managing currency pegs the combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity in turn this real rigidity makes the economy prone to involuntary unemployment during external crises this paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency first and second best monetary and fiscal solutions are analyzed second best solutions are prudential whereas first best solutions are not

the role of net foreign assets in a new keynesian small open economy model abstract this paper develops a small open economy sticky price model that determines a unique stable long run asset position for households as function of their incentive to anticipate or postpone consumption and labor effort across periods this is accomplished by adopting an overlapping generations structure in which new households with no assets enter the economy in each period the same characteristics of household behavior that determine long run assets are also important determinants of the model s responses to shocks stabilizing producer prices results in a milder recession following a drop in world demand than stabilizing consumer prices because it prevents the markup in the pricing of goods from increasing in addition given an initial foreign debt allowing consumer prices to rise causes a decrease in the ex post real interest rate on impact lowering the interest burden of the initial debt the differences across policy rules generated by the initial asset position are robust to changes in the latter as long as these are brought about by changes in parameter values that do not alter the fundamental characteristics of household and firm behavior that are also the key determinants of long run assets

idiosyncratic variation of treasury bill yields i document a dramatic increase in the importance of two types of variation in treasury bill yields beginning in the early 1980s the first is idiosyncratic variation in individual short maturity less than three months bill yields the second is a common component in treasury bill yields that is not shared by yields on other instruments such as short maturity privately issued instruments or longer maturity treasury notes and bonds some evidence suggests the first type reflects increased market segmentation these results have important implications for the calibration and testing of no arbitrage term structure models and interpreting tests of the expectations hypothesis united states treasury bill yields play a central role in economists efforts to understand the behavior of financial markets the focus on treasury bills is driven by the belief that bill yields can be viewed as benchmarks from which yields on other debt instruments are derived for example in no arbitrage models of the default free term structure the stochastic properties of the hypothetical instantaneous interest rate determine bond prices researchers often construct and evaluate these models using short maturity bill yields as proxies for instantaneous interest rates similarly bill yields are frequently used to test the expectations hypothesis of the term structure 2 economists standard pricing models for default risky securities also view treasury yields as building blocks in such models yields on default risky securities depend at least in part on the yields of default free securities and the underlying stochastic default process therefore yields on treasury bills have been used in studies of the effects of monetary policy on the business cycle not because bills are intrinsically critical to the economy but because

temporary stabilization a stochastic analysis abstract this paper develops a stochastic model of exchange rate based inflation stabilization in which agents have expectations of devaluation driven by a mixed diffusion jump process in a richer stochastic environment where a brownian motion drives the rate of devaluation and a poisson process determines the probability of devaluation we examine consumption and wealth equilibrium dynamics when a stabilization plan is implemented and contingent claims markets are unavailable we also assess the effects of exogenous shocks on consumption and welfare finally we use the proposed model to carry out a simulation experiment of the equilibrium dynamics

stabilization policy and the costs of dollarization this paper compares the welfare costs of business cycles in a dollarized economy to those associated with several alternative monetary regimes belonging to three broad families interest rate feedback rules inflation targeting and money growth rate rules the analysis is conducted within an optimizing model of a small open economy with sticky prices the model is calibrated to the mexican economy and is driven by 3external shocks terms of trade world interest rate and import price inflation we show econometrically that these shocks explain more than 75 of the observed forecasting error variance of mexican output and the mexican real exchange rate at 4 to 16 quarter horizons the welfare comparisons suggest that dollarization is the least successful of the monetary policy rules considered agents are willing to give up more than 2 of their non stochastic steady state consumption to see a policy other than dollarization implemented

exchange rate based stabilizations a literature review the exchange rate based stabilizations erbss that have been undertaken in chronic inflation countries have generated a controversial body of literature regarding the effects of disinflation programs especially those on real consumption and output this survey provides an extensive overview of the literature on erbs the paper covers various empirical studies that have attempted to document the macroeconomic regularities associated with erbs discussing both their strengths and their weaknesses it analyzes diverse theoretical models that have been put forward to replicate the business cycles associated with erbs and sheds light on which models perform better using real data the results suggest that durables incorporated weak credibility and sticky price model proves to be most compatible with the empirical regularities observed in the course of erbs

