government deficits the real interest rate and ldc debt on global crowding out abstract the paper uses a three regions model of global saving investment balance to present a global crowding out interpretation of present economic trends the model builds on data which point to a possible shortage of savings explosive growth of social expenditures structural public sector deficit in north and south changes of the age pyramid real wage rigidity in many industrial countries

inventories rational expectations and the business cycle abstract the simplest macroeconomic models in which markets clear instantaneously and expectations are rational preclude the existence of business cycles that is of serially correlated deviations of output from trend this paper studies one of several mechanisms that can be used to make these so called new classical models produce business cycles the mechanism is the gradual adjustment of inventory stocks two macroeconomic models of inventory holdings are formulated both imply first that current output should be a decreasing function of the stock of inventories and second that inventories once perturbed from equilibrium levels should adjust only gradually these two features are then embedded into an otherwise standard macroeconomic model in which markets clear instantaneously and expectations are rational two principal conclusions are reached first disturbances such as unanticipated changes in money will set in motion serially correlated deviations of output from trend second if desired inventories are sensitive to the real interest rate then even fully anticipated changes in money can affect real variables

relative price variability and nonuniform inflationary expectations using a generalization of a rational partial information framework presented fully in cukierman and wachtel 1979 it is shown that there is a positive relationship between the variance of relative price change and the variance of inflationary expectations across markets in the economy this implication is then tested empirically using data on the variance of relative price change and on the variance of directly measured expectations the empirical evidence supports the view that there is a positive relationship between the two variances and that more than one third of this relationship is explainable in terms of the model presented

the differing effects of pre and post 1981 federal budget deficits on tax adjusted real interest rates this paper employs an estimating equation relating tax adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre and post 1981 federal budget deficits on ex ante and ex post real tax adjusted short term interest rates over the period 1961 1 1992 2 the results for the 1961 1 1992 2 period taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential gdp occurring in 1981 1 indicate that the ratio of both the nipa deficit and the cyclically adjusted deficit to potential gdp have a significant effect on ex ante and ex post real tax adjusted interest rates for the post 1981 period but no significant effect before 1981

budget deficits short term real interest rates and the specification of expected inflation an empirical investigation the purpose of this paper is to illustrate whether empirical estimates of the effects of budget deficits on short term real interest rates are sensitive to the choice of the expected inflation variable survey data on expected inflation and the rational expectations method described by mishkin 1981 are used to construct two measures of the short term real interest rate results for two previous studies on this deficit interest rate relationship are re estimated using these measures of expected inflation and the interest rate variables additional results reported in this paper further indicate that empirical estimates of the interest rate effects of budget deficits are sensitive to the choice of the expected inflation variable in addition to the choice of the inflation variable a number of other robustness tests are included we are able to conclude that 1 increases in budget deficits do not generally raise short term real interest rates and 2 short term real interest rates are not independent of

government deficits capital flows and interest rates 1988 government deficits capital flows and interest rates applied economics vol 20 no 6 pp 753 765

does parents money matter abstract this paper asks whether parents income per se has a positive impact on children s abilities previous research has established that income is positively correlated across generations this does not prove that parents money matters however since income is presumably correlated with ability this paper estimates the impact of parents income by focusing on income variation due to factors union industry and job loss that arguably represent luck i find that changes in parents income due to luck have a negligible impact on children s human capital for most families although parents money does matter for families whose father has low education

monetary disturbances inventory fluctations and the level of sales a theoretical and empirical analysis there has in the past several years been a revival of interest in the topic of inventory fluctuation and its relationship to the short run dynamics of output one important reason for this interest can be traced to the pioneering work on aggregate supply begun by lucas 11 12 and extended among many others by barro 3 4 in their models the behavior of output is driven by intertemporal considerations it is a natural extension of such models if output is storable to consider the implication of producers whose current output can either be sold immediately or held in stock for future sales current sales by the same token may be either current production or goods from inventory in a recent paper blinder and fischet 6 develop such a model using it they demonstrate that inventory dynamics can be an explanation for an empirical weakness of simple versions of the lucas type models real world business cycles are characterized by considerable persistence simple equilibrium business cycle models do not exhibit such persistence or in some cases it is present only through the ad hoc presence of a lagged output term in the aggregate supply function except for the influence of inventories producers in the blinder fischer analysis behave as do producers in most new classical macro models they are price takers and quantity setters in a model where inventories exert an influence on output decisions such neoclassical behavior cannot be ascribed to perfectly competitive conditions if firms are perfect competitors output decisions will not reflect the state of current inventories

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

the long run relationship between interest rates and inflation some cross country evidence abstract this paper analyzes the effect of anticipated inflation on nominal interest rates paying special attention to the stability of this relationship over various regimes these regimes are analyzed to find out whether the inflation forecastability proposition recently advanced by barsky explains the observed poor performance of the fisher equation with historical data the analyses make use of the so called threshold and digression models and data from 11 western countries for 1875 1984 the main result of this paper is that the forecastability proposition does not explain the weakness of the anticipated inflation effect on interest rates rather various institutional factors seem to be of more importance

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

tax increment financing interaction between two overlapping jurisdictions abstract this paper analyzes the interaction between two overlapping jurisdictions a school district and a city when one of them the city uses tif tax increment financing to finance an improvement in the provision of its public good both jurisdictions levy taxes on property and they provide different public goods the city is not allowed to raise its tax rate to increase public good provision but since the increment in the public good causes property values to increase the city s revenue is higher with the new level of public good however if this new revenue is not enough to finance the new public good level then tif allows the city to capture for a limited period of time all extra revenues the school district obtains due to the increase in property values then the city and the school district choose the public good level to satisfy their budget constraints with the goal of maximizing total property values two different results regarding efficiency of public good provision are obtained depending on the equilibrium concept used with nash behavior the result is underprovision of the public good provided by the school district the second and more interesting case is when the school district takes into account that its decisions affect the provision of the city s public good in this leader follower equilibrium where the school district plays the role of the leader the results show that the provision of the school district public good depends on how the city s public good is provided if the city s public good is underprovided overprovided then the school district s public good is overprovided underprovided

is a military really a luxury good an international panel study of ldcs this paper introduces country specific fixed effects into a theoretical and empirical model of military expenditure contrary to the existing literature the model indicates that the share of military expenditure decreases with a country s income

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

an empirical analysis of federal budget deficits and interest rates directly affecting savings and loans the crisis in the savings and loan sl furthermore over the same period there were some eight years when only one federally insured sl 4 6 7 10 11 13 15 16 17 18 none of the published research has investigated the impact of the budget deficit on interest rate measures directly faced by s ls such as the cost of funds to the s ls the yield on new home mortgages at s ls or the s l mortgage portfolio yield accordingly this study investigates empirically the impact of federal budget deficits upon these interest rate measures that directly affect s ls

exchange controls and interest rate determination with traded and non traded assets the irish united kingdom experience abstract this paper is an empirical study of the effectiveness of exchange controls in recent irish experience vis a vis the united kingdom specifically we examine the effects of domestic money market conditions on an array of irish interest rates following the imposition of the controls and the relative importance of covered british interest rates during the process of financial disintegration induced by these controls using time varying parameter estimation we find that the central bank gained only partial and temporary control over interest rates through domestic monetary channels for most assets and liabilities interest parity conditions were restored within six months after a policy change

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

interest rates uncertainty and the livingston data the observed relationship between the standard deviation of forecasts and past forecast errors as found in the livingston survey suggests the interpretation of the standard deviation as a measure of inflation uncertainty the mean and the standard deviation for the inflation rate forecast found in the livingston survey furthermore are used as regressors in a reduced form interest rate equation the results indicate a large negative effect of such uncertainty on interest rates the inclusion of the uncertainty measure and commonly omitted lagged values of all variables in our analysis of data leads to more theoretically plausible estimated effects of money growth and expected inflation on interest rates than do standard estimates

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

anticipated money inflation uncertainity and real economic activity this paper critically examines a number of maintained hypotheses that are necessarily being tested along with the basic notion derived from the rational expectations re formulation of lucas 1972 19 73 that only unanticipated money matters the trend stationary representation of secular real output of lucas and others is replaced by a difference stationary representation found by nelson and plosser 1980 to be consistent with u s historical data the impact of inflation uncertainty on real activity is considered attention is paid to possible mis measurement of agents ex ante anticipated money growth it is found that three alternative measures of anticipated money growth produce a stable impact on growth of output and employment contemporaneous and lagged values of unanticipated money growth have no significant additional explanatory power in the presence of any one of the three measures of anticipated money growth beyond this it is impossible to reject the hypothesis that the initial positive real impact of anticipated money is not temporary inflation uncertainty is found to act as a significant depressant of real economic activity in the presence of all tested combinations of anticipated and unanticipated money growth this abstract was borrowed from another version of this item

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection