utility rebates for energy star appliances are they effective we estimate the impact of utility cash rebates on the market share of energy star appliances by exploiting the variation in timing and size of rebates across us states we find that a dollar increase in the population weighted utility rebate raises the share of energy star qualified clothes washers by 0 4 but does not affect dishwasher and refrigerator shares using information on energy saved by an energy star appliance and assuming a redemption rate of 40 the cost per tonne of carbon saved is about 140 for the clothes washers rebate program the corresponding cost of a megawatt hour saved about 28 is lower than the estimated cost of building and operating an additional power plant and the average on peak spot price we conclude that the energy star clothes washers rebate program is on average a cost effective way for utilities to reduce electricity demand

cotrending and the stationarity of the real interest rate abstract this paper introduces the concept of cotrending to trend stationary series with structural breaks we apply it to nominal interest rates and inflation in order to test the long run fisher effect

stylized facts and regime changes are prices procyclical we investigate empirically the stability of the correlation between output growth and inflation using a technique that allows for changes in regime we look at recent quarterly data for the g4 and at historical data for the u s and u k we find evidence of changes both in means and variances in both sources of data in the quarterly data we find that the covariance between output growth and inflation is typically negative in the historical data we find as suggested in previous studies that inflation was procyclical especially in the inter war years but has been countercyclical in the post war period

testing for the absence of expected real profits from forward market speculation abstract this paper tests for the absence of expected real profits from forward market speculation it contrasts with the literature that has considered opportunities for expected nominal profit from speculation that is profits denominated in one of the currencies these studies assume money illusion on the part of market participants but this paper does not empirical results fail to find evidence of unexploited real profit opportunities

cross country performance of levy regime switching models for stock markets abstractthis article compares the performance of regime switching levy models across sixteen 16 international stock markets from a cross country perspective the empirical application is dedicated to the study of equity markets in the americas asia and europe the results are of interest for a financial audience in order to document the sensitivity of stock indexes to the intensity of jumps under changing economic regimes expansion or recession we pick up singularities in japan and malaysia compared to other countries and regions of the world

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

monetary policy regimes and the reduced form for interest rates this study investigates whether the recent poor performance and inst ability of reduced form interest rate equations can be accounted for by changes in monetary policy regimes the results imply that reduced form coefficients move by statistically significant and economically meaningful amounts in response to such policy parameter shifts both in sample and out of sample predictions from the models that allow f or the endogeneity of the money stock outperform those produced by the conventional specification copyright 1987 by ohio state university press

the federal reserve s new operating procedures a post mortem abstract although money stock targeting has been the strategic focus of federal reserve policy since the mid 1970 s operating policy the tactics whereby the longer run strategy is implemented over short term intervals has been changed by the federal reserve at least twice over this period a particularly dramatic change in operating policy was announced by the federal reserve in october 1979 this paper provides empirical evidence that settles questions about the nature of this change and suggests that the new operating procedures may have contributed to the heightened interest rate volatility experienced over the 1979 to 1982 period

domestic foreign interest rate differentials near unit roots and symmetric threshold models this paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric band tar model that allows for a heteroscedastic error process we find that the time series properties of monthly short term interest differentials over the period 1974 2005 between the united states and canada france germany japan and the united kingdom can be characterized by a symmetric band tar process which can explain its near unit root behavior reported in the extant literature results significantly reject a linear model in favor of the alternative hypothesis of a two regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands

inflation and real short term interest rates a kalman filter analysis of the term structure this paper applies the kalman filter technique to look at the relationship among real interest rates inflation and the term structure of interest rate under the expectations hypothesis using quarterly data from 1960 1 to 1991 1 for inflation three month nominal short term interest rates and long term yields with maturities from one to five years this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time varying premium and a random walk real interest rate in other words a reconciliation of the expectations hypothesis with the data is attained by assuming time varying term premium and non stationary real interest rate

technology invention and diffusion in residential energy consumption a stochastic frontier approach traditional large appliances absorb a large share of residential electricity consumption and represent important targets of energy policy strategies aimed at achieving energy security despite being characterized by rather mature technologies this group of appliances still offers large potential in terms of efficiency gains due to their pervasive diffusion in this paper we analyse the electricity consumption of a set of four traditional white goods in a panel of ten eu countries observed over 21 years 1990 2010 with the aim of disentangling the amount of technical efficiency from the overall energy saving the technical efficiency trend is modelled through a set of technology components representing both the invention and adoption process by the means of specific patents weighted by production and bilateral import flows which allows to overcome the rigid stochastic frontier framework in modelling the effect of technical change our results show that the derived energy demand and inefficiency trends are both related to changes in the amount of available technology embodied in energy efficient appliances the effect is significant both in its domestic and international components and suggests an active role of innovation and trade policies for achieving efficiency targets which directly impact the amount of electricity consumed by households

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

inflation targeting with nairu uncertainty and endogenous policy credibility abstract stochastic simulations are employed to compare performances of monetary policy rules in linear and nonlinear variants of a small macro model with nairu uncertainty under different assumptions about the way inflation expectations are formed cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenously to the monetary authorities track record in delivering low inflation it is shown that endogenous policy credibility strengthens the case for forward looking inflation forecast based rules relative to backward looking taylor rules

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

measuring business cycles a modern perspective in the first half of this century special attention was given to two features of the business cycle 1 the comovement of many individual economic series and 2 the different behavior of the economy during expansions and contractions both of these attributes were ignored in many subsequent business cycle models which were often linear representations of a single macroeconomic aggregate however recent theoretical and empirical research has revived interest in each attribute separately notably dynamic factor models have been used to obtain a single common factor from a set of macroeconomic variables and nonlinear models have been used to describe the regime switching nature of aggregate output we survey these two strands of research and then provide some suggestive empirical analysis in an effort to unite the two literatures and to assess their usefulness in a statistical characterization of business cycle dynamics

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

is energy efficiency capitalized into home prices evidence from three u s cities abstract we test for evidence that energy efficiency features are capitalized into home prices in three u s metropolitan areas using hedonic regressions and multiple matching procedures we find that energy star certification is associated with higher sales prices in two of the markets the research triangle region of north carolina and portland oregon we find that local green certifications in portland and in austin texas are also associated with higher prices and that the estimated price impacts are larger than those from energy star matching on observables proves to be important in some cases reducing the estimated impacts compared with models without matching we calculate the implied energy savings from the estimated premiums and find that in the research triangle market the energy star premiums approximately equal the savings that program is designed to achieve but in portland the premiums are slightly greater than the program s savings due to low energy costs in the region

likelihood ratio based tests for markov regime switching markov regime switching models are widely considered in economics and nance although there have been persistent interests see e g hansen 1992 garcia 1998 and cho and white 2007 the asymptotic distributions of likelihood ratio based tests have remained unknown this paper considers such tests and establishes their asymptotic distributions in the context of nonlinear models allowing for multiple switching parameters the analysis simultaneously addresses three di culties i some nuisance parameters are unidenti ed under the null hypothesis ii the null hypothesis yields a local optimum and iii the conditional regime probabilities follow stochastic processes that can only be represented recursively addressing these issues permits substantial power gains in empirically relevant situations besides obtaining the tests asymptotic distributions this paper also obtains four sets of results that can be of independent interest 1 a characterization of conditional regime probabilities and their high order derivatives with respect to the model s parameters 2 a high order approximation to the log likelihood ratio permitting multiple switching parameters 3 a re nement to the asymptotic distribution and 4 a uni ed algorithm for simulating the critical values for models that are linear under the null hypothesis the elements needed for the algorithm can all be computed analytically the above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria such as the bayesian information criterion bic can be sensitive to the hypothesis and the model s structure when applied to the us quarterly real gdp growth rates the methods suggest fairly strong evidence favoring the regime switching speci cation consistently over a range of sample periods

