velocity futures markets does the fed need a structural model i introduction during the 1990s the concept of inflation targeting caught on among both monetary theorists and monetary policy makers this interest took several forms some advocated a backward looking approach as exemplified by the taylor rule which would require central bankers to offset shocks that had driven inflation away from its target path others advocated a forward looking approach whereby the central bank would target the forecast that is set policy in such a way that the optimal forecast of inflation was exactly equal to its target value this forward looking strategy could use either central bank or private forecasts of inflation some of those who advocated a forward looking strategy based on private forecasts went so far as to suggest that such a policy would eliminate any need for the central bank to develop a structural model of the economy bernanke and woodford 1997 criticized this line of analysis by suggesting that due to problems related to circularity and indeterminacy or solution multiplicity 1 a policy of targeting the forecast was not likely to be effective in this article we argue that because the circularity problem can be easily remedied a private forecast based policy is feasible and central banks do not need a structural model of the economy ii the circularity problem because monetary policy impacts the price level with a long and variable lag it is not surprising that many economists have looked for ways of incorporating private sector forecasts into the monetary policy making process taken to its logical extreme such an approach would require the central bank to adjust its policy instrument until the private sector s forecast of inflation for instance was equal to the target value at first glance the idea of replacing a bureaucratic decision making process with a simple rule based on rational expectations and efficient markets theory has great intuitive appeal bernanke and woodford however showed that there is a circularity problem associated with attempts to target private sector forecasts of inflation or any other goal variable if a policy of targeting the forecast were credible and effective then at each and every point in time the market would expect the future price level to be equal to its target value but in that case private sector forecasts would be uninformative that is they would be unable to provide the monetary authority with information about economic shocks that might impact the price level and thus would provide no guidance as to how the monetary authority could use its tools to offset those shocks on closer inspection it turns out that there are a number of distinct issues entangled in the general circularity problem for instance does the problem apply only to private sector forecasts or to central bank forecasts as well and are there ways of developing private sector forecast based policy rules that are not susceptible to the circularity problem if the answer is yes what does this imply about the widely held view that monetary authorities need to base policy on their own internal structural models of the economy svensson 1997 suggested that his inflation forecast targeting proposal was not susceptible to the circularity problem because it relied on internal central bank forecasts not private sector forecasts bernanke and woodford however showed that the effectiveness of svensson s proposal was based on the fact that central bank forecasts were derived from a structural model of the economy and that the distinction between internal and external forecasts was essentially meaningless for the circularity problem if the problem is not private sector forecasts per se then the next question is whether it is possible to set up a policy targeting rule based on private sector forecasts that avoids the circularity problem and also minimizes the need for the central bank to rely on a structural model of the economy

the returns and forecasting ability of large traders in the frozen pork bellies futures market using settlement prices and nine years of daily commitments for large reporting traders in the frozen pork bellies futures market the authors find that these traders generate significant profits and the distribution of trader returns over time is not random further analysis finds that a subset of large elite traders possesses significant forecasting ability indicating that they not only are able to consistently anticipate the direction of price changes but are also on the right side of the market when large price changes occur hence certain futures market traders accumulate trading experience and knowledge permitting them to accrue considerable wealth copyright 1994 by university of chicago press

the impact of futures price targeting on the precision and credibility of monetary policy this paper analyzes the hypothesis that the targeting of macroeconomic aggregates can be done more effectively by pegging the price of a futures contract linked to future announcements of the policy target where there is an information lag futures price targeting may be more efficient than a contingent money supply rule a policy of futures price targeting would be less likely to suffer from the time inconsistency problem the use of futures price targeting would also appear to be superior to policies based on intermediate targeting as well as most types of discretion copyright 1995 by ohio state university press

a proposal to end inflation this paper suggests how the price level could be stabilized by the bank of england adopting a rule to peg the price of a new financial instrument this new instrument would be similar but not identical to a price index futures contract the paper explains how the scheme would work assesses potential objections and discusses how the bank of england could enhance the credibility of its commitment to the rule it also compares the scheme with the alternatives of targeting the monetary growth rate or targeting the price level copyright 1994 by royal economic society

inflation proof currency the feasibility of variable commodity standards under a proposal by robert l greenfield and leland b yeager 1989 the value of currency is tied to the value of a defined basket of goods by indirect convertibility the note issuing bank offers to redeem its currency for sufficient gold to buy the basket in the market the authors find that this arrangement cannot be applied to the currency that is the medium of account for quoting prices of goods and that it would imply unlimited change in the gold price when the price of the basket deviates from unity a feedback rule with slower price adjustment may however be feasible copyright 1993 by ohio state university press

