optimal duplication of effort in advocacy systems abstract the paper focuses on the creation of information for decision making when agents effort is non observable and rewards are indirect that is only based on the final decision following dewatripont and tirole dewatripont m tirole j 1999 advocates journal of political economy 107 1 39 the paper shows that the creation of advocates of special interests as opposed to non partisans generates an efficient mechanism of mutual monitoring that reduces the scope for manipulation such monitoring is preferable over imposing penalties for detected manipulation it is also preferable to creating an agency that monitors the non partisan agent applications to transfer price policies and comparative judicial systems are considered

price and authority in inter profit center transactions price and authority have traditionally been regarded as alternative social mechanisms for allocating resources however actual transactions whether inter or intrafirm can be evaluated in terms of the extent to which they combine both of these mechanisms an especially revealing example of this is the exchange of goods between two profit centers in the multi profit center firm three of the most common arrangements or transfer pricing polices for effecting these transactions are examined here exchange autonomy transfers depend primarily on price with no or minimal use of authority mandated full cost transfers involve a substantial exercise of authority relative to the use of price mandated market based transfers use both authority and price in important ways for all three policies the transaction costs of these internal transactions may exceed these costs on external transactions

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

further long memory properties of inflationary shocks several previous studies have found fractionally integrated or long memory behavior in the conditional mean of inflation this paper notes that extremely similar phenomena are also apparent in the squared and absolute values of residuals from fractionally filtered inflation series hence the inflation process appears to have a dual long memory feature in both its first and its second conditional moments we suggest a parametric model of long memory in both the conditional mean and the conditional variance some monte carlo evidence is presented that supports estimation of the model by approximate maximum likelihood methods we then report estimated models for the inflation series for several different industrialized countries including the united states for nearly all of the countries in our study there is strong evidence of statistically significant long memory parameters in both the conditional mean and the variance we note some of the implications for modeling inflation

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

inflation and real short term interest rates a kalman filter analysis of the term structure this paper applies the kalman filter technique to look at the relationship among real interest rates inflation and the term structure of interest rate under the expectations hypothesis using quarterly data from 1960 1 to 1991 1 for inflation three month nominal short term interest rates and long term yields with maturities from one to five years this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time varying premium and a random walk real interest rate in other words a reconciliation of the expectations hypothesis with the data is attained by assuming time varying term premium and non stationary real interest rate

on the european responsibility in the agricultural multilateral trade negotiations modelling the impacts of the common agricultural policy the present round of multilateral trade negotiations is still deadlocked over agricultural trade the european union eu is urged by its trading partners to open its agricultural markets economic evaluations of trade liberalisation scenarios unanimously conclude that a substantial opening of agricultural markets is required for a successful welfare improving doha round in this paper we perform new evaluations to identify precisely the contributions of the european farm policy and to examine the robustness of these evaluations in the representation of this complex policy using the same specifications as in major previous studies our first simulations show that the eu has a major responsibility in delivering significant gains to the developing countries on the other hand when we conduct the same experiments with a more relevant calibration and modelling of the european farm policy instruments the gains that these developing countries may reap from the eu liberalisation are considerably reduced accordingly the current charge against the eu is simply inopportune

interest rates and exchange rates some new empirical results abstract this paper presents indirect evidence on the behavior on the real interest rate by studying the correlations between changes in nominal interest rates and in exchange rates these correlations are examined both before and after october 6 1979 the empirical evidence supports the views that monetary shocks affect the real rate and that the change in fed monetary policy on october 6 led to greater variation in the real rate

can futures market data be used to understand the behavior of real interest rates this paper examines whether futures market data can be used to understand the behavior of real interest rates several ways of examining the data indicate that futures market data are not particularly informative about real interest rates not only does this evidence cast some doubt on results in previous research that make use of futures market data to draw inferences about real interest rates but it also indicates that future research on real interest rates may need to turn to a different line of attack understanding the behavior of real interest rates is a central issue in financial economics in previous research on this topic several approaches have been used to measure real interest rates in one approach real interest rates have been calculated by subtracting survey data on inflation expectations such as the livingston data from nominal interest rates the problem with survey based measures of real interest rates is that they are only as good as the survey measure of inflation expectations and there may be little incentive for the survey respondents to answer accurately an even more telling criticism of survey based measures often ignored in the literature is that the behavior of market expectations in driven by economic agents ai the margin who are eliminating unexploited profit opportunities market expectations are unlikely therefore to be well measured by the average expectations of survey respondents 2 because of doubts about survey based measures of real interest rates other

