the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

the growth potential of startups over the business cycle this paper shows that employment in cohorts of us firms is strongly influenced by aggregate conditions at the time of their entry employment fluctuations of startups are procyclical they persist into later years and cohort level employment variations are largely driven by differences in firm size rather than the number of firms an estimated general equilibrium firm dynamics model reveals that aggregate conditions at birth rather than post entry choices drive the majority of cohort level employment variation by affecting the share of startups with high growth potential in the aggregate changes in startup conditions result in large slow moving fluctuations in employment

consumer search incomplete exchange rate pass through and optimal interest rate policy this paper studies utility maximizing monetary policy in a two country economy with consumer search frictions search frictions provide a microfoundation for incomplete exchange rate pass through and international deviations from the law of one price lop i show that optimal interest rate policy targets deviations from the lop and acts to mitigate the effect of search frictions in a quantitative setting with internationally correlated technology and preference shocks optimal policy generates positive cross country correlation of nominal interest rates

tastes and technology in a two country model of the business cycle explaining international trade on international financial markets allows people to insure country specific risk and smooth consumption intertemporally equilibrium models of business cycles with trade on global financial markets typically yield international consumption correlations near one and excessive volatility of investment the authors incorporate nontraded goods in the model and find that the implications for aggregate consumption investment and the trade balance are consistent with business cycle properties of industrialized countries however the model driven by technology shocks alone yields counterfactual implications for comovements between consumption and prices at the sectoral level taste shocks produce price quantity relationships more consistent with the data copyright 1995 by american economic association

a dynamic general equilibrium analysis of deviations from the laws of one price abstract using disaggregated west german prices this study documents movements in relative export and producer prices and in relative import and producer prices which are variable and highly autocorrelated this suggests the presence of time varying persistent deviations from the laws of one price perfect competition monopoly and monopolistic competition with constant mark up pricing are inconsistent with the variability in relative export and producer prices furthermore cournot oligopoly is inconsistent with the variability in relative import and producer prices a dynamic general equilibrium model with differentiated oligopolistic competition and strategic pricing is shown to generate variable and persistent movements in both measures of relative prices

the operations of the bank of england 1890 1908 a dynamic probit approach this paper analyzes the workings of the pre world war i gold standard using weekly data and a dynamic probit econometric technique the authors evidence sheds light on three potentially conflicting motivations underlying bank rate changes profitability convertibility and concern for home trade the conflict among these goals manifests itself in the bank s asymmetric responses to inflows and outflows of gold and in the bank s asymmetric responses to changes in market interest rates the authors results are consistent with the view that central bank cooperation played an important role in the workings of the gold standard copyright 1995 by ohio state university press

distribution capital and the short and long run import demand elasticity the elasticity of substitution between home and foreign goods is one of the most important parameters in international economics the international macro literature which is primarily concerned with short run business cycle fluctuations assigns a low value to this parameter the international trade literature which is more concerned with long run changes in trade flows following a change in relative prices assigns a high value to this parameter this paper constructs a model where this discrepancy between the short and long run elasticities is due to frictions in distribution goods need to be combined with a local non traded input distribution capital which is good specific home and foreign goods may be close substitutes but if distribution capital is slow to adjust then agents cannot shift their consumption in the short run following a change in relative prices and home and foreign goods appear as poor substitutes in the short run in the long run this distribution capital can be reallocated and agents can shift their purchases following a change in relative prices thus the observed substitutability gets larger as time passes

exchange rate pass through and credit constraints abstract the macroeconomic evidence of the short term impact of exchange rates on exports and prices is notoriously weak this paper examines the microfoundations of this disconnect i study the response of firms export and price setting decisions to fluctuations in exchange rates and credit conditions using firm level survey data financially constrained firms pass through exchange rate changes to prices at almost twice the rate of unconstrained firms similarly their export volumes are about twice as sensitive to exchange rate fluctuations the effect of borrowing constraints is particularly strong during the recent financial crisis

price dispersion and the border effect abstract cross country price differences could reflect regional market segmentation within countries or national segmentation at the border in a search based model of price setting identifying national versus regional segmentation requires data on regional trade flows a calibration to u s and canadian data implies predominantly regional frictions u s producers are three times more likely to sell in their home region than another u s region and canadian producers are seven times more likely to sell in their home region than another canadian region frictions vis a vis foreign regions are only slightly higher models that ignore regional segmentation can misstate the severity of frictions at the border

