tips inflation expectations and the financial crisis the authors show that inefficiencies in the u s market for inflation linked bonds can be exploited by informed traders who include survey estimates or inflation model forecasts in trades on breakeven inflation the treasury inflation protected securities market has yet to fulfill investors expectations as a low risk efficient and liquid financial instrument

short term inflation expectations evidence from a monthly survey note the assumption that economic agents have rational expectations is commonplace in studies of macroeconomic policy and asset market behavior research examining observable expectations from surveys however has generally found that the data reject the rational expectations hypothesis friedman 1980 reports that forecasts of long term interest rates from surveys of financial market participants are not rational figlewski and wachtel 1981 note that most investigators of the livingston survey data on economists inf lation expectations conclude that these data do not conform to the rational expectations hypothesis british survey data on the inflation expectations of consumers analyzed by evans and gulamani 1984 and on the inflation expectations of business firms examined by pesaran 1985 also appear inconsistent with rational expectations the failure of survey data to pass tests of rationality have led researchers such as mishkin 1983 to question the usefulness of survey data to proxy expectations this paper examines a different source of expectations data namely the surveys of money market participants conducted by money market services inc mms data from the mms surveys have been widely used in studies of how asset prices respond to unanticipated changes in economic variables recent papers by urich and wachtel 1984 pearce and roley 1985 and smirlock 1986 employ the median predicted inflation rate from the mms survey to construct a measure of the unexpected component of inflation announcements

falling behind the joneses relative consumption and the growth savings paradox abstract concern for individual consumption relative to per capita consumption can induce a fear of falling behind which increases precautionary savings this fear intensifies as societal income growth increases allowing for a positive effect of growth on savings rates

money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

growth habit formation and catching up with the joneses when habits are introduced multiplicatively in a capital accumulation model the consumers objective function might fail to be concave in this paper we provide conditions aimed at guaranteeing the existence of interior solutions to the consumers problem we also characterize the equilibrium path of two growth models with multiplicative habits the internal habit formation model where individual habits coincide with own past consumption and the external habit formation or catching up with the joneses model where habits arise from the average past consumption in the economy we show that the introduction of external habits makes the equilibrium path inefficient during the transition towards the balanced growth path we characterize in this context the optimal tax policy

tips from tips the informational content of treasury inflation protected security prices treasury inflation protected securities tips are frequently thought of as risk free real bonds using no arbitrage term structure models we show that tips yields exceeded risk free real yields by as much as 100 basis points when tips were first issued and up to 300 basis points during the 2007 2008 financial crisis this spread predominantly reflects the poorer liquidity of tips relative to nominal treasury securities other factors including the indexation lag and the embedded deflation protection in tips play a much smaller role ignoring this spread also significantly distorts the informational content of tips break even inflation a widely used proxy for expected inflation

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

formation of inflation expectations in british manufacturing industries over the past decade increasing use has been made of direct information on price expectations in empirical studies of the expectations formation process in the united states livingston s inflation expectation series have been extensively analysed by turnovsky i970 turnovsky and wachter i972 pesando i975 mcguire i976 carlson i977 mullineaux i978 i980 jacobs and jones i980 figlewski and wachter i98i and others in the united kingdom the general public expectations of consumer prices made available in the gallup polls have been studied by carlson and parkin i975 holden and peel i977 smith i982 severn 1983 and evans and gulamani i984 similar studies have also been carried out with respect to surveys conducted in germany france and most other oecd countries however despite the apparent importance of businessmen s expectations for the understanding of the inflationary process the empirical research on inflation expectations in the united kingdom has been mainly concerned with the consumers price expectations the present paper is an attempt to rectify this shortcoming by extending the empirical analysis of the inflation expectation process to british manufacturing industries using the results of the industrial trend surveys conducted by the confederation of british industries cbi the plan of the paper is as follows section i deals with the methodological problems of deriving quantitative inflation expectations series from qualitative responses such as the ones reported in the cbi surveys the subjective probability method due to theil carlson and parkin and the regression method recently proposed by the author pesaran i984 for the conversion of categorical responses to quantitative measures are briefly discussed section ii sets out the alternative models of inflation expectations formation section iii describes the data on inflation expectations in british manufacturing industries and discusses the forecasting value of alternative measures of inflation expectations section iv focuses on the issue of measurement errors in expectations and the econometric problems involved section v reports the results of estimation of alternative models of inflation expectations and investigates the quantitative impact of government policy and general economic conditions on inflation

