some empirical evidence on the effects of shocks to monetary policy on exchange rates this paper investigates the effects of shocks to u s monetary policy on exchange rates we consider three measures of these shocks orthogonalized shocks to the federal funds rate orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the romer and romer index of monetary policy in sharp contrast to the literature we find substantial evidence of a link between monetary policy and exchange rates specifically according to our results a contractionary shock to u s monetary policy leads to i persistent significant appreciations in u s nominal and real exchange rates and ii significant persistent deviations from uncovered interest rate parity in favor of u s interest rates

macroeconomic forecasting in the euro area country specific versus area wide information abstract this paper compares several time series methods for short run forecasting of euro wide inflation and real activity using data from 1982 to 1997 forecasts are constructed from univariate autoregressions vector autoregressions single equation models that include euro wide and us aggregates and large model methods in which forecasts are based on estimates of common dynamic factors aggregate euro wide forecasts are constructed from models that utilize only aggregate euro wide variables and by aggregating country specific models the results suggest that forecasts constructed by aggregating the country specific models are more accurate than forecasts constructed using the aggregate data

the fed and the stock market an identification based on intraday futures data this article develops a new identification procedure to estimate the contemporaneous relation between monetary policy and the stock market within a vector autoregression var framework the approach combines high frequency data from the futures market with the var methodology to circumvent exclusion restrictions and achieve identification our analysis casts doubt on var models imposing a recursive structure between innovations in policy rates and stock returns we find that a tightening in policy rates has a negative impact on stock prices and that the federal reserve fed has responded significantly to movements in the stock market estimates are robust to various model specifications

nowcasting the real time informational content of macroeconomic data abstract a formal method is developed for evaluating the marginal impact that intra monthly data releases have on current quarter forecasts nowcasts of real gross domestic product gdp growth the method can track the real time flow of the type of information monitored by central banks because it can handle large data sets with staggered data release dates each time new data are released the nowcasts are updated on the basis of progressively larger data sets that reflecting the unsynchronized data release dates have a jagged edge across the most recent months

monetary policy shifts and the term structure we estimate the effect of shifts in monetary policy using the term structure of interest rates in our no arbitrage model the short rate follows a version of the taylor s 1993 discretion versus policy rules in practice carnegie rochester conference series on public policy 39 195 214 rule where the coefficients on the output gap and inflation vary over time the monetary policy loading on the output gap has averaged around 0 4 and has not changed very much over time the overall response of the yield curve to output gap components is relatively small in contrast the inflation loading has changed substantially over the last 50 years and ranges from close to zero in 2003 to a high of 2 4 in 1983 long term bonds are sensitive to inflation policy shifts with increases in inflation loadings leading to higher short rates and widening yield spreads

ecb monetary policy surprises identification through cojumps in interest rates this paper proposes a new econometric approach to disentangle two distinct response patterns of the yield curve to monetary policy announcements based on cojumps in intraday tick data of a short and long term interest rate we develop a day wise test that detects the occurrence of a significant policy surprise and identifies the market perceived source of the surprise the new test is applied to 133 policy announcements of the european central bank ecb in the period from 2001 2012 our main findings indicate a good predictability of ecb policy decisions and remarkably stable perceptions about the ecb s policy preferences

asset market responses to conventional and unconventional monetary policy shocks in the united states abstract we quantify the responses of a wide range of united states financial market variables to domestic monetary policy shocks over conventional and unconventional monetary policy environments our results show that responses to policy shocks are in the same direction but generally larger and more significant in the unconventional period the larger responses are mostly due to larger shocks in the unconventional period but some variables show evidence of a larger transmission of shocks we separately use our framework to test shadow short rate estimates as a proxy for short maturity interest rates across conventional and unconventional periods

mixed risk aversion abstract we analyze the class of increasing utility functions exhibiting all derivatives of alternating sign this property that we call mixed risk aversion is satisfied by the utility functions most commonly used in financial economics the utility functions displaying mixed risk aversion can be expressed as mixtures of exponential functions we characterize stochastic dominance and we find conditions for both mutual aggravation and mutual amelioration of risks when agents are mixed risk averse finally the analysis of the distribution function describing a mixed utility allows one to characterize the behaviour of its indexes of risk aversion and to discuss its implications for portfolio selection journal of economic literature classification numbers d81 g11

gdp nowcasting application and constraints in a small open developing economy despite data limitations an attempt is made to find out if a gdp nowcasting model can provide reliable forecasts for a small open economy two competing bayesian vector autoregressive models are tested rigorously to obtain the optimal model by minimizing in sample forecasting errors the main finding of this study is that gdp nowcasting can produce reliable results for a small open economy despite the unavailability of sufficient data sets and the lack of high frequency indicators

