short term optimal wind power generation capacity in liberalized electricity markets mainly because of environmental concerns and fuel price uncertainties considerable amounts of wind based generation capacity are being added to some deregulated power systems the rapid wind development registered in some countries has essentially been driven by strong subsidizing programs since wind investments are commonly isolated from market signals installed wind capacity can be higher than optimal leading to distortions of the power prices with a consequent loss of social welfare in this work the influence of wind generation on power prices in the framework of a liberalized electricity market has been assessed by means of stochastic simulation techniques the developed methodology allows investigating the maximal wind capacity that would be profitably deployed if wind investments were subject to market conditions only for this purpose stochastic variables determining power prices are accurately modeled a test system resembling the size and characteristics of the german power system has been selected for this study the expected value of the optimal short term wind capacity is evaluated for a considerable number of random realizations of power prices the impact of dispersing the wind capacity over statistical independent wind sites has also been evaluated the simulation results reveal that fuel prices installation and financing costs of wind investments are very influential parameters on the maximal wind capacity that might be accommodated in a market based manner

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

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

wind power in the danish liberalised power market policy measures price impact and investor incentives wind power has a strong position at the danish electricity market mainly caused by high feed in tariffs in the 1990s investments in new wind power installations on land however have declined dramatically after the danish electricity market was liberalised in 1999 first the paper describes how policy measures directed towards wind power have been redesigned to match the liberalised market then we estimate the impact of the redesigned tariffs on the electricity prices finally we assess whether the new tariffs make an incentive to invest in wind power the paper concludes that the new tariffs not by itself make evidence for the actual danish recession in new wind power installations after the electricity reform the main causes could include a combination of problems in spatial planning high risk aversion of new wind turbine investors and perhaps more favourable support schemes in other countries

political and legal restraints on ownership and control of public companies abstract law and politics affect the financial structure of the public corporation perhaps as much as economics law restricts financial institutions from holding large equity blocks and from networking the small blocks they do own impetus for these restrictions came from several sources a public spirited belief that financial stability would be fostered by financial fragmentation american federalism each state created its own insular set of financial institutions rivalries between groups of financial institutions and popular mistrust of powerful private financial institutions the stability of many of these rules also derives from the political resistance that one would expect corporate managers and benefited financial institutions to offer to any change

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

forward exchange bias hedging and the gains from international diversification of investment portfolios abstract the gains to the us investor from international diversification of investment portfolios are examined for portfolio strategies that hedge and strategies that do not hedge exchange rate risk via the interbank forward market using the sharpe performance index and stochastic dominance as performance measures almost all the unhedged strategies outperformed the hedged strategies for 1985 1988 the opposite held for 1981 1984 the results are explained by the biasedness of forward rates in predicting future spot rates jel f30

a note on interest on required reserves as an instrument of monetary control abstract the purpose of this paper is to evaluate the potential role of interest on required reserves as a monetary control instrument it is found that an increase in the interest rate paid on reserves held at the federal reserve has counteracting effects on the variability of the money stock hence there is an optimal setting for the interest rate on required reserves that theoretically may include or lie anywhere between the extreme cases of no interest payment and the payment of interest at the maximum feasible level

theoretical approaches to monetary disinflation abstract during the 1980s many countries adopted tight monetary policies to reduce high inflation rates which were the legacy of the 1970s as inflation threatens to rise at the beginning of this decade this paper provides a survey of the 1980s literature which sought to provide theoretical understandings of how monetary disinflation is achieved four models are presented monetarist neo keynesian new classical and post keynesian each model s explanation of the recession which accompanies the monetary disinflation is outlined as well as possible policy measures to reduce the extent of the recession and to hasten the return to full employment

in defense of base drift the federal reserve has been criticized for allowing the base from which it calculates its target growth paths for the monetary aggregatesto drift from year to year in response to past deviations from target drift in the base implies that target misses permanently affect the levels of the monetary aggregates using a simple theoretical model this paper shows that the optimal degree of base drift consistent withprice stability depends on the importance of permanent versus transitory income and velocity disturbances neither zero base drift nor complete base drift are likely to be compatible with price stability copyright 1986 by american economic association

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

federal reserve independence abstract the federal reserve is always called an independent agency the term independent is rarely defined the only attempt in the literature and internal records is based on chairman martin s statement that the federal reserve is independent with the government not independent of the government martin explained several times that independence within government meant that the federal reserve helped to finance government budget because they were approved by congress and signed by the president financing budget deficits is the very opposite of the principle adopted when congress approved the federal reserve act in 1913 in fact the federal reserve has supported treasury operations many times i conclude that it is far more important to have an enforceable policy rule such as the taylor rule but any rule must have a provision that permits the rule to be set aside

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

the fed and short term rates is it open market operations open mouth operations or interest rate smoothing abstract it is widely believed that the fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the funds rate recently however several analysts have suggested that the fed need not conduct open market operations to change the funds rate rather they argue it is sufficient that the fed indicate its desire for the funds rate this paper notes that there is yet a third alternative the interest rate smoothing hypothesis that suggests that the fed does not move rates per se but rather smooths the transition of rates to the new equilibrium required by economic shocks this paper tests the open market and open mouth alternatives using a methodology first used by cook and hahn journal of monetary economics 1989a 331 finding no evidence that either open market operations or open mouth operations can account for the close relationship between the funds rate and the funds rate target a variety of evidence consistent with the interest rate smoothing hypothesis is considered the results suggest that many changes in the fed s funds rate target are an endogenous response to economic events and suggest that an alternative way to identify exogenous changes in policy is to identify exogenous changes in the fed s funds rate target

money stock targeting base drift and price level predictability lessons from the u k experience abstract it is controversial whether money stock targeting without base drift i e following a trend stationary growth path makes the price level more predictable in the presence of permanent shocks to money demand we develop a procedure that is not subject to the lucas critique applying this procedure to the case of the u k we find that the variance of the trend inflation rate in the u k would have been reduced by more than one half if the bank of england had not allowed base drift

