations on the trade of fifty four nations between 1919 and 1938 we examine whether this skepticism also applies to the infamous interwar trade blocs traditional historical accounts attribute to them a large drop in international trade and a rise in the political tensions that would later erupt in world war ii in this study we show that no bloc raised trade among its members as a whole or decreased trade between members and nonmembers however our findings are not wholly consistent with the skepticism recent studies express we argue that conflicts of interest among the great powers encouraged the emergence of the bloc system and also gave rise to intrabloc trade shifts consistent with the political interests of their great power hubs the political military alliances these conflicts created also reduced trade between their signatories and we argue more generally that the causal chain runs from politics to trade as a result measuring only the effect of agreements and institutions on aggregate trade between their members can generate inaccurate estimates of their value added

business cycles in international historical perspective business cycle models seek to answer the question of why economies go through cycles of recession and recovery or boom and bust any theory of the business cycle makes two sorts of claims what shocks are most important in disturbing the economy and what economic structure is necessary for propagating these shocks for example one common explanation of business cycles begins with monetary shocks and then seeks to explain why monetary shocks are not purely neutral as neoclassical theory would have it and instead have real effects at least in the short term early models in this vein were often implicitly or explicitly based on the proposition that markets do not clear continuously early equilibrium real business cycle theories instead emphasized the importance of real shocks especially to technology which may cause socially efficient fluctuations even when markets are always in equilibrium more recent models have attempted to marry the equilibrium approach to macroeconomics with the substantive keynesian ideas that money is not neutral and that economic fluctuations are costly new keynesian theories of the business cycle admit the possibility of a number of economic shocks including monetary and technology shocks but then focus on explaining how nominal price rigidities within the economy can turn these shocks into recessions or booms other models show that business cycles driven by keynesian animal spirits are consistent with rigorous microfoundations and rational expectations seeking empirical evidence for and against these various approaches we turn business cycle theories loose on perhaps the greatest macroeconomic laboratory

golden fetters the gold standard and the great depression barry eichengreen oxford university press new york 1992 pp xix 448 39 95

risk return and equilibrium an extension this study extends a recent empirical reexamination of the risk ret urn relationship by examining the possibility that an omitted size re lationship may account for the anomalous results h levy s generaliz ed capital asset pricing model provides the theoretical basis for incorporating the impact of firm size on expected return by examining the relative importance of unsystematic risk in pricing closely held securities compared to pricing widely held securities in so doing the empirical analysis also provides a test of an implication of the generalized capital asset pricing model two methodologies are used t o test the hypotheses empirically the results indicate that even thou gh size has a significant impact on the risk return relationship it apparently does not account for the anomalous results this implicati on is consistent under both methodologies copyright 1988 by the university of chicago

poverty and economic development evidence for the brazilian states abstract in the present study our primary concern is to examine the effects of poverty on economic development across the brazilian states from 1980 to 2015 many studies assess the effects of economic growth and economic development on poverty incidence but there is almost no one trying to measure the impact of poverty prevalence on economic development the results of this paper indicate that poverty incidence is essential in the economic development of the brazilian states poorer brazilian states have lower income per worker even when controlling for investment in physical capital human capital stock and the effective depreciation of capital the results point to the variables measuring extreme poverty as having more influence on the economic development of the brazilian states in relation to the variables quantifying poverty

stock market seasonals and prespecified multifactor pricing relations despite nonstationarities in the factor betas and factor prices of the chen roll ross 1986 multifactor model investors are rewarded for bearing risks associated with the change in expected inflation and industrial production in non january months however variations in these factors have opposite influences on stock prices these findings may partially explain why several recent studies fail to detect a significant non january risk premium in the stock market but this evidence is only suggestive since theoretical and statistical difficulties prevent precise interpretations of specific pricing relations in the chen roll ross model

