consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association

smooth pasting as rate of return equalization abstract we further elucidate the smooth pasting condition behind optimal early exercise of options it is easy to show that smooth pasting implies rate of return equalization between the option and the levered position that results from exercise this yields new economic insights into the optimal early exercise condition that the option holder faces

timing of investment under technological and revenue related uncertainties the effects of two forms of uncertainty on the timing of irreversible investment are considered technological uncertainty is modeled as a poisson arrival process that reduces the cost of investment while revenue uncertainty is modeled as a diffusion process technological uncertainty has no effect on the optimal investment policy when revenue uncertainty is absent however when combined with revenue uncertainty increased technological uncertainty makes investment less attractive relative to waiting the paper also makes a more general point in clarifying the difference in how diffusion type of uncertainty and unidirectional stochastic progress affect investment timing

variations in farm consumption and their relationship to income an empirical investigation of illinois farm households empirical tests of household consumption have yielded mixed results regarding the validity of the life cycle permanent income lcpi hypothesis a significant problem with such studies is the diffi

watchfully waiting medical intervention as an optimal investment decision abstract watchfully waiting involves monitoring a patient s health state over time and deciding whether to undertake a medical intervention or to postpone it and continue observing the patient in this paper we consider the timing of medical intervention as an optimal stopping problem the development of the patient s health state in the absence of intervention follows a stochastic process geometric brownian motion spontaneous recovery occurs in case the absorbing state of good health is reached we determine optimal threshold values for initiating the intervention and derive comparative statics results with respect to the model parameters in particular an increase in the degree of uncertainty over the patient s development in most cases makes waiting more attractive however this may not hold if the patient s health state has a tendency to improve the model can be extended to allow for risk aversion and for sudden poisson type shocks to the patient s health state

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

a general equilibrium money and banking paradigm in this paper we propose and analyze a new paradigm for monetary analysis that is considerably richer than the standard money multiplier models found in the literature a general equilibrium approach to financial assets is developed that leads directly to a multiplier system that transcends the traditional dependence on demand deposits and is easily amenable to exposition and manipulation the model incorporates financial innovation and regulatory changes easily and allows for the general equilibrium effects of the variation in financial ratios that result from induced movements in income interest rates or prices the current analysis differs from traditional multiplier presentations in two distinct ways first the traditional approach to monetary expansion and multiplier analysis relies upon the ratios of various financial assets to demand deposits over the last decade decreased financial regulation and subsequent innovation have substantially changed the nature of depository institution liabilities and their substitutability with demand deposits this has led to the reduction in emphasis on demand deposits per se and an increasing dependence upon transaction accounts other than demand deposits thrift institutions now accounts automatic transfer accounts and overdrafts money market mutual funds and overnight repurchase agreements have made the dependence on demand deposits as a basis for multiplier analysis somewhat obsolete and artificial the model developed here can accommodate any number of transaction assets by specifying general asset demand ratios relative to total household wealth the second and more fundamental way in which our model differs from existing ones is the way in which it weds general equilibrium considerations with simple multiplier analysis the traditional approach to multipliers is to assume that any ratio between two financial assets vying for a role in the aggregate wealth portfolio is exogenous and invariant to other variables in today s economy this seems rather inappropriate any regulatory or asset preference change will result in changes in the endogenous variables in the economy which will further impact financial demands the exogeneity of asset preferences and reserve ratios is no

farmers marginal propensity to consume an application to illinois grain farms the marginal propensity to consume mpc for a sample of eighteen illinois farms over the 1979 86 period is determined four consumption models were estimated using disposable household income plus depreciation as the measure of income estimated short run mpcs ranged from 0 007 to 0 020 while long run mpcs varied between 0 143 to 0 381 these results indicate farm family consumption responded little to changes in income and that the life cycle hypothesis model explains consumption significantly better than the other models robustness of the results is demonstrated using a larger sample of farms for 1986 87

dynamic monotonicity and comparative statics for real options abstract we analyze the relationship between complementarities and monotonicity in dynamic programs while complementarities supermodularity and nondecreasing differences are sufficient for monotonic statics in stochastic dynamic programs they are only robustly necessary in a limited way under heavy discounting monotonicity of the decision rule doesnotin general imply monotonicity of the optimal path in fact optimal paths in such models may exhibit extremely complex behavior for convex adjustment costs many real option models have monotone decision rules while for fixed costs they typically do not we also strengthen a well known characterization of complementarities due to milgrom and shannon 19 journal of economic literatureclassification numbers c61 d92 e22

off farm labor supply responses to permanent and transitory farm income a sample of iowa farm couples is used to evaluate whether off farm labor supply decisions respond to permanent and transitory components of farm income off farm labor supply of both spouses declines in response to increases in permanent farm income farm wives also reduce off farm labor supply in response to positive transitory farm income shocks consequently one mechanism farm households use to smooth their goods consumption when facing fluctuating farm income is to modify their consumption of leisure ability to smooth goods consumption does not imply the absence of liquidity constraints among farm households unless leisure consumption is also smoothed

