implications of economic interdependence for endogenous wage indexation decisions this paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices if stochastic disturbances are common across countries interdependence has no effect on equilibrium indexation choices in identical countries however if disturbances are country specific numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy we also show that indexation choices may be either strategic complements or strategic substitutes but that strategic complementarity becomes more likely as the degree of interdependence rises

trade s dynamic solutions to transboundary pollution abstract this study develops a differential game to examine the effects of trade liberalization on transboundary water pollution water pollution is due to wastewater emissions from countries in a shared waterway along the u s mexico border with available data of pollution abatement costs public health damages and trade benefits noncooperative and cooperative games are examined with changes in trade policy and public health damages results show trade liberalization leads mexico to curtail pollution in both games cooperation and trade liberalization limit emissions from both countries and curtail strategic behavior of the united states from mexico s pollution control efforts in the noncooperative game

islands indexation and monetary policy this paper develops a synthesized macroeconomic model that incorporates the local global informational asymmetries of an islands economy into a setting characterized by endogenous wage indexation in such an economy agents are unable both to filter out the separate influences of demand and supply shocks on observed output prices and to distinguish between the separate price effects of local and aggregate disturbances so that optimal wage indexation depends upon both the variances of supply and demand disturbances and the information conditioned forecasts of agents as a result optimal monetary policy generally depends upon the variances of local and aggregate supply and demand

nominal wage flexibility wage indexation and monetary union membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non membership this counteracts the stabilisation policy cost of giving up monetary independence but more wage flexibility is only an imperfect substitute for an individual monetary policy it is possible that an increase in wage flexibility is welfare decreasing because of the accompanying rise in price variability the interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full indexation equilibrium

pigouvian taxation of energy for flow and stock externalities and strategic noncompetitive energy pricing abstract the literature on energy and carbon taxes is by and large concerned about the derivation of globally efficient strategies in contrast this paper considers the dynamic interactions between cartelized energy suppliers and a consumers government that collectively taxes energy carriers for pigouvian motives two different kinds of external costs are associated with energy consumption flow e g acid rain and stock externalities e g global warming the dynamic interactions between a consumers government and a producers cartel are modeled as a differential game with a subgame perfect nash equilibrium in linear and nonlinear markov strategies the major implications are that the nonlinear solutions are pareto inferior to the linear strategies and energy suppliers may preempt energy taxation and thereby may raise the price at front however this effect diminishes over time because the producers price declines while taxes increase

energy prices and carbon taxes under uncertainty about global warming this paper extends the strategic interactions between producers of fossil fuels concerned about their profits and a taxing government concerned about the consumers welfare for uncertainty global warming follows an ito process stochasticity requires to differentiate between reversible and irreversible emissions in contrast to the deterministic version the unconstrained reversible case allows for a closed form solution but not the more realistic and constrained case nevertheless interesting analytical properties e g about when to stop emissions implicit conservation due to monopolistic supply are derived and complemented by a numerical example

real interest rates in regional economic blocs this paper investigates the long run relationship of real interest rates within a number of economic blocs such as asia pacific europe north america using cointegration analysis and vector error correction models

capital market integration in the pacific basin region an impulse response analysis abstract we examine the extent of capital market integration in a group of pacific basin countries following the deregulation of their markets and explore whether the financial influence of japan in the region has overtaken that of the us looking at long run comovements of real interest rates through the use of cointegration and using impulse response analysis to examine the speed of adjustment of real interest rates to long run equilibrium following a shock in one of the markets which is another indicator of the degree of capital market integration we find that these countries are closely linked with world financial markets and more so with japan than with us

discretion wage indexation and inflation it is now well understood that discretionary policy making frequently leads to socially sub optimal outcomes this point was first made by kydland and prescott 12 using an example of a monetary policy game they argued that in the presence of output distortions in the economy the monetary authority has an incentive to renege on earlier promises to maintain price stability by expanding the money supply in order to create unexpected inflation thereby increasing output and employment since private wage setters form expectations rationally this policy action is anticipated and in equilibrium leads to excessive inflation without any resulting change in output or employment consequently in the absence of enforceable policy rules the time consistent discretionary monetary path produces a socially sub optimal inflation rate this form of policy behavior has important implications for the decisions of private agents such as their choice of the degree of wage indexation however most work in the literature on endogenous wage indexation stemming from the seminal paper by gray 10 has analyzed the equilibrium indexation choice assuming either a constant money growth rule 1 or a monetary rule involving lagged or contemporaneous feedback 8 17 only the recent papers by devereux 5 6 have attempted to examine the implications of time consistent discretionary monetary policy for endogenous wage indexation the informational structure he considers has the monetary authority setting the money stock prior to the realization of shocks so that the authority has no information regarding current period disturbances when determining its course of action this assumption precludes any contemporaneous attempt by the monetary authority to stabilize output or the price level devereux reaches the conclusion that wage setters who are aware of the authority s policy decision will find it optimal to index positively to unanticipated price level surprises since none of the aggregate shocks are offset directly by the monetary authority thus the informational environment confronting the authority influences the degree of indexation and subsequently the manner in which aggregate demand and supply variability impinge upon social welfare

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

interest rates aggregate information and monetary policy abstract interest rates set on economy wide markets represent an important source of information to economic agents within the class of business cycle models advanced by lucas and barro this paper explores the information conveyed by such aggregate signals and the types of monetary policies that can influence economic activity by changing the information content of interest rates

understanding the fisher equation it is argued that univariate long memory estimates based on ex post data tend to underestimate the persistence of ex ante variables and hence that of the ex post variables themselves because of the presence of unanticipated shocks whose short run volatility masks the degree of long range dependence in the data empirical estimates of long range dependence in the fisher equation are shown to manifest this problem and lead to an apparent imbalance in the memory characteristics of the variables in the fisher equation evidence in support of this typical underestimation is provided by results obtained with inflation forecast survey data and by direct calculation of the finite sample biases to address the problem of bias the paper introduces a bivariate exact whittle bew estimator that explicitly allows for the presence of short memory noise in the data the new procedure enhances the empirical capacity to separate low frequency behaviour from high frequency fluctuations and it produces estimates of long range dependence that are much less biased when there is noise contaminated data empirical estimates from the bew method suggest that the three fisher variables are integrated of the same order with memory parameter in the range 0 75 1 since the integration orders are balanced the ex ante real rate has the same degree of persistence as expected inflation thereby furnishing evidence against the existence of a fractional cointegrating relation among the fisher variables and correspondingly showing little support for a long run form of fisher hypothesis copyright 2004 john wiley sons ltd

the time varying behaviour of real interest rates a re evaluation of the recent evidence a time varying parameter model with markov switching conditional heteroscedasticity is employed to investigate two sources of shifts in real interest rates 1 shifts in the coefficients relating the ex ante real rate to the nominal rate the inflation rate and a supply shock variable and 2 unconditional shifts in the variance of the stochastic process the results underscore the importance of modelling continual change in the ex ante real rate in terms of other economic variables rather than relying on a statistical characterization that permits only a limited number of discrete jumps in the mean of the process copyright 1999 john wiley sons ltd

on the characterisation of the world real interest rate this paper characterises the world real interest rate as a common trend in real interest rates in germany japan and the united states even if there is scepticism in the existence of the world real interest in theoretical terms real interest parity is based on the presumed validity of uncovered interest parity and purchasing power parity but the empirical evidence of these parity conditions is not strong and thus the presence of the world real interest rate the significance of this paper is therefore to visualise the current level of international economic integration by characterising the approximate world real interest rate as a single common trend taking full advantage of the fact that real interest rates in three large open economies have been moving together sharing a common component even if their levels are distinctively different this single common trend has desirable properties as the world real interest rate first it is a parsimonious and monotonically increasing function of the real interest rates in three large open economies that can be world price or interest rate maker in contrast with small open economies second it is moving together with national real interest rates one for one hence the deviations from the world rate are temporary because common trend represents the common driving force of national rates over the long run period third it can explain as high a proportion as possible of the variances of national rates

nonstationarity of regressors and tests on real interest rate behavior this article reexamines tests on the behavior of real interest rates in light of recent results that indicate that regressors are nonstationary and not strictly exogenous strong rejections of constancy of real interest rates that have been found previously in the literature are confirmed here although there is some evidence here that real rates are negatively correlated with expected inflation this result is not as strong as has been indicated by previous research in addition results that found a significant negative correlation between real rates and nominal rates before 1979 are not supported here although there is evidence for a positive correlation of real and nominal interest rates after 1979

wage contingencies the pattern of negotiation and aggregate implications of alternative contract structures abstract a model of long term contracts is developed in which the choice of the negotiation pattern is endogenized when disturbances to the economy derive primarily from relative shocks staggered negotiation is optimal because adjustments made by negotiating agents transmit desirable employment effects into sectors that are looked into previously negotiated contracts the price level acts as the transmission mechanism indexation of wages to the price level enhances the benefits of staggered negotiation because the sector specific information revealed by the price level acts as a substitute for explicit inclusion in the contract of sector specific information the degree of persistence and the level of variation in aggregate output and employment measures which are commonly used in comparing the merits of synchronized versus staggered regimes are shown to be inappropriate criteria upon which to judge the optimality of the negotiation pattern

is there an operational interest rate rule in his 1983 paper jeremy siegel derives a seemingly implementable policy rule involving optimal responses to interest rates the existence of such a rule would be of tremendous interest to central banks whose monetary policies place heavy weight on responses to interest rates the siegel rule is especially appealing because it is i an optimal combination policy in the sense of william poole 1970 and ii the proposed implementation of the rule does not require detailed knowledge of the structure of the economy all that is required is a calculation of the covariance between innovations in prices and interest rates within the confines of a rational expectations equilibrium model in which siegel assumes agents do not make use of information embodied in the current nominal interest rate he is able to design an optimal combination policy that does not require detailed information about the economy that such an optimal policy exists is not new but that it can be easily implemented is novel the policy rule depends solely on the covariance between innovations in the aggregate price level and innovations in the nominal rate of interest normalized by the variance of innovations in the interest rate when this index is zero policy has been set optimally when the index is positive the feedback term on interest rates in the money supply rule is too large and when the index is negative the feedback term is too small given that one can obtain reduced form expressions for prices and interest rates the index is easily computed unfortunately siegel s proposal violates robert lucas s 1976 critique that is he implicitly treats as invariant certain aspects of economic behavior that will generally change when one moves to an operational interest rate rule this note shows in detail that in a model where prices are flexible and agents observe local market prices i e the model at least employed verbally by siegel that the coefficients in the aggregate supply and demand functions are not invariant to the form of the money supply rule this lack of invariance will cause siegel s rule to be nonoperational the sensitivity of parameters in aggregate supply functions to policy is not restricted to equilibrium models with flexible prices this property also extends to contracting models with endogenous indexing see for example jo anna gray 1976 therefore siegel s rule will not be implementable in a wide variety of commonly used macro models

the information content of the interest rate and optimal monetary policy optimal monetary policy rules are derived in a rational expectations cum contracting framework monetary policy is redundant if wage setters exploit the incomplete current information embodied in today s nominal interest rate however the monetary authorities can save wage setters the costs of indexing to the interest rate a contemporaneous money supply feedback rule is as effective as wage indexation a lagged rule relevant under a regime of money supply targeting is also as effective if investors use the interest rate both rules have the same implications for the real interest rate as poole s combination policy however the two rules have strikingly different implications for the nominal interest rate

inflation and real interest rates on assets with different risk characteristics given the importance of ex ante real interest rates to economic decision making it is no surprise that much empirical research focuses on them 1 several recent studies find that the ex ante real returns for short term u s treasury securities are not constant and are negatively correlated both with inflation and with nominal interest rates this paper examines the extent to which these findings hold for assets of longer maturity are robust with respect to the choice of price index and are stable over time we expand the set of assets studied to include those of longer maturity both publicly and privately issued for two reasons first their ex ante real returns may differ substantially from that of a short term nominally riskless security second because longer maturity assets have risk characteristics closer to capital their ex ante real returns are potentially more relevant for investment and savings decisions we explore the use of various price indices because the index used in most studies the consumer price index severely overstates inflation during the 1970s as a result of its inappropriate treatment of residential housing costs 2 this overstatement casts doubt on an important finding of previous studies that there are long stretches of time during the 1970s when ex ante real rates are significantly negative given the existence of holding costs for the goods relevant to most price indices and the absence of a riskless real return no arbitrage conditions are violated by a negative ex ante real rate however its persistence is problematical because asset holders are typically assumed to have a positive rate of time preference which ensures a positive ex ante real rate in the long run we find that before 1979 a negative relationship of ex ante real rates both with inflation and with nominal interest rates appears for the longer maturity assets as well as the short term nominally riskless asset indeed the relationship grows