deficit and money growth in the united states reply abstract evidence from annual data that larger federal government budget deficits have led to faster growth of the monetary base since world war ii is not robust to simple diagnostic checks against spurious regression

is inflation persistence different in reality this study examines the inflation persistence using both online and official price indexes in argentina brazil china japan germany south africa the uk and the us using fractional integration technique the main results suggest that the degree of persistence estimated by the long memory parameter is smaller when using online price indexes believed to be a more realistic measure of inflation mainly in the cases of argentina brazil china and the uk monetary policy implications are discussed

nominal interest rates as indicators of inflation expectations forward interest rates have become popular indicators of inflation expectations theusefulness of this indicator depends on the relative volatilty and the correlation of inflation expectations and expected real interest rates this paper studies u s and u k data using a range of different tools and data sets the forward rate rule perfoms reasonably well in spite of significant movements in the expected real interest rate the reason is that the noise that movements in the expected real interest rate add to the inflation expectations is balanced by a tendency for expected real interest rates and inflation expectations to move in opposite directions

an empirical investigation into the international real interest rate linkages linear dynamic stochastic processes are derived for the ex ante real interest rates from those followed by the ex post real rates under the identifying assumption of rational expectations the technique is used to study instantaneous and lagged effects of u s ex ante real rates on a number of oecd ex ante real rates the author finds significant contemporaneous correlations between ex ante real rates in the long run however real rates seem to be insulated

non stationarities in macro economic time series further evidence and implications two sources of non stationarities in the mean of macro economic time series are investigated the empirical evidence for several countries clearly implies that differencing is to be preferred to the assumption of a deterministic linear time trend this result is somewhat weaker with respect to the analogous choice between seasonal differencing and seasonal dummy variables it is recommended that the time series properties of the variables considered in empirical work be carefully checked because the estimated relationships may heavily depend on the chosen detrending procedure les non stationarites dans ies chroniques macro economiques resultats supplmentaires et implications l auteur examine deux sources de non stationarite dans la mnoyenne des chroniques macroeconomiques les resultats d analyses de donnees pour plusieurs pays montrent clairement qu on doit preferer l usage d un processus de differences finies a l emploi d une tendance lineaire deterministe ce resultat est un peu moins robuste pour ce qui est du choix analogue entre l utilisation de differences saisonnieres par rapport a

unemployment and real interest rates econometric testing of inflation neutrality roeconomics has in its simpler characterizations asserted three hypotheses about the economy first the short run expectationsaugmented phillips curve is vertical second the real rate of interest is independent of anticipated inflation third expectations are formed rationally in the sense that people use mathematical expectations conditional on available information the three propositions together suggest the neutrality of the economy with respect to anticipated inflation in this paper i propose a set of regression based econometric tests of these three neutrality propositions i carry out simple versions of these tests for the postwar american economy such neutrality propositions distinguish the modern neoclassical school from the traditional american keynes hicks school of macroeconomics it is true that these state

is there a unit root in the inflation rate new evidence from panel data models with multiple structural breaks in this article we examine whether or not the inflation rate for 17 oecd countries can be modelled as a stationary process we find that 1 conventional univariate unit root tests without any structural breaks generally reveal that the inflation rate contains a unit root 2 the kpss univariate test with multiple structural breaks reveals that for 10 out of 17 countries inflation is stationary and 3 the kpss panel unit root test reveals strong evidence for stationarity of the inflation rate for panels consisting of countries which were declared nonstationary by univariate tests

analysing inflation by the fractionally integrated arfima garch model this paper considers the application of long memory processes to describing inflation for ten countries we implement a new procedure to obtain approximate maximum likelihood estimates of an arfima garch process which is fractionally integrated i d with a superimposed stationary arma component in its conditional mean additionally this long memory process is allowed to have garch type conditional heteroscedasticity on analysing monthly post world war ii cpi inflation for ten different countries we find strong evidence of long memory with mean reverting behaviour for all countries except japan which appears stationary for three high inflation economies there is evidence that the mean and volatility of inflation interact in a way that is consistent with the friedman hypothesis

an empirical investigation of the determinants of national interest rates differences abstract under floating exchange rates countries are supposed to be able to follow independent monetary policies while exchange and interest rates are free to adapt to expectations and new information this note investigates over the recent period of floating exchange rates whether interest rate differences are caused by expectations of exchange rate fluctuations international arbitrage model or differences in domestic economic policies domestic model or both simultaneously a domestic interest rate determination model has to be postulated and a classical fisherian relation was selected even with such a simple domestic model the driving force in setting interest rate seems to be domestic rather than international this result could be explained by international market inefficiencies but more probably by the fact that exchange rate variations are so unpredictable that their expectations play a little role in setting differences between national interest rates