lessons from the political economy of the new deal the new deal produced a fundamental change in the structure of american government the national government came to play a much larger role in the financing of social welfare programmes while administration of the programmes was largely located at the states both the purely national and the shared federal parts of the welfare system were characterized by impersonal rules the political economy of how the rules came about and how the new deal experience may have contributed to americans changing their views on the danger of dealing with the national government is the primary focus the paper closes with speculations about the possible effect of changing views on american participation in the second world war after 1939

time varying volatilities and calculation of the weighted implied standard deviation rogalski tinic have reported a monthly pattern in ex post stock return variances that differs between small and large market capitalization firms maloney rogalski find that option prices reflect these monthly patterns ex ante this study extends maloney rogalski s work by devising an expiration specific weighted implied standard deviation wisd it is found that i the monthly patterns in one month wisds are basically similar to the monthly patterns in ex post variances detected by rogalski tinic for both large and small size firms and ii use of expiration specific wisds as opposed to standard composite wisds results in improved performance of option pricing models

british monetary and fiscal policy in the 1930s current economic turbulence has revived interest in interwar macroeconomic instability and policy this paper provides a guide to the current state of knowledge on british macroeconomic policy between 1929 and the eve of the second world war for today s economists and policy makers mindful that some will seek lessons from this earlier age it makes clear the very particular economic and policy context of the time including the marked difference between british and american economic performance and policies and the challenge posed by the massive rise in debt brought about by the first world war knowledge transfer is possible here for policy learning but what transpires is that lessons are typically stronger as negatives than as positives namely what should not be done in general as against what might be done this largely situation specific the focus is the role and effectiveness of the monetary and fiscal policies pursued together with an assessment of the principal policy not adopted namely the keynesian solution of significant loan financed public works to remedy mass unemployment the analysis is comparative with respect to us macroeconomic economic performance and policy it explores the different macroeconomic shocks of the contraction phase the term great depression is not really appropriate to the british experience in the two countries comparative policy regimes and then in turn analyses the policy mix and policy effectiveness of monetary and fiscal policy including for britain the counterfactual keynesian solution a business cycle periodization is adopted with the key role for the abandonment of the gold standard in terms of regaining freedom of choice in macroeconomic policy itself experiencing significant developments after 1931 the traditional role of the cheap money induced housing boom in britain s post 1932 economic recovery is reaffirmed the impact of the fiscal policies actually pursued are then discussed as are assessments of the likely effectiveness of the keynesian solution had the 1929 liberal party s we can conquer unemployment spending package been implemented

a century of us central banking goals frameworks accountability several key episodes in the 100 year history of the federal reserve have everal key episodes in the 100 year history of the federal reserve have been referred to in various contexts with the adjective great attached to been referred to in various contexts with the adjective great attached to them the great experiment of the federal reserve s founding the great them the great experiment of the federal reserve s founding the great depression the great infl ation and subsequent disinfl ation the great moderation depression the great infl ation and subsequent disinfl ation the great moderation and the recent great recession here i ll use this sequence of great episodes and the recent great recession here i ll use this sequence of great episodes to discuss the evolution over the past 100 years of three key aspects of federal to discuss the evolution over the past 100 years of three key aspects of federal reserve policymaking the goals of policy the policy framework and accountability reserve policymaking the goals of policy the policy framework and accountability and communication the changes over time in these three areas provide a useful and communication the changes over time in these three areas provide a useful perspective i believe on how the role and functioning of the federal reserve have perspective i believe on how the role and functioning of the federal reserve have changed since its founding in 1913 as well as some lessons for the present and for changed since its founding in 1913 as well as some lessons for the present and for the future the future

kicking the habit moving from pegged rates to greater exchange rate flexibility why do governments find it so difficult to move from pegged exchange rates to greater exchange rate flexibility i first establish that there is a problem to be solved that there are powerful incentives for greater flexibility deriving from changes in the international economic and financial environment but that policymakers find it difficult to engineer a smooth transition i offer practical suggestions and a framework under which the probability of a smooth transition can be maximised drawing examples from recent economic history i then attempt to understand the experience of selected countries which have undertaken this transition

