monetary policy and the stock market theory and empirical evidence this paper gives a comprehensive review of the literature on the interaction between real stock returns inflation and money growth with a special emphasis on the role of monetary policy this is an area of research that has interested monetary and financial economists for a long time monetary economists have been interested in the question whether money has any effect on real stock prices while financial economists have investigated whether equity is a good hedge against inflation empirical studies show that money can be helpful in predicting future stock returns empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run the short run negative relation between stock returns and inflation can easily be explained by theoretical models if the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns while if it conducts a procyclical policy we could observe a positive relation according to both theoretical and empirical studies investors receive an inflation risk premium for holding equity

the output composition puzzle a difference in the monetary transmission mechanism in the euro area and u s we revisit recent evidence on how monetary policy affects output and prices in the u s and in the euro area the response patterns to a shift in monetary policy are similar in most respects but differ noticeably as to the composition of output changes in the euro area investment is the predominant driver of output changes while in the u s consumption shifts are significantly more important we dub this difference the output composition puzzle and explore its implications and several potential explanations for it while the evidence seems to point at differences in consumption responses rather than investment as the proximate cause for this fact the source of the consumption difference remains a puzzle

do financial markets learn from ecb monetary policy abstract this article examines the magnitude of stock market reactions to european central bank ecb monetary policy announcements since the introduction of the ecb declining absolute abnormal returns have been compatible with the theory that stock markets learn from ecb monetary policy in particular eurozone financial markets extract information from the ecb announcements and consider this information before making investment decisions furthermore the predictability of ecb monetary policy has been increasing over time

assessing horizontal mergers under uncertain efficiency gains the analysis of horizontal mergers hinges on a tradeoff between unilateral effects and efficiency gains we examine the role of uncertainty in this tradeoff in theory the attitude towards uncertainty depends on the curvature of the social objective function on the one hand adjustment effects both on the consumers and firms sides tend to make consumers surplus and firms profits convex on the other hand pass through effects may act in the opposite direction we show that convexity prevails in a number of situations including the most general linear demand model implications for empirical merger analysis are exposed

the microstructure of the euro money market abstract this paper provides an empirical examination of the microstructure of the euro money market especially the overnight market the interbank market for short term funds in the transnational currency created in january 1999 the institutional framework shaping the microstructure of the money market can be delimited as the union of 1 central banks interest setting bodies and their long term policy strategy 2 instruments for monetary policy operations and liquidity management 3 the private market financial instruments and trading mechanisms for funds and 4 the payment and settlement infrastructure for the transfer of those funds all four elements can significantly influence the intraday behaviour of money market rates to study their effects on the euro money market 5 months of intraday data for overnight deposits have been recorded from brokers in four euro area countries and the uk posting their quotes on reuters and from the italian electronic market mid the results show two hump shaped or u shaped intraday patterns of quoting frequency and volatility but flatter intraday patterns sometimes weakly single hump shaped for bid ask spreads even intraday overnight rate levels hardly differ across brokers located in different euro area countries reflecting the high integration of this market already shortly after the introduction of the euro despite some remaining heterogeneities in market structures and trading channels quoting activity rate volatility and spreads increase on ecb governing council days particularly after the 1 45 pm release time of interest rate decisions however since the amplitude of this volatility is economically small and since turnovers are not indicative of adverse selection the average degree of policy uncertainty seems to have been rather limited during our sample period ecb announcements of new m3 data related to the first pillar of its monetary policy strategy around 10am seem to be associated with very moderate increases in short term volatility tuesdays eurosystem main refinancing auctions with the open market exhibit active pre and post auction liquidity re allocation but only a very short and moderate increase in volatility after the announcement of the allotments and no signs of market power or adverse selection open market operation settlement days exhibit the highest turnovers during the business week at least for the mid without however being affected by any special risks finally it is shown that spreads and volatility tend to be very high at the end of the minimum reserve maintenance period and that the same happened during the year 2000 changeover days reflecting the high risks involved in both

on optimal legal standards for competition policy a general welfare based analysis we present a new welfare based framework for optimally choosing legal standards decision rules we formalise the decision theoretic considerations widely discussed in the existing literature by capturing the quality of the underlying analysis and information available to a regulatory authority and we obtain a precise necessary and sufficient set of conditions for determining when an economics or effects based approach would be able to discriminate effectively between benign and harmful actions and consequently dominate per se as a decision making procedure we then show that in a full welfare based approach the choice between legal standards must additionally take into account i indirect deterrence effects of the choice of standard on the behaviour of all firms when deciding whether or not to adopt a particular practice and ii procedural effects of certain features of the administrative process in particular delays in reaching decisions and the investigation of only a fraction of the actions taking place we therefore derive necessary and sufficient conditions for adopting discriminating rules as advocated by the effects based approach we also examine what type of discriminating rule will be optimal under different conditions that characterise different business practices we apply our framework to two recent landmark decisions microsoft vs eu commission 2007 and leegin vs psks 2007 in which a change in legal standards has been proposed and show that it can powerfully clarify and enhance the arguments deployed in these cases

budget balancing incentive mechanisms abstract a p xepapadeas j environ econom management20 113 26 1991 developed a pollution abatement incentive mechanism that both reduces the information requirements of a regulator and is budget balancing drawing only on the social gains from pollution abatement to encourage firm compliance this paper demonstrates that contrary to xepapadeas the budget balancing system of random penalties cannot be used to induce compliance with the regulator s objectives if firms are risk neutral however the mechanism can be successfully applied if firms are sufficiently risk averse e rasmusen rand j econom 18 428 435 1987

legal uncertainty as a welfare enhancing screen consider legal uncertainty as uncertainty about the legality of a specific action in particular suppose that the threshold of legality is uncertain i show that this legal uncertainty raises welfare legal uncertainty changes deterrence in opposite directions the probability of conviction increases for firms below the threshold while the probability of conviction decreases for firms above the threshold hence legal uncertainty acts as a welfare enhancing screen and increases welfare legal uncertainty discourages some actions with low private benefits while it encourages other actions with high private benefits

optimal proof burdens deterrence and the chilling of desirable behavior determination of the stringency of the burden of proof is a central design question in any system of adjudication including in many private settings employee promotion and firing product launches prior work oriented towards ex ante behavior focuses on deterrence using models in which individuals decide whether or not to commit a harmful act versus abstention or perhaps instead commission of a less harmful act such as when greater precaution is taken 1 in this setting the optimal proof burden maximizes deterrence which involves maximizing the difference between the ex ante likelihoods of correct and incorrect imposition of sanctions section i briefly derives this result and shows how contrary to some suggestions it differs from the familiar preponderance of the evidence rule under which sanctions are applied if and only if it is more likely than not that the individual before the tribunal committed the harmful act such analysis however omits a central concern with the mistaken imposition of sanctions that the prospect of such error will chill desir able behavior in competition law efficient procompetitive behavior e g promotional pricing may be discouraged with securities regulation the cost of capital may be raised if honest ipos often lead to successful class action suits under tort law health care providers might avoid treatment of high risk patients for fear of erroneous malpractice liability this dimension of the problem seems widespread and is likely to be

regulatory risk vertical integration and upstream investment abstract we investigate the impact of regulatory risk on vertical integration and upstream investment by a regulated firm that provides an essential input to downstream competitors regulatory risk reflects uncertainty about the regulator s commitment to a regulatory policy that promotes the regulated firm s noncontractible investment we show that when the regulator sets the regulatory policy after the vertical industry structure has been established some degree of regulatory risk is ex ante socially beneficial regulatory risk makes vertical integration profitable and stimulates high upstream investment at a lower social cost this occurs for moderate costs of high investment and firms small risk aversion our analysis sheds new light on some relevant empirical patterns in vertically related markets

