definition consistent measurement of exchange market pressure currencies can be under severe pressure but in a managed exchange rate regime that is not fully visible via the change in the exchange rate the literature has proposed a way to measure such exchange market pressure emp indirectly by adding interest rate changes and forex interventions to the exchange rate change we demonstrate that this measure is not consistent with the definition of emp and develop a new measure that is consistent this is first derived within the commonly used monetary exchange rate model then we generalize the analysis by avoiding the use of an exchange rate model we find that the interest rate should not be taken in the first difference form used so far but rather in level form and relative to the interest rate chosen if the country had no exchange rate objective applications on the european monetary system and east asian crises confirm that this improvement is highly relevant in practice

targeting inflation by constant interest rate forecasts this paper reviews the concept of constant interest rate inflation forecast cir targeting it stresses the time inconsistent nature of cir targeting and provides a new method for constructing cir forecasts consistently in the context of models with forward looking variables a dynamic new keynesian model with forward looking price setting is used as an illustration suggesting that the main reason for choosing a relatively long forecast targeting horizon lies in the monetary authorities objective to smooth interest rate movements as greater nominal and real stabilization is achieved at a relatively short inflation forecast targeting horizon

the opportunistic approach to monetary policy and financial market conditions we test the concept of the opportunistic approach to monetary policy in south africa post 2000 inflation targeting regime the article contributes to the current debate on central banks having additional objectives over and above inflation and output by incorporating a measure of financial conditions in the modelling framework our findings support the two features of the opportunistic approach first we find that the models that include an intermediate target that reflects the recent history of inflation rather than simple inflation target improve the fit of the models second the data supports the view that the south african reserve bank sarb behaves with some degree of nonresponsiveness when inflation is within the zone of discretion but react aggressively otherwise recursive estimates from our preferred model reveal that overall there has been a subdued reaction to inflation output and financial conditions amidst the increased economic uncertainty of the 2007 2009 financial crisis

taylor rules for the ecb using expectations data we estimate taylor rules for the euro area using consensus economics data for expected inflation and output growth and compare these estimates with more conventional specifications in which actual outcomes are used we find that the ecb takes expected inflation and expected output growth into account in setting interest rates while in the more conventional model specification the coefficient of realized inflation is not significantly different from zero

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

nominal income targeting in an open economy optimizing model abstract this paper presents simulation results regarding the performance of nominal income targeting a monetary policy rule that sets interest rates in response to deviations of nominal gdp growth from a target path the macroeconomic model is one in which agents solve dynamic optimization problems with rational expectations but in an environment with slow price adjustments in the present version consumption choices reflect habit formation and the economy is open to international flows of goods and securities when calibrated to quarterly us data the model s results suggest that nominal income targeting performs well in relation to inflation targeting and taylor rules

the propagation of monetary policy shocks in a heterogeneous production economy abstract realistic heterogeneity in price rigidity interacts with heterogeneity in sectoral size and input output linkages in the transmission of monetary policy shocks quantitatively heterogeneity in price stickiness is the central driver for real effects input output linkages and consumption shares alter the identity of the most important sectors to the transmission reducing the number of sectors decreases monetary non neutrality with a similar impact response of inflation hence the initial response of inflation to monetary shocks is not sufficient to discriminate across models and ignoring heterogeneous consumption shares and input output linkages identifies the wrong sectors from which the real effects originate

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

assessing nominal income rules for monetary policy with model and data uncertainty nominal income rules for monetary policy have long been debated but two issues are of particular recent interest first there are questions about the performance of such rules over a range of plausible empirical models especially models with and without explicit rational inflation expectations second there are questions about the performance of these rules in real time using the type of data that is actually available contemporaneously to policy makers rather than final revised data this paper determines optimal monetary policy rules in the presence of such model uncertainty and real time data uncertainty and finds only a limited role for nominal output growth

a joint model for the term structure of interest rates and the macroeconomy we present and estimate a continuous time term structure model that incorporates observable macroeconomic variables and latent variables with a clear macroeconomic interpretation our model is able to accurately describe the joint dynamics for us macroeconomic variables and the yield curve however the observable variables do not explain the long end of the term structure central tendencies of these macroeconomic variables do a much better job in this respect these unobservable factors also play an important role in the description of the interest rate policy rule both observable and non observable factors determine the risk premia and hence bond excess holding returns copyright 2006 john wiley sons ltd