the argentine stabilization plan of december 20th abstract in this paper an analytical model is developed to incorporate the essential characteristics of the stabilization plan implemented in argentina in january 1979 the model is based upon a set of simplifying assumptions that only approximate the complexity of the real world it is assumed that the expectations of inflation and the degree of excess demand or supply in the non traded goods market are the main intermediate determinants of the rate of inflation in that market the rate of change of prices of traded goods being determined by the external inflation together with the rate of devaluation treating thus the external rate of inflation as exogenous the only instrument available for influencing the rate of inflation in the long run is the rate of devaluation since the model assumes a fixed exchange rate regime the money supply is endogenous and hence unsuitable as an instrument of economic policy

risk aversion intertemporal substitution and the term structure of interest rates an equilibrium model of the term structure of interest rates is derived from a representative agent framework with recursive utility preferences a key ingredient is a time varying subjective discount factor which is linked to the short term rate of interest the proposed model incorporates a vector autoregression description of macroeconomic dynamics and links them to those of the term structure so that nominal bond yields are affine functions of observable state variables the model is estimated and compared to both a restricted expected utility version of the model and a reduced form no arbitrage model we find that all three models can fit the term structure equally well but that only the unrestricted non expected utility model can empirically account for the tent shaped pattern and magnitude of coefficients from predictive regressions of excess bond returns on forward rates documented by cochrane and piazzesi 2005 bond risk premia american economic review 95 138 160 the unrestricted equilibrium model fits the term structure and captures the important features of bond risk premiums with economically plausible values for the structural preference parameters

exchange rate management intertemporal tradeoffs exchange rate management is possible only if the government pursues consistent monetary and fiscal policies the authors constructa model in which the real consequences of exchange rate management depend on the precise time pattern of these policies the authors study the constraints on feasible policies and the comparative dynamics of disinflation by means of exchange rate targeting theoretical results are consistent with exchange rate managed disinflation attempts in argentina chile and israel copyright 1987 by american economic association

exchange rate based inflation stabilization the initial real effects of credible plans abstract this paper studies the initial effects of exchange rate based stabilization programs within a dynamic general equilibrium model of a small open economy in which inflation acts as a tax on intermediate transactions and capital accumulation is subject to convex adjustment costs and gestation lags the model replicates the typical pattern of slow inflation convergence sustained real exchange rate appreciation trade balance deterioration and expansion in domestic spending followed by a deflationary slowdown without resorting to sticky prices imperfect credibility or adaptive expectations calibrated versions of the model are compared with the initial effects of the argentine convertibility plan of april 1991

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

balance of payments crises in a cash in advance economy the author shows that a flexible prices sidrauski type model with a cash in advance constraint is capable of depicting some of the phenomena associated with a balance of payments crisis like the onesrecently observed in argentina and mexico current accounts deficits and appreciation of the real exchange rat e it is also shown that these phenomena become exacerbated as the rate of devaluation before the crisis occurs becomes smaller copyright 1987 by ohio state university press

capital income taxation equilibrium determinacy and the taylor principle abstract the taylor principle disregards nominal capital income taxation the paper derives a tax adjusted taylor principle and shows that empirical studies on monetary policy rules tend to reach too strong conclusions concerning the appropriateness of the monetary policy response to inflation

financial fragility in small open economies firm balance sheets and the sectoral structure episodes of large capital inflows in small open economies are often associated with a shift of resources from the tradable to the non tradable sector and sometimes lead to balance of payments crises this article builds a two sector dynamic model to study the evolution of the sectoral structure and its impact on financial fragility the model embeds a static mechanism of balance of payments crisis which produces multiple equilibria within a single time period when the non tradable sector is large enough compared to the tradable sector the article studies the dynamics induced by an increase in financial openness it shows that the relative size of the non tradable sector overshoots which makes the economy more likely to be financially fragile during the transitory dynamics using an extended version of the model the article conducts a quantitative analysis and shows that this mechanism accounts well for several episodes of large capital inflows that led to financial crises

balance of payments crises and devaluation the collapse of a fixed exchange rate is typically marked by a sudden balance of payments crisis in which speculators fleeing from the domestic currency acquire a large portion of the central bank s foreign exchange holdings faced with such an attack the central bank often withdraws temporarily from the foreign exchange market allowing the exchange rate to float freely before devaluing and returning to a fixed rate regime this paper links the timing of the initial speculative attack to the magnitude of the expected devaluation and to the length of the transitional period off loating an implication of the analysis is that there exist devaluations so sharp and transition periods so short that acrisis must occur the moment the market first learns that the current exchange parity will eventually be altered for sufficiently long transition periods the floating exchange rate overshoots its new peg before appreciating back toward it for shorter periods the rate depreciates monotonically to its new fixed level accordingly the central bank s return tothe foreign exchange market can occasion a capital outflow or a capital inflow this abstract was borrowed from another version of this item