market structure and the nature of price rigidity evidence from the market for consumer deposits panel data on consumer bank deposit interest rates reveal asymmetric impacts of market concentration on the dynamic adjustment of prices to shocks banks in concentrated markets are slower to raise interest rates on deposits in response to rising market interest rates but are faster to reduce them in response to declining market interest rates thus banks with market power skim off surplus on movements in both directions since deposit interest rates are inversely related to the price charged by banks for deposits the results suggest that downward price rigidity and upward price flexibility are a consequence of market concentration

the reaction of stock prices to unanticipated changes in money a note much of the past work on the money stock market relationship centered on the question of whether money is a leading indicator of stock prices studies by sprinkel 22 homa and jaffee 10 and hamburger and kochin 8 supported the view that past increases in money lead to increases in equity prices the implication of this work was that investors could earn above normal proflts by using a trading strategy based on the observed behavior of the money stock this contradicts the efficient markets hypothesis which asserts that current asset prices reflect all available information so that no such trading strategy can exist subsequent research by cooper 3 pesando 17 rozeff 21 and rogalski and vinso 19 has shown that past money changes do not contain predictive information on stock prices upholding the efficient markets view this paper investigates whether the response of common stock prices to weekly money announcements is consistent with the efflcient markets hypothesis unlike the above research therefore the focus is on the very short run response of stock prices to both anticipated and unanticipated announced changes in money recent work by berkman 1 grossman 7 urich and wachtel 25 and roley 20 indicates that short term interest rates respond only to the unexpected component of the announcement with short term rates rising when the announced change in money exceeds the expected change berkman also examined the reaction of stock prices finding that an unanticipated increase in the money supply depressed share prices lynge 13 found that positive money announcements lowered stock prices but since he did not distinguish expected from unexpected money growth his results do not bear directly on the efficient markets issue in investigating the response of stock prices to weekly money announcements survey data on market participants forecasts of the announced weekly change

regulatory risk under optimal monopoly regulation i develop a tractable framework to study regulatory risk under optimal monopoly regulation it captures increasing regulatory risk as mean preserving spreads of two regulatory variables weights attached to profits and costs of public funds the regulator s reaction to regulatory risk depends on the curvature of demand for convex concave demand it yields a positive negative information rent effect that benefits hurts the firm consumers dislike a positive information rent effect but their risk preferences also depend on their tendency to dislike fluctuations in consumption risk preference of benevolent regulators may contradict both those of the firm and consumers

financial differences and business cycle co movements in a currency area i propose a unitary framework to interpret the links between differences in financial structures and the monetary policy regimes on the one hand and the correlation of business cycles on the other using a two country micro founded model with financial frictions i predict that a greater financial diversity should reduce cyclical correlation under a given monetary regime and that moving from independent monetary policies to a hard peg or a common currency should increase it for any given degree of financial diversity i use the recent experience of emu to test these ideas and show that my model explains reasonably well the broad patterns of business cycle correlation observed recently among the main euro area countries

agricultural runoff as a nonpoint externality a theoretical development the purpose of this paper is to develop and explore a theory dealing with an important facet of agricultural runoff problems agricultural runoff is a nonpoint externality with notable implications for both research and policy a nonpoint externality exists whenever the externality contributions of individual economic agents cannot be practically measured by direct monitoring without monitoring regulations on emissions cannot be enforced and charges or subsidies cannot be assessed thus policies which are usually suggested for pollution abatement are not available there is great need for a theoretical base that can adequately capture these facts such a theory yields some important implications even before specific empirical applications the economic problem of agricultural runoff can be separated into three distinct categories first the sediment nutrients and chemicals removed by runoff represent a loss of resources to the individual farmer these costs are borne privately by farmers second if the discount rate of the individual farmer is greater than the social discount rate or if the farmer has a planning horizon which is shorter than society s the farmer will mine the soil resource at a rate which is more depletive than is socially optimal this is a temporal externality a third category involves the conservation of mass physical resources lost by the individual farm must appear elsewhere in the environment in sufficient quantities these resources are pollutants since water is the primary transport media for these resources it is water that is polluted by soil nutrients and agricultural chemicals this spatial externality has been the focus of much research here we intend to develop a theory for these issues to employ it to suggest a revised research methodology and to provide some important conclusions about alternative runoff policies only two of the three categories of agricultural runoff problems involve externalities and only the spatial externality is considered here

monetary policy through the credit cost channel italy and germany pre and post emu we present an empirical analysis of the credit cost channel ccc of monetary policy transmission this channel combines bank credit supply and interest rates on loans as a cost to firms the thrust of the ccc is that it makes both aggregate demand and aggregate supply dependent on monetary policy as a consequence 1 credit market conditions e g risk spreads are important sources and indicators of macroeconomic shocks 2 the real effects of monetary policy are larger and persistent we have applied the cointegrated vector autoregression cvar econometric methodology to italy and germany in the hard ems period and in the european monetary union emu period the short run and long run effects of the ccc are detectable for both countries in both periods simulation of the estimated model also confirms that inflation targeting by way of inter bank rate control stabilizes inflation through structural shifts of the stochastic equilibrium paths of both inflation and the output

antitrust enforcement under asymmetric information optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting the antitrust authority does not know cartel costs and so cannot distinguish between a high cost competitive industry and a low cost cartel the problem differs from principal agent models since firms can choose competitive or collusive behavior with costly enforcement the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price collusive firms moderate markups to reduce the risk of being prosecuted copyright 1989 by royal economic society

avoidance screening and optimum enforcement a standard assumption in the economic literature on crime and punishment is that fines are costless transfers given this assumption several economists have argued that it is optimal to set the fine for engaging in a proscribed activity as high as possible the argument is a simple one raising the probability of a fine is costly since it requires devoting more resources to monitoring and apprehending individuals in contrast raising the magnitude of a fine is costless therefore the least costly way to achieve a given expected fine is to set the fine as high as possible presumably equal to the offender s wealth and adjust its probability so that the desired expected fine is obtained

regulatory decision errors legal uncertainty and welfare a general treatment abstract we provide a general treatment of the implications for welfare of various sources of legal uncertainty facing agents about the decisions made by a regulatory authority we distinguish the legal uncertainty from the decision errors made by the authority while an increase in decision errors will always reduce welfare for any given level of decision errors information structures involving more legal uncertainty can improve welfare this holds always when sanctions are set at their optimal level this transforms radically one s perception about the costs of legal uncertainty we also provide general proofs for two results previously established under restrictive assumptions

the regulation of non point source pollution under imperfect and asymmetric information abstract this paper develops a bayesian framework for discussing the role of information in the design of non point source pollution control mechanisms an ambient concentration tax is examined allowing for spatial transport among multiple zones imposition of the tax requires costly measurement of concentrations in selected zones and the selection of zones for measurement must be undertaken without perfect information regarding several parameters of the problem potentially crucial information issues discussed include a the impact of asymmetric priors regarding fate and transport b the cost of measuring ambient concentration and c the optimal acquisition of information regarding fate and transport

interest rate pass through in the emu new evidence from nonlinear cointegration techniques for fully harmonized data this study puts the monetary transmission process in the eurozone between 2003 and 2011 under closer scrutiny for this purpose we investigate the interest rate pass through from money market to various loan rates for up to twelve countries of the european monetary union applying different cointegration techniques we first test for a long run relationship between loan rates and the euro overnight index average eonia based on these findings we allow for different nonlinear patterns for short run dynamics of loan rates our investigation contributes to the literature in mainly two ways on the one hand we use fully harmonized data stemming from the ecb s mfi interest rate statistics in addition we consider smooth transition models as an extension of conventional threshold models our results point to considerable differences in the size of the pass through with respect to either different loan rates or countries in the majority of cases the pass through is incomplete and the dynamics of loans adjustment are different for reductions and hikes of money market rates

environmental policy under imperfect information incentives and moral hazard abstract when net emissions of individual polluters cannot be efficiently monitored then emissions charges controls on emissions levels or subsidies for emissions reduction are not effective as environmental policy instruments this paper proposes instruments that can be applied in such limited information situations these instruments take the form of contracts between a pollution control agency and individual polluters the contracts include a combination of fines and subsidies that induces dischargers to follow optimal environmental policies in the absence of individual monitoring

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

interest rate pass through since the euro area crisis abstract the financial crisis has been characterised by fragmentation in the transmission of monetary policy as reflected in the high dispersion in interest rates on bank loans to euro area firms heterogeneity in interest rate pricing also emerged within countries suggesting that macroeconomic differences were not the only driver of dispersion using individual bank data for twelve euro area countries covering almost a decade since the start of the crisis we identify the balance sheet characteristics that contributed to this fragmentation and document the share of the deviation in interest rates from policy rates that is accounted for by each characteristic interest rate pass through heterogeneity is estimated using an error correction framework that accounts for macroeconomic variation and market structure and includes standard bank characteristics such as size capital and liquidity as well as variables that capture banks funding access risk and asset quality results show incomplete pass through of changes in money market rates targeted by the central bank to firms lending rates sovereign bond yields are shown to affect the cost of finance for firms particularly in stressed countries and market concentration is associated with smaller reductions in lending rates with regard to bank characteristics asset impairment leads to a significant decrease in pass though bank size as a proxy for market power and reliance on central bank funding affect pass through for smaller loans while capital is more significant for larger loans

ambient taxes when polluters have multiple choices economic research on environmental policy design has largely been concerned with the merits of emissions based economic incentives e g emissions charges emissions reduction subsidies transferable discharge permits ambient based tax subsidy schemes have drawn considerable interest in nonpoint pollution literature as alternatives to emissions based instruments expanding especially on segerson s seminal article this article examines the optimal design and budget balancing properties of ambient tax subsidy schemes under more realistic assumptions about the dimensions of firms choice sets than prior research

forecasting ecb monetary policy accuracy is a matter of geography abstract monetary policy in the euro area is conducted within a multi country multi cultural and multi lingual context how does this heterogeneity affect the ability of economic agents to understand and to anticipate monetary policy by the european central bank ecb using a database of surveys of professional ecb policy forecasters in 24 countries we find remarkable differences in forecast accuracy and show that these have important repercussions on market behaviour explaining the differences in forecast accuracy we provide evidence that they are partly related to geography and clustering around informational hubs as well as to country specific economic conditions in large part this heterogeneity can be traced to differences in forecasting models

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

optimal law enforcement with sophisticated and naive offenders abstract research in criminology has shown that the perceived risk of apprehension often differs substantially from the true level to incorporate this insight we extend the standard economic model of law enforcement becker 1968 by considering two types of offenders sophisticates and naives sophisticates always fully take the actual enforcement effort into account while naives do so only when the effort is revealed by the authority otherwise naives rely on their fixed perceptions when the share of naives is high a welfare maximizing authority chooses a low enforcement effort which is over estimated by the naives otherwise it chooses a high effort which is then revealed to all potential offenders in three empirically relevant extensions we allow for lower efficacy of the effort due to avoidance activities endogenous fines and heterogeneity with respect to naives perceptions

price setting and inflation persistence did emu matter surprisingly it did not or at least not directly using micro data on consumer prices and sectoral inflation rates from 6 euro area countries spanning several years before and after the introduction of the euro we look at whether emu has altered the behaviour of retail price setting and or inflation dynamics we find no evidence that anything has changed around 1999 if anything persistence may have slightly increased at the end of 2001 and in the beginning of 2002 period surrounding the euro cash changeover retail price adjustment frequencies both up and down increased substantially while the magnitude of the price adjustment also both up and down was smaller than otherwise however both settled quickly back to the earlier patterns on the contrary we do find evidence of a decline in the persistence of the inflation process in the mid 1990s this could be due to a structural change in private inflationary expectations due at least in part to policies linked to the preparation of emu however this interpretation is weakened by the fact that a similar decline occurred also in the us

measuring the marginal cost of nonuniform environmental regulations a method is presented for measuring the marginal welfare cost of environmental regulations affecting agriculture the method incorporates output market effects and recognizes diversity in production conditions among crops regions and seasons an important advantage of the method is that only regional outputs and changes in regional production costs are needed to calculate deadweight loss thus simplifying the measurement of welfare changes this feature of the model is significant since the complexity and substantial data requirements of most existing impact models cause many environmental regulations to be enacted with inadequate analysis of their economic impacts the method also disaggregates welfare impacts by crop place and time thus encouraging the implementation of nonuniform interventions that achieve a given level of environmental quality more efficiently than uniform policies

research issues in nonpoint pollution control research on nonpoint pollution control instruments has focused primarily on incentives applied either to production inputs that affect nonpoint pollution or to ambient pollution concentrations both approaches may in theory yield an efficient solution however input based incentives will generally have to be second best to make implementation practical design issues include which inputs to monitor and the rates to apply to them the limited research indicates that second best input based incentives can be effective in adjusting input use in environmentally desirable ways alternatively ambient based incentives have theoretical appeal because efficient policy design appears to be less complex than for input based incentives these incentives have no track record nor close analogues that demonstrate potential effectiveness however research on how households and firms might react in response to ambient based incentives is needed before these instruments can be seriously considered

the stability of short term interest rates pass through in the euro area during the financial market and sovereign debt crises we analyse the dynamics of the pass through of banks marginal cost to bank lending rates over the 2008 crisis and the euro area sovereign debt crisis in france germany greece italy portugal and spain we measure banks marginal cost by their rate on new deposits contrary to the literature that focuses on money market rates this allows us to account for banks risks we focus on the interest rate on new short term loans granted to non financial corporations in these countries our analysis is based on an error correction approach that we extend to handle the time varying long run relationship between banks lending rates and banks marginal cost as well as stochastic volatility our application is based on a harmonised monthly database from january 2003 to october 2014 we estimate the model within a bayesian framework using markov chain monte carlo methods mcmc we reject the view that the transmission mechanism is permanent over time the long run relationship moved with the sovereign debt crises to a new one with a slower pass through and higher bank lending rates its developments are heterogeneous from one country to the other impediments to the transmission of monetary rates depend on the heterogeneity in banks marginal costs and therefore its risks we also find that rates to small firms increase compared to large firms in a few countries using a var model we show that overall the effect of a shock on the rate of new deposits on the unexpected variances of new loans has been less important since 2010 these results confirm the slowdown in the transmission mechanism

monetary transmission in the euro area early evidence monetary transmission evidence we examine the euro area monetary policy transmission process using post 1999 data with two main questions in mind has it changed after and because of economic and monetary union emu and if so is it becoming homogeneous across countries given the data limitations we concentrate on three components of the transmission mechanism the banking the interest rate and the asset market channels we find evidence that the transmission through banks has become more potent and homogeneous across countries on the financial market channels our evidence is somewhat weaker but suggestive the interest rate channel appears to have changed even before emu and now affects national economies in a broadly similar way the asset market channel proxied by the stock market effects of monetary policy also seems to work rather homogeneously across national markets no comparison with pre emu is available here a positive answer to both questions raised above represents in our view the best working hypothesis under current knowledge ignazio angeloni and michael ehrmann

imperfect competition law enforcement competition policy is a subject of often heated debate competition authorities seeking to prevent or battle anticompetitive acts in complex cases to the best of their abilities regularly find themselves advised by rival economic theories and disputed empirical analyses as a consequence there is a real possibility that they may occasionally err missing true violations of competition law or finding firms liable that actually had no other intentions than good competition in this paper possible consequences of such imperfect competition law enforcement on firm strategies are considered in a simple model of collusion it is found that the incidence of anti competitive behavior increases in both types of enforcement errors type ii errors decrease expected fines while type i errors encourage industries to collude precautionary when they face the risk of a false conviction hence fallible antitrust enforcement may stifle genuine competition thus stimulating the very behavior competition policy is meant to deter when enforcement errors are non negligible competition authorities run the risk of being over zealous in the sense that welfare is best served by an authority that is selective and conscientious in its targeting of alleged anticompetitive acts