endogenous market structures and the gains from foreign direct investment abstract this paper discusses the gains from liberalizing foreign direct investment fdi in a two country setting with endogenous market structure we investigate two different scenarios in the first scenario headquarters costs are large in the foreign country so that the industry is located in the domestic country only in this case multinational and national firms may coexist and market concentration may make fdi welfare improving for the foreign country and welfare reducing for the domestic country in the second scenario headquarters costs are symmetric and firms will be located in both countries here profitable fdi activities lead to mutual welfare gains irrespective of market structure effects

cointegration tests of the fisher hypothesis with variable trends in the world real interest rate after seventy years the fisher hypothesis has proven to be one of the most durable and influential theories in economics yet after years of debate and testing the empirical accuracy of the proposition remains in question the fisher hypothesis simply states that a one point increase in inflation leads to a one point increase in the nominal interest rate leaving real interest rates unchanged this relationship does not rule out the possibility of other variables influencing the real interest rate or variable trends in the real interest rate arising from sources other than inflation this paper merges the literature on real interest rate parity with tests of the fisher hypothesis to control for variable trends in the real interest rate

decomposing input adjustments under price and production uncertainty a decomposition of input adjustments for stochastic technologies is developed and applied to the case of actuarially fair production insurance the decomposition consists of a pure risk effect and an expansion effect which are analagous to the hicks allen decomposition familiar from consumer theory

cotrending and the stationarity of the real interest rate abstract this paper introduces the concept of cotrending to trend stationary series with structural breaks we apply it to nominal interest rates and inflation in order to test the long run fisher effect

testing for the absence of expected real profits from forward market speculation abstract this paper tests for the absence of expected real profits from forward market speculation it contrasts with the literature that has considered opportunities for expected nominal profit from speculation that is profits denominated in one of the currencies these studies assume money illusion on the part of market participants but this paper does not empirical results fail to find evidence of unexploited real profit opportunities

cross country performance of levy regime switching models for stock markets abstractthis article compares the performance of regime switching levy models across sixteen 16 international stock markets from a cross country perspective the empirical application is dedicated to the study of equity markets in the americas asia and europe the results are of interest for a financial audience in order to document the sensitivity of stock indexes to the intensity of jumps under changing economic regimes expansion or recession we pick up singularities in japan and malaysia compared to other countries and regions of the world

uncovering financial market expectations of inflation this paper seeks to uncover market expectations of inflation from the joint dynamics of nominal interest rates and observed inflation i postulate 1 the existence of a stable vector autoregression in unobserved variables and 2 efficient financial markets the estimation procedure requires no further structural assumptions the econometrician need not observe all the information used by agents in forming forecasts or all the variables that influence real interest rates i find no empirical evidence that economic recessions are correlated with inflation forecast errors however postwar recessions are associated with ex ante real interest rates that are twice the postwar average

monetary policy regimes and the reduced form for interest rates this study investigates whether the recent poor performance and inst ability of reduced form interest rate equations can be accounted for by changes in monetary policy regimes the results imply that reduced form coefficients move by statistically significant and economically meaningful amounts in response to such policy parameter shifts both in sample and out of sample predictions from the models that allow f or the endogeneity of the money stock outperform those produced by the conventional specification copyright 1987 by ohio state university press

endogenous market structures in international trade natura facit saltum abstract almost all of the large literature on international trade with imperfect competition assumes exogenous market structures the purpose of this paper is to develop a simple model that generates alternative market structures as nash equilibria for different parameterizations of the basic model equilibrium market structure is a function of the underlying technology familiar configurations such as a duopoly competing in exports or a single multinational producing in both markets arise as special cases small tax policy changes can produce large welfare effects as the equilibrium market structure shifts implying discontinuous jumps in prices quantities and profits

the lucas critique and the volcker deflation this paper examines in light of the lucas critique the behavior of the phillips curve and of the term structure of interest rates after october 1979 it starts with an informal account of the policy change and then discusses how we might expect these two relations to shift after such a change it finds little evidence of a direct effect of the policy change on the phillips curve at least until 1982 it finds substantial evidence of a direct effect on term structure this abstract was borrowed from another version of this item

the federal reserve s new operating procedures a post mortem abstract although money stock targeting has been the strategic focus of federal reserve policy since the mid 1970 s operating policy the tactics whereby the longer run strategy is implemented over short term intervals has been changed by the federal reserve at least twice over this period a particularly dramatic change in operating policy was announced by the federal reserve in october 1979 this paper provides empirical evidence that settles questions about the nature of this change and suggests that the new operating procedures may have contributed to the heightened interest rate volatility experienced over the 1979 to 1982 period