interest bearing currency legal restrictions and the rate of return dominance of money note the rate of return dominance of money is the crucial anomaly of monetary theory at least this is the position taken by j r hicks in his seminal paper a suggestion for simplifying the theory of money 1935 hicks was concerned about the coexistence of non interest bearing money and real assets whether real assets which are innately risky actually dominate money is of course debatable as tobin 1958 points out the dominance seems unambiguous however when the money is unbacked non interest bearing currency and the competing asset is default free interest bearing government bonds such bonds are promises to pay the unbacked currency and the government is typically the sole legal provider of the unbacked currency the promised currency being unbacked makes the default free claim of the government more plausible this paper considers various explanations of the rate of return dominance of money and defends the legal restrictions view the rate of return dominance of money has been explained by costs of trips to the bank this explanation was the one put forward by hicks baumol 195 and tobin 1956 developed this idea in the inventory model of money this approach assumes that trade is carried out in a non interest bearing currency and that trade directly using a bank s portfolio is impossible the rate of return dominance of money has been explained by costs of intermediation banks intermediate their portfolios into claims that are convenient for trade but doing so is costly friedman 1969 considers the costly intermediation of bonds into interest bearing demand deposits and currency stating competition among banks would force them to pay interest on deposits at a rate falling short of rb the bond rate by the costs of running the banks competition would force banks also to pay interest on currency at a rate below the rate paid on deposits by the extra costs of administering the payment of interest on currency they would of course have an incentive to devise an economical way to pay such interest p 39 bryant and wallace 1979 1980a model the costly intermediation of government bonds into

trade surpluses and life cycle saving behaviour abstract the national income account identity and the life cycle theory of consumption together imply that the current account should be a function of the age structure a country with a high proportion of young and retired should have current account deficits using a panel of 84 countries we find empirical support for this hypothesis

capital flows to the new world as an intergenerational transfer the late nineteenth century saw international mass migrations of capital and labor from the old world to the new factors chased each other and the abundant resources at the frontier demographic structure also contributed to the massive capital flows from britain to the new world the dependency hypothesis is confirmed by estimation of savings functions in three new world economies argentina australia and canada in which high dependency rates may have significantly depressed domestic savings rates and pulled in foreign investment in effect an intergenerational transfer from old savers in the old world to young savers in the new

a model of the bfh payments system the bfh payments system was introduced by robert l greenfield and leland b yeager in a laissez faire approach to monetary stability 6 the key element of their proposal is to dispense with base money and instead tie the means of payment to a nearly comprehensive bundle of goods and services by the institution of indirect convertibility their system promises to be free from inflation and several sources of recession while bfh was named to credit fischer black i eugene fama 3 4 and robert hall 10 11 it must not be confused with their specific institutions or arguments greenfield and yeager modified their ideas and have continued to develop the system 20 5 21 8 9 the purpose of this paper is to present a model of bfh consistent with simple textbook macroeconomics contrary to first impressions bfh is best understood using the concept of money but the absence of base money makes the quantity theory inappropriate for analysis instead a simple keynesian model illustrates the determination of interest rates real income the price level and the quantity of money aggregate supply the is relationship and money demand are conventional only the money supply process is unusual

on the optimal hedge of a nontraded cash position in this paper we focus on the optimal demand for futures contracts by an investor with a logarithmic utility function who attempts to hedge a nontraded cash position when the analysis is conducted in the cash commodity price space we show that the value function associated with the bernoulli investor program is not additively separable thus suggesting that this investor hedges against shifts in the opportunity set as represented by the commodity price by establishing the equivalence between the cash formulation of the problem and the wealth formulation we are able to analyze the problem in the wealth commodity price space in this space we show the additive separability of the value function when the futures settlement price process is perfectly locally correlated with the commodity price process the demand for futures in this instance is composed of a a mean variance term and b a minimum variance component that is a classic feature of models with nontraded assets since the first best nonmyopic optimum is attained however the deviation from a mean variance demand should not be interpreted as the expression of a nonmyopic behavior but rather as an attempt to restore a first best optimum on the other hand when the correlation between the futures price and the underlying commodity price is imperfect in general the value function does not separate additively the first best solution cannot be attained and the optimal futures trading strategy involves a hedging term against shifts in the opportunity set in the classic dynamic portfolio problem the investor selects a trading strategy in risky and riskless assets so as to maximize his or her expected lifetime utility in this environment where all assets can be freely traded the logarithmic investor behaves myopically to the extent that he or she ignores shifts in the opportunity set when making current choices samuelson 271 mossin 24 hakansson 16 merton 22 in particular in models with continuous trading it turns out that the value function corresponding to the investor s program is additively separable in wealth and state variables the implication is that his or her behavior will be myopic i e that his or her demand functions for assets will be of the pure meanvariance efficiency type and in particular will not include any dynamic hedging components that are characteristic of financial markets with shifting opportunities in this paper we investigate the structure of the bernoulli investor s demand functions in the situation where one asset cannot be freely traded in the market

financial market innovation and security design an introduction abstract the article describes in the context of theory and practice this special issue of the journal of economic theory on financial market innovation and security design the main focus is on security design in incomplete financial markets possibly with asymmetrically informed traders we first survey the general equilibrium literature which emphasizes the spanning role of securities we then provide a unified framework encompassing the literature that employs a cara guassian setting to study the impact of financial innovation on risk sharing and information aggregation journal of economic literature classification numbers g10 d52

can monetary stabilization policy be improved by cpi futures targeting scott sumner and similarly kevin dowd proposes to have the central bank write futures contracts on the consumer price index and automatically adjust the money stock in response to the public s net position in such contracts as a way of improving the precision and credibility of monetary policy the authors identify two serious problems that can be expected to render sumner s proposal ineffective 1 the public has no incentive to take a speculative position in the contracts until it is too late to adjust the money stock and 2 the central bank lacks an effective budget constraint copyright 1997 by ohio state university press

returns to individual traders of futures aggregate results by means of a data set previously unavailable for academic research actual trading histories of individual futures traders are examined with this more detailed data the author is able to 1 test the risk return hypothesis directly 2 include a much larger segment of the market than before and 3 use actual instead of hypothetical t rading strategies it is shown that the commercial hedging traders are most profitable while noncommercial speculative traders earn n egative or zero profits because speculators are not receiving reward s for the risks they willingly absorb the theory of normal backwarda tion and its extension can be rejected copyright 1987 by university of chicago press

the variable rate of growth effect in the life cycle saving model the rate of growth in real gnp g affects the aggregate saving rate positively in life cycle saving models this rate of growth effect is invariably estimated as the coefficient of g in the saving function we show that other determinants of the saving rate influence the rate of growth effect in other words the rate of growth effect is not constant specifically the real rate of return on financial assets and the population dependency ratio determine the timing of saving over the life cycle and hence alter the rate of growth effect the dependency ratio also has an effect on the saving rate which is independent of g because it together with the foreign saving rate determines the level of saving over the life cycle

toward a positive economic theory of hedging the hedging models developed over the last half century are evaluated for their ability to explain the actual hedging behavior of the various economic agents this evaluation shows a total lack of a reasonable positive model of hedging behavior while each class of existing models predicts some observed behavior none is able to predict the broad range of actions that is easily observed in the real world in this paper i develop such a model and include a plausible and coldly rational economic explanation for why farmers don t hedge at all while merchandisers with identical risk attitudes will fully hedge

the evolution of a free banking system the institutional features of models of unregulated monetary systems have often been arbitrarily and implausibly assumed this paper instead provides realistic grounding for important features by constructing a logical evolutionary account of free banking sophisticated and orderly arrangements are shown to emerge from competition and the pursuit of less costly methods of payment the emergence of standardized commodity money is followed by the development in turn of basic money transfer banking easily transferable bank liubilities and clearinghouses the features of an evolved free banking system differ from those assumed in recent models of competitive payments systems

the effects of customs unions on the pattern and terms of trade in a ricardian model with a continuum of goods abstract this paper adapts the dornbusch fischer samuelson continuum of goods ricardian model to three countries the pattern of trade and the terms of trade are determined endogenously in this general equilibrium model we derive comparative statics effects of endowment and tariff changes on trade patterns and terms of trade and apply the results to customs union theory trade creation and trade diversion impacts of unions are shown to be determined by the position of countries traded goods on the continuum in addition the desirability of economic integration is found to depend on the level of country development

can interest bearing money circulate a small denomination arkansan experiment 1861 63 legal restrictions theory suggests that dominance of non interest bearing currency is possible only because legal impediments prevent financial institutions from offering interest bearing alternatives a viable interest bearing medium must be issued in denominations low enough for day to day use however and without historical examples of small denomination interest bearing issues we cannot properly test whether interest bearing currency will circulate as legal restrictions theory predicts civil war arkansas offers a rare instance where large quantities of small denomination interest bearing money were actually issued mostly below 5 the results of this arkansan experiment show that small denomination interest bearing issues can indeed function as the primary medium of exchange

implications of population ageing for economic growth the share of the population aged 60 and over is projected to increase in nearly every country in the world during the period 2005 50 population ageing will tend to lower both labour force participation and savings rates thereby raising concerns about a future slowing of economic growth our calculations suggest that oecd countries are likely to see modest but not catastrophic declines in the rate of economic growth however behavioural responses including greater female labour force participation and policy reforms including an increase in the legal age of retirement can mitigate the economic consequences of an older population in most non oecd countries declining fertility rates will cause labour force to population ratios to rise as the shrinking share of young people will more than offset the skewing of adults towards the older ages these factors suggest that

using usda forecasts to estimate the price flexibility of demand for agricultural commodities we estimate the general equilibrium price flexibility of demand for corn and soybeans using monthly changes in expected supply published by the usda our estimates reflect the demand response to a one year supply shock and thus correspond to the inverse demand elasticity we derive the conditions under which our estimates are consistent and we show how demand flexibility varies by season inventory time horizon and demand composition at average inventory and without accounting for corn ethanol use we obtain price flexibility estimates of 1 35 and 1 03 for corn and soybeans respectively current corn ethanol production levels are associated with much larger absolute flexibilities for both commodities copyright 2012 oxford university press

interest bearing currency evidence from the civil war experience in interest bearing currency evidence from the civil war experience james gherity 1993 reports an experience with interest bearing notes during the american civil war that runs counter to the predictions of the legal restrictions theory of the demand for money wallace 1983 he concludes that this failure of the legal restrictions theory is best explained by white 1987 and that the experience fails to support makinen and woodward s 1986 explanation of why interest free money is an inherently superior circulating medium he arrives at this latter conclusion based on his own assertion that interest bearing notes may sometimes circulate at par when market participants decide to avoid the transactions costs of calculating the interest that has accumulated on them this comment corrects an analytical error in his paper and clarifies the experience gherity s proposition concerning the avoidance of transactions costs is wrong as a consequence for some of the note issues concerned the legal restrictions theory is refuted more strongly than he indicates but for others it is less so there is little in the experience to discriminate between the white explanation and that of makinen and woodward indeed for some of the note issues neither the legal restrictions theory white nor makinen and woodward adequately explains the behavior that occurred the competing theories

technical progress in a three country ricardian model with a continuum of goods abstract this paper develops a three country extension to the ricardian model with a continuum of goods in contrast to the standard two country version uniform technical progress in one country is shown to make the country which is a close substitute in production unambiguously worse off while improving the welfare of the other less similar country

the numeraire portfolio abstract a portfolio formed from a given list of assets is defined as a numeraire portfolio for the list if a it is self financing b its value is always positive and c zero is always the best conditional forecast of the numeraire dominated rate of return of every asset on the list the numeraire portfolio exists if and only if there are no profit opportunities from trading assets on the list for a sample list of heterogeneous assets nyse size quintile portfolios corporate bonds and short term bills numeraire dominated returns are similar to market model forecast errors and as abnormal return measures clearly dominate market adjusted returns

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

a continuous time equilibrium model of forward prices and futures prices in a multigood economy abstract this paper is a theoretical investigation of equilibrium forward and futures prices we construct a rational expectations model in continuous time of a multigood identical consumer economy with constant stochastic returns to scale production using this model we find three main results first we find formulas for equilibrium forward futures discount bond commodity bond and commodity option prices second we show that a futures price is actually a forward price for the delivery of a random number of units of a good the random number is the return earned from continuous reinvestment in instantaneously riskless bonds until maturity of the futures contract third we find and interpret conditions under which normal backwardation or contango is found in forward or futures prices these conditions reflect the usefulness of forward and futures contracts as consumption hedges