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

time to build and the real options channel of residential investment abstract a standard real options model predicts that time to build investment could be delayed by uncertainty over future revenue we quantify the first order importance of this mechanism in the 2002 2011 housing boom bust cycle by developing and estimating a model of sequential irreversible investment with stochastic bottlenecks we find that the main driver of construction delays during the boom is construction bottlenecks however further delay in construction during the bust is caused by an increase in uncertainty which grew by 21 6 between 2002 and 2009 the model can account for more than one third of the decline in residential investment between 2002 and 2009

treasury auction bids and the salomon squeeze recent press accounts claim that collusion is common practice in treasury auctions and that as a result the auction profits are excessive but this paper finds that the auction prices are on average marginally higher than the secondary market bid prices the auction profits however are systematically related to the total fraction of winning bids tendered by banks and dealers the postauction prices of the two year notes in which salomon brothers had a 94 percent holding are also examined the secondary market prices of these notes were significantly higher than the estimated competitive prices in the four week postissue period

the continuing muddles of monetary theory a steadfast refusal to face facts lionel robbins was concerned about the methodology of economic science when he discussed the relationship between theory and reality two of the examples of inappropriate relationships were taken from monetary economics such shortcomings continue among the worst are 1 is lm whereby the monetary authorities set the monetary base and the interest rate is market determined 2 the monetary base multiplier of bank deposits and the role of reserve ratios 3 the current three equation neoclassical consensus assuming perfect creditworthiness and hence no need for banks 4 the analysis of the evolution of money

sticky inflation and the real effects of exchange rate based stabilization abstract this paper tests the empirical validity of the forward looking pricing hypothesis using data from four exchange rate based stabilization erbs episodes it finds that backward looking components of inflation play an important role in inflation dynamics in some cases exceeding the importance of forward looking components the paper then shows that the presence of empirically relevant degrees of inflation stickiness increases the size of the real exchange rate appreciation predicted by an imperfect credibility model of erbs the 12 real appreciation predicted by the sticky inflation model is a 70 improvement over the predictions of the fully forward looking pricing setup but as in other erbs models still falls short of matching the real appreciations observed in practice

liquidity maturity and the yields on u s treasury securities the efrect8 of aaaet liquidity on expected retuma for ts with infinite maturities toc ka are eumined for bonda treuury notes and bills with matched maturities of lellll than 6 months the yield to maturity ill higher on notes which have lower liquidity the yield di1ferential between notes and billa is a decreuing and convex function of the time to maturity the results provide a robult confirmation of the liquidity effect in auet pricing this paper studies empirically the effects of the liquidity of capital assets on their prices amihud and mendelson 1986 1989 proposed that liquidity affects asset prices because investors require a compensation for bearing transaction costs transaction costs paid whenever the asset is traded form a sequence of cash outflows the discounted value of this cost stream proxies for the value 1088 due to illiquidity which lowers the asset s value for any given cash flow that the asset generates 1 as a result the return on assets should be an increasing function of their illiquidity other things equal for stocks the illiquidity effect is expected to be strong because their transaction cost sequence is infinite amihud and mendelson 1986 1989 demonstrated that common stocks with lower liquidity yielded significantly higher average returns after controlling for risk and for other factors these results on the importance of liquidity in the pricing of stocks raise additional questions i does the liquidity effect depend on the specific controls used by amihud and mendelson 1986 1989 1 ii does illiquidity have a similarly strong effect on the pricing of bonds whose maturities are finite and iii if liquidity affects bond yields how is this effect related to the bond s time to maturity

the relative pricing of u s treasury strips empirical evidence abstract we investigate pricing relations and the potential for arbitrage in the u s treasury strips market stressing the importance of reconciling quoted treasury data with actual market pricing conventions we document that stripping and reconstitution profits in the strips market are fleeting and rarely economically significant that matched maturity principal and coupon strips generally have different prices due at least in part to richness or cheapness in the underlying note or bond and that apparent negative forward rates in the strips market are concentrated in certain long maturity strips that do not actually exist at the time

an international study of tax effects on government bonds it is shown that coupon bonds alone are not sufficient to span time dated claims on ordinary income capital gains and non taxable wealth in an incomplete bond market where the pure dated claims are not spanned by existing bonds marginal rates of substitution between present consumption and pure dated claims on ordinary income capital gains income and non taxable wealth respectively can differ across bondholders however the relative pricing of coupon bonds in each of these countries is shown to be consistent with the tax status of the major non tax exempt holders of government debt

