an analysis of revisions to the industrial production index revisions to percentage changes in the total index of industrial production ip contain systematic components and are correlated with other information available at the time the provisional estimates are prepared indicating that the preliminary estimates are inefficient in particular revisions to percentage changes in ip i tend to be upward ii contain substantial seasonality iii generally increasse during periods in which ip is accelerating and iv revisions to the same month tend to be in the same direction filters for the provisional estimates that exploit these inefficiencies are estimated and the estimates generated from these filters pass the efficiencies are estimated and the estimates generated from these filters pass the efficiency test

nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

an econometric investigation of the monetary neutrality and rationality propositions from an international perspective t he combination of the natural rate of unemployment and the rational expectations hypotheses in macroeconomic models results in the now well known conclusion that anticipated short run monetary stabilization policies do not influence real economic variables this policy ineffectiveness proposition has been named the macro rational expectations mre hypothesis by modigliani 1977 as a result the implicit policy prescription is that a price level stabilization policy should be pursued the empirical validity of this conclusion is perhaps the central issue in modern stabilization theory barro 1977 1978 1981 barro and rush 1980 and leiderman 1980 have presented empirical evidence for the united states supporting this proposition however a number of recent studies have claimed that previous empirical results which support the finding that anticipated policy is neutral are flawed corrections of these problems often result in conflicting conclusions see small 1979 gordon 1979 and mishkin 1982 given the important implications of the mre hypothesis it is curious that almost all formal testing has been focused upon the united states while barro has suggested that a cross country study would be useful as far as we know only darby 1980 attempts to test whether anticipated changes in monetary policy are neutral across countries unfortunately his results suffer from problems caused by using generated regressors in addition he makes no attempt to test the individual implications of the mre hypothesis which encompasses the propositions that expectations are rational lad anticipated monetary policy does not matter in this paper we employ the methodology developed by mishkin to test the mre hypothesis in six countries canada germany italy japan the united kingdom and the united states the paper is divided into three major sections and a conclusion section ii briefly reviews mishkin s testing method in section iii the procedure employed to specify the money growth equation is discussed and these equations specified section iv presents and discusses the results of applying the method introduced in section ii in the conclusion the major findings are restated possible limitations discussed and extensions suggested

measuring the liquidity effect this paper measures the effect on the federal funds rate of an open market operation the paper deals with simultaneous equations bias by developing a proxy for the errors the federal reserve makes in forecasting the extent to which treasury operations will add or drain reserves available to private banks these errors induce fluctuations in bank reserves which have measurable consequences for the federal funds rate the paper estimates that a reduction in nonborrowed reserves of 30 million if sustained for an entire fourteen day reserve maintenance period will cause the federal funds rate to rise by ten basis points copyright 1997 by american economic association

a little bit more evidence on the natural rate hypothesis from the u k abstract the evidence for the neutrality of anticipated changes in monetary policy in the u k over the period 1963q1 1982q1 is examined breaks in the stochastic process generating the money stock are used to identify the model the results are generally unfavourable to the proposition that only unanticipated money matters

politics and the implementation of public policy the case of the us military housing allowance program are bureaucracies in fact controlled by the president congress or legislation we analyze a 1998 policy change in the department of defense s dod 6 5 billion annual military housing allowance program results show that both the president and congress were able to influence the bureaucracy even in the presence of an exceedingly specific law that outlined the manner in which the dod was to allocate the funds after policy implementation allowances were disproportionately higher in locations that a supported the president in the 1996 election and b were represented by members of the house or senate armed services committees

the liquidity trap and u s interest rates in the 1930s most current literature assumes that a central bank loses the ability to influence interest rates through variations in reserve supply as soon as overnight rates have been driven to zero i argue that reserve supply can be directly related to longer term rates when overnight rates are zero because banks reserve demand is then defined by the role of cash as an asset free of interest rate risk i present evidence that reserve supply affected longerterm interest rates in the u s from 1934 through 1939 while overnight rates were at the zero floor even when the changes in reserve supply reflected factors unlikely to have affected expectations of future overnight rates

the interrelation of stock and options market trading volume data this research empirically investigates the relation between common stock and call option trading volumes the paper hyothesizes and tests a sequential flow of information between the stock and option markets if information trading for cboe listed firms is predominantly accomplished through option trading then existing research methodologies may be biased against finding any significant economic consequences in those instances where option listing is an important variable results indicate that trading in call options leads trading in the underlying shares with a one day lag black 2 suggests that information traders may prefer trading in options rather than shares due to economic incentives provided by reduced transaction costs capital requirements and trading restrictions and due to the greater action afforded by option trading manaster and rendleman 12 empirically support black s 2 option information trading preference finding incremental information content in option prices up to twenty four hours prior to its reflection in stock prices jennings and starks 10 report that the stock price adjustment process upon arrival of new information differs for those firms listed on the chicago board option exchange cboe and they demonstrate that stock price adjustment to new information occurs more rapidly for firms with listed call options the results in both papers appear to warrant consideration of an optiontrading variable in the design of empirical tests both manaster and rendleman 12 and jennings and starks 10 investigate the price relation between shares and call options this paper investigates trading volume copeland 4 posits the use of trading volume as a proxy for the rate of information arrival he concludes that the relation between absolute value of price changes and volume is positive and linear if one accepts a sequentialinformation arrival hypothesis as valid the present research hypothesizes and tests a sequential flow of information between the stock and option markets analyses presented are based on econometric tests for causality1 derived from the works of granger 6 and sims 22 if information trading takes place

the identification of monetary policy disturbances explaining the liquidity puzzle abstract this paper examines recent work on the identification of monetary policy disturbances its main finding is that the empirical anomalies found in the literature reflect a failure to properly address the federal reserve s policy of accommodating reserve demand shocks a new method of identifying monetary policy using nonborrowed reserves is proposed using this specification policy has a strong persistent liquidity effect regardless of subsample policy granger causes output even in the presence of interest rates explaining approximately 49 of the variance in output at a two year horizon and the residual explanatory power of interest rates for output is negligible

the case for open market purchases in a liquidity trap prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short term nominal interest rate renders open market operations ineffective for achieving macroeconomic stabilization goals we show that even were this the case there remains a powerful argument for large scale open market operations as a fiscal policy tool as we also demonstrate however this same reasoning implies that open market operations will be beneficial for stabilization as well even when the economy is expected to remain mired in a liquidity trap for some time thus the microeconomic fiscal benefits of open market operations in a liquidity trap go hand in hand with standard macroeconomic objectives motivated by japan s recent economic experience we use a dynamic general equilibrium model to assess the welfare impact of open market operations for an economy in japan s predicament we argue japan can achieve a substantial welfare improvement through large open market purchases of domestic government debt

unanticipated money growth and unemployment post sample forecasts in the late 1970s robert j barro published what has since become a popular model of business fluctuations barro s 3 findings provide evidence advocating the short run neutrality of money under rational expectations forging an important empirical link to the theoretical studies of lucas 19 20 and sargent and wallace 33 the original barro unemployment model has received additional support from further statistical testing 5 6 15 despite criticisms and modifications some of which are considered in barro s 6 updated model these equations have inspired numerous empirical studies analyzing unanticipated effects of macroeconomic variables this paper examines post sample forecasts of barro s original 3 and revised 6 unemployment equations for the 1974 84 period mayer 23 24 harvey 13 179 80 and lovell 18 among many contend that the ability to successfully forecast outside of the sample period is an important criterion for evaluating model robustness this view is also reflected in a substantial body of studies including 10 25 26 29 39 which investigate the post sample predictive performance of macroeconomic models one year ahead forecasts indicate that the barro 3 6 equations accurately predict unemployment for the 1974 79 period during 1980 84 however the predictive performance of both models sharply deteriorates augmenting the barro models with interest rate volatility in accordance with the findings of evans 11 and tatom 38 considerably improves the overall forecasting ability this modification also rectifies the 1980s structural instability of the barro unemployment equations furthermore the basic conclusions of the seminal barro work are retained with this augmented model the results reveal that increases in interest rate volatility exert significantly adverse effects upon unemployment corroborating with the findings of evans 11 and tatom 38 still interest rate volatility could be overlooked in previous estimations of the barro or other models of business fluctuations due to the variable s relative constancy prior to 1979

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

does anticipated aggregate demand policy matter further econometric results a heated debate has arisen over what modigliani has dubbed the macro rational expections mre hypothesis this hypothesis embodies two component hypotheses 1 rational expectations and 2 short run neutrality i e that anticipated changes in aggregate demand will have already been taken into account in economic agents behavior and will thus evoke no output or employment response together these component hypotheses imply that deterministic feedback policy rules will have no effect on business cycle fluctuations the irrelevance of these types of policy rules is inconsistent with much previous macro theorizing as well as with the views of policymakers it is thus an extremely controversial proposition which requires a wide range of empirical research this paper is a sequel to a previous paper by the author that paper developed a methodology for testing the mre hypothesis and found that anticipated money growth does matter to the business cycle this paper extends the analyses to cases where the rate of nominal gnp growth or the inflation rate rather than money growth is the aggregate demand variable the empirical results are also negative on the mre hypothesis and its corresponding policy ineffectiveness proposition this abstract was borrowed from another version of this item

is the dollar high because of large budget deficits abstract it is widely believed that the u s dollar has been high in recent years because of large u s budget deficits using three statistical techniques this paper shows that the belief has no empirical support ricardian equivalence may explain the lack of a positive association between the budget deficit and the dollar s exchange rate

us money announcements and covered interest parity the case of japan abstract this paper examines the effects of us money announcements on dollar and yen denominated securities in their respective onshore markets the effects are consdered over several periods corresponding to possible us and japanese policy regimes the consistency of the responses is further examined by testing whether the responses of dollar denominated securities yen denominated securities the spot yen dollar exchange rate and the forward yen dollar exchange rate violate covered interest parity given the results of previous studies the evidence suggests that restrictions on capital mobility in japan have not allowed complete international integration of japanese financial markets

fiscal policy and private investment expenditure a study of australia and the united states the effect of government spending on private sector s investment and profitability is examined within the context of an open economy macro model the empirical results of the study indicate that the private investment expenditure in australia and the united states is crowed out by government investment and government consumption respectively these results are in conflict with the hypothesis of fiscal neutrality in addition the empirical results of corporate profitability provide no support for the complementary relationship between public and private investment expenditure

quantitative easing in the 1930s during the 1934 39 recovery from the u s great depression overnight interest rates were usually at a lower bound meanwhile american monetary authorities followed policies related to today s debates on quantitative easing they tried to stabilize yields on treasury bonds with open market operations they created rapid growth in high powered money and they allowed transitory factors to affect high powered money effects of these policies on bond yields reveal a portfolio effect of short duration asset supply on term premiums this portfolio effect helps explain why high powered money growth was associated with recovery of real activity over 1934 39

uncertainty and the neutrality of government financing policy abstract some ideas from the theory of finance are applied to consider whether debt financed tax cuts affect desired consumption it is shown that government financing policy is a matter of indifference to infinitely lived households if a perfect substitute for public debt exists the analysis allows for uncertainty about future taxes and for missing markets in some kinds of assets income redistribution risk and the public insurance aspects of an income tax scheme qualify this neutrality result but in general the net effect is ambiguous the real resource costs of financial transacting as well as government superiority in the intermediation process may be one rationale for activist debt management policy a better understanding of functioning capital markets is essential to evaluate these arguments

the term structure of eurodollar interest rates and its relationship to the us treasury bill market abstract this paper examines an efficient market of the term structure of eurodollar interest rates and its relationship with the us treasury bill market standard test procedures and granger causuality tests are conducted which provide evidence showing that past changes in short term eurodollar or domestic interest rates are not useful in predicting changes in long term eurodollar interest rates the eurodollar market appears to be efficiently integrated with the us domestic financial market

parochial interests and the centralized provision of local public goods evidence from congressional voting on transportation projects abstract local public goods financed from a national tax base provide concentrated benefits to recipient jurisdictions but disperse costs creating incentives for legislators to increase own district spending but to restrain aggregate spending due to the associated tax costs while these common pool incentives underpin a variety of theoretical analyses which tend to predict inefficiencies in the allocation of public goods there is little direct evidence that individual legislators respond to such incentives to test for reactions to such incentives this paper analyzes 1998 congressional votes over transportation project funding the empirical results provide evidence that legislators respond to common pool incentives the probability of supporting the projects is increasing in own district spending and decreasing in the tax burden associated with aggregate spending having found that legislators do respond to such incentives i use the parameter estimates to calculate the efficient level of public goods which suggest over spending in aggregate especially in politically powerful districts and large associated deadweight loss

administrative procedures and political control of the bureaucracy administrative procedure the notice and comment process in the context of medicare physician payment reform a fundamental restructuring of the way in which the medicare program pays for physician services i find contrary to the deck stacking thesis that the health care financing administration hcfa was more responsive to physicians expecting reductions in fees than to the intended beneficiaries of the new payment system although these results do not necessarily imply that congress exerted little influence over hcfa decision making they suggest that certain administrative procedures do not operate as instruments of political control d elegation of policymaking authority from elected officials to unelected bureaucrats is a fact of contemporary american politics it does not however necessarily imply abdication as officeholders possess instruments that potentially limit bureaucratic discretion presidents for example fill many high level agency posts with appointees whose preferences closely resemble those of the chief executive members of congress regularly conduct oversight hearings which are proceedings designed to monitor and if necessary redirect agency activity the presence

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

government debt and the demand for money an extreme bound analysis m keivan deravi charles e hegji and h dean moberly the article provides evidence that there is a relationship between government debt and interest rates via the demand for money this relationship is examined through the wealth effect of government debt on money demand and the robustness of the results is tested by the use of extreme bound analysis in addition to standard econometric techniques we find that ols regression shows government debt affecting the demand for money positively implying that federal government debt is net wealth in addition the extreme bound analysis shows that the estimates of the government debt coefficient are robust under alternative specifications of the goldfeld model i introduction this paper studies the relationship between government debt and interest rates the approach used in this paper differs from previous studies in two ways first this relationship is examined through the wealth effect of government debt on the demand for money second the robustness of the results is tested by use of extreme bound analysis as an alternative to standard econometric techniques theoretically there is no clear cut consensus as to whether or not government debt should be net wealth the argument used most often is that government debt will be net wealth if future tax liabilities to service the debt are for the aggregate economy only partially discounted two explanations for this partial discounting are offered first in dealing with finite lived individuals thompson 1967 assumes that the average remaining lifetime of current taxpayers is shorter than for future interest payments on the federal debt in this situation the net present value of a stream of equal interest payments and taxes will be positive as a counter argument barro 1974 has shown that current generations can act effectively as if they are infinite lived when they are linked to future generations through a series of pairwise transfers of wealth here the realization by current generations that tax liabilities will be left to future generations extends the lifetime of the relevant stream of tax liabilities for debt service government debt is then wealth neutral mundell 1971 provides a second reason for partial discounting by assuming that capital markets are imperfect and that the relevant discount rate for tax liabilities is higher than the rate for interest payments these discount rates are respectively thought of as applying to high risk of loan default and low risk of loan default individuals this difference in discount rates creates a positive wealth effect since under mundell s assumptions government debt held by taxpayers involves a loan from low discount rate to high discount rate individuals as barro 1974 has again countered this wealth effect will exist only to the extent that the government is more efficient at providing such a loan than the private sector finally barro 1974 kormendi 1983 and later aschauer 1985 advance an argument as to why government debt might be negative net wealth suppose there is considerable uncertainty about the intertemporal and cross sectional burden of the future tax liability necessary to service the debt in this case the certainty equivalent value of these future taxes might exceed the certainty equivalent value of the future income stream of the debt so that government debt would be negative net wealth the majority of the empirical studies of the net wealth induced linkage between government debt and interest rates have attempted to measure this relationship using consumption functions if privately owned government debt is net wealth the wealth effect of this debt working through a keynesian consumption function will be positive so that increased government borrowing will result in increased current consumption and interest rates several studies have assessed the relationship between government borrowing and consumption or interest rates via this mechanism

adaptive signal processing hierarchy and budgetary control in federal regulation control over agency budgets is a critical tool of political influence in regulatory decision making yet the causal mechanism of budgetary control is unclear do budgetary manipulations influence agencies by imposing resource constraints or by transmitting powerful signals to the agency i advance and test a stochastic process model of adaptive signal processing by a hierarchical agency to address this question the principal findings of the paper are two first presidents and congressional committees achieve budgetary control over agencies not by manipulating aggregate resource constraints but by transmitting powerful signals through budget shifts second bureaucratic hierarchy increases the agency s response time in processing budgetary signals limiting the efficacy of the budget as a device of political control i also show that the magnitude of agency response to budgetary signals increased for executive branch agencies after 1970 due to executive oversight reforms i conclude by discussing the limits of budgetary manipulations as a device of political control and the response of elected authorities to adaptive signal processing by agencies

the value of the vote a model and test of the effects of turnout on distributive policy the most plausible assumption is that if certain groups or classes of citizens habitually do not vote their interest will be neglected in the actions and policies of governments key 1950 506 i introduction this article investigates the effects of voter participation on the distribution of government funds a simple model shows why for some types of distributive policy incumbents will have a greater probability of reelection if high turnout regions receive more funds than do low turnout regions the model predicts therefore that politicians who seek reelection and similarly politicians including the ideologically driven selected into office because they set popular policy will tend to allocate more funds to regions with higher turnout i test the model s predicted relationship between turnout and spending for the south in the 1930s spending data are county level allocations by the federal emergency relief administration fera which was the early new deal s main program to provide relief to the unemployed the evidence suggests that turnout had a substantial effect on fera spending if an individual was a voter rather than a nonvoter it typically led to an increase on the order of 30 in the expected fera allocation for the individual s county the findings shed light both on the role of voting in representative democracies and on the historical role of voting rights in the southern political system elections voter participation and policy representative democracy creates a tendency for government to set policy that improves politicians prospects for reelection this may occur because politicians design policy for the purpose of winning reelection or it may occur because elections sort into office those politicians who for ideological or other reasons tend to set policy that wins votes 1 the type of policy that improves the prospects for reelection depends upon how voters respond to policy to illustrate this point consider the distribution of a fixed sum between different regions e g counties one key consideration is the extent to which voting behavior responds to distributive policy allocating funds to groups that do not respond will be less likely to lead to reelection groups that do not respond include those who will always vote in support of the incumbent those who will always vote in opposition to the incumbent and those who do not vote previous work on distributive politics has examined how distribution is influenced by constituents voting behavior with respect to whom they support when they do vote for example wright 1974 wallis 1984 1987 1991 kiewiet and mccubbins 1985 cox and mccubbins 1986 and fleck 1999 examine favoritism of swing and loyal voters 2 this article takes a different but complementary approach by focusing on the distributive effects of whether people vote quite simply winning the approval of a group of citizens has a larger effect on reelection if those citizens vote in large numbers than if they do not this provides a reason to expect that politicians will tend to allocate relatively little to those who do not vote this is consistent with the long recognized point that nonvoters have little influence on policy a point that key 1950 made clear and that follows naturally from economic models of voting such as that of downs 1957 bennett and mayberry 1979 show a similar effect of legislative representation on interstate redistribution states with more representatives per capita in congress tend to have lower ratios of taxes paid into the federal treasury relative to federal grants in aid received by modeling and estimating the effects of voter participation this article contributes to the general understanding of how voting influences the allocation of resources furthermore the substantial size of the estimated effects underscores the critical role that voting rights played in the southern political system

returns to contrarian investment strategies tests of naive expectations hypotheses abstract this paper examines the ability of naive investor expectations models to explain the higher returns to contrarian investment strategies contrary to lakonishok shleifer and vishny 1994 we find no systematic evidence that stock prices reflect naive extrapolation of past trends in earnings and sales growth building on bauman and dowen 1988 and la porta 1995 however we find that stock prices appear to naively reflect analysts biased forecasts of future earnings growth further we find that naive reliance on analysts forecasts of future earnings growth can explain over half of the higher returns to contrarian investment strategies

monetary policy and long term interest rates an efficient markets approach abstract this paper is an application of efficient markets theory to analyze empirically the relationship of money supply growth and long term interest rates this approach has the advantage over calier research on this subject in that it imposes a theoretical structure on this relationship that flows easier interpretation of the empirical results as well as more powerful statistical tests on the interest of ascertaining the robustness of the results many different empirical tests are carried out in this paper and they uniformly do not support the preposition that increases in the money supply are correlated with declines in long rates

are preliminary announcements of the money stock rational forecasts abstract we develop a theoretical framework of analyzing preliminary announcements of economic data and then apply this framework to the money stock we find that preliminary announcements of the money stock are best characterized as measured with classical errors in variables that is the revision is not correlated with the true value of the series the revision is however forecastable using information available at the time of the preliminary announcement our ability to forecast the revision implies that preliminary announcements are not rational estimates of the true money stock

an empirical analysis of expected stock price movements the livingston survey of economists forecasts of key economic variables has served as the data source for a number of studies investigating the forrnation and effects of expectations much of this work has utilized the price level predictions from the survey to proxy anticipated inflation l this measure of expected inflation has also been analyzed by several researchers to see if it conforrns to the notion of rational expectations with differing conclusions 2 this paper extends the analysis of the livingston data by examining the forecasts of common stock prices made by the individual survey participants since predicted movements in stock prices may play an important role in portfolio decisions and according to tobin s q model real investment decisions it seems useful to explore the characteristics of these forecasts the paper addresses two main issues first are the stock price predictions in accord with rational expectation forrnation second how are the respondents expectations of stock price movements related to their forecasts of inflation and real

the impact of news and alternative theories of exchange rate determination over the last decade two of the more important developments in the area of exchange rate determination are the construction of the asset market model and the recognition that news is a key factor affecting exchange rates the asset market model has evolved as an alternative to the traditional flow model of exchange rate determination in contrast to the flow model where the exchange rate is determined by the flow demand for and flow supply of foreign exchange exchange rates adjust to allocate the total stock of foreign exchange in question in the asset market model this model may be presented in one of two forms the monetary approach or the portfolio balance approach the former is summarized in the work of bilson 1978a dornbusch 1976 frenkel 1976 johnson 1976 and mussa 1976 1979 while the latter stems from the efforts of branson 1981 branson halttunen and masson 1977 dooley and isard 1982 kouri 1976 kouri and de macedo 1978 and rodriguez 1980 while the logical consistency of these models has enhanced their popularity empirical support has been limited the importance of unanticipated shocks or news in explaining exchange rate behavior has been suggested by dornbusch 1980 frenkel 1981 isard 1983 and mussa 1979 the basis for this suggestion is the efelcient markets approach that suggests securities prices in a capital market should reflect all available information therefore the predominant cause of exchange rate movements is news that could

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

testing short run neutrality abstract this paper derives and implements a robust test of the short run neutrality of anticipated policy that is valid when the information set used to form expectations is incorrectly specified and the effect of unanticipated policy on deviations of output from the natural rate varies over time the test is based on the observation that if unanticipated policy affects output with a maximum lag of n quarters then any information prior to n should be uninformative about output movements the test is applied to quarterly data for the united states and the paper concludes that policy is not neutral

fiscal deficits and long term interest rates further evidence from annual data much debate has recently centered on the popular view that large u s budget deficits financed by the sale of bonds cause high interest rates if valid this view implies that deficits crowd out efficient private investment and adversely affect economic growth however bailey 2 and barro 3 have challenged this conventional view on theoretical grounds based on the ricardian equivalence proposition bailey and barro contend that rational economic agents interpret government deficits as postponed tax liabilities and thus will have no effects on private wealth or interest rates such theoretical ambiguity in regards to the impact of budget deficits has also been matched by an equally conflicting empirical evidence for example barth iden and russek 4 deleeuw and holloway 8 hutchison and pyle 20 makin 24 makin and tanzi 25 and zahid 35 have found a positive and significant effect of deficits on interest rates on the other hand evans 11 12 13 hoelscher 17 motley 28 and plosser 29 30 have all failed to find any systematic support for a significant positive impact of deficits on interest rates it should be observed that the above empirical studies have employed either monthly or quarterly data however some researchers e g hoelscher 18 have recently charged that monthly or quarterly data bias the results in favor of finding no significant linkage between deficits and interest rates they reasoned that portfolio adjustment lags are too long for monthly or even quarterly observations to reflect the actual correlation between deficits and interest rates to eliminate this problem of periodicity annual data was instead advocated 2 using annual data hoelscher 18 concluded that deficits have caused positive and significant changes in long term interest rates in the united states

the effects of compulsory schooling on growth income distribution and welfare abstract in this paper we consider an olg model with productive capital and human capital affecting the quality of labor in each generation parents invest in their children s education but disregard its external effect on the aggregate production function government intervention in providing compulsory schooling increases economic growth along the equilibrium path while the intragenerational income distribution becomes more equal also in the long run the majority of individuals in each generation are better off due to compulsory schooling

tests of rationality neutrality and market efficiency a monte carlo analysis of alternative test statistics abstract this paper examines the small sample properties of three testing strategies used to analyze the rationality monetary neutrality and market efficiency hypotheses we focus on the original two step barro test of the mre hypothesis formed entirely from ols results a test that employs the correct variance covariance formulae for these two step estimates and mishkin s fimle testing framework each test is examined under likely model respecifications the findings highlight the extensive bias incurred by drawing inferences from simple unadjusted two step estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses

the optimal public and private provision of safe assets abstract we develop a theory of optimal government debt in which publicly issued and privately issued safe assets are substitutes while government bonds are backed by future tax revenues privately issued safe assets are backed by the future repayment of pools of defaultable private loans we find that a higher supply of public debt crowds out privately issued safe assets less than one for one and reduces the interest spread between borrowing and deposit rates our main result is that the optimal level of public debt does not fully crowd out private lending and maintains a positive interest spread moreover the optimal level of public debt is higher the more severe are financial frictions

market rationality tests based on cross equation restrictions abstract the information used by researchers in cross equation tests of rational expectations may be a small subset of the information available to the market such tests produce consistent estimates but have low power we develop a mechanism for dealing with this problem and use the procedure to perform cross equation tests on predictions from the football betting market the tests fail to reject rationality we provide evidence that market predictions from betting markets are not formed rationally it appears therefore that cross equation tests have low power even if the information sets used by the researcher and the market are approximately the same

overcoming the zero bound on interest rate policy the paper proposes three options for overcoming the zero bound on interest rate policy a carry tax on money open market operations in long bonds and monetary transfers a variable carry tax on electronic bank reserves could enable a central bank to target negative nominal interest rates a carry tax could be imposed on currency to create more leeway to make interest rates negative quantitative policy monetary transfers and open market purchases of long bonds could stimulate the economy by creating liquidity broadly defined a central bank needs more fiscal support than usual from the treasury to pursue quantitative policy at the interest rate floor

voting for protection does direct foreign investment influence legislator behavior the political economy of trade protection has long been of interest to economists and policy makers the idea that levels of protection may be endogenous with trade flows has been a particularly important issue in the literature in general the endogenous protection literature postulates that import penetration will cause domestic interests to lobby more intensely for protection thus higher levels of import penetration lead to increased protection as a result a number of papers see for example arye l hillman 1982 wolfgang mayer 1984 robert e baldwin 1985 stephen p magee et al 1989 ronald d fischer 1992 have established that foreign firms will import less under a regime of endogenous protection than one where the level of protection is exogenous to trade flows on the empirical side daniel trefler 1993 finds that ignoring the endogeneity of trade and protection understates the impact of u s protection on imports by a magnitude of ten this abstract was borrowed from another version of this item

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

the political economy of fema disaster payments a central contribution of public choice theory to the analysis of government activity is in viewing the activities of government not as determined by some single altruistic dictator but rather as the result of a process involving individual political agents who react to the incentives they face federal disaster relief administered by the federal emergency management agency fema is one activity that is ripe for political influence due to the process of disaster declaration and relief after a disaster strikes a particular state the governor makes a request to the president for disaster assistance following a governor s request the president then decides whether to declare the state or region a disaster area only after a disaster has been declared by the president can disaster relief be given fema is in charge of determining the level of relief funding for the area but additional appropriations are determined by congress in cases requiring large amounts of funding beyond fema s allocated budget the act which governs the rules of federal disaster declaration and expenditures gives the president the authority to declare a disaster without the approval of congress

monetary policy and short term interest rates an efficient markets rational expectations approach this paper is an application of efficient markets rational expectations theory to analyze empirically the relationship of money supply growth and short term interest rates a hotly debated issue in the literature this approach has the advantage over earlier research on this subject in that it imposes a theoretical structure that allows easier interpretation of the empirical results as well as more powerful statistical tests the empirical results uniformly do not support the proposition that increases in money growth are correlated with declines in short rates the relationship between money supply growth and nominal interest rates is a hotly debated issue in the literature one view associated with keynesian structural macromodels has an increase in money growth leading at least in the short and medium runs to a decline in interest rates 2 an alternative view associated with milton friedman 6 7 indicates that interest rates might rise in response to higher money growth because there is a rise in inflationary expectations and hence a rise in interest rates through a fisher 5 effect

liquidity traps and large scale financial crises this paper estimates a nonlinear threshold var to investigate if a keynesian liquidity trap due to a speculative motive was in place in the u s great depression and the recent great recession we find clear evidence in favor of a breakdown of the liquidity effect after an unexpected increase in m2 in the 1921 1940 period this evidence which is consistent with the keynesian view on a liquidity trap is shown to be state contingent in particular it emerges only when a speculative regime identified by high realizations of the dow jones index is considered a standard linear framework is shown to be ill suited to test the hypothesis of a keynesian liquidity trap an investigation performed with the same data for the period 1991 2010 confirms the presence of a liquidity trap just in the speculative regime this last result emerges significantly only when we consider the federal funds rate as the policy instrument and we model the divisia m2 measure of liquidity

deflation and monetary policy in a historical perspective remembering the past or being condemned to repeat it inflation is currently low and stable in industrialized countries but might deflation replace inflation as a major policy concern we present a broad cross country historical study of deflation over the past two centuries in order to shed light on current policy challenges in the light of the relevant theoretical approaches we empirically characterize good bad and ugly deflations assess similarities between the current low inflation environment and that of the gold standard period and discuss lessons from the historical record as to policies to escape undesirable deflation and the relative merits of interest rate and monetary instruments michael bordo and andrew filardo

understanding the accumulation of bank and thrift reserves during the u s financial crisis abstract the level of aggregate excess reserves held by u s depository institutions increased significantly at the peak of the 2007 2009 financial crisis although the amount of aggregate reserves is determined almost entirely by the policy initiatives of the central bank that act on the asset side of its balance sheet the motivations of individual banks in accumulating reserves differ and respond to the impact of changes in the economic environment on individual institutions we undertake a systematic analysis of this massive accumulation of excess reserves using bank level data for more than 7000 commercial banks and almost 1000 savings institutions during the u s financial crisis we propose a testable stochastic model of reserves determination when interest is paid on reserves which we estimate using bank level data and censored regression methods we find evidence primarily of a precautionary motive for reserves accumulation with some notable heterogeneity in the response of reserves accumulation to external and internal factors of the largest banks compared with smaller banks we combine propensity score matching and a difference in differences approach to determine whether the beneficiaries of the capital purchase program of the troubled asset relief program accumulated less cash including reserves than non beneficiaries contrary to anecdotal evidence we find that banks that participated in the program accumulated less cash including reserves than nonparticipants in the initial quarters after the capital injection

on the econometric testing of rationality market efficiency procedures for testing the rational expectations hypothesis deserve careful study because rationality of expectations has such important implications for macroeconomic modeling and policy analysis rationality of expectations generally imposes cross equation restrictions 2 in this paper we discuss the implementation and analyze the econometric properties of a particular test of such restrictions this test has been used in recent empirical studies of bond market behavior 3 since the test focuses on the distinction between anticipated and unanticipated movements in variables as in barro 1977 1978 it is applicable to many macroeconomic issues indeed the results of this paper are useful in further work abel and mishkin 1983 that clarifies the relations among tests of 1 rationality and market efficiency 2 the short run neutrality of anticipated policy and 3 granger 1969 causality in macroeconometric models two important questions about the test of cross equation restrictions arise naturally first under what conditions will the test lead to correct inference about the rationality of expectations second what is the relation of this cross equation test to the more common singleequation test of market efficiency frequently used in the literature the answers to these questions are provided by the theorem in section ii which states the asymptotic equivalence of the cross equation test with the more common test of market efficiency also in section ii we discuss identification and demonstrate that we can test for rationality of expectations even if some parameters are not identified finally we present an empirical example in section iii and concluding remarks in section iv

cross regime evidence of macroeconomic rationality rational expectations macromodels predict that the short run effects of monetary shocks on real output x should be negatively related across policy regimes to the variability of such shocks this paper presents cross regime tests of this and related propositions based on a sample of 47 countries the within regime estimates reveal a consistent pattern of positive short run real output effects with neutrality of money holding in the long run the cross regime tests show that x is negatively related to the variance of monetary shocks positively related to the variance of real output shocks negatively related to the variance of velocity shocks and unrelated to either the mean or variance of anticipated money growth

unanticipated monetary policy and real economic activity some cross regime evidence abstract classical equilibrium models of business cycles predict several consequences of policy regime shift this paper examines these predictions using evidence from the post 1979 period and by comparing several pre war monetary regimes the policy invariance proposition and the lucas hypothesis receive some support from the evidence although some discrepancies remain

an integrated view of tests of rationality market efficiency and the short run neutrality of monetary policy abstract this paper analyzes an important class of models in which expectations play an important role topics included in the analysis are tests of 1 rationality of forecasts in either market or survey data 2 capital market efficiency 3 the short run neutrality of monetary policy and 4 granger causality in macroeconometric models the common elements of these tests are highlighted in particular cross equation tests for rationality or the short run neutrality of money are shown to be equivalent to more common regression tests in the literature these results demonstrate that the exact specification of the relevant information set used in rational forecasts is not necessary for the cross equation tests to have desirable asymptotic properties also discussed are the conditions for identification of coefficients and testability of hypotheses

liquidity preference as behavior toward risk is a demand for short term securities not money in 1958 james tobin generalized the keynesian theory of liquidity preference by means of his famous portfolio model in which the demand for money narrowly defined is treated as behavior towards interest risk whatever merit this theory may have had then has long since been questionable the reason is the existence of a large set of substitutes for money typically short term money market instruments which can be regarded as riskless or virtually so and which pay substantial interest the availability of these instruments would appear to make tobin s theory that money is held to cope with interest risk resemble a scenario without a recognizable cast of actors in the literature on monetary theory other authors have also expressed misgivings about the tobin theory by noting that savings and nontransferable time deposits have the same risk properties as money but pay interest see for example robert barro and stanley fischer 1976 although correct the allusion to these deposits is simplistic it is true that while both types mimic money s freedom from interest risk in the conventional sense of capital loss time deposits are still exposed to a kind of interest risk because they can be liquidated before maturity only with interest penalty more important business firms are either denied access to savings deposits or as in the united states can hold a maximum of 150 000 per account at commercial banks thereby effectively eliminating large firms as holders furthermore although business firms can own most time deposits they typically do not except for negotiable cds a money market instrument they are loath to tie up funds in long term maturities and they can usually obtain the same or higher yields on other types of short term debt instruments that are also negotiable in the united states households have long accounted for about one third of demand deposits business firms owning most of the rest therefore any effort to rest a case against the tobin theory of money demand on the existence of savings and time deposits gets at only a small part of the problem this stricture extends to so called now and ats accounts these interest bearing demand deposits disguised under other names are also denied to business firms for them the short term instruments of the money market are the principal alternative to money in asset portfolios

day to day monetary policy and the volatility of the federal funds rate we propose a model of the interbank money market with an explicit role for central bank intervention and periodic reserve requirements and study the interaction of profit maximizing banks with a central bank targeting interest rates at high frequency the model yields predictions on biweekly patterns of the federal funds rate s volatility and on its response to changes in target rates and in intervention procedures such as those implemented by the fed in 1994 theoretical results are consistent with empirical patterns of interest rate volatility in the u s market for federal funds

restoring banking stability beyond supervised capital requirements emerging economies have been particularly prone to financial sector crises reflecting marked information asymmetries and political interference as well as the substantial volatility in underlying economic conditions and the vulnerability of banking and finance when structural economic changes create a new and uncharted operating environment the standard regulatory paradigm relies mainly on supervised capital adequacy but it may not be enough other measures to improve the incentive structure for bankers regulators and other market participants could effectively increase the number of concerned skilled and watchful eyes intermittent application of supplementary blunt instruments could also be useful

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

does anticipated monetary policy matter an econometric investigation a heated debate has arisen over the policy ineffectiveness proposition associate with the work of lucas sargent and wallace it postulates that anticipated aggregate demand policy will have no effect on business cycle fluctuations so that one deterministic feedback policy rule is as good as any other from the point of view of stabilizing the economy this paper develops a methodology for empirically analyzing rational expectations models displaying this neutrality result and then applies it to the important question of whether anticipated monetary policy matters to the business cycle

the demand for money from the great depression to the present myths and legends about the great depression have dominated the public s perception of the business cycle they have shaped government policy and until recently they have even held powerful sway among economists in the immediate aftermath of the great depression many economists came to question the fundamental concept of economic equilibrium velocity was thought to be highly unstable as in the case of the liquidity trap so that the quantity of money supplied was consistent with any level of nominal income in the real sector there was the frightening specter of underemployment

