the predictive content of the output gap for inflation resolving in sample and out of sample evidence this paper evaluates potential explanations for the sometimes poor forecasting performance of the phillips curve one explanation is that out of sample metrics are noisy or equivalently have relatively low power another potential explanation is instability in the coefficients of the model to assess these forces this paper compares sample forecasting results to results from bootstrap simulations of models that either assume stability or allow breaks in the coefficients of the model this analysis indicates that a significant portion of the weakness of the out of sample evidence is attributable to power limitations but instabilities in the coefficients on the output gap also play a role

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

a note on comparative downside risk aversion abstract we provide comparative global conditions for downside risk aversion which are similar to the ones studied by ross for risk aversion we define a coefficient of downside risk aversion and study its local properties

monetary policy shifts and the stability of monetary policy models since the publication 1976 of the classic lucas critique researchers in empirical macroeconomics have endeavored to specify models that capture the underlying dynamic decision making behavior of consumers and firms who require forecasts of future events recently a number of researchers have developed simple models that have become the workhorses for monetary policy analysis the models vary considerably with regard to optimizing foundations and explicit treatment of expectations however relatively little effort has been devoted to testing the empirical importance of the lucas critique for these simple models can one find specifications that are policy invariant this paper develops and implements a set of tests for several monetary policy models used extensively in the literature in particular we attempt to test the robustness of optimizing versus nonoptimizing models to changes in the monetary policy regime we present evidence that shows that some forward looking models from the recent literat

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

electoral politics interest groups and the size of government electoral politics interest groups and the size of government i introduction interest groups have been considered main actors in the political drama for some time now by political scientists as in bentley 1908 schattschneider 1935 and truman 1951 and more recently by economist also such as olson 1965 and stigler 1975 despite the widespread consensus on their importance there have been few formal attempts to analyze their impact on public policies thus borooah and van der ploeg 1983 90 were moved to declare that theory based on the importance of different interest groups is badly needed in economics an important exception is becker s 1983 1985 analysis of interest group competition becker draws insights about the nature of the trade offs that occur when interest groups compete for political influence but becker consciously avoids incorporating into his model political institutions such as voting voting rules and candidates 1983 391 4 1985 330 rather he assumes that the political process operates as a veil through which the underlying strengths and demands of various interest groups are revealed this paper takes a different tack but one complementary to becker s approach the analysis is based on an explicit model of the political process that includes interest groups in the model interest group influence is a potential supply of votes for which parties or candidates compete each party seeks a winning coalition of voters and thus engages in implicit logrolling tullock 1959 572 an equilibrium exists in the competition for the support of interest groups and the nature of the equilibrium electoral platforms is identified below embodied in the characterization of the equilibria is a set of parameters that can be said to measure the strengths of the various interest groups and which enable one to identify how candidates change their policy positions in response to a change in the strength of an interest group it is therefore possible to analyze simultaneously the existence of an electoral equilibrium its nature including its normative properties and changes in equilibrium due to shifts in the balance of forces between competing groups 1 in contrast to becker 1983 1985 these analytical features are not assumed outright rather they are based on an underlying model of elections the theoretical underpinnings for this model are discussed in section ii interest groups are often alleged to be responsible in part for recent increases in the size of government in western democracies 2 therefore in sections iii and iv a model of the political process is used to study the impact of an increase in the influence of a particular interest group on government size in the simple models of the public sector considered here increasing group influence per se does not cause the size of the government to increase but an increase in the government s size does result when i there are constraints on the government s ability to change tax shares in response to a shift in group power or ii there is a publicly provided good which benefits one untaxed group and that group s sole concern with government policy is to maximize the amount of the good that it gets the paper concludes by considering some of the normative implications of the results ii interest groups in the electoral process there are two sets of actors in the model parties and interest groups and two sets of relationships which must be analyzed the relationships between interest groups and the parties and the relationship between the parties themselves with respect to the first question this paper investigates the determinants of each interest group s influence on the platforms proposed by the parties with respect to the second it explores whether the competition for votes between the parties produces an equilibrium and if so what its properties are

new results on precautionary saving under two risks this paper identifies a new sufficient condition for a prudent agent to have positive precautionary saving in the presence of labor income and interest rate risks of any size we also provide three economic interpretations for this condition focusing respectively on the marginal effect of saving on total income variance on the sign of the covariance between total income and the return of saving and on the effect of saving on the utility premium