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

temporary stabilization predetermined exchange rates the paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation against a background in which a constant rate of devaluation has no real effects it is shown that the temporary policy does and furthermore that the real effects tend to become bigger in absolute value as the horizon of the temporary policy is shortened the central discussion is carried out in terms of a one good cash in advance model with perfect capital mobility and ramsey type consumers results are extended to account for home goods and variable velocity the roles of capital mobility and banking liberalization are briefly discussed

negative option values are possible the impact of treasury bond futures on the cash u s treasury market abstract this paper uses a unique financial instrument in the u s treasury market to study the price behavior of the put option embedded in the november 2009 14 callable u s treasury bond we find that beginning in august 1993 the estimated option value was persistently negative on nearly every day for the ensuing eight months we show that the anomalous pricing behavior arose because the underlying callable bond became the cheapest to deliver issue against u s treasury bond futures contracts hence this paper provides direct evidence that derivative assets can significantly distort pricing in the primary asset market

the price consumption puzzle of currency pegs abstract a defining stylized fact associated with exchange rate based stabilization programs is that their initial phase is characterized by several years of continuous expansion in private consumption and a gradual appreciation of the real exchange rate this paper shows that a large class of standard optimizing models is unable to account for this empirical regularity in particular models in this class predict that a gradual appreciation of the real exchange rate must necessarily be accompanied by a declining path of consumption the paper suggests several possible solutions to this problem and develops one in detail namely the relaxation of the assumption of time separability in preferences specifically it shows that under habit formation currency pegs induce a positive comovement between consumption and the real exchange rate the paper also establishes that habit formation provides an explanation for why in failed currency pegs a contraction in aggregate demand sets in before the collapse of the program

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

price stability and the ecb s monetary policy strategy abstract this paper focuses on the price stability objective within the framework of the single monetary policy strategy it starts by reviewing what this objective which is common to all central banks means second this paper focuses exclusively on the anchoring of short to medium term inflation expectations part 2 several measures show that this anchoring is effective a two pillar small structural macro economic model framework is used to analyze the impact that this anchoring of expectations has on the determination of the short to medium term inflation rate from this point of view observed inflation in the euro area seems to be in line with the theory and the ecb s action seems to be very effective third we focus on the other aspect of monetary stability the degree of price level uncertainty and the anchoring of inflation expectations in the medium to long term even though this assessment is more difficult than it is in the short to medium term since we only have a track record covering 6 years various indicators from the theoretical analysis paint a fairly reassuring picture of the effectiveness of the device used by the ecb

money and inflation in the euro area a case for monetary indicators abstract this paper examines inflation indicators for the euro area by studying the relationship between inflation output money and interest rates using data spanning 1980 2001 the central finding is that both the output gap and the real money gap the difference between the real money stock and the long run equilibrium real money stock contain considerable information regarding future inflation in contrast the eurosystem s money growth indicator the difference between nominal money growth and a reference value the prominent first pillar in its monetary strategy contains little information about future inflation and no information beyond that contained in the output and real money gaps the predictive performance of the output gap has improved compared to that in a previous version of this paper most likely because of better estimation methods

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

the dynamics of a small open economy in response to monetary fiscal and productivity shocks abstract this paper evaluates empirically the relative importance of monetary and fiscal versus technology shocks in an open economy characterized by perfect international capital mobility the variance covariance matrix of these shocks is estimated a stochastic model is used to perform numerical simulations the results show that persistent shocks to productivity can reproduce several empirical regularities including the puzzling high correlation between national saving and investment remarkably well and that monetary and fiscal shocks play a minor role

development of the market for u s treasury strips 1992 development of the market for u s treasury strips financial analysts journal vol 48 no 2 pp 68 74

