the informational role of stock and bond volume in a kyle 1985 model the sign of the correlation between a firm s debt and equity returns is the same as the sign of the cross market kyle s lambda the sign is positive negative if private information concerns the mean risk of the firm s assets we show empirically that information conveyed by order flows is primarily about asset means the cross market lambdas are quite large consequently the portions of bond and stock returns explained by order flows are highly correlated even though the order flows themselves are virtually uncorrelated

short selling and the price discovery process we show that stock prices are more accurate when short sellers are more active first in a large panel of nyse listed stocks intraday informational efficiency of prices improves with greater shorting flow second at monthly and annual horizons more shorting flow accelerates the incorporation of public information into prices third greater shorting flow reduces post earnings announcement drift for negative earnings surprises fourth short sellers change their trading around extreme return events in a way that aids price discovery and reduces divergence from fundamental values these results are robust to various econometric specifications and their magnitude is economically meaningful the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

limited liability and incentive contracting with ex ante action choices abstract this article examines a principal agent model of financial contracting in which a risk neutral entrepreneur agent makes an unobservable ex ante effort choice while employing the investment funds of a risk neutral investor principal the key innovation is that the investment contract is subject to statutory liability limits given these liability limits two settings are considered one in which the investor payoff function is also constrained to be monotonically nondecreasing in firm profit and another in which no such monotonic contract constraint is imposed in the former case a standard debt contract is shown to emerge and a first best effort choice is not achieved in the latter setting the optimum is characterized by a live or die payoff function and a first best effort level may or may not be realized

consumption based approach to res e quantification insights from a pan european case study abstract the nexus between renewable electricity res e generation and interconnection is likely to play a large part in future de carbonised power systems this paper examines whether res e shares should be measured based on consumption rather than production with a european case study presented for the year 2030 the case study demonstrates the volume and scale of res e transfers and shows how countries have differing res e shares when comparing those derived based on the traditional production based approach to the alternative the proposed consumption based approach accounts for res e being imported and exported on an hourly basis across 30 european countries and highlights concerns regarding uncoordinated support mechanisms price distortions and cost inequality these concerns are caused by cross border subsidisation of electricity and this work proposes that an agency be appointed to administer regional res e affairs this agency would accurately quantify res e shares and remunerate producers from the country that consumed their electricity instead of where it has been produced policy would be enhanced by enabling more equitable and optimal electricity decarbonisation

supply and demand shifts of shorts before fed announcements during qe1 qe3 abstract cohen et al 2007 find that shifts in the demand curve for shorting predict negative stock returns we use their approach to examine supply and demand changes at the time of the federal open market committee fomc announcements we show that shifts in the demand for borrowing treasuries and agencies predict quantitative easing qe a reduction in the quantity demanded at all points along the demand curve predicts expansionary qe announcements

adjustment costs inventories and output this paper analyzes the optimal adjustment strategy of an inventory holding firm facing price and quantity adjustment costs in an inflationary environment the model nests both the original menu cost model that allows production to be costlessly adjusted and the later model that includes price and quantity adjustment costs but rules out inventory holdings it is shown that the firm s optimal adjustment strategy may involve stockouts at low inflation rates output is inversely related to the inflation rate and the length of time demand is satisfied increases with the demand elasticity but decreases with the storage cost and the real interest rate

evaluating unemployment policies what do the underlying theories tell us the paper surveys unemployment policies for advanced market economies and evaluates them by examining the predictions of the underlying macroeconomic theories the basic idea is that for the most part different unemployment policy prescriptions rest on different macroeconomic theories and our confidence in the prescriptions should depend at least in part on theories ability to predict some salient stylized facts about unemployment behavior the paper considers four types of policies laissez faire demand management policies supply side policies and structural policies copyright 1995 by oxford university press

