money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

high and low frequency variations and the cyclical behaviour of real wages the conflicting empirical evidence on the cyclicality of real wages may be a result of the fact that the measure of comovements employed in the literature is affected by coherence among non business cycle variations in the data by recursively removing components the degree to which long and short term cycles contaminate the existing evidence is studied while confirming many of the results of the current literature it is found that evidence of cyclicality is affected more by long rather than by short term components even though the data have been detrended by a number of different methods it has been suggested in the literature that wages become more countercyclical as the deflators used represent less finished bundles of goods this study shows that this result is robust to the removal of components from either end of the spectrum

economic news exchange rates and interest rates the paper esamines the post october 1979 response of exchange rates and interest rates to the new information contained in the first announcement of fifteen us macroeconomic series illarkets respond primarily to monetary news but also to news about the trade deficit domestic inflation and variables that reflect the state of the business cycle for all fifteen macroeconomic variables an increase decrease in interest rates is accompanied by an appreciation depreciation of the dollar which is consistent with models that stress price rigidity and absence of purchasing power parity the effect of economic news on asset prices has received increasing attention in the economic literature because an outcome of the efficient markets rational expectations hypothesis is that flesible asset prices change the moment new information about future fundamentals arrives in the market in the exchange rate literature the role of news has gained importance because structural models have failed to predict most of the variation in exchange rates during the 1970s see imeese and rogoff 1983 researchers were naturally led to investigate the types of news that make exchange rates so volatile and to utilize news in order to test which model of exchange rate determination is consistent with the floating eschange rate experience notable studies are those of dornbusch 1980 frenkel 1981 edwards 1982a b 1983 copeland 1984 and rose 1984 in this paper i also examine the effects of macroeconomic news on eschange rates but i adopt a different more direct strategy one that complements previous work avoids some of its shortcomings and promises interesting conclusions i examine the instantaneous response of exchange rates the moment a piece of economic news hits the market if one can isolate the exact time during a business day when news arrives it is straightforward to examine the response of exchange rates because financial data are continuously available the advantages of the present methodology are many first it is possible to identify the exact types of economic news and how they affect exchange rates second the simultaneity bias which plagues the previous literature on exchange rates and news is not present here the independent variables that represent news can be interpreted as causal the paper was presented at the 1985 meeting ofthe american economic association the author wishes to thank sebastian edwards r w hafer nicholas karamouzis andrew rose and two anonymous referees for helpful comments kim rupert of the money market services for providing the survey data soo kounne for able research assistance and barnard college for research support

international interest rates and us monetary policy announcements evidence from hong kong and singapore this paper investigates the responses of market interest rates to us monetary policy announcements for the us and two emerging economies hong kong and singapore which are similar on many respects but have experienced opposite exchange rate regimes in the last twenty years our results based on market expectations extracted from federal fund futures rates document that fomc announcements significantly affect the term structure of interest rate in the us and both asian countries further international interest rate differentials around fomc meeting dates tend to be negative for short maturities with the impact gradually dissipating as bond maturity increases finally for the case of singapore we find that domestic interest rates react to both external and domestic monetary policy announcements with a magnitude that is larger over the full bond maturity spectrum for domestic announcements these results are robust to time varying futures risk premia and alternative measures of interest rates expectations

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

why interest rates rise when an unexpectedly large money stock is announced ment of an unexpectedly large growth in the money supply will lead to an immediate increase in interest rates this announcement effect is often taken as confirmation of the monetarist view that the way to bring down interest rates even in the short run is to reduce the rate of money growth in this paper we provide an alternative explanation of the announcement effect that is consistent with the keynesian view that in the short run the way to bring down interest rates is to expand the money supply we do not address the issue of inflationary expectations in a formal way though in the long run we would expect the well known fisher effect to hold looking closely at the announcement effect it is clear that whatever may be the true short run relationship between money growth and interest rates it cannot be inferred from a simple correlation of announcements of changes in the money stock with the resulting changes in interest rates this is because of several properties of the announcement phenomenon that we capture in the model

