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

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

the new role for the world bank the world bank was founded to address what we would today call imperfections in international capital markets its founders thought that countries would borrow from the bank temporarily until they grew enough to borrow commercially nac 1946 p 312 black 1952 some critiques and analyses of the bank are based on the assumption that this continues to be its role for example some argue that the growth of private capital flows to the developing world has rendered the bank irrelevant however we will argue that modern analyses should proceed from the premise that the world bank s central goal is and should be to reduce extreme poverty and that addressing failures in global capital markets is now of subsidiary importance the bank s stated goal is reducing poverty the overwhelming majority of bank subsidies from its shareholder countries go to the international development association ida its arm for making grants and highly concessional loans to the lowest income countries the bank s greatest impact comes from its role in the dramatic policy changes many developing countries have undertaken in multiple sectors that most economists would consider likely to reduce poverty either by increasing growth or promoting equity why might donor countries choose to work through an international organization to advance the goal of reducing poverty effective aid often involves

us business credit sources demand deposits and the missing money abstract this study accounts for much of the missing money in the us through compensating balances business lending by banks affects demand deposit growth standard money demand models include variables that likely pick up income and interest rate effects on the transactions demand for demand deposits and on compensating balance requirements provided that bank lending to firms is stable however during the missing money period business shifted toward nonbank sources of short term credit causing a decline in compensating balances empirical finding support this hypothesis as a partial explanation for the missing money using the federal reserve board s demand deposit model

alternative p models of inflation forecasts i introduction inflation forecasts play a key role in monetary and macroeconomics during the past three decades dramatic changes in the inflationary environment have stimulated a wealth of studies on the relative accuracy of alternative models of inflation forecasts in particular mehra 1988 stockton and glassman 1987 and reichenstein and elliott 1987 found varying performance in traditional models including the term structure phillips curve and typical monetarist models across postwar periods against this background hallman porter and small 1991 hps introduced a model called p star p sup as inflation forecasters holy grail the p sup framework is built on the general perception that inflation over the long run is a monetary phenomenon however as christiano 1989 argued p sup entails no practical implication for shorter run horizons that are of primary interest to inflation forecasters he further pointed out that for the period of 1970 89 one to three year ahead forecasts from p sup are not meaningfully more accurate than those from traditional models the usefulness of p sup as an anchor for the price level also suffers from another limitation the assumption that velocity which is the ratio of nominal gdp to a monetary aggregate is stable over the long run hps justified the validity of this hypothesis based on postwar 1955 88 data for the broad monetary aggregate m2 used in their model during the early 1990s however the growth rate of m2 apparently slowed down relative to that of gdp leading to a sharp rise in m2 velocity this consequently caused p sup to persistently underpredict actual inflation duca 1995a has provided a detailed discussion on plausible sources of this instability in velocity the literature has also offered plausible solutions to correct p sup models for the observed structural change ranging from redefining the relevant monetary aggregate to directly accounting for a trend break in velocity while evidence supports that these individual methods improve upon the original p sup formulation there is a lack of research comparing their performance especially in periods other than the early 1990s the first objective of the present study therefore is to fill this void the second objective of this paper is to reevaluate the robustness of earlier findings regarding the relative performance of hps s original p sup model to this end we divide the full out of sample forecast period of 1970 96 into three subsamples our results reveal a pattern of switching forecast performance between money based and output based models across recent periods the fragility of these models highlights the extent of temporal instability in the inflation generating process this paper proceeds as follows the next section describes alternative p sup model specifications and other inflation forecast models section iii discusses the forecast results section iv summarizes and concludes ii model specifications the p sup model the benchmark of the p sup model is the quantity theory of money which relies on the equation of exchange 1 p sub t equivalent to m sub t v sub t y sub t where p is the price level m is a measure of money supply v is the velocity of money y is the level of output real gdp and a time subscript denotes the current value of a variable it follows that if v sub t and y sub t reach their long run equilibrium levels at mathematical expression omitted and mathematical expression omitted respectively then the current equilibrium price level mathematical expression omitted can be determined as 2 mathematical expression omitted according to hps mathematical expression omitted is measured by the historical mean of v sub t and mathematical expression omitted by the level of potential gdp