taxing incumbent monopoly to foster entry abstract this paper investigates whether it is welfare enhancing to tax the output of a monopoly in order to foster cost inefficient entry this question is of particular concern in the energy markets dominated by cartel like affiliations opec and oil russia s gas exports to europe and the interest and practice to stimulate the development of alternative fuels making the realistic assumption that none of the players can commit to future policies subsidies are not a viable strategy for the government a tax cannot be first best but can be second best if the government cannot force the incumbent monopoly to sell its output at no profit and if the incumbent s profit is discounted however stimulating supply by improving the conditions for entry is not the prime concern of taxation after all it lowers aggregate supplies and may even lower the entrant s supply but to accrue parts of the monopoly rent

understanding real interest rates this paper outlines an approach to measuring real interest rates and testing hypotheses on their behavior it then describes what we know about real interest rates in the aggregate economy and provides estimates of real interest rates for the agricultural sector the evidence presented in this paper indicates that real interest rates for the agricultural economy have been extremely high in the l98ds and that their behavior seems to be linked to that found for real rates in the aggregate economy what has been the source of these high real rates the answer seems to be that it was a result of a concerted effort by the monetary authorities to disinflate the economy however the brunt of the fed s disinflationary policy has fallen more heavily on the farm sector which has had to face far higher reel rates than the rest of the economy although breaking the back of inflation was certainly a worthy goal for the fed farmers have had to pay a heavy price they have had to suffer for the sins of an economy that was excessively inflationary which then had to be brought back into line with disinflationary policy this abstract was borrowed from another version of this item

strategic behavior and efficiency in the common property extraction of groundwater groundwater has always been regarded as a common property resource where entry is restricted by land ownership and private exploitation is inefficient in 1980 gisser and sanchez presented a first estimation of this inefficiency cornparing socially optimal exploitation with private competitive exploitation using a model with linear water demand average extraction cost independent of the rate of extraction and linearly decreasing with respect to the water table level they characterized the private exploitation of the aquifer assuming that farmers are myopic and choose their rate of extraction to maximize their current profits whereas optimal exploitation is obtained by maximizing the present value of the stream of aggregate profits their results show that if the storage capacity of the aquifer is relatively large the difference between the two systems is so small that it can be ignored for practical consideration this result has been called the gisser sanchez rule by nieswiadomy 1985 and it has and important policy implication regulation of the resource does not seem justified since the profits it brings are not very high 1

optimal monetary policy endogenous supply and rational expectations abstract in this paper we demonstrate that the choice of monetary policy regime will affect the variability of output when private agents in forming their supply decisions take into account the authority s selection of a policy rule a striking feature of the analysis is that the choice between policy rules in sargent wallace 1975 framework but with endogenous aggregate supply depends only on the variability of aggregate demand under each rule and not on the variability of aggregate supply it follows that the choice of monetary policy rules reduces to the problem analyzed by poole 1970 in the stochastic keynesian structure

monetary instruments and policy rules in a rational expectations environment abstract this paper explores the implications of rational expectations and the aggregate supply theory advanced by lucas 1973 and barro 1976 for analysis of optimal monetary policy under uncertainty along the lines of poole 1970 returning to a topic initially treated by sargent and wallace 1975 not surprisingly these two classical concepts alter both the menu of feasible policy choice and the desirability of certain policy actions in our setup unlike that of sargent and wallace 1975 the systematic component of monetary policy is a relevant determinant of the magnitude of business fluctuations that arise from shocks to the system central bank behavior both the selection of monetary instruments and the framing of overall policy response to economic conditions can work to diminish or increase the magnitude of business fluctuations however the activist policies stressed by the present discussion bear little if any relationship to the policy options rationalized by the conventional analysis of monetary policy under uncertainty in particular in contrast to poole s analysis money supply responses to the nominal interest rate are not important determinants of real economic activity rather the central bank should focus on policies that make movements in the general price level readily identifiable by economic agents

the behavior of u s short term interest rates since october 1979 short term interest rates in the united states have been too high since october 1979 in the sense that both unconditional and conditional forecasts based on an estimated vector autoregression model summarizing the prior experience under predict short term interest rates during this period although a non structural model cannot directly answer the question of why this has been so comparisons of alternative conditional forecasts point to the post october 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short term interestrates this finding is consistent with the authors earlier conclusion based on analysis of a small structural macroeconometric model that the high average level of interest rates has been due to a combination of slow growth of nominal money supply and continuing price inflation which together have kept real balances small in relation to prevailing levels of economic activity this abstract was borrowed from another version of this item

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