the proper scope of government theory and an application to prisons when should a government provide a service in house and when should it contract out provision we develop a model in which the provider can invest in improving the quality of service or reducing cost if contracts are incomplete the private provider has a stronger incentive to engage in both quality improvement and cost reduction than a government employee has however the private contractor s incentive to engage in cost reduction is typically too strong because he ignores the adverse effect on noncontractible quality the model is applied to understanding the costs and benefits of prison privatization

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

the direction of innovation abstract how do innovation policies affect the direction of research is market based innovation too radical or too incremental we construct a novel and tractable model of the direction of innovation firms pursue inefficient research directions because they race to discover easy yet less valuable projects and because they work on difficult inventions where they can appropriate a larger portion of the social value fixing these inefficiencies requires policy to condition on properties of inventions that could have been discovered but were not policies which do not do so like patents and prizes may fail to encourage firms to research in the efficient direction even if they obtain the optimal quantity of r d

do competitively acquired funds induce universities to increase productivity abstract this paper analyzes the impact of private and public third party funds on the productivity of swiss university departments and public research institutions estimating a production function assuming that labor inputs produce master students and scientific publications reveals a positive effect of public third party funding on productivity but not for private funds however once we include technology transfer as an additional output the coefficient for public third party funding turns insignificant while private funding becomes significant indicating that the disciplining effect of public donors focuses on publications while private donors foster technology transfer we employ three alternative approaches to tackle endogeneity and find qualitatively robust results

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

inflation and real short term interest rates a kalman filter analysis of the term structure this paper applies the kalman filter technique to look at the relationship among real interest rates inflation and the term structure of interest rate under the expectations hypothesis using quarterly data from 1960 1 to 1991 1 for inflation three month nominal short term interest rates and long term yields with maturities from one to five years this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time varying premium and a random walk real interest rate in other words a reconciliation of the expectations hypothesis with the data is attained by assuming time varying term premium and non stationary real interest rate

interest rates and exchange rates some new empirical results abstract this paper presents indirect evidence on the behavior on the real interest rate by studying the correlations between changes in nominal interest rates and in exchange rates these correlations are examined both before and after october 6 1979 the empirical evidence supports the views that monetary shocks affect the real rate and that the change in fed monetary policy on october 6 led to greater variation in the real rate

on interest rates inflationary expectations and tax rates abstract this paper provides new evidence on the relationship between inflation and the rate of interest for the united states during the 1953 1984 period the results indicate that contrary to most previous studies the fisher hypothesis is inverted which means that it is the real rate of interest rather than the nominal rate that moves inversely to the rate of inflation however this is the case only during periods of relatively stable inflation rates and moderate regulatory change over longer periods when factors are more volatile the inverted fisher hypothesis is rejected

patentability r d direction and cumulative innovation we present a model of cumulative innovation where firms can conduct r d in both a safe and a risky direction innovations in the risky direction produce quality improvements with higher expected sizes and variances as patentability standards rise an innovation in the risky direction is less likely to receive a patent that replaces the current technology which decreases the static incentive for new entrants to conduct risky r d but increases their dynamic incentive because of the longer duration and hence higher reward for incumbency these together with a strategic substitution and a market structure effect result in an inverted u shape in the risky direction but a u shape in the safe direction for the relationship between r d intensity and patentability standards there exists a patentability standard that induces the efficient innovation direction whereas r d is biased towards against the risky direction under lower higher standards the optimal patentability standard may distort the r d direction to increase the industry innovation rate that is socially deficient

can futures market data be used to understand the behavior of real interest rates this paper examines whether futures market data can be used to understand the behavior of real interest rates several ways of examining the data indicate that futures market data are not particularly informative about real interest rates not only does this evidence cast some doubt on results in previous research that make use of futures market data to draw inferences about real interest rates but it also indicates that future research on real interest rates may need to turn to a different line of attack understanding the behavior of real interest rates is a central issue in financial economics in previous research on this topic several approaches have been used to measure real interest rates in one approach real interest rates have been calculated by subtracting survey data on inflation expectations such as the livingston data from nominal interest rates the problem with survey based measures of real interest rates is that they are only as good as the survey measure of inflation expectations and there may be little incentive for the survey respondents to answer accurately an even more telling criticism of survey based measures often ignored in the literature is that the behavior of market expectations in driven by economic agents ai the margin who are eliminating unexploited profit opportunities market expectations are unlikely therefore to be well measured by the average expectations of survey respondents 2 because of doubts about survey based measures of real interest rates other

interest rates and the subjective probability distribution of inflation forecasts the interst rate effects of the first four moments of the subjective probability distribution of inflation forecasts from the asa nber survey are examined over the period 1968 4 1985 4 using tre asury bill yields as the nominal rate variable in the context of a re duced form fisher equation the authors find that inflation uncertain ty as measured by the average variance of the probability distributi ons of inflation forecasts to be insignificant however the average skewness and kurtosis variables which result from these probability distributions do significantly affect interest rates they interpret these effects as accounting for the level of risk or uncertainty abou t future inflation copyright 1988 by ohio state university press

is inflation persistence different in reality this study examines the inflation persistence using both online and official price indexes in argentina brazil china japan germany south africa the uk and the us using fractional integration technique the main results suggest that the degree of persistence estimated by the long memory parameter is smaller when using online price indexes believed to be a more realistic measure of inflation mainly in the cases of argentina brazil china and the uk monetary policy implications are discussed

nominal interest rates as indicators of inflation expectations forward interest rates have become popular indicators of inflation expectations theusefulness of this indicator depends on the relative volatilty and the correlation of inflation expectations and expected real interest rates this paper studies u s and u k data using a range of different tools and data sets the forward rate rule perfoms reasonably well in spite of significant movements in the expected real interest rate the reason is that the noise that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions

an empirical investigation into the international real interest rate linkages linear dynamic stochastic processes are derived for the ex ante real interest rates from those followed by the ex post real rates under the identifying assumption of rational expectations the technique is used to study instantaneous and lagged effects of u s ex ante real rates on a number of oecd ex ante real rates the author finds significant contemporaneous correlations between ex ante real rates in the long run however real rates seem to be insulated

an empirical investigation of the determinants of national interest rates differences abstract under floating exchange rates countries are supposed to be able to follow independent monetary policies while exchange and interest rates are free to adapt to expectations and new information this note investigates over the recent period of floating exchange rates whether interest rate differences are caused by expectations of exchange rate fluctuations international arbitrage model or differences in domestic economic policies domestic model or both simultaneously a domestic interest rate determination model has to be postulated and a classical fisherian relation was selected even with such a simple domestic model the driving force in setting interest rate seems to be domestic rather than international this result could be explained by international market inefficiencies but more probably by the fact that exchange rate variations are so unpredictable that their expectations play a little role in setting differences between national interest rates

on the global supply of basic research abstract in a two country schumpeterian growth model we study the incentives for basic research investments by governments in a globalized world a country s basic research investments increase with the country s level of human capital and decline with its own market size this may explain why some smaller countries invest so much in basic research compared with the optimal investments achievable when countries coordinate their basic research policies a single country may over invest in basic research however the total amount of decentralized basic research investments is always below the socially optimal investment level which justifies policy coordination in this area

stock prices asset portfolios and macroeconomic variables in ten european countries abstract this paper investigates the relationship between stock indices asset portfolios and macroeconomic variables in ten european countries it is shown that employment imports inflation and interest rates are inversely related to stock prices expectations about future real activity measures for money and the u s yield curve are positively related to stock prices a portfolio of european stock indices was constructed and it is shown that this portfolio is the variable that most strongly explains the variation in the stock prices the associations between stock prices and macroeconomic variables are shown to be strongest in germany the netherlands switzerland and the united kingdom there is a high degree of similarity between the effects in the first three of these countries in several instances the stock prices are related to historic value of economic variables indicating that predictive models can be constructed