investments holdup and the form of market contracts the authors analyze incomplete contracts to induce efficient investment with exogenous switching costs fixed price contracts are efficient generate some rigidity in prices are renegotiated intermittently by possibly small amounts and when inflation is positive generate asymmetric responses to shocks all consistent with evidence on prices and wages with two sided specific investments efficiency requires prices to have sufficient escalator clauses to avoid renegotiation as observed in many long term contracts a third case with one sided specific investments can generate take or pay contracts and explain why firms sometimes pay for specific investments that appear to benefit employees directly

aggregate consequences of limited contract enforceability we study a general equilibrium model in which entrepreneurs finance investment with optimal financial contracts because of enforceability problems contracts are constrained efficient we show that limited enforceability amplifies the impact of technological innovations on aggregate output this implies that economies with lower enforceability of contracts are characterized by greater macroeconomic volatility a key assumption for the amplification result is that defaulting entrepreneurs are not excluded from the market

financial innovation and the demand for liquid assets note introduction recent innovations in the banking and finance sector have caused great difficulties for the conduct of monetary policy shifts in monetary aggregates unexplained by interest rate behavior when there are financial innovations make it difficult for the monetary authorities either to use an asset demand function in the conduct of monetary policy or to distill information from the behavior of monetary aggregates while the monetary authorities may know the specific innovations they generally do not know how these innovations will affect particular aggregates clearly such knowledge is important and essential since then the monetary authorities can more accurately interpret growth rates of the monetary aggregates and reduce policy mistakes especially when the growth rates of various aggregates differ substantially and the authorities must determine which aggregate is more reflective of general monetary conditions hester 1981 freedman 1983 and pierce 1984 among others have documented and discussed many of the specific financial innovations for the united states and canada as outlined by pierce these innovations generally can be divided into three types i those innovations which have lowered transactions costs for asset purchases and sales ii the emergence of previously unavailable assets and iii those innovations which allow institutions to avoid reserve requirements hester has theoretically analyzed the last of these this paper focuses on the other types of innovations primarily the first transactions or transfer costs are an important aspect of asset demands since most near money assets possess approximately equivalent risk characteristics the two most important features of competing assets are return and liquidity liquidity can be defined as the cost of transfer to an acceptable means of payment over the last decade both relative and absolute transfer costs and thus liquidity have varied dramatically and have generally been reduced this has caused substitutions between assets and thus shifts in monetary aggregates unexplained by macroeconomic variables such as income and interest rates it is such unexplained shifts over the last decade which have caused concern over the appropriate definitions of monetary aggregates

the origins of state capacity property rights taxation and politics economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes this paper develops a framework where policy choices in market regulation and taxation are constrained by past investments in legal and fiscal capacity it studies the economic and political determinants of such investments demonstrating that legal and fiscal capacity are typically complements the results show that among other things common interest public goods such as fighting external wars as well as political stability and inclusive political institutions are conducive to building state capacity some correlations in cross country data are consistent with the theory

how financial performance of world s top companies are related to business environment businesses need an environment in which business conditions in features such as starting a business registering property getting credit paying taxes trading across borders and enforcing contrac

the velocity of us m2 in the 1990s some further evidence this paper investigates the behaviour of m2 velocity in recent years with special emphasis on the post 1989 period unlike previous studies in this area m2 velocity is analysed in the context of a small vector autoregressive var model which includes income prices interest rates and money growth volatility the hypothesis of a structural shift in m2 velocity associated with the post 1989 period is rejected by the var model this suggests that the unusual behaviour of m2 velocity since 1989 may be traced to the variability in its determinants rather than to a shift in the process generating velocity variance decompositions indicate that real income and the short term opportunity cost of m2 are the most important determinants of m2 velocity the long term opportunity cost of m2 and the return on equities also have significant impacts on m2 velocity

contract form wage flexibility and employment we begin with two uncontroversial hypotheses firm productivity is expensive to measure and employment entails relationship specific investments these assumptions imply that firms would optimally choose fixed wage contracts and complement these with bonus pay when measuring employee performance is not too costly these assumptions imply that under an optimal employment contract hours of work is less responsive while total compensation is more responsive to shocks under bonus pay contracts compared to fixed wage contracts using data from the panel study of income dynamics psid where shocks are proxied using the local unemployment rate we find strong support for these two implications

should bond funds be added to m2 abstract in the early 1990s m2 growth has been weaker than estimated while bond mutual funds have grown rapidly this study assesses whether adding bond funds to m2 would yield a monetary aggregate that is more explainable using a standard error correction model of money with and without modifications for bond interest rate and thrift resolution effects results indicate that it is important to net out institutional and ira keogh assets from bond funds as is done for m2 and that adding such a bond fund series to m2 results in an aggregate that is somewhat more explainable than m2

the behavior of money demand in the 1980s existing money demand functions did not predict the strength in m1 in the 1980s this strength derived from the combination of a change in the character of m 1 due to elnancial deregulation and the sharp fall in market rates that began in 1982 the public s m2 demand function however remains unaffected by the forces that altered the m1 demand function the character of the public s m 1 demand function changed with the legalization nationwide in january 1981 of the checkable deposits known as nows because nows pay explicit interest they are used by the public as an instrument for saving as well as for effecting transactions mehra 1986 the addition of nows to m1 therefore caused m1 to become more highly substitutible with the savings instruments included in the non ml component of m2 that is savings deposits small time deposits money market deposit accounts mmdas and money market mutual funds of noninstitutional investors mmmfs furthermore financial institutions move the rate paid on nows only sluggishly in response to changes in market rates in contrast the rates paid on small time deposits mmdas and mmmfs move promptly in response to changes in market rates consequently when market rates fell beginning in late summer 1982 the differential between the rates paid on the non ml components of m2 and on nows fell sharply the public then substituted out of the non ml components of m2 and into the nows in m1 these substitutions increased m1 de

law regulation and the business climate the nature and influence of the world bank doing business project the importance of a well functioning legal and regulatory system in creating an effective market economy is now widely accepted one flagship project that tries to measure the environment in which businesses operate in countries across the world is the world bank s doing business project which was launched in 2002 this project gathers quantitative data to compare regulations faced by small and medium size enterprises across economies and over time the centerpiece of the project is the annual doing business report it was first published in 2003 with five sets of indicators for 133 economies and currently includes 11 sets of indicators for 189 economies the report includes a table that ranks each country in the world according to its scores across the indicators the doing business project has become a major resource for academics journalists and policymakers the project also enjoys a high public profile with close to ten million hits on its website each year with such interest it s no surprise that the doing business report has come under intense scrutiny in 2012 following discussions by its board the world bank commissioned an independent review panel to evaluate the project on which i served as a member in this paper i first describe how the doing business project works and illustrate with some of the key findings of the 2015 report next i address what is valuable about the project the criticisms of it and some wider political economy issues illustrated by the report

decentralisation as an incentive scheme recent changes have introduced more decentralization in a number of traditionally centralized countries 1 in the case of france it is sometimes claimed that the 1982 1983 reform of subcentral government is of historical importance although the principles of that reform are not contested any more by the new majority elected in 1986 opinions still differ on a number of policy issues some of the issues are presented in this introductory section but the main purpose of this paper is not to expose or discuss in detail the problems of decentralization in france as argued in the second part of the introductory section the theoretical framework in which the policy issues of decentralization are usually discussed by economists is somewhat unsatisfactory in particular when applied to unitary states such as britain or france the bulk of the paper is devoted to the exploration of a different approach to decentralization it is not purported however that this approach could completely replace the more traditional one consequently when in the concluding section we return briefly to the policy issues identified here this is to be read as a preliminary attempt to evaluate the relevance of the reasoning developed in the paper

red tape and delayed entry does cutting red tape foster entrepreneurship in industries with the potential to expand we address this question by combining the time needed to comply with government entry procedures in 45 countries with industry level data on employment growth and growth in the number of establishments during the 1980s our main empirical finding is that countries where it takes less time to register new businesses have seen more entry in industries that experienced expansionary global demand and technology shifts our estimates take into account that proxying global industry shifts using data from only one country or group of countries with similar entry regulations will in general yield biased results

results of a study of the stability of cointegrating relations comprised of broad monetary aggregates abstract we find strong evidence of a stable money demand relationship for mzm and m2m through the 1990s though the m2 relation breaks down somewhere around 1990 evidence has been accumulating that the disturbance is well characterized as a permanent upward shift in m2 velocity which began around 1990 and was largely over by 1994 taken together our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds although this reallocation may have been induced by depository restructuring we argue that the substitution could be explained by appropriately measured opportunity cost

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

financial sector weakness and the m2 velocity puzzle i introduction there has been a long running debate over the usefulness of monetary aggregates as intermediate targets or information variables in the conduct of monetary policy in the mid1970s the missing money episode associated with m1 money demand was documented by goldfeld 1976 and judd and scadding 1982 passage of the depository institutions deregulation and monetary control act in 1980 and the garn st germain act in 1982 ushered in a period of financial deregulation including interest bearing checking accounts and money market deposit accounts these innovations affected depositor behavior to such an extent as to make m1 unreliable as a target or indicator of policy as a result research efforts focused on m2 demand with initial evidence of stable short run specifications for this aggregate as in small and porter 1989 this issue remains timely with the recent example of the european central bank debating whether to target a monetary aggregate or inflation in its implementation of monetary policy as svensson 1999 points out in the united states feldstein and stock 1994 argue that the federal reserve should use the m2 monetary aggregate as an intermediate target on the other hand a fair amount of work suggests that m2 is not reliable as either a target or an indicator of monetary policy friedman and kuttner 1992 show that by the early 1990s the relationship between m2 and gross domestic producct gdp had weakened and estrella and mishkin s 1997 work provides further support for this finding miyao 1996 presents evidence that a cointegrating m2 demand relationship broke down in the 1990s as the link between m2 and gdp deteriorated the forecasting ability of m2 money demand equations also suffered the difficulties in forecasting m2 spurred a number of publications examining whether the deterioration in the m2 equation s forecasting ability was temporary or whether more fundamental factors such as flaws in the construction of the m2 aggregate the opportunity cost or both were at work carlson and parrott 1991 and duca 1992 first argued that the existence of troubled thrifts and the length of time it took the resolution trust corporation to resolve the thrifts difficulties helped explain the weakness in m2 in particular duca found that the change in the volume of cumulated deposits at resolved thrift institutions accounted for a large part of the m2 weakness although he suggested his findings be viewed cautiously because of the short time period of the analysis in the same article as well as in one subsequent to it duca 1995 also examined whether some of the weakness in m2 reflected substitution by households away from m2 type deposits and into bond and equity mutual funds he found that adding a bond fund series to m2 reduced estimated m2 growth shortfalls orphanides et al 1994 carlson and keen 1996 feldstein and stock 1996 and mehra 1997 also present evidence that the unusual behavior of m2 was related to growth in stock and bond mutual funds koenig 1996a 1996b focused on the competitiveness problems of financial intermediaries in the face of tighter regulations and stricter capital standards he proposed an alternative strategy for empirically modeling m2 by altering the opportunity cost measure to include a long term treasury bond rate this addition substantially improved forecasts of m2 until 1995 when large prediction errors once again appear feinman and porter 1992 and mehra 1997 also attempted to explain recent m2 instability through alternative measures of the opportunity cost rather than refine the opportunity cost or redefine the m2 monetary aggregate carlson et al 2000b present consistent evidence of a cointegrating relationship through the 1990s between real m2 various scale measures and an opportunity cost measure this result is obtained after adjusting for periods of financial restructuring in the early 1990s characterized by a sharp increase in bond and equity funds and a steep decline in small time deposits

what do firms disclose and why enforcing corporate governance and transparency in central and eastern europe this version may 10 2005 jel classification codes g15 g18 key words corporate governance ownership concentration transition economics disclosure enforcement site stockholm school of economics the data collection for this paper was financed through the swedish hungarian business research council anete pajuste also acknowledges financial support from cerge ei foundation under a program of the global development network the authors have benefited from comments by stijn claessens colin mayer and participants at the ecgi

does legal enforcement affect financial transactions the contractual channel in private equity analyzing 210 developing country private equity investments we find that transactions vary with nations legal enforcement whether measured directly or through legal origin investments in high enforcement and common law nations often use convertible preferred stock with covenants in low enforcement and civil law nations private equity groups tend to use common stock and debt and rely on equity and board control transactions in high enforcement countries have higher valuations and returns while relying on ownership rather than contractual provisions may help to alleviate legal enforcement problems these results suggest that private solutions are only a partial remedy

adding bond funds to m2 in the p star model of inflation abstract during the early 1990s m2 growth has been unusually weak and the p star model has underpredicted inflation at the same time bond funds have grown rapidly we find that the p star model performs well recently when m2 is adjusted for bond funds

are risky assets substitutes for monetary assets i introduction financial innovation over the past couple of decades has enhanced the liquidity of many financial assets particularly noncapital certain risky assets further financial assets previously not regarded as monetary assets such as mutual funds and particularly money market mutual funds now provide monetary services such as liquidity and transactions services l given the increased liquidity of such funds the question arises as to whether risky assets are substitutes for capital certain monetary assets if noncapital certain assets are indeed substitutes for capital certain assets and are also being used for transactions purposes then agents may be treating risky assets as money although this issue has been addressed in the united states in the context of the addition of bond funds to m2 by for example duca 1995 no such research has yet been conducted in the united kingdom including risky assets in the analysis contradicts the work of ando and shell 1975 spencer 1986 appendix i pp 184 93 and spencer 1994 broadly they argue that since some nonrisky assets provide monetary services and probability also liquidity individuals would not hold risky assets for these purposes 2 in contrast hicks 1935 states that falling transaction costs and rising wealth encourages individuals to increase the proportion of risky assets in portfolio holdings most studies generally assume that risky assets fail to provide significant monetary services and for example have been excluded from the asset demand analysis of barr and cuthbertson 1991a drake fleissig and swofford 1997 and money demand studies such as taylor 1987 belongia and chrystal 1991 drake and chrystal 1994 and drake 1996 alternatively barr and cuthbertson 1991b use only risky assets in their asset demand system analysis the degree of substitution between risky assets and capital certain assets is an empirical issue while noncapital certain risky assets mutual funds and other financial assets may well be becoming closer substitutes for what people are using as money they are in no way perfect substitutes for the highly liquid cash assets to evaluate the role of noncapital certain assets we construct a noncapital certain risky divisia aggregate consisting of equities government bonds and unit trusts the divisia index allows for less than perfect substitution between assets and weights component assets according to their differing degrees of moneyness which may vary over time due to many factors for example financial innovation see barnett 1980 this methodology has been widely applied to monetary aggregation and money demand studies in a number of countries as in belongia 1996 drake 1996 drake and chrystal 1997 and anderson jones and nesmith 1997 to determine whether risky assets are substitutes for capital certain assets we use two other divisia aggregates constructed from traditional measures of money the first of these is an aggregate of highly liquid zero yield cash assets given that the component assets all have zero own rates of return however divisia aggregation is equivalent in this case to simple summation the second aggregate is a divisia aggregate of interest bearing capital certain assets including risky assets complicates the analysis because the degree of risk aversion will affect the estimates of substitution between capital certain and noncapital certain assets thus we also analyze how different degrees of risk aversion affect the results the substitution relationship between assets is estimated from an asymptotically ideal model aim the choice of an aim is in line with the recommendation of barnett fisher and serletis 1992 that flexible systems of demand equations should be used that allow for nonlinear optimizing behavior by economic agents furthermore this paper can be seen as an extension of the recent application of this model to u

