does it matter how monetary policy is implemented abstract in the u s existing monetary base measures add an adjustment factor for changes in reserve requirement ratios to high powered money implicitly the monetary base assumes that the economic effects of changes in reserve requirements are identical to those due to changes in high powered money theory however does not generally support the prediction that the two policy tools will have the same economic effects structural vars are estimated to compare the short run paths of inflation and output growth under two different types of policy shocks in doing so this analysis gives one a measure of the costs associated with this implicit equivalence assumption the evidence is consistent with the hypothesis that the federal reserve at least partially offsets reserve requirement changes with open market operations and the hypothesis that dynamic explanations of macroeconomic variables are improved by separating reserve requirement changes from other monetary policy moves

knowing the right person in the right place political connections and resistance to change we use a political economy model of schumpeterian growth with entry to investigate how an incumbent politician can strategically use the level of red tape to acquire incumbency advantage by setting sufficiently high red tape the politician induces the incumbent firm in the intermediate sector to invest in political connections which are valued also by voters who recognize that bureaucratic costs can be reduced by connected firms within this framework we study the markov perfect equilibria of an infinitely repeated game among politicians firms and voters and show that all equilibria are characterized by investments in political connections and the re election of the incumbent politician political connections may prevent entry of advanced competitors and cause the economy to lag behind the technological frontier our model provides a possible explanation for the persistence of inefficient democracies and political barriers to technology development where these reflect shared rather than conflicting interests jel o31 o33 o40 d72 d73

the information value of the fomc policy directive under the new operating procedures the federal reserve s federal open market committee fomc meets every one to two months to determine its monetary policy objectives over the near term at the conclusion of each meeting the fomc issues a policy directive to the system s account manager at the new york federal reserve bank specifying short run money growth targets and a federal funds interest rate tolerance range the policy directive is not disclosed to the public until after the next meeting when a new directive becomes effective in an earlier paper o brien 1981 evidence was presented suggesting that immediate disclosure of the fomc policy directives over the period january 1976 june 1979 would have improved the accuracy of market expectations of near term interest rate levels by no more than minor amounts in this paper we examine the information value of the fomc policy directives in predicting near term levels of interest rates urder the federal reserve s revised operating procedures adopted in late october 1979 but modified in late 1982 in the next section the interest rate information value of the fomc policy directive is discussed in terms of a simple money demand and supply model

a note on discount rate policy and the variability of discount window borrowing abstract the purpose of this note is to evaluate the appropriate discount rate policy rules consistent with minimization of the variability of borrowing at the federal reserve discount window in the context of goodfriend s 1983 model of the bank borrowing decision it is demonstrated that either a penalty rate or a subsidy rate policy will produce minimized variability of borrowing so long as the subsidy rate adjusts point for point to changes in the value of the federal funds rate these policy rules are compatible with a policy procedure designed to target borrowed or non borrowed reserves if the fed does not adhere to one of these specific rules minimization of borrowing variability requires an open market procedure in which the fed pegs the federal funds rate

distributional coalitions the industrial revolution and the origins of economic growth in britain from the late 1600s to the mid 1800s britain was able to transform from a divided kingdom with a fragmented often stagnant economy into a powerful and stable state that simultaneously saw an expansion in the power wealth and stability of the central government while encouraging an economic transformation that gradually allowed both industrial technology and liberal commerce to flourish and break out of its mercantilist straitjacket we explain how rent seeking elites who might normally have opposed such sweeping transformations promoted institutional changes that in the long run expanded the economy and encouraged innovation even at the expense of class interests in the short run this meant that rent seeking in the 18th century was not so much reduced as redirected from local monopolies to state authorities and parliament but in the longer run the process of professionalization made possible greater liberalism in general even at the expense of general rent seeking itself the position of parliament as a meta institution for reforming and weakening rent creating restrictions as needed was pivotal to this process ideological changes particularly the scottish enlighten ment transformed the terms of the debate but could only be operationalized once interests were aligned so that gainers from industrialization could compensate or overcome traditional interests