the handbook of international macroeconomics preface 1 introduction rick van der ploeg amsterdam 2 quantity constrained models of open economies neil rankin warwick 3 imperfect competition and open economy macroeconomics huw d dixon york 4 relative price movements in dynamic general equilibrium models of international trade david backus nyu patrick kehoe pennsylvania and finn kydland carnegie mellon 5 international fiscal policy coordination and competition assaf razin and efraim sadka tel aviv 6 capital taxation in the world economy a lans bovenberg tilburg 7 history of the international monetary system implications for research in international macroeconomics and finance barry eichengreen berkeley 8 on inflation unemployment and the optimal exchange rate regime george alogoskoufis athens 9 macroeconomic policy speculative attacks and balance of payments crisis pierre richard agenor and robert p flood imf 10 continuous time models of exchange rates and intervention giuseppe bertola princeton 11 stylized facts of nominal exchange rate returns casper g de vries leuven 12 partial versus general equilibrium models of international capital market equilibrium 13 sovereign debt kenneth kletzer santa cruz 14 growth and external debt daniel cohen cepremap 15 growth and deficits in an interdependent world index

industrial output variability and real wage fluctuations determinants and implications i introduction the study of business cycles has been at the heart of macroeconomic theory for decades theoretical efforts have focused on providing an adequate explanation for sources of economic fluctuations and toward this explanation new keynesian models have emphasized rigidity that interferes with market forces and exacerbates the effects of demand fluctuations on the supply side of the economy the form of rigidity is in sharp contrast between sticky wage and sticky price models sticky wage models have emphasized rigidity in the labor market to explain economic fluctuations labor contracts specify in advance the nominal wage that prevails for the contract duration following contract negotiation a positive disturbance to aggregate demand raises the price of the output produced in the absence of any stipulation for wage indexation the increase in price lowers the real product wage faced by firms causing it to fall below its market clearing value the fall in the real wage causes output and employment to rise above their natural full equilibrium levels output adjustments moderate the increase in price that is necessary to clear the product market in addition sticky price models have emphasized rigidity in the product market to explain economic fluctuations monopolistically competitive firms face small menu costs when they change prices menu costs are resources involved in announcing and implementing a price change firms may opt therefore to change prices at specific intervals given price rigidity producers adjust output in the face of demand shocks accordingly an increase in the real wage correlates with an increase in output in the face of demand shocks to test competing theoretical explanations efforts have focused on the cyclical behavior of the real wage and accompanying output fluctuations in the face of demand shocks 1 the evidence appears conflicting and therefore does not convincingly support a given explanation 2 unlike previous empirical research on the subject the objective of this investigation is to study the cyclical behavior of the real wage and the relative response of the nominal wage and price to demand shocks toward this objective the present investigation estimates the time series response of real wage rates to aggregate demand shocks in each of 28 private industries of the united states listed in appendix table a1 differences in the response across industries are then used to discriminate between sticky wage and sticky price explanations the evidence establishes the relation between output fluctuations and the response of the real wage to demand shocks across industries the results across industries of the united states produce the following evidence contrary to the implications of sticky wage models the price response to demand shocks does not move closely with the nominal wage response consistent with the implications of sticky wage models however an increase in nominal wage flexibility rigidity moderates exacerbates industrial output fluctuations in the face of demand shocks nonetheless an increase decrease in price flexibility relative to nominal wage flexibility moderates increases the output response to demand shocks across industries consistently industrial output fluctuations increase with the cyclical response of the real wage to demand shocks for example an increase in the real wage correlates with an increase in real output during periods of expansionary demand in general industrial prices adjust independently of the nominal wage to demand shocks increasing real wage variability further industrial real output variability does not vary significantly with nominal wage flexibility in the face of demand shocks in contrast an increase in the price response to demand shocks moderates output variability across industries consistently an increase in the real wage response to demand shocks correlates with an increase in industrial real output variability as predicted by sticky price models of business cycles

real wages over the business cycle evidence from panel data one topic on which keynes did not disagree with classical economists was the cyclical behavior of real wages keynes 1936 as well as various classical writers predicted that real wages should move countercyclically quoting the general theory p 17 in general an increase in employment can only occur through the accompaniment of a decline in real wages thus i am not disputing this vital fact which the classical economists have rightly asserted as indefeasible this prediction is based on the premise of competition and a given short run capital stock increases in employment then correspond to more intensive use of capital and through diminishing product lower real wages for this reason evidence by dunlop 1938 and tarshis 1939 that real wages move procyclically was viewed as paradoxical both dunlop and tarshis based their findings on an observed positive correlation between real and money wages which given the procyclical movement of money wages implies a positive correlation between

the impacts of hong kong s currency board reforms on the interbank market abstract among the economies with a currency board system cbs hong kong hk is probably the one with the largest and most developed financial sector as well as the highest capital mobility hence studying hk s cbs is not only crucial to hk but also important for the understanding of the modern cbs this paper outlines the major monetary reforms in hk since the late 1980s the impacts of these reforms and the 1997 1998 asian financial crisis are then examined empirically we focus on the differentials between the us and hk interbank interest rates we assume the conditional mean equation follows an autoregressive process and the conditional variance equation follows a generalized autoregressive conditional heteroscedasticity process this model captures the time varying level and volatility of the differential in light of the empirical results we provide an assessment of the reforms in hk

sticky wage or sticky price analysis of the cyclical behavior of the real wage the study of business cycles has been at the heart of macroeconomic theory for decades theoretical efforts have focused on providing an adequate explanation for sources of economic fluctuations new keynesian explanations have emphasized rigidity that interferes with market forces increasing the effect of demand shocks on the output produced the form of rigidity is in sharp contrast between sticky wage and sticky price models the former imposes rigidity on the shortrun adjustment of wages to demand shocks 20 47 the latter in contrast imposes rigidity on the short run price adjustment to demand shocks 2 34 40 9 43 4 the theoretical plausibility of competing explanations of business cycles has stimulated interest to establish their empirical validity 32 28 1 8 11 23 21 26 these efforts have focused attention on cyclical fluctuations of the real wage in response to demand shocks the real wage may move procyclically or countercyclically according to the relative adjustment of wages and prices the interest in studying the cyclical behavior of the real wage relates to its implications to the real effects of aggregate demand shocks in the context of sticky wage models nominal wage rigidity reinforces the countercyclical response of the real wage to demand shocks and the real effect of these shocks on output growth sticky price models in contrast advocate that price rigidity increases the procyclical response of the real wage to demand shocks and their real effect on output growth the results of earlier investigations of the cyclical behavior of the real wage appear conflicting and therefore do not lend support to a given explanation 2 the present investigation seeks to contribute to this literature unlike previous empirical research on the subject the objective of this investigation is to study the cyclical behavior of the real wage and the relative flexibility of the nominal wage and the price level that determines this behavior in response to demand shocks using data for the united states in the preand post world war ii sample periods the cyclical

the effects of money announcements under alternative monetary control procedures the response of interest rates to money announcement surprises is theoretically exam ined in this paper in the models developed not only changes in oper ating procedures but also reserve requirement systems are found to potentially affect the response the response also varies depending o n the desired degree of monetary control moreover under the current two week contemporaneous reserve requirements adopted in february 19 84 the responses in the first and second weeks of the two week reser ve maintenance period may differ previous empirical results conform to the predictions of the theoretical models copyright 1987 by ohio state university press

an economic theory of central places is not really a theory of spatial economic behaviour instead it is a series of brilliant conjectures about the locational configurations that will result from such behaviour the brilliance of these conjectures is illustrated by the successful applications of the theory to such diverse phenomena as the locational patterns of retailing activity in cities and of service centres in rural areas the size distribution of cities and the diffusion of information and diseases in this paper we outline an economic model of central places 2 our theorising has two distinct purposes first we wish to begin the development of a theory of central places that is based on maximising behaviour of economic agents any theory of economic behaviour from which central places can be derived is necessarily both difficult and cumbersome non convexities in the activities of buying and selling drive the model and thus non differentiabilities and discontinuities abound as one seeks more generality in such circumstances difficulties multiply rapidly in order to begin the job we have used assumptions that are specific and sometimes even crude the second purpose of our theorising is to illustrate the limitations of current central place theory by providing counter examples to some propositions commonly accepted to follow from it for this purpose we need not worry about lack of generality in any of our counter examples of course we are not solely concerned to refute accepted generalisations by doing so we hope to make alternative possibilities apparent what we hope to attain therefore is a theoretical development inspired by the extremely fruitful conjectures of existing central place theory

domestic macroeconomic news and foreign interest rates abstract this study examines the impact of us and uk news on futures prices of us uk german and japanese government bonds we find that certain us information has a significant influence on german japanese and british interest rates while uk information has almost no effect on foreign rates second we examine the foreign term structure to investigate whether the importance of us information arises because it either signals common world wide shocks or induces an anticipated exchange rate stabilization by foreign central banks the evidence is mixed except for the us cpi surprise which appears to provide information about a common world wide shock g15

currency substitution and the demand for money some evidence for canada recently the possibility that foreign and domestic currencies are substitutes has received considerable attention see 1 2 3 10 19 21 currency substitution has important implications for the working of flexible exchange rates if the degree of currency substitution is high small changes in the money supply would induce large changes in the exchange rate furthermore currency substitution would transmit the effect of monetary disturbances from one country to another indeed significant currency substitution would seriously undermine the ability of flexible exchange rates to provide monetary independence this paper examines the empirical importance of currency substitution in the framework of the demand function for money if currency substitution is important the expected change in the exchange rate should be a significant determinant of the demand for home currency in section 2 we undertake such a test for the canadian demand for money during the recent flexible exchange rate period there is considerable evidence that the forward exchange rate is a good measure of the expected exchange rate our own tests confirm these results for canadian data since 1970

beyond economic base theory the role of the residential economy in attracting income to swiss regions segessemann a and crevoisier o beyond economic base theory the role of the residential economy in attracting income to swiss regions regional studies regional development theories are mainly focused on export based activities to explain regional competitiveness the increasing mobility of workers and residents leads to a reconsideration of this approach residential economy has become a strategic issue to generate incomes within regions with this view the paper analyses the link between economic activities and incomes from workers and annuitants residents a spatial typology breakdown is compiled for swiss regions using a hierarchical cluster analysis hca empirical results highlight various regional development profiles conversely to export based theories regions with higher income are those with strong residential economy thus opening new avenues for local governance

coase spatial pricing and self organising cities modern computational techniques offer new horizons for urban economics in the form of agent based simulation frameworks this paper reports on a cellular automata ca simulation in which urban land transforms on the basis of locally optimal bargaining between developers and local communities local governments because ca is an explicitly spatial modelling methodology the space time specific paths to global equilibrium can be observed because it is an atomistic methodology cells represent decision units it is suitable for articulating microeconomic theories of urban processes including planning we present a space time specific simulation of cities evolving under two alternative planning regimes in one the community has property rights and uses planning conditions planning gain impact fees and so on to ensure that each development occurs at a socially optimal density this is a theoretically simplified rendition of the british development control system simplified in the sense of acting from a position of perfect knowledge and having a single objective of optimising locational externalities in the other simulation developers have the right to develop but the community is allowed to make rather than receive compensatory payments in order to achieve socially optimal land use patterns and densities decision making in both systems is local and socially efficient however case by case ad hoc development control with compensatory exactions has the effect of steering development to the least polluting locations although socially optimal densities can occur under alternative control regimes as the second simulation demonstrates the stylised british development control process acts like a decentralised locational pricing system and by definition yields a superior land use pattern than any other style of planning system at one level our model articulates the coasian invariance theorem the same partial equilibrium outcome can be achieved whichever way the property rights over land development fall at another level the results demonstrate that in a spatial resource allocation problem such as land use planning global equilibrium is not independent of property rights the total social product in the urban land economy is greater when the community holds rights over development

money supply announcements interest rates and foreign exchange abstract this paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run the test results are consistent with the joint hypothesis for example it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar if the rise in interest rates was entirely due to higher inflationary expectations the dollar should not appreciate

clubs local public goods and transportation models a synthesis abstract clubs local public goods and transportation models are analyzed within a unified model the emphasis is on the derivation of optimal allocation pricing and the size of the sharing group we derive the conditions under which optimal prices will yield surplus or deficit as well as those under which competitive provision will be efficient given heterogeneous tastes we prove that segregation according to tastes is generally efficient although several cases where this result does not hold are also discussed we show that the existing literature is unnecessarily restrictive and that the unified approach suggested here considerably extends the existing analysis of clubs local public goods and the transportation problems

federal reserve information and the behavior of interest rates this paper tests for the existence of asymmetric information between the federal reserve and the public by examining federal reserve and commercial inflation forecasts it demonstrates that the federal reserve has considerable information about inflation beyond what is known to commercial forecasters it also shows that monetary policy actions provide signals of the federal reserve s information and that commercial forecasters modify their forecasts in response to those signals these findings may explain why long term interest rates typically rise in response to shifts to tighter monetary policy jel e52 e43 d82 asymmetric information between the federal reserve and the public is a phenomenon that is often posited but rarely tested numerous models of central bank behavior for example show that the existence of asymmetric information has important implications for the effectiveness of policy and the consequences of dynamic inconsistency yet there

currency substitution and speculative attacks on a currency board system abstract a currency board arrangement cba is supposed to be robust against attacks currency substitution complicates life with controversial implications for floating versus fixed exchange rate regimes after reporting evidence of currency substitution in hong kong a monetary model incorporating currency substitution is used to estimate the shadow exchange rate and the probability of speculative attack on the hong kong dollar a decomposition analysis of a markov switching model indicates that the no attack regime was the most durable one this implies that hong kong s quasi cba was relatively robust against both speculative attacks and currency substitution

currency substitution and instability in the world dollar standard comment myron ross correctly points out in his comment that u s price inflation is better predicted by the american money supply mlus than by the broader ten country world money supply mlw over the whole statistical time series from 1960 to 1980 provided in mckinnon s 1982 article specifically he showed that american price inflation is more highly correlated with mlus lagged one or two years than with mlw similarly lagged however mckinnon s present tense assertion that in general growth in the world money supply is a better predictor of american price inflation than is american money growth applies only to the weak dollar standard of the 1970 s and early 1980 s as his preceding discussion intended but failed to indicate clearly only in this later period of volatile exchange rates and price level instability in the united states do alternative hard currencies such as the yen and deutsche mark become competitive as international stores of value and units of account hence international currency substitution associated with the ebb and flow of speculation against or for the dollar significantly destabilized the demand for mlus in the 1970 s and 1980 s and only in this later period might one expect the sum of these internationally substitutable monies ml to predict world and perhaps even american price inflation better than does mlus in contrast during the strong dollar standard of the 1950 s and 1960 s the dollar was unchallenged as international money exchange rates were by and large convincingly fixed speculation for or against the dollar was incapable of substantially altering u s interest rates or of directly affecting the demand for mlus because cyclical international influences did not then destabilize the demand for dollars mlus was by itself a fairly efficient predictor of american prices thus ross s statistical results for the period 1960 to 1980 show somewhat greater predictive strength in mlus compared to ml because the 1960 s data outweigh the dissimilar data of the 1970 s let us instead partition the sample of imf data around the year 1970 whence began the transition from fixed to fluctuating exchange rates and the maturation of alternative monetary systems in europe and japan after applying similar statistical correlation procedures to those used by ross we show a striking structural shift in the world s monetary system the explanatory power of mlw increases sharply as that of mlus declines moderately tan 1982 for the early period of 1960 to 1970 table 1 shows simple correlation coefficients between annual percentage changes in money supplies and changes in american and world wholesale price indices the mlus provides a good explanation of u s prices and of world prices one to two years hence whereas the broader definition of mlw in which mlus enters with a 50 percent weight does surprisingly poorly being insignificantly correlated with american or world prices apparently money growth in industrial countries other than the united states was not then an independent source of worldwide inflationary pressure during the strong dollar standard table 2 shows the same simple correlations between percentage changes in prices and money for the weak dollar standard of stanford university please note that a typographical error giving the last word in the original title as market appeared on the cover of the june 1982 issue of this review the title was correct in the table of contents and on the article

real wages over the business cycle a band spectrum approach this paper presents new evidence on the cyclical relationship between real wages and aggregate employment as is well known models that attribute fluctuations in output to movements in aggregate demand and retain the assumption of flexible product prices the adpf hypothesis imply countercyclical real wage movements as employment adjusts along a downward sloping aggregate demand for labor schedule in contrast real business cycle theories 10 15 13 suggest procyclical movements as workers substitute work for leisure along dynamic labor supply schedules the empirical evidence on these propositions remains mixed some influential studies report a negative relationship 4 5 25 others report a positive relationship 2 12 18 and geary and kennan gk 7 to identify the purely business cycle correlation and distinguish it from correlations at very high and very low frequencies the frequency domain decomposition provides a simple framework for reconciling the conflicting conclusions of previous studies and for focusing attention on the business cycle relationship i show that the highly significant positive or negative correlations reported in previous studies are attributable to variations at frequencies far too high or far too low to be associated with the business cycle the true business cycle relationship is quite different from that revealed by simple regressions of real wages on employment i find a weak but statistically significant negative relationship over business cycle frequencies for the post war u s data when wages are deflated by the producer price index ppi the negative relationship is particularly strong over the subperiod 1947 70 but becomes weak and insignificant over the last sixteen years 1971 86 this finding is consistent with the widely held belief that in the former period cyclical movements in employment were determined by changes in aggregate demand while real shocks dominated in the 1970s however when wages are deflated by the consumer price index cpi the business cycle relationship is weak and not statistically significant over both subperiods these results contrast sharply with those of previous studies that do not isolate business cycle components