relationship of profitability of world s top companies with entrepreneurship competitiveness and business environment indicators identifying the factors affecting profitability is important from the perspective of market players one of the most important benchmarks of firm performance is accounting profit and effective fact

a new empirically weighted monetary aggregate for the united states i introduction this article uses an approach to long run econometric modeling proposed by pesaran et al 2001 hereafter pss to develop an empirically weighted broad monetary aggregate for the united states and to demonstrate the advantages of this type of aggregate from a monetary policy perspective in particular we examine the ability of this type of approach to deal with periods of significant financial innovation and money demand instability a key requirement for monetary aggregates to provide a useful role in guiding monetary policy is that they should be stably related to the objectives of policy such as inflation or nominal income growth in this context the united states has exhibited periodic evidence of significant money demand instability most notably these have been goldfeld s 1976 case of the missing m1 in 1973 74 and the missing m2 episode of the early 1990s feldstein and stock 1996 in both cases the aggregate in question experienced a significant velocity increase and as a consequence previously established and apparently stable money demand relationships began to seriously overpredict the growth in these aggregates the missing m1 episode in 1973 74 together with subsequent evidence that m2 was more predictable than m1 led many economists to use m2 as an indicator of nominal activity hence during the 1980s m2 became the primary intermediate target of monetary policy furthermore the primacy of m2 appeared to be well supported by the available empirical evidence feldstein and stock 1994 for example established that the rate of change of m2 was a statistically significant predictor of the rate of change of nominal gross domestic product gdp over the period 1959 92 furthermore m2 remained statistically significant when short term interest rates were added to the relationship subsequent research such as miyao 1996 and estrella and mishkin 1997 however cast doubt on the robustness of this result carlson et al 2000 p 34 for example summarize the current situation by arguing that the promising empirical conclusions of feldstein and stock 1994 that established predictive content for m2 in a vector error correction setting do not seem to find support in data that extend through the mid 1990s the key factor behind the breakdown in the m2 relation appears to have been the substitution away from time deposits and into mutual funds particularly stock and bond mutual funds in the low interest rate environment of the early 1990s although the definition of m2 has been expanded by the federal reserve in the past to include money market mutual funds mmmfs and money market deposit accounts mmdas for example a number of analysts duca 1995 darin and hetzel 1994 orphanides et al 1994 have advocated that m2 should be expanded further to include these stock and bond mutual funds m2 significantly these studies typically use the simple sum aggregation approach in which all component assets are given equal and constant weights over time this approach does not seem consistent however with the accumulating evidence of a significant shift in wealth holders preferences sometime in the early 1990s carlson et al 2000 for example add to the empirical evidence that had accumulated during the 1990s by suggesting that the instability was associated with a permanent upward shift in m2 velocity between 1990 and 1994 furthermore they argue that our results support the hypothesis that households permanently reallocated a portion of their wealth from time deposits to mutual funds p 381 clearly simple sum aggregation is not able to take account of these changes in preferences more significantly however simple sum aggregation cannot take account of any changes in the relationship between component assets and nominal income over time although carlson et al 2000 do manage to reestablish a stable money demand relationship for the mzm money at zero maturity and m2m m2 minus small time deposits aggregates through the 1990s this is only possible by specifically accounting for the financial innovation that occurred in the early 1990s