liquidity reconstitution and the value of u s treasury strips an apparent pricing anomaly exists in the market for u s treasury strips zerocoupon strips created from principal payments typically trade at significantly higher prices than otherwise identical zero coupon strips created from coupon payments in addition to documenting this phenomenon this study demonstrates that differences in liquidity and differences in reconstitution characteristics explain much of this price variation u s treasury strips are zero coupon bonds created from either the principal or individual coupons of u s treasury bonds if the maturity date and face value are identical the cash flows for a strip derived from a principal payment are identical to the cash flows for a strip derived from a coupon payment however the two instruments almost always trade at significantly different prices for a recent sample 5 31 91 the mean percentage difference in price is greater than 1 2 with some differences greater than 2 7 this is an apparent anomaly since securities with identical cash flows should trade at the same price although coupon strips and principal strips have identical cash flows at maturity closer inspection reveals two differences the two instruments have different degrees of liquidity and different reconstitution characteristics previous studies have documented the effect of liquidity on prices in other markets amihud and mendelson 1986 1989 find that common stocks with differences in liquidity have significantly different risk adjusted rates of return silber 1991 studies restricted stock offerings and documents substantial price discounts on these illiquid securities vis a vis identical stocks that trade in the open market 1 in a study of u s treasury bills and treasury bonds with remaining maturities of less than six months amihud and mendelson 1991 find that differences in liquidity contribute to differences in prices between matched pairs of bills and bonds of the same

exchange rate versus monetary aggregate targeting the turkish case this article compares and contrasts the macroeconomic effects of exchange rate targeting and money supply targeting by using quarterly data from turkey for the period february 1986 march 2000 the results of the var analysis show that the exchange rate does not have the traditional hump shaped effect that money supply has on output in addition we observe that an exchange rate depreciation leads to a temporary improvement in the trade balance for only a year while monetary innovations have longer lasting effects those results suggest that money based targeting is more appropriate than exchange rate targeting for turkey

monetary policy in a financial crisis what are the economic effects of an interest rate cut when an economy is in the midst of a financial crisis under what conditions will a cut stimulate output and employment and raise welfare under what conditions will a cut have the opposite effects we answer these questions in a general class of open economy models where a financial crisis is modeled as a time when collateral constraints are suddenly binding we find that when there are frictions in adjusting the level of output in the traded good sector and in adjusting the rate at which that output can be used in other parts of the economy then a cut in the interest rate is most likely to result in a welfare reducing fall in output and employment when these frictions are absent a cut in the interest rate improves asset positions and promotes a welfare increasing economic expansion

a further contribution towards explaining why disinflation through currency pegging may cause a boom abstract we revisit the question of why exchange rate based erb disinflation is often expansionary we use an analytical dge model in discrete time with staggered wages if the policy is unanticipated and if the currency is pegged at the level it would have reached under unchanged policies then a boom occurs for preannounced erb disinflation our model also predicts a boom the explanation for both is that when wages are staggered wage setters have to be forward looking anticipating lower future inflation they reduce wages before the change in the exchange rate causing a favourable supply side effect on output

stabilization policies in developing countries what have we learned abstract the paper reviews the recent experience with stabilization programmes in latin america in the light of traditional and monetarist models of inflation and the exchange rate the traditional model links both inflation and payments problems to budget deficits the monetarist model too believes that inflation is caused by fiscal deficits but it takes a more optimistic view of stabilization full purchasing power parity and perfect capital mobility make stabilization just a question of the appropriate exchange rate policy and the proper rate of domestic credit creation the traditional view is substantially right as a long run model but it fails in the dynamics the monetarist model is as we know now fundamentally wrong as a short run description of the possibilities of inflation control there is need and room for a paradigm that places emphasis on the debt money mix in financing the budget on the stickiness of inflation rates and on the place of short run real exchange rate and real interest rate variations that these are key features of the transition phase is amply borne out by the devasting and unsuccessful experiences with monetarist stabilization in argentina chile and brazil

stabilization and its discontents argentina s economic restructuring in the 1990s abstract this paper assesses the argentine stabilization and market reform strategies since 1989 we argue that argentina may be penned in by its own success exchange rate targeting quelled inflation but the resulting real appreciation has limited export and employment growth microeconomic reforms raised efficiency but have threatened income distribution and hence political stability exclusive styles of policy making helped enact reform but have led to corruption and policy insensitivity and contributed to rising social discontent we close by suggesting how a second generation of reforms could tackle these issues and spread the proceeds of reform to a wider segment of the argentine public