the donald robertson memorial prizewinner 2003 the nature of the neighbourhood this paper considers the order that emerges in cities as individuals exchange and pool rights over resources in pursuit of individual and mutual gain in his 1937 article the nature of the firm ronald coase explained the existence and size of firms in terms of transaction costs neighbourhoods are important units of consumption and production and can like firms be explained by transaction costs a theory of the neighbourhood is developed based on transaction costs property rights and related ideas from the new institutional economics a neighbourhood is defined as a nexus of contracts and four rules that govern neighbourhood evolution are specified normative aspects of the theory are illustrated by examining the organisational order in neighbourhoods in particular the pattern of residual claimants in the contracts that underpin neighbourhood dynamics

monetary policy and market interest rates this thesis contains four chapters each of which examines different aspects of the uncertainty facing monetary policymakers monetary policy and market interest rates investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities the reaction of market rates is shown to depend crucially on market participants interpretation of the factors underlying the policy move these theoretical predictions find support in an empirical analysis of the u s financial markets predicting monetary policy using federal funds futures prices examines how prices of federal funds futures contracts can be used to predict policy moves by the federal reserve although the futures prices exhibit systematic variation across trading days and calendar months they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the federal open market committee from 1994 to 1998 monetary policy with uncertain parameters examines the effects of parameter uncertainty on the optimal monetary policy strategy under certain parameter configurations increasing uncertainty is shown to lead to more aggressive policy in contrast to the accepted wisdom should central banks be more aggressive examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality these counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior an unrestricted model taking the dynamics of the economy and multiplicative parameter uncertainty into account leads to optimal policy prescriptions which are very close to observed federal reserve behavior

the information content of discount rate announcements what is behind the announcement effect abstract a considerable volume of research shows that asset prices respond to changes in the federal reserve s discount rate while several competing hypotheses have been advanced to explain the market s response to discount rate announcements comparatively little effort has been made to differentiate among alternative hypotheses the result is an abundance of evidence establishing that asset prices respond to discount rate announcements but little if any agreement about why markets respond this article attempts to fill a void in the literature by pointing out how competing hypotheses differ and by constructing tests explicitly designed to differentiate among competing explanations the evidence suggests that the market s reaction to discount rate changes is purely an announcement effect i e a reaction to new information contained in the announcement that the direct effect of discount rate changes on market rates is nil that the announcement effect is invariant to the federal reserve s operating procedure and that generally speaking changes in the discount rate do not signal a change in monetary policy the announcement effect appears to vary with both the nature and extent of the information that the announcement of a discount rate change is believed to contain

the fed and interest rates a high frequency identification we measure monetary policy shocks as changes in the fed funds target rate that surprise bond markets in daily data these shock series avoid the omitted variable time varying parameter and orthogonalization problem of monthly vars and do not impose the expectations hypothesis we find surprisingly large and persistent responses of bond yields to these shocks 10 year rates rise as much as 8 10 of a percent to a one percent target shock the usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response this abstract was borrowed from another version of this item

optimal and equilibrium membership in clubs in the presence of spillovers abstract this paper treats a partial equilibrium club economy in which clubs impose positive or negative externalities on one another both spillovers in congestable good and crowding are studied it is shown that an increase the relative strength of the first type of spillover may result in either an increase or decrease in the optimal club size and public good levels spillovers in crowding on the other hand have a definite effect on the optimal membership and production of public good these optimal outcomes are then compared to nash equilibrium club size and public good provision when clubs are established by profit maximizing entrepreneurs instead of a social planner

gmm estimates of currency substitution between the canadian dollar and the u s dollar this paper investigates the empirical strength of currency substitution between the canadian dollar and the u s dollar euler equations implied by a small open economy money in the utility function model are estimated and tested by hansen s generalized method of moments procedure the major empirical finding is that both the elasticity of currency substitution and the share of u s currency in the production of canadian liquidity services are economically small even though the combined domestic and u s real balances appear to provide statistically significant economizing on transactions costs copyright 1994 by ohio state university press

the employment real wage relationship an international study the neoclassical and keynesian theories of employment both predict an inverse relationship between employment and real wages in the short run the observed correlation between employment and real wages however has usually failed to conform to this prediction dunlop 1938 and tarshis 1939 reported a positive correlation between real and money wages which given procyclical movement of money wages was interpreted as evidence against the theoretical prediction the statistical significance of these results was however challenged by ruggles 1940 and tobin 1948 more recent studies by kuh 1966 and bodkin 1969 failed to detect a significant relationship between real wages and employment these findings stimulated a series of contributions by solow and stiglitz 1968 barro and grossman 1971 1976 and others developing alternative models not apparently refuted by the evidence barro and grossman recast macro theory under the assumption that markets did not clear modigliani 1977 argued that the observed relationship between employment and real wages could be accounted for in an oligopolistic model of firm behavior thus both the competitive and equilibrium assumptions of the classical model were diagnosed as the sources of its apparent empirical refutation

currency substitution under nonexpected utility some empirical evidence this paper derives and tests the restrictions implied by an optimizing model of currency substitution under nonexpected utility using quarterly data for israel from 1978 to 1988 we find that the elasticity of intertemporal substitution is less than one the elasticity of currency substitution is greater than one relative risk aversion is about seven and the elasticity of currency substitution is greater than the intratemporal elasticity of substitution between consumption and liquidity services in most cases the evidence supports the hypothesis of nonexpected utility as well as the inclusion of liquidity services in the representative agent s objective function the methodology of this paper can be applied to other interesting cases of currency substitution copyright 1993 by ohio state university press

managing exchange rate crises evidence from the 1890s abstract this paper investigates the effectiveness of the monetary authority s borrowing policies in resolving exchange rate cises it shows why obtaining loans or lines of credit in foreign currency may avoid at least temporarily the devaluation of a fixed rate and discusses the problem of the optimal size of the loan and or the line of credit the analysis focuses on a particular episode of foreign exchange rate pressure during the troubled years between 1894 to 1896 the results suggest that the borrowing policy followed by the us treasury in those years was effective in avoiding the collapse of the united states gold standard and that the amount of the borrowing undertaken by the treasury might have been optimal

money supply announcements and market reactions in an open economy an open economy model of the money supply announcement financial market reaction phenomenon under policy anticipations is formulated whose major divergence from earlier models is the prediction that short term interest rate movements need not be positively correlated with unexpectedly high monetary growth while at variance with the most consistent empirical regularity in the united states this prediction in fact accords with previous empirical findings for both the united kingdom and canada copyright 1990 by ohio state university press

on the derivation of monetary policy shocks should we throw the var out with the bath water this paper considers an alternative econometric approach to the standard var methodology for identifying and estimating the effects of monetary policy shocks the alternative approach makes more reasonable assumptions about economic agents information set by 1 restructuring the var variables according to what data are actually observable in each point in time and 2 augmenting the var model with available measures of market participants expectations of various economic variables thus increasing the assumed information set should we throw the var out with the bath water unfortunately the results of this paper are somewhat inconclusive the expectations measures prove to be quite valuable the variances of all innovations are reduced by at least one half compared to the standard var innovations nevertheless the innovations monetary policy shocks and impulse responses for both methods are fairly similar indeed they are similar enough that the standard var approach cannot be rejected out of hand but dissimilar enough that the standard approach cannot be validated

the contractual nature of the firm for their helpful comments i am grateful to armen a alchian yoram barzel keith leffler john s mcgee and dean worcester 1 ronald h coase the nature of the firm 4 economica 386 1937 the paper however was written several years earlier see note 3 infra 2 the social sciences citation index provides the following information breaking down the period of 1966 80 into three five year periods the total citations of coase s firm paper for each subperiod are 1966 70 17 citations 1971 75 47 citations and 1976 80 105 citations

on the optimal structure of local governments the authors show that space matters in designing the optimal provision of local public goods geography imposes a particular institutional structure of local governments due to the overlapping of market areas associated with different local public goods the optimum can be decentralized through local governments that have jurisdiction over market areas of all local public good types this implies that the appropriate suppliers of local public goods are metropolitan governments which finance them through user charges and land rent in addition the authors approach invalidates the prevailing theory of fiscal federalism according to which a layer of government should be established for each type of local public good copyright 1995 by american economic association

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

the relative stickiness of wages and prices i introduction a continuing challenge to macroeconomics is to explain how a purely nominal disturbance produces short term aggregate real effects in the classical paradigm in which wages and prices are perfectly flexible a positive nominal aggregate demand disturbance will cause nominal wages and output prices to rise in the same proportion leaving real wages unchanged thus neither employment nor output will be affected consequently many business cycle theories posit the existence of wage and or price stickiness to explain how nominal aggregate demand disturbances generate real macroeconomic effects according to these theories the failure of nominal wages or prices to fully adjust in the short run to purely nominal disturbances explains why shocks to aggregate demand will cause both employment and output to temporarily deviate from their natural rates the relative importance of wage and price stickiness in the transmission of nominal shocks to the real economy however remains an unsettled issue the purpose of this paper is to exploit evidence on the behavior of real wages in an attempt to assess the relative importance of these two sources of stickiness first consider models emphasizing sticky or slowly adjusting nominal wages 1 if for example output prices are free to adjust but nominal wages are sticky a positive aggregate demand shock will cause prices to rise and real wages to temporarily fall below market clearing levels the fall in real wages will stimulate employment and thus output as the aggregate demand shock induces movement along a stable labor demand curve consequently sticky wage models predict a negative correlation between aggregate demand shocks and real wages if on the other hand wages are flexible while output prices are sticky 2 aggregate demand disturbances and real wages will tend to be positively correlated in the short run in sticky price models imperfectly competitive firms may resist adjusting output prices in response to changes in demand perhaps due to menu costs instead increases in demand are met by corresponding increases in output this requires an increase in labor inputs which in turn requires an increase in the real wage rate if wages are flexible and the labor supply curve is positively sloped thus when prices are sticky but wages are flexible a positive aggregate demand shock is associated with an increase in real wages it may be that neither prices nor wages are fully flexible if prices and wages both exhibit stickiness we would expect real wages to be positively correlated or negatively correlated with aggregate demand shocks depending in large part on whether prices or wages are stickier thus knowledge of the direction of the short run response of real wages to aggregate demand disturbances would offer important evidence on the relative stickiness of nominal wages and output prices if all business cycle fluctuations are due solely to aggregate demand disturbances such evidence could be obtained by examining the cyclical behavior of real wages since regardless of the source of stickiness aggregate demand disturbances are positively correlated with employment and output countercyclical procyclical real wages would indicate that nominal wages are stickier more flexible than output prices indeed some consider the stylized fact of slightly procyclical real wages 3 to be an important challenge to models that emphasize wage stickiness for example bennett mccallum 1986 argues for the superiority of models with sticky output prices since if wage stickiness alone were responsible for the real effects of monetary actions with product prices adjusting flexibly then we should observe countercyclical movements in the real wage that we do not has recently been reconfirmed in a study by bils 1985 gregory mankiw 1987 107 has concluded the final and perhaps most serious problem with the unadorned nominal wage story is that real wages do not move over the business cycle as the theory predicts

exchange rate crises with domestic bank runs evidence from the 1980s abstract the sherman silver purchase act of 1890 led to inflation fears and a series of flights from the dollar in spite of these runs the dollar was never devalued the question remains why grilli 1990 argues that it was the treasury s ability to borrow that prevented collapse while this explains why the gold standard endured from 1894 to 1896 it does not explain why there was no successful attack before that time the paper argues that the gold standard endured during 1893 because an internal drain of commercial bank funds stopped the external drain a revised series of collapse probabilities is provided and shown to be zero during the internal drain

blue chip rationality tests this paper tests the rationality of forecasts made by individuals who contribute to the blue chip consensus forecasting service and tries by means of a questionnaire on forecasting methods to establish why some forecasters appear more rational than others tests based on consensus forecasts prove unreliable as guides to the number of individuals who produce rational forecasts individual forecasts are more likely to be rational if they are based on a mainstream economic theory and incorporate a substantial element of judgment copyright 1991 by ohio state university press

in search of a stylised fact do real wages exhibit a consistent pattern of cyclical variability the paper surveys the studies on the cyclical behaviour of real wages published from the twenties onwards the traditional simple neoclassical model of the labour market suggests that real wages tend to move countercyclically however from a theoretical viewpoint there are few reasons to expect this behaviour once the simple model is extended to account for imperfect competition uncertainty lagged responses or contracting between firms and workers empirical studies give different answers to the problem the contributions reviewed in the paper are arranged roughly in a chronological order the interwar period the postwar pre econometric studies the econometric work using aggregate data the evidence produced on the basis of longitudinal data the analyses of the shock responsiveness of real wages and finally the most recent papers attempting a reconciliation of the somewhat conflicting evidence derived from aggregate and panel data