analytical approximations in models of hysteresis decisions made under ongoing uncertainty and costly reversibility entail a range of the state variable where inaction is optimal which in turn produces hysteresis permanent effects of temporary shifts the range is usually defined by non linear equations that need numerical solutions in this paper a technique of analytical approximations is developed and applied to two models menu costs and investment the resulting explicit solutions help clarify why hysteresis is important even for small irreversibility in the menu cost model hysteresis is two orders of magnitude larger than under the akerlof yellen or mankiw assumptions when decisions that are costly to reverse are made under conditions of ongoing uncertainty the optimum policy usually entails a range of inertia the action should be taken only when the value of the underlying state variable becomes especially favourable and reversed only when it becomes especially unfavourable there is an intermediate range over which inaction is optimal this in turn gives rise to hysteresis starting from a value in the range of inertia if the state variable crosses the action trigger point and then returns to its original level the action will be taken but not reversed thus a temporary change will leave a permanent effect numerical solutions for models of irreversible investment show that the range of inaction is remarkably large even when the cost of reversal is small see brennan and schwartz 1985 constantinides 1986 and dixit 1989a b for examples of this unfortunately the equations tlhat determine the optimum policy are highly non linear they do not have analytical solutions therefore we lack a clearer and more general understanding of why hysteresis is numerically so important in this paper i derive analytical approximations for the solutions of more general problems of this kind when the costs of change are small the idea that small costs of change induce large amounts of inertia has been popularized in the model of akerlof and yellen 1985 mankiw 1985 and others in these models second order small costs of making price changes yield price stickiness in response to first order changes in the money supply this is a simple application of the envelope theorem but these models are static and their application to a dynamic reality must assume either permanent shocks or static expectations when there is ongoing uncertainty which is rationally expected by the decision maker the option value of the status quo enlarges the zone where inaction is optimal adding these features to the mankiw akerlof yellen may model i show that fourth order small costs of change generate first order inertia

money and the business cycle with one period nominal contracts a modified version of the nominal contract developed by j a gray 1976 and s fischer 1977 is introduced in a general equilibrium model with money which has been used in the real business cycle literature money is introduced in the model through cash in advance constraint two kinds of contracts are examined namely a nominal wage contract and a nominal price contract the nominal wage contract improves the fit of the model in many respects the nominal price contract increases the output volatility enormously but it has some unrealistic features

quantifying the long term economic benefits of european electricity system integration abstract this paper aims to quantify the long term economic benefits that arise from an increasing integration of the pan european electricity system by means of comparing model based decarbonization scenarios developed with the model limes eu it explicitly accounts for the interplay between transmission infrastructure and renewable generation capacity expansion we confirm earlier findings that on aggregate pan european transmission capacity expansion constitutes a no regret option for integrating increasing shares of variable renewables it leads to positive social returns on investment in all mitigation scenarios under analysis however the reduction in total discounted system costs stemming from transmission capacity expansion is modest in magnitude over the period 2010 2050 it reaches a maximum of 3 5 for a case with massive expansion compared to one in which the status quo remains in technical terms this means that the optimum is rather flat and taking into account regional and local benefits and distributional aspects could alter the evaluation of the economic benefits a crucial finding is that the configuration of pan european transmission infrastructure and the importance of specific country connections i e a southern versus a northern solution hinges on the relative development of specific investment costs for solar and wind technologies over the next decades

slow moving capital we study three cases in which specialized arbitrageurs lost significant amounts of capital and as a result became liquidity demanders rather than providers the effects on security markets were large and persistent prices dropped relative to fundamentals and the rebound took months while multi strategy hedge funds who were not capital constrained increased their positions a large fraction of these funds actually acted as net sellers consistent with the view that information barriers within a firm not just relative to outside investors can lead to capital constraints for trading desks with mark to market losses our findings suggest that real world frictions impede arbitrage capital this abstract was borrowed from another version of this item

on the prevalence of labor contracts with fixed duration the prevalence of labor contracts with fixed duration seems surprising why is a fixed duration preferred to a stochastic duration that depends on the consumer price index in this paper the specification of the contract duration is determined endogenously the wage rate can be indexed to the consumer price index but there is a loss since the indexation must be the same for different types of shocks this loss increases with the variability of the contract duration since the loss due to the contracting cost depends on the expected discounted duration only a fixed duration is chosen copyright 1992 by american economic association

short sale restrictions and market reaction to short interest announcements according to the diamond verrecchia hypothesis if increases in short interest are correlated with information that is not yet public they should precipitate a price adjustment stocks with unexpected increases in short interest are found to generate statistically significant but small negative abnormal returns for a short period around the announcement date when the sample is divided into stocks with and without tradable options nonoptioned stocks closely mimic these results but the optioned stocks do not in a cross sectional analysis of individual firms the short term negative abnormal returns are found to be 1 more negative the higher the degree of unexpected short interest and 2 less negative if the firm has tradable options

where do all the windmills go influence of the institutional setting on the spatial distribution of renewable energy installation abstract promoting renewable energy sources is one policy response to climate change not only is there currently a debate over the best policy instrument it is also discussed whether the renewable energy production should be expanded centralized at locations with the highest production potential or decentralized close to load it is yet not fully understood what influences the spatial distribution of renewable energy installation i assess the effect of subsidy scheme and market design on the spatial distribution of wind energy installations by comparing a feed in tariffs versus market premiums and b uniform versus nodal pricing the analysis is based on theoretical considerations and using a six node test model that reflects the consumption and renewable resource distribution in several countries and regions the institutional setting has great influence on the spatial distribution and resulting system costs with uniform pricing a market premium only leads to a more decentralized expansion of renewable energy production than a tariff when sites share similar wind conditions spatially more distributed expansion of wind power performs better in terms of total costs and share of wind power in final demand when networks are restricted

firm specific information and the correlation between individual stocks and bonds abstract this paper examines the correlation between the returns on individual stocks and the yield changes of individual bonds issued by the same firm and finds that they are negatively and contemporaneously correlated this suggests that individual stocks and bonds are driven by firm specific information that is predominantly related to the mean rather than the variance of the firm s underlying assets furthermore i find that lagged stock returns have explanatory power for current bond yield changes while current stock returns are unrelated to lagged bond yield changes this shows that stocks lead bonds in reflecting firm specific information

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

parametric study of variable renewable energy integration in europe advantages and costs of transmission grid extensions abstract wind and solar energy will play an important role in the decarbonization of the european electricity generation however high shares of these variable renewable energies vres challenge the power system considerably due to their temporal fluctuations and geographical dispersion in this paper we systematically analyze transmission grid extensions as an integration measure for vres in europe we show the effects of grid extensions for fundamental properties of the power system as a function of the penetration and mix of wind and solar energy backup capacity requirements and overproduction are reduced with a powerful overlay transmission grid we determine the costs of the grid extensions in dependence of the vre penetration and mix and find that the grid integration costs remain below 25 of the vre investment costs for all conceivable vre configurations furthermore robust design features of future power systems in terms of grid geometry and flexibility requirements for backup technologies are identified we apply a spatially and temporally highly resolved techno economic model of the european power system for our analysis

theoretical developments in the light of macroeconomic policy and empirical research macroeconomics is surveyed with emphasis on the implications of the new classical and rational expectations critiques for the keynesian paradigm and the role of macro policies at the background are the main macro developments of the 1 970s and 1 980s as well as the specific lessons of recent high chronic inflation processes a synthesis is emerging in which the basic keynesian view of the existence of market and price coordination failures as well as room for pareto improving policy intervention are maintained at the same time the theoretical underpinnings are undergoing substantial change mainly due to a rational expectations reformulation

short selling and price discovery in corporate bonds we show short selling in corporate bonds forecasts future bond returns short selling predicts bond returns where private information is more likely in high yield bonds particularly after lehman brothers collapse of 2008 short selling predicts returns following both high and low past bond returns this together with short selling increasing following past buying order imbalances suggests short sellers trade against price pressures as well as trade on information short selling predicts bond returns both in the individual bonds that are shorted and in other bonds by the same issuer past stock returns and short selling in stocks predict bond returns but do not eliminate bond short selling predicting bond returns bond short selling does not predict the issuer s stock returns these results show bond short sellers contribute to efficient bond prices and that short sellers information flows from stocks to bonds but not from bonds to stocks

is renewable energy effective in promoting growth abstract this paper applies panel data techniques to analyze the role of the various energy sources in economic growth for a set of 24 european countries 1990 2007 controlling for energy consumption and energy dependency the results suggest that the negative effect of the use of renewables supplants the positive effect of creating income by exploiting a natural resource locally and thus growth does not appear to improve with the change towards renewables the high costs of promoting renewables are probably being placed excessively upon the economy namely by increasing the costs of electricity tariffs thus inducing a deceleration in economic activity fossil fuels lead to dissimilar effects on growth while natural gas does not appear to be relevant in explaining growth coal hampers the capacity for growth whereas the use of oil stimulates that growth this is in line with productive structures that are deeply grounded in fossil fuels particularly oil

some evolutionary foundations for price level rigidity this paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb in the model firms must set their prices in face of aggregate demand shocks their payoff depends on the level of aggregate demand as well as on their own price and their neighbor s price the latter assumption captures local interactions despite the fact that the rational expectations equilibrium ree is characterized by a simple pricing rule that firms can easily adopt the economy does not converge to the ree for all parameter values when the volatility of monetary innovations is low and interactions among firms are high the aggregate price level exhibits rigidity in that it does not fully react to contemporaneous aggregate demand shocks we discuss the role of the nature of experimentation and of path dependence driven by interactions in explaining these results

the economic impacts of a submarine hvdc interconnection between norway and great britain in the present paper we analyze the profitability of different hvdc interconnection alternatives between norway and great britain for present and future scenarios the analysis is done from a merchant and a social welfare perspective the analyses include interconnections between norway and scotland and southern great britain respectively as well as an alternative link to a future offshore wind farm from a social welfare perspective the northern interconnection alternative is profitable under all sets of assumptions the southern alternative is profitable under present conditions but less than the northern alternative the alternative link to the offshore wind park is not profitable but this result is highly dependent on market conditions from a merchant perspective none of the alternatives is profitable clearly illustrating that leaving investments to commercial parties does not realize all projects that increase social welfare

price adjustments in a general model of state dependent pricing we study the distribution of retail price adjustments under the assumption that firms are more likely to adjust their prices when doing so is more valuable our setup nests calvo 1983 at one extreme and a fixed menu cost model at the other all parameterizations are ranked by a measure of state dependence high state dependence implies counterfactually that there are no small price changes and that the variance of price changes falls sharply with trend inflation the parameterization that best fits microdata has low state dependence implying a phillips curve coefficient 60 as large as that of the calvo model but is nonetheless well behaved at high inflation rates

the new keynesian synthesis the new keynesians made more rapid progress in understanding the microeconomics of unemployment than in understanding the microeconomics of nominal price rigidity but the past five years have seen important breakthroughs in this second area this paper will describe these breakthroughs discuss our current understanding of nominal rigidity and assess the work that remains to be done

impact of intermittent non conventional renewable generation in the costs of the chilean main power system abstract chile has recently approved a law aiming a target for electricity generation with non conventional renewable energy ncre of 20 by year 2025 it is anticipated that most of this ncre generation will be provided by intermittent energy sources wind and solar photovoltaic pv the economic consequences of intermittent ncre penetration in the chilean central interconnected system sic are assessed the ncre penetration is simulated with a 10 year horizon 2017 2027 considering four scenarios of ncre penetration 10 15 20 and 30 of total generation the authors model the hydro thermal operation of the power system and analyze spot prices total operation costs and capacity factors results show that the average spot price in the sic when having an optimal minimum cost generation mix is 89 7 us mwh as intermittent ncre penetration increases some thermal base load units capacity factors change producing an increase in the generation cost additional transmission capacity is also needed elevating the total cost the average incremental cost of integrating intermittent ncre generation is 65 8 us mwh when increasing ncre penetration from 10 to 30 the effect of fossil fuel price fluctuation is also addressed two policy guidance elements are presented intermittency should be reduced by diversifying the renewable portfolio and penetration costs of intermittent ncre generation have to be incorporated into their investment or operation costs

the magnitude of menu costs direct evidence from large u s supermarket chains we use store level data to document the exact process of changing prices and to directly measure menu costs at five multistore supermarket chains we show that changing prices in these establishments is a complex process requiring dozens of steps and a nontrivial amount of resources the menu costs average 105 887 year per store comprising 0 70 percent of revenues 35 2 percent of net margins and 0 52 price change these menu costs may be forming a barrier to price changes specifically 1 a supermarket chain facing higher menu costs due to item pricing laws that require a separate price tag on each item changes prices two and one half times less frequently than the other four chains 2 within this chain the prices of products exempt from the law are changed over three times more frequently than the products subject to the law in principle fixed costs of changing prices can be observed and measured in practice such costs take disparate forms in different firms and we have no data on their magnitude so the theory can be tested at best indirectly at worst not at all alan blinder 1991 p 90

do central banks act asymmetrically empirical evidence from the ecb and the bank of england the paper attempts to exploit whether monetary authorities have a different behaviour during recession and expansion to this end a multivariate extension of hamilton markov switching model is adopted first regime dependent taylor type rules are estimated for the euro area and the united kingdom in order to capture the systematic behaviour of central banks then impulse response functions that account for the different phases of the business cycle are analysed in addition a comparative analysis concerning the estimated rules as well as the different reaction of real economy to monetary shocks is implemented the study strongly suggests that central banks cannot neglect the regime where the monetary action takes place it follows that the phase of business cycle is an important matter in monetary policy decision process

the life cycle model of consumption and saving a central implication of life cycle models is that agents smooth consumption we review the empirical evidence on smoothing at frequencies from within the year up to across a lifetime we find that life cycle models particular those which incorporate realistic features of markets and goods have more empirical successes than failures we also show that some apparent deviations from theoretical predictions imply very small welfare losses for agents finally we emphasize that the coherence of life cycle models imposes an important discipline when incorporating new features into models

beliefs and consumer search in a vertical industry this paper studies vertical relations in a search market as the wholesale arrangement between a manufacturer and its retailers is typically unobserved by consumers their beliefs about who is to be blamed for a price deviation play a crucial role in determining wholesale and retail prices the common assumption in the consumer search literature is that consumers exclusively blame an individual retailer for a price deviation we show that in the vertical relations context predictions based on this assumption are not robust in the sense that if consumers assign just a small probability to the event that the upstream manufacturer is responsible for the deviation equilibrium predictions are qualitatively di erent for the robust beliefs the vertical model can explain a variety of observations such as retail price rigidity or alternatively low cost pass through non monotonicity of retail prices in search costs and seemingly collusive retail behavior the model can be used to study a monopoly online platform that sells access to nal consumers

the theory of evolution and the evolution of theory veblen s methodology in contemporary perspective this paper traces recent developments in economic theory from the perspective of thorstein veblen s methodological distinction between teleological and evolution modes of scientific thought it is argued that the imposition of rational behavior at the individual level prevents neoclassical theory from exhibiting genuine evolutionary processes since decision rules are prevented from emerging out of a process of adaptation to a changing environment the standard rationality postulate can nevertheless give rise to quasi evolutionary sequences at the aggregate level this possibility is blocked in macroeconomic literature by the use of the representative agent construct and the imposition of the hypothesis of self fulfilling expectations c 1996 academic press limited copyright 1996 by oxford university press

adaptive expectations coordination in an economy with heterogeneous agents abstract in this paper we study the problem of expectations coordination on the stationary state in a one dimensional economy with heterogeneous agents we consider a constant gain adaptive learning rule we allow for heterogeneity of the fundamentals and of the constant gain parameters we show that these two sources of heterogeneity may create difficulties to the process of coordination

secondary market liquidity and security design theory and evidence from abs markets we develop and empirically test a theory of optimal security design under adverse selection accounting for strategic trading by uninformed investors who will liquidate a security in secondary markets only if their idiosyncratic carrying costs exceed the security s expected trading loss such investors demand primary market discounts equaling expected carrying costs borne plus trading losses incurred issuers minimize the total illiquidity discount by splitting cash flow into tranched debt claims with liquidity predicted to increase with seniority while the optimal number of tranches increases with underlying cash flow risk empirical tests confirm our model predictions

a structural approach to identifying the sources of local currency price stability the inertia of the local currency prices of traded goods in the face of exchange rate changes is a well documented phenomenon in international economics this paper develops a structural model to identify the sources of this local currency price stability and applies it to micro data from the beer market the empirical procedure exploits manufacturers and retailers first order conditions in conjunction with detailed information on the frequency of price adjustments following exchange rate changes to quantify the relative importance of local non traded cost components markup adjustment by manufacturers and retailers and nominal price rigidities in the incomplete transmission of such changes to prices we find that on average approximately 60 of the incomplete exchange rate pass through is due to local non traded costs 8 to markup adjustment 30 to the existence of own brand price adjustment costs and 1 to the indirect strategic effect of such costs though these results vary considerably across individual brands according to their market shares