inducing liquidity in thin financial markets through combined value trading mechanisms asset pricing theory hypothesizes that investors are only interested in portfolios individual securities are evaluated only in terms of their contribution to portfolio risk and return yet standard financial market design is that of parallel unconnected markets whereby investors cannot submit orders in one market conditional on events in others when markets are thin this exposes them to substantial execution risk fear of ending up with unbalanced portfolios after trading may even keep investors from submitting orders further eroding liquidity and the ability of markets to equilibrate the suggested solution is a portfolio trading mechanism referred to as combined value trading cvt investors are allowed to submit orders for packages of securities and the system matches trades and computes prices by optimally combining portfolio orders in an open book we study the performance of the cvt mechanism experimentally and compare it to the performance of parallel unconnected double auctions in experiments with similar parametrization and either a similar number of subjects or substantially thicker markets we present evidence that our portfolio trading mechanism facilitates equilibration to the extent that the thicker markets do inspection of order submission and trade activity reveals that subjects manage to exploit the direct linkages between markets enabled by the cvt system

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

the inexorable and mysterious tradeoff between inflation and unemployment this paper discusses the short run tradeoff between inflation and unemployment although this tradeoff remains a necessary building block of business cycle theory economists have yet to provide a completely satisfactory explanation for it according to the consensus view among central bankers and monetary economists a contractionary monetary shock raises unemployment at least temporarily and leads to a delayed and gradual fall in inflation standard dynamic models of price adjustment however cannot explain this pattern of responses reconciling the consensus view about the effects of monetary policy with models of price adjustment remains an outstanding puzzle for business cycle theorists several years ago i gave myself a peculiar assignment i decided to try to summarise all of economics in ten simply stated principles the purpose of this task was to introduce students to the economic way of thinking in the first chapter of my textbook principles of economics i figured if god could boil all of moral philosophy down to ten commandments i should be able to do much the same with economic science most of the ten principles i chose were microeconomic and hard to argue with they involved the importance of tradeoffs marginal analysis the benefits of trade market efficiency market failure and so on i allocated the last three principles to macroeconomics the first of these was a country s standard of living depends on its ability to produce goods and services which i viewed as the foundation of all growth theory the second was prices rise when the government prints too much money which i took to be the essence of classical monetary theory the last of my ten principles is the subject of today s lecture society faces a short run tradeoff between inflation and unemployment perhaps not surprisingly this statement turned out to be controversial when my publisher sent out the manuscript for review a few readers objected

the output inflation tradeoff and central bank reform evidence from new zealand the 1989 reserve bank of new zealand act provides a natural experiment in which the effects of institutional change on economic relationships can be studied the act set price stability as the single objective of monetary policy and gave the bank great independence reforms of this nature may lead to a greater short run output inflation tradeoff by altering optimal stabilisation policy and wage indexation allowing for environments where learning about the new regime is assumed to be rapid as well as slow we find that a large rise in the new zealand tradeoff has occurre d since implementation of the act

is there a role for monetary aggregates in the conduct of monetary policy abstract we examine the potential policy role of monetary aggregates by attempting to use them as effectively as possible in the analysis of empirical relationships we focus on their role as information variables since any more ambitious use such as in a policy rule would presuppose some information content in the aggregates our results show that in the united states since 1979 the monetary aggregates fall considerably short of those requirements and results with german m3 are hardly more favorable we also investigate whether empirical relationships are not reflective of information relationships because of the use of these variables in countercyclical policy the results are not consistent with that interpretation

does inflation targeting improve fiscal discipline abstract we explore the performances of inflation targeting it adoption in terms of fiscal discipline fd while most existing studies focus exclusively on the role of fd as a precondition for it adoption using a sample of developing and developed countries we show that it adoption exerts a positive and significant effect on fd a result robust to a wide variety of alternative specifications in addition this effect is statistically significant only in developing countries a result that may fuel the current debate regarding the relevance of it adoption in general and particularly for developing countries

monetary policy strategies for latin america the authors examine possible monetary policy strategies for latin america that may help lock in the gains the region attained in the fight against inflation in the 1990s instead of focusing the debate about the conduct of monetary policy on whether the nominal exchange rate should be fixed or flexible the focus should be on whether the monetary policy regime appropriately constrains discretion in monetary policymaking three basic frameworks deserve serious discussion as possible long run strategies for monetary policy in latin america the authors examine the advantages and disadvantages of a hard exchange rate peg monetary targeting and inflation targeting in light of monetary policy s recent track record in several latin american countries looking for clues about which of the strategies might be best suited to economies in the region the answer it depends on the country s institutional environment some countries appear not to have the institutions to constrain monetary policy if discretion is allowed in those countries there is a strong argument for hard pegs including full dollarization that allow little or no discretion to monetary authorities in countries such as chile which can constrain discretion inflation targeting is likely to produce a monetary policy that keeps inflation low yet appropriately copes with domestic and foreign shocks monetary targeting as a strategy for latin america is not viable because of the likely instability of the relationship between inflation and monetary aggregates of which there is ample international evidence no monetary strategy can solve the basic problems that have existed in latin american economies for a long time the authors welcome the recent move in latin american countries toward inflation targeting but say no policy will succeed unless government policies also create the right institutional environment

investment risks in power generation a comparison of fossil fuel and renewable energy dominated markets abstract due to their high capital intensity weather dependent renewable energies res such as solar and wind face considerable investment risks in power markets in addition their uncertain production volumes also affect the investment risks of other plant types through the impact on power prices and residual demand increasing res shares thus potentially increase overall investment risks in power markets which many analysts consider to be a potential problem against this background this paper compares investment risks of different technologies in markets with increasing shares of variable res it further analyses how generation mixes are affected by these investment risks if the risks are evaluated on a stand alone basis or in a plant portfolio context of a private firm for this purpose a stylized investment and dispatch model is used to conduct monte carlo simulations from which risk measures are derived the results show that capital intensive res face the highest stand alone risks since their profits are most affected by the power price risk however the results further indicate that the stand alone risks of variable res decrease with their share in the market because of a negative correlation of output and price risk in addition res have a risk benefit in firm plant portfolios in terms of constituting a hedge against losses of fossil fuel plants this positive portfolio effect however rapidly decreases and becomes negative with increasing res shares in the market

stock markets banks and growth panel evidence this paper investigates the impact of stock markets and banks on economic growth using a panel data set for the period 1976 98 and applying recent gmm techniques developed for dynamic panels on balance we find that stock markets and banks positively influence economic growth and these findings are not due to potential biases induced by simultaneity omitted variables or unobserved country specific effects

business case uncertainty of power plants in future energy systems with wind power abstract the european power sector is transforming due to climate policies and an increased deployment of intermittent res the sector will require thermal power plants for the decades to come but their business cases are negatively affected by this transformation this study presents a novel tool to quantify the effect of policy price and project related uncertainties on power plant business cases this tool can support policymakers in stimulating necessary investments in new thermal generation capacity we find that these investments are currently unsound power plants recoup on average 12 to 59 of their initial investment future climate policy i e the co 2 price has a very strong impact on business cases affects the profitability by 5 40 points the impact of the deployment of wind power is average 2 8 point difference between 10 and 21 wind penetration variations in annual wind power production barely affect the profitability variation of 1 point to stimulate new investments policymakers should first decrease the uncertainty in business cases caused by policy durable climate policy is especially important also policies to increase the profits of thermal power plants should be carefully considered and implemented this combined approach will reduce the revenue gap that needs to be bridged by supportive policies

inflation targeting and inflation performance a comparative analysis this article examines how the impact of inflation targeting on inflation performance depends on the choice of country samples adoption dates time periods and methodological approaches we apply two different estimation methods difference in differences and propensity score matching for our sample of 25 advanced and 59 emerging and developing countries over the period 1985 to 2011 our findings suggest that distinguishing countries by economic development is crucial as no effect of inflation targeting is found for advanced economies whereas the results suggest a significant negative effect of inflation targeting on inflation in emerging and developing countries the results are robust to the methodology used for the analysis

trading mechanisms and stock returns an empirical investigation this paper examines the effects of the mechanism by which securities are traded on their price behavior we compare the behavior of open to open and close to close returns on nyse stocks given the differences in execution methods applied in the opening and closing transactions opening returns are found to exhibit greater dispersion greater deviations from normality and a more negative and significant autocorrelation pattern than closing returns we study the effects of the bid ask spread and the price adjustment process on the estimated return variances and covariances and discuss the associated biases we conclude that the trading mechanism has a significant effect on stock price behavior

a portfolio risk analysis on electricity supply planning abstract conventional electricity planning selects from a range of alternative technologies based on the least cost method without assessing cost related risks the current approach to determining energy generation portfolios creates a preference for fossil fuel consequently this preference results in increased exposure to recent fluctuations in fossil fuel prices particularly for countries heavily depend on imported energy this paper applies portfolio theory in conventional electricity planning with taiwan as a case study the model objective is to minimize the risk weighted present value of total generation cost both the present value of generating cost and risk variance of the generating cost are considered risk of generating cost is introduced for volatile fuel prices and uncertainty of technological change and capital cost reduction the impact of risk levels on the portfolio of power generation technologies is also examined to provide some valuable policy suggestions study results indicate that replacing fossil fuel with renewable energy helps reduce generating cost risk however due to limited renewable development potential in taiwan there is an upper bound of 15 on the maximum share of renewable energy in the generating portfolio in the meantime reevaluating the current nuclear energy policy for reduced exposure to fossil fuel price fluctuations is worthwhile

high penetration wind generation impacts on spot prices in the australian national electricity market this paper explores wind power integration issues for the south australian sa region of the australian national electricity market nem by assessing the interaction of regional wind generation electricity demand and spot prices over 2 recent years of market operation sa s wind energy penetration has recently surpassed 20 and it has only a limited interconnection with other regions of the nem as such it represents an interesting example of high wind penetration in a gross wholesale pool market electricity industry our findings suggest that while electricity demand continues to have the greatest influence on spot prices in sa wind generation levels have become a significant secondary influence and there is an inverse relationship between wind generation and price no clear relationship between wind generation and demand has been identified although some periods of extremely high demand may coincide with lower wind generation periods of high wind output are associated with generally lower market prices and also appear to contribute to extreme negative price events the results highlight the importance of electricity market and renewable policy design in facilitating economically efficient high wind penetrations

establishing the role that wind generation may have in future generation portfolios assessing the correct future mix in generation portfolios has become more difficult given the introduction of emission trading schemes the recent fuel price rises and the increasing competitiveness of wind energy this paper combines analysis of generation economics load and wind generation characteristics generation adequacy and plant utilization to gain insight into the role of wind generation in desirable generation portfolios the unique characteristics of wind generation are accounted for in the analysis and sensitivity analysis is carried out with respect to discount rates carbon taxes and various fuel price scenarios results show that for a large range of future scenarios wind generation has a significant role to play in future generation portfolios in ireland mean variance portfolio theory is applied to examine the benefits of portfolio diversification in terms of avoiding exposure to volatile fuel prices analysis shows that wind generation has a further role to play in generation portfolios in this respect

optimal wind power deployment in europe a portfolio approach geographic diversification of wind farms can smooth out the fluctuations in wind power generation and reduce the associated system balancing and reliability costs the paper uses historical wind production data from five european countries austria denmark france germany and spain and applies the mean variance portfolio theory to identify cross country portfolios that minimise the total variance of wind production for a given level of production theoretical unconstrained portfolios show that countries spain and denmark with the best wind resource or whose size contributes to smoothing out the country output variability dominate optimal portfolios the methodology is then elaborated to derive optimal constrained portfolios taking into account national wind resource potential and transmission constraints and compare them with the projected portfolios for 2020 such constraints limit the theoretical potential efficiency gains from geographical diversification but there is still considerable room to improve performance from actual or projected portfolios these results highlight the need for more cross border interconnection capacity for greater coordination of european renewable support policies and for renewable support mechanisms and electricity market designs providing locational incentives under these conditions a mechanism for renewables credits trading could help aligning wind power portfolios with the theoretically efficient geographic dispersion 2009 elsevier ltd

inflation targeting and inflation expectations in mexico in this article we analyse inflation expectations in mexico after a review of the theoretical and empirical literature we apply unit root normality and cointegration tests to the data provided by banco de mexico banxico in the survey on the expectations of the private sector economics specialists our results reject the null hypothesis of normality for inflation expectations over the period 2004 01 2011 12 the exchange rate has become one of the most relevant variables in the transmission mechanism of monetary policy in a small open economy in this regard we show the existence of a long run relationship between nominal exchange rate and interest rate where inflation expectations matter for long term dynamics

a taxonomy of automated trade execution systems abstract a taxonomy of automated trade execution systems in financial markets is developed over 50 automated market structures in 16 countries are analyzed these markets consist of computerized rules governing both allowable message types and the means by which such messages are translated into trades computerized market structures are classified by ordered sets of trade execution priority rules trade matching protocols and associated degree of automation of price discovery and transparency to include informational asymmetries between classes of market participants differences in systems across types of financial instruments geographical locations and over time are analyzed jel g15 d44

quantitative goals for monetary policy we study empirically the macroeconomic effects of an explicit de jure quantitative goal for monetary policy quantitative goals take three forms exchange rates money growth rates and inflation targets we analyze the effects on inflation of both having a quantitative target and of hitting a declared target our empirical work uses an annual data set covering 42 countries between 1960 and 2000 and takes account of other determinants of inflation such as fiscal policy the business cycle and openness to international trade and the endogeneity of the monetary policy regime we find that both having and hitting quantitative targets for monetary policy is systematically and robustly associated with lower inflation the exact form of the monetary target matters somewhat especially for the sustainability of the monetary regime but is less important than having some quantitative target successfully achieving a quantitative monetary goal is also associated with less volatile output

inflation in mozambique empirical facts based on persistence seasonality and breaks this article investigates inflation in mozambique using long range dependence lrd techniques in monthly data from december 1995 to october 2012 two important features of the data are analysed persistence and seasonality looking at aggregated and disaggregated data the stability of the parameters across the sample is also investigated the results indicate a high degree of persistence in the data along with a strong seasonal pattern policy implications are discussed

a binary conflict ascending price bicap mechanism for the decentralized allocation of the right to use railroad tracks the questions posed for study are motivated by controversies over how sweden might change from a centralized system of railroad management to a decentralized system the central rail administration banverket will retain ownership and maintenance responsibility of the tracks but will sell access to the tracks to private firms the questions are about the mechanism that might accomplish this task parties to the controversy have claimed that the technical aspects of networks will as a matter of principle preclude the operation of any decentralized method this paper explores the properties of a mechanism developed as a challenge to that claim the mechanism is examined in the context of a testbed experimental environment that contains many potential problem causing elements in the tests performed the mechanism operated to efficiently allocate access to the network and it did so for behavioral reasons that are understandable in terms of theory the paper closes with suggestions for further study of environments that might present additional challenges to a mechanism

the mirage of fixed exchange rates this paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets contrary to popular wisdom industrialized country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack but if their commitment to use those resources lacks credibility with markets the costs to the broader economy of defending an exchange rate peg can be very high the dynamic interplay between credibility and commitment is illustrated by the 1992 swedish and british crises and the 1994 95 mexican collapse we also discuss the small number of successful fixers

design for optimized multi lateral multi commodity markets abstract in this paper we propose a design for an economically efficient optimized centralized multi lateral periodic commodity market that addresses explicitly three issues i substantial transportation costs between sellers and buyers ii non homogeneous in quality and nature commodities iii complementary commodities that have to be traded simultaneously the model allows sellers to offer their commodities in lots and buyers to explicitly quantify the differences in quality of the goods produced by each individual seller the model does not presume that products must be shipped through a market hub we also propose a multi round auction that enables the implementation of the direct optimized market and approximates the behaviour of the ideal direct optimized mechanism the process allows buyers and sellers to modify their initial bids including the technological constraints the proposed market designs are particularly relevant for industries related to natural resources we present the models and algorithms required to implement the optimized market mechanisms describe the operations of the multi round auction and discuss applications and perspectives

global liquidity transmission to emerging market economies and their policy responses abstract this paper analyzes the transmission of global liquidity gl from advanced economies aes to emerging market economies emes we distill gl momenta from the macro financial data of aes through a factor model and identify them with sign restrictions as policy driven market driven and risk averseness factors using a panel factor augmented var analysis we then investigate eme responses to shocks to gl momenta a positive shock to policy driven liquidity boosts growth in emes elevating stock prices and currency values while a shock to risk averseness has a largely opposite effect a market driven gl expansion boosts stock markets and lowers funding costs increasing competitiveness and current account balance inflation targeting emes are found to fare better than emes under alternative regimes in terms of macro financial volatility

optimal investment portfolio in renewable energy the spanish case abstract this article presents a model for investing in renewable energies in the framework of the spanish electricity market in a way that risk is minimised for the investor while returns are maximised the model outlined here is based on an economic model for calculating cash flows intended to obtain the internal rate of return irr of the different energies being studied wind photovoltaic mini hydro and thermo electrical the irrs obtained are considered the returns on investments while their standard deviations are considered associated risks in order to minimise risk a comprehensive portfolio of investments is created that includes all of the available energies by means of a system of linear equations the solution of the linear system is graphically checked using the efficient frontier method for the different financing options several case studies within the renewable energies plan per is its spanish abbreviation that is in force in spain in the period 2005 2010 are analysed in order to illustrate the method as are other case studies using different types of financing helping us to reach the pertinent conclusions

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

flexible inflation targets forex interventions and exchange rate volatility in emerging countries abstract emerging economies with inflation targets it face a dilemma between fulfilling the theoretical conditions of strict it which imply a fully flexible exchange rate or applying a flexible it which entails a de facto managed floating exchange rate with foreign exchange forex interventions to moderate exchange rate volatility using a panel data model for 37 countries we find that although it lead to higher exchange rate instability than alternative regimes forex interventions in some it countries have been more effective to lower volatility than in non it countries which may justify the use of flexible it by policymakers

the effectiveness of monetary policy anchors firm level evidence analyses of monetary policy posit that exchange rate pegs inflation targets and central bank independence can help anchor private sector inflation expec tations yet there are few direct tests of this argument we offer cross national micro level evidence on the effectiveness of monetary anchors in controlling private sector inflation concerns using firm level data from eighty one countries approximately 10 000 firms we find evidence that international anchors exchange rate commit ments correlate significantly with a substantial reduction in private sector concerns about inflation while domestic anchors inflation targeting and central bank inde pendence do not our conjecture is that private sector inflation expectations are more responsive to exchange rate anchors because they are more transparent more con straining and more costly than domestic anchoring arrangements the literature on monetary policy highlights the role of monetary institutions in stabilizing private sector inflation expectations central bank independence cbi inflation targeting it and fixed exchange rates pegs are widely viewed as insti tutions that have the capacity to mitigate private sector concerns that policymak ers will exploit them after they have locked in their price wage and investment decisions while other empirical research explores the institutional correlates of inflation and its variability yielding mixed results we use firm level data in our study to directly assess the impact of monetary anchors on private sector inflation concerns we find evidence that pegs mitigate firm owners concerns with infla tion but that domestic anchors such as it and cbi are uncorrelated with our micro indicators of inflation expectations considerable research has investigated the use of it cbi and pegs as institu tions that establish monetary policy credibility whereas these anchors are expected

dealing with time inconsistency inflation targeting versus exchange rate targeting adopting a single instead of multiple targets can be an effective way to overcome the classic time inconsistency problem the choice of a single mandate depends on the trade openness and the credibility reduced form empirical results show as central banks become less credible they are more likely to adopt a pegged exchange rate and the tendency to peg depends on trade openness in a model with loose commitment as credibility falls either an inflation target or a pegged exchange rate is more likely to be adopted arelatively closed highly open economywould adopt an inflation target exchange rate peg

inflation targeting in latin america toward a monetary union this paper examines how monetary policy decisions in brazil regarding short term interest rates have affected the term structure of interest rates we apply an event study methodology in two distinct periods between january 2000 and august 2003 right after the implementation of the inflation targeting in brazil and between september 2003 and july 2008 the main results are 1 the surprise effects have decreased 2 the explanation power has increased in the second period indicating enhancement of monetary policy 3 market participants adjust their expectations with greater advance 4 the surprise effects of decisions on short term rates on the term structure of interest rates are now close to those found in the usa and germany but higher to those found in the uk and italy therefore the results indicate that fixed income market expectations are better adjusted to the central bank anti inflationary policy

implications of an index contingent trading mechanism this article analyzes a call market that enables conditioning not only on an asset price but also on an index a weighted average of stock prices that is determined simultaneously with the prices of all assets the authors compare two trading systems with and without index conditioning and find that in the system with index conditioning traders indeed use the facility of index conditioning there is more depth liquidity in the market price fluctuations around true values are lower expected trading costs of liquidity traders are lower and the expected utility of informed traders is lower than in a system without index conditioning copyright 1997 by university of chicago press

the impact of central bank independence on the performance of inflation targeting regimes abstract this paper examines the effects of inflation targeting on inflation in both advanced and emerging economies we do not detect significant effects in advanced economies and only find small benefits in emerging economies in line with previous studies however when we differentiate the impact of inflation targeting based on the degree of central bank independence we find large effects in emerging economies with low central bank independence our results therefore suggest that central bank independence is not a prerequisite for countries to experience significant declines in inflation following the adoption of inflation targeting furthermore we provide evidence that one channel through which inflation targeting lowers inflation more in countries with low central bank independence is the reduction of budget deficits following the adoption of an inflation target

smart market mechanisms from practice to theory abstract for the past decade experimental economists have been developing smart markets that allow for the processing and balancing of complex contingencies automatically by the market mechanism we develop a theoretical framework for representing smart markets and demonstrate a smart market mechanism that enforces all or none contingencies for a single good and satisfies four basic properties of fairness and efficiency it is then shown that such a market violates a fundamental invariant of traditional auction markets and so the law of a single price does not appear to apply to such a market we conclude by discussing the implications of this result to the general design of smart market mechanisms

assessing the value of wind generation in future carbon constrained electricity industries this paper employs a novel monte carlo based generation portfolio assessment tool to explore the implications of increasing wind penetration and carbon prices within future electricity generation portfolios under considerable uncertainty this tool combines optimal generation mix techniques with monte carlo simulation and portfolio analysis methods to determine expected overall generation costs associated cost uncertainty and expected co2 emissions for different possible generation portfolios a case study of an electricity industry with coal combined cycle gas turbines ccgt open cycle gas turbines ocgt and wind generation options that faces uncertain future fossil fuel prices carbon pricing electricity demand and plant construction costs is presented to illustrate some of the key issues associated with growing wind penetrations the case study uses half hourly demand and wind generation data from south eastern australia and regional estimates of new build plant costs and characteristics results suggest that although wind generation generally increases overall industry costs it reduces associated cost uncertainties and co2 emissions however there are some cases in which wind generation can reduce the overall costs of generation portfolios the extent to which wind penetration affects industry expected costs and uncertainties depends on the level of carbon price and the conventional technology mix in the portfolios

stock market microstructure and return volatility evidence from italy abstract this paper studies the impact of the stock market microstructure on return volatility and on the value discovery process in the milan stock exchange the primary trading mechanism employed by this exchange is a call market which is usually preceded and followed by trading in a continuous market we find that the opening transaction in the continuous market has the highest volatility and that opening the market with the call transaction seems to produce relatively lower volatility in the closing transaction investors correct perceived errors or noise in the prices set at the call the implications of the results for market design are examined

stock market structure and volatility the procedure for opening stocks on the nyse appears to affect price volatility an analytical framework for assessing the magnitude of the structurally induced volatility is presented the ratio of variance of open to open returns to closeto close returns is shown to be consistently greater than one for nyse common stocks during the period 1982 through 1986 tbe greater volatility at the open is not attributable to the way in which public information is released since both the opento open return and the close to close return span the same period of time instead the greater volatility appears to be attributable to private information revealed in trading and to temporaryprice deviations induced by specialist and other traders the implied cost of immediacy at the open is significantly higher than at the close other empirical evidence in this article documents the volume of trading at the open the time delays between the exchange opening and the first transaction in a stock the difference in daytime volatility versus overnight volatility and the extent to which volatility is related to trading volume

inflation targeting fiscal rules and the policy mix cross effects and interactions we examine how inflation targeting it and fiscal rules fr affect inflation and fiscal performance in a large panel of countries during 1990 2009 in line with theory both fr and it appear to shape monetary and fiscal outcomes significant cross effects seem to exist as it strengthens fiscal performance whereas the combination of fr and it tends to be associated with more disciplined macroeconomic policies than if only one of these institutions operates our findings suggest that it and fr affect the coordination of the policy mix and point to potential benefits of reforming macroeconomic frameworks in a holistic fashion

inflation responses to commodity price shocks how and why do countries differ this paper relates the inflationary impact of commodity price shocks across countries to a broad range of structural characteristics and policy frameworks over the period 2001 2010 using several approaches the analysis suggests that economies with higher food shares in cpi baskets fuel intensities and pre existing inflation levels were more prone to experience sustained inflationary effects from commodity price shocks countries with more independent central banks and higher governance scores seem to have contained the impact of these shocks better the effect of the presence of inflation targeting regimes however appears modest and not evident during the 2008 food price shock the evidence suggests that trade openness financial development dollarization and labor market flexibility do not significantly influence the way in which domestic inflation responds to international commodity price shocks

inflation targeting is it to blame for banking system instability abstract in light of the financial crisis the practice of inflation targeting it has been blamed for authorities failure to respond to the increase in financial systemic risk and to the development of asset bubbles however utilizing a rich database containing nearly 5500 commercial banks from 70 countries among which 22 are it for the period 1998 2012 this paper argues that on average inflation targeting national banking systems i are more stable ii possess sounder systemically important banks and iii are less distressed than or at least as distressed as other banks during periods of global liquidity shortages our results are robust to a series of tests such as when we compare countries with the same legal origins or control for the delegation of bank supervision responsibility to bodies other than the central bank overall we conclude that it cannot be blamed for contributing to financial fragility

economics of nuclear and renewables abstract this paper provides an assessment of the economic challenges faced by both nuclear power and new renewable electricity technologies the assessment reflects the need to incorporate new renewables into power grids and issues faced in dispatching power and their effect on traditional electricity technologies as well as the need for transmission extension and or grid reinforcement wider introduction of smart grids and the likely demise of nuclear in some oecd countries are bound to enhance the future prospects for new renewables however their immediate future expansion will depend on continued subsidies which are becoming difficult to sustain in present economic circumstances development of large energy storage facilities and carbon pricing could significantly enhance future renewable energy prospects correspondingly expanding renewable energy in spite of their popularity with some governments and sections of the public is likely to face challenges which will slow their present rapid progress nuclear is now shied away from in many industrialized countries and having mixed prospects in developing economies in many instances it suffers from high initial costs long lead times and often excessive construction delays nuclear power also faces challenging risks investment as well as regulatory in contrast to renewables its share of global energy consumption is declining

fuel mix diversification incentives in liberalized electricity markets a mean variance portfolio theory approach monte carlo simulations of gas coal and nuclear plant investment returns are used as inputs of a mean variance portfolio optimization to identify optimal base load generation portfolios for large electricity generators in liberalized electricity markets we study the impact of fuel electricity and co2 price risks and their degree of correlation on optimal plant portfolios high degrees of correlation between gas and electricity prices as observed in most european markets reduce gas plant risks and make portfolios dominated by gas plant more attractive long term power purchase contracts and or a lower cost of capital can rebalance optimal portfolios towards more diversified portfolios with larger shares of nuclear and coal plants

two fallacies concerning central bank independence this paper takes issue with two basic conclusions prevalent in the literature on central bank behavior first the paper argues that it is inappropriate to presume that central banks will in the absence of any precommitment technology necessarily behave in a discretionary fashion that implies an inflationary bias since there is no functional connection between average rates of money creation or inflation and policy responsiveness to cyclical disturbances it is entirely feasible for the bias to be avoided in other words there is no necessary tradeoff between flexibility and commitment second to the extent that the absence of any absolute precommitment technology is nevertheless a problem it will apply to a consolidated central bank plus government entity as well as to the central bank alone thus contracts between governments and central banks do not overcome the motivation for dynamic inconsistency they merely relocate it this abstract was borrowed from another version of this item

pros and cons of exposing renewables to electricity market risks a comparison of the market integration approaches in germany spain and the uk abstract the article examines how renewable electricity res e producers are integrated into the electricity market under the support legislations and regulatory frameworks of germany spain and the uk focus is on wind power which faces the highest market integration challenge of all res e the analysis shows that the three countries follow contrasting approaches of exposing res e producers to the market risks of forward electricity markets balancing markets and system planning requirements risk exposure is highest in the uk and lowest in germany from a policy maker s perspective there is a trade off between a high risk and a low risk approach when res e face high market risks a higher level of financial support is required to stimulate res e development than in a low risk environment but the exposure to market risks may also give an incentive to make efficient use of the respective market thus limiting the indirect costs to society the special characteristics of wind energy however put natural limits to the response of wind power plants to market prices and locational price signals and will increasingly influence electricity markets and grid infrastructure these interdependencies should be recognised in the design of res e policies and market regulations

inflation targeting matters evidence from oecd economies sacrifice ratios using data from oecd economies we show that inflation targeters suffered smaller output losses during disinflations when compared to nontargeters we also study why some countries choose to inflation target while others do not and find that higher average inflation and smaller debt levels render the adoption of the regime more likely applying heckman s procedure to control for selection bias does not alter the link between inflation targeting and less costly disinflations

an evaluation of private forecasts of interest rate targets in brazil abstract this study shows that the private sector accurately predicts short term interest rate targets set by the brazilian monetary authorities with increased transparency under inflation targeting such evidence suggests that the public perceives the central bank as credible

inflation targeting and output inflation tradeoffs abstract this article assesses whether the adoption of inflation targeting it helps reduce the output inflation tradeoff we address the self selection problem of it policy adoption by the endogenous switching regressions and show that the output inflation tradeoffs are significantly lower in it countries not only over the whole sample but also across the developed and developing country subsamples in addition we also find strong evidence supporting the positive selection hypothesis i e countries have higher probability of adopting it are exactly those who benefit more larger reduction of output inflation tradeoff from the implementation of it additional results reveal that economies with higher trade openness lower financial openness and less flexible exchange rate regime are associated with larger tradeoff between output and inflation but the effects are only statistically significant in the it regime

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

inflation targeting in emerging economies panel evidence abstract this paper shows there is no evidence that the inflation targeting regime it improves economic performance as measured by the behavior of inflation and output growth in developing countries the control of common time effects results in less negative and less significant it impacts on inflation inflation volatility and output growth volatility than previously found in the literature additionally our analysis shows robust evidence of lower output growth during it adoption on balance although lower long run mean inflation signals that the central banks of emerging economies with inflation targeting are more inflation averse the costs of disinflation have not been lower than under other monetary regimes

inflation targeting genuine effects or publication selection bias abstract this paper uses a meta regression analysis mra to evaluate the impact of publication selection bias as for the macroeconomic effects of inflation targeting it a popular approach to implementing monetary policy documented in the existing literature using 8 059 point estimates from 113 studies we show that a significant part of the documented positive effects of it on inflation and to some extent output growth volatility is in fact due to publication selection bias in particular results pointing to lower inflation volatility and higher real gdp growth tend to be favored by researchers as well as those pointing to statistically significant macroeconomic effects however even after controlling for these two types of biases we find it to be correlated with lower inflation and higher real gdp growth differently the evidence on the it inflation volatility relationship is found to be less clear

international experiences with different monetary policy regimes any views expressed in this paper are those of the author only and not those of columbia university or the national bureau of economic research abstract this paper examines the international experiences with four basic types of monetary policy regimes 1 exchange rate targeting 2 monetary targeting 3 inflation targeting and 4 monetary policy with an implicit but not an explicit nominal anchor the basic theme that emerges from this analysis is that transparency and accountability are crucial to constraining discretionary monetary policy so that it produces desirable long run outcomes because the devil is in the details in achieving transparency and accountability what strategy will work best in a country depends on its political cultural and economic institutions as well as on its past history

inflation targeting in colombia 2002 2012 proquest denotes formulae omitted over the last twenty years nearly thirty countries have adopted inflation targeting regimes to conduct monetary policy in addition to the announce ment of specific inflation targets inflation targeting regimes have been characterized by increased transparency enhanced communication with the public and explicit accountability mechanisms moreover their policy strategy is based on setting short run interest rates rather than on targeting monetary aggregates in principle inflation targeting regimes also increase exchange rate flexibility the performance of inflation targeting regimes has been a matter of exten sive research for instance ball and sheridan and lin and ye conclude that in industrialized countries inflation targeting did not make a difference in inflation and output behavior 1 the spirit of these conclusions is echoed in two recent surveys on the performance of inflation targeting 2 another line of research on inflation targeting in industrialized countries studies its impact on sacrifice ratios output losses per point of inflation during monetary driven disinflations according to proponents inflation targeting anchors inflation expectations and it should thus allow for less costly disinflation processes while goncalves and carvalho find strong evidence supporting this hypoth esis in developed countries brito shows that the results are not robust to the inclusion of time effects 3 de roux and hofstetter conclude that inflation targeting allows for less costly disinflations even when controlling for time effects but only if disinflations are slow 4 for fast disinflations it does not yield less costly disinflations for developing countries the evidence is less conclusive goncalves and salles find that inflation targeting allows for a greater reduction in inflation and lower output volatility a result confirmed by lin and ye 5 brito and bystedt however suggest that the greater inflation reduction came at the expense of poorer output growth 6 in the surveys walsh concludes that evidence on inflation targeting in developing countries is clearly favorable to the regime while ball is more skeptical calling the outcomes inconclusive 7more recently de carvalho filho shows that during the recent global finan cial crisis inflation targeting nations outperformed non inflation targeting nations on several dimensions for both developed and developing economies their policy response was more aggressive they allowed the exchange rate to more effectively absorb the shocks and they recorded a stronger macro economic performance output industrial production and unemployment 8the vast empirical literature comparing performance across different mon etary regimes stands in contrast to the relatively scant research on the tools strategies goals and dilemmas faced by inflation targeting central banks espe cially in developing countries while there is good information on the overall comparative performance of these regimes little information is available on the political economy dimensions the increasing variety of instruments and goals of inflation targeting central banks and the challenges that lie ahead for them in this paper we fill part of this gap by examining the experience of the cen tral bank of colombia banco de la republica over the last decade a period of consolidation and innovation of its inflation targeting strategy colombia is one of five large latin american economies that have well established inflation targeting regimes along with brazil chile mexico and peru all of these countries adopted inflation targeting more than ten years ago yet their performance tools and goals have not been extensively studied cen tral banks in the region have used a variety of tools beyond short run policy interest rates including liquidity and reserve requirements credit provisions capital controls and interventions in the foreign exchange markets

the mirage of exchange rate regimes for emerging market countries this paper argues that much of the debate on choosing an exchange rate regime misses the boat it begins by discussing the standard theory of choice between exchange rate regimes and then explores the weaknesses in this theory especially when it is applied to emerging market economies it then discusses a range of institutional traits that might predispose a country to favor either fixed or floating rates and then turns to the converse question of whether the choice of exchange rate regime may favor the development of certain desirable institutional traits the conclusion from the analysis is that the choice of exchange rate regime is likely to be of second order importance to the development of good fiscal financial and monetary institutions in producing macroeconomic success in emerging market countries this suggests that less attention should be focused on the general question whether a floating or a fixed exchange rate is preferable and more on these deeper institutional arrangements a focus on institutional reforms rather than on the exchange rate regime may encourage emerging market countries to be healthier and less prone to the crises that we have seen in recent years

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

does inflation targeting make a difference in developing countries we evaluate the treatment effect of inflation targeting in thirteen developing countries that have adopted this policy by the end of 2004 using a variety of propensity score matching methods we show that on average inflation targeting has large and significant effects on lowering both inflation and inflation variability in these thirteen countries however the effectiveness of inflation targeting on lowering inflation is found to be quite heterogeneous the performance of a given inflation targeting regime can be affected by country characteristics such as government s fiscal position central bank s desire to limit the movements of exchange rate its willingness to meet the preconditions of policy adoption and the time length since the policy adoption

monetary targets as a policy rule lessons from the swiss experience abstract this paper provides a survey and analysis of swiss monetary policy since the shift to a floating exchange rate in 1973 although the swiss national bank snb by international comparison managed to achieve a high degree of price stability it could not prevent temporary bursts of inflation i argue that the problem lay in an inappropriate snb response to such disturbances as unexpected exchange rate shocks and show that in constructing optimum feedback rules the snb must take account of the logs in the effects of monetary policy i also discuss the snb s current strategy resting on a medium term growth target for the monetary base

interest rates and monetary policy this article conducts a thorough intertemporal analysis of nominal interest rate based monetary policy its main contribution is to show how such a policy can have different effects depending on the assumptions made about the saving and borrowing behaviour of firms we consider two cases i consumers are savers and firms are borrowers and ii both consumers and firms are borrowers the nation as a whole is borrowing from abroad in one case we confirm conventional wisdom but in the other case we find there may be unexpected and surprising results moreover our analysis has important implications for both inflation and nominal exchange rate targeting policies

the design of decentralized auction mechanisms that coordinate continuous trade in synthetic securities abstract this paper explores smart market mechanisms that link auction markets together in order to support trade in synthetic securities that are derived from a well defined bundle of underlying component securities these mechanisms coordinate the auctions of the component securities without interrupting the normal order flow of these markets by selectively locking individual orders using techniques from concurrency control theory a decentralized market mechanism that automatically performs cross market arbitrage is developed this mechanism requires only that the markets for the component securities be loosely coupled i e intermarket communications are not instantaneous a mechanism that does not require orders to be locked but is subject to arbitrage is also examined

inflation targeting makes the difference novel evidence on inflation stabilization abstract though svensson 1997 svensson 2003 provides theoretical evidence that the introduction of inflation targeting is consistent with an inflation stabilizing monetary policy empirical evidence that the introduction of inflation targeting actually changes central bank s behavior is still missing this paper aims to close this gap and estimates forward looking monetary policy rules for 20 inflation targeting countries to this end we use a data set which is available to the central bank in real time published on a frequently basis comparable among all countries and which includes the periods before and after the introduction of inflation targeting we find that the introduction of inflation targeting significantly shifts the central bank s reaction function toward inflation stabilizing we also provide evidence of time varying effects and find that central banks stabilize inflation once inflation targeting is introduced we take our results as strong evidence that the introduction of inflation targeting makes the difference for monetary policy strategies

electricity market design for facilitating the integration of wind energy experience and prospects with the australian national electricity market abstract australia has been an early and enthusiastic adopter of both electricity industry restructuring and market based environmental regulation the australian national electricity market nem was established in 1999 and australia also implemented one of the world s first renewable energy target schemes in 2001 with significant recent growth in wind generation australia provides an interesting case for assessing different approaches to facilitating wind integration into the electricity industry wind project developers in australia must assess both potential energy market and tradeable green certificate income streams when making investments wind farm energy income depends on the match of its uncertain time varying output with the regional half hourly market price a price that exhibits daily weekly and seasonal patterns and considerable uncertainty such price signals assist in driving investments that maximize project value to the electricity industry as a whole including integration costs and benefits for other participants recent nem rule changes will formally integrate wind generation in the market s scheduling processes while a centralized wind forecasting system has also been introduced this paper outlines experience to date with wind integration in the nem describes the evolution of market rules in response and assesses their possible implications for facilitating high future wind penetrations

a double sided multiunit combinatorial auction for substitutes theory and algorithms combinatorial exchanges have existed for a long time in securities markets in these auctions buyers and sellers can place orders on combinations or bundles of different securities these orders are conjunctive they are matched only if the full bundle is available on business to business b2b exchanges buyers have the choice to receive the same product with different attributes for instance the same product can be produced by different sellers a buyer indicates his preference by submitting a disjunctive order where he specifies the quantity he wants of each particular good and what limit price he is willing to pay for each good thus providing a subjective valuation of each attribute only the goods with the best prices will be traded this article considers a doubled sided multiunit combinatorial auction for substitutes that is a uniform price auction where buyers and sellers place both types of orders conjunctive and orders and disjunctive xor orders we show that linear competitive prices exist we also propose an algorithm to clear the market which is particularly efficient when the number of traders is large and the goods are divisible

using renewables to hedge against future electricity industry uncertainties an australian case study abstract a generation portfolio modelling was employed to assess the expected costs cost risk and emissions of different generation portfolios in the australian national electricity market nem under highly uncertain gas prices carbon pricing policy and electricity demand outcomes were modelled for 396 possible generation portfolios each with 10 000 simulations of possible fuel and carbon prices and electricity demands in 2030 the lowest expected cost generation portfolio includes 60 renewable energy increasing the renewable proportion to 75 slightly increased expected cost by 0 2 mwh but significantly decreased the standard deviation of cost representing the cost risk increasing the renewable proportion from the present 15 to 75 by 2030 is found to decrease expected wholesale electricity costs by 17 mwh fossil fuel intensive portfolios have substantial cost risk associated with high uncertainty in future gas and carbon prices renewables can effectively mitigate cost risk associated with gas and carbon price uncertainty this is found to be robust to a wide range of carbon pricing assumptions this modelling suggests that policy mechanisms to promote an increase in renewable generation towards a level of 75 by 2030 would minimise costs to consumers and mitigate the risk of extreme electricity prices due to uncertain gas and carbon prices