can we improve the structure of financial systems 1993 the main theme of this paper is that several of the characteristics of our present western monetary and banking systems have been crucially dependent on the particular temporal process of historical development and are not an essential feature of more fundamental preferences or technological conditions they exist in part because we take them for granted it is the purpose of this paper to examine what might change in both theory and practice if some of these inessential characteristics were to be changed

accounting for non interest bearing currency a critique of the legal restrictions theory of money the legal restrictions theory of money developed by neil wallace and others implies that all noncommodity currency would be interest bear ing under laissez faire if the interest rate on bonds is positive this note cites historical evidence to the contrary it then analyzes the source of the legal restrictions theory s inapplicability and o ffers an alternative computation cost based explanation for nonintere st bearing currency copyright 1987 by ohio state university press

on the fluctuations in consumption and market returns in the presence of labor and human capital an equilibrium analysis abstract we examine the effects of human capital on consumption stock market and other fluctuations in a general equilibrium continuous time model a representative consumer worker investor derives utility from consumption and leisure a representative firm demands labor as the sole input to a stochastic production technology driven by general possibly nonmultiplicative shocks for cobb douglas utility and multiplicative shocks labor is nonstochastic and consumption and stock market volatility are equated as under no human capital deviations from this are analyzed for logarithmic utility and constant elasticity of substitution production technology cases are identified where the presence of labor causes consumption to be smoother than the stock market

futures markets and commodity options hedging and optimality in incomplete markets abstract this paper examines the allocational roles of futures markets and commodity options in multi good and multi period economies in a continuous time model with time additive utilities and homogeneous beliefs trading in unconditional futures contracts the market portfolio and a riskless asset gives any pareto optimal allocation individuals optimal holdings of futures contracts in the continuous time model are related to their consumption bundles and to their risk tolerances it is shown that both hedging and reverse hedging behavior are possible in the general model with discrete trading options on portfolios of commodity options are shown to permit any unconstrained pareto optimal allocation

demography national savings and international capital flows this paper addresses the relationship between age distribution national savings and the current account balance the results point to substantial demographic effects with increases in both the youth and old age dependency ratios associated with lower savings rates they also point to differential effects on savings and investment and thus to a role for demography in determining the current account balance the estimated demographic effect on the current account balance exceeds 6 percent of gdp over the last three decades for a number of countries and given expected demographic trends is likely to be substantially larger over the coming decades copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

diversification cones trade costs and factor market linkages abstract this paper finds non uniform differences in the distribution functions of factor usage intensities among 10 rich oecd countries the 10 countries form three distinct groups such that the between group differences are more pronounced than within group differences and capital abundant countries are in capital abundant groups the estimation works even if the same industry codes represent different goods across countries in the data the finding is consistent with the multiple cone factor proportions theory with zero trade costs with each group being one cone an alternative interpretation is non zero trade costs both interpretations imply weak factor market linkages between the countries in different groups

the mechanics of indirect convertibility this paper sets out the mechanics and equilibrating processes of indirectly convertible monetary systems in which currency issuing banks redeem their currency with redemption media of the same value as the commodity or commodity basket that defines the dollar it goes on to investigate the paradox of indirect convertibility and suggests that indirect convertibility is feasible despite the paradox finally it assesses the systems of fisher hall and others that have been suggested as alternatives to indirect convertibility but concludes that these alternative systems are open to serious objections copyright 1995 by ohio state university press

should central banks target cpi futures the author considers recent proposals that the government should attempt to stabilize the nominal value of a cpi futures contract under a variety of conditions arbitrageurs will break the peg and bankrupt the central bank the central bank ends up in a gaming problem with private traders or the regime collapses into discretion copyright 1997 by ohio state university press

interday variations in volume variance and participation of large speculators abstract we use data uniquely available from the commodity futures trading commission cftc to document the intraweek trading patterns of large speculators in five futures markets these markets include futures traded against the standard and poor s 500 stock index treasury bonds gold corn and soybeans we also examine the influence of large speculator trades on the patterns of volume and volatility for the contracts in our sample though we detect the familiar u shaped and inverted u shaped patterns across weekdays for volatility and aggregate volume the association between volume and volatility becomes stronger when we separate large speculator volume from volume associated with other traders the coefficient on large speculator volume is much larger than the coefficient on other volume in these regressions compared with total volume large speculator volume is greater on mondays than on the other days of the week in all five markets