domestic foreign interest rate differentials near unit roots and symmetric threshold models this paper investigates the near unit root behavior of interest rate differentials across countries using a symmetric band tar model that allows for a heteroscedastic error process we find that the time series properties of monthly short term interest differentials over the period 1974 2005 between the united states and canada france germany japan and the united kingdom can be characterized by a symmetric band tar process which can explain its near unit root behavior reported in the extant literature results significantly reject a linear model in favor of the alternative hypothesis of a two regime symmetric threshold model that exhibits significantly greater persistence within the threshold bands than when outside the threshold bands

a decomposition of profit loss under output price uncertainty in this paper firm profit loss is decomposed as the sum of two terms related to the output price uncertainty price expectation error and risk preference plus one extra term expressing technical inefficiency we then describe the implementation of our theoretical model in a robust data envelopment analysis dea framework which allows an effective and separate estimation of each term of the decomposition in addition we offer an operational tool to reveal producers risk preferences a 2009 database of french fattening pig farms is used as an illustration our results indicate that risk preference and technical inefficiency are the main sources of profit loss

regime changes in international real interest rates are they a monetary phenomenon in this paper we use the bai and perron 1998 2001 2003 methodology to test for multiple structural breaks in the mean real interest rate for 13 industrialized countries we find extensive evidence of structural breaks in the mean real interest rate for all 13 countries in an attempt to explain the breaks in international real interest rates we also test for multiple structural breaks in the mean inflation rate for the 13 countries once again we find extensive evidence of structural breaks in the mean inflation rate for all of the countries interestingly the breaks in inflation rates and real interest rates often coincide with increases decreases in the mean inflation rate as we move from one regime to the next typically associated with decreases increases in the mean real interest rate

measuring the impacts of production risk on technical efficiency a state contingent conditional order m approach this article studies the influence of risk on farms technical efficiency levels the analysis extends the order m efficiency scores approach proposed by daraio and simar 2005 to the state contingent framework the empirical application focuses on cross section data of catalan specialized crop farms from the year 2011 results suggest that accounting for production risks increases the technical performance a 10 increase in output risk will result in a 2 5 increase in average firm technical performance 2014 elsevier b v all rights reserved

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

exchange rate volatility and u s monetary policy an arch application this paper examines the effect of shifts in u s monetary policy regimes on the stochastic process that generates foreign exchange rates to account for the observed behavior of the data record the author models nominal dollar exchange rates as univariate autoregressive conditional heteroskedastic processes he then tests the stability of this process across u s monetary policy regimes for four of the currencies in the sample accounting for regime shifts improves the fit of the model regime shifts also appear to diminish the degree of persistence of variance making it less likely that exchange rates are integrated in variance copyright 1989 by ohio state university press

inflation targeting with nairu uncertainty and endogenous policy credibility abstract stochastic simulations are employed to compare performances of monetary policy rules in linear and nonlinear variants of a small macro model with nairu uncertainty under different assumptions about the way inflation expectations are formed cases in which policy credibility is ignored or treated as exogenous are distinguished from cases in which credibility and inflation expectations respond endogenously to the monetary authorities track record in delivering low inflation it is shown that endogenous policy credibility strengthens the case for forward looking inflation forecast based rules relative to backward looking taylor rules

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

in search of substitution between foreign production and exports abstract are foreign production and exports substitutes or complements standard theory of the multinational corporation mnc assumes substitution while previous empirical work examining the relationship has generally found strong evidence of complementarity this study examines product level data which more closely fits the assumption of a single product firm often used in mnc theory and finds substantial evidence for both a substitution and a complementarity effect between affiliate production and exports with japanese automobile parts for the us market i also test for and find evidence of substitution using product level data on a set of japanese produced final consumer goods

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

interest rate volatility and monetary policy in october 1979 the federal reserve shifted from an interest rate oriented operating procedure to a reserves oriented procedure it is argued in this paper that part of the very large increase in interest rate volatility which resulted from the policy switch may have been due to shifts in the parameters of the money demand equation shifts due to the adoption of a reserve aggregates operating procedure this result is derived by comparing rational expectations equilibria in a simple theoretical model under alternative policy rules this allows the variance of interest rates to be explicitly expressed as a function of the policy rule this abstract was borrowed from another version of this item

a simple account of the behavior of long term interest rates recent empirical research on the term structure of interest rates has shown that the long term interest rate is well described by a distributed lag on short term interest rates but does not conform to the expectations theory of the term structure it has been suggested that the long rate overreacts to the short rate this paper presents aunified taxonomy of risk premia or deviations from the expectations theory this enables the hypothesis of overreaction to be formally stated it is shown that if anything the long rate has underreacted to the short rate however the independent movement of the long rate is primarily responsible for the failure of the expectations theory

measuring business cycles a modern perspective in the first half of this century special attention was given to two features of the business cycle 1 the comovement of many individual economic series and 2 the different behavior of the economy during expansions and contractions both of these attributes were ignored in many subsequent business cycle models which were often linear representations of a single macroeconomic aggregate however recent theoretical and empirical research has revived interest in each attribute separately notably dynamic factor models have been used to obtain a single common factor from a set of macroeconomic variables and nonlinear models have been used to describe the regime switching nature of aggregate output we survey these two strands of research and then provide some suggestive empirical analysis in an effort to unite the two literatures and to assess their usefulness in a statistical characterization of business cycle dynamics

estimating state contingent production frontiers chambers and quiggin 2000 use state contingent representations of risky production technologies to establish important theoretical results concerning producer behavior under uncertainty unfortunately perceived problems in the estimation of state contingent models have limited the usefulness of the approach in policy formulation we show that fixed and random effects state contingent production frontiers can be conveniently estimated in a finite mixtures framework an empirical example is provided compared to conventional estimation approaches we find that estimating production frontiers in a state contingent framework produces significantly different estimates of elasticities firm technical efficiencies and other quantities of economic interest

likelihood ratio based tests for markov regime switching markov regime switching models are widely considered in economics and nance although there have been persistent interests see e g hansen 1992 garcia 1998 and cho and white 2007 the asymptotic distributions of likelihood ratio based tests have remained unknown this paper considers such tests and establishes their asymptotic distributions in the context of nonlinear models allowing for multiple switching parameters the analysis simultaneously addresses three di culties i some nuisance parameters are unidenti ed under the null hypothesis ii the null hypothesis yields a local optimum and iii the conditional regime probabilities follow stochastic processes that can only be represented recursively addressing these issues permits substantial power gains in empirically relevant situations besides obtaining the tests asymptotic distributions this paper also obtains four sets of results that can be of independent interest 1 a characterization of conditional regime probabilities and their high order derivatives with respect to the model s parameters 2 a high order approximation to the log likelihood ratio permitting multiple switching parameters 3 a re nement to the asymptotic distribution and 4 a uni ed algorithm for simulating the critical values for models that are linear under the null hypothesis the elements needed for the algorithm can all be computed analytically the above results also shed light on why some bootstrap procedures can be inconsistent and why standard information criteria such as the bayesian information criterion bic can be sensitive to the hypothesis and the model s structure when applied to the us quarterly real gdp growth rates the methods suggest fairly strong evidence favoring the regime switching speci cation consistently over a range of sample periods

does real interest parity hold at longer maturities abstract this paper investigates the validity of real interest parity rip for long maturities across the us britain and germany a standard view commonly referred to as the fisher hypothesis is that over long horizons movements in expected inflation dominate movements in nominal interest rates or that real interest rates are equal over the 1973 1991 sample period however rejections of conditional rip occur at all horizons extending from a quarter to five years the evidence indicates that there appears to be no tendency for expected real interest rates to be equalized over longer maturities

international interest rate linkages and the exchange rate regime abstract return differentials between instruments denominated in canadian dollars and instruments denominated in american dollars are investigated the study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s both real and nominal return differentials are investigated the results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between canada and the united states models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change the major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials jel e42 e58 g15

financial crisis and the great depression a regime switching approach i explore the timing of and effects of the u s financial crisis of the 1930s in a regime switching framework estimated conditional probabilities over the state of the financial sector suggest that a prolonged period of crisis begins not with the 1929 stock market crash but with the first banking panic of october 1930 these probabilities also suggest that the crisis persists until the introduction of federal deposit insurance in early 1934 consistent with the view that this financial crisis had real effects these conditional probabilities contain additional explanatory power for output fluctuations this is in addition to that provided by the money stock