making the implicit explicit a look inside the implicit discount rate implicit discount rates idrs are employed in energy models to capture household investment decisions yet the factors behind the idr and their respective implications for policy making usually remain blurred and fractional the proposed comprehensive framework distinguishes three broad categories of factors underlying the idr for household adoption of energy efficient technologies eets preferences notably over time risk loss debt and the environment predictable ir rational behavior bounded rationality rational inattention behavioral biases and external barriers to energy efficiency existing empirical findings suggest that the factors underlying the idrs that differ across household characteristics and technologies should be accounted for in energy models furthermore the framework allows for a fresh look at the interplay of idrs and policies we argue that a simple observation of high idrs or observing correlations between idrs and socio economic characteristics does not provide guidance for policy making since the underlying sources cannot be identified instead we propose that some of the factors underlying the idr notably external barriers can be changed through directed policy interventions whereas other factors notably preferences and predictable ir rational behavior are innate and can only be taken into account through reactive policy interventions

designing incentive schemes for promoting energy efficient appliances a new methodology and a case study for spain the energy efficiency gap has been high on research and policy agendas for several decades incentive schemes such as subsidies taxes and bonus malus schemes are widely used to promote energy efficient appliances most research however considers instruments in isolation and only rarely in the context of political constraints on instrument use or for alternative policy goals this paper presents a methodology for the optimal design of incentive schemes based on the minimisation of dead weight loss for different policy goals and policy restrictions the use of the methodology is illustrated by designing optimal combinations of taxes and subsidies in spain for three types of appliance dishwashers refrigerators and washing machines the optimal policies are designed subject to different policy goals such as achieving a fixed reduction in emissions or a certain increased market share for efficient appliances and for policy constraints such as budget neutrality the methodology developed here can also be used to evaluate past and current incentive schemes

exploring the role of households hurdle rates and demand elasticities in meeting danish energy savings target abstract the eu s energy efficiency directive eed sets a binding target for energy savings in eu member states the eed further requires member states to perform ex ante evaluations of energy efficiency policies implemented to achieve these savings however ex ante evaluation of energy efficiency policies is difficult as it requires detailed modelling of end users investment and energy demand behaviour this paper details the danish interact modelling approach for ex ante evaluation of energy efficiency policies directed at residential heating interact integrates the energy system model times dk into a computable general equilibrium framework the paper explores the potential for meeting denmark s eed target through a policy induced increase in households investments in energy efficiency retrofits the paper considers the effect of energy efficiency policies on households investment behaviour by applying different levels of hurdle rates on households investments in energy efficiency retrofits the paper shows that reducing the hurdle rate from 25 to 4 could meet more than a third of danish energy saving requirements for the period 2021 2030 this result includes a direct rebound effect of 31 finally the paper demonstrates that reducing the hurdle below 10 has a substantial negative impact on households disposable income making such policy less viable from a policy perspective

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

sources of regime switching in short term interest rates for canada the purpose of this study is to identify sources of regime switching in short term interest rates for canada the choice of information variables is based on three well known hypotheses about interest rates the expectations hypothesis the fisher relationship and the condition for uncovered interest parity the empirical framework consists of an autoregressive distributive lag adl model in error correction form with information spreads and a markov regime switching estimation methodology the models choose interest rate regimes that are similar in many respects to those found for the usa the different regimes in canada are driven by movements in the monetary policy rate the us short term rate and the long term yield the monetary policy rate is found to trigger very large changes in the short term rate responding one for one in the high variance regime and slightly less in the more normal interest rate regime both the us short rate and long term yield are also found to trigger relatively large

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

international interest rate linkages and the exchange rate regime abstract return differentials between instruments denominated in canadian dollars and instruments denominated in american dollars are investigated the study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s both real and nominal return differentials are investigated the results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between canada and the united states models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change the major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials jel e42 e58 g15

high and volatile real interest rates where does the fed fit in the federal reserve s new procedures for the conduct of monetary policy introduced on october 6 1979 have been the subject not only of considerable academic and political interest but also of intense debate b friedman 1982 roley 1982 walsh 1982 1984 mascaro and meltzer 1983 among others the fed s new operating procedures generally are perceived to have resulted in abnormally high and volatile real interest rates and thus to have contributed to if not been totally responsible for the deepest recession in postwar history in this paper we address the following question was the advent of the increased volatility and level of the real rate of interest concurrent with the fed s october 1979 change in operating procedures that is was the real rate of interest high and more volatile immediately after the october 1979 change in policy procedures in which case we might infer a connection between the fed s change in policy procedures and the increased volatility and level of the real rate or did the real rate become high and more volatile some time following the policy change which might lead us to conclude that the increased volatility and the increased level of the real rate was connected to some other event s occurring after the october 1979 policy change

regime switching analysis for the impacts of exchange rate volatility on corporate values a taiwanese case a second moment regime switching model with not only a switching intercept and a switching slope but also a switching error variance is applied to examine the impacts of exchange rate volatility erv on corporate values cv for the 10 industries investigated in taiwan two different regimes categorized as strong impact and weak impact are identified the dominant power varies from one industry to another the wald statistics for the null of equality are ambiguous which show that if the markov switching ms model is plausible then the erv might not be one major factor but another factor that could switch the cv of taiwan s industries for the model s volatility influence the data of 8 out of 10 industries are shown to fit a two state model when the volatility is stimulated a two state first order ms model is appropriate for the goodness of fit analysis at the 10 significant level

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

efficiency effectiveness and implementation feasibility of energy efficiency rebates the renove plan in spain abstract state sponsored incentive policies frequently include subsidies or rebates for the purchase of more efficient appliances however more research is required into the effects of this tool in isolation a case in point is the so called renove plan in spain first the inefficiency losses dead weight losses associated with energy efficiency rebates must be taken into account such a policy may also encourage the large scale purchasing of energy efficient appliances which may finally result in an increase in electricity consumption rebound effect furthermore although a subsidy is more widely accepted than other tools from social and political viewpoints especially than taxes the fiscal consolidation challenge faced by many countries reduces the scope for environmental policy measures on the expenditure side of the budget and strengthens the need to use taxes to meet the agreed policy objectives this paper shows that the current application of the spanish renove plan with rebates on the dishwasher market for energy efficient appliances generates some welfare losses a rebound effect and a considerable deficit in public budgets the paper examines and assesses the effect of different combinations of taxes and rebates in the case of dishwashers in spain based on their performance in terms of economic efficiency environmental effectiveness and implementation feasibility

threshold nonlinear interest rates abstract this note shows that the federal funds rate is consistent with a nonlinear three regime threshold process in which temporary permanent innovations dominate in the two outer middle regimes this nonlinear process is consistent with a stabilizing force for interest rates

the political economy of truth in advertising regulation during the progressive era abstract this paper explores the origins and effects of truth in advertising regulation during the progressive era was advertising regulation adopted in response to rent seeking on the part of firms that sought to limit the availability of advertising as a competitive device or was advertising regulation desired because it furnished a mechanism through which firms could improve the credibility of advertising we find the available evidence to be more consistent with the latter hypothesis

acquisitions as exaptation the legacy of founding institutions in the u s commercial banking industry this study focuses on how founding institutions impact intraorganizational capabilities and how such imprints may have different external manifestations in subsequent historical eras we introduce the concept of exaptation to organizational theory identifying an important process whereby the historical origin of a capability differs from its current usefulness three founding conditions branching policy modernization and political culture influenced banks development of capabilities for managing dispersed branches and these capabilities subsequently led to variation in banks propensity to engage in acquisitions

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

monetary policy shifts and long term interest rates the pure expectations hypothesis peh serves as the benchmark model for the relationship between yields on bonds of different maturities when coupled with rational expectations however empirical renderings of the model fail miserably i explore the possibility that failure to account for changes in monetary policy regime explains much of the failure of the peh estimating changing monetary regimes in conjunction with the peh significantly improves its performance the predicted spread between the long and short rates is highly correlated with the actual spread the standard deviation of the theoretical spread is nearly identical to that of the actual spread