comparing the welfare costs and initial dynamics of alternative inflation stabilization policies abstract this paper uses calibrated versions of a sticky price currency substitution model to compare the initial dynamics and welfare costs of three types of stabilization program exchange rate based erb money based mb and money based with initial reliquefication mbr erb and mbr programs are found to induce an initial expansion in real activity whereas mb programs are initially contractionary the welfare gains of eliminating high inflation are significant under permanent erb and mbr programs but small under permanent mb programs in addition temporary mb programs are shown to be much more disruptive than temporary erb or mbr programs these results provide an explanation for why mb programs are so rarely implemented and suggest that empirical studies that fail to distinguish mb from mbr programs are likely to be biased toward finding that stabilizations are always expansionary regardless of the nominal anchor

exchange rate based stabilizations under real frictions the role of endogenous labor supply abstract this paper studies exchange rate based stabilization programs in the context of a model of a small open economy where labor supply is endogenous agents derive utility from both consumption and leisure in environments where consumption is subject to a cash in advance constraint a cut in the rate of devaluation lowers the nominal interest rate and hence alters the optimal mix of consumption and leisure the paper shows that in the presence of adjustment costs of investment a perfectly credible cut in the devaluation rate causes simultaneously a consumption and output boom a cumulative current deficit a sustained real appreciation of the domestic currency and an increase in labor supply over time it is also shown that an imperfectly credible stabilization program in this environment would have effects similar to the perfectly credible program but generate richer dynamics such as an initial boom in output followed by a recession which begins prior to the end of the program the model has clear welfare implications in that permanent reductions in inflation are unambiguously welfare enhancing

a seasoning process in the u s treasury bond market the curious case of newly issued ten year notes the pricing behavior of new treasury notes and bonds issued during the treasury s regular refunding operations suggest the existence of a seasoning process prices of new issues are generally higher than prices of equivalent seasoned issues although overpricing for issues with original maturities of 3 5 and 30 years persists for approximately two to three months after issuance the seasoning process for treasury notes with original maturity of 10 years is more pronounced and lengthier on average the prices of these notes take approximately 20 months to adjust and become comparable to the prices of seasoned issues to a lesser extent this overpricing is present in the prices of the principal strips derived from the newly issued ten year notes

the decline in idiosyncratic values of us treasury securities abstract unique features and market frictions can lead to idiosyncratic pricing for some us treasury securities this study uses a linear programming lp model to measure aggregate idiosyncratic pricing of t notes and t bonds from 1980 to 2016 we document an average idiosyncratic pricing of 0 11 per 100 par as compared to an average bid ask spread of 0 08 further idiosyncratic pricing declined dramatically from the early 1980s to the 2010s empirical evidence suggests that the 1986 tax reform act increasing issue sizes and improving market liquidity contribute to the decline at the individual security level we identify factors contributing to and mitigating idiosyncratic pricing

eurosystem monetary targeting lessons from u s data abstract using a small empirical model of inflation output and money estimated on u s data we compare the relative performance of monetary targeting and inflation targeting the results show monetary targeting to be quite inefficient yielding both higher inflation and output variability this is true even with a nonstochastic money demand formulation our results are also robust to using a p model of inflation therefore in these popular frameworks there is no support for the prominent role given to money growth in the eurosystem s monetary policy strategy

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

the future of monetary aggregates in monetary policy analysis this paper considers the role of monetary aggregates in modern macroeconomic models of the new keynesian type the focus is on possible developments of these models that are suggested by the monetarist literature and that in addition seem justified empirically both the relation between money and inflation and between money and aggregate demand are considered regarding the first relation it is argued that both the mean and the dynamics of inflation in present day models are governed by money growth this relationship arises from a conventional aggregate demand channel claims that an emphasis on the link between monetary aggregates and inflation requires a direct channel connecting money and inflation are wide of the mark the relevance of money for aggregate demand in turn lies not via real balance effects or any other justification for money in the is equation but on money s ability to serve as a proxy for the various substitution effects of monetary policy that exist when many asset prices matter for aggregate demand this role for monetary aggregates which is supported by empirical evidence enhances the value of money to monetary policy

modern hyper and high inflations since 1947 hyperinflations by cagan s definition in market economies have been rare much more common have been longer inflationary processes with inflation rates above 100 percent per annum based on a sample of 133 countries and using the 100 percent threshold as the basis for a definition of very high inflation episodes this paper examines the main characteristics of such inflations among other things we find that i close to 20 percent of countries have experienced inflation above 100 percent per annum ii higher inflation tends to be more unstable iii in high inflation countries the relationship between the fiscal balance and seigniorage is strong both in the short and long run iv inflation inertia decreases as average inflation rises v high inflation is associated with poor macroeconomic performance and vi stabilizations from high inflation that rely on the exchange rate as the nominal anchor are expansionary

