the bond old bond spread abstract i document the profits on a trade that is long the old 30 year treasury bond and short the new 30 year treasury bond and is rolled over every auction cycle from june 1995 to november 1999 despite the systematic convergence of the spread over the auction cycle the average profits are close to zero the difference in repo market financing rates between the two bonds is a significant cost of carry in this trade i show that variation in the bond old bond spread is driven by the treasury supply of 30 year bonds as well as aggregate factors affecting investors preference for liquid assets

inflation and elections theory and evidence for six oecd economies i introduction political business cycle pbc models feature the idea that governments stimulate demand prior to elections in order to improve election prospects while the first generation of pbc models developed by nordhaus 1975 and macrae 1977 assume that voters are naive and retrospective rogoff and sibert 1988 and rogoff 1990 have developed a rational pbc rpbc model where voters are rational and forward looking most empirical studies of political business cycles examine whether unemployment falls the growth rate increases or fiscal and monetary policies become more expansive prior to elections 1 to my knowledge only alesina and roubini 1992 and alesina cohen and roubini 1992 have studied election cycles on inflation based on a large number of elections in 18 oecd countries the authors find evidence of a post election surge in the inflation rate lasting for 3 5 quarters this paper examines whether the existence of election cycles on inflation can be interpreted as supportive evidence of the rpbc theory by focusing on the theory s implications for the relation between post election inflation and the government s re election chances prior to the election in the theoretical part of the paper it is shown that the rpbc theory does not produce unambiguous predictions the functional form of the relation depends on the government s preferences and the election date if electoral terms are fixed or the election takes place close to the mandatory election date average post election inflation will be higher the closer is the election race provided the government always cares about the social costs of election cycles in the empirical part of the paper i generate estimates of the incumbent s election win probability for a sample of 50 elections in six oecd countries three alternative probability series are generated the probability estimates are interacted with dummies turned on after each election and included as regressors in panel data regressions on inflation the three probability series produce the same conclusion the relation between post election inflation and the incumbent s election win probability is hump shaped if the election race is close the inflation rate increases by 0 014 0 018 during the first year after an election i find no indication of an upward jump in inflation after elections when the incumbent s win probability is close to zero or one as noted in the theoretical part of the paper these results are consistent with the rpbc theory the paper is organized as follows the theoretical model is developed in section ii section iii presents the data sample election win probabilities are computed in section iv section v presents the panel data regressions section vi concludes ii theoretical model the theoretical framework is the signalling game developed by persson and tabellini 1990 extended to accommodate the fact that governments always face some uncertainty about the election outcome i first examine a two period game with fixed electoral terms where the election takes place at the end of period one i then consider a three period game where the incumbent chooses whether to call an election in the first or in the second period the output level and the inflation rate in each period t are denoted x sub t and pi sub t respectively pi sub t is determined by the policymaker output is given by the following supply function 1 mathematical expression omitted where mathematical expression omitted are inflation expectations and mu sub t is the policymaker s competence mu sub t is private information for the policymaker and follows a ma 1 process mu sub t eta sub t eta sub t 1 mathematical expression omitted theta with probability 0 5 eta sub t theta with probability 0

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

taxation and political business cycles in eu economies this paper examines whether incumbent national governments of 11 member states of the european union manipulated the tax policy instruments at their disposal in order to create national political business cycles opportunistic or partisan the empirical evidence based on data concerning the 1965 to 1997 period does not support this hypothesis rather it appears that governments have pursued stabilization policies

political business cycles 40 years after nordhaus the aim of this article is to survey the huge literature that has emerged in the last four decades following nordhaus s rev econ stud 42 2 169 190 1975 publication on political business cycles pbcs i first propose some developments in history of thought to examine the context in which this ground breaking contribution saw the light of the day i also present a simplified version of nordhaus s model to highlight his key results i detail some early critiques of this model and the fields of investigations to which they gave birth i then focus on the institutional context and examine its influence on pbcs the actual research agenda finally i derive some paths for future research

trading in networks theory and experiments intermediation is a prominent feature of economic production and exchange two features of intermediation are salient coordination among traders between the source and the destination and competition between alternative combinations of intermediaries we develop a simple model to study these forces and we test the theoretical predictions in experiments our theoretical analysis yields a complete characterization of pricing equilibrium in networks there exist both ecient and inecient equilibria suggesting a key role of coordination among intermediaries strategic interaction leads to either buyer and seller retaining all surplus or intermediaries extracting all surplus we develop conditions on network structure under which these di erent extremal outcomes arise respectively laboratory experiments show that eciency prevails in almost all cases so traders are successful in coordination subjects coordinate on extreme surplus division finally experiments highlight the role of network structure in determining pricing and the

government debt management the long and the short of it standard optimal debt management dm models prescribe a dominant role for long bonds and advocate against issuing short bonds they require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue r r new ones these features of dm are inconsistent with u s data we introduce incomplete markets via small transaction costs which serves to make optimal dm more closely resemble the data r r are negligible short bond issuance substantial and persistent and short and long bonds positively co vary intuitively long bonds help smooth taxes over states and short bonds over time solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions

a search based theory of the on the run phenomenon we propose a model in which assets with identical cash flows can trade at different prices infinitely lived agents can establish long positions in a search spot market or short positions by first borrowing an asset in a search repo market we show that short sellers can endogenously concentrate in one asset because of search externalities and the constraint that they must deliver the asset they borrowed that asset enjoys greater liquidity a higher lending fee specialness and trades at a premium consistent with no arbitrage we derive closed form solutions for small frictions and provide a calibration generating realistic on the run premia

did the federal reserve s mbs purchase program lower mortgage rates abstract on november 25 2008 the federal reserve announced it would purchase mortgage backed securities mbs this program affected mortgage rates through three channels 1 improved market functioning in both primary and secondary mortgage markets 2 clearer government backing for fannie mae and freddie mac and 3 anticipation of portfolio rebalancing effects we use empirical pricing models for mbs yields and for mortgage rates to measure relative importance of channels the first two were important during the height of the financial crisis but the effects of the third depended on market conditions overall the program put significant downward pressure on mortgage rates

does there exist a political business cycle a box tiao analysis theories of the political business cycle are by now common they range from the elegant theoretical work of nordhaus 1975 to the essentially empirical work of tufte 1978 they all assume that politicians manipulate the economy to aid their reelection efforts in particular politicians manipulate macroeconomic policy to create a boom just before election day golden and poterba 1980 provide an excellent review of this literature both tufte and nordhaus provide casual evidence for the existence of a political business cycle using inflation and unemployment rates as indicators of macroeconomic outcomes tufte and nordhaus predict at a minimum that unemployment should be decreasing before election day if presidents are really manipulating the economy very well then unemployment should be at a minimum in the october before the election and hence should be rising after the election in the nordhaus version the economy pays for the pre election boom with a post election surge in the inflation rate nordhaus also suggests that the president should engineer a recession early in his term to reduce inflationary expectations tufte 1978 20 presents graphs of the unemployment series and claims that visual examination shows them to be generally consistent with the hypothesis however he provides no statistical tests of the hypothesis nor does he estimate the quantitative impact of elections on unemployment tufte does not examine the inflation series nordhaus restricts himself to comparing unemployment rates in the two years preceeding and following an election with a simple nonparametric test supporting the hypothesis the literature provides several good empirical tests of the political business cycle hypothesis both paldam 1979 and mccallum 1978 test for the existence of four year cycles and find none however they do not test for discontinuous changes in the series around election day golden and poterba examine whether the use of policy instruments changes near election day and

market manipulation price bubbles and a model of the u s treasury securities auction market this paper models the u s treasury securities auction market and demonstrates that mar ket manipulation can occur in a rational equilibrium it is a dynamic model with traders participating in a when issued market a treasury auction and a resale market manipu lations occur when dealers in the when issued market use their knowledge of the net order flow in order to corner the auction and squeeze the shorts from the when issued market this manipulation equilibrium generates bubbles in treasury security prices and specials in repo rates we also compare discriminatory and uniform price auction rules with respect to manipulation our analysis shows that manipulations can occur in long run equilibrium under discriminatory price auctions but not under uniform price auctions

special repo rates this article provides the causes and symptoms of special repo rates in a competitive market for repurchase agreements a repo rate is in effect an interest rate on loans collateralized by a specific instrument a special is a repo rate significantly below prevailing market riskless interest rates this article shows that specials can occur when those owning the collateral are inhibited whether from legal or institutional requirements or from frictional costs from supplying collateral into repurchase agreements specialness increases the equilibrium price for the underlying instrument by the present value of savings in borrowing costs associated with the repo specials this article characterizes competitive repurchase or repo markets and the equilibrium relationship between repo rates and the underlying cash market prices repurchase markets are often called financing markets since they are effectively vehicles for collateralized borrowing that are often used to finance the purchase of the underlying collateral this article provides causes and effects of specials meaning specific repo rates significantly below prevailing market interest rates for loans of similar maturity and credit risk the example of united states treasury instruments is emphasized because of the extensive use of the treasury repo market as a means of hedging against or speculating on changes in u s interest rates and because of the high incidence of specials in treasury repo rates numerous specific instru

asymmetry and discrimination in internet peering evidence from the linx abstract is the quality of interconnection between internet operators affected by their asymmetry while recent game theoretic literature provides contrasting answers to this question there is a lack of empirical research we introduce a novel dataset based on internet routing policies and study the interconnection decisions amongst the internet service providers isps that are members of the london internet exchange point linx our results show that interconnection quality degradation can be significantly explained by asymmetry between providers we also show that competition authorities should also focus on the centrality of an operator and not only on its market share

collusion in uniform price auctions experimental evidence and implications for treasury auctions in uniform price auctions of shares there exist collusive equilibria in which bidders capture the entire surplus from the auction as well as competitive equilibria in which the auctioneer captures the entire surplus from the auction we provide experimental evidence that in uniform price auctions non binding pre play communication facilitates convergence to collusive equilibrium outcomes on the other hand regardless of the opportunities for communication in discriminatory auction experiments subject strategies conform closely with the unique equilibrium in undominated strategies in which bidders gains are equal to the smallest tick size in the bidding schedule this evidence suggests that uniform price auctions of treasury securities may result in lower revenues than the currently employed discriminatory procedure

testing the satisficing version of the political business cycle 1905 1984 this paper develops a test of the satisficing version of the political business cycle previous tests have focused on maximizing models of political behavior and are not sufficiently general to test for satisficing behavior using annual u s data for the period 1905 to 1984 we find evidence supporting the satisficing version of the political business cycle model but we reject the maximizing version in accordance with the satisficing hypothesis we find that increasing inflation or unemployment and decreasing monetary base growth in the third year of a presidential term are followed typically by reversals during the election year

how auctions work for wine and art interview auctioneers and even to buy a little wine in the meantime i have also had the opportunity with john abowd 1988 to observe and collect data on the auction sale of impressionist and contemporary paintings this paper reports on some of the empirical regularities that i and others have observed in the actual operation of the auction markets for these items in view of the rich and diverse array of theoretical literature on auctions it seems high time economists began to spell out precisely what facts it is meant to explain 2

government intervention and strategic trading in the u s treasury market we study the impact of permanent open market operations pomos by the federal reserve on u s treasury market liquidity using a parsimonious model of speculative trading we conjecture that i this form of government intervention improves market liquidity contrary to conclusions drawn by existing literature and ii the extent of this improvement depends on the market s information environment evidence from a novel sample of federal reserve pomos during the 2000s indicates that bid ask spreads of on the run treasury securities decline when pomos are executed by an amount increasing in proxies for information heterogeneity among speculators fundamental volatility and pomo policy uncertainty consistent with our model

hedging winner s curse with multiple bids evidence from the portuguese treasury bill auction auctions of government securities typically permit bidders to enter multiple price quantity bids despite the widespread adoption of this institutional feature and its use by bidders the motivations behind its use and its effects on auction outcomes are not well understood theoretically and have been little explored empirically this paper proposes that bidders use multiple bids to adjust for winner s curse by spreading her bids a bidder aligns her outcome more closely to the aggregate outcome of the auction this hypothesis is tested using bidding data from treasury bill auctions in portugal i find that ceteris paribus a bidder submits a greater number of bids and disperses prices on these bids more widely when there is a greater potential for winner s curse in particular both these measures of bid spreading increase with the volatility of market interest rates and the expected number of participating well informed bidders

presidential politics budget deficits and monetary policy in the united states 1960 1976 this paper has focused on the extent to which the traditional tools of macroeconomic management in the united states monetary and fiscal policy have contributed to a political business cycle regardless of whether politicians can successfully influence real economic variables to their own ends the evidence presented here suggests that they tried and that they enjoyed some at least indirect aid from their independent monetary authorities in doing so several major conclusions emerge

is the political business cycle really dead a decade ago in this journal mccallum 26 proclaimed the theory of the political business cycle 30 25 17 to be dominated by the emergence of the rational expectations literature 23 24 34 clearly the two theories are inconsistent when a strong view of rational expectations sees governments unable to manipulate real variables to create booms in election years since then new developments in macroeconomics have occasioned serious doubts as to whether the strong version of rational expectations is supported by the data 28 2 1 31 12 furthermore new advances in the political business cycle literature 36 4 have attempted to reconciliate the two theories by emphasizing that expectation errors may result from the presence of party dependent policy reaction functions and uncertainty about election outcomes the purpose of this paper is to step back and reconsider whether or not the empirical evidence presented by mccallum favoring rational expectations for the u s was really that strong and could be generalized to other countries here the u k given that the rational expectations hypothesis has been rejected at least in the strong mccallum and sargent version 26 34 it

business cycles and the political process the interrelationship between the political sector and the macroeconomy in democratic societies has been examined extensively in recent years research in this area has generally been concerned with two issues first following the lead of kramer 16 various authors have examined the impact of economic conditions on congressional 1 13 21 24 and presidential elections 4 5 the results at the congressional level have been mixed but it is reasonably safe to conclude that economic conditions do affect presidential elections the second issue and the one of primary concern in this study has dealt with the development of models of politico economic interaction the basic concept in these models is that an administration s popularity and therefore the probability of staying in power depends critically on economic conditions knowing this the administration seeks to manipulate the economy in order to maintain power the use of economic tools for political goals by governments is well established in the literature theoretical contributions by nordhaus 20 and macrae 18 have demonstrated the potential for a politically motivated business cycle in a world of politico economic interaction empirical support for the existence of such a cycle is provided by the work of frey and schneider 7 8 9 the main purpose of this paper is to develop a theoretical model of the political business cycle that generates empirically testable proposition the goal is to integrate the theoretical conclusions of a formal model similar to the nordhaus 20 and macrae 18 framework with the empirical support provided by frey and schneider 7 8 9 the possibility of a political business cycle is important for several reasons in macroeconometric models government policy that is endogenous to the system is usually treated as if it were exogenous this may cause serious misspecification errors further forecasts of the future course of economic events which depend heavily on government action will be inaccurate unless the political motivations of governments are considered

us presidential elections and real gdp growth 1961 2004 in this paper i show that since 1960 an electoral cycle in us output growth can both be seen by the naked eye in the raw data and confirmed by a statistical analysis that allows for rational partisan effects as well as a wide range of control variables that is controlling for multiple lags of interest rate changes inflation money growth energy prices lagged output growth government spending or its growth and temporary partisan effects the timing of elections exerts a significant influence on quarterly real gdp growth

mechanism choice and strategic bidding in divisible good auctions an empirical analysis of the turkish treasury auction market we propose an estimation method to bound bidders marginal valuations in discriminatory auctions using individual bid level data and apply the method to data from the turkish treasury auction market using estimated bounds on marginal values we compute an upper bound on the inefficiency of realized allocations as well as bounds on how much additional revenue could have been realized in a counterfactual uniform price or vickrey auction we conclude that switching from a discriminatory auction to a uniform price or vickrey auction would not significantly increase revenue moreover such a switch would increase bidder expected surplus by at most 0 02 percent

quantitative easing auctions of treasury bonds abstract the federal reserve uses reverse auctions to implement its purchases of treasury bonds in quantitative easing qe to evaluate dealers offers across multiple bonds the fed relies on its internal yield curve model fitted to secondary market bond prices from november 2010 to september 2011 a one standard deviation increase in the cheapness of a treasury bond how much the market price of the bond is below a model implied value increases the fed s purchase quantity of that bond by 276 million and increases the auction costs on that bond by 2 6 cents per 100 par value controlling for standard covariates our results suggest that the fed harvests gains from trades by purchasing undervalued bonds but strategic dealers extract some profits because the fed s relative values can be partly inferred from price data

the response of interest rates to us and uk quantitative easing we analyse declines in government bond yields following announcements by the federal reserve and the bank of england of plans to buy longer term debt using dynamic term structure models we decompose us and uk yields into expectations about future short term interest rates and term premiums we find that declines in us yields mainly reflected lower expectations of future short term interest rates while declines in uk yields appeared to reflect reduced term premiums thus the relative importance of the signalling and portfolio balance channels of quantitative easing may depend on market institutional structures and central bank communication policies

the electoral budget cycle this article begins with a review of the now substantial literature on the thesis that polticians manipulate governmental outputs so as to favor their chances of reelection it concludes that while this electoral cycle thesis was initially overstated by its proponents it retains more plausibility than recent critics have allowed this conclusion is then demonstrated through an analysis of expenditures by the ten provincial governments in canada between 1951 and 1984

political parties and the business cycle in the united states 1948 1984 this paper tests the existence and the extent of a politically induced business cycle in the u s in the post world war ii period the cycle described in this paper is different from the traditional political business cycle of nordhaus it is based on a systematic difference between the monetary policies of the two parties in a model with labor contracts from an explicit optimization problem we derive a system of equations for output and money growth then we successfully test the non linear restriction imposed by the theory on the parameters of the system of equations we cannot reject the hypothesis that money growth has been systematically different under the two types of administration and that this difference contributes to explain output fluctuations

endogenous elections electoral budget cycles and canadian provincial governments the existence of manipulative electoral budget cycles and opportunistic election setting is examined in the framework of a parliamentary democracy empirical tests are conducted using a pooled time series cross section data set derived from canadian provincial governments over the 1962 1992 period evidence in support of the electoral budget cycle hypothesis but not the opportunistic election timing hypothesis is obtained

the unemployment rate consequences of partisan monetary policies economists and political scientists have identified several ways in which political motivations and institutional arrangements can affect macroeconomic policymaking one way is described by the political business cycle model 42 37 in which vote seeking politicians manipulate the path of the economy to secure unsustainably favorable conditions at election times variants of this model have been widely tested with limited success a second channel for political impacts comes through partisan policy changes brought about by electoral turnover the pathbreaking work in this literature includes the contributions of hibbs 30 31 32 33 and beck 11 these works have focused on the empirical issue of how unemployment rates vary under democratic and republican presidents in the u s and have found strong support for the proposition that unemployment rates decline under democratic administrations a third phenomenon has been studied primarily by economists and concerns the credibility problem faced by a central bank selecting money growth rates models of the credibility problem 8 21 describe a setting in which the central bank and the public interact by respectively choosing actual and expected money growth rates in a variant of the prisoners dilemma this interaction can result in excessive inflation

bidder behavior in multiunit auctions evidence from swedish treasury auctions we analyze a unique data set on multiunit auctions which contains the actual demand schedules of the bidders as well as the auction awards in over 400 swedish treasury auctions first we document that bidders vary their prices bid dispersion and the quantity demanded in response to increased uncertainty at the time of bidding second we find that bid shading can be explained by a winner s curse driven model in which each bidder submits only one bid despite the fact that the bidders in our data set use much richer bidding strategies third we explore the extent to which the received theories of multiunit auctions are able to offer insights into the bidder behavior we observe our empirical evidence is consistent with some of the predictions of the models of auctions that emphasize private information the winner s curse and the champion s plague while the models of multiunit auctions serve as useful guideposts our empirical findings also point to several new areas of research in multiunit auctions

an integrated test for electoral cycles in the u s economy this paper offers the first integrated test of the electoral model of business cycles the test begins with unrestricted estimates of presidential electoral patterns in u s economic outcomes real gnp unemployment and inflation and policies money growth and the adjusted budget surplus these estimates are then used to determine whether the estimated electoral patterns in macropolicy yield predicted electoral patterns for macro outcomes that are consistent with estimates of both actual electoral patterns in outcomes and voting behavior the results indicate that four year electoral cycles in macroeconomic outcomes and policies are strongly significant for the united states for the period 1951i to 1986ii copyright 1989 by mit press

special repo rates an empirical analysis duffie 1996 examines the theoretical impact of repo specials on the prices of treasury securities and concludes that all else the same an issue on special will carry a higher price than an otherwise identical issue we examine this hypothesis and find strong evidence in support of it we also examine whether the liquidity premium associated with on the run issues is due to repo specialness and find evidence of a distinct effect finally we investigate whether auction tightness and percentage awarded to dealers are related to subsequent specialness and find that both variables are generally significant underlying the cash market for u s treasury securities is the financing or repo market at any given time the repo rate for most treasury issues the general collateral rate is the same but a few issues are typically on special an issue on special has associated with it a repo rate that is less than the prevailing general collateral rate as a result the owner of a security that is on special is able to obtain below market financing rates via a repurchase agreement duffie 1996 examines the theoretical causes of repo specials and their impact on the prices of treasury securities in the context of a general equilibrium model his primary conclusion is that specialness will be priced in the cash market meaning that all else the same an issue on special or likely to go on special will carry a higher price than an otherwise identical issue we investigate this hypothesis using data on repo specials and find clear evidence in support of it we conclude that specialness is priced and that the magnitude of the cash market premium reflects both the future duration and magnitude of repo specialness we also examine whether the liquidity premium associated with on therun issues is due to repo specialness and find evidence of a distinct effect finally as a test of duffie s model we investigate whether auction tightness and percentage awarded to nonbank primary dealers are related to subsequent specialness the evidence is consistent with predictions with both variables generally significant

the relative effects of demand and supply on output growth and price change this study demonstrates an analytical model for evaluating the relative importance of demand and supply factors in determining output growth and price change empirical analysis of the 1947 80 data shows that for most industry groups demand effects are more dominant in determining output growth whereas supply effects are more dominant in determining price change the conclusion remains the same when the effects of uncontrollable variables such as taste and technology are excluded the study provides useful information for analyzing the effectiveness of demand and supply management policies in affecting output growth and price change introduction recently the stability and validity of the phillips curve and the effectiveness of demand management policies to deal with stagflation have been questioned by many economists evidence has been accumulated e g eckstein 1984 to suggest that variations in aggregate supply price were the predominant influences on the general price level of the u s economy but little is known about whether demand or supply factors were more dominant in determining economic growth studies on the relative importance of demand and supply factors at the industry level have been very few but the recent studies by houthakker 1979 and 1981 suggested the importance of supply shifts and or economies of

political models of the business cycle should be revived political models of the business cycle have typically been ignored because they appear inconsistent with rational behavior and because empirical evidence is inconclusive this paper addresses the second issue demonstrating for u s real gnp unemployment and inflation that electoral cycles persistent patterns across electoral terms are significant but apparently only for republican incumbents and that partisan cycles persistent differences between parties are also significant these findings are consistent with the conjecture that a minority party is more constrained by electoral concerns whereas a majority party is freer to pursue partisan objectives

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

studying the role of political competition in the evolution of government size over long horizons here we argue for the use of cointegration and error correction analysis to combine economic factors that are nonstationary with political factors that are stationary into an empirical model of the evolution of public policy over long periods the approach is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the government of canada over 130 years political competition emerges as the primary political factor affecting government size

the effectiveness of alternative monetary policy tools in a zero lower bound environment this paper reviews alternative options for monetary policy when the shortterm interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates we use a model of risk averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level slope and curvature term structure risk we find that these treasury factors historically were quite helpful for predicting both yields and excess returns over 1990 2007 the historical correlations are consistent with the claim that if in december 2006 the fed were to have sold off all its treasury holdings of less than 1 year maturity about 400 billion and use the proceeds to retire treasury debt from the long end this might have resulted in a 14 basis point drop in the 10 year rate and an 11 basis point increase in the 6 month rate we also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009 our estimates imply that at the zero lower bound such a maturity swap would have the same effects as buying 400 billion in long term maturities outright with newly created reserves and could reduce the 10 year rate by 13 basis points without raising short term yields

anticipated and repeated shocks in liquid markets we show that treasury security prices in the secondary market decrease significantly before subsequent auctions and recover shortly after this price pattern implies a large issuance cost for the treasury department which is estimated to be between 9 and 18 basis points of the auction size for example this cost amounts to over half a billion dollars for issuing treasury notes alone in 2007 our results appear to be consistent with the hypothesis of primary dealers limited risk bearing capacity and the imperfect capital mobility of end investors in the treasury market e g federal agencies sovereign wealth funds pension funds and etc highlighting the important role of capital mobility even in the most liquid financial markets

valuing dealers informational advantage a study of canadian treasury auctions in many financial markets dealers have the advantage of observing the orders of their customers to quantify the economic benefit that dealers derive from this advantage we study detailed data from canadian treasury auctions where dealers observe customer bids while preparing their own bids in this setting dealers can use information on customer bids to learn about i competition that is the distribution of competing bids in the auction and ii fundamentals that is the ex post value of the security being auctioned we devise formal hypothesis tests for both sources of informational advantage in our data we do not find evidence that dealers are learning about fundamentals we find that the information about competition contained in customer bids accounts for 13 27 of dealers expected profits

discriminatory versus uniform treasury auctions evidence from when issued transactions abstract we use when issued transactions data to assess the treasury s current experiment with uniform auctions when issued volume is higher under uniform as compared to discriminatory auctions suggesting a higher information release which should reduce pre auction uncertainty and the winner s curse under uniform auctions when issued volatility falls after the auction and again after the outcome announcement the pattern is the opposite for discriminatory auctions this is further evidence that uniform auctions increase pre auction information and lower the short squeeze a direct comparison of markups in uniform and discriminatory auctions yields mixed results

the federal reserve s large scale asset purchase programmes rationale and effects we provide empirical estimates of the effect of large scale asset purchases lsaps on longer term us treasury yields within a framework that allows for several transmission channels including the scarcity channel associated with the preferred habitat literature and the duration channel associated with interest rate risk we also clarify lsaps role in the broader context of historical monetary policy strategy results indicate that lsap style operations mainly impact longer term rates via the nominal term premium within that premium the response is predominantly embodied in the real term premium the scarcity and duration channels both seem to be of considerable importance

presidential elections and federal reserve policy an empirical test traditional macro economic models of federal reserve fed behavior typically assume that the fed enjoys a well defined objective function based on social welfare and generally predict counter cyclical monetary policy the increasing observation of procyclical monetary policy has led many researchers to investigate new models of fed behavior several recent papers imply that procyclical fed behavior is due to a lack of political accountability friedman 7 toma 23 and shughart and tollison 21 all attribute considerable bureaucratic discretion to the fed and seek to explain monetary policy by examining typical bureaucratic objectives other papers such as pierce 19 20 weintraub 26 and kane 10 11 argue that the fed operates in an arena filled with political constraints that cause sub optimal monetary policy but these constraints are not modeled explicitly one possible political constraint on fed behavior is the incumbent president s desire for re election in the political business cycle pbc literature presidential re election opportunities are enhanced by the production of a precise set of inflation and unemployment outcomes leading up to the election thus to the extent that presidents desire cyclical macro economic outcomes there will be executive pressure on the fed to create or accommodate such outcomes the effect this pressure will have on fed policy is ultimately an empirical question but most models deal with it by assumption traditional macro modeling assumes a zero effect while the pbc models implicitly assume that a favorable election cycle is a primary goal of all economic policymakers this paper examines presidential influence on the federal reserve by testing for an election cycle in money growth the major result is the identification of a regular 16 quarter cycle in money growth corresponding with presidential elections this cyclical effect is found to be stable over time and significant under a wide range of model specifications further when the cyclical component of money growth is used to simulate a simple macro model it produces a classic political business cycle in inflation and real output growth

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

underpricing in discriminatory and uniform price treasury auctions this paper compares the newer uniform price u s treasury auctions to the traditional discriminatory mechanism and examines the extent to which the auction mechanisms are responsible for underpricing empirically i find that even for the newer uniform price auctions the average price received by the treasury is less than the price of the same securities in the concurrent secondary market although this underpricing is reduced by half relative to the older mechanism from the summary statistics released by the treasury i calibrate common value auction models for the two mechanisms and predict the level of underpricing in each auction i find that the observed magnitude of underpricing in the auctions is consistent with the model s predictions

a partisanship theory of fiscal and monetary regimes this paper indicates that income redistribution motivated by the distributive ideals of liberal political p arties create unanticipated disincentives for productive effort thi s suggests that newly elected liberal parties are likely to engage in monetary surprises in order to compensate for the adverse effects of these disincentives on real income estimated reaction from function s support these predictions a measure of income redistribution the change in the ratio of the social expenditures of government to gnp has a positive significant effect on money growth in addition when the presidency changes from conservative to liberal there is a posit ive and significant increase on money growth copyright 1987 by ohio state university press

opinion polls and political business cycles theory and evidence for the united states the paper shows that the frey schneider schultz hypothesis that there is a negative relation between the government s popularity and the government s incentives to engineer political business cycles is consistent with rational forward looking voting provided one makes appropriate assumptions about the incumbent s preferences the empirical part of the paper presents evidence favourable to the hypothesis using quarterly data on us money growth

what does monetary policy do to long term interest rates at the zero lower bound this article uses a structural var with daily data to identify the effects of monetary policy shocks on various longer term interest rates since the federal funds rate has been stuck at the zero lower bound the var is identified using the assumption that monetary policy shocks are heteroskedastic monetary policy shocks have especially high variance on days of fomc meetings and certain speeches while there is otherwise nothing unusual about these days a complementary high frequency event study approach is also used i find that stimulative monetary policy shocks lower treasury and corporate bond yields but the effects die off fairly fast

empirical advances in political economy editor s note i wish to thank coeditor mark zupan who took responsibility for organizing and implementing both the special symposium on public choice and the processing of papers through the refereeing and editorial process for this special section on behalf of all the editors i also would like to express thanks to carolyn williams editorial coordinator for taking on yet another responsibility in arranging the conference symposium meetings and the management of the files the symposium on public choice was held at lake tahoe during the 1993 we a meetings the many efforts of authors referees editors and staff have resulted in an exciting complement to this year s economic inquiry offerings

public expenditures in canadian provinces an empirical study of politico economic interactions it is widely believed that government ideology and electoral constraints are two major factors that influence the level of public expenditures however frey and schneider argue that the effects of the two phenomena are not simultaneous only when a government is popular can it pursue ideological goals and when popularity is low energies must be redirected toward gaining support from voters to win the next election data draw from the canadian provincial case are used to test empirically this hypothesis the findings support the frey and schneider explanation