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

fiscal policy debt management and exchange rate credibility lessons from the recent italian experience abstract this paper explores some potential determinants of exchange rate credibility with reference to the italian experience of the 1990s the analysis relies on a nonlinear framework emphasizing shifts between credible and non credible states and assuming a significant degree of persistence in the above regimes almost all fiscal and debt management indicators display significant effects on devaluation expectations the main policy implications of the paper are that a restrictive fiscal stance a lengthening of average debt maturity and an increase in the share of foreign denominated debt are crucial to stabilize the lira exchange rate and to qualify italy in the former group of countries which will join emu

inference using qualitative and quantitative information with an application to monetary policy i introduction there has been a revival of interest in the use of qualitative information in macroeconomic analysis recently an impetus for this revival is the apparent inability of modern statistical analyses that use only quantitative information to resolve significant macroeconomic controversies for example the direction of causality between money and output continues to be the subject of considerable debate the use of qualitative information in macroeconomic analysis has a long tradition mitchell 1927 and burns and mitchell 1946 use the descriptions in thorp s 1926 annals and several statistical series to identify the unobserved phase of the business cycle 1 in their chapters on the federal reserve friedman and schwartz 1963 use diaries policy records and monetary aggregates to identify the stance of monetary policy the essence of this traditional method is that it is prudent to use both qualitative and quantitative information in the process of inference because of the potential gain in confidence associated with cross verification both types of information are needed to identify the asymmetries and nonlinearities that are characteristic of business cycles policy initiatives and other economic phenomena questions concerning the interpretation of results using qualitative information however have been raised 2 a source of unease is the difficulty of assessing a researcher s distillation of the information in descriptive materials no obvious metric for evaluating the coding of a qualitative variable exists i present an alternative framework for combining qualitative and quantitative information in order to draw inferences of an unobservable variable quantitative information is an observable time series variable qualitative information is an indicator variable coded by a researcher that reflects the distillation of literary materials motivated by the traditional method i consider the case where both types of observable information are imperfect representations of an unobserved state variable an iterative algorithm that uses quantitative and qualitative information to draw inferences of the unobservable variable is constructed the algorithm produces an inference of the unobservable state variable for each sample period using the two types of information it also produces a probabilistic assessment of whether the qualitative indicator is a reliable indicator of the true unobserved state as discussed in more detail below this algorithm is closely related to those of cosslett and lee 1985 and hamilton 1989 the algorithm is applied to the problem of determining the stance of monetary policy a goal is to confront a problem that economic agents may actually face because of the secrecy surrounding the monetary policy process a description of that problem is how can observable information qualitative and quantitative be combined to infer the stance of monetary policy also can the reliability of the qualitative information or a distillation of it be measured i implement the algorithm using two prominent indicators of monetary policy the paper is organized as follows the alternative framework for using qualitative and quantitative information to draw inferences of an unobservable variable is presented in the next section the application to the problem of inferring the stance of monetary policy is presented in section iii in this section indicators of policy are introduced the model is estimated and the relationship between the dynamic conditional monetary policy inferences and an important forecaster of macroeconomic activity is explored section iv concludes ii an alternative framework for inference stochastic structure my alternative framework is based on a particular conception of the statistical model underlying the traditional method let y sub t denote a quantitative variable and i sub t denote a 0 1 qualitative variable

estimating the effects of consumer incentive programs on domestic automobile sales we investigate the effects of consumer sales promotion on automobile sales the largest dollar volume durable goods category in retailing between 1985 and 1987 the domestic automakers offered major year end promotions on automobiles using low rate financing and cash rebates to stimulate sales this article uses time series techniques to evaluate the sales patterns for general motors ford and chrysler between 1983 and 1987 explicitly estimating the effects of the incentive programs the analysis indicates that the 1985 and 1986 promotional campaigns were quite successful but that the 1987 campaign was largely ineffective the 1986 and 1987 promotions were also followed by large post promotion drops in sales the analysis contains two notable findings that are in contrast with the considerable body of empirical evidence about the effects of promotion on nondurable goods

regime switching stochastic volatility evidence from the crude oil market this paper incorporates regime switching into the stochastic volatility sv framework in an attempt to explain the behavior of crude oil prices in order to forecast their volatility more specifically it models the volatility of oil return as a stochastic volatility process whose mean is subject to shifts in regime the shift is governed by a two state first order markov process the bayesian markov chain monte carlo method is used to estimate the models the main findings are first there is clear evidence of regime switching in the oil market ignoring it will lead to a false impression that the volatility is highly persistent and therefore highly predictable second incorporating regime switching into the sv framework significantly enhances the forecasting power of the sv model third the regime switching stochastic volatility model does a good job in capturing major events affecting the oil market

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

testing the term structure of interest rates using a stationary vector autoregression with regime switching abstract the expectations model of the term structure for us data on three and six month treasury bills for the period 1962 1 1987 3 is explored the analysis allows for the nonstationarity of the data and for unobserved stochastic switches of regime by estimating vars in the yield spread and the change in the three month rate which allow the time series processes to change between regimes in contrast to other results for the expectations model such as those of hamilton 1988 mankiw and miron 1986 and others we find that the data do not reject the model

durable goods and residential demand for energy and water evidence from a field trial this article describes a household production model in which energy efficient durable goods cost less to operate so households may use them more the model is estimated using household level data from a field trial in which participants received high efficiency clothes washers free of charge the estimation strategy exploits this quasi random replacement of washers to derive precise estimates of the household production technology and a demand function for clothes washing during the field trial households increased clothes washing on average by 5 6 after receiving a high efficiency washer implying a price elasticity of 06 the complete model is used to evaluate the cost effectiveness of recent changes in minimum efficiency standards for clothes washers

state timing of policy adoption workmen s compensation in the united states 1909 1929 using event history analysis this study of workmen s compensation analyzes how fast american state legislators responded to the work accident problem states were quicker to adopt legislation when productivity and work accident litigation were high and when nonagricultural workers outnumbered agricultural ones despite the influence of capital and labor in shaping workmen s compensation in other analyses the speed of state legislation was unaffected by the presence or interests of capital and labor groups this suggests that the speed of adoption was shaped by a different aspect of capital labor relations than is seen when studies focus on the activities of specific actors or groups

is there a peso problem evidence from the dollar pound exchange rate 1976 1987 one of the most puzzling aspects of the floating exchange rate regime since 1973 has been the apparent irrationality embedded in investors exchange rate expectations this paper investigates whether exchange rate forecasts although biased are still rational the idea is that investors can be rational and yet make repeated mistakes if the true model of the exchange rate is evolving over time the author s results support the hypothesis that the exchange rate has followed a switching regime process moreover the switching regime model estimated can explain about 75 percent of the bias implied by the forward market and the survey data copyright 1993 by american economic association

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

tax incidence with endogenous quality and costly bargaining theory and evidence from hybrid vehicle subsidies abstract endogenous quality and bargaining are important features of many markets but are typically omitted from studies of incidence we develop a model with product upgrades and costly bargaining and find that tax rate pass through only partially characterizes the welfare impact of taxation consumers may respond to a tax or subsidy by changing product quality or by changing their bargaining effort we apply the insights of our theory to the study of subsidies for green goods specifically hybrid electric vehicles in canada we utilize highly detailed transaction data and leverage panel variation in subsidies across provinces for identification our baseline estimate finds that prices rises by 570 for every 1000 increase in the subsidy but this pass through estimate substantially underestimates consumer gains because a majority of this price increase 459 80 is due to increased product quality in the form of additional options and features

the role of asymmetries and regime shifts in the term structure of interest rates we examine the relationship between interest rates of different maturities for the us germany and japan over the period 1982 2000 using a general multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts this approach has a very general underlying theoretical rationale that allows for time varying term premia and other short run deviations from the expectations model of the term structure the resulting nonlinear models provide good in sample fits display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out of sample forecasting properties

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

do energy prices influence investment in energy efficiency evidence from energy star appliances abstract i examine whether electricity prices influence the likelihood that consumers purchase high efficiency appliances by using state year panel data on electricity prices and the proportion of sales of new appliances that involve high efficiency energy star models i find no evidence that electricity prices affect the propensity for consumers to choose high efficiency appliances point estimates are extremely small and precisely estimated the findings suggest that price based energy policies may be limited in the extent to which they increase investment in residential energy efficiency which has been considered one of the lowest cost opportunities for reducing carbon emissions

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

inflation real short term interest rates and the term structure of interest rates a regime switching approach this study explores the implications of the expectations hypothesis by examining the implied term premium in conjunction with an explicit description of processes generating both inflation and short term real interest rates it models inflation and short term real interest rates using a technique that allows for changes in regimes and generates future forecasts of inflation and real interest rates the hypothesis is that persistent shifts in the term premium under the expectations hypothesis might come from forecast errors by econometricians if regime shifts are omitted shifts which are however observed by the agents this study examines whether persistent shifts in the term premium can be eliminated after taking into account the regime shifts in the processes for inflation and real interest rates the results indicate that there still exists persistence in the term premium however the implied term premium generated from regime switching models shows less persistence than those from arima models

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

the social costs of unit banking restrictions abstract many u s commercial banks are prohibited from establishing more than one full service office location in the absence of free entry to the banking industry this constraint may force unit banks to operate with a socially inefficient combination of inputs moreover entry to the industry in unit banking states may be more difficult than in branching states where market entrants need not necessarily acquire a new charter if so existing unit banks could price their output above marginal social cost earning excess profits and imposing allocational inefficiencies this paper demonstrates empirically that unit banking restrictions in the united states impose statistically and economically significant deadweight social costs

the origins of the blue sky laws a test of competing hypotheses abstract between 1911 and 1931 47 of the 48 states adopted state securities or blue sky laws this paper employs an event history analysis to analyze public interest public choice and ideological explanations for the enactment of blue sky laws the data suggest that the decision to adopt a blue sky law was heavily influenced by the strength of progressive lobbies however the type of law adopted was more strongly influenced by the prevalence of small banks that faced competition for depositors funds from securities salesmen i also provide evidence that more stringent blue sky laws increased small bank profits

optimal prediction of cyclical downturns abstract in the conventional way of visualizing economic time series the prediction problem does not dichotomize into predicting turning points and predicting conditional means yet the prediction of turning points has always been considered a separate issue in business cycle literature the paper first discusses these issues and then describes a model where the prediction of turning points does separate from the prediction of conditional means using the model an optimal way of predicting turning points is derived and applied to u s data the paper uses time series methodology and the theory of optimal stopping times

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

democracy and markets the case of exchange rates the relationships between the workings of democratic institutions and currency markets are studied severa competing propositions about how political re equilibration affects currency markets are derived and tested the results support the view that democratic politics affects currency markets expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria additionally opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and or the contents of public policies electoral institutions mitigate the impact of politics on currency market equilibria political effects are weaker in countries with proportional representation electoral systems than in countries with majority plurality systems there is less evidence that central bank independence consensual corporatist systems or political coherency reduces the effect of politics on currency markets he study of democracy and markets is at the heart of political economy understanding how political equilibration and economic equilibration are related is one of the main challenges facing this field the size and nature of currency markets make them especially important cases substantively with globalization currency markets have become important constraints on elected governments reducing their room to maneuver analytically in comparison to most goods markets currency markets are informationally efficient asset markets with distinctive equilibria today s exchange rate is determined by currency traders fully informed expectations about tomorrow s exchange rate the sensitivity of these markets to the arrival of new information therefore makes them particularly well suited for studying the effects of political news and uncertainty on economic equilibration 1 this article demonstrates there are informationally relevant political factors insofar as exchange rate determination is concerned factors that directly affect the transition probabilities between currency market equilibria moreover these factors vary in important ways across democracies some electoral institutions lessen the effects of politics on currency

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

social discounting under uncertainty a cross country comparison recent research suggests that social cost benefit analysis should be conducted with a declining discount rate for instance newell and pizer discounting the distant future how much do uncertain rates increase valuations j environ econ manage 46 2003 52 71 show that the us certainty equivalent discount rate declines through time using a simple autoregressive model of us interest rates this paper extends that line of research estimating both autoregressive and regime switching models of real interest rates to determine certainty equivalent discount rates in australia canada germany and the uk it is found that the regime switching model is a better model of past interest rate behavior for all four countries this model tends to produce a more rapid decline in certainty equivalent discount rates the paper provides applications to the economics of climate change and nuclear power