federal reserve interest rate targeting rational expectations and the term structure abstract the amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved indeed spreads between certain long and short rates appear unrelated to future changes in the short rate contrary to the rational expectations hypothesis of the term structure this paper estimates a daily model of federal reserve interest rate targeting behavior which accompanied by the maintained hypothesis of rational expectations explains the varying predictive ability of the yield curve and elucidates the link between fed policy and the term structure

financial globalization and real regionalization over the period 1972 1986 the correlations of gdp employment and investment between the united states and an aggregate of europe canada and japan were respectively 0 76 0 66 and 0 63 for the period 1986 to 2000 the same correlations were much lower 0 26 0 03 and 0 07 real regionalization at the same time u s international asset trade has significantly increased for example between 1972 and 1999 united states gross fdi and equity assets in the same group of countries rose from 4 to 23 percent of the u s capital stock financial globalization we argue that these two trends are intimately related we document that the correlation of real shocks between the u s and the rest of the world has declined we then present a model in which international financial market integration occurs endogenously in response to less correlated shocks financial integration further reduces the international correlations in gdp and factor supplies we find that both less correlated shocks and endogenous financial market development are needed to account for all the changes in the international business cycle

international deviations from the law of one price the role of search frictions and market share this article examines the size and persistence of international deviations from the law of one price in an industry with search frictions cost differences lead foreign and domestic firms to price differently within countries when local firms are more common in each country there are large and persistent price differences across countries large and persistent changes in international relative costs lead to large and persistent changes in international relative prices dynamic considerations imply that the amount of a cost shock firms pass through to prices is u shaped in the market share of firms receiving the shock

a model for the federal funds rate target this paper is a statistical analysis of the manner in which the federal reserve determines the level of the federal funds rate target one of the most publicized and anticipated economic indicators in the financial world the paper introduces new statistical tools for forecasting a discrete valued time series such as the target and suggests that these methods in conjunction with a focus on the institutional details of how the target is determined can significantly improve on standard vector autoregression forecasts of the effective federal funds rate we further show that the news that the fed has changed the target has statistical content substantially different from the news that the fed failed to make an anticipated target change causing us to challenge some of the conclusions drawn from standard linear var impulse response functions

the political economy of american monetary policy preface 1 introduction thomas mayer 2 studying the fed towards a broader public choice perspective thomas willett 3 the federal reserve reaction function a specification search salwa khouri 4 corporate profitability as a determinant of restrictive monetary policy estimates for the post war united states gerald epstein and juliet schor 5 federal reserve behavior since 1980 a financial market perspective william melton and v vance roley 6 the federal reserve and its institutional environment a review michael munger and brian roberts 7 the political economy of monetary policy robert hetzel 8 political monetary cycles nathaniel beck 9 congress and the fed why the dog does not bark in the night nathaniel beck 10 the federal reserve as a political power james pierce 11 monetary policy and political economy the federal reserve and the bank of japan thomas cargill and michael hutchinson 12 a positive analysis of the policymaking process at the federal reserve raymond lombra and nicholas karamouzis 13 a theory of fomc dissent voting with evidence from the time series thomas havrilesky and robert schweitzer 14 explaining fomc members votes john gildea 15 fed behaviour and x efficiency theory toward a general framework harinder singh and roger frantz 16 minimizing regret cognitive dissonance as an explanation of fomc behavior thomas mayer 17 the discount window william poole 18 leaning against the wind the behavior of the money stock in recession and recovery 1953 8 elmus wicker 19 bureaucratic self interest as an obstacle to monetary reform edward kane index

evaluating density forecasts with applications to financial risk management density forecasting is increasingly more important and commonplace for example in financial risk management yet little attention has been given to the evaluation of density forecasts the authors develop a simple and operational framework for density forecast evaluation they illustrate the framework with a detailed application to density forecasting of asset returns in environments with time varying volatility finally the authors discuss several extensions copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

