political uncertainty and macroeconomic performance abstract it is often claimed that politically induced economic flucturations are harmful for the society in this paper we show that this conjecture is not necessarily correct and such fluctuations can actually improve society s macroeconomic performance

the implications of financial cooperation in israel s semi cooperative villages abstract financial cooperation through credit sharing and co signing of debts was a source of strength for israel s semi cooperative moshavim in the early decades of their development but such cooperation entails a potential free rider problem when farmers borrowings are uncoordinated and recent events in israel have demonstrated the severe implications it can have this paper presents a theoretical analysis of the externalities generated by financial cooperation and tests its conclusions empirically using israeli data simulation results indicate that the potential instability of financial cooperation is aggrevated when the moshav population is heterogeneous

inflation risk and international asset returns abstract we show that inflation risk is priced in international asset returns we analyze inflation risk in a framework that encompasses the international capital asset pricing model icapm of adler and dumas 1983 in contrast to the extant empirical literature on the icapm we relax the assumption that inflation rates are constant we estimate and test a conditional version of the model for the g5 countries france germany japan the uk and the us over the period 1975 1998 and find evidence of statistically and economically significant prices of inflation risk in addition to priced nominal exchange rate risk our results imply a rejection of the restrictions imposed by the icapm in an extension of our analysis to 2003 we show that even after the termination of nominal exchange rate fluctuations in the euro area in 1999 differences in inflation rates across countries entail non trivial real exchange rate risk premia

off farm work decisions of farm couples estimating structural simultaneous equations with ordered categorical dependent variables we estimate a full system of structural farm and off farm labor supply equations of farm couples as a set of simultaneous equations with categorical dependent variables in a first step the reduced form is estimated by ordered probit with unknown thresholds then the identified structural coefficients are recovered from the reduced form coefficients through minimum distance estimation using census data from israel we find that for men a one hour increase in farm labor supply causes a one hour decrease in off farm labor supply but not for women this could not have been found without estimating structural coefficients

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

in defense of the nsf economics program abstract the nsf economics program funds basic research in economics across all its disparate fields its budget has experienced a long period of stagnation and decline with its real value in 2013 below that in 1980 and having declined by 50 percent as a percent of the total nsf budget the number of grants made by the program has also declined over time and its current budget is very small compared to that of many other funders of economic research over the years nsf supported research has supported many of the major intellectual developments in the discipline that have made important contributions to the study of public policy the public goods argument for government support of basic economic research is strong neither private firms foundations nor private donors are likely to engage in the comprehensive support of all forms of economic research if nsf were not to exist select universities with large endowments are more likely to have the ability to support general economic research in the abse

inflation real interest rates and the bond market a study of uk nominal and index linked government bond prices this paper estimates expected future real interest rates and inflation rates from observed prices of uk government nominal and index linked bonds the estimation method takes account of imperfections in the indexation of uk index linked bonds it assumes that expected log returns on all bonds are equal and that expected real interest rates and inflation follow simple time series processes whose parameters can be estimated from the cross section of bond prices the extracted inflation expectations forecast actual future inflation more accurately than nominal yields do the estimated real interest rate is highly variable at short horizons but comparatively stable at long horizons changes in real rates and expected inflation are strongly negatively correlated at short horizons but not at long horizons

monetary institutions monopolistic competition unionized labor markets and economic performance recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy but not both this leads to two opposing views about the effects of central bank conservativeness we evaluate the relative merits of those conflicting views by developing a unified framework we find that i the effect of conservativeness on employment depends on unions relative aversion to unemployment versus inflation and ii for plausible values of this relative aversion and more than one union social welfare is maximized under a highly conservative central bank we also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation

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

real and nominal interest rates a discrete time model and its continuous time limit i provide a general equilibrium theory of the term structure of real interest rates in a discrete time economy i derive the prices for one period and two period real bonds and a simple recursive formula for general k period bonds and prove that the price formula with appropriately specified parameters converges to that of the cox ingersoll and ross model 1985 in addition i consider the behavior of nominal bond prices in a partial equilibrium setting in which an exogenous price level process is correlated with the real economy finally i provide an illustrative empirical investigation of the model the results indicate a significant correlation between the price level and the growth rate of consumption which does not support the money nuetrality assumption underlying cox ingersoll and ross s nominal bond prices and related empirical studies such as gibbons and ramaswamyu 1992 heston 1991 and pearson and sun 1991 article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

multiple wage bargaining systems in the single european currency area little attention in the emu literature has been paid to the interaction between central bank monetary rules and systems of collective wage bargaining analytically and empirically coordinated wage bargaining systems respond with real wage restraint to non accommodating monetary policy since wage determination is dominated by collective bargaining in all the emu member states and wage coordination within the member states has grown since 1980 this is a topic of potential importance in particular the replacement of the bundesbank directly targeting german inflation by an ecb targeting european inflation has removed a major institutional support of wage restraint in germany the consequences of this for emu are worked out under two scenarios that inflation expectations will be generated by ecb monetary policy and that they will reflect german inflation outcomes possible institutional developments are discussed including government union bargains the bundesbank has also played a major role in maintaining fiscal rectitude by targeting excess fiscal deficits in germany again its replacement by the ecb targeting if at all european rather than german fiscal policy loosens fiscal constraints for underlying structural reasons therefore it is possible that germany and other emu countries will move to a period of fiscal activism with wage restraint and low inflation purchased through social contract negotiations

stabilisation policy targets and unemployment in imperfectly competitive economies this paper argues that the rate of equilibrium unemployment depends on the objectives of the central bank in a model where the central bank uses monetary policy to stabilise the economy we show that unemployment and inflation will be lower with an inflation target than with targets for output money or nominal gdp the intuition for this is that the elasticities of demand in both the product and the labour markets are greater when there is an inflation target we show that this leads to a lower mark up of price over marginal cost and makes wages more sensitive to unemployment

the tips treasury bond puzzle we show that the price of a treasury bond and an inflation swapped treasury inflation protected securities tips issue exactly replicating the cash flows of the treasury bond can differ by more than 20 per 100 notional treasury bonds are almost always overvalued relative to tips total tips treasury mispricing has exceeded 56 billion representing nearly 8 of the total amount of tips outstanding we find direct evidence that the mispricing narrows as additional capital flows into the markets this provides strong support for the slow moving capital explanation of arbitrage persistence

distinguished lecture on economics in government the private uses of public interests incentives and institutions as a long time student of the public sector i welcomed the opportunity to come to washington as a member of the council of economic advisers and later to become the chairman of the council partly because it gave me an opportunity to study at first hand this immensely important part of our economy and society and to test my ideas against the reality of government in action to be sure i came also as an activist if not with a fully articulated agenda at least with a view about what it was that government should and should not be doing my reference point was the fundamental theorems of welfare economics which as some describe them proved that the market left to itself would produce efficient allocations many saw in these theorems the vindication of adam smith s faith in the invisible hand leading the self interested decisions of each person to maximize the well being of the nation as a whole today many of us look at the fundamental theorem not as a description of the world but as an explication of the conditions under which a market equilibrium will be pareto efficient these conditions are quite strong the importance of some of the more explicit assumptions like the lack of externalities and the completeness of markets has long been known in the last two decades we have explored much more seriously the consequences of the informational assumptions implicit in the belief that markets are efficient in particular it has been shown that in the presence of imperfect information or incomplete markets the economy will not be pareto efficient in other words there joseph stiglitz is senior vice president and chief economist world bank washington d c stiglitz was a member of the council of economic advisers from 1993 95 and chairman

portfolio selection with inflation linked bonds and indexation lags abstract we derive the price of inflation indexed bonds of which the payments are linked to a lagged price index and solve for the optimal bond portfolio under both inflation and indexation lags in closed form we show that indexation lags increase the number of state variables characterizing both the bond prices and the optimal portfolio the lag induced state variables affect the future investment opportunity and hence further arm investors with the tools for hedging inflation risk that is however unhedgeable if there is no indexation lag we find that the optimal portfolio accounts for the indexation lags by also exploring the historical information and increases investors welfare therefore we document a positive effect of the indexation lags that are typically considered as a type of market friction

inflation risk premia in the term structure of interest rates this paper estimates the size and dynamics of inflation risk premia in the euro area based on a joint model of macroeconomic and term structure dynamics information from both nominal and index linked yields is used in the empirical analysis our results indicate that the inflation risk premium on euro area 10 year nominal yields was approximately equal to 20 basis points on average over the 1999 2007 period the inflation premium has also been subject to moderate but statistically significant fluctuations for the post 2003 period in which reliable index linked bond prices are available our results suggest that increases in the raw break even inflation rate above 2 the upper bound of the european central bank s definition for price stability have mostly reflected variations in the inflation risk premium while long term inflation expectations have remained well anchored

endogenous contract structure and monetary policy abstract we analyze the co determination of monetary policy and the labor contracts chosen by members of the public who can either fix or index their nominal wages fixed nominal wages allow the central bank to offset productivity shocks while the public fix nominal wages in response to the central bank offsetting shocks so there is an equilibrium in which realistically nominal wages are fixed and shocks offset a result which holds in single as well as in multi period games in addition there may be equilibria in which agents index their nominal wages and the central bank optimally responds by stabilizing price in contrast to conventional models the ramsey rule may be implemented in a finitely repeated game the central bank does not deviate for fear that agents would change their labor contracts such that the central bank s least favored equilibrium will subsequently be played

core and crust consumer prices and the term structure of interest rates we propose a model for nominal and real term structures of interest rates that includes dynamics for the three main components of total inflation core food and energy these dynamics combine together to produce a measure of expected total inflation that investors use to price nominal treasuries this framework captures different frequencies in inflation fluctuations shocks to core are more persistent and less volatile than shocks to food and especially energy the crust we find that a common structure of latent factors determines and predicts the term structure of yields and inflation our model outperforms popular benchmarks e g arma var and random walk specifications and it is at par with the survey of professional forecasters in forecasting inflation moreover we estimate real rates that agree with inflationindexed bond yields after adjusting for the liquidity premium in these bonds finally inflation and real rate risk premia show a declining pattern consistent with the changing nature of inflation and real rate risks

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

the real thing a dynamic profile of the term structure of real interest rates and inflation expectations in the united kingdom 1982 89 this article estimates real interest rates and inflation expectations from market observable data without assuming anything about the form of agents expectation formation mechanism by examining prices of index linked and conventional gilt edged securities form the u k bond market real interest rates and inflation expectations are computed quarterly beginning 1982 2 for up to fourteen maturities ranging from 1988 to 2024 copyright 1990 by the university of chicago

the nonneutrality of monetary policy with large price or wage setters monetary rules matter for the equilibrium rate of employment when the number of price wage setters is small even when assuming rational expectations complete information central bank precommitment and absence of nominal rigidities if the central bank is nonaccommodating sufficiently large unions bargaining independently have an incentive to moderate sectoral money wages and thereby expected real wages the result is an increase in the real money supply and hence higher demand and employment this does not hold with accommodating monetary policy since unions wage decisions cannot then affect the real money supply a similar argument holds for large monopolistically competitive price setters

does inflation targeting really make a difference evaluating the treatment effect of inflation targeting in seven industrial countries abstract we evaluate the treatment effect of inflation targeting in seven industrial countries that adopted this policy in the 1990s to address the self selection problem of policy adoption we make use of a variety of propensity score matching methods recently developed in the treatment effect literature our results show that inflation targeting has no significant effects on either inflation or inflation variability in these seven countries further evidence from long term nominal interest rates and income velocity of money also supports the window dressing view of inflation targeting

monetary accommodation imperfect central bank transparency and optimal delegation optimal delegation restores the beneficial effects of non accommodating monetary policy when the central bank is allowed to be not fully transparent about its response to wages

monetary regimes and the co ordination of wage setting abstract a recent literature argues that a strict monetary regime may reduce equilibrium unemployment by disciplining wage setters as wage setters abstain from raising wages to avoid a monetary contraction however in this literature the wage setters are assumed not to co ordinate their wage setting the present paper argues that precisely because a strict monetary regime may discipline the unco ordinated wage setting thus lowering unemployment in the unco ordinated outcome it also reduces wage setters incentives to co ordinate it is shown that an accommodating monetary regime may reduce equilibrium unemployment via the strengthening of the wage setters incentives to co ordinate

the costs of equal land distribution the case of the israeli moshavim equal land distribution achieved by government policy may adversely affect aggregate output israeli moshavim cooperative villages operate under an equal land allocation rule this study assesses the production and distributional consequences of three alternative hypothetical allocation rules a free market allocation a value maximizing policy of distributing land to current farmers and a policy that maximizes value added without discrimination based on nativity or ethnicity production and supply functions are estimated using sample data on israeli family farms then the four allocation rules are simulated the output loss from distributing land equally is found to be modest compared to the income inequality generated by the other rules

monetary accommodation and unemployment why central bank transparency matters abstract this note qualifies previous results on the beneficial effects of a non accommodating monetary rule on employment by considering the case where the central bank is not fully transparent about its reaction to wages

inflation uncertainty and unemployment uncertainty why transparency about monetary policy targets matters abstract disclosure of monetary policy targets reduces unemployment uncertainty at the expense of higher inflation uncertainty thereby posing a dilemma for monetary policymakers

real risk inflation risk and the term structure i present a model for the term structures of nominal and real interest rates in the uk that incorporates markov switching and allows for non neutralities nonlinear dynamics and flexibility in the dynamics of the risk premia the model is used to assess how accurately the term structure reflects changing expectations of future yields and inflation i find that variations in inflation expected over the next two to three years are very accurately reflected by current yields over longer horizons the term structures closely track changing expectations regarding future nominal and real yields but not future inflation

policy watch the introduction of indexed government debt in the united states abstract this article describes the early phases of the development of the market for indexed government debt in the united states the first such bonds were issued in 1997 one set with a maturity of ten years the other with a maturity of five years in the wake of the treasury issuance several non treasury borrowers have issued indexed debt and several new index linked products for retail customers have been introduced as expected the new indexed notes have outperformed conventional nominal notes in the secondary markets for treasury debt when bad news has become available about inflation and conversely

what does the term structure tell us about future inflation abstract this empirical analysis indicates that for maturities of six months or less the term structure of nominal interest rates provides almost no information about the future path of inflation but does provide information about the term structure of real interest rates however as maturities lengthen to nine and twelve months the nominal term structure begins to contain information about future inflation but ceases to provide information about the real term structure these results are explained by differences in the relative variability of expected future inflation changes and real term structure slopes at different points in the term structure

testing the relative purchasing power parity hypothesis the case of korea abstractthis study examines the relative purchasing power parity ppp hypothesis using the data from the korean won us dollar and the korean won japanese yen foreign exchange markets we extract proxies for inflation from stock market returns of korea the united states and japan based on the method used by chowdhry roll and xia in 2005 we explicitly test the relative ppp hypothesis in light of the short run price volatility using monthly bimonthly and quarterly data from 1 january 1998 to 31 december 2012 our findings suggest that the empirical test results from the entire sample period do not support the relative ppp hypothesis however the results from the sample period excluding the asian financial crisis period show that the relative ppp hypothesis holds for the korean won us dollar market with a moderate magnitude of inflation impact but not for the korean won japanese yen market abrupt changes in exchange rates during the crisis period may have affected the relationship between inflation an