does monetary unification lead to excessive debt accumulation abstract if discretionary monetary policy gives rise to an inflation bias monetary unification boosts the accumulation of public debt the additional debt accumulation harms welfare if governments are sufficiently myopic in the presence of myopic governments debt ceilings play a useful role in avoiding excessive debt accumulation in a monetary union and allowing a conservative independent central bank to focus on price stability with supply shocks monetary unification results in excessive variability of public debt a debt target that constrains stabilization policy helps to prevent this

the federal funds rate and the channels of monetary transmission the authors show that the interest rate on federal funds is extremely informative about future movements of real macroeconomic variables then they argue that the reason for this forecasting success is that the funds rate sensitively records shocks to the supply of bank reserves that is the funds rate is a good indicator of monetary policy actions finally using innovations to the funds rate as a measure of changes in policy the authors present evidence consistent with the view that monetary policy works at least in part through credit i e bank loans as well as through money i e bank deposits copyright 1992 by american economic association

rules and discretion with noncoordinated monetary and fiscal policies the time inconsistency of optimal monetary policy is due to the effects of tax distortions thus the issue of how to improve upon the time consistent suboptimal monetary policy is related to that of the coordination of monetary and fiscal policy we present a model with three players the central bark the fiscal authority and wage setters in which distortionary taxes are explicitly modelled we show that binding commitments to monetary rules are not necessarily welfare improving if monetary and fiscal policy are not coordinated we also examine the effects of different degrees of independence of the central bank

interest rate volatility and the term structure a two factor general equilibrium model we develop a two factor general equilibrium model of the term structure the factors are the short term interest rate and the volatility of the short term interest rate we derive closed form expressions for discount bonds and study the properties of the term structure implied by the model the dependence of yields on volatility allows the model to capture many observed properties of the term structure we also derive closed form expressions for discount bond options we use hansen s generalized method of moments framework to test the cross sectional restrictions imposed by the model the tests support the two factor model there are essentially two approaches to the modeling of the term structure of interest rates in continuous time the equilibrium approach pioneered by

a model of currency depreciation and the debt inflation spiral abstract this paper shows how a government that cannot make credible policy commitments might manage its exchange rate and fiscal stance in a world of rational expectations the dynamic game model developed here potentially can generate diverse patterns of macroeconomic behavior patterns that differ as a result of assumed differences in government objectives under some types of government the ongoing strategic interaction between the public and private sectors leads to a disinflationary outcome other governments may push the economy into a spiral of rising debt and inflation

central bank independence and public debt policy the various proposals for the institutional design of the european monetary union have drawn fresh attention to the link between monetary and public debt policies this paper explores the strategic interaction between fiscal authorities setting public debt and the central bank controlling monetary policy in the absence of political distortions an optimally designed conservative independent central bank is sufficient to establish the second best in the presence of political distortions or with coordination of monetary and fiscal policy however also a debt target is needed

investment in electricity networks with transmission switching we consider the application of dantzig wolfe decomposition to stochastic integer programming problems arising in the capacity planning of electricity transmission networks that have some switchable transmission elements the decomposition enables a column generation algorithm to be applied which allows the solution of large problem instances the methodology is illustrated by its application to a problem of determining the optimal investment in switching equipment and transmission capacity for an existing network computational tests on ieee test networks with 73 nodes and 118 nodes confirm the efficiency of the approach

who wants an independent central bank monetary policy making and politics the costs and benefits of cooperative monetary and fiscal policy are analysed in the framework of a partisan business cycles model it is shown that political parties with different ideologies prefer to choose different arrangements for macroeconomic policy making more specifically right wing parties favour independent central banks more than left wing parties an independent central bank is also the generally preferred option from a social welfare point of view in addition the form of policy making arrangements between the fiscal and monetary authorities is shown to influence the extent of partisan cycles

inflation and stock prices no illusion campbell and vuolteenaho 2004 use var results to advocate inflation illusion as the explanation for the positive association between inflation and dividend yields using a structural approach we find that a fully rational dynamic general equilibrium model can generate a positive correlation between dividend yields and inflation as observed in the data the paper describes a channel by which the technology shock moves both inflation and dividend yields in the same direction resulting in a positive correlation between the two

cross border asset holdings and comovements in sovereign bond markets we analyze the importance of different asset holdings for the interdependence of the yield curves in the euro area using a spatial var model we find that the cross border holdings of long term deb