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

estimation of a forward looking monetary policy rule a time varying parameter model using ex post data abstract in this paper we consider estimation of a time varying parameter model for a forward looking monetary policy rule by employing ex post data a heckman type 1976 the common structure of statistical models of truncation sample selection and limited dependent variables and a simple estimator for such models annals of economic and social measurement 5 475 492 two step procedure is employed in order to deal with endogeneity in the regressors this allows us to econometrically take into account changing degrees of uncertainty associated with the fed s forecasts of future inflation and gdp gap when estimating the model even though such uncertainty does not enter the model directly we achieve efficiency in estimation by employing the standardized prediction errors for inflation and gdp gap as bias correction terms in the second step regression we note that no other empirical literature on monetary policy deals with this important issue our empirical results also reveal new aspects not found in the literature previously that is the history of the fed s conduct of monetary policy since the early 1970s can in general be divided into three subperiods the 1970s the 1980s and the 1990s the conventional division of the sample into pre volcker and volcker greenspan periods could mislead the empirical assessment of monetary policy

putting risk in its proper place this paper examines preferences toward particular classes of lottery pairs we show how such concepts as prudence and temperance can be fully characterized by a preference relation over these lotteries if preferences are defined in an expected utility framework with differentiable utility the direction of preference for a particular class of lottery pairs is equivalent to signing the nth derivative of the utility function what makes our characterization appealing is its simplicity which seems particularly amenable to experimentation

u s monetary policy surprises identification with shifts and rotations in the term structure we develop a model to extract measures of monetary policy surprises from the maturity structure of the yield curve the model endogenously allows for the fact that the yield curve may either shift or rotate in response to monetary policy shocks a latent factor model approach with identification through heteroskedasticity harnesses the term structure to extract monetary policy shocks the approach offers informational advantages over event studies results from the u s term structure from 1994 strongly support the hypothesis that differing term structure responses are reactions to different types of monetary policy shock rather than differing reactions to the same policy shock

automated earnings forecasts beat analysts or combine and conquer prior studies attribute analysts forecast superiority over time series forecasting models to their access to a large set of firm industry and macroeconomic information an information advantage which they use to update their forecasts on a daily weekly or monthly basis a timing advantage this study leverages recently developed mixed data sampling midas regression methods to synthesize a broad spectrum of high frequency data to construct forecasts of firm level earnings we compare the accuracy of these forecasts to those of analysts at short horizons of one quarter or less we find that our midas forecasts are more accurate and have forecast errors that are smaller than analysts when forecast dispersion is high and when the firm size is smaller in addition we find that combining our midas forecasts with analysts forecasts systematically outperforms analysts alone which indicates that our midas models provide information orthogonal to analysts our results provide preliminary support for th

precautionary self insurance cum protection abstract precautionary self insurance cum protection sicp arises when an individual spends more on sicp when background risk is introduced we develop a two period model wherein additive multiplicative background risk prevails in the second period using the theory of monotone comparative statics and risk apportionment we derive necessary and sufficient conditions under which the individual spends more on sicp when the background risk deteriorates via higher order stochastic dominance prudence is called for to create a precautionary motive that induces the individual to shift his wealth in a way to reduce the loss of expected utility caused by the addition of background risk thereby giving rise to the precautionary sicp

background risk and self protection abstract the presence of background risk increases self protection effort or caution as long as an agent is prudent in addition the result extends to monetary self protection investment if wealth and consumption are complements

a note on the idea of the moral economy in their research note robert bates and amy curry 1992 have drawn our attention to the importance for political science of the challenges posed by the moral economic approach using their essay as a springboard and recasting their understanding of the idea of the moral economy i show that the full significance of this controversy would be better illuminated by moving the debate on to a different terrain one that captures the fundamental sources of the antagonism between the moral economic and competing approaches i begin by setting out the central difficulty in bates and curry s reading of the moral economy argument and relate that to how the controversy has been framed in the recent political science literature i then offer a sketch of the core claims of the moral economic approach drawing out the radicalness of their challenge and offer an estimate of their weaknesses and value i conclude with some observations about political philosophy and the idea of the moral economy