a monte carlo based decision support tool for assessing generation portfolios in future carbon constrained electricity industries abstract this paper presents a novel decision support tool for assessing future generation portfolios in an increasingly uncertain electricity industry the tool combines optimal generation mix concepts with monte carlo simulation and portfolio analysis techniques to determine expected overall industry costs associated cost uncertainty and expected co 2 emissions for different generation portfolio mixes the tool can incorporate complex and correlated probability distributions for estimated future fossil fuel costs carbon prices plant investment costs and demand including price elasticity impacts the intent of this tool is to facilitate risk weighted generation investment and associated policy decision making given uncertainties facing the electricity industry applications of this tool are demonstrated through a case study of an electricity industry with coal ccgt and ocgt facing future uncertainties results highlight some significant generation investment challenges including the impacts of uncertain and correlated carbon and fossil fuel prices the role of future demand changes in response to electricity prices and the impact of construction cost uncertainties on capital intensive generation the tool can incorporate virtually any type of input probability distribution and support sophisticated risk assessments of different portfolios including downside economic risks it can also assess portfolios against multi criterion objectives such as greenhouse emissions as well as overall industry costs

taylor rules and exchange rate predictability in emerging economies abstract this study demonstrates the relationship between exchange rate determination and an endogenous monetary policy represented by taylor rules we fill a gap in the literature by focusing on a group of fifteen emerging economies that adopted free floating exchange rates and inflation targeting beginning in the mid 1990s because of the limited span of the time series which is a common obstacle to studying emerging economies we employ panel data regressions to produce more efficient estimates following the recent literature we use a robust set of out of sample statistics incorporating bootstrapped and asymptotic distributions for the diebold mariano statistic the clark and west statistic and theil s u ratio by evaluating different specifications for the taylor rule exchange rate model based on their out of sample performances we find that a present value forward looking specification shows strong evidence of exchange rate predictability

how the european central bank decided its early monetary policy the main goal of this paper is to detect the mechanisms that should rationally stimulate the decision making policies of the european central bank ecb this is carried out under the framework of theoretical principles of interest rate rules firstly we deduce a set of logically advisable guidelines for the strategy actually developed by this central bank then we contrast a wide set of hypotheses with reference to those variables the ecb takes into account on deciding its monetary policy with a flexible treatment regarding the number of months of advance or delay in the explanatory variables the results lead us to the conclusion that the ecb besides adopting a smooth strategy especially bears in mind the expected core inflation rate with a reaction coefficient adjusted to that initially proposed by taylor the economic growth rate though it has a significant positive coefficient matters relatively little and is backward looking finally we evaluate up to what point the behaviour of the ecb is a

the feasibility of an index contingent trading mechanism auction or call trading systems are used in many stock exchanges an essential problem in the application of these systems is that orders in one security cannot be conditioned on prices of other securities this paper proposes and analyzes the feasibility of an index contingent trading system in this system limit orders may be conditioned on an index any weighted average of the security prices that is determined simultaneously with the prices in addition to the asset price without any assumptions about traders behavior it is shown that under a reasonable restriction on the structure of the limit orders there is a unique solution vector of prices to any set of orders in all securities moreover the paper presents a quick and simple algorithm that converges to the solution this algorithm is based on an extension of the current mechanisms therefore it can be implemented easily in any computerized auction system

income and democracy existing studies establish a strong cross country correlation between income and democracy but do not control for factors that simultaneously affect both variables we show that controlling for such factors by including country fixed effects removes the statistical association between income per capita and vari ous measures of democracy we present instrumental variables estimates that also show no causal effect of income on democracy the cross country corre lation between income and democracy reflects a positive correlation between changes in income and democracy over the past 500 years this pattern is con sistent with the idea that societies embarked on divergent political economic development paths at certain critical junctures jel d7 e 1

asymmetric monetary policy rules in australia abstractin this study the hypothesis that the reserve bank of australia rba implements an asymmetric monetary policy rule is tested we estimate both linear and asymmetric monetary policy reaction functions for the period before inflation targeting was adopted for the period when inflation targeting was explicitly adopted and for the full sample period the results of the linear monetary policy rules are consistent with the estimates reported from other studies that estimate linear monetary policy rules for australia on the other hand the results of estimating the asymmetric monetary policy rules for the pre inflation targeting period shows that the rba had reacted symmetrically suggesting that it had acted with the same aggressiveness towards both inflation and output gaps of the same magnitude over both phases of the business cycle however for the inflation targeting period the results show that the rba had reacted asymmetrically in its policy response to the inflation gap output gap or both

making the most of high inflation this article examines the relationship between the real effects of inflation and its level in countries with frequent episodes of high inflation the real effects are computed as asymmetric impulse responses of output to inflation separately in the regimes with different signs of the differences between the expected inflation and the predicted output neutral inflation it is found that with the increase in inflation such effects increase in the regime with the positive sign relatively to the effects in the regime with the negative sign it is also shown that this finding is valid for most countries with high inflation episodes where inflation is greater than 4 8 for at least 25 of quarterly observations this leads to a simple policy prescription that in economies with frequent high inflation episodes anti inflationary monetary decisions are least damaging for output if undertaken in the periods when the difference between the expected and output neutral inflation is negative

transitions to inflation targeting panel evidence from panel estimates of an extended version of the taylor rule reaction function that adds lagged inflation output gaps and exchange rates we confirm that inflation is more central to the setting

a trading mechanism contingent on several indices we introduce a trading mechanism where the execution of an order on a security can be made contingent on the relation between the clearing price of the security and the clearing price of one or several indices a mechanism similar to ours but limited to only one index was implemented on the tel aviv stock exchange we argue that it is in some cases crucial to make the execution of an order contingent on several indices our mechanism consists of a particular implementation of a double sided multi unit combinatorial auction with substitutes or dmcs auction which we introduced in an earlier article

disinflations in a model of imperfectly anchored expectations abstract we study disinflations under imperfect credibility of the central bank we propose a framework to model imperfectly credible announcements and use it to study the distribution of the output cost for a given disinflation imperfect credibility is modeled as the extent to which agents rely on adaptive learning to form expectations lower credibility increases the mean variance and skewness of the distribution of the sacrifice ratio when credibility is low disinflations become very costly for adverse realizations of the shocks but an opportunistic disinflation a disinflation implemented after a period of below trend inflation can significantly lower the sacrifice ratio with simulated data we reinterpret the reduced form evidence in sacrifice ratio regressions coefficient estimates from these regressions can be misleading for policymakers considering the cost of disinflation