deep habits and exchange rate pass through abstract habit persistence at the level of individual goods varieties can explain incomplete exchange rate pass through to international prices deep habits give rise to a dynamic import demand function that leads to import price markup adjustments independently of nominal pricing frictions augmenting a two country dsge model with deep habits we obtain low exchange rate pass through to import prices even when nominal local currency price rigidities are negligibly low as nominal pricing frictions become more important the presence of deep habits further impedes the pass through of exchange rate fluctuations estimating model variants with limited information as well as full information methods we find that the deep habits model requires much lower degrees of nominal price rigidities to match empirical measures of the pass through of exchange rate fluctuations to us import prices

pass through of competitors exchange rates to us import and producer prices this paper shows that in theory and bls microdata the prices of imported goods respond to the exchange rates er of the producer s foreign competitors in contrast standard models have no role for competitors ers excluding the effects of competitors exchange rates typically biases upwards estimates of bilateral exchange rate pass through because competitors ers and bilateral ers are positively correlated a multi country version of atkeson and burstein s 2008 industry aggregation model is able to explain a sizable proportion of pass through of competitors exchange rates to import prices and also predicts pass through of foreign competitors prices and pass through of competitors ers to us producer prices both of which are supported in the data the results suggest that pass through will be larger for er movements shared by a greater fraction of foreign competitor countries

understanding international prices customers as capital the article develops a new theory of pricing to market driven by dynamic frictions of building market shares our key innovation is a capital theoretic model of marketing in which relations with customers are valuable we discipline the introduced friction using data on differences between short run and long run price elasticity of international trade flows we show that the model accounts for several pricing puzzles of international macroeconomics jel e13 f14 f31 f41 f44 m31

consumer search price dispersion and international relative price fluctuations this article develops a model of consumer search consistent with the evidence of substantial price dispersion and time spent shopping within countries to study international deviations from the law of one price lop and relative price fluctuations search frictions lead firms to price discriminate across markets based on the opportunity cost of search which depends on the local wage with productivity and taste shocks estimated from the data deviations from the lop are as volatile and persistent as in the data fluctuations in relative wages real exchange rates and the terms of trade are also consistent with the data

demand shocks and open economy puzzles abstract we pose good markets frictions on top of an otherwise standard two country international real business cycle irbc model shopping for goods takes effort which prevents perfect matching between customers and producers an increase in search effort implies increased measured productivity demand shocks increase expenditures and search effort simultaneously increasing output consumption productivity and the trade deficit and appreciating the real exchange rate thus we solve the backus smith puzzle and we show that the cross country correlation of consumption is higher than that of output standard irbc models cannot account for these puzzles along with movements in tfp

explaining armington what determines substitutability between home and foreign goods for decades trade economists have modeled imperfect substitution between home and foreign goods in consumption often called the armington assumption with little analysis of what explains the wide variation in these substitution elasticities across sectors using a varying coefficients model the authors estimate armington elasticities between u s domestic and foreign goods across over one hundred industrial sectors from 1980 to 1988 and examine the role of product industry political and home bias factors as determinants they find strong support that the presence of foreign owned affiliates affects armington elasticities in important ways and some support that entry barriers and union presence have an effect

persistent real exchange rates abstract three well known facts that characterize exchange rate data are a the high correlation between bilateral nominal and real exchange rates b the high degree of persistence in real exchange rate movements and c the high volatility of real exchange rates this paper attempts a joint albeit partial rationalization of these facts in an environment with no staggered contracts and where prices are preset for only one quarter there are two key innovations in the paper first we augment a standard two country open economy model with learning by doing in production at the firm level this induces monopolistically competitive firms to endogeneize the productivity effect of their price setting behavior specifically firms endogenously choose not to adjust prices by the full proportion of a positive monetary shock in order to take advantage of the productivity benefits of higher production second we introduce habits in leisure this makes the labor supply decision dynamic and adds an additional source of propagation we show that the calibrated model can quantitatively reproduce significant fractions of the aforementioned facts moreover as in the data the model also produces a positive correlation between the terms of trade and the nominal exchange rate