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

economic determinants of the nominal treasury yield curve abstract macroeconomic shocks account for most of the variability of nominal treasury yields inducing parallel shifts in the level of the yield curve we develop a new approach to identifying macroeconomic shocks that exploits model based empirical shock measures technology shocks shift yields through their effect on expected inflation and the term premium shocks to preferences for current consumption affect yields through their impact on real rates and expected inflation for both shocks the systematic reaction of monetary policy is an important transmission pathway we find little evidence that fiscal policy shocks are an important source of interest rate variability

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

new keynesian macroeconomics and the term structure this article complements the structural new keynesian macro framework with a no arbitrage affine term structure model whereas our methodology is general we focus on an extended macro model with an unobservable time varying inflation target and the natural rate of output which are filtered from macro and term structure data we obtain large and significant estimates of the phillips curve and real interest rate response parameters our model also delivers strong contemporaneous responses of the entire term structure to various macroeconomic shocks the inflation target dominates the variation in the level factor whereas the monetary policy shocks dominate the variation in the slope and curvature factors

restoring the conservative central banker proposition under monetary fiscal interaction abstract in a model with fiscal policy hughes hallett et al hughes hallett a libich j stehlik p 2009 rogoff revisited the conservative central banker proposition under active fiscal policies economics letters 104 140 143 challenge the relevance of the conservative central banker proposition and other standard results by considering an underlying model which makes the macroeconomic relations more explicit we are able to simplify the analysis and restore the conservative central bank result

what drives spreads in the euro area government bond market spreads between euro area government bond yields are related to short term interest rates which are in turn related to market liquidity to cyclical conditions and to investors incentives to take risk in theory lower interest rates are associated with lower degrees of risk aversion and smaller government bond spreads empirically the eurosystem s short term interest rates are positively related to those spreads which our econometric model finds to include significant and policy relevant default risk and liquidity risk components simone manganelli and guido wolswijk

predicting u s recessions financial variables as leading indicators this paper examines the out of sample performance of various financial variables as predictors of u s recessions series such as interest rates and spreads stock prices and monetary aggregates are evaluated individually and in comparison with other financial and nonfinancial indicators the analysis focuses on out of sample performance from one to eight quarters ahead results show that stock prices are useful with one to three quarter horizons as are some well known macroeconomic indicators beyond one quarter however the slope of the yield curve emerges as the clear individual choice and typically performs better by itself out of sample than in conjunction with other variables

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

the structure of public debt and the choice of exchange rate regime this paper explores the relationship between the denomination of public debt and the choice of exchange rate regime three types of debt nominal indexed and foreign and two regimes fixed and flexible are considered indexed debt is insulated against unexpected inflation the real domestic currency value of foreign debt is subject to valuation effects from real exchange rate shocks the fear of floating result that foreign debt makes pegging more attractive is shown to hold unambiguously only if the peg is fully credible if the peg lacks credibility a critical factor is the perceived likelihood of using the escape clause of a switch to a float which raises the costs of pegging foreign debt increases the temptation to resort to the escape clause so when a peg is not fully credible as is almost always the case in reality pegging tends to be less attractive than floating in the presence of foreign debt ce memoire explore le rapport entre la denomination de la dette publique et le choix d un regime de taux de change trois types de dettes sont considerees nominale indexee etrangere et deux types de regimes taux fixes et taux flexibles la dette indexee est immunisee contre l inflation imprevue la valeur reelle en monnaie domestique de la dette etrangere est sujette a des effets attribuables aux chocs dans les taux de change reels la peur de laisser flotter le taux de change aide a comprendre qu une dette etrangere rend le taux fixe plus attrayant mais ce resultat est sans ambiguite seulement si le taux fixe est pleinement credible si le taux fixe manque de credibilite un facteur critique est la perception de la probabilite qu on va utiliser l echappatoire du passage au taux flottant ce qui augmente les cots d un taux fixe la dette etrangere accroit la tentation d avoir recours a la clause echappatoire ce qui fait que quand un taux fixe n est pas pleinement credible comme c est a peu pres toujours le cas en realite un regime de taux de change fixe tend a tre moins attrayant qu un regime de taux de change flottants quand il y a dette etrangere

