monetary innovations and interest rates this paper examines the effect of unexpected weekly changes in the money supply on financial markets l examination of financial market reaction to weekly monetary surprises provides information on how the economy reacts to monetary changes also the reaction to weekly monetary surprises may put real or imagined constraints on federal reserve behavior as noted by tobin a decade ago certainly the rate of growth of the money stock has become the customary capsule form for describing monetary policy and gauging how easy or tight it is for a time it seemed that public preoccupation with this number might itself be a market constraint on the federal reserve believers in monetarism would regard accelerated growth of m1 as the harbinger of more inflation and higher interest rates if such people were to dominate financial markets they would make it difficult for the fed to carry out a rate reducing expansionary policy tobin 1974 p 70 throughout the paper unexpected weekly changes in the money supply monetary innovations are measured by reported changes in the supply of money minus expected changes where expected changes in money are obtained from market survey data changes in current interest rates of various terms to maturity are used to measure the effects of innovations on financial markets

money supply announcements and interest rates another view in this paper i use a new approach to analyze the impact of money supply announcements on the bond market before 1980 the only available work on this subject consisted of a few unpublished papers by conrad 1978 sivesind 1978 and urich 1979 1 more recently published papers by grossman 1981 and urich and wachtel 1981 have appeared roley 1982 extends the grossman study to incorporate data after the federal reserve policy statement of october 6 1979 both grossman and urich and wachtel are primarily concerned with the question of money market efficiency using survey data made available by money market services of san francisco and data on treasury bill yields each finds that the market responds quickly to unanticipated changes in the money supply but that anticipated changes have no effect on interest rates in addition grossman finds that when he adds other variables such as past changes in the money

do tax allowances stimulate investment considerable empirical work on investment behavior makes use of a capital cost variable to capture the effects of various corporate tax allowances the assumption behind most of this work is that all available tax allowances may be claimed by the firms however there are several reasons why this may not be true one purpose of this paper is to explore the effect on capital cost of assuming that firms have unused tax allowances and that the investment funds system if system is not used to finance marginal investments during periods of if releases another purpose is to construct econometric investment functions in order to compare the performance of alternative definitions of capital cost in fact the hypothesis that tax allowances do not have the effect on capital cost implied by a mechanical interpretation of statutory tax rules cannot be rejected in particular if releases may raise the return on intramarginal investment rather than create investment incentives

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

inflation depreciation and the neutrality of the corporate income tax the treatment of depreciation allowances interest deductions and capital gains in the corporate income tax base may have a strong impact on the user cost of capital and hence on the firm s investment decisions particularly when inflation and interest rates are high and fluctuating a few general conditions for neutrality confined to exponential depreciation schedules are given in the literature in this paper these conditions are reconsidered in a broader perspective by a specifying general depreciation functions b employing the concept neutrality locus to represent the class of tax systems which ensure neutrality in a given situation and c stating some results on equivalent tax systems numerical results based on norwegian data are reported

tax policy and business fixed investment revisited abstract this paper examines the effect of tax incentives on business capital expenditures in both a single equation and general system framework using equations that extend the neoclassical approach to incorporate more fully expectations and balance sheet variables in the single equation case the average gain in real business fixed investment per dollar of ex ante or static corporate tax loss calculated over a five year period is 0 52 for the investment tax credit with a peak of 0 62 in the third year the corresponding figure for accelerated depreciation is 0 49 with a peak of 0 57 in the second year in the case of reductions in corporate profits taxes the bang for a buck in partial equilibrium is only 0 05 in the complete system simulations the tax incentives show greater impacts due to feedback effects of higher output sales and profits on capital outlays and to some offset for the static revenue losses as corporate profits are increased the ranking for the three tax programs favors accelerated depreciation the investment tax credit then reductions in corporate profits taxes the ratios of the real gain in business fixed investment per dollar of corporate tax loss are 0 81 0 76 and 0 19 increase of 50 to 100 over the single equation results the total elasticities of response average 0 40 for the investment tax credit 0 44 for accelerated depreciation and 0 11 for reductions in corporate profits taxes

why interest rates rise when an unexpectedly large money stock is announced ment of an unexpectedly large growth in the money supply will lead to an immediate increase in interest rates this announcement effect is often taken as confirmation of the monetarist view that the way to bring down interest rates even in the short run is to reduce the rate of money growth in this paper we provide an alternative explanation of the announcement effect that is consistent with the keynesian view that in the short run the way to bring down interest rates is to expand the money supply we do not address the issue of inflationary expectations in a formal way though in the long run we would expect the well known fisher effect to hold looking closely at the announcement effect it is clear that whatever may be the true short run relationship between money growth and interest rates it cannot be inferred from a simple correlation of announcements of changes in the money stock with the resulting changes in interest rates this is because of several properties of the announcement phenomenon that we capture in the model

portfolio choice of government incentives the case of commercialization of a new coal based technology economic and financial incentives have become accepted tools for the implementation of government policies such as encouraging the widespread use of new technologies that offer significant economic and political benefits at the macroeconomic level but are not well perceived by managers at the micro level due to significant retrofitting costs this study using portfolio and real investment theories develops a quantitative methodology for selecting the optimal mix of incentives based on financial and operating factor sensitivities of the targeted firms in an uncertain environment the proposed methodology overcomes several shortcomings of previous studies the study applies the suggested method to a recent dod doe 1995 g project data that estimates the net benefits of a new coal based technology the results show that government policies based on a combination of incentives are more effective than individual incentive based policies the empirical analysis of firms which account for the 163 boiler sites in the sample reveals that the optimal incentive package is weighted about 2 1 in favor of tax incentives versus research and development subsidies

small sample bias and adjustment costs the response of most stock variables e g capital housing consumer durables and prices to exogenous impulses involves a dynamic or short run reaction and a target or long run reaction the difference between these two is typically attributed to some form of adjustment cost in this paper i argue that the small sample problems of cointegrating procedures used to estimate the long run component are particularly severe when adjustment costs are important more precisely elasticity estimates will tend to be biased downward i illustrate the empirical relevance of this by showing that the target elasticity of capital with respect to its cost is severely downward biased when estimated with conventional ols cointegration procedures once this is corrected the elasticity of the u s capital output ratio to the cost of capital is found to be large and close to minus one copyright 1994 by mit press

the response of short term interest rates to weekly money announcements each friday at 4 10 p m est the federal reserve announces its estimate of the narrowly defined money stock for the statement week ending nine days previously these money announcements have become one of the main events in financial markcts if for no other reason than the fact that significant movements in interest rates have been associated with large unanticipated changes in the money stock moreover since the late 1970s interest rate fluctuations in response to money stock announcements have dramatically increased over the 1l 2 hour intervals spanning the weekly announcements for example the variance of the change in the threemonth treasury bill yield in the three years since october 1979 is more than thirty times larger than that of the previous two year period l two factors may account for a large portion of the increased volatility of shortterm interest rates first on october 6 1979 the federal reserve adopted a reserve aggregate approach to monetary control replacing a procedure that emphasized stability of short term yields second despite the greater emphasis placed on monetary control the variance of weekly announced changes in the money stock has risen by about 70 percent since late 1979 in turn if greater volatility of announced changes makes future changes more difficult to predict the volatility of unanticipated weekly changes in money would have also increased 2 thus if financial markets are efficient and if weekly money announcements contain relevant information larger unanticipated changes in money may have caused larger fluctuations in interest rates

inflation and economic growth a multi country empirical analysis the world eocnomy is currently adjusting to a low inflation regime which has implicastions for the cross country distribution of world growth opportunities in contrast to previous related work which assumes unidirectional causality this paper uses the granger methodology to examine both the direction and pattern of causality between inflation and economic growth in 70 countries using annual data over the period 1960 89 among the conclusions are that first the relationship between inflation and growth is non uniform across countries 40 of countries studied reveal no causality one third exhibit unidirectional causality and about one fifth of countries show bidirectional causality second a vast majority of countries which show either uni or bi directional causality beong to the industrial group and third the low world inflation regime will on balance redistribute real growth opportunities benefit away from the developing countries towards the industrialized countries

discretionary monetary policy with costly inflation this paper considers how an output cost of inflation affects the discretionary inflation bias we show that conditions exist under which costly inflation actually increases this inflation bias

cross country evidence on long run growth and inflation i introduction many believe inflation has important adverse effects on long run economic performance this conviction is based on the logic summarized by fischer and modigliani 1978 for example that firms and workers devote productive resources to dealing with inflation that inflation uncertainty reduces efficiency by discouraging long term contracting and increasing relative price variability and so on nonetheless many others believe that the magnitudes of such costs are small and insignificant at moderate rates of inflation cross country growth regressions would seem to offer a sensible means of empirically determining inflation s effects 1 such analysis would appear less sensible however in light of the levine and renelt 1992 finding that estimates of the growth inflation relationship vary sharply with the regression specification nonetheless analyses completed subsequent to levine and renelt 1992 for example fischer 1991 1993 cozier and selody 1992 and cukierman et al 1993 continue to use growth regressions to infer inflation s effects and typically conclude growth and inflation to be inversely related this paper shows that while inflation does generally appear to be inversely related to growth estimates of the relationship suffer two additional robustness problems problems which emerge across a variety of model specifications more specifically this analysis first demonstrates the sensitivity of growth inflation results to modifications to the sample of countries limited from the start to low and moderate inflation countries it next demonstrates the sensitivity of results to modifications in the time period for example among oecd countries abbreviating the covered time period from 1960 85 to 1968 85 reduces inflation s effect on growth to insignificance such fragility with respect to the country sample and time period may be viewed as even more fundamental than the regression specification sensitivity documented by levine and renelt 1992 this analysis then shows that the same robustness problems plague alternative specifications of the growth inflation relationship the baseline regression estimated here supposes a linear growth inflation relationship formally it follows from an augmented solow growth model 1956 in which inflation drives the level but not the growth rate of steady state income plausible alternatives include allowing inflation to have non linear effects on growth as in log and quadratic specifications and respecifying the model such that inflation formally drives steady state growth rather than just the steady state level of income such alternatives to the baseline specification yield results which suffer the same basic difficulties of sensitivity to country sample and time period ultimately these findings should further discourage that is lay to rest the practice of quantifying inflation s effects with cross country growth regressions while cross country growth regressions may be viewed as generally suggesting that inflation imposes costs the fragility of the estimates indicates researchers will need to use alternative approaches to better identify inflation s costs researchers might for example find it productive to build on the investment analyses of huizinga 1993 and pindyck and solimano 1993 which combine time series and cross section variation ii theory as detailed by mankiw romer and weil 1992 the solow growth model 1956 augmented to allow for human capital may be used to derive a simple relationship between growth and initial income population growth and the rates of physical and human capital investment 1 ln y sub i t y sub i 0 gamma sub 0 gamma sub 1 ln y sub i 0 gamma sub 2 ln n sub i g delta gamma sub 3 ln s sub i gamma sub 4 ln h sub i v sub i the variable y denotes income per capita n represents exogenous population growth g denotes the exogenous rate of growth of labor augmenting technology delta is the common rate of depreciation of physical and human capital and s and h denote respectively the rates of physical and human capital accumulation

services outsourcing and innovation an empirical investigation we provide a comprehensive empirical analysis of the links between international services outsourcing domestic outsourcing profits and innovation using plant level data we find a positive effect of international outsourcing of services on innovative activity at the plant level such a positive effect can also be observed for domestic outsourcing of services but the magnitude is smaller this makes intuitive sense as international outsourcing allows more scope for exploiting international factor price differentials therefore giving the establishment higher profits and more scope to restructure production activities towards innovation we also find that international outsourcing has a positive effect on profitability as predicted by theory while this is not true for domestic sourcing the results are robust to various specifications and an instrumental variables analysis

credibility of trade policy reform and investment the mexican experience abstract this paper assesses whether the program of trade liberalization undertaken by mexico after 1985 was undermined by lack of credibility it provides an empirical counterpart to some of the credibility issues that have been discussed elsewhere in the literature and proposes a methodology based on the estimation of a probit model to measure the probability of trade policy reversal due to the likelihood of occurrence of a balance of payments crisis it is shown that the probability of trade policy reversal reduced indeed the rate of capital accumulation during the first years of the reform

money supply announcements interest rates and foreign exchange abstract this paper presents a test of the joint hypothesis that money supply announcements affect the real interest rate and that changes in the real interest rate affect the exchange rate in the short run the test results are consistent with the joint hypothesis for example it is found that announcement of an unexpected jump in the money supply is accompanied by an increase in interest rates and an appreciation of the dollar if the rise in interest rates was entirely due to higher inflationary expectations the dollar should not appreciate

inflation tax rules and investment some econometric evidence this paper presents econometric evidence on the effect of tax incentives on business investment in the united states in the period from 1953 through1978 the analysis emphasizes that the interaction of inflation and existing tax rules has contributed substantially to the decline of business investment since the late 1960 s because the investment process is far too complex for any simple econometric model to be convincing i have estimated three quite different models of investment behavior the strength of the empirical evidence rests on the fact that all three specifications support the same conclusion more generally the analysis and evidence show that theoretical models of macroeconomic equilibrium should specify explicitly the role of distortionary taxes especially taxes on capital income the failure to include such tax rules can have dramatic and misleading effects on the qualitative as well as the quantitative properties of macroeconomic theories this paper was presented as the fisher shultz lecture at the fourth world congress of the econometric society 29 august 1980 in aix en province this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this abstract was borrowed from another version of this item

market response to the weekly money supply announcements in the 1970s the hypothesis that the weekly announcement of the money supply affects interest rates is examined the announcement effect is interpreted as a policy anticipation effect that is an unanticipated increase in the money supply leads to an increase in interest rates in anticipation of future tightening by the federal reserve estimates of this effect with proxies for the unanticipated change constructed from a survey of money supply forecasts and an arima model indicate that a financial markets respond very quickly to the announcement and b the response was largest when policymakers emphasized the importance of the monetary aggregates financial market participants are careful observers of the weekly money supply announcement and generally agree that the announcement often leads to changes in interest rates this occurs because the announcement leads market participants to revise their expectations both of future federal reserve policy actions and of future economic conditions in this paper we examine the response of yields on treasury bills to the announcement of the money supply and the extent to which that response has varied in the last ten years money supply announcements may affect market interest rates in three ways first actual expansion of the money supply leads to lower interest rates through a liquidity effect however rapid monetary growth which is not anticipated leads market participants to expect the federal reserve to counteract such growth in the future as a consequence there may be a policy anticipation effect which causes higher interest rates in anticipation of future tightening furthermore prolonged rapid monetary growth also creates inflation and inflationary expectations which lead to higher interest rates thus there may exist a third effect the inflationary expectations effect which also leads to higher interest rates our interest in this paper is in the immediate market response to the weekly announcement of the money supply which as we argue below is most likely to be a policy anticipation effect the policy anticipation effect is best described by example suppose that the announced change in the money supply exceeds that which was expected by

do taxes matter lessons from the 1980 s the response of the economy to two major although in important respects offsetting tax reforms has been much smaller than ardent supply side revolutionaries expected thus suggesting that a reassessment of the grounds for revolt is in order this paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation with particular reference to savings and capital gains realizations i then reconstruct a 1992 view about how taxes affect behavior a unifying theme is that the tax system does much more than alter the relative prices of real variables it also provides incentives to misreport income restructure financial claims time transactions change the legal form of organization and so on for this reason observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways disentangling these explanations requires an emphasis on the transaction based nature of the tax system and the administration and enforcement of tax laws this abstract was borrowed from another version of this item