tax policy and aggregate demand management under catching up with the joneses this paper examines the role for tax policies in productivity shock driven economies with catching up with the joneses utility functions the optimal tax policy is shown to affect the economy countercyclically via procyclical taxes i e cooling down the economy with higher taxes when it is overheating in booms and stimulating the economy with lower taxes in recessions to keep consumption up thus models with catching up with the joneses utility functions call for traditional keynesian demand management policies but for rather unorthodox reasons

welfare implications of the interaction between habits and consumption externalities we analyze the welfare properties of the equilibrium path of a growth model where both habits and consumption externalities affect the utility of consumers our analysis highlights the crucial role played by complementarities between externalities and habits in order to generate an infficient dynamic equilibrium in particular we show that the competitive equilibrium is inefficient when consumption externalities and habit adjusted consumption are not perfect substitutes

money interest rates and exchange rates with endogenously segmented markets we analyze the effects of money injections on interest rates and exchange rates when agents must pay a baumol tobin style fixed cost to exchange bonds and money asset markets are endogenously segmented because this fixed cost leads agents to trade bonds and money infrequently when the government injects money through an open market operation only those agents that are currently trading absorb these injections through their impact on these agents consumption these money injections affect real interest rates and real exchange rates the model generates the observed negative relation between expected inflation and real interest rates as well as persistent liquidity effects in interest rates and volatile and persistent exchange rates

inflation risk and international asset returns abstract we show that inflation risk is priced in international asset returns we analyze inflation risk in a framework that encompasses the international capital asset pricing model icapm of adler and dumas 1983 in contrast to the extant empirical literature on the icapm we relax the assumption that inflation rates are constant we estimate and test a conditional version of the model for the g5 countries france germany japan the uk and the us over the period 1975 1998 and find evidence of statistically and economically significant prices of inflation risk in addition to priced nominal exchange rate risk our results imply a rejection of the restrictions imposed by the icapm in an extension of our analysis to 2003 we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999 differences in inflation rates across countries entail non trivial real exchange rate risk premia

information and securities a note on pareto dominance and the second best a unified analysis is provided of two related problems the first concerns the welfare impact of changing the set of tradeable securities in an incomplete market economy the second concerns the welfare implications of changing the common information structure faced by all agents both problems arise from a common second best framework in which expanding the set of trading opportunities can lead to a pareto worsening journal of economic literature classification number 026 rl 1987 academic press inc in this note we provide a unified analysis of two related problems the first concerns the welfare impact of changing the set of tradeable securities in an incomplete market economy the second concerns the welfare implifications of changing the common information structure faced by all agents we will discuss apparent paradoxial results that arise in both problems using a single geometric example the example provides a clear illustration of the source of the apparent paradoxes both problems arise from a common second best framework by second best we mean the lipsey lancaster 20 idea of additional constraints on allocations over and above resource availability constraints our discussion brings together two related but distinct literatures the we are greatly indebted to james ohlson for many constructive comments and to david kreps and n v long for comments on a previous draft

economic surprises and the behaviour of asset prices some analyses and further empirical results this paper examines the implications of serial correlation in asset prices for market efficiency and announcement effect tests the impact of four types of economic surprise is examined after allowing for observed serial correlation in three asset price series

term structure inflation and real activity this paper estimates an internally consistent structural model that imposes cross sectional restrictions on the dynamics of the term structure of interest rates inflation and output growth distinct from previous term structure settings this model introduces both time varying central tendencies and a stochastic conditional mean of output growth the estimation of the model which is based on u s data over a 1960 to 2005 sample period provides reliable estimates for the implicit term structures of real interest rates expected inflation rates and inflation risk premia as well as for expectations of macroeconomic variables the model has better out of sample forecasting properties than a number of alternative models and it contradicts the puzzling evidence that during the great moderation in inflation subsequent to the mid 1980s the forecasting ability of structural models deteriorated with respect to atheoretic statistical models