seigniorage and political instability the importance of seigniorage relative to other sources of government revenue differs markedly across countries this paper tries to explain this regularity by studying a political model of tax reform the model implies that countries with a more unstable and polarized political system will have more inefficient tax structures and thus will rely more heavily on seigniorage this prediction of the model is tested on cross sectional data for seventy countries the authors find that after controlling for other variables political instability is positively associated with seigniorage copyright 1992 by american economic association

loss of monetary discretion in a simple dynamic policy game abstract we analyze a simple policy game featuring monetary credibility problems and argue that loss of monetary discretion is not advantageous two elements form the basis of our analysis firstly we endogenize the source of credibility problems and secondly we consider a dynamic framework where credibility problems are not time invariant by doing this we are able to demonstrate that credibility problems are temporary and in steady state the government has removed these through sound policies a binding policy rule will only serve as an obstacle towards this steady state

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

the cyclical properties of consumption growth and the real term structure abstract expected real yields on nominally risk free bonds and expected consumption growth at horizons from one quarter to two years are identified using time series models and their basic properties are examined the principal results are 1 real yields and consumption growth are weakly negatively correlated over the full sample period of 1953 1991 2 excluding the 1979 1985 sub period real yields and consumption growth are strongly positively correlated 3 the cyclical properties of real yields and consumption growth are qualitatively similar in the pre 1979 data and they are consistent with a simple real business cycle model

dispersion as cross sectional correlation we introduce the concept of cross sectional dispersion of stock market returns as an alternative to the time series approach to estimating the global correlation level of equity markets our objective is to derive a simple instantaneous measure of the general level of global market correlation our cross sectional method of estimating global correlation is dynamic and using cross sectional data gives instantaneous information on the trend of global correlation the traditional time series method requires a long period of observations and overlapping data have to be used to study the change in correlation both methods yield similar estimates for a long period however so a combination of the cross sectional and time series approaches should be of practical use to global asset managers

inflation targeting fiscal rules and the policy mix cross effects and interactions we examine how inflation targeting it and fiscal rules fr affect inflation and fiscal performance in a large panel of countries during 1990 2009 in line with theory both fr and it appear to shape monetary and fiscal outcomes significant cross effects seem to exist as it strengthens fiscal performance whereas the combination of fr and it tends to be associated with more disciplined macroeconomic policies than if only one of these institutions operates our findings suggest that it and fr affect the coordination of the policy mix and point to potential benefits of reforming macroeconomic frameworks in a holistic fashion

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

public debt indexation and denomination with an independent central bank abstract this paper examines the interaction between public debt management and the design of monetary institutions the analysis shows that delegation of monetary policy to an independent central bank is more effective in containing inflationary expectations than the use of foreign currency or inflation indexed debt if delegation of monetary policy is viable the optimal policy is to issue nominal debt this increases the sensitivity of taxes and output to unexpected inflation thus minimizing the inflation needed to offset supply shocks evidence on central bank independence debt composition and output variability suggests that the normative argument has some positive content

stylized facts on nominal term structure and business cycles an empirical var study this paper examines the importance of various macroeconomic shocks in explaining the movement of the term structure of nominal bond yields in the post war usa as well as the channels through which such macro shocks influence the yield curve using a structural vector autoregressive var model the results show that the monetary policy and the aggregate supply shocks are important determinants of the nominal term structure moreover the monetary policy innovations have a large but transitory effect on the nominal bond yields primarily by changing the slope of the yield curve and the aggregate supply shocks from private sector have a more persistent effect on the level of the yield curve but have little effect on the slope of the yield curve

an analysis of the stability and growth pact we use a stylised model to analyse the stability and growth pact for countries that have formed the european monetary union emu in our model shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully therefore while governments have no incentive to sign a stability pact in the absence of a monetary union they do so with monetary union to restrain this externality with uncertainty a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy with differences in initial conditions conflicts of interest arise we study the nash bargaining solution

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

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

macroeconomic models and the yield curve an assessment of the fit abstract many have questioned the empirical relevance of the calvo yun model this paper adds a term structure to three widely studied macroeconomic models calvo yun hybrid and svensson we back out from observations on the yield curve the underlying macroeconomic model that most closely matches the level slope and curvature of the yield curve with each model we trace the response of the yield curve to macroeconomic shocks we assess the fit of each model against the observed behaviour of interest rates and find limited support for the calvo yun model in terms of fit with the observed yield curve we find some support for the hybrid model but the svensson model performs best

transmission switching in expansion planning transmission switching ts is introduced to add flexibility to the transmission and generation capacity expansion planning problem ts could improve the performance of the capacity expansion planning model and reduce the total planning cost the capacity expansion planning problem is decomposed into a master problem and two subproblems the master problem utilizes the candidate set for additional generating unit and transmission capacity investments to find the optimal plan throughout the planning horizon the subproblems use the optimal plan apply transmission switching to relieve any transmission flow violations and calculate the optimal dispatch of generating units the transmission network contingencies are also considered in the subproblems the case studies exhibit the effectiveness of the proposed expansion planning approach

optimal monetary policy cooperation through state independent contracts with targets abstract simple state independent monetary institutions are shown to secure optimal cooperative policies in a stochastic linear quadratic two country world with international policy spill overs and national credibility problems institutions characterize delegation to independent central bankers facing quadratic performance related contracts punishing or rewarding deviations from primary and intermediate policy targets

yield curve in an estimated nonlinear macro model this paper estimates a sticky price macro model with us macro and term structure data using bayesian methods the model is solved by a nonlinear method the posterior distribution of the parameters in the model is found to be bi modal the degree of nominal rigidity is high at one mode sticky price mode but is low at the other mode flexible price mode i find that the degree of nominal rigidity is important for identifying macro shocks that affect the yield curve when prices are more flexible a slowly varying inflation target of the central bank is the main driver of the overall level of the yield curve by changing long run inflation expectations in contrast when prices are more sticky a highly persistent markup shock is the main driver the posterior probability of each mode is sensitive to the use of observed proxies for inflation expectations ignoring additional information from survey data on inflation expectations significantly reduces the posterior probability of the flexible price mode incorporating this additional information suggests that yield curve fluctuations can be better understood by focusing on the flexible price mode considering nonlinearities of the model solution also increases the posterior probability of the flexible price mode although to a lesser degree than using survey data information

a theory of the nominal term structure of interest rates a model of the nominal term structure of interest rates is developed that has a positive and stationary process for the interest rate and delivers closed form expressions for the prices of discount bonds and european options on bonds unlike the one state variable version of the cox ingersoll and ross 1985 model this model even in its one state variable version allows the term premium to change sign as a function of the state and the term to maturity and also allows for shapes of the yield curve that are observed in the u s data but that are disallowed in the cox ingersoll and ross model article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

what does the yield curve tell us about the federal reserve s implicit inflation target this paper uses a dynamic stochastic general equilibrium dsge model to explore the additional information that can be extracted from the yield curve about the federal reserve s implicit inflation target in the model monetary policy follows a nominal interest rate rule with a drifting inflation target and agents have imperfect information about the persistent component of inflation target when the yield curve information is included the dsge model generates inflation expectations that are highly correlated with survey data evidence in the dsge model agents learn quickly inflation target and the gap between the perceived target and the actual target is quantitatively small this is in contrast to some of existing studies that suggest a persistent role of imperfect information even as long run inflation expectations has declined and stabilized at a low level since the mid 1980s

does central bank independence lower inflation this paper provides a potential explanation for the recent findings of no significant relationship between central bank independence cbi and lower inflation we argue that although cbi delivers lower inflation in the short term it may reduce the scope for productivity enhancing public investment and so harm future growth potential we also argue that the effects on growth make cbi less likely to achieve lower inflation in the long term

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

optimal interest rate smoothing this paper considers the desirability of the observed tendency of central banks to adjust interest rates only gradually in response to changes in economic conditions it shows in the context of a simple model of optimizing private sector behaviour that assignment of an interest rate smoothing objective to the central bank may be desirable even when reduction of the magnitude of interest rate changes is not a social objective in itself this is because a response of policy to irrelevant lagged variables may be desirable owing to the way it steers private sector expectations of future policy

money prices interest rates and the business cycle the mechanisms governing the relationship of money prices and interest rates to the business cycle are the most studied and most disputed topics in macroeconomics in this paper we first document key empirical aspects of this relationship we then ask how well three benchmark rational expectations macroeconomic models a real business cycle model a sticky price model and a liquidity effect model account for these central facts while the models have diverse successses and failures none can account for the fact that real and nom inal interest rates are inverted leading indicators of real economic activity that is none of the models captures the post war u s business cycle fact that a high real or nominal interest rate in the current quarter predicts a low level of real economic activity two to four quarters in the future i introduction the positive correlation of monetary aggregates and real economic activity over the course of many business cycles is a key empirical fact about the u s economy indeed the dynamic dimension of this covariation is so strong and stable that a monetary variable has long been included in the commerce department s index of leading economic indica tors while this pattern of cyclical comovement is widely agreed upon its interpretation is not some macroeconomists view money as purely passive with a positive response to varying levels of economic activity producing the positive correlation others view changes in the quantity of money as an important perhaps dominant source of economic fluctua tions frequently the real effects of monetary changes are suggested to arise from frictions in commodity labor or financial markets in economic theories that describe the influence of these frictions the transmission mechanism from monetary changes to real activity is typically viewed as involving interest rates and the price level the primary goal of this paper is to evaluate three models that explain the link between money prices interest rates and the business cycle we do this in three steps first we docu ment the cyclical behavior of these variables in the united states over the postwar period second we construct three quantitative rational expectations models of macroeconomic activity i a real business cycle model with endogenous money ii a model of commodity market frictions with mon etary non neutralities arising from gradual adjustment of goods prices and iii a model of financial market frictions with monetary non neutralities arising from gradual adjust ments of portfolios finally we compare the models predic tion for the business cycle behavior of money prices and interest rates with the data in exploring the predictions of these models we take the stock of money to be one of several exogenous variables in the system all of our models are capable of generating a forecasting role for money relative to real economic activity similar to that found in the u s data in the real business model monetary changes can forecast real activity because productivity is related to many underlying sources of shocks and because these real shocks also affect the money stock in the models with sticky prices and liquidity effects short hand names for the models with frictions in the com modity and financial markets monetary changes have an additional direct positive effect on aggregate output the outline of the paper is as follows section ii describes the data and documents its business cycle characteristics section iii outlines the three macroeconomic models and develops the particular quantitative versions of the models used in our analysis our main empirical results are pre sented in section iv and section v summarizes our results and concludes

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

money debt and deficits in a dynamic game this paper analyzes a dynamic linear quadratic game between the fiscal and monetary authorities the equilibrium outcome of the game determines the time path of money creation fiscal deficits and public debt the game is solved for different equilibrium concepts the equilibria are then compared and interpreted with reference to alternative institutional arrangements the main results are i coordination increases the speed of adjustment towards the steady state and takes the steady state value of public debt closer to the desired target ii precommitments take the non cooperative equilibrium closer to the coordinated outcome iii increasing the weight that each policymaker assigns to his own private objectives slows down the adjustment process places more burden on the opponent but has ambiguous effects on the steady state value of public debt

macro factors and the affine term structure of interest rates this paper formulates an affine term structure model of bond yields from a dynamic stochastic general equilibrium model with observable macro state variables as the term structure factors model implications for the joint macro term structure dynamics are consistent with the empirical patterns from the var estimation model calibration and simulation exercises also provide clear macroeconomic interpretations of the latent term structure factors as found in the finance literature most of the slope factor movement can be explained by exogenous monetary policy shocks and the level factor movement is closely related to the technology shocks

measuring european financial integration in this paper we present a set of specific measures to quantify the state and evolution of financial integration in the euro area five key markets are considered namely the money corporate bond government bond credit and equity markets building upon the law of one price we have developed two types of indicators that can be broadly categorized as price based and news based measures we have complemented these measures by a number of quantity based indicators mainly related to the evolution of the home bias results indicate that the unsecured money market is fully integrated while integration is reasonably high in the government and corporate bond markets as well as in the equity markets the credit market is among the least integrated especially in the short term segment

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

expectation puzzles time varying risk premia and dynamic models of the term structure abstract linear projections of returns on the slope of the yield curve have contradicted the implications of the traditional expectations theory this paper shows that these findings are not puzzling relative to a large class of richer dynamic term structure models specifically we match all the key empirical findings reported by fama and bliss 1987 american economic review 77 4 680 692 and campbell and shiller 1991 review of economic studies 58 495 514 among others within large subclasses of affine and quadratic gaussian term structure models additionally we show that certain risk premium adjusted projections of changes in yields on the slope of the yield curve recover the coefficients of unity predicted by the models key to this matching are parameterizations of the market prices of risk that let the risk factors affect the market prices of risk directly and not only through factor volatilities the risk premiums have a simple form consistent with fama s findings on the predictability of forward rates and are also shown to be consistent with interest rate feedback rules used by a monetary authority in setting monetary policy

sovereign bond yield spreads a time varying coefficient approach abstract we study the determinants of sovereign bond yield spreads across 10 emu countries between q1 1999 and q1 2010 we apply a semiparametric time varying coefficient model to identify to what extent an observed change in the yield spread is due to a shift in macroeconomic fundamentals or due to altering risk pricing we find that at the beginning of emu the government debt level and the general investors risk aversion had a significant impact on interest differentials in the subsequent years however financial markets paid less attention to the fiscal position of a country and the safe haven status of germany diminished in importance by the end of 2006 two years before the fall of lehman brothers financial markets began to grant germany safe haven status again one year later when financial turmoil began the market reaction to fiscal loosening increased considerably the altering in risk pricing over time period confirms the need of time varying coefficient models in this context

debt contingent inflation contracts and targets abstract this paper analyzes fiscal and monetary policy interaction in a simple policy game with debt and output shocks seigniorage provides revenue for the government but results in an inflation bias we analyze three mechanisms designed to eliminate some or all of the biases in monetary policy an inflation performance contract inflation target both contingent on the stock of debt and a zero inflation rule the performance contract and inflation target result in higher interest rate remove all biases in monetary policy and achieve the pre commitment policy hence they are equivalent the first two solutions also yield a higher expected welfare than a zero inflation policy

optimal investment plan for dynamic thermal rating using benders decomposition abstract the dynamic thermal rating is a new technology that utilizes the capacity of power transmission lines based on the ambient factors and the line condition it usually offers higher thermal capacity than the traditional static rating we propose a multi stage mixed integer programming model and find the optimal investment plan for the dynamic ratings using benders decomposition the investment plan includes when and which line should be upgraded to dynamic rating and which line should be switched out of service the problem is decomposed into a master problem and three sub problems the master problem explores the candidate lines for both the investment plan and the switching plan throughout the planning horizon the sub problems evaluate the proposed plans in terms of unmet demand and generation cost generation and transmission contingencies are also included in the model we use our model on garver s system and ieee 118 bus power systems to demonstrate our solution approach we conduct sensitivity analyses and study the uncertainty in real time thermal ratings loads and the discounting rate our studies show that the utilization of the dynamic ratings and the practice of transmission switching are complementary and can reduce the cost on the 118 bus system up to 30 percent

asset pricing implications of a new keynesian model to match the stylised facts of goods and labour markets the canonical new keynesian model augments the optimising neoclassical growth model with nominal and real rigidities we ask what the implications of this type of model are for asset prices using a second order numerical solution to the model we examine bond and equity returns the equity risk premium and the behaviour of the real and nominal term structure we catalogue the factors that are most important for determining the size of risk premia and the slope and level of the yield curve in a world of technology shocks only increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces risk premia in a world of monetary policy shocks only both real and nominal rigidities raise risk premia the results indicate that the implications of the new keynesian model for average asset returns depend critically on the

a structural decomposition of the us yield curve abstract by expanding the macro part of macro finance models historical fluctuations in us bond yields turn out to be largely consistent with the rational expectations hypothesis we estimate a medium scale macro finance dsge model of the term structure to establish this our finding contrasts with existing macro finance models and suggests that their small scale or non structural perspective on the macroeconomy mutes expectations thereby underestimating the expectations hypothesis potential out of sample forecasts are competitive with more flexible term structure models given the empirical validation we interpret various episodes through the lens of the model and investigate which structural shocks cause the yield curve to contain information about future growth

fiscal policy coordination and emu a dynamic game approach abstract this paper examines the case for fiscal policy coordination in a european economic and monetary union emu a two bloc model with two market structures is examined emu producing a single homogeneous good in both blocs emu1 and a two good emu emu2 where each bloc produces a single home good the european central bank sets monetary policy so as to achieve credibly low inflation rates we find that for emu2 as relative prices can change countries have an incentive to improve their terms of trade leading to an inefficient noncooperative outcome which can be avoided by cooperation

monetary union without fiscal coordination may discipline policymakers abstract with benevolent policymakers and fiscal leadership monetary unification reduces inflation taxes and public spending these disciplining effects of a monetary union which become stronger if the number of participants in the union increases are likely to raise welfare two types of arrangements are considered for the union s common central bank ccb making the ccb more conservative and imposing an inflation target on the ccb in contrast to the results of svensson 1997 svensson l e o 1997 optimal inflation targets conservative central banks and linear inflation contracts american economic review 87 98 114 an optimally designed conservative ccb may outperform inflation targeting finally we find that fiscal coordination offsets the disciplining effects of monetary unification hence subsidiarity in fiscal policymaking may enhance welfare

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

designing fiscal and monetary institutions for a european monetary union this paper explores the conditions under which aeuropean monetary union emu is an optimum currencyarea the scope for an emu increases with theconvergence of structural and fiscal policies smallmoney holdings a conservative european central bank and dependent national central banks how nationalpolicies affect the rest of the union once the emu hasbeen established is also investigated the case forsurveillance of national structural and fiscalpolicies appears to depend mainly on the monetaryarrangements in the union

explorations into factors explaining money market returns in this article we measure and interpret the common factors that describe money market returns results are presented for both three and four factor models we find that the three factor model explains on average 86 percent of the total variation in most money market returns while the four factor model explains on average 90 percent of this variation using mimicking portfolios we provide an interpretation of the systematic risks represented by these factors in this article we attempt to measure and interpret the common factors that describe money market returns the factor approach we employ assumes that the covariance matrix of a set of random variables in this case excess returns can be decomposed into common or systematic components and idiosyncratic or nonsystematic components this decomposition into systematic and nonsystematic components is based on an assumption of a linear relationship between the returns of each security and a set of common factors this is the assumption of linear return generating models which form an integral part of the structure of many asset pricing theories for example arbitrage pricing theory apt as developed by ross 1976 the interpretation is that the common factors represent sources of systematic or nondiversifiable risk and the idiosyncratic component of returns represents diversifiable risks our focus here is not on testing a particular asset pricing model per se but on developing empirical evidence for the existence of stylized facts regarding money market returns the stylized facts take the form of the existence measurement and interpretation of the common factors that are found in money markets our attempt to measure and interpret these sources of systematic risk may eventually lead to the construction of observable eco

convergence and anchoring of yield curves in the euro area we study the convergence of european bond markets and the anchoring of inflation expectations in the euro area using high frequency bond yield data for france germany italy and spain as well as smaller euro area countries and a control group comprising the uk denmark and sweden we find that economic and monetary union emu has led to substantial convergence in euro area sovereign bond markets in terms of interest rate levels unconditional daily fluctuations and conditional responses to major macroeconomic announcements our findings also suggest a substantial increase in the anchoring of long term inflation expectations since emu particularly for italy and spain which have seen their long term interest rates become much lower much less volatile and much better anchored in response to news finally we present evidence that the elimination of exchange rate risk and the adoption of a common monetary policy were the primary drivers of bond market convergence in the euro area as opposed to fiscal policy restraint and the loose exchange rate peg of the 1990s jel no e52 e58

determinants of sovereign bond yield spreads in the emu an optimal currency area perspective in the light of the recent financial crisis we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the european monetary union we find evidence for a level break in the cointegrating relationship moreover results show that i fiscal imbalances namely expected government debt to gdp differentials are the main long run drivers of sovereign spreads ii liquidity risks and cumulated inflation differentials have non negligible weights but iii all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an optimal currency area oca in particular we establish i that results are overall driven by those countries not passing the oca test and ii that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness

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

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices