jump diffusion processes and the term structure of interest rates the authors investigate the term structure of interest rates when the underlying state variables and production technologies follow the jump diffusion processes even in some cases where the traditional expectations theory about the term structure is consistent with general equilibrium under diffusion processes the traditional theory is not consistent under jump diffusion processes it is shown that bond prices are strictly higher under jump risks than otherwise and that consumers with logarithmic utility functions will develop hedge portfolios in the presence of jump diffusion a number of continuous time asset pricing models have been derived under stochastic diffusion processes with continuous sample paths see e g black and scholes 2 merton 21 breeden 3 and cox ingersoll and ross 8 however recent empirical studies see e g brown and dybvig 4 feinstone 10 and jarrow and rosenfeld 17 suggest that the underlying processes may follow

regulatory discretion and the unofficial economy johnson kaufmann and shleifer 1997 find that the share of the unofficial economy in gdp is determined by the extent of control rights held by politicians and bureaucrats in post communist economies exploring in more detail the role of bribes and using a broader data set from the oecd latin america and transition economies we find that the unofficial economy accounts for a larger share of gdp when there is more corruption and when the rule of law is weaker while these findings are consistent with the earlier results for transition economies in the larger country sample we find it is not necessarily the case that more regulation or higher taxes directly increases the size of the unofficial economy the problem appears to be not regulation or taxation per se but whether the state administrative system can operate without corruption a high level of regulatory discretion helps create the potential for corruption and drive firms into the unofficial economy

lurking in the shadows the informal sector and government policy abstract this paper develops a dynamic model that sheds light on the evolution of the informal sector we show how tax rates and enforcement policies influence the size of this sector and how the sector naturally declines as an economy transitions towards steady state we find small changes in the tax rate cause measurable changes in the size of informal employment but modest changes in enforcement have negligible effects these results suggest that while reductions in the tax rate combined with increased enforcement reduce the size of the informal sector tax rate reductions and penalties for evasion are the most effective

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

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

public enforcement private monitoring evaluating a new approach to regulating the minimum wage this paper examines compliance with federal minimum wage laws in the u s apparel industry and analyzes the impact of new methods of intervention designed to improve regulatory performance drawing

minimum wages and compliance the case of trinidad and tobago explores compliance to the national minimum wage in trinidad and tobago potential costs associated with the national minimum wage actual incidence of compliance in terms of employment and wage distribution nature of labor market this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from an this abstract was borrowed from another version of this item

using electoral cycles in police hiring to estimate the effect of police on crime comment previous empirical studies have uncovered little evidence that police reduce crime possibly due to simultaneity problems this paper uses the timing of mayoral and gubernatorial elections as an instrumental variable to identify a causal effect of police on crime increases in the size of police forces are shown to be disproportionately concentrated in mayoral and gubernatorial election years increases in police are shown to substantially reduce violent crime but have a smaller impact on property crime the null hypothesis that the marginal social benefit of reduced crime equals the costs of hiring additional police cannot be rejected

a lagrange multiplier test for causality in variance we adapt the lagrange multiplier lm principle to test for noncausality in variance of financial returns the new test is compared with a portmanteau statistic cheung y w ng l k 1996 a causality in variance test and its application to financial market prices journal of econometrics 72 33 48 a monte carlo study reveals superior power of the lm test

is there a world real interest rate abstract this study uses panel data techniques to estimate a common component to the ex post real interest rates of nine countries with liberal capital markets over the past 16 years we show that the residuals from such a regression have almost no serial correlation and that each country s real interest rate is highly correlated with the estimated world real interest rate the primary exception to these findings is the behavior of the us real interest rate which exhibits large and persistent deviations from the estimated world real interest rate although it is still highly correlated with the world real interest rate

an intertemporal general equilibrium model of asset prices this paper develops a continuous time general equilibrium model of a simple but complete economy and uses it to examine the behavior of asset prices in this model asset prices and their stochastic properties are determined endogenously one principal result is a partial differential equation which asset prices must satisfy the solution of this equation gives the equilibrium price of any asset in terms of the underlying real variables in the economy in this paper we develop a general equilibrium asset pricing model for use in applied research an important feature of the model is its integration of real and financial markets among other things the model endogenously determines the stochastic process followed by the equilibrium price of any financial asset and shows how this process depends on the underlying real variables the model is fully consistent with rational expectations and maximizing behavior on the part of all agents our framework is general enough to include many of the fundamental forces affecting asset markets yet it is tractable enough to be specialized easily to produce specific testable results furthermore the model can be extended in a number of straightforward ways consequently it is well suited to a wide variety of applications for example in a companion paper cox ingersoll and ross 7 we use the model to develop a theory of the term structure of interest rates many studies have been concerned with various aspects of asset pricing under uncertainty the most relevant to our work are the important papers on intertemporal asset pricing by merton 19 and lucas 16 working in a continuous time framework merton derives a relationship among the equilibrium expected rates of return on assets he shows that when investment opportunities are changing randomly over time this relationship will include effects which have no analogue in a static one period model lucas considers an economy with homogeneous individuals and a single consumption good which is produced by a number of processes the random output of these processes is exogenously determined and perishable assets are defined as claims to all or a part of the output of a process and the equilibrium determines the asset prices our theory draws on some elements of both of these papers like merton we formulate our model in continuous time and make full use of the analytical tractability that this affords the economic structure of our model is somewhat similar to that of lucas however we include both endogenous production and

enforcement and compliance with labor regulations in argentina the author analyzes the effect of government enforcement on compliance with labor regulations in argentina a country where only half of the workforce receives all the benefits to which they are legally entitled constructing panel data for the period 1995 2002 across provinces and using the number of labor inspectors per capita as a proxy for enforcement he estimates the effect of enforcement on compliance with six employment and social security regulations minimum wage maximum hours paid vacation time annual extra monthly wage workers compensation insurance and health insurance because of potential simultaneity between enforcement and compliance the author explores instrumenting enforcement by electoral years two stage least squares estimates suggest enforcement increases compliance

illegal immigration border enforcement and relative wages evidence from apprehensions at the u s mexico border we examine illegal immigration in the united states from mexico over the period 1976 1995 one challenge is that we do not observe the number of individuals that attempt to enter the united states illegally we only observe the number of individuals apprehended attempting to cross the u s mexico border illegally based on a simple migration model we postulate the existence of an apprehensions function which expresses apprehensions at the border as a function of illegal attempts to cross the border and u s border enforcement effort we find that a 10 decrease in the mexican real wage leads to a 7 5 to 8 8 increase in apprehensions at the border excerpt

compliance and enforcement decisions under the national labor relations act this article analyzes the growth of regulatory litigation under the national labor relations act by modeling the compliance and enforcement decisions made by the employers unions and workers covered by the act an empirical analysis of the model on time series data for 1950 80 confirms the importance of compliance and enforcement incentives in explaining the growth of unfair labor practice charges while some actions of the national labor relations board the regulatory agency established by the act influence these incentives and the resulting regulatory litigation changes in some important incentives notably relative labor costs are beyond the board s influence

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

rules of origin and the eu med partnership the case of textiles this paper analyses the impact of rules of origin on patterns of trade in the context of the pan european system of diagonal cumulation the paper first highlights the importance of rules of origin in all preferential trading arrangements while arguing that those rules can easily lead to trade suppression and or trade diversion we then focus on the introduction of the pan european system in 1997 and show evidence to suggest that the introduction of the system materially impacted on trade between the eu and its cefta efta and baltic states partner countries the main body of the paper then empirically explores the impact of the lack of cumulation in the textile industry on the countries of the southern mediterranean the results suggest that rules of origin may indeed substantially constrain trade between non cumulating countries possibly by as much as 70 80 per cent in aggregate while preferential trading agreements thus serve to increase intra pta trade through the liberalisation of trade barriers they may also be doing so by effectively raising external barriers to trade through the use of constraining rules of origin to the extent that they do so increases the likelihood of trade diversion and trade suppresion

congressional influence on u s monetary policy abstract congressional influence is generally discounted or ignored in political models of federal reserve behavior here i show that changes in the leadership of the senate banking committee are significantly correlated with monetary base growth more liberal committee leaders are associated with significantly higher base growth other factors held constant the result is shown to hold across several econometric specifications and different definitions of the congressional preference variable

global transmission channels for international bank lending in the 2007 09 financial crisist abstract during a financial crisis credit provision by international banks may be affected by three global channels changes in willingness to lend from increased economic uncertainty in funding availability from interbank liquidity markets and in solvency from weakened balance sheets in this paper we examine the extent to which each channel affected bank lending in developing countries during the global financial crisis of 2007 09 we find evidence that the liquidity and uncertainty channels were important although lending sensitivity to these channels remained unchanged during the crisis we also find heterogeneity in the lending behavior of european versus u s banks

heterogeneous effects of imperfectly enforced minimum wages in low wage labor markets abstract we present minimum wage effects across different enforcement regimes exploiting state time variation and policy discontinuities at contiguous districts across state borders in india we show that the effect of minimum wages on wages and employment significantly increases with an increase in enforcement in weak enforcement regimes estimated wage effects are negligible and employment effects are negative or null in stricter regimes wage effects are positive and strong and employment effects are positive or null in most specifications these results are consistent with theories on imperfect enforcement in monopsonistic labor markets and are robust to alternative definitions of enforcement and employment and employing instrumental variables for enforcement

you can pay me now and you can pay me later the dynamic response of executive compensation to firm performance empirical studies estimating the impact of firm performance on executive pay have primarily concentrated on the short run response in this study the authors present estimates of the complete dynamic response of ceo pay to firm performance they find that the cumulative response of pay to performance is roughly ten times that of the contemporaneous response a onetime innovation in firm performance typically raises pay over the next 4 5 years and compensation arrangements have shifted toward greater performance sensitivity and longer term pay arrangements over the four decades studied copyright 1995 by university of chicago press

contractual dualism market power and informality we develop a search theoretic model of contractual dualism in formal and informal labour markets the model i provides the micro underpinnings for endogenous determination of employer market power in the formal and informal sectors ii offers a unified and coherent set up whereby a host of salient features of developing country labour markets can be explained together and iii places for the first time the stiglerian prescription of the optimal unemployment minimising minimum wage in the broader context of labour markets where formal job creation is costly where employer market power is endogenous and where formal employment informal employment and unemployment coexist

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

the effect of money shocks on interest rates in the presence of conditional heteroskedasticity most current empirical work finds no evidence that money shocks lower interest rates we show that these nonresults are mainly due to a failure to model the conditional heteroskedasticity of interest rates autoregressive conditional heteroskedasticity arch models find a significant liquidity effect where ordinary least squares ols models do not the existence of a liquidity effect is found using different models and sample periods when arch models are used in estimation but never when ols is employed

the credit effects of monetary policy evidence using loan commitments in addition to the usual channels monetary policy may affect spending by changing the supply of bank loans and the creditworthiness of borrowers this paper tests for these credit effects using a contractual difference across commercial bank loans the author finds that bank loans not made under a commitment slow after tight policy while loans under commitment accelerate or are unchanged this divergence coincides with reports of tighter credit by lenders and by small firms suggesting the divergence reflects a reduction in the supply of credit to the firms without commitments rather than a reduction in their demand for loans

congressional oversight committee influence on u s monetary policy revisited abstract grier 1991 shows that monetary policy is influenced by congress in that increases in the liberality of the senate banking committee leadership are significantly positively correlated with monetary base growth chopin cole and ellis 1996 claim that the house leadership statistically dominates the senate leadership for predicting money growth but that the direction of the effect is perverse a more liberal house leadership is associated with a lower rate of base growth in this paper i show that chopin cole and ellis s claims are unfounded properly measured both house and senate leadership have a significant positive effect on base growth over grier s 1991 original sample in later periods money growth regressions are not sufficiently stable to support hypothesis tests

the regulation of labor author s botero juan djankov simeon la porta rafael lopez de silanes florencio shleifer andrei abstract we investigate the regulation of labor markets through employment collective relations and social security laws in 85 countries we find that the political power of the left is associated with more stringent labor regulations and more generous social security systems and that socialist french and scandinavian legal origin countries have sharply higher levels of labor regulation than do common law countries however the effects of legal origins are larger and explain more of the variation in regulations than those of politics heavier regulation of labor is associated with lower labor force participation and higher unemployment especially of the young these results are most naturally consistent with legal theories according to which countries have pervasive regulaory styles inherited from the transplantation of legal systems

the impact of rules of origin on trade flows a great deal of post war trade liberalization resulted from regional preferential trade agreements preferential trade agreements cut tariffs on goods originating only in those nations that have signed the agreement therefore they need rules of origin to determine which goods benefit from the tariff cut rules of origin have long been ignored for two good reasons they are dauntingly complex and at first sight appear mind numbingly dull the third standard reason for ignoring them the assertion that they do not matter much turns out to be wrong we show that rules of origin are important barriers to trade moreover such rules are emerging as an important trade issue for three additional reasons first preferential trade deals are proliferating worldwide second the global fragmentation of production implies complex international supply chains which are particularly constrained and distorted by rules of origin third the extent to which regionalism challenges the wto based trading system depends in part on incompatibilities and rigidities built into rules of origin our empirical results exploit a natural experiment that was created by technical changes to europe s lattice of rules of origin roos in 1997 this change known as diagonal cumulation relaxed the restrictiveness of rules of origin on trade among the eu s free trade agreement fta partners without changing the degree of tariff preference our analysis allows us to establish a lower bound and upper bound estimate of trade impact of roos reduced trade among the eu s trade partners the lower bound we find is something like 10 while the upper bound is around 70 the second part of the paper draws the policy lessons that arise from considering the implications of our empirical findings the most direct lessons are for fta writers we argue that europe s implementation of cumulation is a good way of reducing the welfare reducing impact of overlapping rules of origin without gutting their fraud fighting ability we also suggest a three part procedure for establishing a more multilateral framework for rules of origin which would be more transparent flexible administratively feasible and negotiable patricia augier michael gasiorek and charles lai tong

black swans before the black swan evidence from international libor ois spreads abstract the libor ois spread is a closely monitored indicator of the financial health of economy previous research has used this spread to identify and anticipate abrupt changes in financial markets taylor and williams 2009 refer to the drastic increase in the us libor ois spread on august 7th 2007 as a black swan in the money market in this paper rather than rely on visual observations of black swans we estimate them using bai and perron s 1998 procedure we estimate structural breaks granger causality tests and innovation accounting in international libor ois spreads and a cds index to better understand their dynamics during the recent crisis our results reveal that black swans appeared in smaller economies prior to that in large ones during the financial crisis in addition we find that only shocks to the us libor ois spread has any statistically significant effects after 30 days

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

the consequences of increased enforcement of legal minimum wages in a developing country an evaluation of the impact of the campana nacional de salarios minimos in costa rica in august 2010 the costa rican government implemented a comprehensive program to increase compliance with legal minimum wages the campana nacional de salarios minimos national campaign for minimum wages to evaluate the impact of the campaign the authors use a regression discontinuity rd approach which compares what happened to workers who before the campaign had been earning below the minimum wage to those who before the campaign had been earning above the minimum wage they analyze a panel data set with information on workers from before the campaign began july 2010 and after the campaign had been in operation for some time july 2011 the evidence supports the conclusion that the campaign led to an increase in compliance with minimum wage laws in costa rica the mean earnings of those being paid less than the minimum wage in 2010 increased by approximately 10 more than the earnings of those being paid more than the minimum wage the campaign led to the largest increases in the wages of wome

institutions informal labor markets and business cycle volatility i build a business cycle labor search and matching model with informal labor markets which shows that different dimensions of institutional quality have similar effects on the size of the informal sector but different effects on the relationship between informality and long run macroeconomic outcomes and between informality and labor market volatility for the same change in informal sector size changes in different proxies for institutional quality have contrasting quantitative implications for the steady state and the volatility of the labor market despite having similar consequences on other macroeconomic variables these results highlight the importance of identifying the source behind changes in the size of the informal sector to characterize the link between informality and business cycle dynamics

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

large shocks in the volatility of the dow jones industrial average index 1928 2013 we determine the events that cause large shocks in volatility of the djia index over the period 1928 2013 using a new semi parametric test based on conditional heteroscedasticity models we find that these large shocks can be associated with particular events financial crashes elections wars monetary policies etc we show that some shocks are not identified as extraordinary movements by the investors due to their occurring during high volatility episodes especially the 1929 1934 1937 1938 and 2007 2011 periods

reciprocity and willingness to pay taxes evidence from a survey experiment in latin america are citizens more willing to pay taxes when the government s performance improves we review the tax morale literature disentangling its different components and provide empirical evidence exploiting a novel survey conducted in seventeen latin american cities and an experimental attempt at measuring reciprocity in tax collection in developing countries the evidence suggests that governments interested in increasing tax revenues should not focus solely on escalating the coercive power of the state that is more audits and fines rather providing better public services to society can be an effective albeit limited tool to raise revenues

rules of origin as commercial policy instruments this article examines the role of rules of origin as a commercial policy instrument that targets the input composition of imports using a three country partial equilibrium structure we demonstrate conditions under which the imposition of a binding rule will be welfare improving for an importer facing competitive export suppliers we further show that employing rules of origin in this way would be complementary to rather than a substitute for conventional optimal tariffs copyright economics department of the university of pennsylvania and the osaka university institute of social and economic research association

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

employer tax evasion in the unemployment insurance program we use unique data to analyze employer tax compliance with unemployment insurance ui provisions the data indicate that employers may have underreported 728 million of ui taxes nationally in 1987 alone to formally examine this noncompliance a theoretical model of payroll tax evasion is developed showing that increasing payroll tax rates among other things likely increases noncompliance by risk neutral firms this prediction is empirically verified the finding that ui tax evasion is systematically related to various firm characteristics suggests that ui audits may be effectively targeted by statistical profiles derived from our model thereby improving compliance