managerial incentive problems a dynamic perspective the paper studies how a person s concern for a future career may influence his or her incentives to put in effort or make decisions on the job in the model the person s productive abilities are revealed over time through observations of performance there are no explicit output contingent contracts but since the wage in each period is based on expected output and expected output depends on assessed ability an implicit contract links today s performance to future wages an incentive problem arises from the person s ability and desire to influence the learning process and therefore the wage process by taking unobserved actions that affect today s performance the fundamental incongruity in preferences is between the individual s concern for human capital returns and the firm s concern for financial returns the two need be only weakly related it is shown that career motives can be beneficial as well as detrimental depending on how well the two kinds of capital returns are aligned it is well understood by now that informational externalities may place special demands on the organization of economic exchange simple price mediated markets will frequently fail in the presence of asymmetric information in that case more elaborate contractual arrangements have to be used as substitutes for the price system lately considerable effort has been devoted to the analysis of contracting under incomplete information with the objective to understand the range of economic institutions that emerge in response to the failure of the price system the analysis of moral hazard has played a prominent role in this development moral hazard problems arise when for some reason or another transacting parties cannot contract contingent on the delivery of the good for instance in buying labour services it may be that the amount of labour supplied is not directly observable precluding a simple exchange of wage for labour as a partial remedy to this problem an imperfect mutually observed signal about the supply of labour can be used as a proxy in the contract frequently output is taken as such a proxy the drawback is that output is often influenced by other factors than labour input which induce undesirable risk into the contract one is therefore faced with a tradeoff between allocating risk associated with incomplete observability and providing incentives for a proper supply of labour gaining insight into this tradeoff is important not only for understanding contracting in the small e g managerial incentive schemes but also because it is closely related to the fundamental tension between equity and efficiency in the society as a whole while our understanding of moral hazard has advanced a lot in past years it is clear that much work remains an important question that has received little attention until

academic freedom private sector focus and the process of innovation we develop a model that clarifies the respective advantages and disadvantages of academic and private sector research rather than relying on lack of appropriability or spillovers to generate a rationale for academic research we emphasize control rights considerations and argue that the fundamental tradeoff between academia and the private sector is one of creative control versus focus by serving as a precommitment mechanism that allows scientists to freely pursue their own interests academia can be indispensable for early stage research at the same time the private sector s ability to direct scientists toward higher payoff activities makes it more attractive for later stage research

real interest rates anticipated inflation and unanticipated money a multi country study a bstractin this paper we examine real interest rate behavior in canada west germany the united states and the united kingdom using a model that yields a semi reduced form equation linking the real interest rate to monetary growth shocks anticipated inflation and expected inflation variance the estimator used in our analysis accommodates regressors from other regressions ensuring that accurate inferences are obtained in all countries we find that increases in anticipated inflation initially dampen real interest rates in addition a significant and negative relationship between unanticipated money shocks and real interest across all countries is discovered inflation variance typically exhibits little explanatory power

core inflation and trend inflation abstract this paper examines empirically whether the measurement of trend inflation can be improved by using disaggregated data on sectoral inflation to construct indexes akin to core inflation but with a time varying distributed lags of weights where the sectoral weight depends on the timevarying volatility and persistence of the sectoral inflation series and on the comovement among sectors the modeling framework is a dynamic factor model with time varying coefficients and stochastic volatility as in del negro and otrok 2008 and is estimated using u s data on seventeen components of the personal consumption expenditure inflation index

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

correct cointegration tests of the long run relationship between nominal interest and inflation the fisher 1930 hypothesis suggests that a long run equilibrium relationship exists between the non stationary series nominal interest and expected inflation testing such a cointegrating relationship is complicated by the presence of the unobserved ex antereal rate of interest in residuals from the cointegrating regression assumptions concerning the stochastic properties of the expected real rate of interest are examined and two proxies for the ex antereal rate are employed in multivariate cointegration tests of the fisher hypothesis

industry or academia basic or applied career choices and earnings trajectories of scientists we extend life cycle models of human capital investments by incorporating matching theory to examine the sorting pattern of heterogeneous scientists into different career trajectories we link differences in physical capital investments and complementarities between basic and applied scientists across industry and academic settings to individual differences in scientist ability and preferences to predict an equilibrium matching of scientists to careers and to their earnings evolution our empirical analysis using the national science foundation s scientists and engineers statistical data system database is consistent with theoretical predictions of i sorting by ability into basic versus applied science among academic scientists but not among industry scientists and ii sorting by higher taste for nonmonetary returns into academia over industry the evolution of an earnings profile is consistent with these sorting patterns the earnings trajectories of basic and applied scientists are distinct from each other in academia but are similar in industry this paper was accepted by lee fleming entrepreneurship and innovation

incentives in academics why is there tenure this paper models ancademic department as an internal labor market the major problem facing the university administration is to ensure that members of its departments are willing to hire the best possible candidates academic tenure is seen to be a necessary condition for this the analysis is also consistent with other aspects of the academic environment including tenure track appointments contract buy outs early retirement plans and when a budget crunch hits the elimination of entire departments the results extend in a simple way to other organizations in which members have an input into overall decisions

a simple adaptive measure of core inflation this paper proposes a new measure of core inflation and compares it with several existing measures the new measure is adaptive and is designed to track sudden and persistent movements in inflation such as those arising from changes in monetary policy regimes the adaptive measure filters out transients more effectively than existing measures and it is a superior predictor of locally mean reverting components of inflation

