the policy preferences of the us federal reserve in this paper we model and explain us macroeconomic outcomes subject to the discipline that monetary policy is set optimally exploiting the restrictions that come from optimal policymaking we estimate the parameters in the federal reserve s policy objective function together with the parameters in its optimization constraints for the period following volcker s appointment as chairman we estimate the implicit inflation target to be around 1 4 and show that policymakers assigned a significant weight to interest rate smoothing we show that the estimated optimal policy provides a good description of us data for the 1980s and 1990s

the cross euler equation approach to intertemporal substitution in import demand this paper addresses the empirical dilemma in identifying and estimating the parameters governing the intertemporal elasticity of substitution ies for import demand we propose a new concept the cross euler equation for overcoming this empirical dilemma ies parameters are estimated by exploiting the cointegrating restriction implied by the cross euler equation further by comparing the ies estimates from the cross euler equation to those from the standard euler equation we test the hypothesis whether import demand is affected by nuisance factors using the us data we found imported goods consumption to be robust against nuisance factors but not for domestic goods copyright 2005 john wiley sons ltd

price stability vs output stability tales of federal reserve administrations abstract this study disentangles policy parameters from those describing private sector behavior by simultaneously estimating an empirical model for inflation and output along with a loss function for the last three federal reserve administrations three important results emerge first the federal reserve appears to put more emphasis on price stability than output stability when the entire sample is considered second and more importantly the loss function parameters exhibit structural break at the time paul volcker was appointed chairman the accommodative characteristics of monetary policy were replaced with a more active policy towards controlling inflation finally interest rate smoothing is found to be an important feature of the monetary policymaking process for all three administrations

declining volatility in the u s automobile industry dramatic changes in the volatility of output occurred in the u s auto industry in the early 1980s namely output volatility declined the covariance of inventory investment and sales grew more negative and adjustments to production schedules which in earlier decades stemmed primarily from plants hiring and laying off workers were more often accomplished with changes in average hours per worker after the mid 1980s using a linear quadratic inventory model with intensive and extensive labor adjustments we show how all of these changes could have stemmed from one underlying factor a decline in the persistence of motor vehicle sales jel g31 l25 l62 m11

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

the dynamic optimizing approach to import demand a structural model abstract the conventional import demand equations are generally regarded as static and its empirical specifications are often criticized as ad hoc this paper derives a tractable structural import demand equation from the dynamic optimizing intertemporal approach

estimation of a forward looking monetary policy rule a time varying parameter model using ex post data abstract in this paper we consider estimation of a time varying parameter model for a forward looking monetary policy rule by employing ex post data a heckman type 1976 the common structure of statistical models of truncation sample selection and limited dependent variables and a simple estimator for such models annals of economic and social measurement 5 475 492 two step procedure is employed in order to deal with endogeneity in the regressors this allows us to econometrically take into account changing degrees of uncertainty associated with the fed s forecasts of future inflation and gdp gap when estimating the model even though such uncertainty does not enter the model directly we achieve efficiency in estimation by employing the standardized prediction errors for inflation and gdp gap as bias correction terms in the second step regression we note that no other empirical literature on monetary policy deals with this important issue our empirical results also reveal new aspects not found in the literature previously that is the history of the fed s conduct of monetary policy since the early 1970s can in general be divided into three subperiods the 1970s the 1980s and the 1990s the conventional division of the sample into pre volcker and volcker greenspan periods could mislead the empirical assessment of monetary policy

international capital mobility amongst the major industrialised countries too little or too much this paper examines capital flows among the major industrialized countries with a view to assessing m feldstein and c horioka s 1980 claim that international capital mobility is limited it argues that saving investment correlation tests are inherently flawed and proposes an alternative methodology for testing the degree of international capital mobility it finds that capital flows have been excessive in the sense that they are driven by speculative forces rather than by economic fundamentals copyright 1995 by royal economic society

cointegration aggregate consumption and the demand for imports a structural econometric this paper uses a two good version of hall s 1978 representative agent permanent income model to derive a structural import demand equation for nondurable consumer goods under the identification restriction that taste shocks are stationary the model is shown to imply that log imports log domestic goods and the log relative price of imports are co integrated the data decisively reject the null hypothesis that imports the relative price of imports and the consumption of home goods are not co integrated we employ the non linear least squares technique recently proposed by phillips and loretan 1990 to estimate the parameters of the import demand equation the long run price elasticity of import demand is estimated to be 0 95 the elasticity of import demand with respect to a permanent increase in real spending is estimated to be 2 20 these estimates fall within the range reported in studies by helkie and hooper 1986 cline 1989 and the many studies surveyed by goldstein and kahn 1985 the message of this paper is that at least for non durable consumer goods it is possible to interpret the traditional import demand equation as a co integrating regression and to interpret the price and expenditure elasticities estimated from such a trade equation as a co integrating vector estimates of the co integrating vector can be used to recover estimates of the utility parameters of the representative household the similarity between the ols and phillips loretan estimates of the parameters suggests that the simultaneous equation bias is not large this abstract was borrowed from another version of this item

econometric policy evaluation and inverse control the traditional approach to monetary policy evaluation entails a first step in which structural parameters are estimated and a second in which the performance of alternative policy rules is studied this paper combines the two steps of the traditional approach into one by estimating a structural model subject to the restriction that the central bank chooses the policy rule that minimizes expected loss the structure is a forward looking new keynesian model in which equilibrium values of output and inflation depend on expectations of future values of those variables analysis of u s data between 1965 and 2001 support the hypotheses that the sample contains two policy regimes that the fed placed far greater weight on stabilizing inflation after 1980 and that improvements in policy were available in both regimes the unified approach also sharpens estimates of structural parameters

changes in federal reserve preferences abstract using a model of optimizing central bank behavior i estimate the dynamic behavior of preferences which are captured by the relative weight put on stabilizing inflation versus minimizing the output gap unlike previous work i let this parameter vary continuously over time there is a drastic but steady rise in the weight on inflation around the appointment of paul volcker however i find variation in preferences throughout the sample period the results suggest that preference changes have been more complex than typically assumed in the literature the estimated preference series is used to perform counterfactual experiments and to construct a new measure of monetary shocks

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

services tradeability trade liberalization and foreign direct investment textabstractthe article analyzes a two country general equilibrium model to examine the role played by services in the world economy services play an increasingly important role in the world economy as observed for instance by the growing share in employment production exports and foreign direct investment firms increasingly delegate costly knowledge intensive intermediate stage processing activities in their production processes to specialized outside producers in order to gain cost advantages countries generally differ in the extent to which producers in final goods sectors have the opportunity to gain cost advantages by using knowledge intensive producer services in the article the authors concentrate on trade patterns between countries that are similar in all respects except that one country lacks a producer services sector the authors also develop a general equilibrium model in which a home country and a foreign country both produce a manufactured good and a basic commodity called food

new issues in the uruguay round and beyond the general agreement on tariffs and trade gatt is a treaty establishing a framework of rules and principles for policies affecting merchandise trade it also provides a forum in which sovereign states periodically engage in reciprocal trade liberalisation and rule making 2 as a result of substantial reductions in tariffs through periodic rounds of multilateral negotiations rule making has gradually become as if not more important than liberalisation per se starting with the kennedy round i964 7 but especially in the tokyo i973 9 and uruguay i986 rounds an increasing number of agenda items involved the negotiation of rules and disciplines for specific trade related domestic policies rather than further reductions in tariffs and other border measures rules pertaining to product standards subsidies and government procurement were prominent items on the agenda of the tokyo round the uruguay round further expanded the multilateral negotiating agenda by adding trade related investment measures trims trade related intellectual property rights trips and measures affecting the contestability of service markets the trend for multilateral trade negotiations to address domestic policies shows no sign of abating calls for a post uruguay round negotiation have identified issues such as competition policy foreign direct investment fdi regulations innovation policies and the interaction between trade and environmental policies as possible topics for discussion 3 in part the steady agenda expansion reflects changes in the structure of the global economy the managerial and technological innovations of the last decade such as just in time inventory management and the increased tradeability of services created pressures for greater specialisation and geographical splintering of production this in turn made regulations pertaining to services fdi transfer of technology and protection of intangible assets more important for both governments and firms flows associated with services fdi and intellectual property ip are smaller than merchandise trade but are quite substantial table i reveals that global merchandise trade in i990 was 3 5 trillion while world trade in commercial services was about 820 billion global receipts for ip were some 33 billion and income flows

changes in the federal reserve s inflation target causes and consequences this paper estimates a new keynesian model to draw inferences about the behavior of the federal reserve s unobserved inflation target the results indicate that the target rose from 1 1 4 percent in 1959 to over 8 percent in the mid to late 1970s before falling back below 2 1 2 percent in 2004 the results also provide some support for the hypothesis that over the entire postwar period federal reserve policy has systematically translated short run price pressures set off by supply side shocks into more persistent movements in inflation itself although considerable uncertainty remains about the true source of shifts in the inflation target jel e31 e32 e52

inferring monetary policy objectives with a partially observed state accounting for the uncertainty inherent in real time perceptions of the state of the economy is believed to be critical for the analysis of historical monetary policy we investigate this claim through the lens of a small scale new keynesian model with optimal discretionary policy and partial information about the state the model is estimated using maximum likelihood on us data over the volcker greenspan bernanke regime a comparison of our estimates to those from a version of the model with complete information reveals that under partial information i the federal reserve demonstrates a significant concern for stabilizing fluctuations in the output gap and ii the discrepancy between optimal and observed policy behavior is smaller

estimating central bank preferences under commitment and discretion this paper explains u s macroeconomic outcomes with an empirical new keynesian model in which monetary policy minimizes the central bank s loss function the presence of expectations in the model forms a well known distinction between two modes of optimization termed commitment and discretion the model is estimated separately under each policy using maximum likelihood over the volcker greenspan bernanke period comparisons of fit reveal that the data favor the specification with discretionary policy estimates of the loss function weights point to an excessive concern for interest rate smoothing in the commitment model but a more balanced concern relative to inflation and output stability in the discretionary model

determining the need for issue linkages in multilateral trade negotiations in multilateral trade negotiations trade offs usually are made within the issue areas that are on the agenda in the absence of cross issue trade offs linkages agreement may not be possible to maximize both the potential gains from trade and the scope for agreement negotiators need to be willing and able to consider the feasibility of issue linkages this raises the practical problem of determining when such trade offs are likely to be necessary although quantitative methods of policy analysis have been developed they have not been widely used by policymakers in part owing to the fact that negotiations focus largely on nontariff measures this article proposes a qualitative approach to the problem and applies it to the tokyo and uruguay round negotiations on safeguards to protect domestic industries from problems related to increases in imports

revealing the preferences of the us federal reserve we use bayesian methods to estimate changes in us post war monetary policy in the smets and wouters model we perform the estimations by allowing for a break in monetary policy at the time of volcker s appointment as chairman this enables us to capture changes in the monetary policy regime introduced by volcker during the volcker greenspan period we find support for the assumption that monetary policy in the volcker greenspan period performed optimally under commitment our estimation strategy allows us to estimate the preferences of the us federal reserve in the volcker greenspan period where the main objective of policy appears to be inflation followed by interest rate stabilization output growth and interest rate smoothing we find that the great moderation of output growth is explained by a combination of two factors the decrease in the volatility of the structural shocks and the improved monetary policy conduct inflation stabilization however is mainly due to the change in monetary policy that took place at the beginning of volcker s mandate copyright 2010 john wiley sons ltd

cascading contingent protection abstract this paper extends the literature on the incentive effects of contingent protection by identifying and analyzing the vertical linkages that may exist across instances of contingent trade policy it is shown that the accessibility of contingent protection in a downstream industry may provide additional inducement for upstream suppliers of intermediate inputs to pursue contingent protection as well in general access to instruments of contingent protection at more than one stage of the production stream enhances the opportunity for components producers to engage in indirect rent seeking contingent protection may be pursued precisely because of the likelihood of downstream injury and cascading protection

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

a note on the estimation of import trade demand functions this paper compares six alternative methods of computing the import demand function we use a sample of 33 countries from 1995 1 to 2016 3 and brand new information on import contents made available by wiod preferred models take into account the separate effects of each final demand component contrary to some recent studies we observe that private expenditure is the main driver of import variations

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

from inflation to more inflation disinflation and low inflation volume 2 of a history of the federal reserve forthcoming covers the years of inflation and disinflation followed by a return to relatively low inflation it addresses four questions why did inflation start why did it continue for 15 or more years from 1965 to about 1982 why did it end why did it not return as we look back to the 1950s and 1960s two of the many changes in the federal reserve system affecting inflation deserve comment first in the 1950s the goal was price stability and zero reported inflation not inflation of about 2 percent the 1959 1960 disinflation brought reported consumer price index cpi inflation measured as a 12 month moving average to less than 1 percent from march through august 1959 this measure again was below 1 percent through most of 1961 and it did not reach 2 percent until early 1966 properly measured and adjusted for biases in the price index the true price level probably declined modestly during this period this period of deflation was also a period of sustained economic growth it and several periods of deflation discussed in volume 1 of a history of the federal reserve 2003 show no evidence of the liquidity trap that absorbed much recent attention in the united states and japan a second major change is the role of economists and economic research at the federal reserve board and in the federal reserve banks in the 1950s the board had no economists as members and there were few economists as

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

monetary regime switches and central bank preferences monetary policy objectives and targets are not necessarily constant over time the regime switching literature has typically analyzed and interpreted changes in policymakers behavior through simple interest rate rules this paper analyzes policy regime switches by explicitly modeling policymakers behavior and objectives we show that changes in the parameters of simple rules do not necessarily correspond to changes in policymakers preferences in fact capturing and interpreting regime changes in preferences through interest rate rules can lead to misleading results

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

regime switching and monetary policy measurement this paper applies regime switching methods to the problem of measuring monetary policy policy preferences and structural factors are specified parametrically as independent markov processes interaction between the structural and preference parameters in the policy rule serves to identify the two processes the estimates uncover policy episodes that are initiated by switches to dove regimes shown to granger cause both nber recessions and the romer dates these episodes imply real effects of monetary policy that are smaller than those found in previous studies

intertemporal substitution in import demand abstract this paper investigates the role of intertemporal substitution in us import demand using a model of import consumption based on the permanent income hypothesis estimation of the model yields an intertemporal elasticity for consumer imports which is close to 0 8 an estimate which may include importers purchase and inventory responses to the real interest rate the implied relative price elasticity of import consumption is also estimated to be close to one these results indicate that consumption imports may respond to changes in their intertemporal price as well as changes in their price relative to that of domestic substitutes

politics and the fed in the standard economic model of policy choice choices are made by analyzing the social welfare implications to find welfare optimizing policy choices in this paper i argue that in a democratic government and perhaps elsewhere policy choices emerge from a political process people vote the voting process chooses elected representatives with their appointees the representatives make policy choices the appropriate model for policy analysis is a political economy model this conclusion is reinforced by my fifteen years of studying the history of the federal reserve 1 from the start that study reflected the influence of james buchanan and many others who followed him by analyzing policy choices made by individuals or committees motivated by considerations other than optimal welfare some of my prior work with alex cukierman and scott richard is fully in that tradition meltzer cukierman and richard 1991 consider recent federal reserve policy the federal reserve has more than doubled the size of its balance sheet it has more than 1 trillion of excess reserves and more than 1 trillion of long term relatively illiquid mortgage backed securities no central bank in a developed country ever had so much long term debt in 1932 a much less informed federal reserve board refused a request from congress to support the mortgage market congress responded by creating the home loan banks a fiscal solution the current board undertook the fiscal operations this is a political decision who would claim it is optimal policy in the late 1970s congress gave the federal reserve a dual mandate except for the years of moderation it has acted lexicographically from 1979 to 1982 it pursued disinflation letting unemployment rise to 10 8 percent before 1979 it concentrated on 1

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

import demand in heterogeneous panel data with cross sectional dependence we investigate the long run income and price elasticity of import demand functions with a heterogeneous unbalanced panel of 34 countries over the period 1985 q1 2018 q3 to estimate world elasticit

competition competition policy and the gatt the authors argue that further moves to liberalize trade and to implement existing gatt rules and principles may have a greater impact on global competition than would the pursuit of harmonization of competition policy they also suggest that current gatt rules and case law provide scope for disputes to be brought before the gatt that relate to both the application and the nonapplication of existing domestic competition laws of gatt contracting parties this leads to de facto discrimination between domestic and foreign products little use has been made of the gatt in this connection perhaps existing indirect avenues for raising competition related disputes in the gatt should be pursued more actively this would help identify what specific government policies might be the subject of multilateral negotiations and explicitly incorporated into the gatt framework

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

the road to uruguay context and to show how its agenda and procedures as well as its problems and possible outcomes have arisen from the conjunction of developments in patterns of world trade and the evolution of the gatt itself the uruguay round has some novel features but it also strongly reflects the continuation of the trends of the last forty years the gatt has fostered the evolution of the world trading system from a highly restrictive form with two major players the us and the uk towards a more liberal and evenly balanced form the practices appropriate to the former circumstances achieved many of their objectives but they proved gradually less able to cope with the strains of the new circumstances and problems thus the gatt s traditional bilateral mode of tariff negotiations has given way first to a more multilateral form of tariff talks and then to a preoccupation with constitutional issues such as trading rules and the sectoral coverage of the gatt its procedures have become progressively more multilateral but especially when one considers trade policy implemented between gatt rounds its outcomes appear recently to have become less so it is paradoxical that whereas initially the gatt harnessed the crude power of bilateralism to achieve multilateral outcomes it has more recently adopted multilateral procedures but with more bi and pluri lateral results

present value tests of an intertemporal model of the current account abstract this paper first demonstrates that in a simple intertemporal open economy model the current account is equal to the expected decline of the present discounted value of net output of a country net output is defined as gross domestic product less the sum of investment plus government spending it then uses econometric methods for present value models to analyze the current account for four countries in two of these countries the model does a satisfactory job of explaining the current account

macroeconomic stability and the preferences of the fed a formal analysis 1961 98 the rate of inflation in the u s has declined from an average of 4 5 in the period 1960 79 to an average of 3 6 in 1980 98 between those two periods the standard deviations of inflation and the output gap have also declined these facts can be attributed to the interaction of three possible factors a shift in central bank preferences a reduction in the variability of aggregate supply shocks and a more efficient conduct of monetary policy in this paper we identify the relative roles of these factors our framework is based on the estimation of a small structural macro model for the u s economy jointly with the first order conditions which solve the intertemporal optimization problem faced by the fed overall our results indicate that the policy preferences of the fed and in particular the implicit inflation target have changed drastically with the advent of the volcker greenspan era in addition we find that the variance of supply shocks has been lower and monetary policy has been conducted more efficiently during this period

shocks and government beliefs the rise and fall of american inflation working paper 2004 22 september 2004 abstract the authors use a bayesian markov chain monte carlo algorithm to estimate a model that allows temporary gaps between a true expectational phillips curve and the monetary authority s approximating nonexpectational phillips curve a dynamic programming problem implies that the monetary authority s inflation target evolves as its estimated phillips curve moves the authors estimates attribute the rise and fall of post world war ii inflation in the united states to an intricate interaction between the monetary authority s beliefs and economic shocks shocks in the 1970s altered the monetary authority s estimates and made it misperceive the tradeoff between inflation and unemployment that misperception caused sharp rise in inflation in the 1970s the authors estimates indicate that policy makers updated their beliefs continuously by the 1980s policy makers beliefs about the phillips curve had changed enough to account for fed chairman paul volcker s conquest of u s inflation in the early 1980s jel classification e3 e5 key words updating beliefs policy evaluation self confirming equilibrium nash inflation ramsey outcomes i introduction today many statesmen and macroeconomists believe that inflation can largely be determined by a government monetary authority then why did the federal reserve board preside over high us inflation during the late 1960s and the 1970s and why under paul volcker did it rapidly bring inflation down during the early 1980s this paper answers these questions by estimating a model that features a particular process that makes a procession of economic shocks induce the monetary authority to alter its model of inflation unemployment dynamics the phillips curve at each date t the monetary authority updates its beliefs about the phillips curve and then recomputes a first period action recommended by a phelps problem a discounted dynamic programming problem that minimizes the expected value of a discounted quadratic loss function of inflation and unemployment 1 the monetary authority pursues the same objectives at each date using the same structural model with only its estimates of that model changing over time 2 this model of the systematic part of inflation puts the monetary authority s beliefs about the phillips curve front and center 3 we assume that the monetary authority s model of the phillips curve deviates in two subtle but important ways from what it would be in a rational expectations model e g kydland and prescott 1977 the first deviation is that while the true phillips curve is like kydland and prescott s we assume that the monetary authority omits the public s expected rate of inflation from its phillips curve by itself this omission need not prevent the outcomes of our model from coinciding with those of kydland and prescott s nor need it imply that the government s model is wrong in a way that could be detected from even an infinite sample whether the monetary authority s model is wrong in a statistically detectable way depends on how we allow the monetary authority to reestimate the parameters of its model in particular if the monetary authority were to believe that the coefficients of its phillips curve are constant over time then its estimates would converge to ones that support a self confirming equilibrium sce after convergence its estimated phillips curve would correctly describe occurrences along the sce path for inflation and unemployment such an after convergence version of our model has little hope of explaining the rise and fall of us inflation that model would have inflation fluctuating randomly around a constant sce level that coincides with kydland and prescott s time consistent suboptimal i e excessive level 4 this outcome motivates our second subtle deviation from a rational expectations equilibrium