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

u k financial market returns 1955 2000 we present and analyze new monthly index series for u k financial assets covering equities bonds bills and inflation the data are consistent with the crsp ibbotson series for the united states we use our indices to estimate equity and bond premia and to make international comparisons especially with the united states germany and japan we illustrate potential uses of the new series by investigating stock market seasonality inflation linked bonds real dividend growth rates and the small firm effect while some of our findings resemble u s results we also report differences between u k and u s stock market behavior copyright 2001 by university of chicago press

inflation real interest rates and the bond market a study of uk nominal and index linked government bond prices this paper estimates expected future real interest rates and inflation rates from observed prices of uk government nominal and index linked bonds the estimation method takes account of imperfections in the indexation of uk index linked bonds it assumes that expected log returns on all bonds are equal and that expected real interest rates and inflation follow simple time series processes whose parameters can be estimated from the cross section of bond prices the extracted inflation expectations forecast actual future inflation more accurately than nominal yields do the estimated real interest rate is highly variable at short horizons but comparatively stable at long horizons changes in real rates and expected inflation are strongly negatively correlated at short horizons but not at long horizons

can consumption spillovers be a source of equilibrium indeterminacy in the framework of a one sector exogenous growth model we show that consumption externalities are not a source of equilibrium indeterminacy when the labor supply is inelastic whereas they are under endogenous labor supply in particular when the marginal rate of substitution between own consumption and the others consumption is constant along the equilibrium path the equilibrium may exhibit indeterminacy when the following two conditions are simultaneously satisfied i both consumption and production externalities are present and ii the elasticity of the labor demand is larger than the elasticity of the frisch labor supply in contrast when the marginal rate of substitution is not constant the equilibrium may exhibit indeterminacy even if the previous two conditions are not met in this case the equilibrium can exhibit indeterminacy even if production externalities are absent we also show that these results do not apply to an endogenous growth model where indeterminacy may arise only when condition ii is met

rational addiction with learning and regret we present a theory of rational behavior in which individuals maximize a set of stable preferences over goods with unknown addictive power the theory is based on three fundamental postulates that consumption of the addictive good is not equally harmful to all that individuals possess subjective beliefs concerning this harm and that beliefs are optimally undated with information gained through consumption although individual actions are optimal and dynamically consistent addicts regret their past consumption decisions and regret their initial assessment of the potential harm of the good addict prone individuals who believe it could not happen to them are most likely to be drawn into a harmful addiction

a dynamic rationing policy for continuous review inventory systems stock rationing is an inventory policy that allows differential treatment of customer classes without using separate inventories in this paper we propose a dynamic rationing policy for continuous review inventory systems which utilizes the information on the status of the outstanding replenishment orders for both backordering and lost sales environments we conduct simulation studies to compare the performance of the dynamic policy with the static critical level and the common stock policies and quantify the gain obtained we propose two new bounds on the optimum dynamic rationing policy that enables us to tell how much of the potential gain the proposed dynamic policy realizes we discuss the conditions under which stock rationing both dynamic and static is beneficial and assess the value of the dynamic policy

testing the relative purchasing power parity hypothesis the case of korea abstractthis study examines the relative purchasing power parity ppp hypothesis using the data from the korean won us dollar and the korean won japanese yen foreign exchange markets we extract proxies for inflation from stock market returns of korea the united states and japan based on the method used by chowdhry roll and xia in 2005 we explicitly test the relative ppp hypothesis in light of the short run price volatility using monthly bimonthly and quarterly data from 1 january 1998 to 31 december 2012 our findings suggest that the empirical test results from the entire sample period do not support the relative ppp hypothesis however the results from the sample period excluding the asian financial crisis period show that the relative ppp hypothesis holds for the korean won us dollar market with a moderate magnitude of inflation impact but not for the korean won japanese yen market abrupt changes in exchange rates during the crisis period may have affected the relationship between inflation an

dynamic inventory rationing strategies for inventory systems with two demand classes poisson demand and backordering we study inventory systems with two demand classes critical and non critical poisson demand and backordering we analyze dynamic rationing strategies where the number of items reserved for critical demand depends on the remaining time until the next order arrives different from results in the literature we do not discretize demand but derive a set of formulae that determine the optimal rationing level for any possible value of the remaining time moreover we show that the cost parameters can be captured in a single relevant dimension which allows us to present the optimal rationing levels in charts and lookup tables that are easy to implement numerical examples illustrate that the optimal dynamic rationing strategy outperforms all static strategies with fixed rationing levels

jealousy and underconsumption in a one sector model with wealth preference abstract the present paper examines the effects of consumption externalities on economic performance in a one sector model with wealth preference the presence of the wealth preference generates a wealth effect in consumption growth which plays a crucial role for consumption externalities to have impacts on the economy our main findings are i regardless of the assumption of inelastic labor supply the distortionary effect of consumption externalities stays in the long run ii the income tax as well as the consumption tax can modify the efficiency and iii the numerical simulations supplement theoretical findings

inflation expectations real rates and risk premia evidence from inflation swaps this paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short term real interest rate expected inflation inflation s central tendency and four volatility factors that follow garch processes we derive analytical solutions for nominal bond yields yields on inflation indexed bonds that have an indexation lag and the term structure of expected inflation unlike prior studies the model s parameters are estimated using data on inflation swap rates as well as nominal yields and survey forecasts of inflation the volatility state variables fully determine bonds time varying risk premia and allow for stochastic volatility and correlation between bond yields yet they have small effects on the cross section of nominal yields allowing for time varying volatility is particularly important for real interest rate and expected inflation processes but long horizon real and inflation risk premia are relatively stable

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

what do you expect imperfect policy credibility and tests of the expectations hypothesis abstract the expectations hypothesis of the term structure of interest rates describes a conventional view of the transmission mechanism of monetary policy where bond rates reflect current and expected movements in the policy controlled rate however empirical rejections of the expectations hypothesis are commonplace and lead many to question this description of policy transmission this paper argues that failure to account for imperfect policy credibility may explain empirical rejections empirical rejections may occur even when changing anticipations of future short rates are the primary source of variation in bond rates and the standard term structure transmission channel remains valid

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

multi class dynamic inventory rationing with stochastic demands and backordering dynamic inventory rationing is considered for systems with multiple demand classes stationary stochastic demands and backordering in the literature dynamic programming has been often applied to address this type of problems however due to the curse of dimensionality computation is a critical challenge for dynamic programming in this paper an innovative two step approach is proposed based on an idea similar to the certainty equivalence principle first the deterministic inventory rationing problem is studied where the future demands are set to be the expectation of the stochastic demand processes the important properties obtained from solving the problem with the kkt conditions are then used to develop effective dynamic rationing policies for stochastic demands which gives closed form expressions for dynamic rationing thresholds these expressions are easy to calculate and are applicable to any number of demand classes numerical results show that the expressions are close to and provide a lower bound for the optimal dynamic thresholds they also shed light on important managerial insights for example the relation between different parameters and the rationing thresholds