stock prices asset portfolios and macroeconomic variables in ten european countries abstract this paper investigates the relationship between stock indices asset portfolios and macroeconomic variables in ten european countries it is shown that employment imports inflation and interest rates are inversely related to stock prices expectations about future real activity measures for money and the u s yield curve are positively related to stock prices a portfolio of european stock indices was constructed and it is shown that this portfolio is the variable that most strongly explains the variation in the stock prices the associations between stock prices and macroeconomic variables are shown to be strongest in germany the netherlands switzerland and the united kingdom there is a high degree of similarity between the effects in the first three of these countries in several instances the stock prices are related to historic value of economic variables indicating that predictive models can be constructed

political vs currency premia in international real interest differentials a study of forward rates for 24 countries abstract different approaches to quantifying the degree of capital mobility for a cross section of currencies particularly saving investment correlations and tests of real interest parity have appeared to show a surprisingly low degree of financial integration we use a new data set forward rate data for 24 countries including many small industrialized countries and seven ldcs to decompose the real interest differential into two parts the covered interest differential or political premium and the real forward discount or currency premium the latter in turn can be decomposed into the exchange risk premium and expected real depreciation we find a high degree of capital mobility across political boundaries for most of the g 11 countries plus hong kong and singapore for our sample period of 1982 to 1987 even for most of the other ldcs and smaller industrialized countries for which covered interest parity clearly fails the political premium is not as big a component of the real interest differential as the currency premium france would appear to have higher capital mobility than most by the criterion of real interest differentials but is seen in fact to have low capital mobility by the criterion of covered interest differentials a clear example of the superiority of the latter criterion

trade and insurance with imperfectly observed outcomes abstractthe following sections are included introductionthe modelunobserved outcomescostly observationconcluding remarksreferences this abstract was borrowed from another version of this item

core inflation and trend inflation abstract this paper examines empirically whether the measurement of trend inflation can be improved by using disaggregated data on sectoral inflation to construct indexes akin to core inflation but with a time varying distributed lags of weights where the sectoral weight depends on the timevarying volatility and persistence of the sectoral inflation series and on the comovement among sectors the modeling framework is a dynamic factor model with time varying coefficients and stochastic volatility as in del negro and otrok 2008 and is estimated using u s data on seventeen components of the personal consumption expenditure inflation index

the relation between stock prices and inflationary expectations the international evidence this paper provides empirical evidence on the relation between stock returns and inflationary expectations for nine countries over the period 1971 80 the fisherian assumption that real returns are independent of inflationary expectations is soundly rejected for each major stock market of the world using interest rates as a proxy for expected inflation our data provide consistent support for the geske and roll model whose basic hypothesis is that stock price movements signal negative revisions in inflationary expectations finally a weak real interest rate effect was found for some of these countries

correct cointegration tests of the long run relationship between nominal interest and inflation the fisher 1930 hypothesis suggests that a long run equilibrium relationship exists between the non stationary series nominal interest and expected inflation testing such a cointegrating relationship is complicated by the presence of the unobserved ex antereal rate of interest in residuals from the cointegrating regression assumptions concerning the stochastic properties of the expected real rate of interest are examined and two proxies for the ex antereal rate are employed in multivariate cointegration tests of the fisher hypothesis

international interest rates and inflationary expectations abstract fama s hypothesis that short term interest rates are efficient predictors of inflation has been criticized on the grounds that his test depends critically on the constancy of the short term expected real rate of interest this paper uses an international framework where the time invariance assumption of the real rate is replaced by the assumption that short term expected real rates are identical at a point in time across countries with well developed capital markets results support fama s contention that short term nominal rates of interest reflect inflationary expectations

a simple adaptive measure of core inflation this paper proposes a new measure of core inflation and compares it with several existing measures the new measure is adaptive and is designed to track sudden and persistent movements in inflation such as those arising from changes in monetary policy regimes the adaptive measure filters out transients more effectively than existing measures and it is a superior predictor of locally mean reverting components of inflation

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection

money supply announcements interest rates and foreign exchange abstract this paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run the test results are consistent with the joint hypothesis for example it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar if the rise in interest rates was entirely due to higher inflationary expectations the dollar should not appreciate

tests of the fisher hypothesis with international data theory and evidence the fisher hypothesis 7 8 states that nominal interest rates adjust fully to expected inflation for years tests of this hypothesis followed fisher 8 in regressing nominal rates on a distributed lag of past inflation which was used as a proxy for the expected rate of inflation see roll 15 for references fisher eventually concluded that nominal rates do not fully reflect expected inflation saying that when the cost of living is not stable the rate of interest takes the appreciation and depreciation into account to some extent but only slightly and in general indirectly 1 fisher attributed this to money illusion in more recent years other researchers have explained the non neutrality of inflation on grounds of general equilibrium sargent 16 and taxes darby 3 and feldstein 6 a new method of testing the fisher hypothesis was introduced by fama 4 he concluded that interest rates set in u s financial markets are informationally efficient fama s work highlighted the two separate although not always distinguishable elements in the fisher hypothesis 1 the effect of expected inflation on the expected real rate and 2 the question of whether or not the nominal rate reflects a rational forecast of expected inflation to test the informational efficiency of nominal rates fama 4 assumed a constant expected real rate arguing in the later paper that the efficiency test is robust with respect to the assumption of the constancy of the expected real rate this assumption has come under severe criticism carlson 2 nelson and schwert 14 on the grounds that the efficiency results are not verifiable given the actual behavior of realized real rates summers 17 extended the study of interest rates to the period 1860 to 1979 using both fisher s and fama s methods and found that the results are less favorable for the fisher hypothesis in a more recent study fama and gibbons 5 tested the fisher hypothesis using a procedure developed by ansley 1 which assumes that the expected real rate follows a random walk they concluded that nominal rates fully reflect expected inflation at the same time that the expected real rate adjusts to it this paper examines the question of whether international interest rates reflect expected inflation in their respective countries in doing so we expand on the previous work of kane and rosenthal 11 we show that although fama 4 introduced a bias into his tests his general approach was correct we then present simple time series tests and show that they fail for eurocurrency rates

market rationality tests based on cross equation restrictions abstract the information used by researchers in cross equation tests of rational expectations may be a small subset of the information available to the market such tests produce consistent estimates but have low power we develop a mechanism for dealing with this problem and use the procedure to perform cross equation tests on predictions from the football betting market the tests fail to reject rationality we provide evidence that market predictions from betting markets are not formed rationally it appears therefore that cross equation tests have low power even if the information sets used by the researcher and the market are approximately the same

political regime change and the real interest rate the effect of changes in policy regimes on real interest rates has important implications for financial and economic theory there is little current evidence that policy regime changes have any impact on the level of real interest rates we use large political changes as our measure of policy regime changes changes in presidential administration are more significantly correlated with real rate changes than are changes in the federal reserve chair or the mean shift points identified by garcia and perron 1996 using time series methods we also show that change of party control of congress is a significant factor explaining real rates we argue that theoretical models built on the assumptions of constant or policy invariant real interest rates are at variance with the empirical evidence

on the accuracy of time series interest rate and survey forecasts of inflation there has been much work examining and evaluating different methodologies in forecasting inflation for example fama 1975 1977 develops an interest rate model to predict the 1 monthahead rate of inflation using the cpi fama and gibbons 1982 1984 modify the interest rate model to account for a nonconstant real rate of interest and compare it to a univariate timeseries forecasting model and to the livingston forecasts carlson 1977a 1977b and others also analyze the consensus forecasts from the livingston survey pertaining to multiperiod forecasts of inflation pearce 1979 considered the livingston survey and time series forecasts our purpose in this paper is to investigate further the relative forecasting ability of three different methodologies in contrast to previous studies that have generally used the cpi to measure inflation our analysis uses the implicit gnp deflator this modification is motivated largely by the fact that calculations of the cpi inflat n rate often are distorted greatly by changes in relative prices e g blinder 1980 fischer 1981 this paper compares the accuracy of three different inflation forecasting procedures these include a univariate time series model an interest rate model based on the methodology of fama and gibbons and the median forecasts derived from the american statistical association national bureau of economic research survey the evidence presented is based on ex ante forecasts of quarterly inflation rates using the gnp deflator for the period 1970 11984 11 based on the evidence presented the general conclusion is that the survey forecasts provide the most accurate inflation forecasts

fisher phillips friedman and the measured impact of inflation on interest a reply the purpose of this paper is to demonstrate that empirical findings which persistently appear to contradict the fisher hypothesis that the nominal rate of interest should rise by the full amount of an increase in anticipated inflation are due basically to a failure to control for changes in the real rate of interest that are associated with changes in anticipated inflation we are guided in our search for proper specification of a fisher equation by a simple general equilibrium model which is employed to derive the impact of a change in anticipated inflation upon nominal interest given the requirement that commodity money and labor markets remain in equilibrium in effect we depart from the empirical tradition which has grown up around testing of the fisher hypothesis that takes the real interest rate to be independent of anticipated inflation and argues that for anticipated inflation properly measured the data ought to support the fisher hypothesis 1