debt dependence and the demographic transition latin america in to the next century abstract in the decades ahead world demographic trends indicate that our planet s share of the population of working age will be gradually diminishing the regional incidence of the trends however shows a marked bias thus the general equilibrium of the world saving investment nexus may be fundamentally realigned in the years to come via dependency effects for example favorable demographic prospects in latin america and elsewhere in the developing world offer poorer countries the chance to use the potential of their own demographic transitions to propel financial transitions to domestically financed accumulation even capital export

luck versus forecast ability determinants of trader performance in futures markets statistical techniques are used to demonstrate that the fortunes of individual futures traders are determined by luck not forecast ability even though a large number of traders appear to exhibit significantly superior forecast ability the investigation strongly supports three conclusions there are fewer participants with significantly superior skill than expected if participants trade randomly there are more traders exhibiting no skill than expected if participants trade randomly and forecast ability is not correlated over time superior forecasters in the early period are only average forecasters in the later period therefore it is luck that determines trader performance copyright 1991 by university of chicago press

a laissez faire approach to monetary stability this paper develops some diverse hints for a new monetary system offered separately by fischer black eugene fama and robert e hall for reasons that will become evident though we should perhaps say payments system instead of monetary system none of the economists mentioned has actually proposed the particular system set forth here nor examined all its properties and we call it the bfh system not to implicate them but only to give credit for some component ideas and to have a convenient label l regardless of who if anyone may actually advocate the system contemplating it is instructive it illuminates by contrast some characteristics of our existing and recent systems

using futures prices to control inflation reply to garrison and white in a recent paper garrison and white g w 1997 offered a thoughtful and skeptical assessment of several recent proposals to use price index futures contracts to achieve price level targets their main focus is a scheme put forward by sumner 1995 but they also addressed a scheme that i suggested dowd 1994 1995 and made substantial criticisms of price index futures schemes in general sumner 1997 has already replied to those that pertain to his scheme and this reply responds to those that pertain to mine 1 the objective of my scheme is to achieve price stability whilst also making the monetary system fully automatic and so doing away with discretionary monetary policy this objective would be achieved by the central bank pegging the price of price index futures contracts and then relying on private sector arbitrage to ensure that the money supply is consistent with a stable expected price level the actual price level would then be equal to this expected price level plus or minus a hopefully small random error

age structure and the current account we adjust current account surpluses and deficits of 57 countries in the period 2005 2009 for differences in the age structure of their populations and find that these differences can account for a significant part of the variation in the data among the large countries we find that the adjustment increases the surpluses of germany and japan while the surpluses of china singapore hong kong korea thailand indonesia and malaysia are significantly diminished

financial speculators underperformance learning self selection and endogenous liquidity we develop an equilibrium model of learning by rational traders to reconcile several empirical regularities cross sectionally most individual speculators lose money large speculators outperform small speculators past performance positively affects subsequent trade intensity most new traders lose money and cease speculation and performance shows persistence learning from trading generates substantial endogenous liquidity reducing bid ask spreads and the impact of exogenous liquidity shocks on asset prices but amplifying the effects of real shocks introducing slightly overconfident traders increases bid ask spreads hurting all traders finally behavioral theories cannot reconcile all of these empirical regularities

legal restrictions and monetary evolution abstract the legal restrictions school of monetary theory hypothesizes that the use of ordinary currency would die out if legal tender laws were abolished instead interest bearing instruments would be used in transactions this paper refutes the claim as far as it applies to money as a medium of exchange the network externality or coordination convention properties of a medium of exchange imply that the strategy of holding interest bearing instruments is not necessarily individually dominant there is a critical mass of users that has to be assembled before a switch can occur

external adjustment and the global crisis abstract the period preceding the global financial crisis was characterized by a substantial widening of current account imbalances across the world since the onset of the crisis these imbalances have contracted to a significant extent in this paper we analyze the ongoing process of external adjustment in advanced economies and emerging markets we find that countries whose pre crisis current account balances were in excess of what could be explained by standard economic fundamentals have experienced the largest contractions in their external balance we subsequently examine the contributions of real exchange rates domestic demand and domestic output to the adjustment process allowing for differences across exchange rate regimes and find that external adjustment in deficit countries was achieved primarily through demand compression rather than expenditure switching finally we show that changes in other investment flows were the main channel of financial account adjustment with official external assistance and ecb liquidity cushioning the exit of private capital flows for some countries