using market valuation to assess public school spending abstract we examine whether school expenditures are valued by potential residents and whether the current level of public school provision is inefficient by estimating the effect of state education aid on residential property values we find evidence that overall state aid is valued by potential residents and that school districts do not overspend on education however we find that districts may overspend in areas where residents have fewer schooling options but find no difference in efficiency by the degree of district unionization one interpretation of these results is that increased competition may reduce overspending on public schools in some areas

blue chip rationality tests this paper tests the rationality of forecasts made by individuals who contribute to the blue chip consensus forecasting service and tries by means of a questionnaire on forecasting methods to establish why some forecasters appear more rational than others tests based on consensus forecasts prove unreliable as guides to the number of individuals who produce rational forecasts individual forecasts are more likely to be rational if they are based on a mainstream economic theory and incorporate a substantial element of judgment copyright 1991 by ohio state university press

equity and tradeoffs in a tax based incomes policy a tax based incomes policy tip is a tax incentive that tries to induce employers and or workers to reduce wage and or price increases it is intended as a complement to the basic anti inflation policy of gradual monetary deceleration and fiscal restraint its purpose is to reduce the capital stock and output loss that would otherwise accompany such a policy see my 1978 1979a articles this article is divided into two sections section i examines the capital stock and output loss under monetary deceleration that is uncomplemented by tip this loss is due primarily to wage growth inertia a central feature of modern capitalist economies such inertia provides not only the rationale for a tip on wage increases but also implies that special effort is required to assure that the design of a complete tip package is fair to labor section ii analyzes the tradeoffs confronting two alternative methods of making tip more equitable to labor profit and or price restraint insurance and a tip on price increases of the largest firms the original tip limited to wage increases at first glance is often perceived as unbalanced and inequitable this section tries to contribute to the development of a balanced equitable tip

identifying a liquidity effect in the japanese interbank market this article examines whether there was a liquidity effect in the japanese interbank market for reserves during the period from january 4 1996 to february 12 1999 according to the standard martingale model the only determinant of the overnight rate during the reserve maintenance period is the rate that is expected to prevail on the settlement day the last day of the period but this model ignores the fact that reserves are used for interbank payments if overdraft costs are introduced into banks reserve management problem the overnight rate will also depend on what this paper calls the reserve surplus which captures the liquidity effect of reserves we identify the liquidity effect by exploiting two institutional features first the overnight rates observed in the morning are forward rates for a contract to be settled later in the day second changes in reserves that are due to factors other than open market operations are rendered temporary through defensive operations by the open market desk we show that the liquidity effect can be identified from the regression of the spot forward differential on these temporary liquidity shocks our estimates indicate that there was a liquidity effect at least before the yamaichi debacle of november 1997

government financing decisions and asset returns abstract this paper presents an empirical investigation of the relation between government financing decisions and asset returns in particular the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates the paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior the results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures the results however also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases

social security payments money supply announcements and interest rates abstract a monthly cycle existed in initially announced changes in seasonally adjusted m1 for a period extending at least from september 1977 to february 1984 this cycle was the source of systematic errors in the widely used money market services forecast of m1 such errors can induce a spurious relation between interest rates and expected changes in the money supply when the survey forecasts are corrected to eliminate systematic errors the apparent negative relation between interest rates and expected money supply changes disappears interest rates were not systematically related to either anticipated or unanticipated money supply changes during the period february 1984 to december 1986

the case of the negative nominal interest rates new estimates of the term structure of interest rates during the great depression throughout the 1930s and early 1940s u s treasury bonds and notes appeared to have negative nominal yields as they approached maturity but negative nominal interest rates are impossible in a world in which one can always hold cash the resolution to this puzzle is that treasury securities in addition to making coupon payments gave the owner the right to buy a new security on a future date this paper describes the institutional environment that led to the apparent negative nominal interest rates develops a method for valuing the exchange privilege and computes accurate measures of the yield to the coupon bearing component of these composite bond options these corrected bond and not yields are then used to calculate new estimates of the term structure of interest rates from 1929 to 1949

electoral incentives public policy and the new deal realignment this paper develops a model of the effects of electoral incentives on policy then applies the model to the new deal realignment in the model policy is the outcome of an agenda setter game between the president and legislators specifically the president sets policy subject to legislative approval the president s ability to concentrate benefits in states with high electoral payoffs depends in part on his or her power to influence legislators prospects for reelection regression analysis shows that new deal spending and roll call voting patterns in the house of representatives support the model historical accounts of other aspects of new deal policy including labor and civil rights issues are consistent with the model together the theoretical results and the empirical evidence help to explain several striking features of the policy and politics of the 1930s including i why a government dominated by the democratic party would provide high benefits to swing states and much lower benefits to the traditionally democratic south ii why favoritism of swing states increased from the 1933 1934 period to the 19371938 period iii why favoritism of swing states decreased from 1938 to 1939 and iv why with the rise of the conservative coalition in congress in the late 1930s it was the representatives from traditionally loyal democratic districts that created the strongest democratic opposition to roosevelt and the new deal this paper develops a model of the effects of electoral incentives on policy then applies the model to the new deal realignment in the model policy is the outcome of an agenda setter game between the president and legislators specifically the president sets policy subject to legislative approval the president s ability to concentrate benefits in states with high electoral payoffs depends in part on his or her power to influence legislators prospects for reelection regression analysis shows that new deal spending and roll call voting patterns in the house of representatives strongly support the model historical accounts of other aspects of new deal policy including positions on labor and civil rights issues are also consistent with the model together the theoretical results and the empirical evidence contribute to the understanding of several striking features of the policy and politics of the 1930s