economies of density versus natural advantage crop choice on the back forty abstract we estimate the factors determining specialization of crop choice at the level of individual fields distinguishing between the role of natural advantage soil characteristics and economies of density scale economies achieved when farmers plant neighboring fields the same using rich geographic data from north dakota including new data on crop choice collected by satellite we estimate a model of how a farmer plants adjacent fields under the farmer s control we find planting decisions on a field are heavily dependent on the soil characteristics of adjacent fields through this relationship we back out the structural parameters of economies of density

aggregate price shocks and financial instability a historical analysis i introduction the notion that central banks should act as lenders of last resort is not controversial how best to carry out that responsibility is however not widely agreed on one view holds that the financial system is inherently fragile and a central bank should forgo other objectives such as preventing inflation when financial instability threatens an alternative view argues that by controlling inflation a central bank will in fact promote financial stability anna schwartz 1988 1995 for example contends that financial instability has often been caused by monetary policies that cause fluctuations in the rate of inflation she argues that monetary policy should focus exclusively on maintaining price stability a few countries for example canada and new zealand have recently made inflation control the paramount objective of their central bank s monetary policy and the maastricht treaty which established monetary union among 11 european community countries specifies control of inflation as the principal objective for the european central bank most countries including the united states assign their central banks multiple objectives such as full employment and financial stability as well as inflation control implicitly the specification of multiple objectives for monetary policy assumes trade offs between those goals that a country might have to accept higher inflation at least temporarily to maintain financial stability for example this article investigates the historical association between aggregate price and financial stability to shed light on the question of whether a commitment to price stability is likely to enhance or lessen financial stability specifically we use data for the united states from 1790 to 1997 to test the hypothesis that aggregate price disturbances cause or worsen financial instability unanticipated aggregate price declines might increase financial distress by leaving some borrowers with insufficient income to repay contracted nominal debt thus unanticipated aggregate price declines would increase insolvency and default rates positive aggregate price shocks on the other hand might cause default rates to fall below expectations and could encourage financial expansion if borrowers and lenders are unable to distinguish changes in relative prices from changes in the aggregate price level financial expansion based on aggregate price misperceptions can lead to resource misallocation however and thereby worsen financial distress associated with subsequent unanticipated aggregate price declines during 1790 1933 unanticipated movements in the price level best represent price shocks whereas the persistence of inflation since 1933 led us to examine the impact of unanticipated inflation on financial conditions during 1934 97 we use the phrase aggregate price shock to refer to unanticipated movements in either the price level or the inflation rate in the absence of consistent time series measures of aggregate financial conditions over a long period we construct an annual index of financial conditions from both quantitative and narrative sources we use a dynamic time series probit model to estimate the impact of aggregate price shocks on financial conditions as reflected in the index we also regress four series used to construct the index on aggregate price shocks to confirm that the relationship between aggregate price shocks and the index is present in its constituent series we control for liquidity real output growth and supply shocks and test whether relationships changed with changes in monetary or financial regime our objective is to shed light on the extent that aggregate price disturbances exacerbate financial instability and whether the relationship between such disturbances and financial conditions is affected by the institutional environment we begin by outlining why aggregate price shocks might cause or worsen financial instability

the fisher hypothesis and the forecastability and persistence of inflation abstract for the period 1860 to 1939 the simple correlation of the u s commercial paper rate with the contemporaneous inflation rate is 0 17 the corresponding correlation for the period 1950 to 1979 is 0 71 this paper attributes this apparent change in the fisher relation to differences in the stochastic process of inflation rather than a change in any structural relationship between interest rates and expected inflation contrary to recent claims in the literature there is little evidence of inflation non neutrality in data from the pre world war i period

adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

inflation persistence alternative interpretations and policy implications in this paper i consider the policy implications of two alternative structural interpretations of observed inflation persistence which correspond to two alternative specifications of the new keynesian phillips curve nkpc the first specification allows for some degree of intrinsic persistence by way of a lagged inflation term in the nkpc the second is a purely forward looking model in which expectations farther into the future matter and coefficients are time varying in this specification most of the observed inflation persistence is attributed to fluctuations in the underlying inflation trend which are a consequence of monetary policy rather than a structural feature of the economy with a simple quantitative exercise i illustrate the consequences of implementing monetary policy assuming a degree of intrinsic persistence that differs from the true one the results suggest that the costs of implementing a stabilization policy when the policymaker overestimates the degree of intrinsic persistence are potentially higher than the costs of ignoring actual structural persistence the result is more clear cut when the policymaker minimizes a welfare based loss function

money at low frequencies many central banks have abandoned monetary targeting because the link between money growth and inflation seemed to disappear in the 1980s using spectral regression techniques we show that for the euro area japan the uk and the us there is a unit relationship between money growth and inflation at low frequencies when the impact of interest rate changes on money demand is accounted for we estimate phillips curve equations in which the low frequency information from money growth is combined with high frequency information from the output gap to explain movements in inflation jel c22 e3

erratum to why has u s inflation become harder to forecast the article journal of money credit and banking supplement to vol 39 no 1 february 2007 contains errors in figures 2 4 and tables 4 5 associated with a coding error in our program for estimating the uc sv model we thank ling hu of platinum grove asset management for finding this error and bringing it to our attention the corrected uc sv rows for tables 4 and 5 are given below corrected versions of figures 2 4 and corrected replication files can be found at http www princeton edu mwatson

a note on the optimal tariff retaliation and the welfare loss from tariff wars in a framework with intraindustry trade abstract this paper uses krugman s 1980 model of trade with product differentiation and monopolistic competition to examine the effects of a uniform ad valorem tariff the main results are there exists an optimal tariff even for a small economy and the optimal tariff rate is an increasing function of the size of the economy and the degree of production differentiation under reasonable parameter assumptions a tariff war between two countries of equal size in which each country retaliates by imposing its own optimal tariff causes a welfare loss equivalent to a drop in income of about 4 percent

sluggish price adjustments and the link between money and price the simple quantity theory of money asserts that because the velocity of money and fullemployment output are constants if the money supply doubles the price level must also double 15 this view of the quantity theory of money is also supported by the policy ineffectiveness proposition put forward by lucas 16 sargent and wallace 20 and barro 1 the policy ineffectiveness proposition asserts that real variables like output and unemployment respond only to unanticipated movements in the money supply but do not respond to anticipated money supply associated with the systematic feedback rules one of the premises essential to the validity of this proposition is the perfect flexibility of prices the corollary of the policy ineffectiveness proposition as expounded by gordon 12 in invalidating this propositin is that because output does not respond to anticipated money supply changes and remains at the natural level the price level responds contemporaneously and proportionately to the anticipated changes in the money supply this conclusion is also consistent with barro s hypothesis that perceived movements in the money stock imply equiproportionate contemporaneous movements in the price level 3 565 66 this one to one relationship between the anticipated money supply and the price level has also been shown theoretically by barro 1 and hercowitz 13 it is this conclusion that needs to be tested by accounting for the speed of adjustments of prices the purpose of this study is to explore theoretically and empirically the link between money supply and price levels by incorporating a gradual price adjustment mechanism more specifically this study examines a the one to one relationship between the log of current money stock and the log of the price level purported by barro 3 b effects of unanticipated money growth on the aggregate price and c importance of anticipated money growth in determining the price level given the current money stock and the current and lagged values of the unanticipated money growth the key element of the study is the realization that the economy is comprised of markets with differing degrees of price adjustments numerous cases of price stickiness can be identified in modern economies as enumerated in survey work by blinder 4 also for instance devadoss and choi 6 observe that the u s agricultural program s price fixing policies such as price

is there a role for monetary aggregates in the conduct of monetary policy abstract we examine the potential policy role of monetary aggregates by attempting to use them as effectively as possible in the analysis of empirical relationships we focus on their role as information variables since any more ambitious use such as in a policy rule would presuppose some information content in the aggregates our results show that in the united states since 1979 the monetary aggregates fall considerably short of those requirements and results with german m3 are hardly more favorable we also investigate whether empirical relationships are not reflective of information relationships because of the use of these variables in countercyclical policy the results are not consistent with that interpretation

money still makes the world go round the zonal view many leading monetary economists have come to regard the monetary aggregates as obsolete measures of the monetary policy stance this critique has led some to view money as having lost its central role in the conduct of monetary policy we say to those advocating excising money from monetary policy not so fast to better understand the potential role for money we develop a zonal view of monetary policy which reflects the historical regularity for the relative informativeness of the quantitative measures of monetary policy such as the monetary aggregates and real interest rates to depend on the inflation zone in which a central bank finds itself the zones range from high inflation zone 1 to deep deflation zone 5 with intermediate zones of moderate inflation zone 2 low inflation zone 3 and low deflation zone 4 we find considerable support for this view in the historical data which stretches back to the 19 th century seen from this perspective the past experience of central banks casts doubt on the singular importance often attributed to the short term real interest rate as an indicator of the stance of monetary policy this applies especially in the current low inflation environment in which many central banks find themselves the zonal view has far reaching implications for monetary policy frameworks for the analytical efforts to understand the monetary policy transmission mechanism and for central bank communication strategies this paper was prepared for the 21 st congress of the european economic association held in vienna on august 27 2006 the views expressed in the paper are solely those of the authors

is inflation always and everywhere a monetary phenomenon using a sample of about 160 countries over the last 30 years we test for the quantity theory relationship between money and inflation when analysing the full sample of countries we find a strong positive relation between long run inflation and the money growth rate the relation is not proportional however the strong link between inflation and money growth is almost wholly due to the presence of high or hyper inflation countries in the sample the relationship between inflation and money growth for low inflation countries on average less than 10 per annum over the last 30 years is weak

inflation dynamics and the output inflation trade off international panel data evidence we explore the impact of inflation and its variability on the output inflation trade off using a unified single step approach in a panel data context a limitation of earlier empirical approaches is that they focus on either cross country or country by country time series analyses this paper employs a dynamic heterogeneous panel data specification and uses an all encompassing estimation framework that accounts for parameter heterogeneity cross sectional dependence dynamics and non stationarity our sample covers 60 countries from 1970 to 2010 while inflation variability reduces the trade off for specific periods and country groups an unambiguous and more pronounced negative relation emerges between the inflation rate and the responsiveness of real output to nominal shocks the findings are in line with the new keynesian view of a negative association between the rate of inflation and the output inflation trade off as well as with the observed flattening of the phillips curve over the past decades

optimal price level drift under commitment in the canonical new keynesian model in both the canonical and many extended versions of the new keynesian model optimal monetary policy under commitment implies price level stationarity as long as expectations are rational we show that this is no longer the case if the central bank and private agents make decisions before observing current shocks the optimal amount of price level drift in response to unexpected innovations to inflation is quantitatively important this result has important implications for monetary policy including the design of the optimal loss function for the central bank if it cannot commit to its future policies a la fois dans la version canonique du nouveau modele keynesien et de ses versions etendues la politique monetaire optimale quand il y a engagement implique qu il y aura stationnarite du niveau des prix aussi longtemps que les anticipations sont rationnelles on montre que ce n est plus le cas si la banque centrale et les agents prives prennent des decisions avant d observer les chocs courants le montant optimal de la derive du niveau des prix en reponse aux innovations non anticipees dans l inflation est quantitativement important ce resultat a des implications importantes pour la politique monetaire y compris le design d une fonction de perte optimale pour la banque centrale si elle ne peut pas s engager a poursuivre ses politiques dans l avenir