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

what makes companies pursue an open science strategy whereas recent scholarly research has provided many insights about universities engaging in commercial activities there is still little empirical evidence regarding the opposite phenomenon of companies disseminating scientific knowledge our paper aims to fill this gap and explores the motivations of firms that disclose research outcomes in a scientific format besides considering a dimension internal to the firm we focus particularly on knowledge sourcing from academic institutions and the appropriability regime we conduct an econometric analysis with firm level data from the fourth edition of the french innovation survey cis and matched scientific publications for a sample of 2512 rd performing firms from all manufacturing sectors this analysis provides evidence that firms are more likely to adopt academic principles if they need to access scientific knowledge that is considered important for their innovation development whereas the mere existence of collaborative links with academic institutions is not a strong determinant furthermore the results suggest that the inclination of firms to publish is sensitive to the level of knowledge spillovers in a sector and the effectiveness of legal appropriation instruments c 2013 elsevier b v all rights reserved

interest rates income taxes and anticipated inflation some new evidence abstract this paper re examines the effect of taxes on the fisher hypothesis using a procedure first proposed by peek and using data through the 1980s and a new data set on expected inflation for the us the tax adjusted hypothesis is rejected in favor of the no tax adjusted hypothesis for the period 1968 iv to 1979 iv for the full sample both hypotheses are accepted these results are thus quite different from those reported by peek a brief discussion of the factors responsible for these differences is provided

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

opportunities and benefits as determinants of the direction of scientific research abstract scientific research and private sector technological innovation differ in objectives constraints and organizational forms scientific research may thus not be driven by the direct practical benefit to others in the way that private sector innovation is alternatively some yet largely unexplored mechanisms drive the direction of scientific research to respond to the expected public benefit we test these two competing hypotheses of scientific research this is important because any coherent specification of what constitutes the socially optimal allocation of research requires that scientists take the public practical benefit of their work into account in setting their agenda we examine whether the composition of medical research responds to changes in disease prevalence while accounting for the quality of available research opportunities we match biomedical publications data with disease prevalence data and develop new methods for estimating the quality of research opportunities from textual information and structural productivity parameters

patents and cumulative innovation causal evidence from the courts cumulative innovation is central to economic growth do patent rights facilitate or impede such follow on innovation this paper studies the effect of removing patent protection through court invalidation on the subsequent research related to the focal patent as measured by later citations we exploit random allocation of judges at the u s court of appeal for the federal circuit to control for the endogeneity of patent invalidation we find that patent invalidation leads to a 50 percent increase in subsequent citations to the focal patent on average but the impact is highly heterogeneous patent rights appear to block follow on innovation only in the technology fields of computers electronics and medical instruments moreover the effect is entirely driven by invalidation of patents owned by large patentees that triggers entry of small innovators suggesting that patents may impede the democratization of innovation

tests of the fisher hypothesis with international data theory and evidence the fisher hypothesis 7 8 states that nominal interest rates adjust fully to expected inflation for years tests of this hypothesis followed fisher 8 in regressing nominal rates on a distributed lag of past inflation which was used as a proxy for the expected rate of inflation see roll 15 for references fisher eventually concluded that nominal rates do not fully reflect expected inflation saying that when the cost of living is not stable the rate of interest takes the appreciation and depreciation into account to some extent but only slightly and in general indirectly 1 fisher attributed this to money illusion in more recent years other researchers have explained the non neutrality of inflation on grounds of general equilibrium sargent 16 and taxes darby 3 and feldstein 6 a new method of testing the fisher hypothesis was introduced by fama 4 he concluded that interest rates set in u s financial markets are informationally efficient fama s work highlighted the two separate although not always distinguishable elements in the fisher hypothesis 1 the effect of expected inflation on the expected real rate and 2 the question of whether or not the nominal rate reflects a rational forecast of expected inflation to test the informational efficiency of nominal rates fama 4 assumed a constant expected real rate arguing in the later paper that the efficiency test is robust with respect to the assumption of the constancy of the expected real rate this assumption has come under severe criticism carlson 2 nelson and schwert 14 on the grounds that the efficiency results are not verifiable given the actual behavior of realized real rates summers 17 extended the study of interest rates to the period 1860 to 1979 using both fisher s and fama s methods and found that the results are less favorable for the fisher hypothesis in a more recent study fama and gibbons 5 tested the fisher hypothesis using a procedure developed by ansley 1 which assumes that the expected real rate follows a random walk they concluded that nominal rates fully reflect expected inflation at the same time that the expected real rate adjusts to it this paper examines the question of whether international interest rates reflect expected inflation in their respective countries in doing so we expand on the previous work of kane and rosenthal 11 we show that although fama 4 introduced a bias into his tests his general approach was correct we then present simple time series tests and show that they fail for eurocurrency rates

market rationality tests based on cross equation restrictions abstract the information used by researchers in cross equation tests of rational expectations may be a small subset of the information available to the market such tests produce consistent estimates but have low power we develop a mechanism for dealing with this problem and use the procedure to perform cross equation tests on predictions from the football betting market the tests fail to reject rationality we provide evidence that market predictions from betting markets are not formed rationally it appears therefore that cross equation tests have low power even if the information sets used by the researcher and the market are approximately the same

on the accuracy of time series interest rate and survey forecasts of inflation there has been much work examining and evaluating different methodologies in forecasting inflation for example fama 1975 1977 develops an interest rate model to predict the 1 monthahead rate of inflation using the cpi fama and gibbons 1982 1984 modify the interest rate model to account for a nonconstant real rate of interest and compare it to a univariate timeseries forecasting model and to the livingston forecasts carlson 1977a 1977b and others also analyze the consensus forecasts from the livingston survey pertaining to multiperiod forecasts of inflation pearce 1979 considered the livingston survey and time series forecasts our purpose in this paper is to investigate further the relative forecasting ability of three different methodologies in contrast to previous studies that have generally used the cpi to measure inflation our analysis uses the implicit gnp deflator this modification is motivated largely by the fact that calculations of the cpi inflat n rate often are distorted greatly by changes in relative prices e g blinder 1980 fischer 1981 this paper compares the accuracy of three different inflation forecasting procedures these include a univariate time series model an interest rate model based on the methodology of fama and gibbons and the median forecasts derived from the american statistical association national bureau of economic research survey the evidence presented is based on ex ante forecasts of quarterly inflation rates using the gnp deflator for the period 1970 11984 11 based on the evidence presented the general conclusion is that the survey forecasts provide the most accurate inflation forecasts

fisher phillips friedman and the measured impact of inflation on interest a reply the purpose of this paper is to demonstrate that empirical findings which persistently appear to contradict the fisher hypothesis that the nominal rate of interest should rise by the full amount of an increase in anticipated inflation are due basically to a failure to control for changes in the real rate of interest that are associated with changes in anticipated inflation we are guided in our search for proper specification of a fisher equation by a simple general equilibrium model which is employed to derive the impact of a change in anticipated inflation upon nominal interest given the requirement that commodity money and labor markets remain in equilibrium in effect we depart from the empirical tradition which has grown up around testing of the fisher hypothesis that takes the real interest rate to be independent of anticipated inflation and argues that for anticipated inflation properly measured the data ought to support the fisher hypothesis 1

are tax effects important in the long run fisher relationship evidence from the municipal bond market are nominal bonds appropriately discounted for taxes empirical estimnates of the response of nominal interest rates to changes in inflation the fisher effect have failed to produce a definitive answer four reasons have been put forward as possible explanations i tobin effects ii fiscal illusion iii peso problems and iv different estimators utilizing data on taxable and tax exempt bond interest rates and several different estimators we find that the fisher effect estimates are always larger for the taxable bond relative to the tax exempt bond suggesting that fiscal illusion and different estimators cannot account for the previous results how economic agents respond to the tax burdens of assets with different tax treatment is an important issue at both the level of the individual micro and the aggregate economy macro one clear source of evidence would appear to be the market for high quality debt trading in both taxable and tax exempt debt occurs on a daily basis the response of the rates of return on taxable and tax exempt debt to changes in expected inflation are described by the fisher relationship the fisher relationship is one of the oldest equilibrium relationships in financial economics fisher s original proposition was that if the real rate of interest is relatively constant over time a fully perceived change in the purchasing power of money as proxied by the inverse of the rate of inflation would be accompanied by a proportional increase in the nominal interest rate darby 1975 points out that when nominal interest income is taxed as are interest payments on u s treasury bills the fisher relationship implies a response from nominal interest rates that is greater than the change in expected inflation in order to maintain the constant ex ante real interest rate summers 1983 suggests that given average marginal tax rates in the united states the appropriate value of the fisher effect is 1 3 to 1 5 for tax exempt bonds the original fisher specification should be a good approximation implying a fisher effect close to unity in a seminal paper fama 1975 presents evidence to support the hypothesis that changes in nominal