are seasonal anomalies real a ninety year perspective in recent years there has been a proliferation of empirical studies documenting unexpected or anomalous regularities in security rates of return in addition to the widely studied relation between firm size and rate of return 1 these include seasonal regularities related to the time of the day harris 1986 the day of the week see ball and bowers 1986 cross 1973 french 1980 gibbons and hess 1981 jaffe and westerfield 1985 keim and stambaugh 1984 and lakonishok and levi 1982 the time of the month ariel 1987 and the turn of the year see haugen and lakonishok 1988 jones pearce and wilson 1987 lakonishok

the january size effect anomaly or risk mismeasurement 1986 the january size effect anomaly or risk mismeasurement financial analysts journal vol 42 no 6 pp 63 70

calendar anomalies abnormal returns at calendar turning points 1988 calendar anomalies abnormal returns at calendar turning points financial analysts journal vol 44 no 6 pp 28 39

the relative importance of total factor productivity and factors of production in income per worker evidence from the brazilian states income per worker gap in different regions of brazil is stunning to assess the relative importance of factor of production and total factor productivity tfp in those income per worker disparities development accounting exercises were carried out for the 1970 1980 1990 2000 and 2010 years in 1970 both types of capital stocks and tpf gaps were associated with the brazilian states lower relative income in comparison to sao paulo state over the decades up to the year 2000 the brazilian states have experienced a relevant capital deepening process which account for income per work catching up however the tfp gaps in relation to the reference state remain almost stable and their reduction is fundamental to the maintenance of the brazilians states income per worker catching up process the conclusions remain similar when the analysis is conducted by means of distinct proxies of physical capital when considering the human capital qualitative aspect we noticed a greater human capital gap among the brazilian states in relation to sao paulo state and as a consequence a reduction in the tfp relative gap

why don t we see poverty convergence average living standards are converging among developing countries and faster growing economies see more progress against poverty yet we do not find poverty convergence countries starting with higher poverty rates do not see higher proportionate rates of poverty reduction the paper tries to explain why analysis of a new dataset suggests that at given mean consumption high initial poverty has an adverse effect on consumption growth and also makes growth less poverty reducing thus for many poor countries the growth advantage of starting out with a low mean is lost due to a high incidence of poverty jel d63 i31 i32 o15

playing the turn of the year effect with index futures the turn of the year effect is a well documented stock market phenomenon in which low capitalization small stocks receive relatively higher returns than high capitalization big stocks on the last trading day of december and the first 8 trading days of january the difference in returns during this period is of the order of 10 strategies for buying and selling these small stocks may be profitable but may also incur large transaction costs that eliminate most or all of the projected gains in this paper we show a preferable way to invest in order to exploit this anomaly use a futures spread that is long in the small stocks and short in the big stocks the optimal investment which uses a modification of the capital growth criterion is large and has a substantial expected gain with minimal risk we have used this analysis successfully in managing investment accounts

why is poverty so high among afro brazilians a decomposition analysis of the racial poverty gap this study aimed to identify the major factors underlying the large discrepancy in poverty levels between two brazilian racial groups whites and afro brazilians we performed an oaxaca blinder type decomposition for nonlinear regressions in order to quantify the extent to which differences in observed geographic sociodemographic and labor characteristics characteristics effect account for this difference the remaining unexplained part coefficients effect provides evidence on how these characteristics differentially impact on the risk of poverty in each group a detailed decomposition of both effects allows the individual contribution of each characteristic to be determined our results show that the characteristics effect explains a large part of the discrepancy in poverty levels with education and labor variables of household members explaining at least one half of the effect and geographic and demographic variables accounting for the remainder however the unexplained part that remains significant has increased in importance in recent last years and probably results from unequal access to high quality education and the persistence of discrimination against colored workers in the labor market