competition between private and public schools vouchers and peer group effects a theoretical and computational model with tax financed tuition free public schools and competitive tuition financed private schools is developed students differ by ability and income achievement depends on own ability and on peers abilities equilibrium has a strict hierarchy of school qualities and two dimensional student sorting with stratification by ability and income in private schools high ability low income students receive tuition discounts while low ability high income students pay tuition premia tuition vouchers increase the relative size of the private sector and the extent of student sorting and benefit high ability students relative to low ability students

historical frontiers and the rise of inequality the case of the frontier of granada the authors acknowledge financial support from the spanish ministry of science and technology grant eco2009 13357 the spanish ministry of economics and competitiveness grant eco2012 35430 and the andalusian council of innovation and science excellence project sej 4546

lag length selection and tests of granger causality between money and income one of the most widely accepred relationships in macroeconomics is the positive relationship between the rate of growth of the money supply and the rate of growth of income a diversity of opinion arises however with the attempt to identify a causal relationship between these variables while friedman and schwartz 1963 initiated the empirical investigation of money income causality sims 1972 made the most significant contribution to this literature with a practical application of the criterion developed by granger 1969 for identifying a causal relationship since the appearance of sims s approach and an alternative one advanced by sargent 1976 many researchers have applied these techniques to the investigation of the causal relationship between money and income l with two exceptions hsiao 1981 and mcmillin and fackler 1984 these researchers have arbitrarily chosen the lengths of their distributed lags the purpose of this paper is to test for granger causality between money and income this paper differs from previous work in that considerably more attention is focused on the effect of the lag specification on the test results in particular we investigate the extent to which rules of thumb arbitrary lag specifications and

the fed and short term rates is it open market operations open mouth operations or interest rate smoothing abstract it is widely believed that the fed controls the federal funds rate by altering the degree of pressure in the reserve market through open market operations when it changes its target for the funds rate recently however several analysts have suggested that the fed need not conduct open market operations to change the funds rate rather they argue it is sufficient that the fed indicate its desire for the funds rate this paper notes that there is yet a third alternative the interest rate smoothing hypothesis that suggests that the fed does not move rates per se but rather smooths the transition of rates to the new equilibrium required by economic shocks this paper tests the open market and open mouth alternatives using a methodology first used by cook and hahn journal of monetary economics 1989a 331 finding no evidence that either open market operations or open mouth operations can account for the close relationship between the funds rate and the funds rate target a variety of evidence consistent with the interest rate smoothing hypothesis is considered the results suggest that many changes in the fed s funds rate target are an endogenous response to economic events and suggest that an alternative way to identify exogenous changes in policy is to identify exogenous changes in the fed s funds rate target

inequality in landownership the emergence of human capital promoting institutions and the great divergence this paper suggests that inequality in the distribution of landownership adversely affected the emergence of human capital promoting institutions e g public schooling and thus the pace and the nature of the transition from an agricultural to an industrial economy contributing to the emergence of the great divergence in income per capita across countries the prediction of the theory regarding the adverse effect of the concentration of landownership on education expenditure is established empirically based on evidence from the beginning of the 20th century in the u s

monetary policy inertia more a fiction than a fact abstract empirical estimates of monetary policy reaction functions feature a very high estimated degree of monetary policy inertia this evidence is very hard of reconcile with the alternative evidence of low predictability of monetary policy rates in this paper we examine the potential relevance of the problem of weak instruments to correctly identify the degree of monetary policy inertia in forward looking monetary policy reaction function of the type originally proposed by taylor 1993 discretion versus policy rules in practice canergie rochester conference series on public policy 39 195 214 after appropriately diagnosing and taking care of the weak instruments problem we find an estimated degree of policy inertia which is significantly lower than the common value in the empirical literature on monetary policy rules

stop go monetary policy we propose and estimate several discrete choice models of monetary policy decision making that feature time varying inertia the models permit us to account for three stylized facts characterizing monetary policymaking in the united states 1 target interest rates are gradually adjusted in small discrete movements 2 there are some long stretches of time in which rates are repeatedly moved and 3 there are other long stretches in which the policy rate does not change our models are used to account for the fed s failure to adopt promptly an easier policy stance during the recession of 2001 they are also used to explain delay in tightening the policy stance during the 2003 2006 period that featured a bubble in house prices and was followed by a financial crisis in 2008

