forecasting recessions the puzzle of the enduring power of the yield curve for over two decades researchers have provided evidence that the yield curve specifically the spread between long and short term interest rates contains useful information for signaling future recessions despite these findings forecasters appear to have generally placed too little weight on the yield spread when projecting declines in the aggregate economy indeed we show that professional forecasters are worse at predicting recessions a few quarters ahead than a simple real time forecasting model that is based on the yield spread this relative forecast power of the yield curve remains a puzzle the appendix is included online as supplementary material

econometric developments in agricultural and resource economics the first 100 years this article reviews the major contributions of agricultural and resource economists in the area of econometrics over the past 100 years early on a number of agricultural economists were in on the ground floor in terms of developing new econometric methods over time as the economics profession became more empirically oriented agricultural and resource economists increasingly assumed the role of early adopters of new econometric methods even so agricultural and resource economists continue to make useful modifications to econometric techniques in order to adapt the methods to the unique nature of the problems and applications that we study

accounting for a shift in term structure behavior with no arbitrage and macro finance models this paper examines a shift in the dynamics of the term structure of interest rates in the u s during the mid 1980s we document this shift using standard interest rate regressions and using dynamic a ne no arbitrage models estimated for the pre and post shift subsamples the term structure shift largely appears to be the result of changes in the pricing of risk associated with a level factor using a macro nance model we suggest a link between this shift in term structure behavior and changes in the dynamics and risk pricing of the federal reserve s in ation target as perceived by investors

a model of target changes and the term structure of interest rates abstract we investigate the effects of short term rate targeting by the federal reserve on the term structure of interest rates and make contributions at two levels using a new series of interest rate targets made available by the federal reserve bank of new york we develop a family of models that highlight the implications of discrete changes in interest rate targets for the term structure of interest rates we show that spreads between short term rates and the overnight federal reserve funds rate are mainly driven by expectations of changes in the target not by the transitory dynamics of the overnight rate around the target hence the bias in tests of the expectations hypothesis that we document can be mainly attributed to the erroneous anticipation of future changes in monetary policy our modeling assumptions and newly available data make it possible to extract a series of market expectations of the next target change which are compared with a series of realized target changes

how stable is the predictive power of the yield curve evidence from germany and the united states empirical research over the last decade has uncovered predictive relationships between the slope of the yield curve and subsequent real activity and inflation some of these relationships are highly significant but their theoretical motivations suggest that they may not be stable over time we use recent econometric techniques for break testing to examine whether the empirical relationships are in fact stable we consider continuous models which predict either economic growth or inflation and binary models which predict either recessions or inflationary pressure in each case we draw on evidence from germany and the united states models that predict real activity are somewhat more stable than those that predict inflation and binary models are more stable than continuous models the model that predicts recessions is stable over our full sample period in both germany and the united states

was there a peso problem in the u s term structure of interest rates 1979 1982 during the period following october 1979 through 1982 the u s federal reserve allowed interest rates to fluctuate widely in contrast to its previous policy of targeting these rates in the 1970s the policy was abandoned in 1982 in favor of an operating procedure that reduced the variation in interest rates this paper implements an estimation method to identify from the term structure of eurodollar returns the market s beliefs that the federal reserve may revert to interest rate targeting the model is not rejected and gives plausible estimates of the probability of a switch in monetary regimes copyright 1991 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

china s official rates and bond yields abstract recent research shows that bond yields are influenced by monetary policy decisions to learn how this works in a bond market that differs significantly from those in the us and europe we model chinese bond yields using the one year deposit interest rate as a state variable we also include the spread between the one year market interest rate and the one year deposit interest rate as another factor the model is developed in an affine framework and closed form solutions are obtained we then test the model empirically with a markov chain monte carlo simulation procedure the results show that the new model that incorporates the official rate in china characterizes the changing shape of the yield curve well

aggregation of information in large cournot markets consider a homogeneous product market where firms have private information about an uncertain demand parameter and compete in quantities we examine the convergence properties of bayesian cournot equilibria as the economy is replicated and conclude that large cournot or almost competitive markets do not aggregate information efficiently except possibly when the production technology exhibits constant returns to scale even in a competitive market there is a welfare loss with respect to the first best outcome due to incomplete information in general nevertheless a competitive market is efficient taking as given the decentralized private information structure of the economy endogenous and costly information acquisition is examined and seen to imply that the market outcome always falls short of the first best level with decreasing returns to scale the results are also shown to be robust to the addition of extra rounds of competition which allows firms to use the information revealed by past prices explicit closed form solutions yielding comparative static results are obtained for models characterized by quadratic payoffs and affine information structures

devaluation expectations the swedish krona 1982 1991 devaluation expectations for the swedish krona are estimated for the period 1982 1991 with several methods first the simplest test is applied under either only the minimal assumption of no positive minimum profit or the additional assumption of uncovered interest parity then a more precise method suggested by bertola and svensson is used in which expected rates of depreciation within the exchange rate band estimated in several ways are subtracted from interest rate differentials finally estimated devaluations expectations are to some extent explained by a few macrovariables and parliament elections

the stochastic volatility of short term interest rates some international evidence this paper estimates a stochastic volatility model of short term riskless interest rate dynamics estimated interest rate dynamics are broadly similar across a number of countries and reliable evidence of stochastic volatility is found throughout in contrast to stock returns interest rate volatility exhibits faster meanreverting behavior and innovations in interest rate volatility are negligibly correlated with innovations in interest rates the less persistent behavior of interest rate volatility reflects the fact that interest rate dynamics are impacted by transient economic shocks such as central bank announcements and other macroeconomic news the past decade has witnessed unprecedented growth in the market for fixedincome derivatives domestically as well as internationally in light of this growth recent research has attempted to empirically characterize the dynamics of short term riskless interest rates necessary for the valuation of many of these securities with few exceptions much of this evidence has been concerned with the behavior of u s interest rates the purpose of this paper is to investigate the dynamics of short term interest rates across a number of countries a particularly noteworthy feature at least of the u s evidence is that the volatility of short term interest rates is itself volatile the stochastic nature of volatility is an important property of interest rate dynamics which we wish to focus on in our comparison to do so practically this paper implements a computationally efficient and statistically reliable method for estimating stochastic volatility models in finance we apply this method to chan et al s 1992 specification of short term riskless interest rate dynamics augmented with stochastic volatility for a clean international comparison we use proxies for short term riskless interest rates drawn from the same market the london interbank market over the same sample period unlike nowman 1997 we find that the

predicting turning points through the integration of multiple models a new method for forming composite turning point or other qualitative forecasts is proposed rather than forming composite forecasts by the standard bayesian approach with weights proportional to each model s posterior odds weights are assigned to the individual models in proportion to the probability of each model s having the correct turning point prediction these probabilities are generated by logit models estimated with data on the models past turning point forecasts an empirical application to gross national product gross domestic product forecasting of 18 organization for economic cooperation and development countries demonstrates the potential benefits of the procedure

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

macroeconomic forecasting using pooled international data it has long been recognized that national economies are economically interdependent see e g burns and mitchell 1946 for evidence of comovements of business activity in several countries and zarnowitz 1985 for a summary of recent evidence recognition of such interdependence raises the question can such interdependence be exploited econometrically to produce improved forecasts of countries macroeconomic variables such as rates of growth of output and so forth this is the problem that we address in this article using annual and quarterly data for a sample of european economic community eec countries and the united states

macroeconomics and the term structure this paper provides an overview of the analysis of the term structure of interest rates with a special emphasis on recent developments at the intersection of macroeconomics and finance the topic is important to investors and also to policymakers who wish to extract macroeconomic expectations from longer term interest rates and take actions to influence those rates the simplest model of the term structure is the expectations hypothesis which posits that long term interest rates are expectations of future aver age short term rates in this paper we show that many features of the configuration of interest rates are puzzling from the perspective of the expectations hypothesis we review models that explain these anomalies using time varying risk premia although the quest for the fundamental macroeconomic explanations of these risk premia is ongoing inflation uncertainty seems to play a large role finally while modern finance theory prices bonds and other assets in a single unified framework we also consider an earlier approach based on segmented markets market segmentation seems important to understand the term structure of interest rates during the recent financial crisis jel e31 e43 e52 e58

why does the yield curve predict output and inflation the slope of the yield curve has been shown empirically to be a significant predictor of inflation and real economic activity but there is no standard theory as to why the relationship exists this article constructs an analytical rational expectations model to investigate the reasons for the empirical results the model suggests that the relationships are not structural but are instead influenced by the monetary policy regime however the yield curve should have predictive power for output and inflation in most circumstances various implications of the theoretical model are tested and confirmed empirically

time varying yield curve dynamics and monetary policy monetary policy the yield curve and the private sector behaviour of the us economy are modelled as a time varying structural vector autoregression the monetary policy shocks of the early 1980s explain a large portion of the persistence of inflation and the level of the term structure changes in inflation expectations implied by the yield curve account for the persistence of the federal funds rate failures of the expectations hypothesis are rare and coincided with the credibility building of paul volcker s fed tenure at the beginning of the 1980s and the sequence of consecutive policy rate cuts around the time of the early 1990s recession copyright 2009 john wiley sons ltd

bayesian composite qualitative forecasting hog prices again a new method for forming composite qualitative forecasts is presented a set of qualitative forecasts is evaluated using auxiliary logit models to predict the probability of each forecast s correctness individual model forecasts are then combined on the basis of normalized values of these probabilities this method is demonstrated with three sets of forecasts on the direction of change in hog prices up or down the application shows that without any information on the manner in which the individual forecasts are generated this method can form a composite forecast that is superior according to a variety of metrics for evaluating qualitative forecasts

taylor rules and the term structure abstract the expectations model of the term structure has been subjected to numerous empirical tests and almost invariably rejected with the failure generally attributed to systematic expectations errors or to shifts in risk premia rules for monetary policy designed along the lines of taylor 1993 discretion versus policy rules in practice carnegie rochester conference series on public policy 39 195 214 specify that the central bank adjusts short term yields in response to deviations of inflation and output gaps from target level such rules give a good empirical account of the behavior of the short term interest rate combining the taylor rule and expectations theory it is possible to generate along lines pioneered by campbell and shiller 1987 cointegration and tests of present value models journal of political economy 95 1062 1088 a series of theoretical long term interest rates when such theoretical rates are calculated for the us over 1980 2004 considerable support for the expectations theory emerges

a tractable interest rate model with explicit monetary policy rates abstract this paper proposes a novel interest rate model that presents simple analytical pricing formulas for interest rate based derivatives including swaps futures swaptions caps and floors exploring the regime switching feature of markov chains the proposed model focuses on discrete changes in the central bank policy rates the main driver of short term rate fluctuations an empirical analysis shows that the proposed model generally outperforms other standard short term rate models in fitting cross sections of options prices moreover the explicit nature of policy rates to some extent enables the model to infer risk neutral probabilities of the central bank rate decisions

term premia and inflation uncertainty empirical evidence from an international panel dataset this paper provides cross country empirical evidence on bond risk premia i construct a panel of zero coupon nominal government bond yields spanning ten industrialized countries and nearly two decades i hence compute forward rates and then use two different methods to decompose these forward rates into expected future short term interest rates and term premiums the first method uses an affine term structure model with macroeconomic variables as unspanned risk factors the second method uses surveys i find that term premium estimates declined across countries over the sample period especially in countries that appear to have reduced inflation uncertainty by making substantial changes in the monetary policy frameworks of their central banks during the recent financial crisis term premiums have remained flat and even declined further in some countries perhaps reflecting the effects of quantitative easing actions by many central banks

expected and predicted realignments the ff dm exchange rate during the ems an empirical model of time varying realignment risk in an exchange rate target zone is developed expected rates of devaluation are estimated as the difference between interest rate differentials and estimated expected rates of depreciation within the exchange rate band using french franc deutsche mark data during the european monetary system the behavior of estimated expected rates of depreciation accord well with the theoretical model of bertola svensson 1990 we are also able to predict actial realignments with some success

uncertainty on monetary policy and the expectations model of the term structure of interest rates abstract in this paper we jointly estimate a forward looking reaction function for the 3 month rate along with a term structure relationship linking the 6 month interest rates to current and expected future 3 month rates in our empirical model the response of the 6 month interest rates to current and future 3 month interest rates is allowed to depend on uncertainty on monetary policy the expectations theory cannot be rejected in periods of low uncertainty on monetary policy

the central bank as shaper and observer of events the case of the yield spread the yield spread has commonly been employed as a successful predictor of economic growth and recessions although its marginal predictive power has decreased since the 1990s notably the yield spread s declining power to predict us economic activity coincided with its growing power to predict us interest rate changes in my view these phenomena are inevitably linked and share one cause the central bank intended to enhance both its transparency and credibility through greater information disclosure this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity

using bayesian techniques for data pooling in regional payroll forecasting this article adapts to the regional level a multicountry technique recently used by garcia ferrer highfield palm and zellner 1987 and extended by zellner and hong 1987 to forecast the growth rates in gross national product across nine countries this forecasting methodology is applied to the regional level by modeling payroll formation in seven ohio metropolitan areas we compare the forecasting performance of these procedures with that of a ridge estimator and find that the ridge estimator produces forecasts equal to or better than those from the newly proposed estimators we conclude that the ridge estimator which does not reference the pooled data information introduced by the newly proposed techniques may serve as a benchmark against which to judge the relative importance of this kind of information in improving forecasts

dynamics of the federal funds target rate a nonstationary discrete choice approach we apply a discrete choice approach to model the empirical behaviour of the federal reserve in changing the federal funds target rate the benchmark of short term market interest rates in the us our methods allow the explanatory variables to be nonstationary as well as stationary this feature is particularly useful in the present application as many economic fundamentals that are monitored by the fed and are believed to affect decisions to adjust interest rate targets display some nonstationarity over time the chosen model successfully predicts the majority of the target rate changes during the time period considered 1994 2001 and helps to explain strings of similar intervention decisions by the fed based on the model implied optimal interest rate our findings suggest that there is a lag in the fed s reaction to economic shocks during this period copyright 2004 john wiley sons ltd

the term structure with semi credible targeting the federal reserve sets targets for interest rates which it enforces through direct market intervention these targets are changed periodically in this paper we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time the probability of target changes is not constant in the model but changes as a function of observables the model performs well at explaining the shifts in the yield curve that accompany target changes in u s financial markets the federal reserve bank the fed is a unique player usually we assume that market participants are price takers in financial markets however there is evidence that this is not true of the fed in fact the fed sets targets for short term rates which it attempts to maintain by market intervention injecting or withdrawing funds from the market to keep the rates near their targets targets are changed from time to time and market participants know when such a target change occurs they may in fact have some limited ability to forecast such target changes several recent papers have provided evidence that models which allow the short rate to revert toward a mean which is itself a random process perform

this is what the leading indicators lead we propose an optimal filter to transform the conference board composite leading index cli into recession probabilities in the us economy we also analyse the cli s accuracy at anticipating us output growth we compare the predictive performance of linear var extensions of smooth transition regression and switching regimes probit non parametric models and conclude that a combination of the switching regimes and non parametric forecasts is the best strategy at predicting both the nber business cycle schedule and gdp growth this confirms the usefulness of cli even in a real time analysis copyright 2002 john wiley sons ltd

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

has the economy become more predictable changes in greenbook forecast accuracy several researchers have recently documented large reductions in economic volatility but a more important question may be whether the economy has become more predictable using forecasts from the federal reserve greenbooks i find that inflation and output have become more predictable though the results for output are somewhat mixed the reductions in unpredictability if any are significantly smaller than reductions in volatility associated with this the predictable component of fluctuations in output and inflation has virtually disappeared

macroeconomic sources of risk in the term structure we develop a new way of modeling time variation in term premia based on the stochastic discount factor model of asset pricing the joint distribution of excess u s bond returns of different maturity and the observable fundamental macroeconomic factors is modeled using multivariate garch with conditional covariances in the mean to capture the term premia by testing the assumption of no arbitrage we derive a specification test of our model we estimate the contribution made to the term premia at different maturities through real and nominal sources of risk from the estimated term premia we recover the term structure of interest rates and examine how it varies through time finally we examine whether the reported failures of the rational expectations hypothesis can be attributed to an omitted time varying term premium

reserve regulation and recourse as a source of risk premia in the federal funds market abstract in this paper we demonstrate that there is a pronounced and persistent daily pattern of returns in the federal funds market centered on wednesday we present evidence that explains this phenomenon as a reflection of the optimal behavior of banks operating in an environment in which there are effective reserve requirements and a penalty cost for recourse to discount borrowing in particular we report empirical evidence that shows there was a significant upward shift in the amplitude of this pattern of daily returns that resulted from 1 the increase in uncertainty associated with the change in federal reserve operating procedures during the 1979 1982 period and 2 the imposition of a surcharge on discount borrowing instituted by the federal reserve our results demonstrate that what otherwise might be regarded as anomalous interest rate behavior is consistent with the optimal response of banks to the regulatory environment within which they operate

have increases in federal reserve transparency improved private sector interest rate forecasts yes this paper shows that since the late 1980s u s financial markets and private sector forecasters have become 1 better able to forecast the federal funds rate at horizons out to several months 2 less surprised by federal reserve announcements 3 more certain of their interest rate forecasts ex ante as measured by interest rate options and 4 less diverse in the cross sectional variety of their interest rate forecasts we also present evidence that strongly suggests increases in federal reserve transparency played a role for example private sector forecasts of gdp and inflation have not experienced similar improvements over the same period indicating that the improvement in interest rate forecasts has been special

the effect of monetary policy actions on exchange rates under interest rate targeting abstract we specify a theoretical model of the exchange rate response to u s monetary policy actions that is capable of explaining a wide range of recent empirical results we show that the response pattern of spot and expected future exchange rates depends on the predictability of federal reserve actions the persistence of shocks to the economy and the reaction of foreign central banks to the us monetary policy shock we also show that the movements of spot and expected future exchange rates in anticipation of a monetary policy change can outweigh the immediate responses at the time of the change

tests of the expectations hypothesis resolving the campbell shiller paradox one of the more puzzling results in the expectations hypothesis eh testing literature is the campbell shiller paradox csp in an influential paper campbell and shiller 1991 found that the slope of the term structure almost always gives a forecast in the wrong direction for the short term change in the yield on the longer bond but gives a forecast in the right direction for long term changes in short rates this paper provides an econometric resolution to the csp specifically it shows that by their construction these tests can generate results consistent with the csp if the eh does not holdnwhatever the reason monte carlo experiments confirm that this explanation can account for campbell and shiller s paradoxical results for most pairings of short term and long term rates considered

cross country differences in monetary policy execution and money market rates volatility abstract volatility patterns in overnight interest rates display differences across industrial countries that existing models designed to replicate the features of individual countries markets cannot account for this paper presents an equilibrium model of the overnight interbank market that matches cross country differences in patterns in interest volatility by incorporating differences in how central banks manage liquidity in response to shocks our model is consistent with central banks practice of rationing access to marginal facilities when the objective of stabilizing short term interest rates conflicts with another high frequency objective such as an exchange rate target

optimal research for cournot oligopolists we extend the classical cournot model to take account of uncertainty in either the cost function or the demand function by undertaking research firms can acquire private asymmetric information to help resolve their uncertainty and make a more informed production decision the model is a two stage game in the first stage research levels are chosen and in the second stage conditional on private research outcomes production decisions are made we find that for a linear continuous information structure there is a unique nash equilibrium to the game in the equilibrium there may be an inefficient amount of aggregate research and there may be incomplete pooling as well the model specializes to the classical case when the cost of research is zero and each firm gains essentially the same information by doing an infinite amount of research or when the cost of research is so high no firm undertakes research

nonlinear mean reversion in the term structure of interest rates abstract the expectations hypothesis implies that the yield curve provides information on the future change in the short term interest rate however transaction costs exist in the financial market which prevent investors from realizing the arbitrage opportunity when the arbitrage does not fully cover the transaction costs the purpose of this paper is to assess the effect of transaction costs on the predictability of the term structure by using the threshold vector error correction model which allows for the nonlinear adjustment to the long run equilibrium relationship a significant amount of threshold effect is found and the adjustment coefficients are regime dependent the empirical result supports the nonlinear mean reversion in the term structure of interest rates

federal funds rate prediction we examine the forecasting performance of a range of time series models of the daily us effective federal funds ff rate recently proposed in the literature we find that i most of the models and predictor variables considered produce satisfactory oneday ahead forecasts of the ff rate ii the best forecasting model is a simple univariate model where the future ff rate is forecast using the current difference between the ff rate and its target iii combining the forecasts from various models generally yields modest improvements on the best performing model these results have a natural interpretation and clear policy implications

duopoly information exchange the case of unknown slope abstract we model information exchange between duopolists facing a common random demand the slope of the common demand curve facing the firms is assumed unknown and firms observe private signals about this slope we show that for sufficiently large variation in the demand slope firms earn strictly higher profit when they share their information rather than keeping it private even with constant marginal costs and homogeneous goods in this case it is a nash equilibrium for the duopolists to share their information in a quid pro quo information exchange consistent with earlier models information exchange raises welfare

market information and firm performance the value of new information depends on how accurate the information is but it may also depend on the characteristics of the firm and the nature of the industry it operates in we develop a game theoretic model to understand how firm and industry characteristics moderate the effect of market information on firm profits our results suggest that information is more valuable when product substitutability is higher suggesting that information is of greater value in more competitive industries our results also suggest that although industry size does not affect the value of information information is more valuable for larger firms we find that except under some conditions more precise market information has a greater impact on profits in a stackelberg mode of conduct than in a bertrand nash mode

term premia and inflation uncertainty empirical evidence from an international panel dataset comment term premia implied by maximum likelihood estimates of affine term structure models are misleading because of small sample bias we show that accounting for this bias alters the conclusions about the trend cycle and macroeconomic determinants of the term premia estimated in wright 2011 his term premium estimates are essentially acyclical and often just parallel the secular trend in longterm interest rates in contrast bias corrected term premia show pronounced countercyclical behavior consistent with theoretical and empirical arguments about movements in risk premia jel e31 e43 e52 g12 h63 in an important recent paper wright 2011 presents a new international interest rate dataset and estimates term premia in far ahead forward rates using an affine gaussian dynamic term structure model dtsm as well as a survey based method he then relates these empirical term premia to macroeconomic conditions notably inflation uncertainty in particular he shows that the marked secular decline in estimated forward term premia across countries is correlated with decreases in measures of uncertainty around forecasts of future inflation in this comment we demonstrate that his model based term premium estimates are distorted by smallsample bias in the estimated model parameters accounting for this bias changes the behavior of the resulting term premium estimates in terms of their trend and cyclical behavior in an affine gaussian dtsm bond yields are determined by a small number of risk factors and the dynamic evolution of these risk factors follows a gaussian vector autoregression var if the risk factors in such a model are observable and if the model is maximally flexible i e if it has no parameter restrictions beyond those required for identification we know from joslin singleton and zhu 2011 that the maximum likelihood estimates of the var parameters can be found by