non joint technologies the hypothesis of non jointness in input quantities separate production functions is well known and it plays an important role in many areas of economics in this paper we define three additional forms of non jointness which have received little or no attention in the literature and which might be relevant for the firm as well as for the representation of the aggregate technology we characterize all forms of non jointness in terms of variable profit and joint cost functions this yields a number of restrictions which are all testable empirically the assumption that production is non joint in input quantities separate production functions inputs allocated between the different production processes plays a crucial role in many areas of economic theory we need only think of international trade theory public finance macroeconomics growth theory or traded non traded good models of international finance in fact it is safe to say that more often than not production is assumed non joint in input quantities in multiple output models little work has been done to test the empirical validity of the assumption of non jointness in input quantities samuelson 1966 studies the characterization of non joint technologies in terms of the transformation function as pointed out by hall 1973 however samuelson s results do not seem very useful for econometric work hall studies the characterization of non jointness in input quantities in terms of the joint cost function this leads to a number of restrictions which can easily be imposed or tested for and which were used in empirical work by burgess 1976 and by kohli 1981 lau 1972 1978 finally characterizes non jointness in input quantities in terms of the profit function besides non jointness in input quantities lau also examines the case of non jointness in output quantities when an input can be cracked into several outputs in this paper we define two additional cases of non jointness and we characterize them in terms of the joint cost function and the variable or normalized restricted profit function the new forms of non jointness that we define may be useful to describe technologies at the level of the firm and may be even more so at the aggregate level some may be useful concepts in other areas of economics as well such as consumer theory by distinguishing between the various forms of non jointness one obtains a number of testable restrictions on the corresponding joint cost or variable profit functions

high and volatile real interest rates where does the fed fit in the federal reserve s new procedures for the conduct of monetary policy introduced on october 6 1979 have been the subject not only of considerable academic and political interest but also of intense debate b friedman 1982 roley 1982 walsh 1982 1984 mascaro and meltzer 1983 among others the fed s new operating procedures generally are perceived to have resulted in abnormally high and volatile real interest rates and thus to have contributed to if not been totally responsible for the deepest recession in postwar history in this paper we address the following question was the advent of the increased volatility and level of the real rate of interest concurrent with the fed s october 1979 change in operating procedures that is was the real rate of interest high and more volatile immediately after the october 1979 change in policy procedures in which case we might infer a connection between the fed s change in policy procedures and the increased volatility and level of the real rate or did the real rate become high and more volatile some time following the policy change which might lead us to conclude that the increased volatility and the increased level of the real rate was connected to some other event s occurring after the october 1979 policy change

impacts of federal crop insurance on land use and environmental quality this article integrates economic and biophysical models to assess how federal crop revenue insurance programs affect land use cropping systems and environmental quality in the u s corn belt region the empirical framework includes econometric models that predict land conversion and crop choices at the parcel level based on expectation and variance of crop revenues land quality climate conditions and physical characteristics at each site the predictions are then combined with site specific environmental production functions to determine the effect of revenue insurance on nitrate runoff and leaching soil water and wind erosion and carbon sequestration results suggest that federal crop insurance has on average a small effect on conversions of non cropland to cropland and somewhat more significant impacts on crop choice and crop rotation these changes in cropping systems have on average small impacts on agricultural pollution

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

on real interest rate dynamics and regime switching abstract we find evidence of regime switching dynamics in the usa and the uk real interest rates over the period 1881 2003 for the uk there is a regime in which the real interest rate displays a relatively stronger mean reversion and a regime in which it displays a relatively weaker mean reversion the former regime is characterized by a relatively larger error in the estimation of the reversion parameter and higher volatility for the usa the two regimes differ in volatility the probability of transition from one regime to another is found to be significantly related to the inflation rate regime and to the political regime the results highlight the importance of regime switching in the dynamics of the real interest rate as well as the role of inflation and political regimes in explaining this switching

threshold nonlinear interest rates abstract this note shows that the federal funds rate is consistent with a nonlinear three regime threshold process in which temporary permanent innovations dominate in the two outer middle regimes this nonlinear process is consistent with a stabilizing force for interest rates

rational bubbles during poland s hyperinflation implications and empirical evidence abstract it has been argued that the polish hyperinflation at the end of the eighties was too excessive to be attributed to market fundamentals only in this paper a range of indirect non structural and structural tests for rational exploding deterministic and stochastic bubbles are carried out we adopt a new strategy based on the work of hall and sola 1993a which allows for the possibility of switching regimes in the time series properties of the data to allow for both indirect tests and structural tests for the presence of stochastic bubbles

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

fiscal policy debt management and exchange rate credibility lessons from the recent italian experience abstract this paper explores some potential determinants of exchange rate credibility with reference to the italian experience of the 1990s the analysis relies on a nonlinear framework emphasizing shifts between credible and non credible states and assuming a significant degree of persistence in the above regimes almost all fiscal and debt management indicators display significant effects on devaluation expectations the main policy implications of the paper are that a restrictive fiscal stance a lengthening of average debt maturity and an increase in the share of foreign denominated debt are crucial to stabilize the lira exchange rate and to qualify italy in the former group of countries which will join emu

separation and hedging results with state contingent production a state contingent model of production under uncertainty is developed and compared with more traditional models of production under uncertainty producer behaviour with both production and price risk in the presence and in the absence of futures and forward markets is analysed in this state contingent framework conditions for the optimal hedge to be positive or negative are derived we also show that under plausible conditions a risk averse producer facing price uncertainty and the ability to hedge price risk will never willingly adopt a nonstochastic technology new separation results which hold in the presence of both price and production risk are then developed these separation results generalize townsend s spanning results by reducing the number of necessary forward markets by one

multinationals multi plant economies and the gains from trade a general equilibrium model of a multinational enterprise based on economies of multi plant operation is developed these economies are modelled as arising from the existence of a joint input whose productivity in each production facility is independent of the number of facilities maintained by a firm the multinational thus offers the world increased technical efficiency by eliminating the duplication of the joint input that would occur with independent national firms since this technical efficiency may come at the expense of increased market power the full determinants of home country host country and world welfare are considered

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

testing the term structure of interest rates using a stationary vector autoregression with regime switching abstract the expectations model of the term structure for us data on three and six month treasury bills for the period 1962 1 1987 3 is explored the analysis allows for the nonstationarity of the data and for unobserved stochastic switches of regime by estimating vars in the yield spread and the change in the three month rate which allow the time series processes to change between regimes in contrast to other results for the expectations model such as those of hamilton 1988 mankiw and miron 1986 and others we find that the data do not reject the model

political regime change and the real interest rate the effect of changes in policy regimes on real interest rates has important implications for financial and economic theory there is little current evidence that policy regime changes have any impact on the level of real interest rates we use large political changes as our measure of policy regime changes changes in presidential administration are more significantly correlated with real rate changes than are changes in the federal reserve chair or the mean shift points identified by garcia and perron 1996 using time series methods we also show that change of party control of congress is a significant factor explaining real rates we argue that theoretical models built on the assumptions of constant or policy invariant real interest rates are at variance with the empirical evidence

market entry and foreign direct investment abstract the welfare economics of foreign direct investment fdi are addressed in a model of two countries and two periods in the first period firms enter markets as national firms in the second period fdi is possible the paper demonstrates that fdi reduces market entry in the first period and equilibrium profits in the second period compared to a trade regime without any fdi prices are higher in the first period but lower in the second period fdi unambiguously improves the sum of discounted consumer surplus if demand functions are linear or log linear and entry is free in the first period

the real interest rate a multi country empirical study how real interest rates behave over time is critical to our understanding of many macroeconomic issues and much recent research has pursued this question very little of the research however has focused on real interest rates outside the united states this paper is an empirical exploration of real interest rate movements in seven oecd countries from 1967 ii to 1979 ii further research is needed on real rates in other countries for several reasons not only are measures of foreign real rates of interest in their ownright but extending an analysis of real rates to other countries also has the following additional benefits it can generate more powerful statistical tests of propositions previously tested on u s data and yield information on whether results found for the u s hold up in other countries this study pursues several questions that have arisen naturally from this earlier work is the hypothesis that the real rate is constant rejected when the analysis is extended to other countries does the real rate decline with increased inflation and money growth in other countries besides the united states how reliable is the fisher effect in which nominal interestrates reflect changes in expected inflation are movements in nominal interest rates a reliable indicator of movements in real rates what kind of variationsin real interest rates are there in different countries have real rates declined from the 60s to the 70s for other countries besides the u s this abstract was borrowed from another version of this item

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

monetary policy and interest rates abstract in the eighties u s interest rates have been characterized by high volatility often related to the fed changes in operating procedure a semiparametric estimator for heteroskedasticity and the diagnostic provided by the bounded influence estimator are applied to a short term interest rate equation attempts to model changes in operating procedure by means of exogenous dummy variables are not satisfactory heteroskedasticity is detected and corrected by gls and the chosen semiparametric estimator the estimates are compared by means of bounded influence regressions which reveal that the semiparametric estimates improve upon gls since the latter does not fully correct for heteroskedasticity

unanticipated monetary policy and real economic activity some cross regime evidence abstract classical equilibrium models of business cycles predict several consequences of policy regime shift this paper examines these predictions using evidence from the post 1979 period and by comparing several pre war monetary regimes the policy invariance proposition and the lucas hypothesis receive some support from the evidence although some discrepancies remain

is there a peso problem evidence from the dollar pound exchange rate 1976 1987 one of the most puzzling aspects of the floating exchange rate regime since 1973 has been the apparent irrationality embedded in investors exchange rate expectations this paper investigates whether exchange rate forecasts although biased are still rational the idea is that investors can be rational and yet make repeated mistakes if the true model of the exchange rate is evolving over time the author s results support the hypothesis that the exchange rate has followed a switching regime process moreover the switching regime model estimated can explain about 75 percent of the bias implied by the forward market and the survey data copyright 1993 by american economic association

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

when and how us dollar shortages evolved into the full crisis evidence from the cross currency swap market abstract this paper investigates when and how the us dollar shortages evolved into the full crisis in the cross currency swap market between major european currencies and the us dollar during the turmoil of 2007 2009 using the dynamic factor model with regime switching coefficients of each swap price with respect to the latent common factor the 1 year market entered the high crisis regime soon after the onset of the subprime problem in august 2007 the 10 year market entered that regime following the collapse of bear sterns in mid march 2008 financial credit spreads have significant predictive power for switches between high and low regimes

the role of asymmetries and regime shifts in the term structure of interest rates we examine the relationship between interest rates of different maturities for the us germany and japan over the period 1982 2000 using a general multivariate vector equilibrium correction modelling framework capable of simultaneously allowing for asymmetric adjustment and regime shifts this approach has a very general underlying theoretical rationale that allows for time varying term premia and other short run deviations from the expectations model of the term structure the resulting nonlinear models provide good in sample fits display regime switches closely related to key state variables driving monetary policy decisions and have satisfactory out of sample forecasting properties

money real interest rates and output a reinterpretation of postwar u s data this paper reexamines both monthly and quarterly u s postwar data to investigate if the observed comovements between money real interestrates prices and output are compatible with the money real interest output link suggested by existing monetary theories of output which include both keynesian and equilibrium models the major empirical findings are these 1 in both monthly and quarterly data we cannot reject the hypothesis that the ex ante real rate is exogenous or granger causally prior in the context of a four variable system which contains money prices nominal interest rates and industrial production 2 in quarterly data there is significantly more information con tained in either the levels of expected inflation or the innovationof this variable for predicting future output given current and lagged output than in any other variable examined money actualinflation nominal interest rates or ex ante real rates the effect of an inflation innovation on future output is unambiguously negative the first result casts strong doubt on the empirical importance of existing monetary theories of output which imply that money should have a causal role on the ex ante real rates the second result would appear incompatible with most demand driven models of output in light of these results we propose an alternative structural model which can account for the major dynamic interactions among the variables this model has two central features i output is unaffected by money supply and ii the money supply process is motivated by short run price stability this abstract was borrowed from another version of this item

u s money demand instability a flexible least squares approach this paper uses a jle rrhle leust squares fls time varying linear regression technique to investiaate coefficient stabilitv for the goldfeld u s money demand model over the period 1959 62 to 19x5 q3 time paths traced out by the fls coefficient estimates exhibit shifts in 1974 and 1983 but these shifts are small relative to a persistent downward trend in the estimated coefficient for the inflation rate indicating potential model misspecitication the fls estimates also indicate that the unit root nonstationarity problem reported by ols money demand studies disappears if the coefficient estimates are allowed to exhibit even small amounts of time variation

testing for real effects of monetary policy regime shifts the rational expectations revolution in macroeconomics has forced economists to think about macroeconomic policy in terms of alternative policy rules or regimes huizinga and mishkin 1986 for example have argued recently that monetary policy has important effects on the ex ante real rate of interest and as evidence they cite apparent changes in the stochastic properties of the real rate coinciding with major shifts in monetary policy regimes more specifically they claim that in the post war period the real rate process in the united states shifted in october 1979 the month the fed changed operating procedures and in october 1982 when the fed deemphasized monetary aggregates mishkin 1986 has argued that these results suggest monetary policy not fiscal deficits bears responsibility for high u s real interest rates in the early 1980s because an understanding of the impact of monetary policy shifts on real interest rates is important for many issues in macroeconomics suggested methods for detecting real rate shifts deserve careful scrutiny the method employed by huizinga and mishkin 1986 tests for shifts in a projection equation of the expost real rate on a set of information variables such as the nominal interest rate and past inflation this projection equation approach is straightforward to apply and therefore potentially of use in testing a variety of macroeconomic hypotheses such as the neutrality of money for the projection equation approach to be valid it is desirable that it exhibit shifts if and only if the true real rate generating process has shifted the purpose of this paper is to show that changes in the real rate process while sufficient to

business cycles and the exchange rate system some international evidence this paper investigates the differences in time series behavior of key economic aggregates under alternative exchange rate systems we use a postwar sample of 49 countries to compare the behavior of output consumption trade flows government consumption spending and real exchange rates under alternative exchange rate systems pegged floating and cooperative systems such as the ems we then examine evidence from two particular episodes involving canada and ireland of changes in the exchange rate system aside from greater variability of real exchange rates under flexible than under pegged nominal exchange rate systems we find little evidence of systematic differences in the behavior of macroeconomic aggregates or international trade flows under alternative exchange rate systems these results are of interest because a large class of theoretical models implies that the nominal exchange rate system has important effects on a number of macroeconomic quantities