competition between private and public schools testing stratification and pricing predictions abstract when there are peer effects in education private schools have an incentive to vary tuition to attract relatively able students epple and romano american economic review 88 1 1998 33 develop a general equilibrium model characterizing equilibrium pricing and student selection into schools when peer effects are present the model predicts that competition will lead private schools to give tuition discounts to more able students and that this will give rise to an equilibrium exhibiting stratification by income and ability between the public and private sectors and to a hierarchy of schools within the private sector the model also yields a variety of comparative static predictions the predictions of the model are tested in this paper using a unique data set assembled by figlio and stone research in labor economics 1999 115 tests of equilibrium predictions of the model reveal that the propensity to attend private school increases with both income and ability and among private schools the propensity to attend the highest tuition schools rises with both income and ability within private schools tuition declines with student ability with a substantial number of even high income households paying little or no tuition the correlation between income and ability is greater in public than private schools tests of comparative static predictions of the model reveal that both income and ability become stronger predictors of private school attendance as public school expenditure falls income becomes increasingly important in determining placement in the private school hierarchy as public school expenditure falls discounts to ability in the lowest quality private school decline as public school expenditure rises while discounts to ability in the highest quality private school are little affected by changes in public school expenditure expenditure in private schools rises as expenditure in public schools increases these empirical results are consistent with the predictions of the theoretical model

inflation targeting as a monetary policy rule the purpose of the paper is to survey and discuss in ation targeting in the context of monetary policy rules the paper provides a general conceptual discussion of monetary policy rules attempts to clarify the essential characteristics of in ation targeting compares in ation targeting to other monetary policy rules and draws some conclusions for the monetary policy of the european system of central banks jel classi cation e42 e52

habit formation in consumption and its implications for monetary policy models this paper explores a monetary policy model with habit formation for consumers in which consumers utility depends in part on current consumption relative to past consumption the empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous condence largely because the habit formation model captures the gradual hump shaped response of real spending to various shocks the paper then embeds the habit consumption specication in a monetary policy model and nds that the responses of both spending and inflation to monetary policy actions are signicantly improved by this modication jel d12 e52 e43

optimal monetary policy revisited does considering us real time data change things croushore 2011 and others have noted that monetary policy may be sensitive to inconsistencies between real time data available to policy makers when making their decisions and revised data which more accurately measureeconomic performance this paper extends the asymmetric preferencemodel suggested by ruge murcia 2003 in order to focus on these inconsistencies which arise because of the long lag between the real time data release and the revised data release we focus on two related monetary policy models in both models the central banker targets a weighted average of revised and real time inflation the models differ by what the second variable is in the monetary objective function with the first model using a weighted average of revised and real time output whereas the second model uses a weighted average of revised and real time unemployment our models identify several new potential sources of inflation bias due to data revisions in addition to the ones previously suggested in the literature our empirical results suggest that the federal reserve bank mainly focuses on targeting revised data for all three variables but it does weigh real time data too as a consequence the inflation bias induced by real time data increases by 12 6 basis points on average but this figure becomes roughly twice as large at the start of recessions

inflation expectations real rates and risk premia evidence from inflation swaps this paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short term real interest rate expected inflation inflation s central tendency and four volatility factors that follow garch processes we derive analytical solutions for nominal bond yields yields on inflation indexed bonds that have an indexation lag and the term structure of expected inflation unlike prior studies the model s parameters are estimated using data on inflation swap rates as well as nominal yields and survey forecasts of inflation the volatility state variables fully determine bonds time varying risk premia and allow for stochastic volatility and correlation between bond yields yet they have small effects on the cross section of nominal yields allowing for time varying volatility is particularly important for real interest rate and expected inflation processes but long horizon real and inflation risk premia are relatively stable

tests of the expectations hypothesis resolving the anomalies when the short term rate is the federal funds rate abstract the expectations hypothesis eh of the term structure plays an important role in the analysis of monetary policy where shorter term rates are assumed to be determined by the market s expectation for the overnight federal funds rate with two exceptions tests using the effective federal funds rate as the short term rate easily reject the eh these exceptions are when the eh is tested over the nonborrowed reserve targeting period and when the test is performed only using data for settlement wednesdays the last day of bank reserve maintenance period this paper argues that these exceptions are anomalous in the former case the failure to reject the eh occurs when economic analysis suggests that the market should be less able to forecast the federal funds rate in the latter case it occurs when there are sharp spikes in the funds rate that cannot improve materially the market s ability to forecast the funds rate additional analysis shows that these anomalous results are a consequence of the procedure used to test the eh

why were changes in the federal funds rate smaller in the 1990s we identify two major changes in the dynamics of the federal funds rate in the 1990s we model the desired rate in a two regime setting one when the fed makes no change and the other when the fed is moving the desired rate to a new level we find that the 1990s saw a longer duration in the no change regime as well as smaller changes in the other regime the smaller changes were neither due to a less aggressive fed nor due to lower volatility of the fundamentals in fact the fed responded more aggressively to changes in fundamentals in the 1990s copyright 2004 john wiley sons ltd

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

taylor rules omitted variables and interest rate smoothing in the us abstract we test for the presence of interest rate smoothing in forward looking taylor rules in first differences we also consider financial and asymmetric preferences indicators we find that interest rate smoothing is not induced by an omitted variable bias

the empirical failure of the expectations hypothesis of the term structure of bond yields this paper tests the expectations hypothesis eh using us monthly data for bond yields spanning the 1952 2003 sample period and ranging in maturity from 1 month to 10 years we apply the lagrange multiplier test developed by bekaert and hodrick 2001 and extend it to increase the test power a by introducing economic variables as conditioning information and b by using more than two bond yields in the model and testing the eh jointly on more than one pair of yields while the conventional bivariate procedure provides mixed results the more powerful testing procedures suggest rejection of the eh throughout the maturity spectrum examined

on the uniqueness of stable marriage matchings abstract a sufficient condition for uniqueness is identified on the preferences in the marriage problem i e two sided one to one matching with non transferable utility for small economies this condition is also necessary this class of preferences is broad and they are of particular relevance in economic applications

futures prices as risk adjusted forecasts of monetary policy many researchers have used federal funds futures rates as measures of financial markets expectations of future monetary policy however to the extent that federal funds futures reflect risk premia these measures require some adjustment in this paper we document that excess returns on federal funds futures have been positive on average and strongly countercyclical in particular excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business cycle indicators such as treasury yield spreads and corporate bond spreads excess returns on eurodollar futures display similar patterns we document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy we also show that risk premia matter for some futures based measures of monetary policy shocks used in the literature

what do you expect imperfect policy credibility and tests of the expectations hypothesis abstract the expectations hypothesis of the term structure of interest rates describes a conventional view of the transmission mechanism of monetary policy where bond rates reflect current and expected movements in the policy controlled rate however empirical rejections of the expectations hypothesis are commonplace and lead many to question this description of policy transmission this paper argues that failure to account for imperfect policy credibility may explain empirical rejections empirical rejections may occur even when changing anticipations of future short rates are the primary source of variation in bond rates and the standard term structure transmission channel remains valid

policy regime changes judgment and taylor rules in the greenspan era this paper investigates policy deviations from linear taylor rules motivated by the risk management approach followed by the fed during the greenspan era we estimate a nonlinear monetary policy rule via a logistic smoothing transition regression model where policy makers judgment proxied by economically meaningful variables drives the transition across policy regimes we find that ignoring judgment induced nonlinearities while estimating taylor rules has remarkable costs in terms of fit above 250 bps in 10 quarters although linear taylor rules describe well the broad contours of monetary policy they fail to detect relevant policy decisions driven by policy makers judgment

the effect of changes in the federal funds rate target on market interest rates in the 1970s abstract this paper examines the influence of monetary policy on interest rates by estimating the effect of changes in the federal funds rate target the federal reserve s policy instrument on market interest rates in the 1970s we find that changes in the target caused large movements in short term rates and smaller but significant movements in intermediate and long term rates we hypothesize that the similarity of the reactions of three six and twelve month rates to changes in the target offers a possible explanation for the lack of support for the expectations theory from studies that have tested the theory using these rates

monetary policy shifts and long term interest rates the pure expectations hypothesis peh serves as the benchmark model for the relationship between yields on bonds of different maturities when coupled with rational expectations however empirical renderings of the model fail miserably i explore the possibility that failure to account for changes in monetary policy regime explains much of the failure of the peh estimating changing monetary regimes in conjunction with the peh significantly improves its performance the predicted spread between the long and short rates is highly correlated with the actual spread the standard deviation of the theoretical spread is nearly identical to that of the actual spread

inflation targeting some extensions previous analyses of the implementation of inflation targeting are extended to monetary policy responses to different shocks consequences of model uncertainty and effects of interest rate smoothing and stabilization model uncertainty output stabilization and interest rate stabilization or smoothing all call for a more gradual adjustment of the conditional inflation forecast toward the inflation target the conditional inflation forecast is the natural intermediate target during inflation targeting the optimal way of reacting to shocks is hence to check how they affect the inflation forecast and then take the appropriate action jel classification e42 e52 e58

macro factors and the term structure of interest rates this paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long run expectations the model extends the approach pioneered by kozicki and tinsley 2001 by modeling consistently long run inflation expectations simultaneously with the term structure application to the u s economy shows the importance of long run inflation expectations in the modeling of long term bond yields the paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve the level factor represents the long run inflation expectation of agents the slope factor captures business cycle conditions and the curvature factor expresses a clear independent monetary policy factor

the yield curve and macroeconomic dynamics we show that microfounded dsge models with nominal rigidities can be successful in replicating features of bond yield data including sizeable term premia and volatile long term yields which have previously been considered puzzling in general equilibrium frameworks at the same time sample moments of consumption growth and inflation can be fit relatively well the improved model performance does not arise directly from the presence of nominal rigidities however this feature introduces short run monetary non neutrality so that monetary policy affects consumption dynamics and bond prices a high degree of interest rate smoothing in the policy rule is essential for our results at the core of dynamic macroeconomic models we find equilibrium relationships which describe the allocation of quantities e g consumption and investment and when imperfect competition prevails the setting of prices these equations are typically valid across time and across states of nature and financial assets form the tool that is supposed to ensure their validity financial assets are therefore an integral part of macroeconomic models any well specified model should be able to match financial data as well as macro data it is therefore problematic that microfounded models have had a hard time explaining key features of asset prices the most famous example of this difficulty is the equity premium puzzle but various features of bond yield data have also been char acterised as puzzling in the literature a number of papers including backus et al 1989 donaldson et al 1990 den haan 1995 and chapman 1997 have con cluded that general equilibrium models cannot generate term premia of a magnitude comparable to what we observe in actual data and may not even be capable of producing positive term premia for equity one could argue that fundamentals the expected future profitability of individual firms are unobservable and difficult to evaluate equity prices may therefore be thought to be subject to fluctuations disconnected from the real economy information acquisition fads etc and one could hope that the inability of macroeconomic models to match equity prices does not represent a signal of misspecification this argument is more difficult to construct for bonds bond yields should ultimately reflect expectations of future monetary policy decisions which at least in recent years are arguably more predictable than equity fundamentals thus the ability of macroeconomic models to explain bond prices represents an important test of their empirical performance in this article we revisit the relationship between bond prices and macroeconomic fundamentals contrary to the papers cited above that rely on flexible price models we

factor endowments inequality and paths of development among new world economies whereas traditional explanations of differences in long run paths of development across the americas generally point to the significance of differences in national heritage or religion we highlight the relevance of stark contrasts in the degree of inequality in wealth human capital and political power in accounting for how fundamental economic institutions evolved over time we argue moreover that the roots of these disparities in the extent of inequality lay in differences in the initial factor endowments dating back to the era of european colonization we document through comparative studies of suffrage public land and schooling policies systematic patterns by which societies in the americas that began with more extreme inequality or heterogeneity in the population were more likely to develop institutional structures that greatly advantaged members of elite classes and disadvantaging the bulk of the population by providing them with more political influence and access to economic opportunities the clear implication is that institutions should not be presumed to be exogenous economists need to learn more about where they come from to understand their relation to economic development our findings not only contribute to our knowledge of why extreme differences in the extent of inequality across new world economies have persisted for centuries but also to the study of processes of long run economic growth past and present

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

the consequences of persistent inequality on social capital a municipal level analysis of blood donation data this paper advances the hypothesis that persistent inequality affects cultural traits and undermines social capital we use blood donation data at the local level in southern spain to document that indeed persistent inequality as measured by land inequality negatively affects blood donation which indicates that it harms social capital this evidence sheds new light into the debates on the consequences of inequality and the determinants of culture

indexing the income tax code monetary fiscal interaction and the great moderation abstract this paper considers the consequences of automatically indexing the us federal income tax code to inflation indexation implemented during the 1981 federal tax overhaul and active monetary policy constitute necessary conditions for a unique rational expectations equilibrium in standard new keynesian models with a generalized progressive labor income tax additionally fixing the monetary regime shows that indexation reduces overall volatility in the model as well as the contribution of supply side disturbances together these results support a fiscal extension to the good policy hypothesis of the great moderation and encourage further indexation of the united states tax code

monetary policy trade offs and the correlation between nominal interest rates and real output the authors present a structural model of the u s economy that combines their price contracting specification with a term structure relationship an aggregate demand curve and a monetary policy reaction function the model matches important features of postwar data well and provides a structural explanation of the correlation between real output and the short term nominal rate of interest the authors perform a battery of monetary policy experiments that show that as viewed through the lens of this model monetary policy has struck a good balance recently among competing monetary policy objectives copyright 1995 by american economic association

market set up in advance of federal reserve policy rate decisions textabstractthis paper considers the uncertainty associated with upcoming federal open market committee fomc announcements and the extent to which participants in the fed funds futures market prepare for such announcements before they actually occur we demonstrate that markets set up well in advance of known announcement days going back as far as six months prior to an fomc meeting as a result there is often less variation in fed funds futures prices in the period immediately preceding an fomc announcement despite greater volume of activity as the market has already incorpo rated anticipated signals we find that macro announcements and central bank officials speeches and congressional testimony are of comparable importance in addition while macro announcements have stronger effects when they are released during the fed s blackout period congressional testimony is more important when it coincides with days when important macro variables are released

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

an exploration in school formation income vs ability we study stable school formation among four students that differ in ability and income in the presence of ability complementarities and school costs to be shared we identify the conditions under which a stable allocation is efficient inefficient nonexistent and tell who become peers

augmenting the taylor rule monetary policy and the bond market i show that augmenting the taylor rule with bond yields observed at the start of the quarter significantly improves the in sample and out of sample fit moreover the augmented rule produces lower forecast errors than those of linear and non linear policy models

inequality does cause underdevelopment insights from a new instrument consistent with the provocative hypothesis of engerman and sokoloff 1997 2000 this paper confirms with cross country data that agricultural endowments predict inequality and inequality predicts development the use of agricultural endowments specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane as an instrument for inequality is this paper s approach to problems of measurement and endogeneity of inequality the paper finds inequality also affects other development outcomes institutions and schooling which the literature has emphasized as mechanisms by which higher inequality lowers per capita income it tests the inequality hypothesis for development institutional quality and schooling against other recent hypotheses in the literature while finding some evidence consistent with other development fundamentals the paper finds high inequality to independently be a large and statistically significant barrier to prosperity good quality institutions and high schooling

the term structure of policy rules abstract a formula is derived that links the coefficients of the monetary policy rule for the short term interest rate to the coefficients of the implied affine equations for long term interest rates the formula predicts that an increase in the coefficients in the monetary policy rule will lead to an increase in the coefficients in the affine equations empirical evidence for such a prediction is provided the curve of the response coefficients by maturity is also predicted by the formula the formula s predictive accuracy and its closed form make it a useful tool for studying the policy implications of embedding no arbitrage affine theories into macro models

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

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

shifting endpoints in the term structure of interest rates abstract this paper links the term structure to perceptions of monetary policy long horizon forecasts of short rates required by no arbitrage term structure models are heavily influenced by the endpoints or limiting conditional forecasts of the short rate process common assumptions that the short rate is mean reverting or contains a unit root are shown to generate unrealistic yield predictions failures occur because these assumptions inadequately account for historical shifts in market perceptions of the policy target for inflation this paper links endpoint shifts to agent learning about shifts in long term policy goals shifting endpoints in short rate processes significantly improve yield predictions