monetary innovations and interest rates this paper examines the effect of unexpected weekly changes in the money supply on financial markets l examination of financial market reaction to weekly monetary surprises provides information on how the economy reacts to monetary changes also the reaction to weekly monetary surprises may put real or imagined constraints on federal reserve behavior as noted by tobin a decade ago certainly the rate of growth of the money stock has become the customary capsule form for describing monetary policy and gauging how easy or tight it is for a time it seemed that public preoccupation with this number might itself be a market constraint on the federal reserve believers in monetarism would regard accelerated growth of m1 as the harbinger of more inflation and higher interest rates if such people were to dominate financial markets they would make it difficult for the fed to carry out a rate reducing expansionary policy tobin 1974 p 70 throughout the paper unexpected weekly changes in the money supply monetary innovations are measured by reported changes in the supply of money minus expected changes where expected changes in money are obtained from market survey data changes in current interest rates of various terms to maturity are used to measure the effects of innovations on financial markets

betting on hitler the value of political connections in nazi germany this paper examines the value of connections between german industry and the nazi movement in early 1933 drawing on previously unused contemporary sources about management and supervisory board composition and stock returns we find that one out of seven firms and a large proportion of the biggest companies had substantive links with the national socialist german workers party firms supporting the nazi movement experienced unusually high returns outperforming unconnected ones by 5 to 8 between january and march 1933 these results are not driven by sectoral composition and are robust to alternative estimators and definitions of affiliation

instability of the u s money demand function this paper surveys the two major episodes of instability of the u s money demand function known respectively as the mystery of missing money and the great velocity decline it also assesses the recent literature on open economy money demand models and their usefulness in explaining the puzzling behavior of money demand manifested shortly after the transition to floating exchange rates copyright 1991 by blackwell publishers ltd

bank capital shocks and countercyclical requirements implications for banking stability and welfare abstract this paper incorporates anticipated and unanticipated shocks to bank capital into a dsge model with a banking sector we apply this model to study basel iii countercyclical capital requirements and their implications for banking stability and household welfare we introduce three different countercyclical capital rules the first countercyclical capital rule responds to credit to output ratio the second countercyclical rule reacts to deviations of credit to its steady state and the third rule reacts to credit growth the second rule proves to be the most effective tool in dampening credit supply housing demand and household debt as well as in enhancing the banking stability by ensuring that banks have higher bank capital and capital to asset ratio after conducting a welfare analysis we find that the second rule outranks the other ones followed by the first rule the baseline and the third rule respectively in terms of welfare accumulation

the federal reserve s new operating procedures a post mortem abstract although money stock targeting has been the strategic focus of federal reserve policy since the mid 1970 s operating policy the tactics whereby the longer run strategy is implemented over short term intervals has been changed by the federal reserve at least twice over this period a particularly dramatic change in operating policy was announced by the federal reserve in october 1979 this paper provides empirical evidence that settles questions about the nature of this change and suggests that the new operating procedures may have contributed to the heightened interest rate volatility experienced over the 1979 to 1982 period

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

u s treasury bill forward and futures prices for the period 1976 87 forward rates on u s t bills averaged more than 30 basis points above the comparable futures market rates since risk is common to both rates i argue that this difference can be explained by the substitutability of different maturity t bills for money consistent with this hypothesis i find that this difference depends positively on interest rates and the spread between the federal funds and 3 month t bill rates and negatively on the ratio of short term governments to broadly defined money also significant shifts occurred in the relationship in october 1979 and august 1982 coinciding with changes in federal reserve operating procedures copyright 1994 by ohio state university press

does the federal reserve affect asset prices abstract the federal reserve is probably one of the institutions most closely monitored by investors this indicates that investors believe the actions of the fed have implications for asset prices to this date the trading activities of the fed in the financial markets have not been examined to see how the fed influences asset prices using daily data on open market operations omos and asset prices this study fills this void one finding of the paper is that omos granger cause both short and long term interest rates furthermore the sign of the relationship confirms the existence of the liquidity effect given that its trades represent a small portion of the market volume how the fed influences bond prices is a puzzle the only reasonable explanation is that the fed s trades have high information content judging by the impulse response paths the reaction of interest rates to open market operations is fast additionally it appears that monetary policy has a lasting impact on interest rates