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

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

a state contingent production approach to principal agent problems with an application to point source pollution control two basic representations of principal agent relationships the state space and parameterized distribution formulations have emerged although the state space formulation appears more natural analytical studies using this formulation have had limited success this paper develops a state space formulation of the moral hazard problem using a general representation of production under uncertainty a closed form solution for the agency cost problem is derived comparative static results are deduced next we solve the principal s problem of selecting the optimal output given the agency cost function the analysis is applied to the problem of point source pollution control c 1998 published by elsevier science s a all rights reserved

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

cost functions under production uncertainty we characterize the cost functions which would be consistent with expected utility maximization when production is uncertain it is not generally possible assuming risk aversion to use only expected output as the constraint in a cost minimization problem in some leading cases cost functions consistent with expected utility maximization are particularly useful because they are devoid of risk preferences

some evidence on the international inequality of real interest rates abstract this paper undertakes econometric tests of the hypothesis that ex ante real interest rates are equal across countries with highly integrated capital markets the issue is of practical importance because the violation of real rate equality is a necessary condition for monetary policy to influence the open economy through the real interest rate channel although an empirical literature concerning real rate equality already exists previous investigators have focused on pre tax real rates this paper contributes to the literature by attempting to incorporate the effects of taxation into the analysis

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

the state contingent properties of stochastic production functions this paper develops the state contingent properties of the most frequently used representations of stochastic production in the agricultural economics literature particular attention is paid to the cases of multiplicative and additive uncertainty and to the convolution of multiplicative and additive uncertainty embodied in the just pope stochastic production function state contingent technologies and their associated cost functions are reviewed and that theory is applied to the stochastic production function a generalisation of the just pope technology that has desirable state contingent characteristics is proposed cost functions based upon state contingent technologies are compared with cost functions based on a parametrised distribution representation of production uncertainty

real and nominal interest rates under uncertainty the fisher theorem and the term structure this paper examines the relation between nominal and real interest rates and the nominal and real term structure under uncertainty we show that two separate risk terms cause the fisher theorem to fail one risk term is related only to the variability of money prices while the other is related to the purchasing power riskiness of the nominal bond monetary policy can affect the value of both these risk terms we also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia even if the economy is neutral with respect to monetary policy monetary policy can alter the nominal term structure

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

money supply announcements and the market s perception of federal reserve policy this paper investigates the reason why innovations in money supply announcements cause interest rates to change the paper empirically discriminates between the liquidity premium and the expected inflation hypotheses by directly taking into account investors expectations regarding the federal reserve s monetary policy stance the results support the liquidity premium hypothesis and the model provides an explanation for the observed time variation in the response of interest rates to money announcement surprises copyright 1990 by ohio state university press

optimal prediction of cyclical downturns abstract in the conventional way of visualizing economic time series the prediction problem does not dichotomize into predicting turning points and predicting conditional means yet the prediction of turning points has always been considered a separate issue in business cycle literature the paper first discusses these issues and then describes a model where the prediction of turning points does separate from the prediction of conditional means using the model an optimal way of predicting turning points is derived and applied to u s data the paper uses time series methodology and the theory of optimal stopping times

the behavior of u s short term interest rates since october 1979 short term interest rates in the united states have been too high since october 1979 in the sense that both unconditional and conditional forecasts based on an estimated vector autoregression model summarizing the prior experience under predict short term interest rates during this period although a non structural model cannot directly answer the question of why this has been so comparisons of alternative conditional forecasts point to the post october 1979 relationship between the growth of real income and the growth of real money balances as closely connected to the level and pattern of short term interestrates this finding is consistent with the authors earlier conclusion based on analysis of a small structural macroeconometric model that the high average level of interest rates has been due to a combination of slow growth of nominal money supply and continuing price inflation which together have kept real balances small in relation to prevailing levels of economic activity this abstract was borrowed from another version of this item

inflation presidents fed chairs and regime shifts in the u s real interest rate several recent papers agree on the existence of significant regime shifts in the u s real interest rate but disagree on the proximate causes of the shifts caporale and grier 2000 point to large political changes as correlates while rapach and wohar 2004 show that real rate breaks are correlated with inflation regime shifts and argue that the inflation regime changes cause the real rate shifts in this paper we show that controlling for the timing of changes in the inflation regime dummy variables representing either party change in the presidency or change in the identity of the fed chair are still strongly significant for explaining real interest rate fluctuations when we control for a fixed coefficient linear relationship between inflation and the real rate we find two real rate regime shifts that line up almost exactly with the accessions of paul volcker and alan greenspan even if we first let inflation regime switches explain the real rate and then look for regime shifts in the residuals we find almost exactly the same two breaks these results imply that fed chairs sometimes differ with respect to their preferred equilibrium real interest rate