inflation output and money this paper uses money demand theory and a rational expectations version of the quantity theory of money to study inflation in the united states during the post korean war period the major results are as follows 1 the theory and tests explain the phenomenon of stagflation that is the negative relation between inflation and real activity observed during the post 1953 period the analysis calls into question the many variants of the phillips curve which presume that inflation real activity relations are positive 2 consistent with the models of patinkin 1961 and fama 1980 monthly quarterly and annual data indicate that the base currency plus reserves held against deposits is the relevant monetary variable in the inflation process and that demand deposits are irrelevant the direct policy implication is that the base is the key monetary variable in the control of inflation 3 the most convincing evidence for the simple quantity theory view of inflation proposed here comes from the comparison of the conditional exmoney demand theory and the quantity theory of money are used to study the inflation process as predicted by the model monthly quarterly and annual data indicate that inflation is positively related to money growth rates and negatively related to growth rates of real activity the theoretical and empirical origins of stagflation are explained and changes in monetary arrangements to simplify the control of inflation are prescribed

a multi country study of the information in the shorter maturity term structure about future inflation abstract empirical analysis of data from ten oecd countries indicates that except for france the united kingdom and germany the shorter maturity term structure does not contain a great deal of information about the future path of inflation on the other hand except for the united kingdom there is a great deal of information in the term structure of nominal interest rates at shorter maturities about the term structure of real interest rates these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes for the different countries

are tax effects important in the long run fisher relationship evidence from the municipal bond market are nominal bonds appropriately discounted for taxes empirical estimnates of the response of nominal interest rates to changes in inflation the fisher effect have failed to produce a definitive answer four reasons have been put forward as possible explanations i tobin effects ii fiscal illusion iii peso problems and iv different estimators utilizing data on taxable and tax exempt bond interest rates and several different estimators we find that the fisher effect estimates are always larger for the taxable bond relative to the tax exempt bond suggesting that fiscal illusion and different estimators cannot account for the previous results how economic agents respond to the tax burdens of assets with different tax treatment is an important issue at both the level of the individual micro and the aggregate economy macro one clear source of evidence would appear to be the market for high quality debt trading in both taxable and tax exempt debt occurs on a daily basis the response of the rates of return on taxable and tax exempt debt to changes in expected inflation are described by the fisher relationship the fisher relationship is one of the oldest equilibrium relationships in financial economics fisher s original proposition was that if the real rate of interest is relatively constant over time a fully perceived change in the purchasing power of money as proxied by the inverse of the rate of inflation would be accompanied by a proportional increase in the nominal interest rate darby 1975 points out that when nominal interest income is taxed as are interest payments on u s treasury bills the fisher relationship implies a response from nominal interest rates that is greater than the change in expected inflation in order to maintain the constant ex ante real interest rate summers 1983 suggests that given average marginal tax rates in the united states the appropriate value of the fisher effect is 1 3 to 1 5 for tax exempt bonds the original fisher specification should be a good approximation implying a fisher effect close to unity in a seminal paper fama 1975 presents evidence to support the hypothesis that changes in nominal

meta analysis of general and partial equilibrium simulations of doha round outcomes quantification of welfare changes due to trade liberalization plays a crucial role for political decision making however significant differences in simulated gains from liberalization do not serve to increase confidence in quantitative assessments based on trade models a meta analysis of trade simulations under the wto doha round is employed to identify model characteristics that influence the magnitude of simulation results findings from a simple regression model are plausible and show that each simulation experiment represents a complex interaction of model characteristics and experimental settings that may not easily be communicated to nonexperts meta analysis proves to be useful for empirically assessing this complexity

the uruguay round agreements impact on developing countries abstract implementation of the results of uruguay round will bring about significant increases in trade investment income and welfare for developing countries this derives from increased market access to developed countries markets and from enhanced efficiency originating from their own liberalization commitments although the distribution of benefits will be uneven developing countries will also benefit from improved rules for trade and investment coupled with enhanced institutional enforcement of these rules and greater exposure to global competition within a more predictable secure and credible international trading environment to maximize the benefits however developing countries will need to continue with recent unilateral reforms to improve their supply response

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

why the wto is deadlocked and what can be done about it the gatt was hugely successful yet its successor organisation is to date failing this paper argues that the expansion in both scope and membership make it radically more difficult for a purely bargain based organisation to succeed three factors limit the scope for deals that would be recognised as mutually beneficial many developing countries are accustomed to transfers rather than bargains the poorest countries have no basis for bargaining and even where mutual advantage is possible it requires cross sectoral deals which are only feasible with new rules that are unattractive to many wto members the paper proposes solutions to these new problems it proposes an explicit component of transfer in the form of non reciprocated liberalisation it proposes a plurilateral solution to the tension between rules and sovereignty it links these through a grand bargain that offers transfers in return for plurilateralism for the marginalised countries it proposes time bound preferences in oecd markets along the lines of agoa finally to recreate for the larger developing countries similar incentives for liberalisation to those previously achieved for developed countries it proposes a limited mfn through which they could restrict their liberalisations to include only other developing countries

the sources of the movements in interest rates the paper investigates the sources of interest rate movements in italy during the 1970s in that decade the country experienced the highest and most variable inflation rate among the industrial nations and was affected both by external shocks and by shocks to the labor and financial markets the paper shows that movements in inflationary expectations dominated the nominal interest rate variability the part of variability that was not explained by expected inflation was accounted for by unanticipated changes in the terms of trade by contrast domestic monetary and real disturbances did not have a sizeable impact on the variability

core and crust consumer prices and the term structure of interest rates we propose a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation core food and energy these dynamics combine together to produce a measure of expected total inflation that investors use to price nominal treasuries this framework captures different frequencies in inflation fluctuations shocks to core are more persistent and less volatile than shocks to food and especially energy the crust we find that a common structure of latent factors determines and predicts the term structure of yields and inflation our model outperforms popular benchmarks e g arma var and random walk specifications and it is at par with the survey of professional forecasters in forecasting inflation moreover we estimate real rates that agree with inflationindexed bond yields after adjusting for the liquidity premium in these bonds finally inflation and real rate risk premia show a declining pattern consistent with the changing nature of inflation and real rate risks

garment industry in sri lanka and the removal of gsp plus by eu the ready made garment industry plays an important role in sri lanka both in terms of export earnings and poverty alleviation through employment generation following the removal of gsp plus by eu in 2010 on the basis of alleged human right violations by the sri lankan government during the last stage of the civil war in 2009 and after it currently faces serious challenges in exporting to the eu its major market given the important role of the ready made garment industry in poverty alleviation through employment generation the impact of removal of gsp plus on the poor is examined in this paper the empirical results of this study demonstrate that poverty and income inequality are expected to be exacerbated in sri lanka as a result of the removal of gsp plus by the eu using non economic reasons such as human rights violation the results are also relevant for the renewed emphasis on trade preferences as a potential instrument for the millennium development goals and the debate on how trade preferences are to be designed to maximise their effectiveness in stimulating a manufacturing supply response

the fisher effect in a signal extraction framework the recent brazilian experience abstract this paper derives a signal extraction framework for examining all testable implications of the fisher equation the signal is the net of taxes nominal interest rate which under the fisher model equals inflation expectation plus the real rate assumed to be constant or a constant plus a martingale difference all alternative linear models can be represented as noise added to the signal the international and brazilian literature are briefly reviewed and the empirical tests reinterpreted in the signal extraction framework the model is tested with brazilian data for the period 1973 1990 using interest rate data on non indexed certificates of deposit from a sample of major brazilian banks the framework detects little noise i e the fisher equation seems to reasonably fit the brazilian evidence this result carries the policy implication that the government cannot have the burden of financing its fiscal deficits ameliorated by issuing non indexed debt in periods when inflation is escalating given the large fluctuations observed in ex post real rates in brazil the reasonable success of the fisher equation also implies the existence of large inflation forecast errors which suggest the need for further research on how agents form inflation expectations when inflation escalates rapidly as it did in the late 1980s in brazil price indices lag behind true inflation this generates a fisher effect even for indexed securities the empirical evidence also corroborates the existence of this fisher effect for indexed securities

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

a meta analysis of general and partial equilibrium simulations of trade liberalisation under the doha development agenda model based simulation of welfare effects is commonly used to make a case for trade liberalisation and to inform participants a nd stakeholders in trade negotiations however the simulated welfare effects of trade liberalisation vary greatly even across studies that model similar liberalisation scenarios this

the adjustment of stock prices to information about inflation this paper analyzes the reaction of stock prices to the new information about inflation based on daily returns to the standard and poor s composite portfolio from 1953 78 it seems that the stock market reacts negatively to the announcement of unexpected inflation in the consumer price index c p i although the magnitude of the reaction is small it is interesting to note that the stock market seems to react at the time of announcement of the c p i approximately one month after the price data are collected by the bureau of labor statistics

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

futures markets and the fluctuations in inflation monetary growth and asset returns inflation and nominal interest rates have been volatile in recent years futures contracts in price indices would help in this environment by enhancing information about prices and by providing a convenient means for people to hedge against inflation there is some evidence that the availability of these instruments would encourage investment and reduce the mean real rate of return on long term bonds indexed bonds which are now significant in britain serve a similar purpose in the absence of such bonds there would be a market for price index futures although the volume of trading would probably be modest this abstract was borrowed from another version of this item

relative price variability real shocks and the stock market in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions the evidence shows that the negative stock returninflation relations proxy for the adverse effects of relative price variability on economic activity particularly during the seventies when the u s experienced oil supply shocks hence it appears that inflation spuriously affects the stock market in two ways the aggregate output link of fama 1981 and the supply shocks reflected in relative price variability a number of papers have attempted to explain the anomalous negative relations between stock returns and inflation witnessed in the post war period one hypothesis that has held up well in light of empirical evidence suggests that the negative relation between stock returns and unexpected inflation simply reflects the more fundamental positive relation between stock returns and future real variables see e g fama 1981 geske and roll 1983 and kaul 1987 1989 in this paper we investigate the effects of relative price variability on output and the stock market and gauge the extent to which inflation proxies for relative price variability in stock return inflation regressions first relative price variability can have detrimental effects on output and employment see e g friedman 1977 and barro 1976 second absolute relative price confusion models of the lucas 1973 type suggest that monetary shocks can induce a positive relation between inflation and relative price variability see e g cukierman 1983 hence the negative stock return inflation relations could simply be a reflection of the negative effects of relative price variability on the stock market we use data for the 1947 1985 period to test the various links of our hypothesis the results indicate that relative price variability is positively related to both expected and unexpected inflation measures relative price variability also has a significant negative effect on output and the stock market more importantly

do forest assets hedge inflation forest assets are commonly viewed as good hedges against inflation the view is based largely however on anecdotal evidence rather than empirical analysis this paper examines the historical relationship between forestry returns and inflation the results suggest that forests in the u s west and south have been superior hedges against higher than anticipated inflation forests in the northeast have been less effective inflation hedges the results also indicate that western and southern forests have been overvalued during periods of relatively high expected inflation markets for forests in the northeast however have been relatively efficient processors of inflation expectations

estimation of the specification error in the fisher equation this paper asks how false is the fisher hypotheis previous work has asked is the fisher hypothesis true the framework here characterizes the specification error in the the fisher equation as model noise following durlauf and hall 1988 1989a 1989b the noise provides a metric for the specification error for the post war period to october 1979 the variance of the noise is small while after that date it is apparently large that is using a method that contains many previous tests of the fisher effect in explaining nominal in explaining nominal interest rate movements mishkin 1991 has criticized this consensus as reflection a common stochastic trend in inflation and nominal interest rates prior to october 1979 the test here is immune to this criticism as i use the ex post real interest rate as the regressand and show that at least prior to october 1979 it obeys a sationary process

trend inflation and the nature of structural breaks in the new keynesian phillips curve in this paper we investigate the nature of structural breaks in inflation by estimating a version of the new keynesian phillips curve nkpc in the presence of a unit root in inflation we show that with a unit root in inflation the nkpc implies an unobserved components model that consists of three components a stochastic trend component a component that depends upon current and future forecasts of real economic activity and a stationary component which is potentially serially correlated or a component of inflation that is not explained by the conventional forward looking nkpc our empirical results suggest that with an increase in trend inflation during the great inflation period the response of inflation to real economic activity decreases and the persistence of the inflation gap increases due to an increase in the persistence of the unobserved stationary component these results are in line with the predictions of cogley and sbordone 2008 who show that the coefficients of the nkpc are functions of time varying trend inflation

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

real interest rates and inflation an ex ante empirical analysis we develop a method of measuring ex ante real interest rates using prices of index and nominal bonds employing this method and newly available data we directly test the fisher hypothesis that the real rate of interest is independent of inflation expectations we find a negative correlation between ex ante real interest rates and expected inflation this contradicts the fisher hypothesis but is consistent with the theories of mundell and tobin darby and feldstein and stulz we also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty

a comparison of inflation forecasts interest rate models provide slightly better monthly forecasts and substantially better eight and fourteen month forecasts of inflation than a univariate time series model the livingston surveys underestimate eight and fourteen month inflation rates especially during the high inflation period of 1978 81 in contrast eight and fourteen month inflation forecasts extrapolated from one month interest rates show little bias and track ex post eight and fourteen month inflation rates better than the survey forecasts

a development friendly prioritisation of doha round proposals agriculture looms large on the wto s agenda it was the first substantive item listed in the work programme of the ministerial declaration launching the doha round and it was arguably at the centre of the failure at cancun developing countries made it clear both before and during the cancun meeting that progress on agriculture was their primary objective negotiations in other areas have received less attention and progressed more slowly this paper considers that prioritisation and suggests that the interests of developing countries in the current round of trade negotiations are much broader than is suggested by the narrow range of agricultural issues that have dominated negotiations a true development round would require a significant reprioritisation of many areas of the wto s current agenda

a random walk through the gibson paradox evidence to support the gibson paradox is often given in the form of a simple correlation between the nominal interest rate and the log of price level or in the form of a simple linear regression between these two variables authors then show using standard procedures of statistical inference that the price level possesses a significant coefficient we argue that this class of evidence is spurious since the nominal interest rate and the price level both integrated variables do not form a cointegrated system

is there a unit root in the inflation rate evidence from sequential break and panel data models summary using sequential trend break and panel data models we investigate the unit root hypothesis for the inflation rates of thirteen oecd countries with individual country tests we find evidence of stationarity in only four of the thirteen countries the results are more striking with the panel data model we can strongly reject the unit root hypothesis both for a panel of all thirteen countries and for a number of smaller panels consisting of as few as three countries the non rejection of the unit root hypothesis for inflation is very fragile to even a small amount of cross section variation 1997 john wiley sons ltd

what does the term structure tell us about future inflation abstract this empirical analysis indicates that for maturities of six months or less the term structure of nominal interest rates provides almost no information about the future path of inflation but does provide information about the term structure of real interest rates however as maturities lengthen to nine and twelve months the nominal term structure begins to contain information about future inflation but ceases to provide information about the real term structure these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes at different points in the term structure

price dynamics in foreign currency futures markets abstract nested tests of samuelson s submartingale and martingale models of price behavior in an efficient futures market find significant autocorrelation at low lags in daily changes of log prices for four of ten currency futures contracts satisfying the assumptions of the statistical tests negative serial correlation following large price changes is also found the analysis controls for bias due to institutional limits on daily price movements simulated trading based on out of sample forecasts suggests the dependencies probably could be exploited by traders who are members of the futures exchange to earn net profits greatly exceeding buy and hold

taxable and tax exempt interest rates the link with inflation abstract a single equation model utilizing taxable tax exempt yield spreads is developed to test restrictions required by the darby feldstein inflation tax hypothesis evidence indicates these restrictions generally can be rejected for post accord data and that there is important information in both yields linking them to inflation

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

on the constancy of the international real rate of interest abstract this paper develops an alternative method of deriving the ex ante real rate of interest given assumptions regarding capital mobility and ppp it is shown that in equilibrium the ex ante real rate will be equalized across countries using cross sectional regression techniques this real rate can be estimated at each moment in time hence it is possible to develop a time series of estimated real rates derived from cross sectional regressions this estimated real rate series is then used in time series tests of the fisher equation for the u s

relying on the information of interested parties we investigate the conventional wisdom that competition among interested parties attempting to influence a decisionmaker by providing verifiable information elicits all relevant information we find that if the decisionmaker is strategically sophisticated and well informed about the relevant variables and about the preferences of the interested party or parties competition may be unnecessary to achieve this result if the decisionmaker is unsophisticated or not well informed competition is not generally sufficient if the interested parties interests are sufficiently opposed however or if the decisionmaker is seeking to advance the parties welfare then competition can reduce or even eliminate the decisionmaker s need for prior knowledge about the relevant variables and for strategic sophistication in other settings only the combination of competition among information providers and a sophisticated skepticism is sufficient to allow effective decisionmaking

estimating the fisher effect and the stochastic money growth process this paper demonstrates that a change in the stochastic process generating money can alter the relationships between money and inflation and between inflation and interest rates the extent to which inflation is forecastable is shown to depend significantly on the extent to which money is forecastable thus the greater the persistence and forecastability of money the greater the likelihood of observing a statistically significant fisher effect us data over the 1953 86 period are used to demonstrate that instability in the fisher effect coincides with changes in the stochastic process generating money there is a significantly stronger fisher effect during a subsample in which money and hence inflation are more predictable