incorporating option values into the economic evaluation of health care technologies abstract despite uncertainty being intrinsic to economic evaluation of health care existing techniques for handling uncertainty remain underdeveloped compared to the formal techniques commonly applied in the business sector this paper develops an alternative approach to handling uncertainty in economic evaluation based on option pricing techniques the presence of uncertainty and the degree of irreversibility of a decision make it clear that some flexibility in the timing of a decision is often a desirable characteristic with an economic value we demonstrate how option pricing techniques can be applied to the decision rules for economic evaluation in health care the key determinants of an option value are the presence and type of uncertainty the ability to defer a decision and the irreversibility of the decision the relative significance of each of these for a particular economic evaluation will depend on the particular characteristics of the technology under consideration

farm consumption and liquidity constraints this study examines whether farm family consumption is liquidity constrained results using 1976 to 1990 data for groups of illinois and kansas farms indicate that consumption behavior is not liquidity constrained analysis of 207 kansas farms in 1989 and 1990 provides similar results these results are in contrast to findings for nonfarm families and support the validity of using the life cycle permanent income hypothesis for farm level modeling and analysis

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

the permanent income hypothesis and consumption durability analysis based on japanese panel data the permanent income hypothesis with durability of commodities is tested on a panel of about 2 000 japanese households for several commodity groups under static expectations about real interest rates and for some class of utility functions consumption which is a distributed lag function of current and past expenditure follows a martingale main empirical results are i the durability of commodities usually classified as services is substantial ii the hypothesis applies to about 85 percent of the population consisting of wage earners and iii income changes explain only a small fraction of the movements in expenditure

testing theories of consumption behavior using information on aggregate shocks income seasonality and rainfall in rural india we develop an integrated framework for testing theories of consumption behavior by examining how agricultural households in rural india respond to anticipated and unanticipated seasonal income fluctuations using information on village level rainfall surprises we estimate idiosyncratic unanticipated income shocks by allowing weather risk to impact households differently depending on observable characteristics in applying our methodology to unique panel data on consumption debt and intrahousehold gift exchanges we address a number of shortcomings in previous tests of theories of consumption behavior yet we find no evidence against the hypothesis that households smooth idiosyncratic fluctuations in their income our approach also uncovers several interesting features of rural credit and insurance markets

instrument choice for money stock control with contemporaneous and lagged reserve requirements note this paper assumes that an economy s monetary author1ty wishes to achieve accurate control of the stock of money and asks whether that goal can be more fully accomplished by means of an operating procedure that manipulates interest rates or reserve aggregates while a sizable number of papers on the subject has been published 1 we believe this is the first to utilize a model that treats output and prices as endogeneous is explicitly dynamic and incorporates rational expectations given recent interest in monetary control issues it is striking that no such analysis has previously been conducted a likely reason is that until very recently it appeared that the values of all nominal magnitudes will be indeterminate in most rational expectations models if the monetary authority uses an interest rate as its operating instrument this appearance was fostered by a result in the well known paper of sargent and wallace 9 and by recognition that similar results hold in other rational expectations models including ones without the policy ineffectiveness property 2 it is shown in 5 however that this indeterminacy does not prevail if an interest rate instrument is used but in a manner that is designed to have some desired effect on the expected quantity of money in some future period that is if some weight is given to a nominal target thus it is in fact possible to conduct an analytical comparison of the type desired even in a model entirely free of money illusion and expectational irrationality in the context of the instrument choice issue it is crucial to distinguish between

income risk and farm consumption behavior abstract using panel data from illinois grain farmers a direct test of the relationship between income risk and farm consumption behavior is conducted the estimation results indicate that income risk significantly affects farm consumption and the results are robust using alternative risk measures this finding casts doubt on the relevance of the conventional life cycle permanent income hypothesis which implies that risk has no effect on consumption

federal reserve operating procedures a survey and evaluation of the historical record since october 1979 comment william poole has produced another thoughtful and thought provoking paper two major conclusions emerge from his work first the instability of growth in m1b since october 1979 can be attributed largely to a reluctance by the federal reserve to permit wide enough swings in the federal funds rate second to correct this problem and to promote greater stability in financial markets and the economy the fed ought to replace lagged with contemporaneous reserve accounting and reform the discount window they should then begin to hit a nonborrowed base or reserves target that grows at a steady rate i will organize my comments around these two conclusions i will not comment directly on the other excellent paper in this session by ralph c bryant i will refer to some of bryant s empirical work though in my discussion of the poole paper poole attributes the continued extensive volatility of m1b growth since october 1979 to efforts by the federal reserve to smooth interest rates he concedes that the fed really has let go the federal funds rate to a very considerable extent but he believes that variability in m1b growth over tonger periods is due primarily to the important role accorded interest rates in federal reserve policy making italics mine he cites four reasons for believing that the post october 1979 targeting procedures qualitatively are not very different from the federal funds targeting procedure followed earlier of the four the most interesting and empirically verifiable is that in nearly one third of the weeks since october 1979 the federal funds rate has averaged within 100 basis points of either the bottom or the top of the widened target range during these weeks the constraint on the funds rate might have prevented the fed from hitting its nonborrowed reserves target poole in fact accepts this view uncritically