community versus market a note on corporate villages we return to the literature on collective villages and reexamine its central arguments in doing so we focus on an institution for allocating land that we call the rule as claimed by its advocates the rule secures land allocations that result in outcomes differing from those that would be achieved by markets the outcomes are not constrained to be efficient but the economic costs paid fail to secure the attainment of guarantees of subsistence greater equality or a greater sense of community resulting from the elimination of envy however in the face of high levels of risk the form of collective property rights embodied in the rule may create what we call communities of mis fortune in which no one can envy others gains or losses resulting from the random shocks of nature

rethinking moral economy i establish three closely related claims the first two are interpretive the third theoretical 1 the prevailing conception of moral economy in political science presupposed by opponents as well as advocates rests too heavily on the distinction between nonmarket and market based societies 2 the prevailing conception of moral economy reduces to the unduly narrow claim that economic incorporation of a nonmarket people is the basis for the moral indignation that leads to resistance and rebellion 3 reconceptualizing moral economy in terms of social goods reveals additional grounds for politically significant moral indignation and permits moral economic political analysis of a larger set of cases and phenomena water politics in the arid american west illustrate the power of a conception of moral economy based on social goods

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

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

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

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

comparative higher order risk aversion and higher order prudence abstract in this paper we define the n th degree utility premium as the pain associated with facing the passage from a more favorable risk to a less favorable risk where the risk increase is specified by the notion of more n th degree risk we further define the n th degree prudence utility premium as the increase in pain when the individual suffers a sure loss we show that the n th degree utility premium normalized by the n 1 th derivative of the utility function evaluated at the initial wealth can explain comparative risk aversion of higher orders on the other hand the n th degree prudence utility premium normalized by the n th derivative of the utility function evaluated at the initial wealth can explain comparative prudence of higher orders

even mixed risk lovers are prudent abstract the purpose of this note is to analyze properties of the risk lovers utility function beyond the positive sign of its second order derivative we show that contrarily to a priori beliefs

monetary policy in a data rich environment abstract most empirical analyses of monetary policy have been confined to frameworks in which the federal reserve is implicitly assumed to exploit only a limited amount of information despite the fact that the fed actively monitors literally thousands of economic time series this article explores the feasibility of incorporating richer information sets into the analysis both positive and normative of fed policymaking we employ a factor model approach developed by stock j h watson m w diffusion indices journal of business economic statistics 2002 20 2 147 forecasting inflation 1999 journal of monetary economics 44 2 293 that permits the systematic information in large data sets to be summarized by relatively few estimated factors with this framework we reconfirm stock and watson s result that the use of large data sets can improve forecast accuracy and we show that this result does not seem to depend on the use of finally revised as opposed to real time data we estimate policy reaction functions for the fed that take into account its data rich environment and provide a test of the hypothesis that fed actions are explained solely by its forecasts of inflation and real activity finally we explore the possibility of developing an expert system that could aggregate diverse information and provide benchmark policy settings

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

identifying vars based on high frequency futures data abstract using the prices of federal funds futures contracts we measure the impact of the surprise component of federal reserve policy decisions on the expected future trajectory of interest rates we show how this information can be used to identify the effects of a monetary policy shock in a standard var this alternative approach to identification is quite different and we argue more plausible than the conventional identifying restrictions we find that a usual recursive identification of the model is rejected as is any identification that insists on a monetary policy shock having an exactly zero effect on prices contemporaneously we nevertheless agree with the conclusion of much of the var literature that only a small fraction of the variance of output can be attributed to monetary policy shocks

international monetary policy surprise spillovers abstract this is the first paper to examine international monetary surprise spillovers and to estimate the response of security prices to monetary and nonmonetary surprises monetary surprises have a slope effect on the domestic yield curve short maturity yields adjust much more than longer maturity yields these results are similar to other studies the following results are new us monetary surprises spill over and affect australian yields and equity returns australian monetary surprises do not spill over to the us nonmonetary surprises are much more important than monetary policy surprises in explaining longer maturity yield changes and equity returns

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models