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

the impact of news on financial markets in the united kingdom note a number of papers see e g cornell 1983 and the references contained therein have appeared in the united states recently that examine the impact of money supply announcements on financial asset prices using the framework of the efficient markets hypothesis these studies indicate that for the united states unanticipated increases in m1 push interest rates and the exchange rate upward and place downward pressure on stock exchange prices a feature common to all these papers is that they utilize expectations data which are derived from surveying market participants rather than from a model such as an arima model in an earlier paper smith and goodhart 1985 we set out to compare the reaction of market prices to announcements made both in the united states and in the united kingdom using the dollar sterling exchange rate a price which by definition is common to both countries we found the impact of money announcements m1 in the united states and m3 in the united kingdom to be remarkably similar in magnitude however when we considered the time taken for the effect to be observed the results differed considerably whereas the u s announcement appeared to affect the exchange rate immediately the impact from the u k announcement was not felt fully until the following working day the aim of this paper is to build on these earlier results for the united kingdom this is done by considering four different financial prices along with four different announcements to ascertain the extent to which each market reacts to each announcement because we are interested not only in the magnitude of any announcement effects but also in the time taken for these effects to be fully realized the equations are estimated with the changes in the various financial prices measured over a number of alternative intervals

real interest rates expected inflation and the inflation uncertainty premium abstract two index linked bond prices can be used to measure current ex ante real interest rates and expected inflation these values can then be substituted into a nominal bond price equation to solve for the inflation uncertainty premium

tax structure and government expenditures with tax equity concerns abstract we augment a standard tax model by concerns about tax equity people get upset when labour is taxed more heavily than capital even the slightest concern for tax equity invalidates the common tenet that capital remains tax exempt in small open economies this holds for exogenous as well as for endogenous government expenditures and irrespective of whether concerns with tax equity only cause emotional discomfort or also impact on work incentives if concerns with tax equity get more intense the economy may choose higher taxes on labour and move to the downward sloped part of its laffer curve for endogenous government spending stronger concerns with tax equity may lead to a larger size of the public sector

the gilts market as an on line window on expected inflation it is argued that government policy could be greatly improved by the existence of a gilts market window on expected inflation the indexed gilts method for measuring expected inflation developed by levin and copeland 1993 is described and extended this extended method is applied to the 41 market days between 20 august 1992 and 15 october 1992 in order to observe how the developing crisis associated with britain s departure from the european exchange rate mechanism affected real interest rates expected inflation and the inflation uncertainty premium the estimates for this period demonstrate that it is technically possible with the indexed gilts method to read the financial markets forecast of the future path of inflation in the uk in addition the estimates show quite clearly that the expected inflation path alters in response to external shocks and to subsequent policy reactions

portfolio selection with inflation linked bonds and indexation lags abstract we derive the price of inflation indexed bonds of which the payments are linked to a lagged price index and solve for the optimal bond portfolio under both inflation and indexation lags in closed form we show that indexation lags increase the number of state variables characterizing both the bond prices and the optimal portfolio the lag induced state variables affect the future investment opportunity and hence further arm investors with the tools for hedging inflation risk that is however unhedgeable if there is no indexation lag we find that the optimal portfolio accounts for the indexation lags by also exploring the historical information and increases investors welfare therefore we document a positive effect of the indexation lags that are typically considered as a type of market friction

after tax term structures of real interest rates inferences from the uk linked and non linked gilt markets abstract this study estimates the after tax term structure of real interest rates using the prices of uk linked and non linked gilts over the period from 25 january 1986 until 25 october 1993 the impact of differential taxation and the existence of noise in observed market prices is found to produce a significant impact on the parameter estimation of term structure models when compared to methods such as brown and schaefer brown r schaefer s 1994 journal of financial economics 35 1 42 that did not two major observations can be made regarding the estimates for spot real interest rates firstly the volatility of the short term rate is much lower than that found by brown and schaefer 1994 which provides a better fit with the predictions of the cir single factor model for interest rates secondly consistent with rumsey rumsey j 1993 an impact of the assumptions about taxes on the estimation of the properties of interest rates working paper there appears to be some evidence to suggest that single factor interest rate models produce a better fit to interest rates on an after tax basis than on a before tax basis

poundm3 surprises and asset prices in this paper the relationship between unanticipated sterling m3 m3 and a variety of asset prices is investigated for part of the uk s experience with monetary targeting the unanticipated component of monetary growth is generated using money market services uk survey data and an arima model it is demonstrated that the uk survey data are rational in that they are an unbiased and efficient forecast and that the market efficiently incorporates unanticipated money growth into asset prices the sign of the unanticipated monetary component in our asset price equations tends to indicate that the fisher the inflation expectations hypothesis is better supported during the sample period

market response to the weekly money supply announcements in the 1970s the hypothesis that the weekly announcement of the money supply affects interest rates is examined the announcement effect is interpreted as a policy anticipation effect that is an unanticipated increase in the money supply leads to an increase in interest rates in anticipation of future tightening by the federal reserve estimates of this effect with proxies for the unanticipated change constructed from a survey of money supply forecasts and an arima model indicate that a financial markets respond very quickly to the announcement and b the response was largest when policymakers emphasized the importance of the monetary aggregates financial market participants are careful observers of the weekly money supply announcement and generally agree that the announcement often leads to changes in interest rates this occurs because the announcement leads market participants to revise their expectations both of future federal reserve policy actions and of future economic conditions in this paper we examine the response of yields on treasury bills to the announcement of the money supply and the extent to which that response has varied in the last ten years money supply announcements may affect market interest rates in three ways first actual expansion of the money supply leads to lower interest rates through a liquidity effect however rapid monetary growth which is not anticipated leads market participants to expect the federal reserve to counteract such growth in the future as a consequence there may be a policy anticipation effect which causes higher interest rates in anticipation of future tightening furthermore prolonged rapid monetary growth also creates inflation and inflationary expectations which lead to higher interest rates thus there may exist a third effect the inflationary expectations effect which also leads to higher interest rates our interest in this paper is in the immediate market response to the weekly announcement of the money supply which as we argue below is most likely to be a policy anticipation effect the policy anticipation effect is best described by example suppose that the announced change in the money supply exceeds that which was expected by

inflation risk premia in the term structure of interest rates this paper estimates the size and dynamics of inflation risk premia in the euro area based on a joint model of macroeconomic and term structure dynamics information from both nominal and index linked yields is used in the empirical analysis our results indicate that the inflation risk premium on euro area 10 year nominal yields was approximately equal to 20 basis points on average over the 1999 2007 period the inflation premium has also been subject to moderate but statistically significant fluctuations for the post 2003 period in which reliable index linked bond prices are available our results suggest that increases in the raw break even inflation rate above 2 the upper bound of the european central bank s definition for price stability have mostly reflected variations in the inflation risk premium while long term inflation expectations have remained well anchored

solving consumption models with multiplicative habits this paper provides derivations necessary for solving an optimal consumption problem with multiplicative habits and a crra outer utility function either for a microeconomic problem with both labor income risk and rate of return risk or for a macroeconomic representative agent model

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

jealousy and equilibrium overconsumption the idea that the happiness of an individual depends upon the consumption of others is widely viewed as an important feature of our shared social existence recent research in finance has used this idea through consumption externalities to explore asset pricing anomalies consumption externalities potentially break the link between pareto optimality and competitive equilibria and open the door for beneficial government intervention e g lars ljungqvist and harald uhlig 2000 in this paper we delineate two effects that a consumption externality may have an increase in aggregate consumption may a raise the marginal utility of individual consumption relative to leisure and or b lower an individual s utility level we refer to a as keeping up with the joneses henceforth kuj following jordi gali 1994 and we refer to b as jealousy jealousy is a distinct concept from kuj under kuj an individual derives greater utility from additional own consumption relative to leisure when others consume more at the same time higher per capita consumption holding fixed individual consumption can trigger either jealousy so that individual utility falls or admiration so that individual utility rises in section i of this paper we show that jealousy implies that the laissez faire equilibrium consumption level is greater than the optimal level whether preferences exhibit kuj is not necessary for this main result intuitively in the presence of jealousy consumption is similar to pollution overpollution exists because individuals do not take into account the cost of polluting on others not because an increase in economywide pollution makes the return to individual polluting higher similarly overconsumption exists because individuals do not take into account the negative effect of own consumption on jealous others things go in the opposite direction when individuals are admiring in section ii we consider a functional form that encompasses several existing models we show that jealousy determines the optimal tax to correct overconsumption and that kuj is mainly important for asset pricing

the policy anticipation hypothesis and the expected inflation hypothesis some new evidence using index linked bonds abstract using price index linked and conventional bonds issued by the uk government estimates of expected inflation and the expected real interest rate are derived these estimates are employed to investigate the relationship between components of the nominal interest rate and surprise monetary change the empirical results support the expected inflation hypothesis rather than the policy anticipation hypothesis

a macro finance model of the term structure monetary policy and the economy this paper develops and estimates a macro finance model that combines a canonical affine no arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation from this new empirical formulation we obtain several interesting results 1 the latent term structure factors from finance no arbitrage models appear to have important macroeconomic and monetary policy underpinnings 2 there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the federal reserve and 3 both forward looking and backward looking elements play important roles in macroeconomic dynamics

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

extracting inflation from stock returns to test purchasing power parity relative purchasing power parity ppp holds for pure price inflations which affect prices of all goods and services by the same proportion while leaving relative prices unchanged pure price inflations also affect nominal returns of all traded financial assets by exactly the same amount recognizing that relative ppp may not hold for the official inflation data constructed from commodity price indices because of relative price changes and other frictions that cause prices to be sticky we provide a novel method for extracting a proxy for realized pure price inflation from stock returns we find strong support for relative ppp in the short run using the extracted inflation measures

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

a single product inventory model for multiple demand classes we consider a single product inventory system that serves multiple demand classes which differ in their shortage costs or service level requirements we assume a critical level control policy and a backorder clearing mechanism in which we treat a backorder for a lower priority class equivalent to a reserve stock shortfall for the higher priority class we show the equivalence between this inventory system and a serial inventory system based on this equivalence we develop a model for cost evaluation and optimization under the assumptions of poisson demand deterministic replenishment lead time and a continuous review q r policy with rationing we propose a computationally efficient heuristic and develop a bound on its performance we provide a numerical experiment to show the effectiveness of the heuristic and the value from a rationing policy finally we describe how to extend the model to permit service times and how to extend the model to a multi echelon setting

information aggregation inflation and the pricing of indexed bonds using daily prices of indexed bonds between 1970 and 1979 we test whether announcements of the israeli cpi contain information that is not already reflected in bond prices the results indicate that bond prices reflect about 85 percent of the new information about inflation as it occurs i e when the central bureau of statistics samples prices the announcement of the cpi 15 days after the end of the sampling period causes the remaining 15 percent adjustment in bond prices this evidence raises questions about the empirical importance of misperceptions about inflation as a source of nonneutrality in monetary policy

the real thing a dynamic profile of the term structure of real interest rates and inflation expectations in the united kingdom 1982 89 this article estimates real interest rates and inflation expectations from market observable data without assuming anything about the form of agents expectation formation mechanism by examining prices of index linked and conventional gilt edged securities form the u k bond market real interest rates and inflation expectations are computed quarterly beginning 1982 2 for up to fourteen maturities ranging from 1988 to 2024 copyright 1990 by the university of chicago

does inflation targeting really make a difference evaluating the treatment effect of inflation targeting in seven industrial countries abstract we evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s to address the self selection problem of policy adoption we make use of a variety of propensity score matching methods recently developed in the treatment effect literature our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries further evidence from long term nominal interest rates and income velocity of money also supports the window dressing view of inflation targeting

sufficient and necessary conditions for information to have social value in pure exchange this paper extends corrects and unifies earlier statements concerning the social value of public information as well as the no trading conditions in pure exchange sufficient and necessary conditions are provided for both the single period and two period cases in a postsignal trading model the social value of information is shown to be closely linked to the allocational efficiency of the market the degree of homogeneity of prior beliefs and of information structures the time additivity of preferences and the efficiency of endowments we conclude that the case in favor of public information is much stronger than previously suggested

dynamic inventory rationing for systems with multiple demand classes and general demand processes we consider the dynamic rationing problem for inventory systems with multiple demand classes and general demand processes we assume that backorders are allowed our aim is to find the threshold values for this dynamic rationing policy for single period systems dynamic critical level policy is developed and the detailed cost approximation subject to this policy is derived for multiperiod systems a dynamic rationing policy with periodic review is proposed the numerical study shows that our dynamic critical level policies are close to being optimal for various parameter settings

a spare parts stocking policy based on equipment criticality demand for spare parts can sometimes be classified into critical and non critical demand depending on the criticality of the equipment in which it is installed to effectively handle this situation in spare parts inventory control we propose a stocking policy where some of the stock is reserved for critical demand for poisson demand and a lot for lot stocking policy with a deterministic replenishment lead time approximations of the service levels for both classes of demand are derived and verified by simulation finally a numerical example is presented to illustrate the advantages of using the proposed policy

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

real and nominal interest rates under uncertainty the fisher theorem and the term structure this paper examines the relation between nominal and real interest rates and the nominal and real term structure under uncertainty we show that two separate risk terms cause the fisher theorem to fail one risk term is related only to the variability of money prices while the other is related to the purchasing power riskiness of the nominal bond monetary policy can affect the value of both these risk terms we also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia even if the economy is neutral with respect to monetary policy monetary policy can alter the nominal term structure

viable allocations of information in financial markets abstract we study in the context of a financial market allocations of information that are consistent with endogenous information acquisition we focus on whether information is concentrated within a fraction of the market or is diffuse the aggregation of information in prices tends to make signals more complementary than they would be if considered in isolation favoring concentration of information however the ability to use some signals together with prices to predict other signals may increase the degree of substitutability among signals we present conditions under which each of these effects is particularly strong

real risk inflation risk and the term structure i present a model for the term structures of nominal and real interest rates in the uk that incorporates markov switching and allows for non neutralities nonlinear dynamics and flexibility in the dynamics of the risk premia the model is used to assess how accurately the term structure reflects changing expectations of future yields and inflation i find that variations in inflation expected over the next two to three years are very accurately reflected by current yields over longer horizons the term structures closely track changing expectations regarding future nominal and real yields but not future inflation

policy watch the introduction of indexed government debt in the united states abstract this article describes the early phases of the development of the market for indexed government debt in the united states the first such bonds were issued in 1997 one set with a maturity of ten years the other with a maturity of five years in the wake of the treasury issuance several non treasury borrowers have issued indexed debt and several new index linked products for retail customers have been introduced as expected the new indexed notes have outperformed conventional nominal notes in the secondary markets for treasury debt when bad news has become available about inflation and conversely

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

public and private information about short and long lived assets using an overlapping generations model this paper considers the impact of an improvement in the technology that investors use to obtain signals about future payouts of a risk asset it is shown that the effects of such a change on the predictability of the gross return on the asset and on the welfare of the agents depend on whether the asset will make multiple future payouts is long lived or a single future payout is short lived and whether the signals about the payoffs are public or private copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

estimating inflation risk premia using inflation linked bonds a review this paper provides an overview of studies that estimate the inflation risk premium using inflation linked bond ilb yields i categorize existing studies outline their research designs and compare their estimates for the inflation risk premium furthermore the importance of accounting for ilb illiquidity and an overview of existing ilb liquidity proxies are demonstrated a discussion of current literature developments such as the zero lower bound and an outline for future research directions conclude the paper

evidence of the fisher effect from u k indexed bonds newly available data from the u k market for indexed securities are used to test the fisher hypothesis for monthly observations of interest rates at 14 maturities the hypothesis that the after tax nominal interest rate is a constant plus anticipated inflation proves to be a reasonable approximation of reality for longer maturities the coefficients on the expected rate of inflation are approximately equal to one the mundell tobin effect is in evidence for shorter maturities the inverted fisher effect is in evidence for shorter maturities the inverted fisher effect is decisively rejected the evidence suggests that past difficulties encountered in trying to prove the fisher effect have been due to the lack of a direct measure of inflation expectations and real interest rates copyright 1992 by mit press

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies