intratemporal substitution and government spending in this paper we examine the idea that a general model of consumption should allow for the direct effect of government expenditures in a two good permanent income model we show given an assumed preference specification that there is a cointegration restriction implied by an intraperiod first order condition of the model this restriction leads to a linear deterministic cointegration relation between government spending private consumption and their relative price that is supported by the data using this restriction to recover the preference parameters we estimate the intraperiod elasticity of substitution for both government and private consumption to be about 0 9 overall we find consistent empirical evidence in support of our model

limit order submission strategies under asymmetric information abstract this paper provides evidence that informed traders dominate the response of limit order submissions to shocks in a pure limit order market in the market we study informed traders are highly sensitive to spreads volatility momentum and depth by contrast uninformed traders are relatively insensitive to all these market conditions the dominance of the informed over limit order submissions is magnified by contrasts between them and the uninformed in the use of aggressively priced limit orders

consumption in developing countries tests for liquidity constraints and finite horizons adjustment programs in developing countries emphasize the importance of reducing fiscal deficits in order to improve aggregate saving and investment performance recent theoretical analyses associated with the ricardian equivalence proposition however suggest that changes in the level of public sector saving may be offset by a change in private saving the empirical relevance of this proposition depends among other things on the length of consumers horizons and on the extent to which households are liquidity constrained empirical tests of a consumption model for a sample of developing economies do not support the equivalence propositions owing to the prevalence of liquidity constraints copyright 1989 by mit press

price drift before u s macroeconomic news private information about public announcements we examine the price behavior of stock index and treasury futures around the release of u s macroeconomic announcements seven out of 18 market moving announcements show evidence of informed trading before the ocial release time for these announcements prices begin to drift in the correct direction about 30 minutes before the announcement time the pre announcement drift accounts on average for about half of the total price adjustment we consider two explanations for this preannouncement drift information leakage and superior forecasting release procedures that may aect information leakage vary greatly across organizations we nd some evidence of predictability of announcement surprises based on reprocessing of public information and on private data collection which might explain the drift

the effects of inflation news on high frequency stock returns previous research using daily returns finds conflicting evidence about the relationship between unanticipated inflation news and stock returns we explore the relationship by looking at the response in minutes and trades of size based stock portfolios to unexpected changes in the regularly scheduled producer price index and consumer price index announcements in particular we answer the following three questions 1 do stocks respond to inflation news 2 what is the speed and path of that response 3 is the response stable or does it vary with the economy the direction of the news or time

price formation and liquidity in the u s treasury market the response to public information the arrival of public information in the u s treasury market sets off a two stage adjustment process for prices trading volume and bid ask spreads in a brief first stage the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume demonstrating that price reactions to public information do not require trading the spread widens dramatically at announcement evidently driven by inventory control concerns in a prolonged second stage trading volume surges price volatility persists and spreads remain moderately wide as investors trade to reconcile residual differences in their private views how do financial markets form prices and provide liquidity when information arrives efforts to address this issue have led to an extensive microstructure literature on equity markets and to a lesser extent on the foreign exchange fx market relatively little work has focused on the u s treasury market however in spite of its importance in its own right and the advantages it offers as an alternative testing ground for microstructure hypotheses

input and output inventories abstract this paper presents a new stage of fabrication inventory model with delivery usage and stocks of input materials that distinguishes between gross production and value added it extends the linear quadratic model of output inventories by adding the joint determination of input inventories empirically input inventories are more important than output inventories maximum likelihood estimation of the decision rules yields correctly signed and significant parameter estimates using data for nondurable and durable goods industries but the overidentifying restrictions of the model are rejected the value added specification dominates because adjustment costs on materials usage are critical to fitting the data

limit order revisions abstract this paper empirically examines limit order revisions and cancellations which contribute to a significant portion of the order activity in many order driven markets we document that limit orders are more likely to be revised or cancelled if they are large and near the bid ask quote we show that order revisions generate net economic benefits to traders our evidence shows strong links between these activities and limit order submission risk using bid ask spread volatility and post event return as proxies we also find that these activities are less intense when the opportunity cost to monitor a stock is high such as during lunch hours or when stock volume relative to the entire market is low

rent seeking by low latency traders evidence from trading on macroeconomic announcements prices of the highly liquid s p 500 exchange traded fund spy and the e mini future es respond to macroeconomic announcement surprises within five milliseconds with trading intensity increasing over 100 fold following the news release however profits from trading quickly are relatively small roughly 19 000 50 000 per event for spy es although the speed of information incorporation has increased in recent years profits have not order flow has become less informative consistent with prices responding directly to news rather than indirectly through trading our evidence indicates that low latency liquidity demanders do not benefit materially from short term monopolistic access to information

the effect of macroeconomic news on stock returns new evidence from newspaper coverage abstract previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns this is in part attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments in this paper we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns since newspaper stories provide an interpretation of the statistical releases we choose newspaper stories as our measure of news our findings indicate that news about gdp and unemployment does affect stock returns

output effects of government purchases the theoretical analysis focuses on the distinction between temporary and permanent movements in government purchases under plausible conditions the temporary case involves an output response that is positive less than one to one with the change in government purchases and larger than that generated by an equal sized but permanent shift in purchase the equilibrium real rate of return rise in the temporary case but changes little in the permanent one defense purchases are divided empirically into permanent and temporary components by considering the role of temporary wars no temporary shifts in nondefense purchases were isolated empirical results verify an expansionary output effect for temporary purchases that exceeds that of permanent purchases the results for some other expectational hypotheses are found to be generally supportive of the theory

the permanent income hypothesis estimation and testing by instrumental variables the permanent income hypothesis with rational expectation is restated estimated and tested by an instrumental variables technique on the postwar u s aggregate time series data the hypothesis is accepted on a consumption series which includes service flows from consumer durables if the consumption series is the one in the national income and product accounts the hypothesis is decisively rejected an explanation is suggested to reconcile the conflicting test results

stock prices and economic news this paper examines the daily response of stock prices to announcements about the money supply inflation real economic activity and the discountrate except for the discount rate survey data on market participants expectations of these announcements are used to identify the unexpected component of the announcements in order to test the efficient markets hypothesis that only the unexpected part of any announcement the surprise moves stock prices the empirical results support this hypothesis and indicate further that surprises related to monetary policy significantly affect stock prices there is only limited evidence of an impact from inflation surprises and no evidence of an impact from real activity surprises on the announcement days there is also only weak evidence of stock price responses to surprises beyond the announcement day this abstract was borrowed from another version of this item

the behaviour of energy related volatility indices around scheduled news announcements implications for variance swap investments abstract this paper investigates the effect of scheduled news announcements on two energy related volatility indices calculated by the chicago board of options exchange these volatility indices are the crude oil volatility index ovx and the energy sector volatility index vxxle which measure the market s expectation of 30 day volatility of crude oil prices and energy sector returns respectively we find that energy related volatility indices tend to fall following several us macroeconomic news releases and opec meetings put differently these news releases resolve investors uncertainty about the future development of energy related markets our results also suggest that macroeconomic releases and oil related events do not seem to exert significantly different impacts on energy market uncertainty we further document that the observed announcement day patterns cannot be exploited to generate significant returns using variance swaps once we incorporate transaction costs our findings are relevant because there are currently no other volatility derivatives traded in exchange markets such as options or futures that offer investors pure exposure to energy related volatility alone as variance swaps do

response of hourly stock prices and trading volume to economic news this paper examines hourly stock returns and trading volume response to announcements about the money supply consumer price index cpi producer price index industrial production and the unemployment rate the empirical results indicate that surprises in announcements about money supply and cpi are significantly associated with stock price changes the announcements of the other three variables do not affect stock prices significantly trading volume is not affected by any of the five economic variable announcements indicating that market participants do not differ substanti ally in the interpretations of the effects of announcements the spee d of adjustment analysis indicates that the effect of information on stock prices is reflected in a short period of one hour or so copyright 1988 by the university of chicago

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

global behaviour of a system with imperfect private public substitutability abstract empirical findings reveal that the relationship between private and public consumption generically differs from country to country it is substitutable for some while it is complementary for others the present paper incorporates this regularity into a simple growth model with public goods which affect utility and production the model casts off the standard assumption of socially constant returns to scale and as a result it generates many interesting dynamic features which do not arise with constant returns when the system displays increasing returns the dynamic path may diverge from an interior equilibrium in expanding oscillations suggesting that self fulfilling expectations could play an essential role with decreasing returns the interior equilibrium becomes a saddle point interestingly it turns out that the substitutability versus complementarity distinction does make a difference in affecting the stationary state and its transitional dynamics

private and government consumption with liquidity constraints abstract economic theory predicts that liquidity constraints and substitutability or complementarity between private and government consumption result in excess sensitivity of private consumption to income and government consumption respectively using annual data we estimate these excess sensitivity parameters for each of 54 countries and show that they not only have sensible values but are also correlated with several variables in ways consistent with economic theory our findings imply that the degree of substitutability between government services and private consumption depends negatively on the fraction of government spending that goes to national defense we also find that liquidity constraints typically exist and they are affected positively by output variability and negatively by the saving rate

fiscal policy and private consumption instrumental variables tests of the consolidated approach since barro s 1974 restatement of the debt neutrality proposition economists have directed considerable research toward determining whether fiscal policy can affect aggregate demand most of the debate both theoretical and empirical has focused on the net wealth content of privately held government debt although existing research has hardly provided a definitive resolution to this debate see for example blinder and deaton 1985 bernheim 1987 barro 1989 recent efforts feldstein 1982 kormendi 1983 aschauer 1985 leiderman and razin 1988 have followed bailey 1971 and broadened the scope of the investigation to include the possibility that government expenditures substitute for private consumption expenditures in doing so feldstein kormendi and aschauer have shown that fiscal neutrality implies certain restrictions on private consumption behavior the first of these restrictions is what feldstein 1982 calls ex ante crowding out for complete ex ante crowding out government spending on goods and services must substitute dollar for dollar for private spending consequently an increase in government expenditures on consumption goods should lead to an equivalent decrease in private consumption expenditures a second restriction is that government finance decisions should not affect private consumption barro 1974 has derived conditions under which this result will obtain essentially maximizing consumers are assumed to be rational and forward looking accurately foreseeing future taxes implied by

algorithmic quoting trading and market quality in agricultural commodity futures markets this paper investigates the effect of algorithmic trading activity as measured by quoting on the corn soybean and live cattle commodity futures market quality using the cme s limit order book

are consumption and government expenditures substitutes or complements morishima elasticity estimates from the fourier flexible form 1 introduction macroeconomists paid relatively little attention to the economic effects of government expenditures and to alternative methods of financing those expenditures until barro 1974 1979 1981 challenged conventional views on the economic impact of government activity much of the literature stimulated by these studies addressed the effects of alternative financing methods for a given path of government expenditures but barro 1981 also stressed the fact that government expenditures can provide direct welfare to economic agents and that variations in the level of government expenditures may have an impact on the consumption decisions of households as a result many studies estimate the extent to which economic agents treat government expenditures as substitutes to or complements with private consumption expenditures e g kormendi 1983 aschauer 1985 graham and himarios 1991 ni 1995 the degree of substitution or complementarity between private consumption and government expenditures is of crucial importance in assessing the impact of fiscal policies on economic welfare thus it is important to establish the extent to which federal expenditures and private consumption are substitutes or complements as a guide to the design of fiscal policies there is much disagreement about the extent to which consumption and government expenditures are substitutes or complements in use for economic agents 1 studies differ in their details so it is difficult to know what might account for such diverse results but it seems fair to say that the relationship between government expenditures and consumption is largely an open question the diversity of the results however may be a consequence of a number of restrictive assumptions that have been used in various studies many of these assumptions appear hard to justify a priori studies typically estimate the parameters of an equation containing private consumption and government expenditures often assuming that the relevant choice variable for the representative household is an aggregate consumption measure given by the sum of nondurables and services consumption e g aschauer 1985 reid 1985 bean 1986 campbell and mankiw 1990 or the sum of nondurables services and the service flow from durable goods e g kormendi 1983 graham and himarios 1991 this implies that each component of private consumption expenditures is a perfect substitute for the household an assumption for which there is no compelling theoretical basis similarly government expenditures defense nondefense and state and local are typically aggregated e g feldstein 1982 aschauer 1985 reid 1985 graham 1993 with various studies excluding either federal or state and local expenditures just as for private consumption expenditures these aggregation assumptions should be tested rather t han simply imposed in applied work in addition although substitution elasticities are generally not constant in an optimizing framework they are often assumed to be constant in applications by using a single aggregate of consumption or a utility function that imposes a constant elasticity of substitution e g aschauer 1985 and ni 1995 finally none of the above mentioned studies computes elasticities of substitution in a manner consistent with microeconomic utility maximization principles 2 in this article we provide estimates of elasticities of substitution between consumption and government expenditures based on the demand systems approach that has been widely used in testing the neoclassical theory of household behavior see eg deaton and muellbauer 1980 and the survey of barnett et al 1992 this approach has a number of attractive features making it a substantial improvement over the applied studies available in the macroeconomics literature the estimates in this article are based on an optimizing framework where both government and consumption expenditures are treated as choice variables by the representative household

limit orders depth and volatility evidence from the stock exchange of hong kong we investigate the role of limit orders in the liquidity provision in a pure orderdriven market results show that market depth rises subsequent to an increase in transitory volatility and transitory volatility declines subsequent to an increase in market depth we also examine how transitory volatility affects the mix between limit orders and market orders when transitory volatility arises from the ask bid side investors will submit more limit sell buy orders than market sell buy orders this result is consistent with the existence of limit order traders who enter the market and place orders when liquidity is needed

modeling demand response based on utility function considering wind profit maximization in the day ahead market abstract in this paper behavior of electricity customers is modeled using utility function the utility function which measures customer s preferences is an important concept in microeconomics this function interprets how a rational consumer would make consumption decisions based on the utility function an economic demand model is developed as a function of customer risk aversion behavior to consider the effect of incentive payment on electricity consumption the proposed model is designed to maximize the individual customer s welfare under incentive based demand response dr programs then the dr is used to maximize wind power profit in the day ahead market to this end the wind power producer can either use real time balancing market or dr to cope with the energy submitted in the day ahead market and the delivered energy to determine the day ahead and balancing market prices a probabilistic two step market clearing optimization is solved considering uncertainties of wind power and behavior of electricity customers the results show that as risk aversion behavior increases more incentive payment is needed to convince the customer to reduce his her demand the numerical results demonstrate effectiveness of the proposed dr model in improving the wind generation profit in the day ahead market

post reform industrial productivity performance of china new evidence from the 1985 industrial census data i introduction during the last decade china implemented a series of economic reforms that followed what many observers agreed was a period of stagnation in industrial productivity 1 the first wave of chinese economic reforms 1978 79 following the economic opening to the west under the four modernizations began after the third plenum of the eleventh central committee of the communist party of china announced a new policy of economic modernization in december 1978 a major goal of the new policy was to improve productivity toward this end the party would 1 allow the formation of private enterprises 2 permit state owned and collective enterprises to retain a portion of their profits 3 devolve a greater degree of decision making to factory managers and drastically reduce the scope of planning 4 introduce material incentives such as bonuses to labor and 5 place increased reliance on markets for inter industry resource allocation it is important to note that at this time in the early 1980s real reform was limited to the agricultural sector as discussed in perkins 1988 the second wave of reforms occurred in 1983 84 with the announcement of sweeping changes for the urban industrial sector these reforms included four major measures 1 a reduction in the number of leadership positions in enterprises 2 a further expansion of enterprise managers authority 3 the substitution of an income tax for remission of profits to the state and 4 removal of the ceiling on bonuses naturally it is important to know whether or not these reforms improved chinese industrial productivity since the early 1980s both chinese and western economists have conducted many empirical studies on china s post reform economic performance however the results from these studies are far from conclusive for example the world bank 1983 1985 field 1984 yeh 1984 chen 1986 chen and sang 1986 pan 1986 and tidrick 1986 have reported that input accumulation accounts for nearly all of output increases in industry as a whole in the early 1980s in particular tidrick 1986 found that china s performance has been extremely disappointing total factor productivity in the state owned industrial sector declined at an annual rate ranging from 0 10 percent to 1 20 percent for the period 1978 83 in contrast more recent studies such as those by kuan et al 1988 and jefferson 1988 have found that china s post reform industrial productivity was significantly improved most notably kuan et al 1988 found that chinese industrial productivity in the state owned sector grew at an average annual rate ranging from 2 7 to 3 1 percent for 1980 84 and from 15 3 to 18 2 percent for 1984 85 this difference in the findings reported in the literature is striking and requires further investigation one explanation is that the various studies are based on different data sets time periods models and data construction methods for example tidrick 1986 used aggregate time series data for state owned industry for the period 1952 83 while kuan et al 1988 used aggregate time series data including only independent accounting units within the state owned industrial sector for the period 1953 85 perkins 1988 reviewed china s overall post reform economic performance using data at the national level he found that during 1976 85 total factor productivity in china grew at an annual rate of 3 79 percent accounting for over 40 percent of china s net material product he concluded that reform and productivity growth thus led the way to higher overall growth and that agriculture and the collectively organized small scale industrial enterprises play an important role in the accelerated productivity growth of the reform periods perkins however hastened to point out that his conclusion is based on impressionistic evidence and is in no sense definitive and suggested that disaggregated data on outputs and inputs by sector or individual industries are required to identify those sectors that accounted for most of the rise in productivity perkins 1988 628

customer and supplier driven externalities the purpose of this paper is to provide empirical evidence helpful for distinguishing different types of externalities we pursue this by extending the productionfunction framework of robert e hall 1990 and caballero and lyons 1990 1992 to exploit two key dimensions of the data disaggregate input output relationships and differences between estimates emphasizing time series versus cross sectional aspects of the data we obtain three main results first from the within estimates using annual data which emphasize the time series properties common across sectors we find a strong reduced form relationship between industry productivity and the activity level input growth of customers in sharp contrast supplier activity levels are insignificant the second result derives from between estimates which emphasize the cross sectional dimension of the data here we find the opposite is true there is a strong reduced form relationship between industry productivity and the activity level of suppliers but no relationship with customer activity levels we interpret the first two results as suggesting that over shorter horizons the linkage between an industry and its customers is pivotal in the transmission of external effects while in the long run external effects are mostly related to intermediate goods linkages the third result concerns the transition from short to long run we find that as the number of periods over which the variables are averaged is incrementally increased from one year toward the full sample period 27 years the significance of customers versus suppliers smoothly reverses itself the remainder of the paper is organized in four sections section i presents the core model and the econometric methods for disentangling the external effects section ii describes the data and estimation section iii presents the main results and our conclusions are presented in section iv

the consumption function under exponential utility abstract a recent article by cantor derived a closed form solution for the consumer optimization problem with exponential utility and normal income shocks this paper derives solutions without imposing the normality assumption and investigates the effect of risk in this more general setting

it and productivity in u s manufacturing do computer networks matter i introduction how computers affect productivity is a long standing research question many recent studies argue that information technology it particularly computers is a significant source of u s productivity the specific mechanism remains elusive detailed data on the use of computers and computer networks have been scarce this article uses new plant level data on computer networks collected by the u s census bureau to estimate the effect of computer networks on labor productivity across u s manufacturing plants the computer network use supplement cnus to the 1999 annual survey of manufactures asm focused on the use of computer networks rather than the presence of computers alone linking the cnus data to current and previous information for the same plants collected in the 1999 asm and the 1997 and 1992 census of manufactures cm allows us to examine the relationship between productivity and the use of computer networks our work differs from others in several important aspects first this is the first study linking the use of computer networks to labor productivity using data for approximately 30 000 plants representing the u s manufacturing sector most previous studies examining the link between productivity and computers or other it in the united states focus on the presence of computers using either data on the stock of computer capital or on current it or computer investment as proxies for the computer stock only one previous study mcguckin et al 1998 examined the link between productivity and how computers were used that study was limited to five u s two digit manufacturing industries covered in the 1988 and 1993 surveys of manufacturing technology smt collected by the u s census bureau and did not separate the use of computer networks from other uses of computers and advanced technologies second we extend the existing model relating it to productivity by including materials as a separate input our dependent variable is a gross output measure of labor productivity although gross output is an appropriate measure of the theoretical output particularly at the plant level most previous plant level studies for the united states use a value added measure and exclude materials as a factor input possibly making their results subject to omitted variable biases third we model the probability that a plant has a computer network as a function of its performance and conditions in prior periods this probability is of interest in its own right it also makes possible the fourth distinguishing feature of our work testing for possible endogeneity problems associated with the computer network variable if good plants are more likely to have computer networks we must account for these characteristics to get a more accurate estimate of the effect of networks our research has five principal findings first average labor productivity is higher in manufacturing plants with networks than in plants without networks second computer networks have a positive and significant effect on labor productivity after controlling for other important factors such as capital intensity and other plant characteristics third the choice of theoretical model has empirical consequences previous studies using value added models appear to overstate the effect of it on productivity by factors of two to three fourth plants with lower relative productivity in previous periods are more likely to have computer networks fifth computer networks have a positive and significant effect on labor productivity even after taking account of possible endogeneity of the computer network variable ii background computers play an important role in the strong economic performance of the u s economy according to many recent studies this role is particularly important during the surge of productivity growth in the late 1990s as discussed in oliner and sichel 2000 jorgenson and stiroh 2000 jorgenson 2001 stiroh 2001 and triplett and bosworth 2000

two fiscal policy puzzles revisited new evidence and an explanation abstract this paper examines two fiscal policy puzzles related to the effects of government spending shocks contrary to theoretical predictions recent empirical evidence suggests a crowding in of consumption and a depreciation of the real exchange rate after a government spending increase while several studies have been made to reconcile the conflicting results this paper provides new time series evidence and proposes an alternative explanation using the japanese data the empirical responses of consumption and the real exchange rate after government spending shocks are shown to be well replicated by an estimated medium scale open economy dynamic stochastic general equilibrium dsge model augmented with i edgeworth complementarity between private and government consumption and ii productive public capital furthermore sensitivity analysis suggests that the combination of edgeworth complementarity home bias and incomplete asset market allows the model to account for an immediate increase in consumption and for a hump shaped depreciation of the real exchange rate after a government consumption shock this result is potentially important in preventing the model from showing the consumption real exchange rate anomaly after the shock

government debt government spending and private sector behavior a current period tax reduction financed by issuing government debt shifts the timing of tax collection from the current period to the future if the future taxes implied by government debt are not fully perceived and discounted by the private sector there will be a net wealth effect that increases private sector consumption thus reducing capital accumulation and growth if on the other hand the implied future taxes are perceived and discounted by the private sector the current period tax reduction will be used to increase private saving to pay for the future taxes and government debt will be absorbed without any real effects on the economy the effects of government spending financed by current period taxation also depend upon private sector perceptions 2 if the benefits of government spending are ignored private sector consumption will decrease in accordance with the reduction in permanent disposable income to the extent that government spending is on consumption type goods that are perceived as substitutes for privately provided consumption goods there will be a relatively greater reduction in private sector consumption to the extent that government spending is on investment type goods yielding future goods and services that are perceived as substitutes for future privately provided consumption goods there will be a relatively smaller reduction in private sector consumption the standard approach to modeling private sector consumption saving behavior involves a rather asymmetric set of assumptions as to how the private sector perceives the various elements of government fiscal policy 3 current period taxes are assumed to be fully perceived but current period government spending is implicitly assumed to be completely ignored by the private sector in considering permanent personal disposable income the private sector is assumed to be forward looking in its assessment of income and taxation the stock of government debt is nevertheless included as part of the stock of private wealth the implicit assumption associate professor of economics graduate school of business university of chicago 1101 east 58th street chicago il 60637 i thank eugene fama levis kochin michael mussa paul evans and an anonymous referee for helpful comments i am particularly grateful to daniel benjamin for contributing many hours of discussion and laura lahaye who was a research assistant and valuable adviser on earlier drafts the theoretical debate on the burden of the debt has been long standing gerald o driscoll 1977 documents ricardo s nineteenth century position robert barro 1974 reopened the debate by introducing the fundamental issue of intergenerational transfers also discussed in merton miller and charles upton 1974 the empirical side of the debate was initiated by levis kochin s 1974 attempt to test for the effects of deficits on consumption and by martin feldstein s 1974 attempt to test for the effects of social security wealth on consumption other empirical contributions include jess yawitz and laurence meyer 1976 myself 1978 and j earnest tanner 1978 1979 with respect to the effects of government deficits and debt and barro 1978 michael darby 1979 and dean leimer and selig lesnoy 1982 with respect to social security wealth see also interesting recent papers by john seater 1982 who generates detailed tests of the effects of deficits and debt on consumption charles plosser 1982 who explores the effects of government spending and debt shocks on interest rates and feldstein 1982 who attempts tests similar to some in this paper see fn 29 2martin bailey s 1962 1971 development of the effects of government spending on private consumption and aggregate economic activity is the seminal contribution paul david and john scadding 1974 extend bailey s ideas and provide some supporting empirical evidence more recently willem buiter 1977 and myself 1978 developed models based on bailey s earlier work barro 1981 has an interesting paper on related issues see also david aschauer 1982 3the standard approach incorporates fiscal policy through the concept of personal disposable income and by including the stock of government debt as part of personal wealth see for example the empirical specification of albert ando and franco modigliani 1963 which has been the basis of most empirical consumption studies since and feldstein 1974 for one of the more influential papers based on the ando modigliani specification

how effective is fiscal policy in raising national saving while fiscal adjustment is commonly viewed as the cornerstone of macroeconomic stabilization the effectiveness of alternative fiscal instruments in raising national saving is still poorly understood this paper enters the debate by estimating a private consumption function that allows for two types of agents finite horizons and liquidity constraints and nests three different consumption hypotheses using a large panel data set that includes both industrial and developing countries we reject full ricardian equivalence we also find substantial differences between industrial and developing countries regarding both the extent of ricardian offsetting and the degree to which the government budget constraint is internalized

government spending and private consumption some international evidence this paper investigates the relationship between private consumption and publicly provided goods and services for a number of countries the empirical results show that in the aggregate private and government consumption are best described as complementary in the sense that an increase in one raises the marginal utility of the other the strength of this relationship is shown to be negatively affected by the government size these findings are robust across all specifications tried copyright 1994 by ohio state university press

government consumption and private consumption correlations abstract this paper examines whether the introduction of government consumption expenditure in a standard one good model of the international real business cycle is sufficient to reconcile the theory with the existing pattern of international consumption and output correlations it is shown that the model can account for existing international correlations only under specific assumptions about the size of effect of government expenditure on agents utility or the variability of government expenditure shocks crucial parameters are identified and the sensitivity of the results discussed 1998 elsevier science ltd all rights reserved

ricardian equivalence under imperfect information abstract in the us aggregate private consumption changes are excessively sensitive not only to current and lagged changes in income but also to current and lagged changes in government expenditures i give a new theoretical interpretation to this observation i show that this excess sensitivity arises when consumers take into account the link between taxes and government expenditures i e when they are ricardian but lack exact information on the aggregate economy while the model provides a simultaneous explanation for both types of excess sensitivity the strong restrictions that it imposes on the data are not supported by the results of econometric estimation

walking on thin ice market quality around fomc announcements abstract this paper examines market quality for the e mini s p 500 futures around federal reserve announcements i document that the release of the federal open market committee fomc statement induces significantly higher than normal volatility and trading volume the bid ask spread is significantly higher in the minutes preceding the release but it returns to its normal level immediately after the release using order level data i show that market depth behind the best bid and ask quotes is much lower on event days hitting an intraday low immediately before the fomc release at values on average about 20 percent of the level observed in control days

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

sensitivity of consumption to income and to government purchases some specification and estimation issues the paper derives a nonlinear error correction model ecm for consumption and shows that existing models that are based on quadratic utility combine permanent income and current income consumption and nest or could nest the hypothesis of substitutability between private consumption and government purchases are special cases of the ecm the importance of some econometric issues that have not received proper attention in the literature is demonstrated by estimating the models using us aggregate quarterly data 1953 1 1992 4 the evidence suggests that the ecm produces more reliable estimates than do the existing restrictive models

trading breaks and asymmetric information the option markets abstract we find that weekend holiday and overnight trading breaks generate excessive perceived risk in the option markets presumably due to asymmetric information which in turn encourages uninformed option traders to postpone trading this perceived risk subsides after two days accompanied by an increase in the option trading volume and the underlying index s actual price volatility these results shed light on the informational role of index options and suggest that the theoretical models results regarding information processing and price discovery in the presence of private information are not limited to single stocks but also apply to the market as a whole

the consumption function and the precautionary demand for savings abstract under the assumptions of constant absolute risk aversion and serially correlated normally distributed income shocks an explicit solution to the consumer s intertemporal optimization problem is derived which parameterizes the precautionary demand for savings

intraday jumps and us macroeconomic news announcements this paper applies recent non parametric intraday jump detection procedures to investigate the presence and importance of intraday jumps in us futures markets more importantly the paper investigates the extent to which statistically significant intraday jumps are associated with us macroeconomic news announcements jumps are prevalent large and contribute heavily to total daily price variation approximately one third of jumps correspond to us macroeconomic news announcements with pure announcement effects causing large increases in the absolute sizes of jumps and the informational surprise of the announcement explaining large proportions of the jumps the statistical and economic significance of news related jumps is confirmed by results that show higher volatility persistence predictability of lower frequency returns larger effects on microstructure variables jump clustering and co jumps from these jumps versus non news related jumps although there are some interesting variations across asset classes

growth and public debt what are the relevant trade offs the interplay between growth and public debt is addressed considering a barro type 1 endogenous growth model where public spending is financed through taxes on income and public debt debt is assumed to be a fixed proportion of gdp which is used as a policy parameter by the government we first show that when debt is a large enough proportion of gdp two distinct bgps may co exist one being indeterminate therefore local and global indeterminacy may arise and self fulfilling expectations appear as a crucial ingredient to understand the impact of debt on growth and on macroeconomic fluctuations we then exhibit two types of important trade off associated with self fulfilling expectations first we show that the lowest bgp is always decreasing with respect to the ratio of debt gdp while the highest one is increasing as a result depending on the bgp selected by agents expectations the relationship between debt and growth is not always negative second we show that the highest bgp which provides the highest welfare is always locally indeterminate while the lowest is always locally determinate therefore depending on the expectations of agents when debt is increasing large fluctuations associated to self fulfilling believes may occur and be associated at the same time with welfare losses if there is a coordination on the low steady state finally a simple calibration exercise allows to provide an understanding of the recent experiences of many oecd countries

high frequency trading and end of day price dislocation abstract we show that the presence of high frequency trading hft has significantly mitigated the frequency and severity of end of day price dislocation the effect of hft is more pronounced on days when end of day price dislocation is more likely to be the result of market manipulation moreover the effect of hft is more pronounced than the role of trading rules surveillance enforcement and legal conditions in curtailing the frequency and severity of end of day price dislocation we show our findings are robust to different proxies of the start of hft by trade size cancellation of orders and co location

ultra fast activity and intraday market quality this paper studies the intraday relationship between ultra fast machine driven activity ufa and market quality in automated equity markets we find that higher ufa is associated with lower intraday market quality greater quoted and effective spreads and lower depth this effect is economically significant and robust to different specifications endogeneity tests and alternative measures of ufa our results hold after controlling for volatility periods of unusually high ufa a proxy for quote stuffing and periods where ufa is primarily driven by fleeting orders inside the spread a proxy for spoofing and competition between liquidity providers

speed algorithmic trading and market quality around macroeconomic news announcements this paper documents that speed is crucially important for high frequency trading strategies based on u s macroeconomic news releases using order level data on the highly liquid s p 500 etf traded on nasdaq from january 6 2009 to december 12 2011 we find that a delay of 300 ms or more significantly reduces returns of news based trading strategies this reduction is greater for high impact news and on days with high volatility in addition we assess the effect of algorithmic trading on market quality around macroeconomic news in the minute following a macroeconomic news arrival algorithmic activity increases trading volume and depth at the best quotes but also increases volatility and leads to a drop in overall depth quoted half spreads decrease increase when we measure algorithmic trading over the full top of the order book

raw materials profits and the productivity slowdown a complementary note raise ever since the problem was first discussed in the late 1970s there has been growing evidence that the sharp productivity slowdown of the industrial countries in the last decade must have been closely linked to the specific macroeconomic shocks of that period and could not be explained by gradual processes such as the slowing down of the technological frontier or the drying up of the sources of conventional factor supplies like land or immigrant labor in no case except possibly the united states is there evidence of a sharp slowdown in productivity growth in the 15 20 year period before 1973 a simple statistical test dates at least one major kink in the productivity growth of most countries in and around the period 1973 1975 the implied link with the sharp oil and raw material price shock of that time is further borne out by the fact that the total productivity slowdown across countries at least in manufacturing seems correlated with the relative raw material price acceleration in different countries though this is not the only direct explanatory factor bruno and sachs 1985 table 12 4 in an attempt to give a theoretical rationale for the link between the events of the 1970s and the sharp productivity slowdown several candidates offer themselves the first and most obvious one for gross output measures of productivity in a material intensive sector like manufacturing is the direct substitution in production of primary inputs against costly energy and raw materials other things being equal conventional doubledeflated base weighted measures of value added productivity will in such case impart a downward bias to the slowdown

monetary policy uncertainty and the market reaction to macroeconomic news abstract we examine whether monetary policy uncertainty influences the reaction of the equity treasury security foreign exchange and crude oil markets as well as medium term interest rates to u s macroeconomic announcements using intraday futures data we show that in the presence of higher policy uncertainty the response to macroeconomic news weakens in the stock and crude oil markets and strengthens in the treasury interest rate and foreign exchange markets in times of elevated monetary policy uncertainty macroeconomic announcements impact the financial and crude oil markets to a large extent through expectations of future monetary policy

an empirical analysis on the substitutability between private consumption and government purchases abstract this paper estimates substitutability of government purchases for private consumption using an optimal consumption model the utility function features several types of nonseparabilities the paper finds that gmm estimates are affected by the specification of nonseparability between private consumption and government purchases by the restriction of time separability and by the measurement of real interest rates

intratemporal substitution between private and government consumption the case of japan abstract in this paper we use japanese quarterly data to examine the relationship between private and government consumption we apply a two step estimation procedure and find additional evidence that the two types of consumption may be complements or unrelated

public goods merit goods and the relation between private and government consumption in this paper we investigate the relation between public and private consumption by constructing a general government spending data set by function for 12 european countries in particular we split government consumption into two categories the 1rst category public goods includes defence public order and justice the second category merit goods includes health education and other services that could have been provided privately equations from a relatively general permanent income model are estimated by gmm the estimates are fairly robust in showing that public goods substitute while merit goods complement private consumption however the relation between merit goods and private goods turns out to be stronger than that between public goods and private goods thus in the aggregate government and private consumption are complements c

consumption and capital market imperfections an international comparison the excess sensitivity of consumption to current income fluctuations is higher in countries where consumers borrow less low levels of consumer debt can result either from capital market imperfections or from a low demand for loans the evidence suggests that the former view is more appropriate than the latter and thus supports the hypothesis that excess sensitivity may be attributed to liquidity constraints rather than to other factors copyright 1989 by american economic association

fiscal policy and aggregate demand reply there appear to be two main conclusions of fred c graham s paper first he argues that the empirical evidence in aschauer 1985 supporting the permanent income hypothesis and a significant degree of substitutability between private consumption and government spending is specific to the sample period and to the limited nature of aschauer s unrestricted alternative model graham 1993 p 666 second after disaggregating government spending into various components he finds limited support for the hypothesis that federal nondefense spending as opposed to total federal state and local spending substitutes for private consumption the focus of my 1985 paper was on deriving a test of the ricardian equivalence theorem within an euler equation framework graham seems to have missed this point indeed there is no evidence in his paper to support the keynesian view that tax cuts stimulate private consumption and aggregate demand admittedly graham finds that changes in disposable income lead to changes in private consumption but this is not enough to support the standard keynesian analysis specifically it is necessary to determine whether tax changes per se induce changes in consumption spending consider a model similar to graham s equation 4 namely