disinflation programs under policy uncertainty abstract this paper uses a model with endogenous labor supply to study exchange rate based inflation stabilization programs under uncertainty regarding the duration of the program the paper finds that the output and consumption dynamics induced by these programs are extremely sensitive to whether the programs are perceived to have a chance of continuing permanently or whether they are expected to end in finite time it is shown that the business cycle dynamics for output that are typically associated with these programs arise only when the policy is expected to collapse in finite time furthermore for the purposes of rationalizing the stylized facts the uncertain duration channel appears to induce a fundamental tension between the consumption dynamics and the current account dynamics these results raise doubts regarding the explanatory power of the uncertain duration channel in particular and the credibility channel in general

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

stabilization with exchange rate management stabilization programs in open economies typically consist of two stages in the first stage the rate of currency devaluation is reduced but the fiscal adjustment does not eliminate the fiscal deficit that causes growth of debt and loss of reserves making a future policy change necessary only later at a second stage is this followed by either an abandonment of exchange rate management or by a sufficiently large cut in the fiscal deficit we study how different second stage policy changes affect economic dynamics during the first stage these changes include tax increases budget cuts on traded and nontraded goods and increases in the growth rate of money

sterilization of short term capital inflows through lower interest rates reductions in international interest rates are a major cause of capital flows to emerging economies increases in domestic interest rates are a frequent policy response to the resulting price increases this is often unsuccessful the paper suggests a theoretical explanation based on distinctive features of emerging financial markets including imperfect asset substitutability and imperfect capital mobility for some sectors of the economy it concludes that the appropriate policy response to capital inflows may be lower interest rates

a reexamination of option values implicit in callable treasury bonds abstract longstaff 1992 and edleson fehr and mason 1993 examine option values implicit in callable treasury bonds and report a significant puzzle implied option values are frequently negative using an alternative approach we reexamine this issue and find that implied option values are generally positive and in contrast to previous studies instances of option values sufficiently negative to overcome the bid ask spread are rare we explain the findings in other studies by showing that the method used may lead to the appearance of a negative option value when the true value is positive

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite

inflation and monetary dynamics in the us a quantity theory approach in this article we investigate the long run link between inflation and money growth in the united states since 1960 a measure of the long run inflation trend is constructed which bears the interpreation of monetary inflation rate and is directly related to the excess nominal money growth process money growth less output growth as postulated by the quantity theory consistent with the memory characteristics of the series their fractional integration and cointegration properties are taken into account in empirical modelling the proposed measure is then compared with several existing measures of core inflation aimed at capturing long run inflation dynamics but unrelated to money growth the monetary long run inflation rate performs well in out of sample forecasting exercises especially over a 2 3 year horizon yielding valuable information to monetary policymakers

financial innovation and the role of derivative securities an empirical analysis of the treasury strips program the role that financial innovation plays in financial markets is very controversial to provide insight into this role we examine how market participants use the highly successful treasury strips program we find that investors use the option to create treasury derivative strips primarily to make markets more complete and take advantage of tax and accounting asymmetries although liquidity related factors help explain differences in the prices of treasury bonds and strips we find little evidence that the option to strip and reconstitute securities is used for speculative or arbitrage related purposes the role of financial innovation is a central issue for both policymakers and researchers in finance 1 critics argue that financial innovations often have no economic role beyond allowing some investors to take highly leveraged speculative or arbitrage related positions in contrast advocates argue that the introduction of new products makes financial markets more complete reduces frictions and transaction costs and leads to a more optimal allocation of risk in the economy to better understand the role played by financial innovation this paper examines how investors use the successful separate trading of registered interest and principal of securities strips program of the u s treasury this program allows investors to strip treasury notes and bonds to create separate discount bonds and to reconstitute previously stripped notes and

efficiency wages disinflation and labor mobility abstract the paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of disinflation policies in an open economy facing imperfect capital markets wages are flexible in the nontradables sector and based on efficiency factors in the tradables sector with perfect labor mobility a permanent reduction in the devaluation rate leads in the long run to a real appreciation a lower ratio of output of tradables to nontradables an increase in real wages measured in terms of tradables and a fall in the product wage in the nontradables sector under imperfect labor mobility unemployment temporarily rises