target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

on the link between exchange rate regimes capital controls and monetary policy autonomy in small european countries 1979 2000 we investigate international monetary policy transmission under different exchange rate and capital account regimes in eleven small open economies during the 1980s and 1990s we find no systematic link between ex post monetary policy autonomy and exchange rate regimes capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks though not strict autonomy the results are consistent both with short term autonomy for small countries even under fixed exchange rates and an open capital account and with long term dependence under flexible exchange rates and an independent stability target results also indicate that euro area market interest rates are significantly more responsive to the development of the corresponding us rate than were the previous national rates

exchange rate target zones a survey of the literature this work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability we discuss the main contributions of the first and second generations of exchange rate target zone models in an attempt to reconcile the poor empirical performance of the krugman model with the reality of exchange rate target zone regimes this line of research integrates target zones with alternative underlying economic models such as imperfect credibility intra marginal interventions and sticky price models it was thus possible to understand the correlations observed between the exchange rate its fundamentals determinants and the interest rate differential and to explain the fact that the statistical distribution of the exchange rate is hump shaped rather than u shaped this implies that the initial emphasis of target zone models on nonlinearities honeymoon effect smooth pasting and marginal interventions has vanished exchange rate target zones are better described as similar to managed floating regimes with intra marginal interventions with some marginal interventions when the exchange rate reaches the edges of the floating band

dynamic forecasts of qualitative variables a qual var model of u s recessions this article presents a new qual var model for incorporating information from qualitative and or discrete variables in vector autoregressions with a qual var it is possible to create dynamic forecasts of the qualitative variable using standard var projections previous forecasting methods for qualitative variables in contrast produce only static forecasts i apply the qual var to forecasting the 2001 business recession out of sample and to analyzing the romer and romer narrative measure of monetary policy contractions as an endogenous variable in a var out of sample the model predicts the timing of the 2001 recession quite well relative to the recession probabilities put forth at the time by professional forecasters qual vars which include information about the qualitative variable can also enhance the quality of density forecasts of the other variables in the system

the erm and monetary integration in the european union an investigation of long run relationships this paper investigates the integration of eu money supplies for the erm period 1979q1 93q4 an estimating equation is derived from a simple equilibrium model of the eu money markets estimation is undertaken using the johansen maximum likelihood cointegration procedure the results show that those eu members with relatively low exchange rate premia against the dm are those whose variations in the money supply have been most sensitive to those of germany

the social costs of monopoly and regulation posner reconsidered focuses on social costs of monopoly and trade regulation in the united states benefit of marginal changes on antitrust activities equality of cost in obtaining monopoly and expected profit of monopolist elasticity of inputs in obtaining monopoly ebsco

the operations of the bank of england 1890 1908 a dynamic probit approach this paper analyzes the workings of the pre world war i gold standard using weekly data and a dynamic probit econometric technique the authors evidence sheds light on three potentially conflicting motivations underlying bank rate changes profitability convertibility and concern for home trade the conflict among these goals manifests itself in the bank s asymmetric responses to inflows and outflows of gold and in the bank s asymmetric responses to changes in market interest rates the authors results are consistent with the view that central bank cooperation played an important role in the workings of the gold standard copyright 1995 by ohio state university press

devaluation expectations the swedish krona 1982 1991 devaluation expectations for the swedish krona are estimated for the period 1982 1991 with several methods first the simplest test is applied under either only the minimal assumption of no positive minimum profit or the additional assumption of uncovered interest parity then a more precise method suggested by bertola and svensson is used in which expected rates of depreciation within the exchange rate band estimated in several ways are subtracted from interest rate differentials finally estimated devaluations expectations are to some extent explained by a few macrovariables and parliament elections

forecasting macro variables with a qual var business cycle turning point index one criticism of vector autoregression var forecasting is that macroeconomic variables tend not to behave as linear functions of their own past around business cycle turning points a large amount of literature therefore focuses on nonlinear forecasting models such as markov switching models which only indirectly capture the relation with turning points this article investigates a direct approach to using information on turning points from the national bureau of economic research nber chronology to model and forecast macroeconomic data our qual var model includes a truncated normal latent business cycle index that is negative during nber recessions and positive during expansions we motivate our forecasting exercise by demonstrating that if starting from a linear specification a truncated normal variable is an omitted variable then forecasts of the remaining variables will become nonlinear functions of their own past we apply the qual var model to recursive out of sample forecasting and find th

the choice of exchange rate bands balancing credibility and flexibility abstract this paper develops a framework for the optimal choice of exchange rate bands within an environment in which policymakers dislike nominal exchange rate variability but value the flexibility to adjust the nominal exchange rate in response to shocks in order to attain real exchange rate objectives the paper provides an endogenous characterization of the optimal exchange rate band in terms of the underlying distribution of shocks to the current and capital accounts of the balance of payments and in terms of the commitment reputation of policymakers

why exchange rate bands monetary independence in spite of fixed exchange rates abstract the paper argues that the reason real world fixed exchange rate regimes usually have finite bands instead of completely fixed exchange rates between realignments is that exchange rate bands counter to the textbook result give central banks some monetary independence even with free international capital mobility the nature and amount of monetary independence is specified informally and in a formal model and quantified with swedish krona data altogether the amount of monetary independence appears sizable for instance an increase in the swedish krona band from zero to about 2 percent may reduce the krona interest rate s standard deviation by about a half

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

interest rate smoothing and price level trend stationarity abstract this paper discusses the definition and mechanics of central bank interest rate smoothing under rational expectations a tension arising between interest rate smoothing and macroeconomic stabilization objectives induces non trend stationary price level and money stock behavior the paper thereby helps explain why such nominal non stationarities are widely observed further implications are drawn for base drift distribution of real returns on long term fixed rate nominal debt and operating characteristics of interest rate pegs and policy instruments

time varying discrete monetary policy reaction functions a novel dynamic ordered probit model with time varying parameters is proposed to estimate a monetary policy reaction function with narrative based monetary indicators the estimation and inference are carried out using the bayesian simulation based approach empirically these are the following findings first there is strong evidence in support that the central bank in taiwan responds counter cyclically to inflation but weaker if any evidence to economic growth secondly the persistence and consistence in policy making of the monetary authority is confirmed by the significance of the positive autoregressive coefficient although not all the estimates of the tvp dop model provide at least partial support of time varying parameters finally the results indicate that studies of the discrete monetary policy reaction functions without explicitly considering the possible dynamics inherent in the time series data and time variations in model parameters may be inappropriate if not incorrect

explaining exchange rate volatility an empirical analysis of the holy trinity of monetary independence fixed exchange rates and capital mobility abstract this paper uses a panel of data from twenty two countries between 1967 and 1992 to explain exchange rate volatility focusing on potential tradeoffs between fixed exchange rates independent monetary policy and capital mobility i use monetary models to parameterize monetary divergence and factor analysis to measure capital mobility exchange rate volatility is loosely linked to both monetary divergence and the degree of capital mobility interestingly exchange rate volatility is significantly correlated with the width of the explicitly declared exchange rate band even after taking monetary divergence and capital mobility into account

does gold offer a better protection against losses in sovereign debt bonds than other metals it is a commonly held view that gold protects investors wealth in the event of negative economic conditions in this study we test whether other metals offer similar or better investment opportunities in periods of market turmoil using a sample of 13 sovereign bonds we show that other precious metals palladium in particular offer investors greater compensation for their bond market losses than gold we also find that industrial metals especially copper tend to outperform gold and other precious metals as hedging vehicles and safe haven assets against losses in sovereign bonds however the outcome of the hedge and safe haven properties is not always consistent across the different bonds finally our analysis suggests that copper is the best performing metal in the period immediately after negative bond price shocks

exchange rate bands with price inertia this problem by committing member states to taking suitable action to prevent cross parities from straying outside some given publicly announced range and williamson s proposal for target zones was explicitly aimed at preventing exchange rate misalignment among the principal industrial countries subsequently the louvre accord struck between members of the group of seven in i 987 involved unpublished commitments designed to constrain fluctuation between the u s dollar and the currencies of its major trading partners funabashi i988 given the obvious practical importance of understanding the implications of such policy commitments for the economy in general and the exchange rate in particular it is perhaps not surprising that the seminal work by krugman i 988 i989 on exchange rate determination within a band has aroused considerable interest under the assumption that the velocity of money follows a brownian motion process he obtains an explicit solution for the exchange rate as a function of the fundamental which shows that the presence of a commitment to intervene so as to defend the band exerts a stabilising influence on the exchange rate even before any such intervention takes place in their contribution to this emerging literature froot and obstfeld i989 note that krugman s minimalist stochastic specification can be derived from a monetary model of exchange rates where prices are perfectly flexible and full employment prevails where international interest differentials match expected exchange rate changes and the exchange rate preserves purchasing power parity cf mussa 1976 and they show that the behaviour of the rate inside a currency band can be obtained using results on regulated brownian motion processes cf harrison i985 using the same framework and techniques flood and garber i989 indicate how the rate will respond to noninfinitesimal intervention and svensson i 989 examines the effect of bandwidth on the stochastic behaviour of interest rates klein i989 considers the effects of uncertainty about the width of the band

stop go monetary policy we propose and estimate several discrete choice models of monetary policy decision making that feature time varying inertia the models permit us to account for three stylized facts characterizing monetary policymaking in the united states 1 target interest rates are gradually adjusted in small discrete movements 2 there are some long stretches of time in which rates are repeatedly moved and 3 there are other long stretches in which the policy rate does not change our models are used to account for the fed s failure to adopt promptly an easier policy stance during the recession of 2001 they are also used to explain delay in tightening the policy stance during the 2003 2006 period that featured a bubble in house prices and was followed by a financial crisis in 2008

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

independence of monetary policy under fixed exchange rates the case of saudi arabia this study specifies a modified version of the monetary approach to the balance of payments mabp model with free capital flow and fixed exchange rates for saudi arabia and tests the independence of monetary policy of its central bank using annual data from 1960 to 1994 further capital flight and speculative inventory behaviour of importers of consumer and capital goods in saudi arabia are also tested to the expected exchange rate depreciation during the periods of exchange turmoil against the riyal the results of this study indicate that saudi arabian monetary authority has at best a weak control on its money supply which is in accord with one of the predictions of mabp theory further the study found little support to the speculative inventory behaviour of the importers of consumer and capital goods in saudi arabia against exchange rate depreciation of the riyal however the results suggest that the expected change in exchange rate depreciation has a positive and a significant impact on capital f

misplaced childhood when recession children grow up as central bankers abstract we examine how much an early i e childhood experience of recession influences the behavior of central bankers we develop a model of decision making by a committee whose leader and members exhibit recession aversion due to their personal experience the model reveals that recession aversion could lead to a reluctance of the policymaker to increase policy rates in a panel multinomial logit model for nine major central banks analyzed over the period 1999 2015 we find that growing up in a recession influences monetary policy making central bankers early personal experiences of recessions shape their policy reactions increasing the willingness to cut policy rates with policy relevant magnitudes the results are robust to alternative behavioral hypotheses accounting for a number of control variables or sample variation

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

the inter war gold exchange standard credibility and monetary independence in this paper we analyze the operation of the inter war gold exchange standard to see if the evident credibility of the system conferred on participating central banks the ability to pursue independent monetary policies to answer this question we econometrically analyze two key parity or arbitrage conditions namely uncovered interest rate parity and a yield gap relationship we find that there were both long and short run deviations from the arbitrage conditions the use to which this policy independence was put is analyzed in the context of a multivariate system which includes reaction function variables

gibrat s law and diversification this article presents an analysis of the growth patterns of the worldwide top 200 firms in the pharmaceutical industry a test of the gibrat s law of proportionate effect is performed and we find in line with previous literature a violation concerning the variance of growth using disaggregated data on sub markets we are however able to show that this violation can be completely accounted for by a diversification effect namely a scale relation between the number of sub markets in which a firm is active and its size to interpret these findings we propose a stochastic branching model of firm diversification consistent with a notion of cumulative corporate competences

interest rate interactions in the classical gold standard 1880 1914 was there any monetary independence this paper examines an hypothesis of svensson 1994 journal of monetary economics 33 157 199 that a credible target zone can confer on a country a degree of independence in the operation of its monetary policy even when exchange rates are fixed we test this hypothesis for the classical gold standard using a newly created monthly data base for the period 1880 1913 building on the recently noted finding that the classical gold standard represented a credible well behaved target zone system we propose a number of ways of testing the svensson model our main finding is that the classical gold standard did indeed confer some independence in the operation of monetary policy for participating countries this would seem to have an important bearing on the kind of institutional framework required for a modern day target zone to function effectively and in particular to weather speculative attacks

on the behaviour of uk money velocity prices and output in the gold standard period 1871 1913 this article provides evidence in support of cointegration among the uk money supply real output and the price level in the gold standard period 1871 1913 the series respond to eliminate short run deviations from the long run equilibrium relation of the equation of exchange cointegration is also observed between the uk and us price levels with the former also responding to eliminate short run deviations from the long run equilibrium relation among the two price levels our results for the components of the quantity equation support arguments that the bank of england moved short term interest rates in response to changes in domestic economic activity taken to be an indicator of future changes in its gold reserve position our evidence concerning the uk us price levels supports the rising position of the united states as an economic power during this period

rules of the game during the international gold standard england and germany abstract the paper suggests an alternative framework to test hypotheses about central bank policy rules during the international gold standard this framework is inspired by work of mundell 1968 on optimal central bank policies and more recent literature on the theory of economic policy which stems from luca s 1976 critique empirical tests obtained from this approach are quite different from those appearing in the empirical literature on the gold standard the results of the tests indicate that the bank of england was not optimally targeting international gold flows inthe case of the rechsbank the hyphothesis that international gold flows were optimally targeted is not rejected at the 5 per level thus the data suggest that the reichsbank was following the rules of the game whereas the bank of england was not

dynamic limited dependent variable modeling and u s monetary policy i estimate using real time data a forward looking monetary policy reaction function that is dynamic and that also accounts for the fact that there are substantial restrictions in the period to period changes of the fed s policy instrument i nd a substantial contrast between the periods before and after paul volcker s appointment as fed chairman in 1979 both in terms of the fed s response to expected in ation and in terms of its response to the perceived output gap in the pre volcker era the fed s response to in ation was substantially weaker than in the volcker greenspan era conversely the fed seems to have been more responsive to real activity in the pre volcker era than later

inflation targeting and exchange rate pass through this paper analyzes how endogenous imperfect exchange rate pass through affects inflation targeting optimal monetary policies in a new keynesian small open economy the paper shows that an inverse relation exists between the pass through and the insulation of the economy from foreign and monetary policy shocks and that imperfect pass through tends to decrease the variability of the terms of trade furthermore with cpi inflation targeting in the short run delayed pass through constrains monetary policy more than incomplete pass through and interest rate smoothing amplifies this effect when the pass through decreases the variability in economic activity tends to rise and the trade off between the stabilization of cpi inflation and output worsens in direct relation to how strictly the central bank is targeting cpi inflation in contrast with domestic inflation targeting optimal monetary policy is not constrained and opposite results occur consequently imperfect pass through favors the choice of domestic to cpi inflation targeting

european business cycles new indices and their synchronicity this article presents a new business cycle index that allows for cycle to cycle comparisons of the depth of recessions within a country cross country comparisons of business cycle correlation and simple aggregation to arrive at a measure of a european business cycle the data augmentation implied by gibbs sampling generates posterior distributions for a latent coincident business cycle index subsample correlations between an aggregated europe index and the national business cycle indices from france germany and italy are consistent with the claim that the european economies are becoming more harmonized

target zones in theory and history credibility efficiency and policy autonomy abstract an experiment with an exchange rate band in austria hungary in the early 20th century provides a rare opportunity to discuss critical aspects of the theory of target zones providing a new derivation of the target zone model as a set of nested hypotheses the inference is drawn that policy credibility and market efficiency were paramount in the success of the austro hungarian experience

bank failures as poisson variates abstract the elasticity of bank failures with respect to a set of explanatory variables is estimated using a maximum likelihood poisson estimator the resulting estimates are compared with their ols counterparts

the impact of conventional and unconventional monetary policy on expectations and sentiment abstract this paper offers evidence on the effect of ecb s conventional and unconventional monetary policy on economic expectations in euro area countries during the us and eu crisis we employ a range of research methodologies in a sample of nine eurozone countries and combine expectations sentiment indicators with a set of macroeconomic and financial variables we find that ecb s conventional monetary policy and fed s monetary policy stance has a positive and significant effect on economic expectations for core eurozone countries and a weak effect on peripheral eurozone countries ecb s unconventional policy measures however have a negative short term effect on core countries economic expectations this result is robust to different methodologies pvar qvar favar and different datasets overall our findings highlight the importance of monetary policy in the determination of economic expectations

a model for the federal funds rate target this paper is a statistical analysis of the manner in which the federal reserve determines the level of the federal funds rate target one of the most publicized and anticipated economic indicators in the financial world the paper introduces new statistical tools for forecasting a discrete valued time series such as the target and suggests that these methods in conjunction with a focus on the institutional details of how the target is determined can significantly improve on standard vector autoregression forecasts of the effective federal funds rate we further show that the news that the fed has changed the target has statistical content substantially different from the news that the fed failed to make an anticipated target change causing us to challenge some of the conclusions drawn from standard linear var impulse response functions

conducting the international orchestra bank of england leadership under the classical gold standard abstract a large literature assigns to the bank of england a leadership role in the management of the classical gold standard this paper documents the exceptional behavior of the bank of england s discount rate in particular that it tended to lead discount rates abroad it then develops a game theoretic analysis of central bank interaction under the classical gold standard sterling s reserve currency status is shown to provide a rationale for stackelberg leadership by the bank of england contrary to popular notions however britain s foreign creditor status does not provide a basis for the bank of england s leadership strategy

diverging trends in aggregate and firm volatility this note documents the diverging trends in volatility of the growth rate of sales at the aggregate and firm levels we establish that the upward trend in firm volatility is not simply driven by a compositional bias in the sample studied we argue that this new fact brings into question the proposed explanations for the decline in aggregate volatility and that given the symmetry of the diverging trends at the micro and macro levels a common explanation is likely we conclude by describing one such theory

the profitability of canadian defence contractors abstract in this paper we employ a simultaneous equations approach to test the hypothesis that firm profitability is affected by or affects the degree to which a firm is involved in defence contracting we find no evidence of any link between corporate profitability and defence contracting activity in canada moreover our data do not support the hypothesis that a positive effect of defence contracting is offset by the government pursuing a bailout contract award strategy based on the nature of the canadian defence procurement system we argue that our results indicate that the government has used its monopsony powers to restrict the rate of return earned on defence contracts to equal that earned in commercial operations thus firms which earn excess profits in commercial markets will also earn excess profits in defence markets

firm growth and laplace distribution the importance of large jumps abstract recent empirical studies have shown that firm growth rate distribution is not gaussian but closely follows a laplace distribution this robust feature of the growth rate distribution challenges existing models based on gibrat s model because it predicts a gaussian distribution first we analyze more than 100 000 japanese firms and empirically show that the laplace shape can be observed for the japanese firms then by using the theory of stochastic processes we theoretically show that the absence of jumps causes the discrepancy between gibrat s model and the laplace shape in particular based on the laplace shape and the law of proportionate effect we show that the firm growth process is a jump process in other words firm growth cannot be explained by the consequence of many small shocks but is determined by a few large jumps the widely observed laplace distribution reflects this jump property of firm growth dynamics

monetary and real shocks and the optimal target zone abstract an exchange rate target zone is analysed in a model where the economy is disturbed by shocks to money demand and goods demand the stabilising properties of a target zone are compared to those of fixed and flexible exchange rate regimes it is found that a target zone offers a compromise between these two extremes it is also shown that when there are shocks to both money and goods demand a target zone is better than either a fixed rate or a floating rate in the sense that it minimises the variance of output and prices

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

an econometric analysis of some models for constructed binary time series macroeconometric and financial researchers often use binary data constructed in a way that creates serial dependence we show that this dependence can be allowed for if the binary states are treated as markov processes in addition the methods of construction ensure that certain sequences are never observed in the constructed data together these features make it difficult to utilize static and dynamic probit models we develop modeling methods that respect the markov process nature of constructed binary data and explicitly deals with censoring constraints an application is provided that investigates the relation between the business cycle and the yield spread

uncovered interest parity monetary policy and time varying risk premia abstract in a recent paper mccallum argued that monetary policy behavior can be responsible for the apparent empirical failure of uncovered interest parity uip the present paper investigates whether optimizing policy behavior can account for the observed regime dependence of uip evidence the main result is that the tradeoff between interest rate and exchange rate stability is a potential candidate for the explanation of the apparent failure of uip and that the consideration of policy reactions can explain why deviations from uip differ systematically by the exchange rate regime

bank rate policy under the interwar gold standard a dynamic probit model the classical gold standard occupies an almost mystical position in the literature of international finance in popular accounts the gold standard is portrayed as a remarkably durable and efficient mechanism for achieving price and exchange rate stability and for relieving balance of payments pressures the system s resilience is attributed to the willingness of nationa monetary authorities to refrain from impeding the international adjustment process when central banks intervened in financial markets it is said they did so mechanically obeying rules of the game which dictated that they reinforce the impact on domestic money and credit of changing balance of payments conditions succeeding generations of economists and historians have sought to qualify this popular view the recent contributions of bordo i98i and cooper i982 make a critical assessment of extravagant claims concerning price and exchange rate stability under the classical gold standard other authors have extended the research of bloomfield i 959 ford i962 and triffin i964 who emphasised the special conditions that permitted the classical gold standard s smooth operation and cast doubt on the tendency of national monetary authorities to adhere faithfully to rules of the game all too often scant mention is made of the interwar gold standard for it is not evident how interwar experience fits into either view certain facts are clear it is clear that the interwar standard was far from durable britain s resumption of gold payments in i925 usually is taken to mark the gold standard s resurrection just as her devaluation a mere 6 years later is taken as its demise in the interim many of the major participants suffered serious balance of payments pressures that threatened to render their exchange rates indefensible the system was anything but conducive to stability it precluded neither price nor income fluctuations as the great depression dramatically illustrated numerous explanations have been advanced for the interwar gold standard s

review of a history of the federal reserve volume i 2003 by allan h meltzer abstract this is a book review of a history of the federal reserve volume i 2003 by allan h meltzer

targeting nominal income growth or inflation within a simple new keynesian model emphasizing forward looking behavior of private agents i evaluate optimal nominal income growth targeting versus optimal inflation targeting when the economy is mainly subject to shocks that do not involve monetary policy trade offs for society inflation targeting is preferable otherwise nominal income growth targeting may be superior because it induces inertial policy making which improves the inflation output gap trade off somewhat paradoxically inflation targeting may be relatively less favorable the more society dislikes inflation and the more persistent are the effects of inflation generating shocks jel e42 e52 f58

growth volatility and size a firm level study abstract this paper provides a systematic cross country investigation of the relation between a firm s growth volatility and its size for the first time the analysis is carried out using comparable and representative sets of data sourced by official business registers of an important number of countries we show that there exists a robust negative relation between growth volatility and size with an average elasticity equal to 0 18 we check the robustness of this result against a number of potential sources of bias and in particular with respect to sectoral disaggregation and against the inclusion of firm age our result is consistent with the idea that independently from specific country characteristics there exists a common underlying mechanism driving the elasticity between size and growth volatility we then propose two mechanisms able to explain our result and we conclude discussing its relevance with respect to the recent literature on granularity

modeling and forecasting multivariate electricity price spikes abstract we consider the problem of forecasting the occurrence of extreme prices in the australian electricity markets from high frequency spot prices in particular we are interested in the simultaneous occurrence of such so called spikes in two or more markets our approach is based on a novel dynamic model for multivariate binary outcomes which allows the latent variables driving these observed outcomes to follow a vector autoregressive process furthermore the model is constructed using a copula representation for the joint distribution of the resulting innovations this has several advantages over the standard multivariate probit model first it allows for nonlinear dependence between the error terms second the distribution of the latent errors can be chosen freely third the computational burden can be greatly reduced making estimation feasible in higher dimensions and for large samples the model is applied to spikes in half hourly electricity prices in four interconnected australian markets the multivariate model provides a superior fit compared to single equation models and generates better forecasts for spike probabilities furthermore evidence of spillover dynamics between the markets is revealed

a realistic model for official interest rate movements and their consequences this article extends the vector autoregression var methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates 1 the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers and 2 the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates for the uk we find some evidence of both types of asymmetries in the us responses to unexpected interest rate shocks are far more symmetric results highlight the importance of considering all types of asymmetries when studying monetary transmission

a new marked point process model for the federal funds rate target methodology and forecast evaluation abstract forecasts of key interest rates set by central banks are of paramount concern for investors and policy makers recently it has been shown that forecasts of the federal funds rate target the most anticipated indicator of the federal reserve bank s monetary policy stance can be improved considerably when its evolution is modeled as a marked point process mpp this is due to the fact that target changes occur in discrete time with discrete increments have an autoregressive nature and are usually in the same direction we propose a model which is able to account for these dynamic features of the data in particular we combine hamilton and jorda s 2002 a model for the federal funds rate target journal of political economy 110 5 1135 1167 autoregressive conditional hazard ach and russell and engle s 2005 a discrete state continuous time model of financial transactions prices and times the autoregressive conditional multinomial autoregressive conditional duration model journal of business and economic statistics 23 2 166 180 autoregressive conditional multinomial acm model the paper also puts forth a methodology to evaluate probability function forecasts of mpp models by improving goodness of fit and point forecasts of the target the ach acm qualifies as a sensible modeling framework furthermore our results show that mpp models deliver useful probability function forecasts at short and medium term horizons

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential

aggregate price shocks and financial instability a historical analysis i introduction the notion that central banks should act as lenders of last resort is not controversial how best to carry out that responsibility is however not widely agreed on one view holds that the financial system is inherently fragile and a central bank should forgo other objectives such as preventing inflation when financial instability threatens an alternative view argues that by controlling inflation a central bank will in fact promote financial stability anna schwartz 1988 1995 for example contends that financial instability has often been caused by monetary policies that cause fluctuations in the rate of inflation she argues that monetary policy should focus exclusively on maintaining price stability a few countries for example canada and new zealand have recently made inflation control the paramount objective of their central bank s monetary policy and the maastricht treaty which established monetary union among 11 european community countries specifies control of inflation as the principal objective for the european central bank most countries including the united states assign their central banks multiple objectives such as full employment and financial stability as well as inflation control implicitly the specification of multiple objectives for monetary policy assumes trade offs between those goals that a country might have to accept higher inflation at least temporarily to maintain financial stability for example this article investigates the historical association between aggregate price and financial stability to shed light on the question of whether a commitment to price stability is likely to enhance or lessen financial stability specifically we use data for the united states from 1790 to 1997 to test the hypothesis that aggregate price disturbances cause or worsen financial instability unanticipated aggregate price declines might increase financial distress by leaving some borrowers with insufficient income to repay contracted nominal debt thus unanticipated aggregate price declines would increase insolvency and default rates positive aggregate price shocks on the other hand might cause default rates to fall below expectations and could encourage financial expansion if borrowers and lenders are unable to distinguish changes in relative prices from changes in the aggregate price level financial expansion based on aggregate price misperceptions can lead to resource misallocation however and thereby worsen financial distress associated with subsequent unanticipated aggregate price declines during 1790 1933 unanticipated movements in the price level best represent price shocks whereas the persistence of inflation since 1933 led us to examine the impact of unanticipated inflation on financial conditions during 1934 97 we use the phrase aggregate price shock to refer to unanticipated movements in either the price level or the inflation rate in the absence of consistent time series measures of aggregate financial conditions over a long period we construct an annual index of financial conditions from both quantitative and narrative sources we use a dynamic time series probit model to estimate the impact of aggregate price shocks on financial conditions as reflected in the index we also regress four series used to construct the index on aggregate price shocks to confirm that the relationship between aggregate price shocks and the index is present in its constituent series we control for liquidity real output growth and supply shocks and test whether relationships changed with changes in monetary or financial regime our objective is to shed light on the extent that aggregate price disturbances exacerbate financial instability and whether the relationship between such disturbances and financial conditions is affected by the institutional environment we begin by outlining why aggregate price shocks might cause or worsen financial instability

invariances and diversities in the evolution of manufacturing industries this work explores and compares some basic properties of corporate growth process at both aggregate manufacturing level and disaggregated sectoral levels using an extensive dataset on italian manufacturing firms we investigate which properties of firm growth dynamics are robust under disaggregation we compare the results obtained with three different definitions of firm size namely total sales number of employees and value added our analysis suggests that while different sectors are characterized by significant differences in firm size distributions in the degrees of concentration and in the autoregressive structure of the growth processes there are also regularities which hold across all of them such as the approximate unit root nature of the growth process and the power exponential shape of the growth rates density together these stylized facts suggest challenging puzzles on the drivers of corporate growth and the resulting industrial structures