the sources of the movements in interest rates the paper investigates the sources of interest rate movements in italy during the 1970s in that decade the country experienced the highest and most variable inflation rate among the industrial nations and was affected both by external shocks and by shocks to the labor and financial markets the paper shows that movements in inflationary expectations dominated the nominal interest rate variability the part of variability that was not explained by expected inflation was accounted for by unanticipated changes in the terms of trade by contrast domestic monetary and real disturbances did not have a sizeable impact on the variability

how do patents affect follow on innovation evidence from the human genome we investigate whether patents on human genes have affected follow on scientific research and product development using administrative data on successful and unsuccessful patent applications submitted to the us patent and trademark office we link the exact gene sequences claimed in each application with data measuring follow on scientific research and commercial investments using this data we document novel evidence of selection into patenting patented genes appear more valuable prior to being patented than non patented genes this evidence of selection motivates two quasi experimental approaches both of which suggest that on average gene patents have had no quantitatively important effect on follow on innovation

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

who makes who breaks which scientists stay in academe we examine the survival of young scientists in academe the propensity to leave follows an inverse u shape publishing increases and patenting decreases the chance of survival scientists with strong preferences for business are less likely to stay in academe

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

new hope for the expectations hypothesis of the term structure of interest rates survey data on interest rate expectations permit separate testing of the two alternative hypotheses in traditional term structure tests that the expectations hypothesis fails and that expected future interest rates are ex post inefficient forecasts we find that the source of the spread s poor predictions of future interest rates varies with maturity at short maturities the expectations hypothesis fails at long maturities however changes in the yield curve reflect changes in expected future rates one for one an implication of the expectations hypothesis this result confirms earlier findings that long rates underreact to short rates but now it cannot be attributed to term premia if the attractiveness of an economic hypothesis is measured by the number of papers which statistically reject it the expectations theory of the term structure is a knockout most tests beginning with macaulay 1938 find no evidence supporting the expectations hypothesis 1 many cannot even reject statistically the alternative hypothesis that the spread between long and short rates contains no information about future interest rate changes 2 to make matters worse in u s postwar data future long rates tend to rise when short rates are above long rates since the expectations hypothesis would predict that long rates tend to fall the theory often does worse than even the naive model that future interest

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

relative price variability real shocks and the stock market in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions the evidence shows that the negative stock returninflation relations proxy for the adverse effects of relative price variability on economic activity particularly during the seventies when the u s experienced oil supply shocks hence it appears that inflation spuriously affects the stock market in two ways the aggregate output link of fama 1981 and the supply shocks reflected in relative price variability a number of papers have attempted to explain the anomalous negative relations between stock returns and inflation witnessed in the post war period one hypothesis that has held up well in light of empirical evidence suggests that the negative relation between stock returns and unexpected inflation simply reflects the more fundamental positive relation between stock returns and future real variables see e g fama 1981 geske and roll 1983 and kaul 1987 1989 in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions first relative price variability can have detrimental effects on output and employment see e g friedman 1977 and barro 1976 second absolute relative price confusion models of the lucas 1973 type suggest that monetary shocks can induce a positive relation between inflation and relative price variability see e g cukierman 1983 hence the negative stock return inflation relations could simply be a reflection of the negative effects of relative price variability on the stock market we use data for the 1947 1985 period to test the various links of our hypothesis the results indicate that relative price variability is positively related to both expected and unexpected inflation measures relative price variability also has a significant negative effect on output and the stock market more importantly

financing innovation evidence from rad grants abstract governments regularly subsidize new ventures to spur innovation this paper conducts the first large sample quasi experimental evaluation of r d subsidies i use data on ranked applicants

do forest assets hedge inflation forest assets are commonly viewed as good hedges against inflation the view is based largely however on anecdotal evidence rather than empirical analysis this paper examines the historical relationship between forestry returns and inflation the results suggest that forests in the u s west and south have been superior hedges against higher than anticipated inflation forests in the northeast have been less effective inflation hedges the results also indicate that western and southern forests have been overvalued during periods of relatively high expected inflation markets for forests in the northeast however have been relatively efficient processors of inflation expectations

estimation of the specification error in the fisher equation this paper asks how false is the fisher hypotheis previous work has asked is the fisher hypothesis true the framework here characterizes the specification error in the the fisher equation as model noise following durlauf and hall 1988 1989a 1989b the noise provides a metric for the specification error for the post war period to october 1979 the variance of the noise is small while after that date it is apparently large that is using a method that contains many previous tests of the fisher effect in explaining nominal in explaining nominal interest rate movements mishkin 1991 has criticized this consensus as reflection a common stochastic trend in inflation and nominal interest rates prior to october 1979 the test here is immune to this criticism as i use the ex post real interest rate as the regressand and show that at least prior to october 1979 it obeys a sationary process

trend inflation and the nature of structural breaks in the new keynesian phillips curve in this paper we investigate the nature of structural breaks in inflation by estimating a version of the new keynesian phillips curve nkpc in the presence of a unit root in inflation we show that with a unit root in inflation the nkpc implies an unobserved components model that consists of three components a stochastic trend component a component that depends upon current and future forecasts of real economic activity and a stationary component which is potentially serially correlated or a component of inflation that is not explained by the conventional forward looking nkpc our empirical results suggest that with an increase in trend inflation during the great inflation period the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component these results are in line with the predictions of cogley and sbordone 2008 who show that the coefficients of the nkpc are functions of time varying trend inflation

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

real interest rates and inflation an ex ante empirical analysis we develop a method of measuring ex ante real interest rates using prices of index and nominal bonds employing this method and newly available data we directly test the fisher hypothesis that the real rate of interest is independent of inflation expectations we find a negative correlation between ex ante real interest rates and expected inflation this contradicts the fisher hypothesis but is consistent with the theories of mundell and tobin darby and feldstein and stulz we also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty

absorptive capacity coauthoring behavior and the organization of research in drug discovery we examine the interface between for profit and publicly funded research in pharmaceuticals firms access upstream basic research through investments in absorptive capacity in the form of in house basic research and pro publication internal incentives some firms also maintain extensive connections to the wider scientific community which we measure using data on coauthorship of scientific papers between pharmaceutical company scientists and publicly funded researchers connectedness is significantly correlated with firms internal organization as well as their performance in drug discovery the estimated impact of connectedness on private research productivity implies a substantial return to public investments in basic research

do expected shifts in inflation affect estimates of the long run fisher relation recent empirical studies suggest that nominal interest rates and expected inflation do not move together one for one in the long run a finding at odds with many theoretical models this article shows that these results can be deceptive when the process followed by inflation shifts infrequently we characterize the shifts in inflation by a markov switching model based upon this model s forecasts we reexamine the long run relationship between nominal interest rates and inflation interestingly we are unable to reject the hypothesis that in the long run nominal interest rates reflect expected inflation one for one

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

tenure issues in higher education the system of tenure that dominates american higher education has long been a source of controversy the institution of tenure has been attacked for entrenching a lazy professoriate more interested in attending faraway conferences and producing unreadable research than in teaching or developing practical insights while on the other hand it has long been defended as an absolute necessity for the defense of open intellectual inquiry the tenure controversy has been sharpened in recent years by several events the end of mandatory retirement which was abolished by federal law effective january 1 1994 has heightened concerns about the productivity and commitment of professors who received tenure long ago and who no longer have the same incentives to invest in long term reputation there is also ongoing concern over the steadily rising cost of higher education which raises the question of what students as well as the taxpayers who support public institutions of higher education are getting for their money 1 the idea that tenure is a wasteful institution for universities runs up against the puzzling fact that the commitment to tenure is one that academic institutions impose on themselves although the american association of university professors aaup provides a powerful lobby in favor of tenure generally colleges and universities most notably private ones are under no legal requirement to observe tenure constraints although as administrators we certainly feel the weight of those constraints our view is that a tenure system in fact provides important benefits to society and to colleges and universities we argue here that the role of tenure is

consensus and uncertainty in economic prediction we define consensus as the degree of agreement among point predictions aimed at the same target by different individuals and uncertainty as the diffuseness of the corresponding probability distributions this distinction is made operational with the aid of the nber asa survey data on matched point and probabilistic forecasts of inflation and the rate of change in gross national product the means of the two sets of forecasts agree closely standard deviations of point forecasts tend to understate uncertainty as measured by standard deviations of the predictive probability distributions however these measures of consensus and uncertainty are on the whole positively correlated there is evidence that expectations of higher inflation generate greater uncertainty about inflation tests also favor the hypothesis that a rise in inflation uncertainty has adverse effects on real growth

what does the term structure tell us about future inflation abstract this empirical analysis indicates that for maturities of six months or less the term structure of nominal interest rates provides almost no information about the future path of inflation but does provide information about the term structure of real interest rates however as maturities lengthen to nine and twelve months the nominal term structure begins to contain information about future inflation but ceases to provide information about the real term structure these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes at different points in the term structure

new techniques to extract market expectations from financial instruments this paper is a selective survey of new or recent methods to extract information about market expectations from asset prices for monetary policy purposes traditionally interest rates and forward exchange rates have been used to extract expected means of future interest rates exchange rates and inflation more recently these methods have been refined to rely on implied forward interest rates so as to extract expected future time paths very recently methods have been designed to extract not only the means but the whole risk neutral probability distribution from a set of option prices

price dynamics in foreign currency futures markets abstract nested tests of samuelson s submartingale and martingale models of price behavior in an efficient futures market find significant autocorrelation at low lags in daily changes of log prices for four of ten currency futures contracts satisfying the assumptions of the statistical tests negative serial correlation following large price changes is also found the analysis controls for bias due to institutional limits on daily price movements simulated trading based on out of sample forecasts suggests the dependencies probably could be exploited by traders who are members of the futures exchange to earn net profits greatly exceeding buy and hold

taxable and tax exempt interest rates the link with inflation abstract a single equation model utilizing taxable tax exempt yield spreads is developed to test restrictions required by the darby feldstein inflation tax hypothesis evidence indicates these restrictions generally can be rejected for post accord data and that there is important information in both yields linking them to inflation

strategic learning in teams this paper analyzes a two player game of strategic experimentation with three armed exponential bandits in continuous time players face replica bandits with one arm that is safe in that it generates a known payoff whereas the likelihood of the risky arms yielding a positive payoff is initially unknown it is common knowledge that the types of the two risky arms are perfectly negatively correlated i show that the efficient policy is incentive compatible if and only if the stakes are high enough moreover learning will be complete in any markov perfect equilibrium with continuous value functions if and only if the stakes exceed a certain threshold

estimating the fisher effect and the stochastic money growth process this paper demonstrates that a change in the stochastic process generating money can alter the relationships between money and inflation and between inflation and interest rates the extent to which inflation is forecastable is shown to depend significantly on the extent to which money is forecastable thus the greater the persistence and forecastability of money the greater the likelihood of observing a statistically significant fisher effect us data over the 1953 86 period are used to demonstrate that instability in the fisher effect coincides with changes in the stochastic process generating money there is a significantly stronger fisher effect during a subsample in which money and hence inflation are more predictable

the role of relative performance in inter firm mobility of inventors abstract prior research has emphasized the influence of inter firm mobility on knowledge flows and innovation yet we have an incomplete picture of the antecedents of inventor mobility building on theoretical traditions related to decision making based on limited asymmetric bounded information and economic and other incentives our paper suggests that after controlling for individual performance and other variables previously shown to affect inter organizational mobility an inventor s performance relative to his co patenting group alters his likelihood of mobility our analysis of 2648 inventors in the pharmaceutical industry shows that for those performing above their reference group of past and current co inventors in patenting an increase in relative performance decreases the likelihood of mobility and for those performing below the reference group a decrease in relative performance decreases the likelihood of mobility we also find that when inventors have more external scientific collaborations their likelihood of mobility increases and this variable moderates the relationship between the performance gap and mobility but only for those performing above their peers