portfolio performance and the euro prospects for new potential emu members abstract entering the emu removes currency risk for assets originating in the euro area while diversification opportunities are likely reduced taking the perspective of an investor in one of the 12 countries that joined the eu in 2004 2007 we contrast actual optimal composition of international equity holdings against two artificial scenarios costless hedging against exchange rate risk and presuming the local market to be part of the emu state specific optimal portfolios are determined from realized covariances for the period 2000 2006 optimized risk is found smaller under currency unification and implied sharp ratios signal significant benefits of emu participation

carbon tax scenarios and their effects on the irish energy sector abstract in this paper we use annual time series data from 1960 to 2008 to estimate the long run price and income elasticities underlying energy demand in ireland the irish economy is divided into five sectors residential industrial commercial agricultural and transport and separate energy demand equations are estimated for all sectors energy demand is broken down by fuel type and price and income elasticities are estimated for the primary fuels in the irish fuel mix using the estimated price and income elasticities we forecast irish sectoral energy demand out to 2025 the share of electricity in the irish fuel mix is predicted to grow over time as the share of carbon intensive fuels such as coal oil and peat falls the share of electricity in total energy demand grows most in the industrial and commercial sectors while oil remains an important fuel in the residential and transport sectors having estimated the baseline forecasts two different carbon tax scenarios are imposed and the impact of these scenarios on energy demand carbon dioxide emissions and government revenue is assessed if it is assumed that the level of the carbon tax will track the futures price of carbon under the eu ets the carbon tax will rise from 21 50 per tonne co2 in 2012 the first year forecasted to 41 in 2025 results show that under this scenario total emissions would be reduced by approximately 861 000 tonnes of co2 in 2025 relative to a zero carbon tax scenario and that such a tax would generate 1 1 billion in revenue in the same year we also examine a high tax scenario under which emissions reductions and revenue generated will be greater finally in order to assess the macroeconomic effects of a carbon tax the carbon tax scenarios were run in hermes the esri s medium term macroeconomic model the results from hermes show that a carbon tax of 41 per tonne co2 would lead to a 0 21 contraction in gdp and a 0 08 reduction in employment a higher carbon tax would lead to greater contractions in output

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

double sided auction mechanism design in electricity based on maximizing social welfare an efficient electricity double sided auction mechanism should control market power and enhance the social welfare of the electricity market based on this goal the paper designs a new double sided auction mechanism in the new mechanism the social welfare contribution of each participant plays a pivotal role because this contribution is the critical factor in market clearing payment settling and transaction matching rules in particular each winner of the auction can gain transfer payments according to his contribution to social welfare in the electricity market and this gives the mechanism the ability to control the market power of some participants at the same time this mechanism ensures that the market organizer balances his budget we then conduct a theoretical and empirical analysis based on the spanish electricity market both of the results show that compared to the uniform pricing mechanism the new mechanism can reduce market power of participants and enhance the social welfare of the electricity market

monetary policy rules work and discretion doesn t a tale of two eras this lecture examines monetary policy during the past three decades it documents two contrasting eras first a rules based era from 1985 to 2003 and second an ad hoc era from 2003 to the present during the rules based era monetary policy in broad terms followed a predictable systemic approach and economic performance was generally good during the ad hoc era monetary policy is best described as a discretion of authorities approach and economic performance was decidedly poor by considering alternative explanations of this policy performance correlation and examining corroborating evidence the paper concludes that rules based policies have clear advantages over discretion this abstract was borrowed from another version of this item

monetary policy theory and practice in respect of the theory of monetary policy i am reminded of the comment that jacob viner made many years ago at a meeting of the american economic association about alfred marshall s economics what is new is highly unlikely at this late date also to be true and significant 1 consequently i shall restrict my remarks on theory to trying to summarize what i regard as the present intellectual position

economic and technical challenges of flexible operations under large scale variable renewable deployment abstract fundamental characteristics of solar and wind power have generated controversy about their economic competitiveness and appropriate techniques for assessing their value this research presents an approach to quantify the economic value of variable renewable capacity and demonstrates its dependence on renewable deployment levels regional resource endowments fleet flexibility and trade assumptions it assesses economic and technical impacts of large scale renewable penetration by linking two models representing electric sector investments and detailed operations model results for california and texas suggest that operational constraints and costs of dispatchable generators e g minimum load levels ramping limits startup costs can impact renewable integration costs but the temporal and spatial variability of solar and wind are larger determinants of their value restrictions on transmission and regional coordination in capacity planning and dispatch decrease the economic value of variable renewable energy highlighting the potential roles of market design and trade energy storage is shown to be a valuable balancing asset at higher solar and wind penetration levels but potential revenues diminish with increased storage deployment

application of mechanism design to electric power markets republished as competition is introduced across the electric power industry around the world market design for the industry is urgently needed to shape its future structure and performance when generator companies compete with one another in a deregulated market they may not be willing to share the information needed to perform an economic dispatch of the generation using game theory this paper designs a new mechanism that achieves efficiency economic dispatch in spite of this information problem in this mechanism when each company acts in the best of its own interest the outcome is efficient the paper demonstrates the merits of the mechanism by simulations including the ieee 14 bus case this paper contained an incorrect graphic when it originally appeared in the ieee transactions on power systems vol 16 no 1 p 1 8 2001 it is republished here with the correct graphic

bayes stein estimation for portfolio analysis in portfolio analysis uncertainty about parameter values leads to suboptimal portfolio choices the resulting loss in the investor s utility is a function of the particular estimator chosen for expected returns so this is a problem of simultaneous estimation of normal means under a well specified loss function in this situation as stein has shown the clas sical sample mean is inadmissible this paper presents a simple empirical bayes estimator that should outperform the sample mean in the context of a portfolio simulation analysis shows that these bayes stein estimators provide significant gains in portfolio selection problems

shifts in us federal reserve goals and tactics for monetary policy a role for penitence during the fi rst period starting in the mid 1920s the federal reserve offi cial during the fi rst period starting in the mid 1920s the federal reserve offi cial policy was to support high quality bank lending but not speculative lending this policy was to support high quality bank lending but not speculative lending this goal was set aside once in 1927 in an episode that many observers then blamed for goal was set aside once in 1927 in an episode that many observers then blamed for the economic collapse that followed the fi nancial crash of 1929 the fed was then the economic collapse that followed the fi nancial crash of 1929 the fed was then reluctant to increase the funds available to banks through the early 1930s even as reluctant to increase the funds available to banks through the early 1930s even as the great depression ravaged the economy the fed s concern with the volume and the great depression ravaged the economy the fed s concern with the volume and quality of lending in the setting of monetary policy did eventually wither however quality of lending in the setting of monetary policy did eventually wither however this only seems to have happened after the publication of friedman and schwartz this only seems to have happened after the publication of friedman and schwartz 1963 a revisionist history of the great depression that blamed its depth on the 1963 a revisionist history of the great depression that blamed its depth on the fed s inappropriate focus on productive lending fed s inappropriate focus on productive lending in the second period after the experience of post world war ii infl ation the in the second period after the experience of post world war ii infl ation the federal reserve in the 1950s was highly concerned with infl ation and was willing to federal reserve in the 1950s was highly concerned with infl ation and was willing to raise interest rates and bring on recessions to nip even modest infl ation rates in the raise interest rates and bring on recessions to nip even modest infl ation rates in the bud this brought withering criticism for the federal reserve on the grounds that bud this brought withering criticism for the federal reserve on the grounds that the recessions of 1957 and 1960 had been unnecessary by the mid 1960s some fed the recessions of 1957 and 1960 had been unnecessary by the mid 1960s some fed offi cials seem to have developed an aversion to creating recessions as a method of offi cials seem to have developed an aversion to creating recessions as a method of

the 1979 federal reserve policy shift some evidence using causality tests on 6 october 1979 the fomc announced a shift from federal funds rate ffr to nonborrowed reserves nbr targeting the sequence of events preceding this major policy change are well known and require only a brief recounting here prior to the 1979 announcement the fomc implemented monetary policy by confining the ffr to a narrow band about 50 to 100 basis points in width any tendency for the rate to move outside this range was countered by providing more or fewer nbr to the banking system the underlying assumption upon which this strategy was based was that money demand was stable the fed could then control the money stock by altering interest rates thereby moving the public along a fixed money demand function during the mid 1970s however various events in the money market e g income and supply shocks financial innovation and portfolio readjustments lessened the stability of money demand and brought the twin objectives of monetary control and financial market stability into frequent conflict the record shows that these conflicts were usually resolved in favor of interest rate stability rather than monetary control the consequence of ffr targeting was inflation attempts to maintain a stable ffr at the operating level in the face of money demand shifts forced the central bank to exceed its money growth targets for periods long enough to increase nominal aggregate demand in the economy with the adoption of the nbr strategy the fed attempted to achieve better control over inflation by short circuiting the endogenous influences of spending on the growth of the money stock in contrast to the pre 1979 policy spending shocks would now be reflected in ffr movements which would to some extent generate pressures to return money growth to its desired path subsequent to the announced policy shift there was much doubt about whether the federal reserve was successfully executing a nbr plan the gist of this skepticism centers on the belief that the new procedures were technically flawed specifically that reserves targeting when combined with lagged reserve accounting and borrowings projection errors resulted in short run accommodation increased interest rate and money growth volatility

on the market impact of wind energy forecasts this paper presents an analysis of how day ahead electricity spot prices are affected by day ahead wind power forecasts demonstration of this relationship is given as a test case for the western danish price area of the nord pool s elspot market impact on the average price behaviour is investigated as well as that on the distributional properties of the price by using a non parametric regression model to assess the effects of wind power forecasts on the average behaviour the non linearities and time variations in the relationship are captured well and the effects are shown to be quite substantial furthermore by evaluating the distributional properties of the spot prices under different scenarios the impact of the wind power forecasts on the price distribution is proved to be considerable the conditional price distribution is moreover shown to be non gaussian this implies that forecasting models for electricity spot prices for which parameters are estimated by a least squares techniques will not have gaussian residuals hence the widespread assumption of gaussian residuals from electricity spot price models is shown to be inadequate for these model types the revealed effects are likely to be observable and qualitatively similar in other day ahead electricity markets significantly penetrated by wind power

a real model of the world business cycle abstract in this paper a stochastic two country log linear infinite horizon model is used to analyze the generation and transmission of economic fluctuations across countries it is argued that following a country specific supply disturbance production interdependence and unitary elasticities in consumption and production are sufficient to generate comovements in aggregate economic activity investment and trade that are persistent over time and positively correlated across countries however the empirical analysis carried out for the usa japan germany and uk for the 1960 82 period suggests that common shocks rather than trade links are responsible for this pattern of comovements

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

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

inducing truthful revelation of generator reliability abstract liberalised electricity markets often include a capacity remuneration mechanism to allow generation firms recover their fixed costs various de rating factors and or penalties have been incorporated into such mechanisms in order to reward the unit based on the contribution they make to system security which in turn depends on the unit s reliability however this reliability is known to the firm but not to the regulator we adopt a mechanism design approach for capacity payments based on a declaration by the firm of their reliability the mechanism scales payments and penalties according to this declared reliability such that the firm s profit maximising strategy is to truthfully reveal its reliability a stochastic mixed complementarity problem mcp is used to model the interactions between the firms and we apply this methodology to a test system using irish electricity market data truth telling is induced increasing the efficiency of capacity payments while eliminating the requirement for the regulator to allocate resources to discovering reliability

money and inflation the case of western developed countries 1960 80 1990 money and inflation the case of western developed countries 1960 80 applied economics vol 22 no 7 pp 863 869

preliminary evidence on the determinants of federal reserve open market operations in the absence of a fixed policy rule the federal reserve bank fed has significant discretion in setting monetary policy the existence of professional fedwatchers attests to the fact that fed policy actions are difficult to interpret recent literature has focused on the motivations behind fed policy making and the need for secrecy and ambiguity we investigate one aspect of fed behavior the propensity of the fed to buy and sell government securities beyond that required to implement stated policies milton friedman 1982 26 called attention to this issue when he wrote

the benefits from international diversification for nordic investors abstract in this paper we investigate the magnitude of the benefits from international diversification from the nordic point of view special attention is paid to whether potentially increased co movement of stock markets together with more volatile nordic currencies have resulted in decreased benefits from international diversification towards the end of the 1980s moreover the paper presents evidence on the benefits from international diversification for a currency which has recently started its free float the finnish markka fim we find significant increases in stock market co movement both unhedged ex ante strategies as well as strategies hedged for exchange rate risk are investigated revealing substantial benefits from international diversification for the nordic countries however we obtain mixed results concerning the question of the optimality of hedging