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

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

nominal interest rates and the news this paper provides new estimates of the impact of monetary policy actions and macroeconomic news on the term structure of nominal interest rates the key novelty is to parsimoniously capture the impact of news on all interest rates using a simple no arbitrage model the different types of news are analyzed in a common framework by recognizing their heterogeneity which allows for a systematic comparison of their effects this approach leads to novel empirical findings first monetary policy causes a substantial amount of volatility in both short term and long term interest rates second macroeconomic data surprises have small and mostly insignificant effects on the long end of the term structure third the term structure response to macroeconomic news is consistent with considerable interest rate smoothing by the federal reserve fourth monetary policy surprises are multidimensional while macroeconomic surprises are one dimensional

the taylor rule and interest rates in the emu area abstract we demonstrate that average interest rates in the emu countries in 1990 98 with the exception of the period of exchange market turmoil in 1992 93 moved very closely with average output gaps and inflation as suggested by the taylor rule

heterogeneous beliefs and housing market boom bust cycles abstract this paper presents a business cycle model capturing the stylized features of housing market boom bust cycles in developed countries the model implies that over optimism of mortgage borrowers generates housing market boom bust cycles if mortgage borrowers are credit constrained and savers do not share their optimism this result holds without price stickiness if price stickiness is introduced into the model then the model replicates a low policy interest rate during a housing boom as an endogenous reaction to a low inflation rate given a taylor rule thus monetary easing observed during housing booms are consistent with the presence of over optimism causing boom bust cycles

multi dimensional skills specialization and oligopolistic competition in higher education abstract this paper develops a differentiated products model of school competition that distinguishes among different dimensions that matter in the skill acquisition process the model predicts that when identical schools compete for students specialization may arise as a competition strategy this serves rich students education goals well poorer students however may attend schools with specializations that do not cater to their relative strengths by doing so these poorer students complement the weaknesses of the richer students through peer effects and receive financial aid in return the empirical analysis provides strong support for the model s predictions about within school implications of specialization

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

more on the speed of adjustment in inventory models when empirical stock adjustment models of manufacturers inventories of finished goods are estimated there appear to be two local minima in the sum of squared residuals functions at one local minimum the estimated adjustment speed is typically quite high at the other it is typically quite low furthermore finding two sets of estimates that fit the data almost equally well does not appear to be a quirk of this particular application rather it stems from a fundamental identification problem that afflicts partial adjustment models of all kinds in the specific context of manufacturers inventories of finished goods the estimation procedure employed by maccini and rossana seems to pick out the solution with rapid adjustment and high serial correlation in the disturbances whereas the solution with slow adjustment and little serial correlation is more often the global minimum this abstract was borrowed from another version of this item

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

a note on the expectations hypothesis at the founding of the fed abstract one of the most influential tests of the expectations hypothesis is mankiw and miron q j econ 101 1986 211 who found that the spread between the long term and short term rates provided predictive power for the short term rate before the fed s founding but not after they suggested that the failure of the expectations hypothesis after the fed s founding was due to the fed s practice of smoothing short term interest rates we show that their finding that the expectations hypothesis fares better prior to the fed s founding is due to the fact that the test they employ tends to generate results that are more favorable to the expectations hypothesis during periods when there is extreme volatility in the short term rate

admission tuition and financial aid policies in the market for higher education we present an equilibrium model of the market for higher education our model simultaneously predicts student selection into institutions of higher education financial aid educational expenditures and educational outcomes we show that the model gives rise to a strict hierarchy of colleges that differ by the educational quality provided to the students we also develop a new estimation procedure that exploits the observed variation in prices within colleges identification is based on variation in endowments and technology it does not rely on observed variation in potentially endogenous characteristics of colleges such as peer quality measures and expenditures we estimate the structural parameters using data collected by the national center for education statistics and aggregate data from peterson s and the national science foundation