higher order generalizations of arrow pratt and ross risk aversion a comparative statics approach abstract we analyze comparative risk aversion in a new way through a comparative statics problem in which for a cost agents can shift from an initial probability distribution toward a preferred distribution the ross characterization arises when the original distribution is riskier than the preferred distribution and the cost is monetary and the arrow pratt characterization arises when the original distribution differs from the preferred distribution by a simple mean preserving spread and the cost is a utility cost higher order increases in risk lead to higher order generalizations and the comparative statics method yields a unified approach to the problem of comparative risk attitudes

the forecasting power of real interest rate gaps an assessment for the euro area the real interest rate gap irg the gap between the short term real interest rate and its natural level is a theoretical concept that has attracted much attention in central banks in recent years this article aims at clarifying its practical relevance for monetary policy in real time for this purpose it provides an empirical assessment of the usefulness of a semi structural versus purely statistical estimates of the real irg for predicting policy relevant macroeconomic variables in the euro area however mixed the results confirm that semi structural estimates of the real irg deserve being added to the central banks toolbox

toward a political theory of the emergence of environmental incentive regulation this article makes some steps toward a formal political economy of environmental policy economists quasi unanimous preference for sophisticated incentive regulation is reconsidered we recast the question of instrument choice in the general mechanism design literature within an incomplete contract approach to political economy we show why constitutional constraints on the instruments of environmental policy may be desirable even though they appear inefficient from a standard economic viewpoint their justification lies in the limitations they impose on the politicians ability to distribute rents insights are provided on the emergence of incentive mechanisms in environmental regulation

industrial policy and politics abstract recognizing the uncontrollable nature of the political system in a fine tuning way we derive simple constitutional rules for industrial policies which take into account simultaneously the inefficiencies of the political system and informational asymmetries of regulators we apply this methodology to the regulation of natural monopolies we consider a two type political system with the majority rule we study how the chosen cost reimbursement rules and pricing rules which characterize regulation are affected by constitutional choices such as public ownership or privatization creation of incentives for regulators or not price discrimination or not

on the utility premium of friedman and savage we re examine the utility premium of friedman savage friedman milton and savage leonard j the utility analysis of choices involving risk journal of political economy 56 1948 pp 279 304 this measure is useful in understanding risky choices for instance its reaction to an increased wealth equates to a precautionary demand for saving we also analyze its two components c 2009 published by elsevier b v

do benefit cuts boost job finding swedish evidence from the 1990s in june 1995 the swedish parliament decided to cut the replacement rate in unemployment insurance from 80 percent to 75 percent a change that took effect on january 1 1996 this paper examines h

the politics of redistributive social insurance this paper analyses the political support for a social insurance that includes elements of redistribution when there exists an imperfect private insurance alternative individuals differ both in their income and risk the social insurance is compulsory and charges an income related contribution with pooling of risks the private insurance is voluntary and charges a contribution based on individual risks however due to the adverse selection problem private insurance companies provide only partial insurance adopting a non expected utility model we show that there is a general majority support for social insurance and that this support is increasing with risk aversion we also show that a mixed insurance is politically impossible regardless of the degree of redistribution of social insurance and the joint distribution of risk and income in the population lastly we analyse how the political support for social insurance is affected by any change in its redistributive component and the possibility of using genetic tests

should oil prices receive so much attention an evaluation of the predictive power of oil prices for the u s economy i introduction oil prices are monitored by consumers firms financial market traders and government officials and are the subject of much media coverage this in large part reflects the view that higher oil prices tend to be followed by inflation and recessions 1 early work by hamilton 1983 as well as recent papers by hamilton 2003 and lee and ni 2002 have provided convincing evidence of a relationship between oil prices and future economic activity 2 much of the literature has focused on whether oil prices improve the fit of a benchmark model via examination of impulse response functions as done by lee and ni 2002 or hypothesis testing as done by hamilton 2003 guo and kliesen 2005 discussed a number of theoretical explanations for the oil price macroeconomy relationship the textbook explanation is that higher oil prices represent an increase in production costs causing a fall in output and higher inflation another strand of literature has argued that large oil price movements cause uncertainty about future oil prices or costly reallocation of labor 3 causing large oil price movements to have asymmetric effects on the economy even to the point that both positive and negative oil price movements hurt output along these lines hamilton 1996 motivated the construction of a net oil price increase nopi variable by arguing that it is the behavior of oil prices relative to recent experience that matters this implies that the only time oil shocks have an impact on gross domestic product gdp is when the price of oil is above the high of the previous year for many purposes though the relevant question is whether the information in oil prices can be used to improve forecasts of macroeconomic variables examples include federal reserve policymaking using the price of oil as an indicator variable private sector planning and portfolio management for these applications it should be of interest to evaluate the historical out of sample forecast performance of models that include oil prices moreover impulse response functions and hypothesis tests are not able to provide information about how much out of sample forecasts can be improved 4 this paper evaluates forecasts of different measures of output inflation and monetary policy all of which are important macroeconomic variables that can plausibly be expected to respond to oil shocks based on both economic theory and media reports we apply standard out of sample predictive ability tests to data covering the period january 1986 to december 2004 this time period has seen substantial variation in the price of oil from a low of 11 per barrel in late 1998 to a high of 53 per barrel in october 2004 and includes two gulf wars as well as multiple boom and bust cycles if oil prices have value as an indicator variable it should clearly be present in our sample as oil price fluctuations of this magnitude will explain a large proportion of the variance of the macroeconomic variables our results suggest that there are few cases where models with oil prices are even able to improve upon the forecasts of simple autoregressive ar models this finding is robust to changes in specification that allow for nonlinearities the use of rolling estimation windows to account for possible parameter instability the use of industry level data and changes in the forecast horizon to ensure that our results are not due to low power of the predictive ability tests that we employ we show that the potential forecasting gains from including oil prices are in most cases close to 0 we conclude that oil prices provide little information about the future direction of the economy the rest of the paper proceeds as follows the next section describes our methodology section iii describes the data section iv presents and discusses the results of tests for predictive ability of oil prices for the macroeconomic variables and section v concludes the paper

the ross characterization of risk aversion strengthening and extension this paper offers an interpretive comparison of the arrow pratt and ross characterizations of comparative risk aversion for expected utility maximizers the tools used in this comparison are then applied to obtain a strengthening of the ross cha racterization this strengthened result is in turn extended to the ca se of general smooth nonexpected utility preferences over probabili ty distributions copyright 1987 by the econometric society

the political economy of targeting one of the most widely used method of targeting is to reduce welfare benefits as income rises although the need for such targeting is clear enough it also entails two important difficulties firstly the prospect for the recipients of losing part of their benefits if they were to earn more can be a deterrent to work harder secondly by reducing the number of recipients targeting reduces the political support for taxation and redistribution the purpose of this paper is to study the voting equilibrium of the degree of targeting and the level of taxation in an economy where labour supply is variable the analysis reveals that targeting may be fatal for redistribution even though it rejects strictly less than the richest half of the population and that it is not possible for a coalition of the extremes to form and reject the middle income group from the welfare system moreover because targeting affects labour supply we find that pareto improvements are possible when targeting is either too low or too high we also find that voting simultaneously over taxation and targeting is favourable to the poor in the sense that they can converge to their most preferred policy by successively forming a majority coalition with the rich to increase targeting and with the middle to increase taxation

the political economy of social security we consider a two period overlapping generations model in which individual voters differ by age and by productivity in such a setting a redistributive pay as you go system is politically sustainable even when the interest rate is higher than the rate of population growth the workers with medium wages not those with the lowest wages and the retirees form a majority which votes for a positive level of social security this level depends on the difference between the rates of population growth and interest as well as on the redistributiveness of the benefit rule

life expectancy heterogeneity and the political support for collective annuities individuals differing in productivity and life expectancy vote over the size and type of a collective annuity its type is represented by the fraction of the contributive bismarckian component based on the worker s past earnings as opposed to the non contributive beveridgean part based on average contribution the equilibrium collective annuity is either a large mostly bismarckian program a smaller pure beveridgean one in accordance with empirical evidence or nil a larger correlation between longevity and productivity or a larger average life expectancy both make the equilibrium collective annuity program more beveridgean although at the expense of its size

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

the quest for prosperity without inflation abstract in recent years activist monetary policy rules responding to inflation and the level of economic activity have been advanced as a means of achieving effective output stabilization without inflation advocates of such policies suggest that their flexibility may yield substantial stabilization benefits while avoiding the excesses of overzealous discretionary fine tuning such as is thought to characterize the experience of the 1960s and 1970s in this study i present evidence suggesting that these conclusions are misguided using an estimated model i show that when informational limitations are properly accounted for activist policies would not have averted the great inflation but instead would have resulted in worse macroeconomic performance than the actual historical experience the problem can be attributed in large part to the counterproductive reliance of these policies on the output gap the analysis suggests that the dismal economic outcomes of the great inflation may have resulted from an unfortunate pursuit of activist policies in the face of bad measurement specifically overoptimistic assessments of the output gap associated with the productivity slowdown of the late 1960s and early 1970s

alternative approaches to comparative nth degree risk aversion this paper extends the three main approaches to comparative risk aversion the risk premium approach and the probability premium approach of pratt 1964 risk aversion in the small and in the large

political sustainability and the design of social insurance this paper examines how the issue of political support affects the design of social insurance it distinguishes between redistributive character and size of social protection three main results emerge first it may be appropriate to adopt a system which is less redistributive than otherwise optimal in order to ensure political support for an adequate level of coverage in the second voting stage second supplementary private insurance may increase the welfare of the poor even if it is effectively bought only by the rich third the case for prohibiting supplementary private insurance may become stronger when the efficiency of private insurance markets increases

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

estimating potential output as a latent variable this article proposes a new method for estimating potential output in which potential real gross domestic product gdp is modeled as an unobserved stochastic trend and deviations of gdp from potential affect inflation through an aggregate supply relationship the output and inflation equations together form a bivariate unobserved components model which is estimated via maximum likelihood through the use of the kalman filter algorithm the procedure yields a measure of potential output and its standard error and an estimate of the quantitative response of inflation to real growth and the output gap

output gaps and monetary policy in the emu area abstract several considerations suggest that the ecb may respond to emu wide output gaps in setting policy estimated reaction functions indicate that central banks respond to output gaps a taylor rule in which the central bank responds to inflation and the gap accounts for recent movements in interest rates in the emu area and optimal control exercises conducted in estimated econometric models suggest that reacting to the gap may be optimal even if the central bank cares solely about inflation in this paper we obtain point estimates with associated confidence bands of the emu wide output gap using uc models

stronger measures of higher order risk attitudes this paper aims to extend the results by ross 1981 15 and by modica and scarsini 2005 13 to stochastic dominance of degree 4 and over specifically it is shown that ross approach can be extended to any order of risk attitude beyond the generalization proposed by modica and scarsini by means of sth degree increase in risk defined by ekern 1980 8 c 2010 elsevier inc all rights reserved

prudence probability premium abstract prudence probability premium is defined in the risk apportionment model eeckhoudt and schlesinger 2006 for an increase in downside risk we show sufficient conditions for comparing the probability premiums between two individuals when the apportioned risk is small and large

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

an optimizing is lm specification for monetary policy and business cycle analysis we ask whether relations of the is lm type can sensibly be used for the aggregate demand portion of a dynamic optimizing general equilibrium model intended for analysis of issues regarding monetary policy and cyclical fluctuations the main result is that only one change the addition of a term regarding expected future income is needed to make the is function match a fully optimizing model whereas no changes are needed for the lm function this modification leads to a dynamic forward looking model of aggregate demand that is tractable and usable with a wide variety of aggregate supply specifications theoretical applications concerning price level determinacy and gradual price adjustment are included

the monetary utility premium and interpersonal comparisons the utility premium is generally defined as the pain or reduction in expected utility caused by an nth degree risk increase where n 2 while it is a very useful concept in understanding a decision maker s choice in uncertain situations the utility premium is not interpersonally comparable this note shows that the monetary utility premium the utility premium divided by the expected marginal utility at the random starting wealth is interpersonally comparable and the comparison is characterized by ross more risk aversion of the corresponding degree

theory ahead of language in the economics of unemployment this paper discusses from the perspective of modern theories of unemployment several unemployment concepts that have been used over the years it argues that many of these concepts are of limited value and are dominated by a few simple concepts that are basic in the analysis of stochastic general equilibrium models

lessons for an aging society the political sustainability of social security systems what is the future of social systems in oecd countries in our view the answer belongs to the realm of politics we evaluate how political constraints shape the social security system in six countries france germany italy spain the uk and the us under population aging two main aspects of the aging process are relevant to the analysis first the increase in the dependency ratio the ratio of retirees of workers reduces the average profitability of the unfunded social security system thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings second an aging electorate leads to larger systems since it increases the relevance of pension spending on the policy makers agenda the overall assessment from our simulations is that the political aspect dominates in all countries albeit with some differences spain the fastest aging country faces the largest increase in the social security contribution rate when labor market considerations are introduced the political effect still dominates but it is less sizeable country specific characteristics not accounted for in our simulations such as the degree of redistribution in the pension system and the existence of family ties in the society may also matter our simulations deliver a strong policy implication an increase in the effective retirement age always decreases the size of the system chosen by the voters while often increasing its generosity finally delegation of pension policy to the ec may reduce political accountability and hence help to reform the systems

mind the gap a monetarist view of the open economy phillips curve abstract in many countries inflation has become less responsive to domestic factors and more responsive to global factors over the past decades we introduce money and credit into the workhorse open economy new keynesian model with this framework we show that i an efficient forecast of domestic inflation is based solely on domestic and foreign slack and ii global liquidity global money as well as global credit is tied to global slack in equilibrium then motivated by the theory we evaluate empirically the performance of open economy phillips curve based forecasts constructed using global liquidity measures such as g7 credit growth and g7 money supply growth instead of global slack as predictive regressors using 50 years of quarterly u s data we document that these global liquidity variables perform significantly better than their domestic counterparts and outperform in practice the poorly measured indicators of global slack that global liquidity proxies for

social insurance with representative democracy in a representative democracy model we determine the preferred social insurance system we show that it corresponds to that which implies the lowest contribution rate when the risk aversion is high

social security and family support this paper shows how the role of the market the state and the family in providing financial support at old age has evolved over time with changes in factors such as the reliability and the effectiveness of family support the rate of interest the cost of public funds and earning inequality we model a society in which agents with different productivity are asked to vote over the existence of a beveridgian pension system we show that when children assistance is certain and large agents may rely exclusively on family to finance old age consumption and prefer to vote for a zero tax rate only if income inequalities are very large a majority will be in favor of a pension system however when the size and the likelihood of family generosity decreases a pension system is more likely to emerge in that case agents supplement children assistance with pension benefits a pension system is also more likely to emerge when the cost of public fund is small and the return from private savings is high

substituting one risk increase for another a method for measuring risk aversion abstract this paper defines the rate of substitution of one stochastic change to a random variable for another it then focuses on the case where one of these changes is an nth degree risk increase and the other is an mth degree risk increase where n m 1 the paper shows that the rate of substitution for these two risk increases can be used to provide a broader definition and two additional characterizations of the nth degree ross more risk averse partial order the implications for local intensity measures of nth degree risk aversion are also examined the analysis organizes the existing results as well as generates new ones

comparative higher order risk aversion and higher order prudence abstract in this paper we define the n th degree utility premium as the pain associated with facing the passage from a more favorable risk to a less favorable risk where the risk increase is specified by the notion of more n th degree risk we further define the n th degree prudence utility premium as the increase in pain when the individual suffers a sure loss we show that the n th degree utility premium normalized by the n 1 th derivative of the utility function evaluated at the initial wealth can explain comparative risk aversion of higher orders on the other hand the n th degree prudence utility premium normalized by the n th derivative of the utility function evaluated at the initial wealth can explain comparative prudence of higher orders

is there a core of practical macroeconomics that we should all believe with emphasis on the adjective practical and the normative verb should my answer to the question of this session is a resounding yes indeed i spent a good deal of time between january 1993 and january 1996 acting on the belief that there is such a core macro model so i certainly hope it exists this believable core model falls well short of perfection leaves many questions unanswered and is subject to substantial stochastic errors nonetheless it is both useful and extensively used in policy analysis where contact with reality is a necessity and you cannot beat something with nothing it also closely resembles but does not quite match the way macroeconomics is taught to beginning and intermediate but not to graduate students in this short presentation i will describe briefly the main practical elements that i think we should agree on without worrying too much about their theoretical underpinnings then i will turn to two critical failings of the standard macro model which cry out for theoretical and empirical repair my organizing principle is the textbook exposition that has been standard though not universal in teaching intermediate macroeconomics for years the question is how does it differ from the core model used in policy analysis

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

public provision of private goods government may provide a good that can if legally permitted be supplemented by private purchases policy is determined by majority rule under standard assumptions on preferences a majority voting equilibrium exists a regime of positive government provision with no restriction on private supplements is shown to be majority preferred to a regime of either only market provision or only government provision combined public and private expenditure on the good is higher under this dual provision regime than under either of the alternatives under some preference configurations the median income voter is pivotal under others a voter with income below the median is pivotal

some stronger measures of risk aversion in the small and the large with applications the arrow pratt measures of risk aversion for von neumann morgenstern utility functions have become workhorses for analyzing problems in the microeconomics of uncertainty they have been used to characterize the qualitative properties of demand in insurance and asset markets to examine the properties of risk taking in taxation models and to study the interaction between risk and life cycle savings problems to name just a few applications equally importantly they have generated the linear risk tolerance class of utility functions which has provided canonical examples in such diverse areas as portfolio theory and the theory of teams despite these successes there have been a number of areas for which the results have been weaker than hoped it is natural to use the risk aversion measures to compare the behavior of individuals in risky choice situations for example consider the individual portfolio choice problem in a two asset world with a riskless asset and a risky asset if individual a has a uniformly higher arrow pratt coefficient of risk aversion than individual b then b will always choose a portfolio combination with more wealth invested in the risky asset but suppose that both assets are risky now there is no obvious sense in which the more risk averse individual can be said to hold a less risky portfolio but it seems strange that such a simple alteration should destroy the analytics which support the basic intuition similarly consider the basic insurance problem if one individual a is more risk averse than another b in the arrow pratt sense it follows that a will pay a larger premium to insure against a random loss than will b typically though an individual evaluates partial rather than total insurance that is only some gambles can be insured against and others must be retained in this case even when the gambles which are retained are independent from those which are insured it is no longer true that the individual whose arrow pratt measure of risk aversion is higher will pay a larger insurance premium the situation is no better when we consider comparative statics exercises for a single individual decreasing absolute risk aversion in the sense of arrow and

means testing versus basic income the lack of political support for a universal allowance this paper studies the political economy of a basic income bi versus a means tested welfare scheme we show in a very simple setting that if society votes on the type of system its generosity as well as the severity of means testing if any a bi system could only emerge in the political equilibrium under very strong and empirically implausible conditions instead the political process leads to a means tested system the necessity to draw political support does affect the design of the system but it only implies that means testing becomes less severe so that benefits are extended also to themiddle classes however a fully universal system is rejected by a majority

voluntary public health insurance we look at the consequences of allowing public health insurance puhi to be voluntary when its coverage can be supplemented in the market puhi redistributes with respect to risk and income and the market is affected by adverse selection we argue that making puhi voluntary does not lead to its collapse since individuals always participate in it additionally in some cases a voluntary puhi scheme increases market efficiency because participation in it sends a signal to private insurers of an individual s health risk type the welfare consequences depend on the status quo if in the status quo no political support exists for a compulsory puhi making it voluntary constitutes a pareto improvement and in some cases all individuals are strictly better off if instead the status quo implements compulsory puhi making it voluntary then results in less redistribution

collective choice and voluntary provision of public goods some public goods are provided entirely with private contributions others with a mixture of public and private funding and still others are entirely publicly funded in order to study this variation a model of dual provision is developed that endogenizes public and private funding households vote over an income tax that finances public supply of the good and on whether to permit private contributions while permitting private contributions may lead to a reduction in total provision a majority always favors permitting private contributions results are developed for small and large economies and the relevance of nonexcludability and noncongestion are investigated

what is new keynesian economics this research was supported by the national science foundation i am grateful to george williams for help with the data and to steven allen laurence ball olivier j blanchard timothy bresnahan charles calomiris dennis carlton robert chirinko russell cooper stanley fischer herschel grossman r glenn hubbard david laidler john leahy assar lindbeck n gregory mankiw david romer julio rotemberg dennis snower john taylor andrew weiss and two anonymous referees for comments on one or more earlier drafts i am also indebted to michael parkin and edmund s phelps for helping to establish the etymology of the phrase new keynesian

inflation as a global phenomenon some implications for inflation modeling and forecasting abstract we model local inflation dynamics using global inflation and domestic slack motivated by a novel interpretation of the implications of the workhorse open economy new keynesian model we evaluate the performance of inflation forecasts based on the single equation forecasting specification implied by the model exploiting the spatial pattern of international linkages underpinning global inflation we find that incorporating cross country interactions yields significantly more accurate forecasts of local inflation for a diverse group of 14 advanced countries including the u s than either a simple autoregressive model or a standard closed economy phillips curve based forecasting model we argue that modeling the temporal dimension but not the cross country spillovers of inflation does limit a model s explanatory power in sample and its pseudo out of sample forecasting performance moreover we also show that global inflation without domestic slack often contributes the most to achieve the gains on forecasting accuracy observed during our sample period 1984 q1 2015 q1 this observation according to theory is crucially related to the flattening of the phillips curve during this time period of increased globalization

a positive theory of social security in many countries social security accounts for a large fraction of the government budget why is this so given that at any point in time the number of recipients of social security benefits is smaller than the number of contributors in the overlapping generations model studied in this paper all individuals currently alive vote on social security in every period in equilibrium the size of social security is larger the greater is the proportion of elderly people in the population and the greater is the inequality of pre tax income within each generation both predictions of the theory are supported by the empirical evidence in cross country data

assessing the lucas critique in monetary policy models empirical estimates of monetary policy rules suggest that the behavior of u s monetary policymakers changed during the past few decades however for that same time period statistical analyses of lagged representations of the economy such as vars often have not rejected the null of structural stability these two sets of empirical results appear to contradict the lucas critique this paper reconciles these results with the lucas critique by showing that the apparent policy invariance of reduced forms is consistent with the magnitude of historical policy shifts and the relative insensitivity of the reduced forms of plausible forward looking macroeconomic specifications to policy shifts

organizing the health insurance market this paper presents a new approach to organizing universal health insurance first the government divides the entire population into many large groups then the government creates a federal health insurance system healthfed modeled on the federal reserve system to fill the role now played by the benefits office of a large firm the healthfed would create a short menu of alternatives solicit bids for insuring the entire group and price alternatives there would be redistribution between groups and pricing of alterna tives to reflect optimal social insurance principles there would be no connection between health insurance and employment it may seem odd that this presidential address is my first publication in health economics at the time when i might have been working on an alternative address i was chair of an expert panel for the advisory council on social security looking at issues in both retirement income and medical care 2 in the process of this work i have come up with a new approach to organizing universal health insurance that is the subject of this paper before starting on health insurance i will say a few words about a wider context offering what i will say as an example in that setting 3 a great deal of attention has been focused on the exciting issue of reorganizing economies dropping central planning commonly economists from those countries em brace capitalism or more specifically laissez faire competition with an enthusi asm which exceeds that ofwestern economists although not necessarily western businessmen yet laissez faire capitalism has received little serious support in the west for a very long time we all know the fundamental welfare theorem which shows many ways that capitalism can be imperfect we have also seen a growth in discussion and analysis of the many ways governments can mess up resource allocation the real question is the design of arrangements that try to integrate the things that each type of institution does better this is hard for two reasons one is that it is in the realm of second best with many constraints the more the constraints the harder the analysis the second is that we do not have good positive theories of government behavior good examples yes good theories no thus the analysis is more intuitive less theory driven than in our picture of private markets but also in our private market analyses we have been greatly complicating our picture recognizing all sorts of information imperfec tions that affect the way that private markets work so i will present to you a proposal for universal health insurance meant to combine something that

the nairu unemployment and monetary policy this paper examines the precision of conventional estimates of the nairu and the role of the nairu and unemployment in forecasting inflation the authors find that although there is a clear empirical phillips relation the nairu is imprecisely estimated forecasts of inflation are insensitive to the nairu and there are other leading indicators of inflation that are at least as good as unemployment this suggests deemphasizing the nairu in public discourse about monetary policy and instead drawing on a richer variety of leading indicators of inflation

real time prediction with u k monetary aggregates in the presence of model uncertainty a popular account for the demise of the u k s monetary targeting regime in the 1980s blames the fluctuating predictive relationships between broad money and inflation and real output growth yet ex post policy analysis based on heavily revised data suggests no fluctuations in the predictive content of money in this paper we investigate the predictive relationships for inflation and output growth using both real time and heavily revised data we consider a large set of recursively estimated vector autoregressive var and vector error correction models vecm these models differ in terms of lag length and the number of cointegrating relationships we use bayesian model averaging bma to demonstrate that real time monetary policymakers faced considerable model uncertainty the in sample predictive content of money fluctuated during the 1980s as a result of data revisions in the presence of model uncertainty this feature is only apparent with real time data as heavily revised data obscure these fluctua