indeterminacy and forecastability recent studies document the deteriorating performance of forecasting models during the great moderation this conversely implies that forecastability is higher in the preceding era when the economy was unexpectedly volatile we offer an explanation for this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium models first we analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability then using a prototypical new keynesian model we numerically demonstrate that indeterminacy due to passive monetary policy can yield superior forecastability as long as the degree of uncertainty about sunspot fluctuations is relatively small

a macro finance model of the term structure monetary policy and the economy this paper develops and estimates a macro finance model that combines a canonical affine no arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation from this new empirical formulation we obtain several interesting results 1 the latent term structure factors from finance no arbitrage models appear to have important macroeconomic and monetary policy underpinnings 2 there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the federal reserve and 3 both forward looking and backward looking elements play important roles in macroeconomic dynamics

a note on budget allocation for market research and advertising abstract firms that introduce new products often conduct market research to reduce the substantial uncertainty in demand when a fixed budget is assigned to marketing oriented activity investments in market research must be balanced against other advertising expenses we characterize a firm s optimal marketing and production decisions for a new product the larger a firm s production cost the higher is the cost associated with unsold products market research increases the forecast accuracy and thus reduces the risk of overage as a consequence one might expect that a firm s investment in market research should be higher if it faces higher production costs interestingly we find that an increase in the production cost may sometimes lead to a decrease in the optimal investment in market research even when the marketing budget is not restrictive

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

the term structure of commercial paper rates this paper tests the expectations hypothesis in the market for commercial paper our main dataset which is new to the literature consists of daily indexes constructed from the actual market yields for nearly all commercial paper issued by u s corporations between january 1998 and august 2003 we show that the term premia built into commercial paper yields rise dramatically at year end causing the expectations hypothesis to be rejected however once we control for these predictable year end eects we nd the reverse that commercial paper yields largely conform with the expectations hypothesis

anticipations of monetary policy in financial markets in recent years financial markets appear better able to anticipate federal open market committee fomc policy changes beginning in the late 1980s and early 1990s longer term interest rates and futures rates have tended to incorporate movements in the federal funds rate several months in advance in contrast to the largely contemporaneous response typically observed before that time after identifying these emerging trends the paper parses the enhanced predictability into a component that can be attributed to the autoregressive behavior of the funds rate and a nonautoregressive component the paper considers institutional developments in fomc policy making that may have contributed to each of these components including gradualism in adjusting the federal funds rate target and transparency regarding the setting of the target and future policy intentions

investigating time variation in the marginal predictive power of the yield spread abstract we use bayesian time varying parameters vars with stochastic volatility to investigate changes in the marginal predictive content of the yield spread for output growth in the united states and the united kingdom since the gold standard era and in the eurozone canada and australia over the post wwii period overall our evidence does not provide much support for either of the two dominant explanations why the yield spread may contain predictive power for output growth the monetary policy based one and harvey s 1988 the real term structure and output growth journal of financial economics 22 305 333 real yield curve one instead we offer a new conjecture

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

the behavior of interest rates implied by the term structure of eurodollar futures this paper considers an equilibrium model of the term structure that is determined by two stochastic factors a short term interest rate and a target level to which the short rate is expected to revert a kalman filter technique that uses a time series cross section of eurodollar futures prices is developed to estimate the parameters of the model the term structures of spot libor and eurodollar futures volatility are compared to that predicted by the model the empirical results indicate that the two factor specification represents a significant improvement over its one factor version copyright 1996 by ohio state university press

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

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

does the beige book move financial markets about two weeks prior to each federal open market committee fomc meeting the federal reserve releases a description of economic activity in a document called the beige book by creating a quantitative index of these qualitative reports we examine whether the content of the beige book affects asset prices the results indicate that more positive beige book reports on economic growth are associated with increases in interest rates particularly intermediate and long term rates but not after controlling for several other macroeconomic indicators the results are consistent with markets viewing the report as a summary indicator of economic growth but not of monetary policy moves in the near term

a re examination of the predictability of economic activity using the yield spread this paper revisits the yield spread s usefulness for predicting future real gdp growth we show that the contribution of the spread can be decomposed into the effect of expected future changes in short rates and the effect of the term premium we find that both factors are relevant for predicting real gdp growth but the respective contributions differ we investigate whether the cyclical behavior of interest rate volatility could account for either or both effects we find that while volatility displays important correlations with both the term structure of interest rates and gdp it does not appear to account for the yield spread s usefulness for predicting gdp growth

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

optimal information acquisition for heterogenous duopoly firms abstract this paper analyzes a stochastic duopoly market in which heterogenous firms acquire costly information about the stochastic market demand prior to their production decisions the equilibrium amounts of information acquired by each firm are compared the comparative statics analyses show the differential effects of a change in information cost the degree of uncertainty in the market demand and the demand and cost function parameters journal of economic literature classification numbers d82 l13 l15

evolving u s monetary policy and the decline of inflation predictability based on a structural var with time varying parameters and stochastic volatility for the post wwii u s we document a negative correlation between the evolution of the long run coefficient on inflation in the structural monetary rule and the evolution of the persistence and predictability of inflation relative to a trend component using an estimated sticky price model we show that a more aggressive policy stance towards inflation causes a decline in inflation predictability jel e37 e52 e58

supply and demand uncertainty reduction efforts and cost comparison abstract in industries like health care consumer goods and agriculture shortages are widely observed and the consequences can be costly one of the main drivers of such shortages is the uncertain nature of supply and demand to reduce uncertainties sufficient information about supply and demand can be obtained by gathering relevant data e g auditing suppliers and conducting market research in this paper we conduct an analysis to examine the impacts of supply uncertainty demand uncertainty and uncertainty reduction efforts on production quantity and total cost we show that in the absence of uncertainty reduction efforts when the financial consequences of shortages are large or when the unit benefit is large supply uncertainty is more costly than demand uncertainty in addition exerting supply uncertainty reduction effort always causes the firm to produce fewer units than exerting demand uncertainty reduction effort although supply uncertainty reduction effort delivers a larger degree of improvement to total cost and hence is more efficient reduced supply uncertainty still leads to a higher system cost than does reduced demand uncertainty

expectations and the treasury bill federal funds rate spread over recent monetary policy regimes this paper shows that the spread between the 3 month treasury bill and the federal funds rate has significant predictive power for the future change in the federal funds rate during the volatile nonborrowed reserves operating regime but it has less and no predictive power during the borrowed reserves regime and the federal funds targeting regime respectively these findings suggest that treasury bill rates forecast future federal funds rates most accurately when the federal reserve follows a well defined rule that does not smooth the impact of shocks on the federal funds rate

expectations bond yields and monetary policy through explicitly incorporating analysts forecasts as observable factors in a dynamic arbitrage free model of the yield curve this research proposes a framework for studying the impact of shifts in market sentiment on interest rates of all maturities an empirical examination reveals that survey expectations about inflation output growth and the anticipated path of monetary policy actions contain important information for explaining movements in bond yields estimates from a forward looking monetary policy rule suggest that the central bank exhibits a preemptive response to inflationary expectations while accommodating output growth and monetary policy expectations forecasted gdp growth plays a significant role in explaining time variation in the market prices of risk the sensitivity of long yields is linked to the persistence of expected inflation under the risk neutral measure models of this type may provide traders and policymakers with a new set of tools for formally assessing the reaction of bond yields to shifts in market expectations the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

endogenous term premia and anomalies in the term structure of interest rates explaining the predictability smile abstract numerous studies have documented a predictability smile in the post war term structure of interest rates spreads between long rates and short rates predict subsequent movements in short rates provided the long horizon is less than three months or greater than two years but not for intermediate maturities proposed explanations of the smile involve interest rate smoothing by the fed time varying risk premia peso problems and measurement error we show that despite their highly restrictive nature some parameterizations of the cox ingersoll ross cir and chen scott cs models of the term structure can account for the predictability smile cir and cs parameterizations which are consistent with the smile regularity are inconsistent with other features of the data however

strategic factor market intelligence an application of information economics to strategy formulation and competitor intelligence this paper develops a model of information acquisition decisions by firms that are competing in a strategic factor market barney 1986 to purchase a scarce resource whose value is unknown and differs across firms the model builds on the argument that more accurate expectations about the firm specific value of resources is other than luck the only way for firms to obtain the specific resources required for competitive advantage we address the more specific question of what types of information firms should gather to accomplish this goal the model generates a series of testable hypotheses about how a firm s optimal mix of different types of information is affected by a number of factors including the level of uncertainty about the value of the resource being acquired the rarity imitability and nonsubstitutability of that resource the level of inscrutability of firms pre existing stocks of resources and firms information gathering and information processing capacities

new techniques to extract market expectations from financial instruments this paper is a selective survey of new or recent methods to extract information about market expectations from asset prices for monetary policy purposes traditionally interest rates and forward exchange rates have been used to extract expected means of future interest rates exchange rates and inflation more recently these methods have been refined to rely on implied forward interest rates so as to extract expected future time paths very recently methods have been designed to extract not only the means but the whole risk neutral probability distribution from a set of option prices

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

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

analysis of exchange rate target zones using a limited dependent rational expectations model with jumps this article examines the exchange rate determination in a target zone regime when the bounds can be fixed for an extended period but are subject to occasional jumps in this case the behavior of the endogenous variable is affected by the agents expectations about both the occurrence and the size of the jump empirical results using data for the franc mark exchange rate provide support for the nonlinear model with time varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity

entrepreneurial networking a blessing or a curse differential effects for low medium and high performing franchisees recent studies have called for a better understanding of the link between networking and entrepreneurial performance we provide such understanding in three ways by focusing on a specific entrepreneurial context franchise systems by developing a multi faceted theoretical framework and by highlighting a contingency that may affect the networking performance link we combine knowledge and learning perspectives with a networking perspective to develop and test a multi faceted framework on the effects of franchisee networking with peers within a franchise system peer networking on franchisee unit performance in particular we argue that the performance benefits that franchisees draw from networking with their peers vary between low medium and high performing franchisees we use ordinary least squares ols and quantile regression analyses to test our hypotheses with empirical data from a dutch franchise system our results confirm that structural resource and relational facets of franchisee peer networking affect unit performance and that they benefit and harm low medium and high performing franchisees differently

the federal reserve system and control of the money supply in the 1970s this paper addresses the question of whether the federal reserve system in the 1970s used the money supply as its predominant intermediate target of policy l did the federal reserve control the money supply in the 1970s where control is defined as requiring that the behavior of the money supply accurately reflect the stance of monetary policy desired by the federal open market committee fomc of the federal reserve system the question just posed is approached through an examination of the system s operating procedures for implementing monetary policy in the 1970s what intermediate target of policy was the fomc trying to achieve as inferred by its choice of operating procedures 2

implications of rational inattention abstract a constraint that actions can depend on observations only through a communication channel with finite shannon capacity is shown to be able to play a role very similar to that of a signal extraction problem or an adjustment cost in standard control problems the resulting theory looks enough like familiar dynamic rational expectations theories to suggest that it might be useful and practical while the implications for policy are different enough to be interesting

investigating the effects of monetary regime shifts the case of the federal reserve and the shrinking risk premium abstract in this paper we use mishkin s efficient markets framework journal of finance 37 1982 63 72 to show that the founding of the federal reserve led to a greater than 50 reduction in the size of the risk term premium a 6 month instrument pays over a 3 month one and that this reduction coincides with the significant reduction in the uncertainty of interest rates that took place during the same period this result demonstrates a major impact this unparalleled us monetary regime shift had on financial markets and provides further confirmation of the importance of accounting for major institutional and policy changes when investigating the sources of changing intertemporal macroeconomic relationships

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

optimal market intelligence strategy when management attention is scarce this paper extends the theoretical literature on firms optimal information strategies to the situation when a firm s management attention capacity to process available data is scarce in this case a firm s optimal market intelligence strategy must trade off learning a little about a broad range of markets a broad strategy with gaining a very deep understanding of one or a few markets a focused strategy this trade off is not present when data are scarce an assumption made in most of the existing literature on optimal information search strategies however in data rich environments which are of increasing relevance given technology changes we show a focused market intelligence strategy is always best when managers need to process a substantial amount of data before beginning to gain insights i e there are increasing returns to attention interestingly this focused strategy can also be best with decreasing returns to attention when a managers are sufficiently efficient in processing the available data and b managers have sufficiently strong initial priors on the unknown market parameters we show a broad market intelligence strategy is only optimal when new data points are sufficiently redundant i e when the learning rate is sufficiently decreasing with the allocation of more attention our results also indicate that advances in information technology can account for the pressure on firms to become more focused and that competition increases the likelihood of a focused strategy competition can lead to asymmetric outcomes where firms focus on different markets finally we note that a focused market intelligence strategy and thus an asymmetric allocation of attention does not require a priori differences between firms markets or market specific core capabilities consequently a focused market intelligence strategy can result in market specific core competencies and produce firm differences from equivalent starting conditions

the role of uncertainty in the term structure of interest rates a garch atsm approach this article examines the roles of uncertainties regarding various macro variables in determining risk premiums of bond yields we develop a multivariate garch var to quantify uncertainties regarding inflation real activities and monetary policy as time varying conditional variances we jointly estimate the multivariate garch and no arbitrage bond pricing equations using a maximum likelihood method the results indicate that the inflation uncertainty is the largest contributor to the dynamics of long term yields since the 1980s while the monetary policy uncertainty also plays noticeable roles