monetary policy by committee consensus chairman dominance or simple majority this paper studies the theoretical and empirical implications of monetary policy making by committee under four different voting protocols the protocols are a consensus model where a supermajority is required for a policy change an agenda setting model where the chairman controls the agenda a dictator model where the chairman has absolute power over the committee and a simple majority model where policy is determined by the median member these protocols give preeminence to different aspects of the actual decision making process and capture the observed heterogeneity in formal procedures across central banks the models are estimated by maximum likelihood using interest rate decisions by the committees of five central banks namely the bank of canada the bank of england the european central bank the swedish riksbank and the u s federal reserve for all central banks results indicate that the consensus model fits actual policy decisions better than the alternative models this suggests that despite institutional differences committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions

the federal reserve s operating procedure nonborrowed reserves borrowed reserves and the liquidity effect abstract recently a number of researchers christiano and eichenbaum 1992 christiano et al 1996a b 1997 evans and marshall 1998 strongin 1995 pagan and robertson 1995 brunner 1994 claim to have found evidence of a statistically significant liquidity effect in a recursive structural var using nonborrowed reserves nbr it is claimed that innovations to nbr reflect the exogenous policy actions of the fed this paper argues that the opposite is true specifically i show that the fed has an incentive to offset bank initiated discount window borrowing when it implements the federal open market committee s policy directive and that it has done so since the late 1950s this practice has created a negative contemporaneous covariance between nbr and the funds rate that has been incorrectly attributed to the liquidity effect by showing that these models capture the endogenous response of the fed to bank borrowing on nbr rather than the effect of exogenous policy actions on the funds rate this paper also resolves the puzzle of the vanishing liquidity effect noted by pagan and robertson 1995 and christiano 1995

relative price distortions and inflation persistence sticky price models often suggest that relative price distortion is a major cost of inflation we provide an intuition for this even at low rates inflation strongly affects price dispersion which in turn has an impact on the economy qualitatively similar to and of the order of magnitude of a negative shift in productivity the utility cost of price dispersion is quantified and its impact on optimal monetary policy discussed price dispersion is incorporated into a linearised model strikingly a contractionary nominal shock has a persistent negative hump shaped impact on inflation but may have a positive hump shaped impact on output

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

evaluating the efficiency of the fomc s new economic projections since 2007 fomc policymakers have been publishing detailed numerical projections of macroeconomic series over the next three years by testing whether the revisions to these projections are unpredictable i find that fomc s efficiency is generally accepted for inflation but often rejected for real economic variables notably for the unemployment rate the rejection is due to the strong autocorrelation of revisions which may reflect information rigidity of fomc s unemployment projections the joint efficiency of the entire projection is accepted in most cases

examining the bond premium puzzle with a dsge model the basic inability of standard theoretical models to generate a sufficiently large and variable nominal bond risk premium has been termed the bond premium puzzle we show that the term premium on long term bonds in the canonical dynamic stochastic general equilibrium dsge model used in macroeconomics is far too small and stable relative to the data we find that introducing long memory habits in consumption as well as labor market frictions can help fit the term premium but only by seriously distorting the dsge model s ability to fit other macroeconomic variables such as the real wage therefore the bond premium puzzle remains

do measures of monetary policy in a var make sense no in many vector autoregressions vars monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the u s federal reserve s reaction function furthermore the residuals from these regressions show little correlation across various vars or with funds rate shocks that are derived from forward looking financial markets my results provide a sharp critique of current monetary vars

monetary policy rules in theory and in practice evidence from the uk and the us given the large amount of interaction between research on monetary policy and its practice this article examines whether some simple monetary policy rules that have been proposed in the academic literature part of which has originated from within central banks provide a reasonable characterization of actual policy in the united kingdom and the united states the article finds the simple rule that describes best the actual us monetary policy is a speed limit rule with dynamics whilst for the uk it is a forward looking rule the simpler dynamics in the uk s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting

greenspan s conundrum and the fed s ability to affect long term yields in february 2005 federal reserve chairman alan greenspan noticed that the 10 year treasury yields failed to increase despite a 150 basis point increase in the federal funds rate as a conundrum this paper shows that the connection between the 10 year yield and the federal funds rate was severed in the late 1980s well in advance of greenspan s observation the paper hypothesize that the change occurred because the federal open market committee switched from using the federal funds rate as an operating instrument to using it to implement monetary policy and presents evidence from a variety of sources supporting the hypothesis the analysis has implications for central banks interest rate policies

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