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 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

exchange rate uncertainty forward contracts and international portfolio selection in this paper ex ante efficient portfolio selection strategies are developed to realize potential gains from international diversification under flexible exchange rates it is shown that exchange rate uncertainty is a largely nondiversiflable factor adversely affecting the performance of international portfolios therefore it is essential to effectively control exchange rate volatility for that purpose two methods of exchange risk reduction are simultaneously employed multicurrency diversification and hedging via forward exchange contracts the empirical findings show that international portfolio selection strategies designed to control both estimation and exchange risks almost consistently outperform the u s domestic portfolio in out of sample periods since grubel 11 applied modern portfolio theory mpt to international investment various authors such as levy and sarnat 17 solnik 20 and lessard 16 have examined the gains from international diversification of investment portfolios for the purpose of establishing the gains from international diversification these studies constructed international portfolios using historical risk and return data from a period of fixed or relatively stable exchange rates and showed that internationally diversified portfolios dominated purely domestic portfolios in terms of mean variance efficiency from the standpoint of today s investors however the previous studies fail to offer operational guidance for international diversification for two important reasons first it is now questionable whether the past findings are still relevant under the current flexible exchange rate regime second by being ex post in nature the past studies ignored the issue of estimation risk or parameter uncertainty and therefore may have overstated the realizable portion of the potential gains from international diversification fluctuating exchange rates are likely to mitigate the potential gains from international diversification by making investment in foreign securities more risky as will be shown later a fluctuating exchange rate contributes to the risk of foreign investment not only through its own variance but also through its positive covariances with the local stock market returns during our sample period of 1980 through 1985 for example exchange rate volatility is found to account for about fifty percent of the volatility of dollar returns from investment in the stock markets of such major countries as germany japan and the u k furthermore the exchange rate changes vis a vis the u s dollar are found to be

dynamic monetary control and interest rate stabilization abstract interest rate stabilization results in an instrument shortage that complicates monetary control by introducing strategic considerations into the trading desk s decision problem the paper demonstrates that when expected future open market operations influence current bank and depositor behavior an instrument shortage is necessary and sufficient for the commitment policy to be time inconsistent and for the discretionary policy to be suboptimal i e worse than the commitment policy the moving average component of the commitment policy is of higher order than the discretionary policy under either regime the expected value of the representative bank is increasing in the trading desk s emphasis on interest rate stability

price smoothing policies a welfare analysis in post wwii experience u s monetary authorities have attempted to eliminate seasonal fluctuations in prices and nominal interest rates developments in financial markets and recently discovered empirical regularities regarding the seasonal cycle seem to make these activities questionable using a money in the utility function model this paper analyzes the welfare properties of price and interest rate smoothing policies and the sense in which the distinction between seasonal and cyclical fluctuations is relevant it is shown that smoothing policies are welfare improving but not optimal and that the origin of the shocks not the persistence of the fluctuations is relevant in formulating policies

impacts of a common green certificate market on electricity and co2 emission markets in the nordic countries abstract the purpose of this study is to analyze the effects of introducing a common nordic system for tradable green certificates tgcs on the electricity market and a future market for tradable co 2 emission permits teps in the analysis the energy system model generator markal was used to model the electricity and district heating supply systems in the four nordic countries sweden norway finland and denmark it is shown that the introduction of tgc quotas reduces wholesale electricity and tep prices the impact on the latter is very pronounced retail electricity prices may become lower or higher depending on the tgc quota than if obligations to fulfill tgc quotas were absent the tgc scheme s efficiency in reducing a specific amount of co 2 emissions is also compared to the corresponding efficiency of a tep scheme involving a broader range of technologies furthermore obligations to fulfill tgc quotas affect investment incentives for new non renewable electricity supply this seems especially true for gas fired power plants finally it is indicated that electricity supply based on biomass combustion dominates the tgc scheme at least in the short run

the policy preferences of fomc members as revealed by dissenting votes comment the purposes of this comment are to present evidence that casts doubt on several of the conclusions of susan belden s recent paper in this journal 1989 and to suggest directions for future research in this area to begin there is skepticism that dissenting votes at least as belden measures them can be unbiased indicators of policy preferences in addition belden partially recognizes but does not fully specify three influences on federal open market gommittee fomc member voting that are prominently featured in the literature these influences are 1 fomc member training background and career experience 2 state of the economy measures and 3 partisanship measures each of these factors alone may help to explain one of belden s three major findings first the training backgrounds and career experiences of bank presidents may help to explain belden s affirmation of their penchant to dissent from fomc directives on the side of monetary tightness second the state of the economy may help to explain belden s finding of a decline in dissent voting when arthur burns was chairman of the federal reserve third differences between the party of the president and the partisan composition of the board of governors may help to explain belden s discovery of shifts in ease and tightness dissent voting behavior under different chairmen since this comment will indicate how these influences qualify belden s elndings it will at the same time suggest fruitful directions for the research agenda in this area

a reconsideration of sims evidence concerning monetarism abstract in var systems such as those of sims 1980 monetary policy surprises may be more accurately represented by interest rate than money stock innovations especially if the monetary authority uses an interest rate instrument

the private and public economics of renewable electricity generation generating electricity from renewable sources is more expensive than conventional approaches but reduces pollution externalities analyzing the tradeoff is much more challenging than often presumed because the value of electricity is extremely dependent on the time and location at which it is produced which is not very controllable with some renewables such as wind and solar likewise the pollution benefits from renewable generation depend on what type of generation it displaces which also depends on time and location without incorporating these factors cost benefit analyses of alternatives are likely to be misleading other common arguments for subsidizing renewable power green jobs energy security and driving down fossil energy prices are unlikely to substantially alter the analysis the role of intellectual property spillovers is a strong argument for subsidizing energy science research but less persuasive as an enhancement to the value of installing current renewable energy technologies

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

monetary policy theory and practice comment in his article monetary policy theory and practice 2 milton friedman included a section on the appropriateness of defensive open market operations the section discusses a number of substantive issues it also contains figures on actual federal reserve operations in 1980 and the share they represent qf securities dealer operations he used the numbers to illustrate his complaint that the federal reserve engages in excessive securities transactions churns its portfoliin a misguided effort to fine tune the supply of nonborrowed reserves while we feel that the allegation basically depends on fundamental policy issues rather than on the numbers cited we nonetheless think it is desirable to set the record straight as to the magnitude of system open market operations the figures given by friedman seriously distort the picture as they represent about a fourfold overstatement of the size of system reserve operations in addition they grossly exaggerate the share of securities dealer transactions accounted for by system operations and thereby give a misleading impression of the importance of these operations to dealer profitability these points will be discussed in turn followed by some observations on the substantive issues

estimating the value of wind energy using electricity locational marginal price abstract there is an increasing interest in adding renewables such as wind to electricity generation portfolios in larger amounts as one response to concern about atmospheric carbon emissions from our energy system and the resulting climate change most policies with the aim of promoting renewables e g rps fit do not explicitly address siting issues which for wind energy are currently approached as the intersection of wind resource land control and transmission factors this work proposes the use of locational marginal price lmp the location and time specific cost of electricity on the wholesale market to signal locations where generation can address electricity system insufficiency after an examination of the spatial and temporal behavior of lmp in michigan over the first two years of wholesale market operation this work combines lmp with wind speed data to generate a value metric high value sites in michigan tend to be sites with higher wind speeds with the bulk of value accruing in the fall and winter seasons

seasonal cycles business cycles and monetary policy abstract this paper presents a dynamic general equilibrium model that is consistent with both seasonal and business cycle facts in the u s economy the model features consumption durability and a transaction technology both crucial in accounting for seasonal patterns of nominal variables a calibrated version of the model is used to quantitatively evaluate welfare consequences of three alternative monetary policy rules 1 the fed s historical policy that smooths nominal interest rates at the seasonal frequency but not at the business cycle frequency 2 a constant money growth rule and 3 a constant interest rate rule we find that the historical policy is associated with higher welfare than both alternatives

the merit order effect a detailed analysis of the price effect of renewable electricity generation on spot market prices in germany the german feed in support of electricity generation from renewable energy sources has led to high growth rates of the supported technologies critics state that the costs for consumers are too high an important aspect to be considered in the discussion is the price effect created by renewable electricity generation this paper seeks to analyse the impact of privileged renewable electricity generation on the electricity market in germany the central aspect to be analysed is the impact of renewable electricity generation on spot market prices the results generated by an agent based simulation platform indicate that the financial volume of the price reduction is considerable in the short run this gives rise to a distributional effect which creates savings for the demand side by reducing generator profits in the case of the year 2006 the volume of the merit order effect exceeds the volume of the net support payments for renewable electricity generation which have to be paid by consumers

the use of inputs by the federal reserve system an extended model recently it has been argued that bureaucratic incentives play an important role in the formulation of policy and the inflationary bias of the federal reserve system shughart and tollison 1983 hereafter s t 1 in particular s t maintain that the fed can retain profits denominated in amenities but not in dollars as a result of the congressional constraint that excess profits be returned to the treasury this constraint provides bureaucratic incentives for the fed to purchase more amenities than a for profit organization and ex plains s t 1983 291 in part the fed s apparent inflationary bias expansionary monetary policy then enlarges the fed s profit amenities choices and allows it to pursue its goal of bureaucratic enhancement s t assume that the dollar value of these amenities is a monotonic transformation of fed employment using this public choice framework they develop a model in which the monetary base is a function of a number of variables including employment in the federal reserve system sysemp

monetary policy signaling from the administration to the federal reserve this chapter employs the index of monetary policy signaling from the administration to the federal reserve safer that was developed in chapter two the safer index is a simple weekly sum of articles that appeared in the wall street journal in which administration officials expressed a desire for easier 1 or tighter 1 monetary policy a key assumption is that systematically over time the financial media capture the essence of communication that is going on between the executive branch and federal reserve officials 1 the signaling index is employed in ordinary least squares regressions for the period from january 1964 to november 1991 cumulative values of the safer index over a three week period as an explanatory variable are found to have a statistically significant effect on the average federal funds rate during the third week as the dependent variable further evidence suggests that the safer index is granger causal with respect to the federal funds rate after classifying the signals by sources within the administration oval office council of economic advisers treasury and other and unidentified sources it is shown that for the overall 1964 1991 period signals from the treasury department and from other and unidentified sources have a statistically significant effect on the federal funds rate while signals from the oval office and the council do not when the data are segmented according to who was the chairman of the federal reserve board at the time ordinary least squares results indicate that the federal reserve did not systematically respond to executive branch signaling in a statistically significant way when william mcchesney martin g william miller and alan greenspan were chairmen but did respond statistically significantly to administration signaling during portions of the periods during which arthur burns and paul volcker were chairmen

the market value of variable renewables the effect of solar wind power variability on their relative price this paper provides a comprehensive discussion of the market value of variable renewable energy vre the inherent variability of wind speeds and solar radiation affects the price that vre generators receive on the market market value during windy and sunny times the additional electricity supply reduces the prices because the drop is larger with more installed capacity the market value of vre falls with higher penetration rate this study aims to develop a better understanding on how the market value with penetration and how policies and prices affect the market value quantitative evidence is derived from a review of published studies regression analysis of market data and the calibrated model of the european electricity market emma we find the value of wind power to fall from 110 of the average power price to 50 80 as wind penetration increases from zero to 30 of total electricity consumption for solar power similarly low value levels are reached already at 15 penetration hence competitive large scale renewable deployment will be more difficult to accomplish than as many anticipate

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

a political model of monetary policy with application to the real fed funds rate abstract we construct an empirical model of u s monetary policy assuming that the federal reserve is an ordinary federal bureaucracy we use the real federal funds rate as our policy measure and show the existence of significant executive legislative and bureaucratic influence on the real rate of interest from 1961 to 1996 we find that presidential party is an adequate statistical measure of executive influence and that the voting scores of the senate banking committee leadership best represent legislative influence we argue that political changes cause systematic and predictable changes in monetary policy

a multinominal logit analysis of the influence of policy variables and board experience on fomc voting behavior previous studies have used probit or logit models to analyze two states of monetary policy tighter or looser in this paper we employ multinominal logit to permit federal reserve monetary policy to assume one of three alternative states tighter looser or no change as a function of three independent economic variables unemployment real growth and inflation and the amount of experience of the board of governors the results indicate that the federal reserve reacted differently under burns miller and volcker and between volcker s two operating procedures in the formulation of monetary policy

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

when did the fomc begin targeting the federal funds rate what the verbatim transcripts tell us in october 1982 the fomc deemphasized m1 and moved to what is commonly referred to as a borrowed reserves operating procedure sometime thereafter the fomc switched to a funds rate targeting procedure but never formally announced the change given the close correspondence between a borrowed reserves operating procedure and a funds rate targeting procedure thornton 1988 suggested that the fomc went immediately to a funds rate targeting procedure others date the switch to the funds rate procedure later meulendyke 1998 suggests the switch came in late 1987 while others suggest the change occurred later this paper reviews the verbatim transcripts of the fomc meetings to establish the timing of the switch the verbatim transcripts suggest that the fomc effectively switched to a funds rate targeting procedure in 1982 the documentary evidence is supported by an analysis of the spread between the funds rate and the funds rate target which suggests that the differences in the behavior of the spread before october 1979 and after october 1982 are relatively small and economically unimportant

do support systems for res e reduce eu ets driven electricity prices abstract support systems for electricity from renewable energy sources res e can reduce electricity prices which have also been influenced by a co2 emission trading scheme ets additional res e substitutes electricity from fossil fuels and thus co2 emissions are reduced the demand for emission reductions is lowered as a result the co2 price is also reduced consequently the wholesale price for electricity decreases however most res e support systems are financed via the electricity market which increases the retail electricity price an assessment for germany shows that retail electricity prices in the first trading period of the eu ets 2005 2007 are lowered by 2 6 euro mwh due to additional res e considering the complete eu the effect is substantially higher this paper describes the effect and the influence of different policy designs it develops an approach for assessing the effect and applies it for the case of germany and roughly estimates the effect for the eu

international portfolio diversification with estimation risk international portfolio diversification has long been advocated as a way of enhancing average returns while reducing portfolio risk for the investor who considers diversifying into foreign securities this proposition however relies on the assumption that the required inputs to the classical mean variance analysis are known with certainty typically expected returns variances and covariances are simply replaced by their ex post sample values and the optimal portfolio is derived without mentioning the uncertainty inherent in these parameter values but the rational investor should take this uncertainty into account when forming expectations and probably will consider estimators that are less subject to estimation error than the classical sample mean this paper investigates alternative estimators of expected returns and their implications for the alleged gains from diversification an important observation is the crucial influence that errors in estimating expected returns have on portfolio analysis a closer examiprevious studies of international portfolio diversification have relied on ex post meanvariance analysis without considering the problem of estimation risk typically past averages are substituted for expected returns and no allowance is made for the uncertainty inherent in these parameter values first i demonstrate the shortcomings of such an approach and second i investigate another method of estimating expected returns initially proposed by stein by shrinking the sample averages toward a common mean i find that the out of sample performance of the optimal portfolio is substantially increased one of the implications of this method is that the classical conclusions vastly overestimate the possible gains in average returns instead benefits from diversification are more likely to accrue from a reduction in risk this paper draws on part of my dissertation at the university of chicago i am grateful to arnold zellner michael mussa george constantinides and especially john bilson for useful discussions and comments numerous improvements were also suggested by the referee this research received the generous financial support of the college interuniversitaire d etudes doctorales dans les sciences du management

a duopoly theory of government money production the 1930s and 1940s abstract during the 1930s and 1940s the treasury and fed possessed significant monetary powers to explain the interaction of these agencies during this period i develop a theory of money production which assumes each party is interested in increasing the seigniorage associated with their production the theory implies that the two agencies will engage in specific forms of cooperation an examination of monetary policy procedures in the 1930s and 1940s indicates that the cooperation view of the fed and treasury relationship has more explanatory power than traditional views

presidential elections and federal reserve policy an empirical test traditional macro economic models of federal reserve fed behavior typically assume that the fed enjoys a well defined objective function based on social welfare and generally predict counter cyclical monetary policy the increasing observation of procyclical monetary policy has led many researchers to investigate new models of fed behavior several recent papers imply that procyclical fed behavior is due to a lack of political accountability friedman 7 toma 23 and shughart and tollison 21 all attribute considerable bureaucratic discretion to the fed and seek to explain monetary policy by examining typical bureaucratic objectives other papers such as pierce 19 20 weintraub 26 and kane 10 11 argue that the fed operates in an arena filled with political constraints that cause sub optimal monetary policy but these constraints are not modeled explicitly one possible political constraint on fed behavior is the incumbent president s desire for re election in the political business cycle pbc literature presidential re election opportunities are enhanced by the production of a precise set of inflation and unemployment outcomes leading up to the election thus to the extent that presidents desire cyclical macro economic outcomes there will be executive pressure on the fed to create or accommodate such outcomes the effect this pressure will have on fed policy is ultimately an empirical question but most models deal with it by assumption traditional macro modeling assumes a zero effect while the pbc models implicitly assume that a favorable election cycle is a primary goal of all economic policymakers this paper examines presidential influence on the federal reserve by testing for an election cycle in money growth the major result is the identification of a regular 16 quarter cycle in money growth corresponding with presidential elections this cyclical effect is found to be stable over time and significant under a wide range of model specifications further when the cyclical component of money growth is used to simulate a simple macro model it produces a classic political business cycle in inflation and real output growth

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

equilibrium exchange rate hedging we assume a world like the one that gives the capital asset pricing model but with many goods and many countries we assume that investors in a given country have homothetic utility functions with the same weights and a currency that has a sure endof period value using a price index with those weights siegel s paradox derived from jensen s inequality makes investors want a positive amount of exchange risk when average risk tolerance is the same across countries every investor will hold the same mix of market risk through the world market portfolio of all assets and exchange risk in a diversified basket of foreign currencies in fact the ratio of exchange risk to market risk is equal to the average investor s risk tolerance we can write the ratio of exchange risk to market risk and the fraction of the market s exchange risk that investors hedge as depending on an average of world market risk premia an average of world market volatilities and an average of exchange rate volatilities the weights in these averages are the same as the weights of the different countries in the currency basket given these averages the ratio and the fraction hedged will not depend directly on exchange rate means or covariances in equilibrium we can use the ratio of exchange risk to market risk to measure average risk tolerance in this model risk tolerance is observable

elections and the fed is there a political monetary cycle to understand the political causes of macroeconomic policy it is necessary to examine the institutions that actually make such policy and the incentives those institutions face an explanation of the political causes of united states monetary policy must treat the various institutions that are influential in the monetary policy process which are at a minimum the federal reserve fed and the executive including the president the treasury department and other advisors in the executive office of the president the reelection motive has proven useful in modeling presidential incentives in this article i investigate whether electoral incentives associated with the theory of the political business cycle pbc can help to explain the behavior of the fed over the last quarter century the political business cycle has had a curious hold on modern political economy while the empirical evidence in favor of the cycle is far from overwhelming its theoretical importance leads to continuing empirical

a public choice theory of the great contraction the conventional chicago wisdom about the great contraction is that it was the result of a massive policy failure according to this view the collapse of the economy was brought about mostly by the fact that the monetary policymakers of the day were more concerned with internal power struggles than with supplying reserves to member banks an explanation which with apologies to professor stigler must have elicited uproarious laughter at the bankers club it has been our purpose in this paper to suggest an alternative theory briefly stated the restrictive monetary policy pursued by the fed from 1929 to 1933 was motivated by the economic interests of member banks the fed s policy produced a massive differential failure rate between member and nonmember banks in which the latter were eliminated at a rate at least five times higher than the former fed member banks faced substantially less competition in the banking market after the house cleaning than before although all banks suffered net losses in the short run in the long run member bank profitability was enhanced by the reduction in the number of nonmember competitors at the same time the fed itself benefitted from a substantial increase in the proportion of the total banking system within its bureaucratic jurisdiction and from a change in its method of finance putting the great contraction in interest group terms we suggested that the fed was acting as the agent of congressmen serving on important oversight committees who in turn were representing the interests of the member banks in their states due to interstate branching restrictions the state is the relevant geographic market within which banks compete we tested this hypothesis using bank failure rate data across states and found that holding other things equal the failure rates of nonmember banks in the early 1930s were significantly higher in states with representation on the house banking and currency committee of course not even friedman and schwartz 1963 299 301 argue that fed policy was the sole direct cause of the great contraction but instead maintain that the fed acted in such a way as to take a relatively severe contraction and turn it into by far the most severe business cycle contraction in the whole of u s history but to the extent that the great contraction was worsened by fed policy and this in turn led to the succession of events called the great depression the latter was a side effect of economically rational interests of federal reserve member banks to say the least this would appear to have been an enormously inefficient method of obtaining the postulated benefits certainly there were other less costly methods available by which member banks could have reduced the number of their nonmember rivals this is perhaps the most difficult problem our theory of the great contraction confronts we can offer two responses first although the literature on the great depression tends to focus on fluctuations in national macroeconomic aggregates e g the money supply unemployment and so on it is clear that the severity of the depression differed radically across states states with relatively large agricultural sectors tended to be especially hard hit suffering the highest rates of unemployment and the most significant numbers of bank failures by contrast states in some other areas most notably new england and the southeast seemed to be less seriously affected we note that in some of our regressions the number of nonmember bank failures was negatively and significantly related to state unemployment rates in 1934 this is certainly not conclusive evidence but it does suggest a pattern of differential costs associated with the great contraction that is the costs of providing benefits to federal reserve member banks in states with representation on the relevant oversight committees may have fallen more heavily on the economies of states not so represented if so this would cast a very different light on the actual costs of these policies to the relevant political decision makers second the potential dilemma in this case is no worse than that encountered in the application of the economic theory of politics to many other kinds of government behavior economists since adam smith have ascribed protectionist trade policies to the influence of special interest groups who benefit modestly at the cost of relatively huge economic inefficiencies many other government actions that might be plausibly explained from an interest group perspective would similarly seem to involve costs to the economy which grossly outweigh the benefits special interests might reasonably expect presumably even in such seemingly extreme cases marginal benefits equal marginal costs to the relevant actors some writers have suggested that the political marketplace in modern democracies is characterized by much larger transactions costs than are normally encountered in ordinary markets see demsetz 1982 this might help explain the seemingly huge discrepancies we observe between apparent concentrated benefits and diffused costs in depression era monetary policy in any event this problem is not peculiar to our theory but is shared by many applications of the interest group model of government it is worth emphasizing that the events we have described do fall into the interest group model s stylized depiction of concentrated benefits versus diffuse costs moreover without having a complete picture of all of the options available to the monetary policymakers we cannot be sure that any of the alternatives was in fact more efficient we do know the path that was chosen and that contrary to the conventional wisdom this path had a rationally motivated interest group basis

federal open market committee structure and decisions abstract this paper examines the dissents of federal open market committee members regarding the domestic monetary policy directive it shows that on balance governors appointed by democratic u s presidents dissented significantly on the easier side while governors appointed by republican u s presidents dissented significantly on the tighter side the pattern of dissents for the reserve bank presidents was like that of republican appointees to the board of governors the bank presidents voting did not reflect regional points of view furthermore the timing of the dissents by both the governors and presidents did not seem to be associated with the onset of congressional or presidential elections

financial panics the seasonality of the nominal interest rate and the founding of the fed after the founding of the fed in 1914 the frequency of financial panics and the size of the seasonal movements in nominal interest ratesboth declined substantially this paper establishes that the fed by carrying out the seasonal open market policy that eliminated the seasonal in nominal interest rates caused the decrease in the frequency of panics since seasonal movements are anticipated and financial panics are probably real events the results show that an anticipated monetary policy had real effects on the economy copyright 1986 by american economic association

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

block holding and keiretsu in japan the effects of capital markets liberalization measures on the stock market abstract long term block holding among large industrial corporations and financial institutions is prevalent in japan little is known about the implications of such business practice on portfolio returns we document the portfolio relationships of parent firms sub firms and specific industry portfolios and we hypothesize that these relationships have changed substantially in japan using certain measures for evaluating portfolios and mean variance spanning we test the hypothesis our empirical results suggest that market efficiency and integration of the japanese stock market may have been greatly enhanced by the japanese government s capital markets liberalization measures implemented in the 1970s and early 1980s

the monetary approach to exchange rate in an efficient foreign exchange market tests based on volatility the variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data the paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data the results are interpreted to suggest either the incompatibility of the monetary approach with sample data or an inefficient foreign exchange market or both models of exchange rate determination based on the monetary approach to the balance of payments imply when coupled with an interest rate parity relation and the assumption of an efficient foreign exchange market that exchange rates are related to a long average of money stocks differentials 1 2 the long average is analogous to the difference across countries of the long average of expected future money stocks which was supposed to characterize the price level of a single country see e g sargent and wallace 20 since long averages are known to have certain smoothing properties it appears that the observed volatility of exchange rates may be inconsistent with these models thus alternative tests of the models may be produced which rely on those properties the aim of this paper is to determine if the observed volatility is consistent with those properties the paper is the first to use tests based on the volatility of the exchange rate in an efficient market model of the monetary approach the first set of tests is based on the property of implied variance bounds for exchange rate movements and the second set consists of the more familiar efficient market tests of forecastability the empirical results violate these two sets of tests of the model thus casting doubt on the model even though the claim that exchange rates are too volatile has been commonly made few direct attempts have been made in the past to determine the validity of the claim some studies have presented estimates of variances of spot and forward rates but lacking an objective criterion to determine what constitutes

perhaps the 1970s fomc did what it said it did briefing forecasts prepared for the federal open market committee fomc are used to estimate changes in the design of us monetary policy and in the implied policy target for inflation from 1970 through 1997 both estimated policy rate responses and fomc transcripts are consistent with intermediate targeting of monetary aggregates throughout the great inflation of the 1970s the unpublished fomc targets for m1 growth are tabulated empirical results support an effective inflation target of roughly 7 in the 1970s and 3 thereafter a notable difference in the 1970s monetary policies of the us and germany is the absence of explicit public objectives for us long run inflation

interaction between central bank behaviour and fiscal policy the us case federal reserve behaviour is analysed using a model which incorporates an effect an effect of iscal pressure on monetary policy formulation incentive structures are hypothesized to be such that the central bank plans over a longer horizan than that relevant to the administration with the cyclically adjusted deficit proxying for fiscal pressure from the administration the response to the deficit then plays an interactive role in affecting the trade off weights applied to the competing goals of monetary policy the model performs well for the usa and provides a pattern of policy that is stable over the full 1961ndash 83 period

nash equilibrium and welfare optimality if is a set of social alternatives a social choice rule scr assigns a subset of a to each potential profile of individuals preferences over a where the subset is interpreted as the set of welfare optima a game form or mechanism implements the social choice rule if for any potential profile of preferences 1 any welfare optimum can arise as a nash equilibrium of the game form implying in particular that a nash equilibrium exists and 2 all nash equilibria are welfare optimal the main result of this paper establishes that any scr that satisfies two properties monotonicity and no veto power can be implemented by a game form if there are three or more individuals the proof is constructive

large scale wind power integration and wholesale electricity trading benefits estimation via an ex post approach abstract the integration of large scale wind power has brought about a series of challenges to the power industry but at the same time a number of benefits are being realized among those the ability of wind power to cause a decline in the electricity market prices has been recognized in quantifying this effect some models used in recent years are based on simulations of the market supply side and the price clearing process the accuracy of the estimates depend on the quality of the input data the veracity of the adopted scenarios and the rigorousness of the solution technique in this work a series of econometric techniques based on actual ex post wind power and electricity price data are implemented for the estimation of the impact of region wide wind power integration on the local electricity market clearing prices and the trading savings that stem from this effect the model is applied to the case of spain where the estimated savings are compared against actual credit and bonus expenses to ratepayers the implications and extent of these results for current and future renewable energy policy making are discussed

comparing the costs of intermittent and dispatchable electricity generating technologies economic evaluations of alternative electric generating technologies typically rely on comparisons between their expected life cycle production costs per unit of electricity supplied the standard life cycle cost metric utilized is the levelized cost per mwh supplied this paper demonstrates that this metric is inappropriate for comparing intermittent generating technologies like wind and solar with dispatchable generating technologies like nuclear gas combined cycle and coal levelized cost comparisons are a misleading metric for comparing intermittent and dispatchable generating technologies because they fail to take into account differences in the production profiles of intermittent and dispatchable generating technologies and the associated large variations in the market value of the electricity they supply levelized cost comparisons overvalue intermittent generating technologies compared to dispatchable base load generating technologies they also overvalue wind generating technologies compared to solar generating technologies integrating differences in production profiles the associated variations in the market value of the electricity supplied and life cycle costs associated with different generating technologies is necessary to provide meaningful comparisons between them this market based framework also has implications for the appropriate design of procurement auctions created to implement renewable energy procurement mandates the efficient structure of production tax credits for renewable energy and the evaluation of the additional costs of integrating intermittent generation into electric power networks