the relative valuation of caps and swaptions theory and empirical evidence although traded as distinct products caps and swaptions are linked by noarbitrage relations through the correlation structure of interest rates using a string market model we solve for the correlation matrix implied by swaptions and examine the relative valuation of caps and swaptions we find that swaption prices are generated by four factors and that implied correlations are lower than historical correlations long dated swaptions appear mispriced and there were major pricing distortions during the 1998 hedge fund crisis cap prices periodically deviate significantly from the no arbitrage values implied by the swaptions market the growth in interest rate swaps during the past decade has led to the creation and rapid expansion of markets for two important types of swap related derivatives interest rate caps and swaptions these over the counter derivatives are widely used by many firms to manage their interest rate risk exposure and collectively represent the largest class of fixed income options in the financial markets the international swaps and derivatives association isda estimates that the total notional amount of caps and swaptions outstanding at the end of 1997 was over 4 9 trillion which was more than 300 times the 15 billion notional of all chicago board of trade treasury note and bond futures options combined caps and swaptions are generally traded as separate products in the financial markets and the models used to value caps are typically different from those used to value swaptions furthermore most wall street firms use a piecemeal approach in calibrating their models for caps and swaptions making it difficult to evaluate whether these derivatives are fairly priced

eaere award for the best paper published in environmental and resource economics during 2019 we present details of the eaere award for the best paper published in environmental and resource economics during 2019 together with those highly commended papers published during this period

a shadow rate new keynesian model abstract we propose a tractable and coherent framework that captures both conventional and unconventional monetary policies with the shadow fed funds rate empirically we document the shadow rate s resemblance to an overall financial conditions index various private interest rates the fed s balance sheet and the taylor rule theoretically we demonstrate the impact of unconventional policies such as qe and lending facilities on the economy is identical to that of a negative shadow rate making the latter a useful summary statistic for these policies our model generates the data consistent result a negative supply shock is always contractionary it also salvages the new keynesian model from the zero lower bound induced structural break

the induced innovation hypothesis and energy saving technological change we develop a methodology for testing hicks s induced innovation hypothesis by estimating a product characteristics model of energy using consumer durables augmenting the hypothesis to allow for the ine uence of government regulations for the products we explored the evidence suggests that i the rate of overall innovation was independent of energy prices and regulations ii the direction of innovation was responsive to energy price changes for some products but not for others iii energy price changes induced changes in the subset of technically feasible models that were offered for sale iv this responsiveness increased substantially during the period after energy efficiency product labeling was required and v nonetheless a sizable portion of efficiency improvements were autonomous

negative interest rate policy and the yield curve we evaluate the implications of the ecb s negative interest rate policy nirp on the yield curve to capture various shapes of the short end of the yield curve induced by the nirp we introduce two policy indicators which summarize the immediate and longer horizon future monetary policy stances we find the four nirp events lowered the short term interest rate by the same amount the impact is dampened at longer maturities for the first two event dates due to lack of forward guidance in contrast in the last two dates forward guidance drives the largest effects in two years

contractionary devaluation in the southern cone the case of chile abstract this paper discusses the effects of a currency devaluation on output employment and the trade balance in a small open economy chile the structure of the foreign trade sector in terms of price elasticities the sectoral differences in relative domestic value added intensities across exports and import competing industries and the degree of wage indexation are the main determinants in our model of the impact of devaluation a simulation carried out with a computable macro model for chile shows a currency devaluation to be contractionary in the short to medium run

a simple macro model for a small open economy facing a binding external constraint chile abstract in this paper a keynesian macroeconomic model for a small open economy is used which describes the functioning of the real part of the economy in the short run when facing a dominant external restriction the main conclusions of this paper are 1 in the chilean case a devaluation has a contractionary impact in the short run i e a 10 real devaluation produces a 3 4 drop on the level of output the non fulfilment of the marshall lerner condition accounts for only 30 of the output contraction while the remaining 70 corresponds to the decline in consumption that is induced by the reduction in real wages 2 when the economy has an external deficit the adequate combination of exchange and fiscal policies to restore the balance of payments equilibrium which minimizes the decline of output depends on the magnitude of the devaluation thus an over shooting in the exchange rate together with a contractionary fiscal policy would produce an unnecessarily deflationary impact in the short run 3 the chilean empirical evidence shows that when there is a dominant external constraint the magnitude of the short run trade off between real wages and employment is not very acute the short run elasticity of employment with respect to the real wage is 0 34

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

alternative policy impacts on us ghg emissions and energy security a hybrid modeling approach abstract this study addresses the possible impacts of energy and climate policies namely corporate average fleet efficiency cafe standard renewable fuel standard rfs and clean energy standard ces and an economy wide equivalent carbon tax on ghg emissions in the us to the year 2045 bottom up and top down modeling approaches find widespread use in energy economic modeling and policy analysis in which they differ mainly with respect to the emphasis placed on technology of the energy system and or the comprehensiveness of endogenous market adjustments for this study we use a hybrid energy modeling approach markal macro that combines the characteristics of two divergent approaches in order to investigate and quantify the cost of climate policies for the us and an equivalent carbon tax the approach incorporates macro economic feedbacks through a single sector neoclassical growth model while maintaining sectoral and technological detail of the bottom up optimization framework with endogenous aggregated energy demand our analysis is done for two important objectives of the us energy policy ghg reduction and increased energy security our results suggest that the emission tax achieves results quite similar to the ces policy but very different results in the transportation sector the cafe standard and rfs are more expensive than a carbon tax for emission reductions however the cafe standard and rfs are much more efficient at achieving crude oil import reductions the gdp losses are 2 0 and 1 2 relative to the base case for the policy case and carbon tax that difference may be perceived as being small given the increased energy security gained from the cafe and rfs policy measures and the uncertainty inherent in this type of analysis

global effective lower bound and unconventional monetary policy abstract in a standard open economy new keynesian model the effective lower bound causes anomalies output and terms of trade respond to a supply shock in the opposite direction compared to normal times we introduce a tractable framework to accommodate for unconventional monetary policy in our model these anomalies disappear we allow unconventional policy to be partially active and asymmetric between countries empirically we find the us euro area and uk have implemented a considerable amount of unconventional monetary policy the us follows the historical taylor rule whereas the others have done less compared to normal times

evaluating central banks tool kit past present and future abstract we develop a structural dsge model to systematically study the principal tools of unconventional monetary policy quantitative easing qe forward guidance and negative interest rate policy nirp as well as the interactions between them to generate the same output response the requisite nirp and forward guidance interventions are twice as large as a conventional policy shock which seems implausible in practice in contrast qe via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound quantitatively qe1 qe3 can account for two thirds of the observed decline in the shadow federal funds rate in spite of its usefulness qe does not come without cost a large balance sheet has consequences for different normalization plans the efficacy of nirp and the effective lower bound on the policy rate

federal reserve interest rate targeting rational expectations and the term structure abstract the amount of information in the yield curve for forecasting future changes in short rates varies with the maturity of the rates involved indeed spreads between certain long and short rates appear unrelated to future changes in the short rate contrary to the rational expectations hypothesis of the term structure this paper estimates a daily model of federal reserve interest rate targeting behavior which accompanied by the maintained hypothesis of rational expectations explains the varying predictive ability of the yield curve and elucidates the link between fed policy and the term structure

evaluating an alternative risk preference in affine term structure models dai and singleton 2002 and duffee 2002 show that there is a tension in affine term structure models between matching the mean and the volatility of interest rates this article examines whether this tension can be solved by an alternative parametrization of the price of risk the empirical evidence suggests that first the examined parametrization is not sufficient to solve the mean volatility tension second the usual result in the estimation of affine models indicating that some of the state variables are extremely persistent may have been caused by the lack of flexibility in the parametrization of the price of risk term structure models have several uses including pricing fixed income derivatives managing the risk of fixed income portfolios and detecting relationships between the term structure of interest rates and macrovariables such as inflation and consumption to perform well in these tasks term structure models must be numerically and econometrically tractable while matching the empirical properties of the term structure movements at least two empirical properties of the term structure of interest rates have been well established by financial economists over the years see dai and singleton 2003 for a survey first the term premium or the expected excess return of treasury bonds has a high time variability second the volatility of interest rates is time varying these two properties are so prominent in the data that they will be referred to as stylized facts while these two stylized facts are very well established in the empirical literature affine term structure models are thoroughly discussed in the theoretical literature affine models are those in which the yield of zero coupon bonds are affine functions of the model state variables classic

minimum cost strategies for sequestering carbon in forests this paper examines the costs of meeting explicit targets for increments of carbon sequestered in forests when both forest management decisions and the area of forests can be varied costs are estimated as welfare losses in markets for forest and agricultural products results show greatest change in management actions when targets require large near term flux increments while land area change is largest when long term increments are needed marginal costs per tonne of carbon flux do not vary greatly with the form of the target and are similar to findings of earlier studies for comparable size of average carbon flux increment

the costs of carbon sequestration a revealed preference approach increased concem by policy makers with the threat of global climate change has brought with it considerable attention to the possibility of encouraging the growth of forests as a means of sequestering carbon dioxide national academy of sciences nas 1992 james p bruce et al 1996 1 the kyoto protocol to the united nations framework convention on climate change 1997 which establishes emission reduction targets for the united states and other industrialized nations states that carbon sequestration can be used by participating nations to achieve their targets moreover even before the kyoto agreement this approach had become an explicit element of both u s and intemational climate policies u s department of energy 1991 united nations general assembly 1992 william j clinton and albert gore 1993 this high level of interest has been due in part to suggestions that sufficient lands are available to use the approach to mitigate a substantial share of annual carbon dioxide c02 emissions greg marland 1988 daniel a lashof and dennis a tirpak 1989 mark c trexler 1991 and claims that growing trees to sequester carbon is a relatively inexpensive means of combating climate change roger a sedjo and allen m solomon 1989 daniel j dudek and alice leblanc 1990 nas 1992 in other words the serious attention given by policy makers to carbon sequestration can partly be explained by implicit assertions about respective marginal cost functions i develop and demonstrate a method by which the costs of carbon sequestration can be estimated on the basis of evidence from landowners behavior when confronted with the opportunity costs of alternative land uses the simplest of previous economic analyses derived single point estimates of average costs associated with particular sequestration levels marland 1988 sedjo and solomon 1989 dudek and leblanc 1990 edwin s rubin et al 1992 omar masera et al 1995 often it has been assumed that land opportunity costs are zero g van kooten et al 1992 j k winjum et al 1992 new york state energy office 1993 robert k dixon et al 1994 another set of studies essentially engineering costing models has constructed marginal cost schedules by using information on revenues and costs of production for altemative uses on representative types or locations of land and then sorting these in ascending order of cost robert j moulton and kenneth r richards 1990 richards et al 1993 simulation models include a model of the lost profits due to removing land from agricultural production peter j parks and ian w hardie 1995 a mathematical programming model of the agricultural sector and the timber market richard m adams et al 1993 a related model incorporating the effects of agricultural price support programs j m callaway and bruce mccarl 1996 and a dynamic simulation model of forestry susan swinehart 1996 lastly an analysis by andrew j plantinga 1995 adopts land use elasticities from an econometric study to estimate sequestration costs we draw on some of the best features of the previous studies including the carbon levelization method of moulton and richards john f kennedy school of government harvard university 79 john f kennedy street cambridge ma 02138 and resources for the future richard newell supplied excellent research assistance and valuable comments on a previous version were provided by lawrence goulder william nordhaus andrew plantinga kenneth richards two anonymous referees participants in seminars at the universities of california at los angeles and santa barbara the university of maryland the university of michigan the university of texas harvard university stanford university yale university resources for the future and the national bureau of economic research the author alone is resdonsible for any errors 1 after fossil fuel combustion deforestation is the second largest source of carbon dioxide emissions estimates of annual global emissions from deforestation range from 0 6 to 2 8 billion tons compared with slightly less than 6 0 billion tons annually from fossil fuel combustion cement manufacturing and natural gas flaring combined r a houghton 1991 t m smith et al 1993

climate change interactions with agriculture forestry sequestration and food security climate change can negatively affect crop productivity decreasing food production in many regions across the world literature suggests forest carbon sequestration fcs is a good alternative to mitigate climate change due to its ability to sequester carbon at low cost nevertheless fcs subsidies have not been addressed together with impacts on food security and climate change reduced crop yields in our multidisciplinary work we collected the crop yield shocks from global circulation crop modeling we also developed a new version of a computable general equilibrium model for the economic analysis thus we evaluate the global economic impacts of using carbon taxes and fcs to achieve 50 emission reductions we find that implementing an aggressive fcs incentive can cause substantial increases in food prices because of land competition between forest and crop production without climate induced yield reductions fcs is attractive but not with the yield reductions with the climate induced yield shocks food price increases are huge so large that it is clear this approach could not be adopted in the real world the results cry out for investment in agricultural research on climate adaptation our findings suggest economic well being falls more without mitigation than with 50 emission reductions

policy effectiveness in spatial resource wars a two region model abstract we develop a spatial resource model in continuous time in which two agents strategically exploit a mobile resource in a two region setup to counteract the overexploitation of the resource the tragedy of commons that occurs when players are free to choose where to harvest the regulator can establish a series of spatially structured policies we compare the equilibria in the case of a common resource with those that emerge when the regulator either creates a natural reserve or assigns territorial user rights to the players we show that when technological and preference parameters dictate a low harvesting effort the policies are ineffective in promoting the conservation of the resource and in addition they lead to a lower payoff for at least one of the players conversely in a context of higher harvesting effort the intervention can help to safeguard the resource preventing extinction while also improving the welfare of both players

do bonds span the fixed income markets theory and evidence for unspanned stochastic volatility most term structure models assume bond markets are complete that is that all fixed income derivatives can be perfectly replicated using solely bonds however we find that in practice swap rates have limited explanatory power for returns on at the money straddles portfolios mainly exposed to volatility risk we term this empirical feature unspanned stochastic volatility usv while usv can be captured within an hjm framework we demonstrate that bivariate models cannot exhibit usv we determine necessary and sufficient conditions for trivariate markov affine systems to exhibit usv for such usv models bonds alone may not be sufficient to identify all parameters rather derivatives are needed

monetary policy expectations at the zero lower bound we show that conventional dynamic term structure models dtsms estimated on recent u s data severely violate the zero lower bound zlb on nominal interest rates and deliver poor forecasts of future short rates in contrast shadow rate dtsms account for the zlb by construction capture the resulting distributional asymmetry of future short rates and achieve good forecast performance these models provide more accurate estimates of the most likely path for future monetary policy including the timing of policy liftoff from the zlb and the pace of subsequent policy tightening we also demonstrate the benefits of including macroeconomic factors in a shadow rate dtsm when yields are constrained near the zlb

exploiting the conditional density in estimating the term structure an application to the cox ingersoll and ross model we propose an empirical method that utilizes the conditional density of the state variables to estimate and test a term structure model with known price formulae using data on both discount and coupon bonds the method is applied to an extension of a two factor model due to cox ingersoll and ross 1985 cir our results show that estimates based on only bills imply unreasonably large price errors for longer maturities we reject the original cir model using a likelihood ratio test and conclude that the extended cir model also fails to provide a good description of the treasury market

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

induced innovation and energy prices this paper uses u s patent data from 1970 to 1994 to study the impact of energy prices on energy efficient innovations theories of technological change have focused both on demand side factors which spur innovative activity by increasing the value of new innovations and supply side factors such as scientific advancements that make new innovations possible data on demand side factors are easily obtained but data on supply side factors that influence innovation are not readily available this paper uses patent citations as a measure of the usefulness of the existing base of scientific knowledge citations to previous patents are used to construct productivity estimates which measure the usefulness of the existing stock of knowledge to inventors in a given energy field for any given year these estimates are then combined with data on demand side factors to estimate a model of induced innovation in energy technologies the results indicate that both energy prices and the supply of knowledge have strongly significant positive effects on innovation the paper concludes with a discussion of the implication of this work for environmental policy

regime shifts in a dynamic term structure model of u s treasury bond yields this article develops and empirically implements an arbitrage free dynamic term structure model with priced factor and regime shift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities this model gives closed form solutions for zero coupon bond prices an analytic representation of the likelihood function for bond yields and a natural decomposition of expected excess returns to components corresponding to regime shift and factor risks using monthly data on u s treasury zero coupon bond yields we show a critical role of priced state dependent regime shift risks in capturing the time variations in expected excess returns and document notable differences in the behaviors of the factor risk component of the expected returns across high and low volatility regimes additionally the state dependence of the regime switching probabilities is shown to capture an interesting asymmetry in the cyclical behavior of interest rates the shapes of the term structure of volatility of bond yield changes are also very different across regimes with the well known hump being largely a low volatility regime phenomenon jel g12 this article develops and empirically implements an arbitrage free dynamic term structure model dtsm with priced factor and regimeshift risks the risk factors are assumed to follow a discrete time gaussian process and regime shifts are governed by a discrete time markov process with state dependent transition probabilities agents are assumed to know both the current state of the economy and the regime they are currently in this leads to regime dependent risk neutral pricing and an equilibrium term structure that reflects the risks of both changes in the state and shifts in regimes

information in the term structure of yield curve volatility using a novel no arbitrage model and extensive second moment data we decompose conditional volatility of u s treasury yields into volatilities of short rate expectations and term premia short rate expectations become more volatile than premia before recessions and during asset market distress correlation between shocks to premia and shocks to short rate expectations is close to zero on average and varies with the monetary policy stance while treasuries are nearly unexposed to variance shocks investors pay a premium for hedging variance risk with derivatives we illustrate the dynamics of the yield volatility components during and after the financial crisis

exchange rate management and stabilization policies in developing countries abstract we outline three channels via which a devaluation has a direct contractionaly impact on the aggregate supply side of the economy local currency costs of intermediate imports wage indexing in the presence of food imports and reduced volume of real credit to firms contractionary effects via the supply side are more damaging than krugman taylor effects via aggregate demand since a cut in aggregate supply leads to upward pressure on inflation while a cut in aggregate demand tends to abate inflation upward pressure on inflation may over time threaten the increase in competitiveness a nominal devaluation also intends to achieve we also discuss the implications of a substantial foreign debt we demonstrate that a successful devaluation raises the real in terms of domestic goods debt service burden causing a krugman taylor like contractionary effect on aggregate demand we then analyse the effects of a preannounced slowdown of the rate of depreciation our results of course do not imply that a devaluation should never be considered they do suggest however that a devaluation is likely to be an ineffective tool for demand management since it may cut aggregate supply as much or more in the short run

determinants of environmental innovation in us manufacturing industries abstract this paper provides new evidence on the determinants of environmental innovation we employ panel data models to study how environmental innovation by us manufacturing industries responded to changes in pollution abatement expenditures and regulatory enforcement during the period 1983 through 1992 we find that 1 environmental innovation as measured by the number of successful environmental patent applications granted to the industry responded to increases in pollution abatement expenditures however 2 increased monitoring and enforcement activities related to existing regulations did not provide any additional incentive to innovate we also find some empirical evidence that environmental innovation is more likely to occur in industries that are internationally competitive

harvesting the commons we study a socio ecological model in which a continuum of consumers harvest a common property renewable natural resource markov perfect nash equilibria of the corresponding non cooperative game are derived and are compared with collectively optimal harvesting policies the underlying mechanisms that drive open access commons in our model are shaped by population size harvesting costs and the ecosystem s productivity if other things equal population is small relative to harvesting costs unmanaged commons do not face destruction more strikingly they are harvested at the collectively optimal rate property rights do not matter in that parametric regime because the resource has no social scarcity value however if other things equal population is large relative to harvesting costs open access renewable natural resources suffer from the tragedy of the commons property rights matter there because the resource has a social scarcity price the population size relative to harvesting costs at which the socio ecological system bifurcates is an increasing function of the ecosystem s productivity a sudden crash in productivity population overshoot or decline in harvesting costs can tip an unmanaged common into ruin the model provides a way to interpret historical and archaeological findings on the collapse of those societies that have been studied by scholars

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

environmental policy and induced technological change evidence from automobile fuel economy regulations this paper investigates whether environmental or energy efficiency regulations induce innovations in relevant technologies through focusing on the tightening of japanese fuel economy regulations in the 1990s and the early 2000s unlike previous studies that analyze patent data i use vehicle level specification data for 1985 2004 to estimate whether regulatory pressure accelerated technological progress in fuel efficiency i compare japanese automakers with selected american and european automakers in a difference in differences framework the estimation results provide strong evidence for induced technological change conditional on other vehicle attributes and the production cost the regulatory tightening induced at least a 3 5 improvement in the average japanese vehicle s fuel economy relative to a counterfactual case with no regulatory change an effect which would have taken at least 4 7 years to be realized with no pressure from fuel economy regulations or fuel prices

innovation and the international diffusion of environmentally responsive technology abstract new evidence is presented on environmental innovation and diffusion over the 1970s and 1980s at a global level a substantial amount of innovations occurred in the united states japan and germany the share of environmental patents in all patents varied between 0 6 and 3 and as such was higher than the corresponding share of pollution abatement expenditure in gdp japanese environmental innovation rates were consistently high certain plausible connections between environmental regulation and innovation also emerge across these three countries and over time innovation responded to pollution abatement expenditure an indicator of the severity of environmental regulations environmental patenting rates in developing countries were also high reaching 2 in many years in brazil developing country innovators obtained a non trivial number of patents most of which appear geared towards adapting imported technologies to local conditions however domestic innovation was only one path to new technologies imports of disembodied environmental technologies foreign patents registered in developing countries were substantial foreign patents were typically important or generic patents evidence also suggests that such patents protected intellectual property in equipment exported developing countries especially in east asia often chose to obtain technologies embodied in pollution abatement equipment

monetary policy uncertainty and economic fluctuations uncertainty associated with the monetary policy transmission mechanism is a key driving force of business cycles to investigate this link we propose a new term structure model that allows the volatility of the yield curve to interact with macroeconomic indicators the data favors a model with two volatility factors that capture shortterm and long term monetary policy uncertainty increases in either of them lead higher unemployment rates but they interact with ination in opposite directions