foreign aid tariffs and nontraded private or public goods abstract the possibility of transfer paradoxes or immiserizing growth in tariff ridden small open developing countries with a nontraded goods sector is analysed in four models a short run sector specific factor model a dual economy model capital is mobile between some but not all sectors a long run model factors are mobile between all sectors and a model with public goods several results of the received literature on transfer paradoxes and or immiserizing growth in distorted small open economies are generalized to nontraded private and public goods allowing for intersectoral factor mobility or immobility

the short and long run effects of tied foreign aid on pollution abatement pollution and employment a pilot model abstract there exists in the literature a presumption that tied foreign aid can be used effectively to reduce cross border pollution focusing in contrast to the received literature on the interaction between the public and private provisions of pollution abatement in the recipient country we question the effectiveness of tied foreign aid in reducing pollution in this context we obtain many novel and policy relevant insights allowing for changes in labour employment and distinguishing between short and long run effects tied foreign aid is shown to crowd out the private provision for pollution abatement in the short run in the long run tied foreign aid raises employment and therefore may be desirable for the recipient but undesirable for the donor country because it also raises pollution the results change drastically if only the government provides pollution abatement

monetary policy regimes expected inflation and the response of interest rates to money announcements this paper examines the response of the term structure of interest rates to weekly money announcements estimated responses for both the pre and post october 1979 periods are first presented then two competing hypotheses involving the policy anticipations and expected inflation effects are formally specified and compared with the estimated responses both hypotheses are found to be consistent with the responses but they have sharply different implications about the federal reserve s short run monetary policy by exploiting these different implications additional empirical results focusing directly on the money stock process support the policy anticipations hypothesis

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

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

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

us money announcements and covered interest parity the case of japan abstract this paper examines the effects of us money announcements on dollar and yen denominated securities in their respective onshore markets the effects are consdered over several periods corresponding to possible us and japanese policy regimes the consistency of the responses is further examined by testing whether the responses of dollar denominated securities yen denominated securities the spot yen dollar exchange rate and the forward yen dollar exchange rate violate covered interest parity given the results of previous studies the evidence suggests that restrictions on capital mobility in japan have not allowed complete international integration of japanese financial markets

time varying yield curve dynamics and monetary policy monetary policy the yield curve and the private sector behaviour of the us economy are modelled as a time varying structural vector autoregression the monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate failures of the expectations hypothesis are rare and coincided with the credibility building of paul volcker s fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession copyright 2009 john wiley sons ltd

the central bank as shaper and observer of events the case of the yield spread the yield spread has commonly been employed as a successful predictor of economic growth and recessions although its marginal predictive power has decreased since the 1990s notably the yield spread s declining power to predict us economic activity coincided with its growing power to predict us interest rate changes in my view these phenomena are inevitably linked and share one cause the central bank intended to enhance both its transparency and credibility through greater information disclosure this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity

a time varying parameter structural model of the uk economy abstract we estimate a time varying parameter structural macroeconomic model of the uk economy using a bayesian local likelihood methodology this enables us to estimate a large open economy dsge model over a sample that comprises several different monetary policy regimes and an incomplete set of data our estimation identifies a gradual shift to a monetary policy regime characterised by an increased responsiveness of policy towards inflation alongside a decrease in the inflation trend down to the two percent target level the time varying model also performs remarkably well in forecasting and delivers statistically significant accuracy improvements for most variables and horizons for both point and density forecasts compared to the standard fixed parameter version

social security payments money supply announcements and interest rates abstract a monthly cycle existed in initially announced changes in seasonally adjusted m1 for a period extending at least from september 1977 to february 1984 this cycle was the source of systematic errors in the widely used money market services forecast of m1 such errors can induce a spurious relation between interest rates and expected changes in the money supply when the survey forecasts are corrected to eliminate systematic errors the apparent negative relation between interest rates and expected money supply changes disappears interest rates were not systematically related to either anticipated or unanticipated money supply changes during the period february 1984 to december 1986

changing interest rate responses to money announcements 1977 1983 abstract this paper investigates when and how the response of interest rates to money announcements changed in recent years the response of both short and long rates rises in october 1979 but drops during 1981 during mid 1982 the response of long rates raises again but without a change in the response of short rates despite a number of ex post explanations for these shifts none of the major hypotheses of why interest rates respond to money announcements provides a complete ex ante explanation of these response shifts

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 persistence of inflation in the united states abstract has the persistence of inflation in the united states changed since 1965 we estimate the persistence of inflation over time using different measures and estimation procedures and we produce confidence intervals for our estimates as well as formal tests of unchanged persistence we find that inflation persistence has been high and approximately unchanged in the u s over our sample period we reconcile our results with other studies that reached different conclusions

on the tying of aid to tariff reform this paper considers the welfare effects of foreign aid that is tied to changes in the recipient s tariff by constructing a three country model with tariffs and by allowing for changes both in the amount of aid and in the tariff rates we are able to consider the welfare implications of two different rules of aid conditionality i a rule which leaves the donor s welfare unchanged and ii a rule which leaves the recipient government s total revenue unchanged it is shown that the tying of aid to a tariff reform can inter alia be used to ensure pareto improvement

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

tied aid and the paradoxes of donor enrichment and recipient impoverishment it is part of received doctrine that in a two country world without hindrance of commodity taxes or other distortions and with market stability assured international transfers necessarily harm the donor and benefit the recipient 2 however in the case of most non private international aid those conditions fail donors often require that aid be spent in a manner not closely related to private preferences in the recipient countries indeed not closely related to any well behaved preferences and they normally finance the aid by means of distorting taxation hence one cannot rule out by appeal to standard theorems the possibility that aid perversely leaves the donor better off and or the recipient worse off let us say that aid is tied in the recipient if it is spent inefficiently in terms of individual preferences and that aid is tied in the donor if it is financed inefficiently thus whether aid is tied is a question of how it is spent or financed it is not a question of the numeraire in terms of which aid is accounted nor of the form in which it is offered 3 evidently the definition of tying is uncommonly broad for example aid may be tied in the recipient not because the donor attaches strings but because the government of the recipient is incompetent or unrepresentative moreover the definition is relevant however the aid is applied whether to private or public goods whether to consumption or investment goods we follow the literature on the transfer problem in assuming that aid is spent on private consumption goods like hospital services and powdered milk this is a matter of convenience and continuity only 4 in the present note we seek to rework the economics of foreign aid under novel assumptions in particular allowance will be made for the possibility that aid is tied in whole or in part in the donor or in the recipient it will be verified that the donor may benefit and the recipient suffer and that these outcomes are com

flexible exchange rates prices and the role of news lessons from the 1970s recent experience with flexible exchange rate systems has led to renewed interest in the operation of foreign exchange markets as reflected in many recent studies of the principal determinants of exchange rates the 1970s witnessed the dramatic alteration of the international monetary system from a regime of pegged exchange rates which prevailed for about a quarter of a century since the bretton woods conference into a regime of flexible though managed rates as a consequence of the emergence of the new legal and economic system traders national governments and international organisations were confronted with new economic problems choices and instruments during the 1970s ex change rates fluctuated widely and inflation rates accelerated the international monetary system had to accommodate extraordinarily large oil related shocks which affected trade flows in goods and assets huge oil payments had to be recycled uncertainties concerning future developments in international politics reached new heights and the prospects for the world economy got gloomier these developments placed unprecedented pressures on the markets for foreign exchange as well as on other asset markets they were associated with a large slide in the value of the us dollar and resulted in speeding up the creation of new institutions like the european monetary system which provided the formal framework for the management of exchange rates among members

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

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

foreign aid and public goods abstract most less developed countries ldcs use foreign economic aid to finance public consumption goods or public intermediate inputs this paper constructs a two country general equilibrium trade model where an income transfer that takes place between the two countries is used by the recipient to finance a public consumption good within this framework the paper identifies the conditions under which the income transfer improves or deteriorates the donor country s terms of trade and shows that the transfer can be welfare enriching for the donor and welfare immiserizing for the recipient country the paper also demonstrates that the transfer can raise reduce world welfare in which case a welfare increase decrease in both the donor and the recipient country is possible

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

us money supply announcements and pacific rim stock markets evidence and implications this paper documents variation across pacific rim countries in the response of equity values to us m1 announcement suprises we relate the difference across countries to measures of capital mobility export trade with the usa foreign exchange and money market arrangements and correlation with the us stock market we find that the response to us m1 suprises is best explained by the country s degree of integration with international capital markets the flexibility of the exchange rate and interest rates may also be significant while the evidence is supportive of the anticipated fed reaction theory of the effect of money announcement suprises the differing response ro m1 shocks across fed policy regimes remains unexplained

changing macroeconomic dynamics at the zero lower bound this article develops a change point var model that isolates four major macroeconomic regimes in the us since the 1960s the model identifies shocks to demand supply monetary policy and spread yield using restrictions from a general equilibrium model the analysis discloses important changes to the statistical properties of key macroeconomic variables and their responses to the identified shocks during the crisis period spread shocks became more important for movements in unemployment and inflation a counterfactual exercise evaluates the importance of lower bond yield spread during the crises and suggests that the fed s large scale asset purchases helped lower the unemployment rate by about 0 6 percentage points while boosting inflation by about 1 percentage point

the yield curve and the macro economy across time and frequencies this paper assesses the relation between the yield curve and the main macroeconomic variables in the u s between early 1960s and 2009 across time and frequencies using wavelet analyses the shape of the yield curve is modelled by latent factors corresponding to its level slope and curvature estimated by maximum likelihood with the kalman filter the macroeconomic variables measure economic activity unemployment inflation and the fed funds rate the cross wavelet tools employed coherency and phase difference the set of variables and the length of the sample allow for a thorough appraisal of the timevariation and structural breaks in the direction intensity synchronization and periodicity of the relation between the yield curve and the macro economy our evidence establishes a number of new stylized facts on the yield curve macro relation and sheds light on several results found in the literature which could not have been achieved with analyses conducted strictly in the time domain as most of the literature or purely in the frequency domain

commodity prices money surprises and fed credibilit strict monetarist theory in an extreme form holds that excessive money growth or the expectation of future money growth shows up immediately in the rapid inflation of goods prices however it is widely argued that for most goods prices are in fact sticky in the short run and reflect money growth only in the long run if one seeks a sensitive market measure of the perceived looseiless or tightness of monetary policy one must look elsewhere than at the general price level interest rates being determined in quickly adjusting financial markets are free to respond immediately to expectations regarding monetary policy in 1981 and 1982 every friday at 4 10 p m eastern standard time the federal reserve board would announce the money stock for the week ending nine days previously if the announced money stock was different from what the market had been expecting interest rates generally jumped in the same direction clearly they were responding to revisions of the expected future path of the money stock but nominal interest rates are an ambiguous indicator of expectations on the one hand an announced increase in the money stock may be received by the market as indicating a higher

the incredible volcker disinflation abstract the reduction in inflation that occurred in the early 1980s when the federal reserve was headed by paul volcker is arguably the most widely discussed and visible macroeconomic event of the last 50 years of u s history inflation had been dramatically rising but under volcker the fed first contained and then reversed this process using a simple modern macroeconomic model we argue that the real effects of the volcker disinflation were mainly due to its imperfect credibility in our view the observed upward volatility and subsequent stubborn elevation of long term interest rates during the disinflation are key indicators of that imperfect credibility studying transcripts of the federal open market committee recently released to the public we find to our surprise that volcker and other fomc members likewise regarded the long term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy drawing from the transcripts and other contemporary sources we consider the interplay of monetary targets operating procedures and credibility during the volcker disinflation

where does the meteor shower come from the role of stochastic policy coordination abstract this paper examines the intra daily volatility of the yen dollar exchange rate over three different regimes from 1979 to 1988 which correspond to different degrees of international policy coordination in each regime we test for heat wave vs meteor shower effects the heat wave hypothesis assumes that volatility has only country specific autocorrelations while the meteor shower hypothesis allows volatility spillovers across markets meteor shower showers can be caused by stochastic policy coordination or by gradual release of private information the rejection of the heat wave hypothesis in the early 1980s discredits the stochastic policy coordination interpretation

the effect of u s money supply announcements on canadian stock bond and currency prices this paper documents associations between weekly u s money supply releases and four price series from canada s financial markets two significant results emerge first the toronto stock index government of canada bond prices and canadian short term interest rates change with surprises in the announced level of u s m1 since the u s began targeting money growth in october 1979 these effects do not appear to be transmitted through canadian monetary variables second the canada u s exchange rate is uncorrelated with u s m1 surprises this suggests that the bank of canada prefers to stabilize the exchange rate rather than the interest rate

political uncertainty and the earmarking of environmental taxes abstract far from being used to secure a double dividend by reducing distorting taxes revenues from environmental taxes seem quite often to be earmarked to particular spending programs in the us for example a range of such taxes feed into environmental trust funds such earmarking runs counter to standard notions of good practice in taxing and spending this paper develops and explores an explanation of such apparent inefficiencies in terms of political uncertainty roughly a green incumbent may chose to earmark revenues if the efficiency loss from doing so is outweighed by the value of constraining subsequent and potentially non green policy makers from wasting the funds raised it emerges for example that those most likely to earmark are green politicians who are politically weak and that earmarking then enables such a policy maker to set the corrective tax higher than they otherwise would but nevertheless lower than the pigovian tax

the reaction of exchange rates to economic news this paper examines the short run responses of spot exchange rates to several types of economic news survey data are used to divide economic announcements into expected and unexpected components with the latter measuring news the results indicate that exchange rates are systematically related to unexpected money announcements after the october 1979 switch in federal reserve operating procedures but not before this response does not appear to have changed however after the october 1982 federal reserve regime change short run exchange rate movements are not systematically related to news on inflation or real activity

accounting for a shift in term structure behavior with no arbitrage and macro finance models this paper examines a shift in the dynamics of the term structure of interest rates in the u s during the mid 1980s we document this shift using standard interest rate regressions and using dynamic a ne no arbitrage models estimated for the pre and post shift subsamples the term structure shift largely appears to be the result of changes in the pricing of risk associated with a level factor using a macro nance model we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the federal reserve s in ation target as perceived by investors