the welfare loss from unstable inflation abstract the calvo price setting mechanism produces relative price dispersion among firms while the rotemberg model is consistent with a symmetric equilibrium nonetheless both models imply the same welfare costs of inflation and the same prescriptions for welfare maximizing central banks

aggregate consumer behaviour and the measurement of inequality this paper presents an approach to inequality measurement based on an econometric model of aggregate consumer behaviour the novel feature of this model is that systems of individual demand functions can be recovered uniquely from the system of aggregate demand functions we present methods for evaluating social welfare based on an explicit social welfare function this social welfare function incorporates measures of individual welfare based on indirect utility functions for all consumer units we develop indexes of inequality based on actual and potential levels of social welfare

corporate financial policy and corporate control abstract this paper presents evidence that stockholder wealth declines on average when managers respond to attempted hostile takeovers with defensive changes in asset and ownership structure the data also indicate that these corporate restructurings are typically quite large and that many are attempts by managers to create barriers specific to the hostile bidder and or to consolidate a block of voting securities in the hands of management allies the evidence suggests that defensive motives whether beneficial or harmful influence corporate asset and ownership structure

predisclosure information firm capitalization and security price behavior around earnings announcements several studies on the relationship between earnings reports and security price behavior provide evidence suggesting that a significant portion of the information revealed through earnings reports is reflected in security prices prior to the report month e g ball and brown 1968 and brown and kennelly 1972 this has been attributed at least partly to the existence of other more timely sources of information which allow market agents to forecast earnings prior to their release the evidence above reflects an average finding across all firms one question of interest is whether there are significant systematic crosssectional differences in the security price reactions to earnings announcements of firms which are associated with specific firm characteristics that lead to differential amounts of predisclosure information this study focuses on firm size capitalization as one such characteristic a firm

regional effects of energy price decontrol the roles of interregional trade stockholding and macroeconomic incidence policy debates over energy pricing frequently pit producing states against consuming states such a distinction ignores the fact that ownership of energy producing and energy using assets is geographically dispersed and that trade links regional economies incorporating these factors as well as alternative patterns of the incidence of higher gas prices into an analysis of natural gas decontrol reveals a significant influence on the net interregional transfers resulting from decontrol apparent consuming regions could benefit from gas decontrol and consuming regions generally do not benefit from policies that tax producer windfalls from decontrol and then redistribute the revenues as compensation to gas users

initial shareholdings and overbidding in takeover contests within the context of takeovers this paper shows that in private value auctions the optimal individually rational strategy for a bidder with partial ownership of the item is to overbid i e to bid more than his valuation this strategy however can lead to i an inefficient outcome and ii the winning bidder making a net loss further the overbidding result implies that the presence of a large shareholder increases the bid premium in single bidder takeovers at the expense of reducing the probability of the takeover actually occurring

firm entry markups and the monetary transmission mechanism abstract two business cycle models with endogenous firm and product entry are estimated by matching impulse responses to a monetary policy shock the competition effect implies that entry lowers desired markups and dampens inflation under translog preferences where the substitutability between goods depends on their number we find evidence of such an effect that model generates more countercyclical markups than dixit and stiglitz 1977 monopolistic competition model where price stickiness is the only source of markup fluctuations in contrast a model with strategic interactions between oligopolistic firms cannot generate an empirically relevant competition effect and is statistically equivalent to the dixit stiglitz model

preemptive bidding and pareto efficiency in takeover auctions this paper extends the fishman 1988 model of preemptive jump bidding in private value takeover auction to auctions with common and affiliated values we show that in the presence of a common value component jump bidding equilibrium results in higher social surplus furthermore we show that under certain conditions allowing for preemptive jump bidding in common value auctions results in ex ante pareto improvement

real wage rigidities and the cost of disinflations this paper analyzes the cost of disinflations under real wage rigidities in a micro founded new keynesian model the conventional view is that real wage rigidities can be a useful mechanism to generate a slump in output after a credible disinflationary policy because they prevent the immediate adjustment of inflation this view is flawed since it depends on analyzing the model in a linearized framework once nonlinearities are taken into account the results change both qualitatively and quantitatively disinflations actually lead to a permanently higher level of output and real wage rigidities increase the output during the adjustment to the new steady state

optimal toeholds in takeover contests abstract we offer an explanation for why raiders do not acquire the maximum possible toehold prior to announcing a takeover bid by endogenously modeling the target firm s value following an unsuccessful takeover we demonstrate that a raider may optimally acquire a small toehold even if the acquisition does not drive up the pre tender target price this occurs because although a larger toehold increases profits if the takeover succeeds it also conveys a higher level of managerial entrenchment and hence a lower firm value if the takeover fails we derive new predictions regarding the optimal toehold and target value following a failed takeover we also examine the impact of a rival bidder and dilution

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

merger negotiations and the toehold puzzle abstract the substantial control premium typically observed in corporate takeovers makes a compelling case for acquiring target shares a toehold in the market prior to launching a bid moreover auction theory suggests that toehold bidding may yield a competitive advantage over rival bidders nevertheless with a sample exceeding 10 000 initial control bids for us public targets we show that toehold bidding has declined steadily since the early 1980s and is now surprisingly rare at the same time the average toehold is large when it occurs 20 and toeholds are the norm in hostile bids to explain these puzzling observations we develop and test a two stage takeover model where attempted merger negotiations are followed by open auction with optimal bidding a toehold imposes a cost on target management causing some targets to rationally reject merger negotiations optimal toeholds are therefore either zero to avoid rejection costs or greater than a threshold so that toehold benefits offset rejection costs the toehold threshold estimate averages 9 across initial bidders reflecting in part the bidder s opportunity loss of a merger termination agreement in the presence of market liquidity costs a threshold of this size may well induce a broad range of bidders to select zero toehold as predicted the probability of toehold bidding decreases and the toehold size increases with the threshold estimate the model also predicts a relatively high frequency of toehold bidding in hostile bids as observed overall our test results are consistent with rational bidder behavior with respect to the toehold decision

competition and the medium of exchange in takeovers the role of the medium of exchange in competition among bidders and its effect on returns to stockholders in corporate takeovers are investigated consistent with recent empirical evidence our model shows that stockholders of both acquiring and target firms obtain higher returns when a takeover is financed with cash rather than equity and that returns to target shareholders increase with competition the model predicts that the fraction of synergy captured by the target decreases with the level of synergy finally it is shown that as competition increases the cash component of the offer as well as the proportion of cash offered increases article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

liquidity traps and expectation dynamics fiscal stimulus or fiscal austerity we examine global dynamics under infinite horizon learning in new keynesian models where the interest rate rule is subject to the zero lower bound as in evans guse and honkapohja 2008 the intended steady state is locally but not globally stable unstable deflationary paths emerge after large pessimistic shocks to expectations for large expectation shocks that push interest rates to the zero bound a temporary fiscal stimulus or a policy of fiscal austerity appropriately tailored in magnitude and duration will insulate the economy from deflation traps however fiscal switching rules that automatically kick in without discretionary fine tuning can be equally effective

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

the determinants of failed takeovers in the banking sector deal or country characteristics abstract the consolidation process which characterized the banking industry in the last decades has been widely analyzed but very few studies have investigated the reasons which bring a number of announced deals to failure we fill this gap in the literature analyzing the characteristics of failed m a operations in a large sample including all the major domestic and cross border deals in the banking sector announced worldwide between 1992 and 2010 the results show that the most important factors which determine the failure of an announced operation are deal specific characteristics in particular the hostility of the bidder and the presence of multiple potential acquirers moreover lengthier negotiations have a lower probability of success contrary to expectations cross border operations are more likely to be successfully completed than domestic ones

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

competing bids target management resistance and the structure of takeover bids we examine the structure of initial takeover bids and the frequency of observing competing bids and target management resistance we find the use of cash is not consistently correlated with the frequency of competition or resistance and that the cost of acquiring information about a target is associated with the likelihood of competition and resistance a high bid premium appears to deter competing offers and is also associated with a lower likelihood of resistance finally target management resistance is associated with an increased likelihood of a competing offer arising and a larger increase in target shareholder wealth between the initial public announcement and outcome dates relative to the not resisted subsample for both successful and unsuccessful acquisition proposals article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

real wage rigidities and disinflation dynamics calvo vs rotemberg pricing abstract calvo pricing implies output gains while rotemberg pricing implies output losses after a disinflation introducing real wage rigidities has opposite effects it generates a long lasting boom in output in calvo and a moderate output slump in rotemberg

the imperfect common knowledge phillips curve calvo vs rotemberg i derive the imperfect common knowledge phillips curve under the assumption of rotemberg pricing the curve differs from the calvo version in one important aspect expectations of future relative prices impact inflation

trend inflation and firms price setting rotemberg versus calvo we compare the calvo and rotemberg price setting mechanisms in a new keynesian model with trend inflation we show that the long run relationship between inflation and output is positive in rotemberg and negative in calvo the dynamics of the two models differ even to a first order approximation positive trend inflation enlarges the determinacy region in the rotemberg model whereas it shrinks it in the calvo model the responses of output and inflation to technology shocks are amplified by trend inflation in calvo whereas they are dampened in rotemberg the two models imply differing non linear adjustments after a disinflation

optimal monetary policy with relative price distortions this paper analyzes optimal monetary policy in a sticky price model with calvo type staggered price setting in the paper the optimal monetary policy maximizes the expected utility of a representative household without having to rely on a set of linearly approximated equilibrium conditions given the distortions associated with the staggered price setting it shows that the complete stabilization of the price level is optimal in the absence of initial price dispersion while optimal inflation targets respond to changes in the level of relative price distortion in the presence of initial price dispersion

corporate takeover bids methods of payment and bidding firms stock returns this study explores the role of the method of payment in explaining common stock returns of bidding firms at the announcement of takeover bids the results reveal significant differences in the abnormal returns between common stock exchanges and cash offers the results are independent of the type of takeover bid i e merger or tender offer and of bid outcomes these findings supported by analysis of nonconvertible bonds are attributed mainly to signalling effects and imply that the inconclusive evidence of earlier studies on takeovers may be due to their failure to control for the method of payment recent studies on corporate takeovers provide inconclusive results on the valuation effects of acquisitions on the common stock of bidding firms 1 substantial differences are reported between the studies that analyze acquisitions initiated as tender offers and those that confine their samples to merger proposals the existence of mixed empirical findings for the bidding firms makes it difficult to interpret existing evidence and to draw conclusions about the managers acquisition motivations nevertheless the reason for the substantial difference between empirical findings on mergers and tender offers still remains an unresolved issue it is observed however that mergers are usually common stock exchange offers whereas tender offers are usually cash offers given that different methods of financing a project have different signalling implications myers and majluf 39 the differential stock returns of bidders in mergers and tender offers may be due to the method of acquisition financing

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

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

revenue maximizing inflation abstract a classic monetary policy result is that revenue maximization entails setting the inflation tax rate equal to the inverse of the interest semi elasticity of the demand for money the standard approach underlying cagan s rule is partial equilibrium in nature treating money demand as being given from outside the model and abstracting from the real effects of inflation this paper reconsiders the question of the revenue maximizing inflation rate in a general equilibrium framework with a labor leisure choice where money is held because it reduces transactions costs in this framework the revenue maximizing inflation tax rate is lower than that implied by cagan s rule

do tender offers create value new methods and evidence abstract conventional techniques of estimating takeover value improvements measure only a fraction of the total gain and include revelation about bidder stand alone value to address these biases we develop the probability scaling method which rescales announcement date returns and the intervention method which uses returns at intervening events perceived value improvements are larger than traditional methods indicate we cannot reject the hypothesis that bidders on average pay fair prices combined bidder target stock returns are higher for hostile offers lower for equity offers and lower for diversifying offers these effects reflect revelation about bidder stand alone value not differences in gains from combination

the macroeconomic effects of nonzero trend inflation we study the macroeconomic effects of nonzero trend inflation in a simple dynamic stochastic general equilibrium model under three common time dependent pricing schemes calvo truncated calvo and taylor we show that regardless of the pricing mechanism trend inflation leads to a reduction in the stochastic means of output consumption and employment and an increase in the stochastic mean of inflation beyond its deterministic steady state level the variability of most aggregates also increases these effects are quantitatively much stronger with calvo pricing

differential information and security market equilibrium we propose a simple model of equilibrium asset pricing in which there are differences in the amounts of information available for developing inferences about the returns parame ters of alternative securities in contrast with earlier work we show that parameter uncer tainty or estimation risk can have an effect upon market equilibrium under reasonable conditions securities for which there is relatively little information are shown to have relatively higher systematic risk when that risk is properly measured ceteris paribus the initially very limited model is shown to be robust with respect to relaxation of a number of its principal assumptions we provide theoretical support for the empirical examination of at least three proxies for relative information period of listing number of security returns observations available and divergence of analyst opinion

dynamic pricing and imperfect common knowledge abstract introducing private information into the dynamic pricing decision of firms by adding an idiosyncratic component to marginal cost can help explain two stylised facts about price changes aggregate inflation responds gradually and with inertia to shocks at the same time as individual price changes can be large the inertial behaviour of inflation is driven by privately informed firms strategically herding on the public information contained in the observations of lagged aggregate variables the model also matches the average duration between price changes found in the data and it nests the standard new keynesian phillips curve as a special case to solve the model the paper derives an algorithm for solving a class of dynamic models with higher order expectations

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

toehold strategies takeover laws and rival bidders abstract prior to the announcement of a tender offer the bidding firm is legally allowed to acquire shares in the open market subject to some limitations these pre announcement purchases are known as toeholds this paper presents a simple model that describes the bidder s optimal toehold acquisition strategy within an environment that closely parallels the present legal institutions the model shows that toeholds and bids interact in a complex manner even without the presence of asymmetric information by examining a simple environment the paper provides a useful alternative hypothesis for tests of other presumably more complex models one of the main implications of our model is that if no competing bidders are expected no toeholds should be purchased the paper also demonstrates that the correct specification of an empirical model can be critical for example under some parameter values toehold purchases may exhibit a negative cross sectional correlation with the pre announcement run up in the stock price this occurs even though prices are strictly increasing the size of the toehold several implications concerning various aspects of merger legislation are considered for example we demonstrate that a rule similar to a fair price provision has the desirable property that a second bidder arrives and wins if and only if he places a higher value on the target than the initial bidder

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

second order approximation to the rotemberg model around a distorted steady state social welfare objectives are investigated when changing prices is costly rotemberg 1982 a quadratic welfare function is derived with a distorted steady state implying inflation and output stabilization goals economic distortions influence inflation aversion in a way that differs from calvo models

dynamic firm behavior and regional deadweight losses from a u s oil import fee this paper analyzes the national and regional efficiency aspects of a 5 per barrel fee on crude oil imported into the united states the emphasis of the paper is twofold firstly a dynamic model of firm behavior capturing explicitly both expectations formation and resource nonrenewability is used to assess the impact of the fee on domestic firm behavior and secondly the regional breakdown of the producer and consumer surplus changes tariff revenues and deadweight losses or gains is performed by taking explicit account of stock ownership in oil producing and oilconsuming corporations and consumption by end use sector the import fee is a politically contentious issue but one that refuses to go away in political circles the perceived benefits of the fee are usually seen as increased energy security and aid to a beleaguered domestic oil and gas industry perceived drawbacks are usually inflation and regional inequities the last point is the political downfall of the tariff producing states are seen to gain from the higher prices brought on by the tariff and consuming states are seen to lose representatives from states with little or no production and this of course covers most states are hard pressed to sell the idea to constituents this paper thus deals with two of the most important questions from a policy perspective the regional incidence of the tariff and its impact on domestic output in a related paper 20 i discuss the economic rationales for an oil import fee i find that any optimal tariff arguments based on u s monopsony power in the world oil market are not valid in today s market estimates show an import supply curve of approximately infinite elasticity and thus an optimal tariff near zero i dispense with the energy security rationale for a tariff as well arguing that any risk of a disruption of imports in the future and that risk may be small in today s market is best handled with other policy tools such as government owned or subsidized stockpiles these conclusions imply that a tariff would impose deadweight losses on the u s economy by encouraging overproduction of domestic petroleum resources and underconsumption of petroleum imports how much overproduction results from the tariff is the focus of section ii below a

an options based approach to forecast competing bids evidence for canadian takeover battles during takeover battles a tender offer provides a call option right to the target s shareholders it guarantees the offered price but maintains the chance of a higher offer we present an options based approach to estimate the probability and expected value of higher competing takeover bids using target stock price data analysing canadian takeover battles in the period 1997 to 2007 we find that during the 5 trading days prior to the occurrence of an increased takeover bid the estimated probability of a higher bid exceeds 80 on average and the expected value of a potential competing bid almost matches the realized value

shocks and government beliefs the rise and fall of american inflation working paper 2004 22 september 2004 abstract the authors use a bayesian markov chain monte carlo algorithm to estimate a model that allows temporary gaps between a true expectational phillips curve and the monetary authority s approximating nonexpectational phillips curve a dynamic programming problem implies that the monetary authority s inflation target evolves as its estimated phillips curve moves the authors estimates attribute the rise and fall of post world war ii inflation in the united states to an intricate interaction between the monetary authority s beliefs and economic shocks shocks in the 1970s altered the monetary authority s estimates and made it misperceive the tradeoff between inflation and unemployment that misperception caused sharp rise in inflation in the 1970s the authors estimates indicate that policy makers updated their beliefs continuously by the 1980s policy makers beliefs about the phillips curve had changed enough to account for fed chairman paul volcker s conquest of u s inflation in the early 1980s jel classification e3 e5 key words updating beliefs policy evaluation self confirming equilibrium nash inflation ramsey outcomes i introduction today many statesmen and macroeconomists believe that inflation can largely be determined by a government monetary authority then why did the federal reserve board preside over high us inflation during the late 1960s and the 1970s and why under paul volcker did it rapidly bring inflation down during the early 1980s this paper answers these questions by estimating a model that features a particular process that makes a procession of economic shocks induce the monetary authority to alter its model of inflation unemployment dynamics the phillips curve at each date t the monetary authority updates its beliefs about the phillips curve and then recomputes a first period action recommended by a phelps problem a discounted dynamic programming problem that minimizes the expected value of a discounted quadratic loss function of inflation and unemployment 1 the monetary authority pursues the same objectives at each date using the same structural model with only its estimates of that model changing over time 2 this model of the systematic part of inflation puts the monetary authority s beliefs about the phillips curve front and center 3 we assume that the monetary authority s model of the phillips curve deviates in two subtle but important ways from what it would be in a rational expectations model e g kydland and prescott 1977 the first deviation is that while the true phillips curve is like kydland and prescott s we assume that the monetary authority omits the public s expected rate of inflation from its phillips curve by itself this omission need not prevent the outcomes of our model from coinciding with those of kydland and prescott s nor need it imply that the government s model is wrong in a way that could be detected from even an infinite sample whether the monetary authority s model is wrong in a statistically detectable way depends on how we allow the monetary authority to reestimate the parameters of its model in particular if the monetary authority were to believe that the coefficients of its phillips curve are constant over time then its estimates would converge to ones that support a self confirming equilibrium sce after convergence its estimated phillips curve would correctly describe occurrences along the sce path for inflation and unemployment such an after convergence version of our model has little hope of explaining the rise and fall of us inflation that model would have inflation fluctuating randomly around a constant sce level that coincides with kydland and prescott s time consistent suboptimal i e excessive level 4 this outcome motivates our second subtle deviation from a rational expectations equilibrium