a discrete state continuous time model of financial transactions prices and times financial transaction prices typically lie on a discrete grid of values and arrive at random times this paper proposes an econometric model with this structure the distribution of each price change is a multinomial conditional on past information and the time interval between the transactions the proposed autoregressive conditional multinomial acm model is not restricted to be markov or symmetric in response to shocks however such restrictions can be imposed the duration between trades is modeled as an autoregressive conditional duration acd model following engle and russell 1998 maximum likelihood estimation and testing procedures are developed the model is estimated with 12 months of tick data on a moderately frequently traded nyse stock airgas the preferred model is estimated with three lags for the acm model and two lags for the acd model both price returns and squared returns influence future durations and present and past durations affect price movements the model exhibits revers

the role of entrepreneurship in us job creation and economic dynamism the united states has long been viewed as having among the world s most entrepreneurial dynamic and flexible economies it is often argued that this dynamism and flexibility has enabled the us economy to adapt to changing economic circumstances and recover from recessions in a robust manner while the evidence provides broad support for this view the outcomes of entrepreneurship are more heterogeneous than commonly appreciated and appear to be evolving in ways that could raise concern evidence along a number of dimensions and a variety of sources points to a us economy that is becoming less dynamic of particular interest are declining business startup rates and the resulting diminished role for dynamic young businesses in the economy we begin by describing how the concept of entrepreneurship is reflected in existing data on firm age and size the recent addition of firm age to official statistics represents a dramatic improvement in the information available to entrepreneurship researchers we then turn to a discussion of the role of startup firms in job creation business startups account for about 20 percent of us gross total job creation while high growth businesses which are disproportionately young

exchange rate pass through when market share matters the authors investigate the pass through from exchange rates to import prices when firms future demands depend on their current market shares they show that profit maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily i e the pass through may be perverse and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates they present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of u s import prices copyright 1989 by american economic association

bank rate policy under the interwar gold standard a dynamic probit model the classical gold standard occupies an almost mystical position in the literature of international finance in popular accounts the gold standard is portrayed as a remarkably durable and efficient mechanism for achieving price and exchange rate stability and for relieving balance of payments pressures the system s resilience is attributed to the willingness of nationa monetary authorities to refrain from impeding the international adjustment process when central banks intervened in financial markets it is said they did so mechanically obeying rules of the game which dictated that they reinforce the impact on domestic money and credit of changing balance of payments conditions succeeding generations of economists and historians have sought to qualify this popular view the recent contributions of bordo i98i and cooper i982 make a critical assessment of extravagant claims concerning price and exchange rate stability under the classical gold standard other authors have extended the research of bloomfield i 959 ford i962 and triffin i964 who emphasised the special conditions that permitted the classical gold standard s smooth operation and cast doubt on the tendency of national monetary authorities to adhere faithfully to rules of the game all too often scant mention is made of the interwar gold standard for it is not evident how interwar experience fits into either view certain facts are clear it is clear that the interwar standard was far from durable britain s resumption of gold payments in i925 usually is taken to mark the gold standard s resurrection just as her devaluation a mere 6 years later is taken as its demise in the interim many of the major participants suffered serious balance of payments pressures that threatened to render their exchange rates indefensible the system was anything but conducive to stability it precluded neither price nor income fluctuations as the great depression dramatically illustrated numerous explanations have been advanced for the interwar gold standard s

goods prices and exchange rates what have we learned import prices typically change by a smaller proportion than the exchange rate between the exporting and importing country recent research indicates that common currency relative prices for similar goods exported to different markets are highly correlated with exchange rates between those markets this evidence suggests that incomplete pass through is a consequence of third degree price discrimination while distance matters for market segmentation borders have independent effects the source of the border effect has not been clearly identified furthermore there is little evidence yet to suggest substantial market power is implied by the observed price discrimination

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

forecasting substantial data revisions in the presence of model uncertainty a recent revision to the preliminary measurement of gdp e growth for 2003q2 caused considerable press attention provoked a public enquiry and prompted a number of reforms to uk statistical reporting procedures in this article we compute the probability of substantial revisions that are greater in absolute value than the controversial 2003 revision the predictive densities are derived from bayesian model averaging over a wide set of forecasting models including linear structural break and regime switching models with and without heteroscedasticity ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures recent improvements in the quality of preliminary uk macroeconomic measurements

pricing to habits and the law of one price this paper proposes a novel international transmission mechanism based on the assumption of deep habits the term deep habits stands for a preference specification according to which consumers form habits on a good by good basis under deep habits firms face more elastic demand functions in markets where nonhabitual demand is high relative to habitual demand creating an incentive to price discriminate we refer to this type of price discrimination as pricing to habits in the presence of pricing to habits innovations to domestic aggregate demand induce a decline in markups in the domestic country but not abroad leading to a departure from the law of one price in this way the proposed pricing to habit mechanism can explain the observation that prices of the same good across countries expressed in the same currency vary over the business cycle furthermore it can account for the empirical fact that in response to a positive domestic demand shock such as an increase in government spending the real exchange rate depreciates domestic consumption expands and the trade balance deteriorates

bequests sibling rivalry and rent seeking we examine bequest sharing rules where sibling rivalry creates wasteful competition for intergenerational transfers we show that equal division of bequests minimizes rent seeking expenditures by siblings while primogeniture maximizes rent seeking costs our results lend theoretical support to the empirical findings of equal bequests without appeal to complex models of the parent child relationship

measuring monetary policy interdependence abstract this paper measures the degree of monetary policy interdependence between major industrialized countries from a new perspective the analysis uses a special data set on central bank issued policy rate targets for 14 oecd countries methodologically our approach is novel in that we separately examine monetary interdependence due to 1 the coincidence in time of when policy actions are executed from 2 the nature and magnitude of the policy adjustments made the first of these elements requires that the timing of events be modeled with a dynamic discrete duration design the discrete nature of the policy rate adjustment process that characterizes the second element is captured with an ordered response model the results indicate there is significant policy interdependence among these 14 countries during the 1980 1998 sample period this is especially true for a number of european countries which appeared to respond to german policy during our sample period a number of other countries appeared to respond to u s policy though this number is smaller than that suggested in preceding studies moreover the policy harmonization we find appears to work through channels other than formal coordination agreements

trade creation and trade diversion in the canada united states free trade agreement in this paper the changes in trade patterns introduced by the canada united states free trade agreement are examined variation in the extent of tariff liberalization under the agreement is used to identify the impact of tariff liberalization on the growth of trade both with member countries and non member countries data at the commodity level are used and the results indicate that the canada united states free trade agreement had substantial trade creation effects with little evidence of trade diversion jel classification f13 f14

why are prices sticky the dynamics of wholesale gasoline prices the menu cost interpretation of sticky prices implies that the probability of a price change should depend on the past history of prices and fundamentals only through the gap between the current price and the frictionless price we find that this prediction is broadly consistent with the behavior of nine philadelphia gasoline wholesalers nevertheless we reject the menu cost model as a literal description of these firms behavior arguing instead that price stickiness arises from strategic considerations of how customers and competitors will react to price changes

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

a new marked point process model for the federal funds rate target methodology and forecast evaluation abstract forecasts of key interest rates set by central banks are of paramount concern for investors and policy makers recently it has been shown that forecasts of the federal funds rate target the most anticipated indicator of the federal reserve bank s monetary policy stance can be improved considerably when its evolution is modeled as a marked point process mpp this is due to the fact that target changes occur in discrete time with discrete increments have an autoregressive nature and are usually in the same direction we propose a model which is able to account for these dynamic features of the data in particular we combine hamilton and jorda s 2002 a model for the federal funds rate target journal of political economy 110 5 1135 1167 autoregressive conditional hazard ach and russell and engle s 2005 a discrete state continuous time model of financial transactions prices and times the autoregressive conditional multinomial autoregressive conditional duration model journal of business and economic statistics 23 2 166 180 autoregressive conditional multinomial acm model the paper also puts forth a methodology to evaluate probability function forecasts of mpp models by improving goodness of fit and point forecasts of the target the ach acm qualifies as a sensible modeling framework furthermore our results show that mpp models deliver useful probability function forecasts at short and medium term horizons

international comparisons of pricing to market behavior this paper measures the degree of price discrimination across export destinations that is associated with exchange rate changes using u s u k german and japanese industry level data given the industries sampled more price discrimination across destinations is observed in the u k german and japanese data for industries that match across source countries however behavior is very similar across source countries furthermore destination specific price adjustment on exports to the united states from germany and japan is similar to price adjustment observed on shipments to other destinations most variation in the data appears to be related to industry copyright 1993 by american economic association