measuring inflation expectations a survey data approach expectations of inflation can be important determinants of actual inflation because they influence the process of wage bargaining price setting speculative buying and financial investing decisions englander and stone 1989 a central bank given its primary objective of price stability therefore takes a natural interest in inflationary expectations of economic agents in fact as illustrated by the theoretical work of e g kydland and prescott 1977 and barro and gordon 1983 inflationary expectations of the public are an important factor determining the success of the central bank in achieving its policy goal measures of inflation expectations can be used for monetary policy purposes for example as information variables in the sense defiined by friedman 1993 or as intermediate targets in the so called direct inflation targeting strategy svensson 1996 fuhrer 1997

pooling forecasts in linear rational expectations models abstract estimating linear rational expectations models in a limited information setting requires replacing the expectations of future endogenous variables either with instrumented actual values or with forecast survey data applying the method of gottfries and persson empirical examinations of the information sets of economic agents quarterly journal of economics 103 251 259 i show how to augment these methods with actual future values of the endogenous variables to improve statistical efficiency the method is illustrated with an application to the us hybrid new keynesian phillips curve where traditional lagged instruments and the median forecast from the survey of professional forecasters both appear to miss significant information used by price setters so that forecast pooling with actual values improves the statistical fit to inflation

uncovering financial market expectations of inflation this paper seeks to uncover market expectations of inflation from the joint dynamics of nominal interest rates and observed inflation i postulate 1 the existence of a stable vector autoregression in unobserved variables and 2 efficient financial markets the estimation procedure requires no further structural assumptions the econometrician need not observe all the information used by agents in forming forecasts or all the variables that influence real interest rates i find no empirical evidence that economic recessions are correlated with inflation forecast errors however postwar recessions are associated with ex ante real interest rates that are twice the postwar average

the effect of business risk on corporate capital structure theory and evidence under corporate and personal taxation we demonstrate that the relation between optimal debt level and business risk is roughly u shaped this result follows from the fact that the tax liability is an option portfolio that is long in the corporate tax option and short in the personal tax option therefore the net effect of a change in business risk on the optimal debt level depends upon the relative magnitudes of the resultant marginal changes in the values of these two options results of empirical tests offer support for the predicted u shaped relationship

state and prospect of public choice a european view the victory of public choice may not yet have arrived and the share of european contributions may still be small it has nevertheless been argued that there is a great future in public choice three especially promising areas have been indicated by way of example the theory of economic policy politico economic models and international political economy

revenue maximising or revenue sacrificing government property tax in pakistan abstractthe idea that states seek to maximise their revenue collection has occupied a significant place in contemporary political economy analysis of taxation and has helped us understand the history of state formation it is however very much at variance with the daily experience of tax policy and practice governments are frequently revenue sacrificers they fail to use the functioning legitimate tax collection systems they have available to actually collect much revenue this paper details the case of property tax collection in pakistan and concludes that governments tend to maximise rule before they maximise revenue

can futures market data be used to understand the behavior of real interest rates this paper examines whether futures market data can be used to understand the behavior of real interest rates several ways of examining the data indicate that futures market data are not particularly informative about real interest rates not only does this evidence cast some doubt on results in previous research that make use of futures market data to draw inferences about real interest rates but it also indicates that future research on real interest rates may need to turn to a different line of attack understanding the behavior of real interest rates is a central issue in financial economics in previous research on this topic several approaches have been used to measure real interest rates in one approach real interest rates have been calculated by subtracting survey data on inflation expectations such as the livingston data from nominal interest rates the problem with survey based measures of real interest rates is that they are only as good as the survey measure of inflation expectations and there may be little incentive for the survey respondents to answer accurately an even more telling criticism of survey based measures often ignored in the literature is that the behavior of market expectations in driven by economic agents ai the margin who are eliminating unexploited profit opportunities market expectations are unlikely therefore to be well measured by the average expectations of survey respondents 2 because of doubts about survey based measures of real interest rates other

market shares financial constraints and pricing behaviour in the export market a structural dynamic model of price and quantity adjustment is estimated on time series data for exports and export prices two sources of dynamics are considered customer markets and preset prices as predicted by the customer market model the market share adjusts slowly after a change in the relative price and financial conditions affect prices prices are found to be sticky in the sense that they do not reflect the most recent information about costs and exchange rates a parsimoniously parameterized structural model explains about 90 of the variation in market share and the relative price

prices productivity and wage bargaining in open economies according to the standard union bargaining model unemployment benefits should have big effects on wages but product market prices and productivity should play no role in the wage bargain we formulate an alternative strategic bargaining model where labour and product market conditions together determine wages a wage equation is derived and estimated on aggregate data for four nordic countries wages are found to depend not only on unemployment and the replacement ratio but also on productivity international prices and exchange rates there is evidence of considerable nominal wage rigidity exchange rate changes have large and persistent effects on competitiveness

regulation financial buffer stocks and short run adjustment an economic case study of sweden 1970 82 regulation financial buffer stocks and short run adjustment an economic case study of sweden 1970 82

drift and breaks in labor productivity abstract we use endogenous break tests and the stock watson tvp mub methodology to investigate changes in the equilibrium rate of growth of labor productivity in the u s the eurozone the u k australia and japan since wwii results for the u s well capture the conventional wisdom of a golden era of high productivity growth the 1950s and 1960s a marked deceleration starting from the beginning of the 1970s and a strong growth resurgence starting from mid 1990s results for the eurozone point towards a deceleration since the early 1980s with the equilibrium rate of growth of output per hour falling to 0 9 in 2004 4

sources of variation in international real interest rates this paper analyses the effects of inflation on ex post real interest rates in an international framework a dynamic factor model is estimated in which real interest rates are influenced by real interest and inflation factors that are common to all the countries and by country specific factors we find that the source of domestic inflation is an important determinant of the effect of inflation on real interest rates a common inflation factor has a negative effect on ex post real interest rates lending support to a form of the mundell tobin effect in international real interest rates and that a country specific inflation factor tends to have a positive effect

are there rational bubbles in foreign exchange markets evidence from an alternative test abstract this paper employs the kalman filter technique to estimate and test for stochastic bubbles for exchange rates between the us dollar and the british pound the japanese yen and the deutsche mark i find no significant evidence of bubbles my results are in sharp contrast with previous findings on exchange rate bubble testing and cast some doubt on those claims that the dollar exchange rates were driven by speculative bubbles in the post bretton woods period

are expectations of inflation rational or is variation of the expected real interest rate unpredictable abstract the joint hypothesis developed and tested in this paper is that the nominal interest rate is a rational expectation of the real interest rate plus the inflation rate and that variation of the expected real interest rate is unpredictable on the basis of information used in the test this test is applied to quarterly data on three month united states treasury bills of 1954 to 1973 the information used in the tests includes besides past interest rates and inflation rates past growth rates of the source base the money supply and real gnp some of the tests allow for a positive marginal tax rate which changes the results little the hypothesis is generally consistent with the data which provides support for the proposition that predictable changes of the money supply do not affect expected real interest rates over periods as short as a quarter

oil abundance and violent political conflict a critical assessment abstract this paper addresses one of the empirical claims of the resource curse argument namely that oil abundance raises the probability of political violence i argue that the two main theoretical premises of the oil civil war link rent seeking and the rentier state model fail to provide a convincing argument as to why oil economies are more vulnerable to the onset of civil war i find that three often mentioned mechanisms as to why oil economies succumb to political violence not convincing that oil economies are poor economic performers that oil economies generate high corruption and that oil economies tend to produce authoritarian regimes i also examine the empirical evidence on the oil civil war link and conclude that the results are not robust i conclude with some policy implications

opting out of the social contract tax morale and evasion we examine the individual level determinants of tax morale in low capacity states specifically latin american countries where the social contract is often perceived as fractured we argue that in

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

state capacity in latin america state capacity is exceptionally low in latin america even when compared to other former colonies this paper analyzes four possible factors that could potentially explain this troubling feature political inequality economic inequality interstate conflict and civil war with the exception of external war these variables have a negative effect on state building in models where the accumulation of state capacity is analogous to investment under uncertainty these analytical predictions are then tested with cross country data paying special attention to latin america democracy s impact on state capacity is quite positive as is the effect of the frequency of external wars when data for the last century is used however in the data for the last half century external wars have little effect but the negative effects of internal wars and income inequality become highly significant the model explains why latin america has failed to develop its state despite the improvement in the various measures of democracy in fact both the theoretical model and the empirical evidence suggest that the effects of democracy are undermined in the presence of high economic inequality

vancouver s gasoline price wars an empirical exercise in uncovering supergame strategies this paper uses a unique data set to determine which dynamic model of tacit collusion best describes behaviour in a particular industry the area investigated is a region of the vancouver british columbia retail gasoline market players are service station managers who compete daily firms choose price in each period using strategies that depend on prices chosen in the previous period periodically unanticipated demand shocks precipitate price wars when shocks occur the firms in the market must determine the new demand conditions and adjust their strategies from an econometric point of view slopes of intertemporal reaction functions are latent variables the resulting system of equations with time varying parameters is estimated via the kalman filter different repeated game oligopoly models correspond to different transition matrices for the latent variables the models can thus be assessed in terms of their power to explain firm behaviour in this market

cost of capital to the hospital sector this paper provides estimates of the cost of equity and debt capital to for profit and non profit hospitals in the u s for the years 1972 83 the cost of equity is estimated using alternatively the capital asset pricing model and arbitrage pricing theory we find that the cost of equity capital using either model substantially exceeded anticipated inflation the cost of debt capital was much lower accounting for the corporate tax shield on debt and capital paybacks by cost based insurers lowered the net cost of capital to hospitals

uncovering financial markets beliefs about inflation targets this paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long term interest rates and inflation when the latter is subject to a targeting policy by the central bank in an empirical application to the canadian inflation target zone results indicate that financial markets perceive the band to be of approximately the same width as announced but asymmetrically distributed around the official target this finding suggests that in practice the monetary authority might attach different weights to positive and negative inflation deviations from the target copyright 2000 john wiley sons ltd

real interest rates and inflation an ex ante empirical analysis we develop a method of measuring ex ante real interest rates using prices of index and nominal bonds employing this method and newly available data we directly test the fisher hypothesis that the real rate of interest is independent of inflation expectations we find a negative correlation between ex ante real interest rates and expected inflation this contradicts the fisher hypothesis but is consistent with the theories of mundell and tobin darby and feldstein and stulz we also find that nominal interest rates include an inflation risk premium that is positively related to a proxy for inflation uncertainty

an examination of the relationship between australian industry equity returns and expected inflation this paper analyses the relationship between inflation and equity returns in australia over the period january 1974 to march 1996 analysis is based on monthly and quarterly data using value weighted equity indices at both the aggregate market and industry level three price indices the consumer price index cpi quarterly and the manufactured materials used index mmu and the manufacturing articles produced index map both monthly and quarterly are used to measure inflation results provide little evidence of the statistically significant negative relationship observed in the us for the full study period analysis is also conducted on three subperiods monetary targeting july 1976 january 1985 checklist approach february 1985 december 1989 and anti inflation january 1990 march 1996 at the market level the anti inflation subperiod does provide some evidence of a negative relationship between inflation and equity returns though statistical significance is not apparent with quarterly tim

internal wars taxation and state building this article addresses the question of whether and how internal wars can lead to state building i offer a new conceptual framework for understanding the varied effects of internal conflict on stat

oligarchic land ownership entrepreneurship and economic development abstract this paper develops a theory in which oligarchic ownership of land or other natural resources may impede entrepreneurship in the manufacturing sector and may thereby retard structural change and economic development we show that due to oligopsony power of owners in the agricultural labor market higher ownership concentration depresses entrepreneurial investments by landless credit constrained households whose investment possibilities depend on the income earned in the primary sector we discuss historical evidence from latin america india taiwan and south korea which supports our theory

schumpeter and public choice part i precursor to public choice what schumpeter might have done had he lived say another twenty years cannot be known whether he might have continued the line of thought initiated in capitalism socialism and democracy or returned to pure economics cannot be ascertained likewise whether he would have shown interest in and how he might have responded to modern public choice is unknowable still it does seem possible to develop logical implications of his theories that is what i propose to do one other preliminary point needs emphasis the fact that no schumpeterian school of public choice has been initiated by followers is not without importance and requires an explanation that a very distinctive public choice has been developed by others only one of whom downs has indicated any schumpeterian influence is perhaps of greater significance schumpeter is difficult to categorize for he was not only a methodological deviant within the austrian school of economics but a deviant as well from their general normative strictures about capitalism socialism and democracy in any event a schumpeterian public choice would be distinctive and likely to combine highly disparate themes methods and his usual fascinating paradoxes i begin by characterizing those features of modern public choice that would either be downplayed or rejected and then attempt a sketch of the positive content of a schumpeterian public choice

blood and debt war and taxation in nineteenth century latin america using data from 11 latin american countries this article challenges the universality of the positive relationship between war and state making availability of external resources state organizati

paying for war and building states the coalitional politics of debt servicing and tax institutions many scholars believe that intense warfare propelled state formation in early modern europe because rulers built tax institutions to pay for wars scholars likewise cite milder geopolitical pressures to explain the lackluster state building in the developing world the authors analyze episodes of ferocious warfare in and beyond europe and find that despite similar fiscal strains not all governments built strong tax institutions to service wartime debt when net creditors in a country s credit market were part of the ruling political coalition they pressed governments to diversify taxes and strengthen fiscal institutions to ensure debt service but when net debtors held political sway governments were indifferent to debt servicing and fiscal invigoration coalitional politics can help to explain why mounting debt service obligations led to fiscal institution building in some cases but not others the analysis highlights how the private economic interests of ruling coalition members can affect state building