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

democracy and markets the case of exchange rates the relationships between the workings of democratic institutions and currency markets are studied severa competing propositions about how political re equilibration affects currency markets are derived and tested the results support the view that democratic politics affects currency markets expectations and uncertainty about electoral outcomes and government survival affect the probability of switching between currency market equilibria additionally opinion polls about chief executive performance have a direct effect on the probabilities of switches between currency regimes suggesting that these polls cause currency traders to revise their expectations about the stability of governments and or the contents of public policies electoral institutions mitigate the impact of politics on currency market equilibria political effects are weaker in countries with proportional representation electoral systems than in countries with majority plurality systems there is less evidence that central bank independence consensual corporatist systems or political coherency reduces the effect of politics on currency markets he study of democracy and markets is at the heart of political economy understanding how political equilibration and economic equilibration are related is one of the main challenges facing this field the size and nature of currency markets make them especially important cases substantively with globalization currency markets have become important constraints on elected governments reducing their room to maneuver analytically in comparison to most goods markets currency markets are informationally efficient asset markets with distinctive equilibria today s exchange rate is determined by currency traders fully informed expectations about tomorrow s exchange rate the sensitivity of these markets to the arrival of new information therefore makes them particularly well suited for studying the effects of political news and uncertainty on economic equilibration 1 this article demonstrates there are informationally relevant political factors insofar as exchange rate determination is concerned factors that directly affect the transition probabilities between currency market equilibria moreover these factors vary in important ways across democracies some electoral institutions lessen the effects of politics on currency

stochastic processes for interest rates and equilibrium bond prices default free bonds represent in essence money sold forward the investor gives dollars say to the government now in exchange for a contract which promises to pay with probability one a given number of dollars at maturity and possibly a stream of intermediate coupon payments prior to maturity only recently have financial economists begun to examine the pricing of those bonds in a portfolio context in that framework nominal liquidity premiums or risk premiums on long term default free bonds are attributable to uncertainty about taste technological and price level changes which may occur prior to maturity of the bonds and prior to each coupon payment if any to the extent that the investor is unable to diversify away that uncertainty there is a systematic risk attached to the marginal utility which he or she can derive from the use in consumption or investment of the dollar payoffs on the bonds in some term structure models the instantaneous or short term rate of interest denoted here as a function of time t by r t in nominal terms and r t in real terms can be taken as a sufficient statistic1 for the source of systematic uncertainty about the marginal utility of the proceeds to be derived from defaultfree bonds maturing beyond the next instant e g merton 1974 vasicek 1977 cox ingersoll and ross 1977 specific assumptions about tastes technology and utility functions lead to specific equilibrium stochastic processes for the instantaneous short term riskless rate and longer term bond prices which are modelled as functionally dependent upon maturity and that short term riskless rate if a closed form solution exists for the long term bond price as a function of maturity and the short term interest rate it will be conditional inter alia on the parameters of the stochastic process for that short term rate marsh 1981 proposed that the closed form solutions could be tested in terms of the restrictions implied cross sectionally on the parameters of the time series process for the returns or prices of longer term bonds each with a given term to maturity for an analogy outside the term structure literature think of the closed form solution given by black and scholes 1972 for the price of an option on a nondividend paying stock with lognormal price dynamics given the model the cross section of time series for the changes in prices for each of the several options written on the same stock are not unrestricted their dispersion is functionally linked to the same volatility parameter for the stock price thus the option model including

tests for the role of risk aversion on input use for risk averting agents risks alter production decisions while the existence of institutions to insure against adverse states of nature will likely restore decisions toward levels under risk neutrality in this article conditions are identified on a stochastic technology to test h that risk averters choose smaller input levels than risk neutral agents and h that an increase in risk aversion reduces input use a robust statistical method to test for dominance is adapted to stochastic production relations it is found that h is likely true for nitrogen application on iowa corn weaker evidence is found in favor of h

long and short term interest rates in a risky world abstract the paper develops and tests a general equilibrium model in which variability or risk affects the choice of portfolios our measures of variability include only the variability of unanticipated growth in monetary and non monetary aggregates and our tests use data ending with the change in federal reserve procedures in october 1979 we find that increased variability of unanticipated money growth raises demands for debt and money and reduces the demand for real capital interest rates on both short and long term debt rise by a risk premium we estimate the size of the risk premium before and after the october 1979 change and we show that the change in federal reserve procedures moved the economy to a less efficient point

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