federal reserve operating procedures a survey and evaluation of the historical record since october 1979 comment william poole has produced another thoughtful and thought provoking paper two major conclusions emerge from his work first the instability of growth in m1b since october 1979 can be attributed largely to a reluctance by the federal reserve to permit wide enough swings in the federal funds rate second to correct this problem and to promote greater stability in financial markets and the economy the fed ought to replace lagged with contemporaneous reserve accounting and reform the discount window they should then begin to hit a nonborrowed base or reserves target that grows at a steady rate i will organize my comments around these two conclusions i will not comment directly on the other excellent paper in this session by ralph c bryant i will refer to some of bryant s empirical work though in my discussion of the poole paper poole attributes the continued extensive volatility of m1b growth since october 1979 to efforts by the federal reserve to smooth interest rates he concedes that the fed really has let go the federal funds rate to a very considerable extent but he believes that variability in m1b growth over tonger periods is due primarily to the important role accorded interest rates in federal reserve policy making italics mine he cites four reasons for believing that the post october 1979 targeting procedures qualitatively are not very different from the federal funds targeting procedure followed earlier of the four the most interesting and empirically verifiable is that in nearly one third of the weeks since october 1979 the federal funds rate has averaged within 100 basis points of either the bottom or the top of the widened target range during these weeks the constraint on the funds rate might have prevented the fed from hitting its nonborrowed reserves target poole in fact accepts this view uncritically

revolving door lobbyists we study how ex government ocials benet from the personal connections acquired during public service lobbyists with experience in the oce of a us senator suer a 24 drop in generated revenue when that senator leaves oce the eect is immediate discontinuous around the exit period and long lasting consistent with the notion that lobbyists sell access to powerful politicians the drop in revenue is increasing in the committee assignments power held by the exiting politician

the rise of europe atlantic trade institutional change and economic growth the rise of western europe after 1500 is due largely to growth in countries with access to the atlantic ocean and with substantial trade with the new world africa and asia via the atlantic this trade and the associatedcolonialism affected europe not only directly but also indirectly by inducing institutional change where initial political institutions those established before 1500 placed significant checks on the monarchy the growth of atlantic trade strengthened merchant groups by constraining the power of the monarchy and helped merchants obtain changes in institutions to protect property rights these changes were central to subsequent economic growth

federal reserve interest rate targeting rational expectations and the term structure abstract the amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved indeed spreads between certain long and short rates appear unrelated to future changes in the short rate contrary to the rational expectations hypothesis of the term structure this paper estimates a daily model of federal reserve interest rate targeting behavior which accompanied by the maintained hypothesis of rational expectations explains the varying predictive ability of the yield curve and elucidates the link between fed policy and the term structure

balanced budget redistribution as the outcome of political competition this paper models balanced budget redistribution between socio economic groups as the outcome of electoral competition between two political parties equilibrium is unique in the present model and a sufficient condition for existence is given requiring that there be enough stochastic heterogeneity with respect to party preferences in the electorate the validity of hotelling s principle of minimum differentiation and of director s law are examined under alternative hypotheses concerning administrative costs of redistributions and voter s possibilities both of abstaining from voting and of becoming campaign activists for one of the parties the policy strategy of expected plurality maximization is contrasted with the strategy of maximizing the probability of gaining a plurality incomes are fixed and known so lump sum taxation is feasible however constraints on tax transfer differentiation between individuals are permitted in the analysis

federal reserve control of the money stock comment it is widely believed that the money stock of the united states somehow defined should play a central role in the conduct of federal reserve monetary policy in particular it is believed that the federal reserve should publicly announce a target time path for the money stock and then try to make the actual stock follow that path closely the analytical basis for this approach to federal reserve policy however is seriously deficient unfortunately moreover debate about this approach seldom focuses on the important controversial issues about which views can justifiably differ instead the debate often becomes mired in confusion and false issues one important source of confusion is an inadequate analysis of the operating procedures through which the federal reserve implements its policy from one short run period to the next a second source is a widespread misperception of the economic processes determining the money stock most noneconomists and even many economists seem to believe that the federal reserve can straightforwardly cause the money stock to follow a target path closely month by month provided only that the federal reserve conscientiously tries to do so a third source of confusion is a poor understanding of the two stage decision process implicit in the

the banking industry under uncertain monetary policy abstract the optimal loan decisions of banks are shown to be dependent on the banks rational forecast of the future federal funds rate which in turn is related to the policy rule used by the fed consequently a change in the policy of the fed will alter the reduced form model of the banking industry this result brings into question the fed s ability to predict and control the money stock under the procedure adopted by the fed between october 1979 and september 1982

the value of democracy evidence from road building in kenya ethnic favoritism is seen as antithetical to development this paper provides credible quantification of the extent of ethnic favoritism using data on road building in kenyan districts across the 1963 2011 period guided by a model it then examines whether the transition in and out of democracy under the same president constrains or exacerbates ethnic favoritism across the post independence period we find strong evidence of ethnic favoritism districts that share the ethnicity of the president receive twice as much expenditure on roads and have five times the length of paved roads built this favoritism disappears during periods of democracy jel d72 h54 j15 o15 o17 o22 r42

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

leaning against boom bust cycles in credit and housing prices this paper studies the potential gains of monetary and macro prudential policies that lean against house price and credit cycles we rely on a model that features borrowers and savers and allows for over borrowing induced by news shock driven cycles we find that policy that responds to changes in financial variables is socially optimal considering the use of a single policy instrument both types of agents are better off when the interest rate optimally responds to credit growth when we allow for the implementation of both interest rate and ltv policies heterogeneity in the welfare implications is key in determining the optimal use of policy instruments the optimal policy for the borrowers is characterized by a ltv ratio that responds countercyclically to credit growth which most effectively stabilizes credit relative to gdp in contrast the optimal policy for the savers features a constant ltv ratio coupled with an interest rate response to credit growth news shock driven cycles account for most of the gains from a policy response to changes in financial variables

macroprudential and monetary policies implications for financial stability and welfare in this paper we analyze the implications of macroprudential and monetary policies for business cycles welfare and financial stability we consider a dynamic stochastic general equilibrium dsge model with housing and collateral constraints a macroprudential rule for the loan to value ratio ltv which responds to credit growth interacts with a traditional taylor rule for monetary policy we compute the optimal parameters of these rules both when monetary and macroprudential policies act in a coordinated and in a non coordinated way we find that both policies acting together unambiguously improves the stability of the system in both cases this interaction is welfare improving for the society especially in the case of the non coordinated game there is though a trade off between borrowers and savers however borrowers can compensate the saver s welfare loss view the mathml sourcela kaldor hicks to achieve a pareto superior outcome

the policy evaluation problem and the demand for money abstract this paper applies the lucas policy evaluation proposition to the money demand function we find some support for the hypothesis that the decrease in serial correlation of interest rates since the fed policy change in 1979 has resulted in an increase in the estimated elasticity of money demand

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

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

the spirit of capitalism and expectation driven business cycles abstract while news shocks are believed to be instrumental in explaining business cycles many existing models fail to predict a boom in consumption investment employment output and asset prices in response to good news about future productivity a model with the intrinsic desire for wealth is shown to generate the aforementioned responses a news driven boom is explained predominantly by an expansion of labor supply and is characterized by the falling real wage the simulated model not only captures well conventional business cycle statistics but also reproduces countercyclical real returns and hump shaped responses of hours and output to an unexpected technology shock

the jeffords effect abstract in may 2001 senator james jeffords left the republican party and tipped control of the u s senate to the democrats this paper uses the surprise event to demonstrate what i term the jeffords effect changes in the political landscape have large effects on the market value of firms i use a firm s soft money donations to the national parties as the measure of how the firm aligns itself politically in this event study a firm lost 8 percent of market capitalization the week of jeffords s switch for every 250 000 it gave to the republicans in the previous election cycle on the basis of the point estimates the stock price gain associated with democratic donations is smaller than the loss associated with republican donations but the estimates are consistent with the effects being equal and opposite the results withstand several robustness checks and the effects appear to persist over time

monetary policy lessons of recent inflation and disinflation by 1975 most economists agreed that the money demand function in the united states was reasonably stable and could serve as a reliable basis for the formulation of monetary policy those suspicious of monetarism were on the defensive in the light of the apparently inexorable increase of m1 velocity of about three percent per year with deviations of only a few tenths of a percent experience with rising money growth and rising inflation through 1980 only confirmed monetarist views as figure 1 shows all this had changed by 1986 with disinflation in the 1980s m1 velocity departed convincingly from its 1953 79 trend the money demand function seems to have fallen apart and is apparently not a reliable basis for monetary policy after all consequently the first major section following this introduction is devoted to the decline of velocity after 1981 and the demise of the standard money demand function some authors including i believe benjamin friedman conclude that this evidence leaves us so uncertain about the nature of money demand that policymakers cannot rely at all on any presumed money demand regularities in contrast my working hypothesis is that the money demand continues to be a stable function of relatively few variables but that the interest elasticity of money demand is substantially higher than previously thought others have sought money demand explanations in terms of regime shifts but that literature will not be discussed here events have not been kind to keynesian monetary policy positions either keynesians tend to concentrate on interest rates especially real interest rates as the best guide to the effects of monetary policy on the economy the real rate is discussed

the micromechanics of the federal funds market implications for day of the week effects in funds rate variability the federal funds rate arguably is the most important interest rate in the u s capital market because it plays a central role in monetary policy and the term structure this paper examines the micromechanics of the funds market we show that in a continuous market with asynchronous trading regulatory constraints and accounting conventions that focus agents attention on discrete time instants have important implications for the dynamics of trading activity and realized market prices we also exhibit a model of the market that explains observed regularities in the intertemporal behavior of the funds rate

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

revisiting the us money demand function an application of the lagrange multiplier structural break unit root test and the bounds test for a long run relationship in this article we examine the issue of a levels relationship and stability of the us money demand function over the period 1959 01 to 2004 02 we use the lagrange multiplier structural break unit root test and the bounds testing approach to a long run relationship in levels of the variables namely real money demand nominal interest rate and real income we find greater evidence for a long run relationship in levels and stability of the us money demand function when we use m2 as a proxy for money demand however we find little evidence for a long run relationship between m1 and m2 with their determinants for the recent period spanning the last decade or so

an exploration into pigou s theory of cycles abstract this paper explores a theory of business cycles in which recessions and booms arise due to difficulties encountered by agents in properly forecasting the economy s future needs in terms of capital the idea has a long history in the macroeconomic literature as reflected by the work of pigou industrial fluctuation macmillan london 1926 the contribution of this paper is twofold first we illustrate the type of general equilibrium structure that can give rise to such phenomena second we examine the extent to which such a model can explain the observed pattern of u s recessions frequency depth without relying on technological regress we argue that such a model offer a framework for understanding elements of both the recent u s recession and of the asia downturns of the late 1990s

intermediate monetary targets and macroeconomic fluctuations it is investigated whether the choice of intermediate target has altered macroeconomic fluctuations and whether the observed changes are consistent with predictions from economic theory since implications from the theoretical literature focus on the effects of structural disturbances an empirical analysis must identify these effects the structural vector autoregressive var technique estimates structural disturbances using restrictions from standard macroeconomic theory based on descriptions of actual targeting procedures by insiders to federal reserve policy decisions the intermediate target for the united states is identified as the interest rate from 1951 to 1969 and money from 1970 to 1986 var models are estimated over each subsample to assess whether the estimated structural disturbances cause endogenous variables to behave as economic theory predicts tests are also performed to assess whether or not the targeting rule affects the variance of endogenous variables attributable to structural sh

party connections interest groups and the slow diffusion of infrastructure evidence from britain s first transport revolution economic and political interests often block or delay infrastructure improvements this paper examines their effects by studying britain s river navigation improvements in the early 1700s a subject of intense lobbying in parliament it shows that stronger party connections and influence in neighboring areas likely to oppose or support projects affected whether a town got a river navigation act their estimated effects are comparable to geography and town economic characteristics in magnitude and help explain whether towns were blocked from getting navigation improvements the findings address institutions following the glorious revolution and broader issues concerning infrastructure technology diffusion and political connections this article is protected by copyright all rights reserved

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

models of technology diffusion abstract the literature on new technology diffusion is vast and it spills over many conventional disciplinary boundaries this paper surveys the literature by focusing on alternative explanations of the dominant stylized fact that the usage of new technologies over time typically follows an s curve the most commonly found model which is used to account for this model is the so called epidemic model which builds on the premise that what limits the speed of usage is the lack of information available about the new technology how to use it and what it does the leading alternate model is often called the probit model which follows from the premise that different firms with different goals and abilities are likely to want to adopt the new technology at different times in this model diffusion occurs as firms of different types gradually adopt it there are actually many ways to generate an s curve and the third class of models which we examine are models of density dependence popularized by population ecologists in these models the twin forces of legitimation and competition help to establish new technologies and then ultimately limit their take up finally we look at models in which the initial choice between different variants of the new technology affect the subsequent diffusion speed of the chosen technology such models often rely on information cascades which drive herd like adoption behaviour when a particular variant is finally selected

1979 1982 rules or discretion in monetary policy gregory hoelscher what determined m1 growth from november 1979 through october 1982 a reaction function is developed and tested which ascribes the level of ml to two fed motives one is the fed s desire to hit its money growth targets the other is to carry out a counter cyclical short run monetary policy both motives are found to be significant during the period this evidence is consistent with the contention of some economists that the period was not a valid test of monetarist policy rules i introduction in october of 1979 the federal reserve system announced that it would use a new operating procedure that would allow it to place strong emphasis on controlling ml this policy shift from an interest rate target regime to a non borrowed reserves target regime was widely considered as tacit acceptance of the monetarist doctrine monetarists had been calling for a policy of stable gradually declining and pre announced money growth paths the change in operating procedure was designed to give the fed greater control over ml and to dramatize the fed s commitment to slowing money growth and inflation at the time many expected the new operating policy to result in a more stable money growth path at the expense of some short term interest rate variability the rate of inflation fell from 13 3 percent in 1979 to 3 9 percent in 1982 but the variability of both short term interest rates and of money growth increased substantially ore importantly the economy slipped into a brief recession in early 1980 and a longer and much more severe one in late 1981 by october 1982 the fed announced that it would de emphasize ml as a target variable but would continue to monitor the broader monetary aggregates thus a three year monetarist inspired experiment came to an end benjamin friedman 1984 and bryant 1983 argue that the events of 1979 82 demonstrate that monetarism as a policy guide is inadequate other economists disagree with these criticisms milton friedman 1984 mccallum 1984 and poole 1982 blame the high variance of monthly or quarterly growth rates in m1 for the poor post 1979 performance of the economy this paper assesses formally the determinants of m1 growth during the 1979 82 period if the fed was attempting to use m1 to fine tune the real sector then the argument that the 1979 82 period was not a valid test of the monetarist approach to monetary policy is that much stronger on the other hand if changes in m1 cannot be explained by fine tuning motives then perhaps the period does represent a test of monetarist policies the next section discusses the reaction function used in the paper section iii describes the data and the test results the evidence is consistent with the hypothesis that the money growth targets and either of two measures of real economic performance the unemployment rate and industrial production were significant determinants of fed policy during the late 1979 to late 1982 period section iv contains conclusions ii methodology the empirical tests use a reaction function the use of a reaction function does not imply that the federal reserve board or the open market committee explicitly acts in accordance with the function the reaction function is instead an as if assumption the fed is assumed to act as if it minimizes a loss function reaction functions have been estimated by a large number of authors barth sickles and wiest 1982 summarize many of the papers published in 1978 and earlier they report that unemployment and to a lesser extent inflation were most commonly cited as significant determinants of federal reserve policy during various portions of the 1952 77 period more recent papers by abrams froyen and waud 1980 levy 1981 allen and smith 1983 bradley 1984 witte 1984a 1984b and bradley and potter 1986 have extended the literature by including additional variables and time periods in the analysis

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

trade interdependence and the international business cycle a stochastic general equilibrium model of the world economy is developed to analyze the contribution of trade interdependence to international business cycles we test some of the implications of the model using data from ten major industrial countries and a variety of detrending techniques to calculate the cyclical component of output we find that the significance of trade in the transmission of economic disturbances across countries is not robust to the choice of the detrending method in general the role of trade interdependence is moderate and seem to have been stronger in the period before 1973

capital regulation and monetary policy with fragile banks optimizing banks subject to runs are introduced in a macro model to study the transmission of monetary policy and its interplay with bank capital regulation when banks are risky a monetary expansion and a positive productivity shock increase bank leverage and risk risk based capital requirements amplify the cycle and are welfare detrimental within a class of simple policy rules the best combination includes mildly anticyclical capital ratios as in basel iii and a response of monetary policy to asset prices or bank leverage