optimal hedging with a subjective view an empirical bayesian approach the standard optimal hedging model has been the preferred theoretical model of normative hedging behavior in empirical applications the model is often implemented with the parameter certainty equivalent pce procedure however the pce procedure completely ignores parameter estimation risk and subjective views we develop an empirical bayesian optimal hedging model that not only effectively accommodates parameter estimation risk but also provides hedgers with a theoretically intuitive yet quantitatively rigorous framework to blend their subjective views and a marketwide or firmwide consensus in determining optimal hedging positions ratios

dynamic asset pricing with non redundant forwards abstract in an incomplete market in which non redundant forward contracts contribute to span the uncertainty some standard results of portfolio theory must be amended when the investment opportunity set is driven by k state variables a k 3 mutual fund separation theorem is obtained in lieu of merton s k 2 fund separation result the additional fund is a portfolio that hedges the interest rate risk brought about by the optimal portfolio strategy itself second the mean variance efficiency of the market portfolio of cash assets is neither a necessary nor a sufficient condition for the linear relationship between expected return and beta to hold third the pricing equation for a forward contract is shown to contain an extra term relative to that for a cash asset term we name strategy risk premium

optimal futures innovation in a dynamic economy the discrete time case abstract we study the optimal futures innovation in a dynamic economy and investigate how the results obtained in a static economy should be modified due to the possibility of dynamic trading we analyze three different notions of ex ante optimality depending on the authority s ability to redistribute wealth among the investors and characterize the optimal futures innovation in each sense journal of economic literature classification numbers d52 d60 g10

a class of quadratic options for exchange rate stabilization abstract we propose the use of a new option which we call quadratic and that central banks could use to smooth exchange rate volatility through the hedging strategies of the issuers we derive analytic pricing and hedging formulas we suggest a criterion to derive the optimal for the central bank option parameters finally we perform several simulation exercises which show the effectiveness of using this option with or without conventional spot interventions

are corn futures prices getting jumpy the article sheds light on price jump risk in corn futures prices in the era of electronic trading and after the shift to real time announcement of usda reports using intraday prices from 2008 to 2015 we employ a nonparametric test to detect jumps and variance analysis to assess the relative importance of jump risk real time trading of major usda reports has substantially increased the frequency and clustering of price jumps and results in higher market liquidity costs in contrast although the presence of jumps on non announcement days has doubled recently their magnitude has declined as have transactions costs during their occurrence the largest jump risk or execution risk is experienced by high frequency traders due to heightened microstructure noise during price jumps however traders holding long term market positions are only minimally affected by increased jump risk

the relation between forward prices and futures prices abstract this paper consolidates the results of some recent work on the relation between forward prices and futures prices it develops a number of propositions characterizing the two prices these propositions contain several testable implications about the difference between forward and futures prices many of the propositions show that equilibrium forward and futures prices are equal to the values of particular assets even though they are not in themselves asset prices the paper then illustrates these results in the context of two valuation models and discusses the effects of taxes and other institutional factors

what should central banks do what should be their macroeconomic objectives and operations before turning to the normative question of what central banks hereafter cbs should do we need to deal with the contentious issue of what cbs actually can do in the field of monetary control one might think that this should be a relatively straightforward matter of fact instead there is a yawning chasm of mutual misunderstanding which has persisted for decades between economists and those working in cbs which has bedevilled the subject virtually every monetary economist believes that the cb can control the monetary base hereafter mo and subject to errors in predicting the monetary multiplier the broader monetary aggregates as well after all mo apart from some relatively unimportant qualifications about coins from the mint represents the liabilities of the cb and the cb should be able to control its own liabilities by open market operations hence the normal assumption is that mo is controllable within a narrow margin if the central bank should fail to do so it must be because it has chosen some alternative operational guide for its open market operations e g holding interest rates constant at some level which operational rule is frequently decried as sub optimal assuming that cbs can almost perfectly control mo economists have constructed several simulated schemes of how an optimal rule for so doing might be set up mccallum i993a b provides good recent examples almost all those who have worked in a cb believe that this view is totally mistaken in particular it ignores the implications of several of the crucial institutional features of a modern commercial banking system notably the need for unchallengeable convertibility at par between currency and deposits and secondly that commercial bank reserves at the cb receive a zero or belowmarket rate of interest the first means that fluctuations in the public s demand for cash which are both strongly seasonal and somewhat unpredictable must be accommodated the second means that commercial banks will not willingly hold free reserves at the end of each day assuming for this purpose that a stated reserve ratio has to be held on each day rather than averaged over say a couple of weeks beyond that needed to meet late fluctuations in the demand for cash after the money market has closed or become thin only if interest rates fall to the very low levels of the i930s and or risks of interest rate variability or late in the day cash runs increase would commercial banks increase their desired free reserves thus given the

fiscal rules and twin deficits the link between fiscal and external balances this paper investigates the relationship between countries fiscal balances and current accounts with an emphasis on the role of fiscal rules the direct effect of fiscal policy on the current account via aggregate import demand is potentially amplified by indirect effects materializing through interest rate effects and inter generational transfers that reduce savings on the other hand the implied positive relation between fiscal and external balances is potentially attenuated by offsetting changes in savings through ricardian equivalence considerations we expect this attenuation effect to be stronger in countries with more stringent fiscal rules and test this hypothesis using a panel of 73 countries over the period 1985 2012 as previous studies we find a positive effect of fiscal balances on the current account supporting the twin deficit hypothesis however the effect of fiscal balances on the current account depends on the stringency of fiscal budget balance or debt rules in place it is reduced by one third on average and virtually eliminated for countries with the most stringent fiscal rules authors abstract

information and normal backwardation as determinants of trading performance evidence from the north sea oil forward market this paper utilizes transaction specific data on forward trading in the international petroleum market to test directly predictions from the theory of normal backwardation against information based predictions of trader performance with the ability to identify buyers and sellers the authors find that no traders make significant profits on interday measures within the day however traders likely to have superior information make significant profits the results are not supportive of normal backwardation but are consistent with the time pattern of information dissemination in this market deals made during the day are widely reported only at day s end copyright 1994 by royal economic society

returns to individual traders in agricultural futures markets skill or luck using individual trader data from the commodity futures trading commission s cftc large trader reporting system ltrs for the period january 2000 to september 2009 this article investigates whether noncommercial traders in the corn live cattle and coffee futures markets persist in making profits two out of sample measures of skill a winner and a loser ranking test and a top and a bottom decile test are used to analyse the ability of traders to consistently perform well at monthly quarterly and annual time horizons the findings identify significant persistence in rankings traders in the top half of the profit distribution in a time period tend to stay in the top half in the next period differences in magnitude of profitability between the top and bottom deciles also provide support that persistent skill exists among the top 10 of traders detailed examination of annual rankings for those traders who were most continuously in the markets further reveals persistence in profits for a smaller s

scottish banking before 1845 a model for laissez faire during the free banking era in eighteenth and early nineteenth century scotland there were a number of legal restrictions affecting the evolution of the system scottish banking was characterized by restrictions on small denomination and interest bearing notes there were also restrictions inhibiting the development of capital markets and entry into banking furthermore the bank of england operated as a shadow central bank for the scottish system these considerations call into question the use of the scottish banking experience as the appropriate model for laissez faire and as evidence against the legal restrictions theory of money and the new monetary economics copyright 1989 by ohio state university press

time varying risk premium further evidence in agricultural futures markets research has provided mixed results regarding the presence of a time varying risk premium in agricultural futures markets in this article we test for the presence of a time varying risk premium focusing on the properties of the underlying data our results show that accounting for the structural break in the 1970s plays a key role in the findings in contrast to recent research we find only limited evidence of time varying risk premium for a two month horizon the corn soybean meal and hog markets show no signs of a risk premium while very weak support for a time varying premium emerges in live cattle for the four month horizon no evidence of a time varying risk premium appears for any of the markets

reply to garrison and white gairison and white henceforth g w have written an interesting critique of my 1995 paper on cpi futures they have questioned the feasibility of using short term cpi futures as a target of monetarzr policy and have also criticized my auxiliary proposal for using long term cpi futures as a way of overcoming the timeinconsistency problem g w have found some significant flaws in my proposal but i don t believe these problems to be unsolvable before discussing their most important criticism i will briefly respond to g w s critique of my solution to the time inconsistency problem in my proposal i argued that if speculators expected inflation then they would buy long term cpi futures from the government in that case the government would be taking a short position and would thus have less incentive to adopt an inflationary policy assuming that speculators would continue to buy cpi futures so long as the expected inflation rate was significantly higher than zero then equilibrium would occur when the potential losses to the government from cpi futures were just large enough to deter the central bank from inflating the money supply g w suggest that the government could simply print money to pay off the successful speculators and that there is no reason why a central bank would feel constrained by these potential losses they argue that