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

inflation investment and growth a money and banking approach output growth investment and the real interest rate in long run evidence tend to be negatively affected by inflation theoretically inflation acts as a human capital tax that decreases output growth and the real interest rate but increases the investment rate opposing evidence this paper resolves this puzzle by requiring exchange for investment as well as consumption inflation then decreases the investment rate and still decreases both output growth and real interest up to some moderately high rate of inflation above which increasingly low investment finally causes capital to fall relative to labour and the real interest rate to rise

hospital investment decisions and the cost of capital this study addresses two issues conceptually and empirically how does hospital ownership type affect hospital investment choices how do differences in the way hospitals are paid cost versus charge based reimbursement affect hospital investment the authors compute cost of capital measures for both for profit and not for profit hospitals whether or not hospital dependence on cost based payment stimulates investment depends on the generosity of such payment relative to the economic cost of capital empirically they find that for profit hospital exit entry decisions are guided by the generosity of payment to a greater extent than the not for profits copyright 1989 by the university of chicago

the effect of relative monetary surprises on spot exchange rates this paper examines the hypothetical relationship between us and canadian monetary surprises and the behaviour of us canadian spot exchange rates past studies have found that positive us monetary surprises were correlated with an appreciating us dollar in foreign exchange markets in this paper it is argued that monetary surprises in the us must be measured relative to foreign monetary innovation rather than in the conventional absolute sense when examining their impact on exchange markets rational investors consider expected returns and risk differentials in the us and local markets jointly in determining whether to be net buyers or sellers of us dollars the monetary actions of both the fed and the central bank operating in the local foreign economy will be considered in the foreign exchange market because of the close synchronization between the weekly money supply announcements in canada and the us it is possible to examine whether the relative or absolute us monetary surprise is more signifi

factor mobility trade and welfare abstract the paper develops a north south model which is driven by scale economies in the modern sector the model predicts that skilled and unskilled labor migrate from south to north and capital migrates from north to south migration of skilled labor and capital exhibits complementarity with trade while migration of labor may exhibit complementarity or substitutability if the terms of trade effects are ignored small movements of all factors affect the welfare of the population in south negatively and of that in north positively the effects of migration on the terms of trade are ambiguous in general

sinning in the basement what are the rules the ten commandments of applied econometrics unpleasant realities of real world data force applied econometricians to violate the prescriptions of econometric theory as taught by our textbooks leamer 1978 vividly describes this behavior as wanton sinning in the basement with sinners metamorphizing into high priests as they ascend to the third floor to teach econometric theory but this sinning is not completely wanton applied econometricians do or should follow some unwritten rules of behavior in effect bounding the sinning and promoting a brand of honor among sinners this paper exposits these rules and culls from them an unauthorized list of the ten commandments of applied econometrics

tax policy and business fixed investment in the united states abstract this paper derives and estimates models of nonresidential investment behavior in which current and future tax conditions directly affect the incentive to invest the estimates suggest that taxes have played an independent role in affecting postwar u s investment behavior particularly for investment in machinery and equipment in addition the paper develops a method for assessing the impact of tax policy on the volatility of investment when such policy is endogenous illustrative calculations using this technique based on the paper s empirical estimates suggest that tax policy has not served to stabilize investment in equipment or nonresidential structures during the sample period

unemployment benefit duration and incentives in britain how robust is the evidence abstract recent years have seen considerable advances in the econometric treatment of micro data in models of unemployment duration this paper examines the evidence from such models concerning the effects of unemployment benefits on incentives to work in britain widely accepted results of a small but significant benefit effect are reproduced using a sample of 1 231 unemployed men however these results are only found when benefit receipt is assumed to follow a hypothetical pattern which is shown to be unrealistic and over generous when more realistic calculations of benefits are used no benefit effect is found the paper also argues that search theory is of little help in determining the choice between competing functional forms and explanatory variables results concerning benefits are shown to be sensitive to the latter