price and wage inflation persistence across countries and monetary regimes abstract we augmented a macro model with intrinsic inflation inertia assuming that prices farer in the past are more likely to be reset we estimated the model for seven industrialized economies to compare their price wage structures and to explore the potential nexus between changes the price wage structure and changes in policy stances we find evidence for duration dependent price adjustments in all the country of the sample although positively sloped after few periods price hazard functions often become flat as in calvo based models instead wage hazard shapes are in line with taylor contracts with the exceptions of france and the united kingdom country comparison shows that price and wage stickiness are correlated regarding monetary policy stances no systematic effect is found observed changes are explained by country specific factors e g market reforms

is quantity theory still alive this paper investigates whether the quantity theory of money is still alive we argue that it is but that the slippage is not negligible for countries with low inflation the relationship between average inflation and the growth rate of money is tenuous at best a correction for variation in output growth and the opportunity cost of money using theory implied elasticities helps explain the slippage for the period since 1990 inflation targeting at low rates of inflation makes it harder to establish the long run relationship between monetary growth and inflation

the behavior of money and other economic variables two natural experiments abstract the object of this paper is to test the performance of the quantity theory model and the related proposition of monetary neutrality in a context in which to use bernanke s phraseology money move d for reasons that were plausibly unrelated to the current state of the economy we investigate this question using data from two recent episodes of monetary policy regime change the move to floating exchange rates throughout the industrialized world following the breakdown of bretton woods in the early 1970s and the shift toward less expansive monetary policy that to varying degrees took place in these countries a decade or so later the results of this exercise are highly positive the money price relationship that we observe is fully consistent with theory growth shifts in the nominal stock of money and in the price level are highly correlated and bear a one to one relation to one another growth shifts in exchange rates are significantly related both to growth shifts in relative price levels and to growth shifts in relative excess supplies of money the classical neutrality proposition in this context superneutrality in general receives strong though not totally unambiguous support

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

some international evidence on the quantity theory of money this paper develops a two equation model of money interest rates and inflation based on the simple quantity theory an d fisher s hypothesis about nominal interest rates the model has both within equation and cross equation restrictions that are tested on long run average cross country data covering the period 1962 88 the major finding is that the restrictions cannot be easily rejected and this suggests that the behavior of interest rates and inflation in a major part of the postwar period can be understood in terms of classical monetary forces copyright 1993 by ohio state university press

american colonial monetary regimes the failure of the quantity theory and some evidence in favour of an alternate view recent developments in monetary economics suggest that the manner in which money is introduced is more important even for price level movements than the quantity of money colonial american experience provides a laboratory for testing this view it is shown that the nature of backing rather than the quantity of money determined its value large secular inflations were ended by changing the nature of backing despite continued large note issues and despite the absence of a metallic standard extremely large note issues and note withdrawals are shown not to have produced inflation currency depreciation or deflation currency appreciation

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

an international comparison of prices and exchange rates a new test of purchasing power parity abstract this paper introduces a new approach based on divisia index numbers to test ppp with both short run and long run data for all major currencies simultaneously the short run results indicate that the predictions of ppp do not hold up at all well on the other hand however the long run data are quite consistent with the ppp hypothesis the results also identify five years as a broad measure of the length of the long run insolar as ppp is concerned

monetary policy and inflationary shocks under imperfect credibility abstract in this note we quantify the deterioration of achievable stabilization outcomes when monetary policy operates under imperfect credibility and weak anchoring of long term expectations within a medium scale dynamic stochastic general equilibrium dsge model we introduce through a simple signal extraction problem an imperfect knowledge configuration in which price and wage setters wrongly have doubts about the determination of the central bank to maintain a fixed long term inflation objective in the face of inflationary shocks the magnitude of private sector learning has been calibrated to match the volatility of us inflation expectations at long horizons we find that the costs of maintaining a given inflation volatility under weak credibility could amount to 0 25 percentage point pp of output gap standard deviation

the central bank as shaper and observer of events the case of the yield spread the yield spread has commonly been employed as a successful predictor of economic growth and recessions although its marginal predictive power has decreased since the 1990s notably the yield spread s declining power to predict us economic activity coincided with its growing power to predict us interest rate changes in my view these phenomena are inevitably linked and share one cause the central bank intended to enhance both its transparency and credibility through greater information disclosure this disclosure improved interest rate predictability but might also have crowded out useful private information formerly in the yield spread that helped predict economic activity

drift and breaks in labor productivity abstract we use endogenous break tests and the stock watson tvp mub methodology to investigate changes in the equilibrium rate of growth of labor productivity in the u s the eurozone the u k australia and japan since wwii results for the u s well capture the conventional wisdom of a golden era of high productivity growth the 1950s and 1960s a marked deceleration starting from the beginning of the 1970s and a strong growth resurgence starting from mid 1990s results for the eurozone point towards a deceleration since the early 1980s with the equilibrium rate of growth of output per hour falling to 0 9 in 2004 4

inflation unemployment regimes and the instability of the phillips curve using the statistical technique of fuzzy clustering regimes of inflation and unemployment are explored for the united states the united kingdom and germany between 1871 and 2009 we identify for each country three distinct regimes in inflation unemployment space similarities exist across countries in both the regimes and the timings of the transitions between regimes however the typical rates of inflation and unemployment experienced in the regimes are substantially different further even within a given regime the results from the cluster analysis reveal persistent fluctuations in the degree of attachment to that regime of inflation unemployment observations over time the economic implications of this are that first the inflation unemployment relationship or phillips curve experiences from time to time major shifts second that it is also inherently unstable even in the short run it is likely that the factors which govern the inflation unemployment trade off are so multi dimensional that it i

on some predictions of the quantity theory of money recently efforts have been made to test some of the long term propositions implied by the quantity theory of money of these two of the more interesting studies are those of lucas 11 and lothian 10 lucas using time series data for the united states and applying fourier transforms detrends the series and then using scatter diagrams of these detrended series finds considerable support for the proposition of one to one correspondence between rate of growth of money and the rate of inflation and for the fisher hypothesis lothian 10 following upon a suggestion of lucas 11 uses cross country averages of time series data for twenty o e c d countries to test the classical neutrality hypothesis the monetary approach to the exchange rate determination and the fisher hypothesis his approach consists of treating the cross country averages to represent longterm steady state points and once again uses scatter diagrams of the appropriate variables he reports complete support for the first two hypotheses and partial support for the fisher hypothesis the aim of this paper is to reexamine two of the propositions implied by the quantity theory of money namely the neutrality hypothesis and the fisher hypothesis for six developed countries by using a methodology recently proposed by wickens and breusch 12 which is an elaboration of an earlier work by bewley 2 their methodology starts with the well known autoregressive distributed lag model which can be estimated to extract long term parameters of interest wickens and breusch s point of departure is that unlike this traditional procedure this model can be transformed in such a way that direct estimates of the long term parameters along with their standard errors can be obtained provided the model is estimated appropriately as explained below clearly this methodology is then ideally suited for application to the issue under consideration the outline of the paper is as follows the hypotheses and the models are explained in section ii the estimation issues are discussed in section iii the results are presented in section iv the paper concludes with a brief summary of the main findings

investigating inflation persistence across monetary regimes under inflation targeting estimates of the indexation parameter in hybrid new keynesian phillips curves are either equal to zero or very low in the united kingdom canada sweden and new zealand analogous results hold for the euro area under the european monetary union and for switzerland under the new monetary regime under stable regimes with clearly defined nominal anchors inflation appears to be purely forward looking these results question the notion that the intrinsic inflation persistence found in post wwii u s data is structural in the sense of lucas carnegie rochester conference series on public policy 1 1976 19 46 and suggest that hardwiring inflation persistence in macroeconomic models is potentially misleading

endogenous financial innovation and the demand for money this paper embeds two key ideas about the nature of financial innovation taken from the empirical literature into a familiar equilibrium monetary model it provides formal support for several alternative econometric specifications for money demand that attempt to capture the effects of financial innovation and demonstrates that a popular theoretical model of money demand when suitably modified can account for some unusual monetary dynamics found in the data thus it helps to establish both the theoretical relevance of recent empirical work and the empirical relevance of recent theoretical work on the demand for money copyright 1995 by ohio state university press

an open economy new keynesian phillips curve for the u k abstract we estimate a pricing equation or new keynesian phillips curve nkpc obtained from a structural dynamic model of price setting based on rotemberg 1982 sticky prices in the united states journal of political economy 90 6 1187 1211 and extended to capture employment adjustment costs and the openness of the united kingdom this model nests the baseline gali and gertler 1999 inflation dynamics a structural econometric analysis quarterly journal of economics 110 127 159 and sbordone 2002 prices and unit labor costs a new test of price stickiness journal of monetary economics 49 265 292 relationship between inflation and marginal cost in the limiting case of no employment adjustment costs no impact of relative prices of imported inputs on real marginal cost and a constant equilibrium markup our findings indicate that each of our modifications to the baseline nkpc model is important for u k data so that inflation in the u k is explained both by changes in employment and by changes in real import prices in general and real oil prices in particular external competitive pressures also seem to affect u k inflation via their impact on the equilibrium price markup of domestic firms

the augmented solow model and the productivity slowdown abstract in an insightful and influential paper mankiw et al 1992 quarterly journal of economics 107 407 437 have suggested that an augmented solow growth model can account for 80 of the variation in output per capita across countries due to different steady state growth paths that result from differences in saving rates education and population growth this paper carries their analysis one step further and asks whether changes in the growth rate between the 1960s and the 1980s can also be explained by this framework our results provide further support for several of mankiw et al s key conclusions investment in physical capital population growth and the initial levels of output seem to matter a great deal however investment in human capital has no ability to account for changes in growth rates over time we conclude that investment in physical capital seems to be quite important for economic growth though the reasons for this importance may not be fully captured by the augmented solow growth model

domestic policies in self enforcing trade agreements abstract if all cross country externalities travel through the terms of trade efficient trade agreements may simply target the terms of trade and ignore domestic policies this argument has been advanced by several prominent studies simply put it reads terms of trade agreements are efficient i show that this result breaks down if the following two standard conditions are met first a self enforcement requirement constrains the agreement and second production possibilities are intertemporally linked these conditions imply that a country s current policy mix affects future production possibilities and thus impacts payoffs under potential defection since a terms of trade agreement does not specify a country s policy mix it effectively invites countries to manipulate their own defection temptation to be self enforcing terms of trade agreement must ensure that no country while optimizing its policies on the iso terms of trade schedule will abandon its zone of voluntary cooperation this requirement implies that terms of trade agreements are inefficient and can be improved upon by agreements that target policies directly

the long run phillips curve a structural var investigation both cointegration methods and non cointegrated structural vars identified based on either long run restrictions or a combination of long run and sign restrictions are used in order to explore the long run trade off between inflation and the unemployment rate in the post wwii u s u k euro area canada and australia overall neither approach produces clear evidence of a non vertical trade off the extent of uncertainty surrounding the estimates is however substantial thus implying that a researcher holding alternative priors about what a reasonable slope of the long run trade off might be will likely not see her views falsified

interpreting inflation persistence comments on the conference on quantitative evidence on price determination the past decade has seen important advances in the analysis of price setting behavior most notably in my view a great deal of effort has been directed at the development of models that on the one hand have an explicit behavioral interpretation the models are clear about who sets prices what they seek to achieve when choosing prices and to what constraints they are subject when making the decision and at the same time can be parameterized so as to be compared in detail to inflation data this has allowed these models to be incorporated into complete dsge models of business fluctuations and of the monetary transmission mechanism that can be econometrically estimated this raises the prospect that it should soon be possible to base policy analysis on models that are both quantitatively realistic and plausibly invariant under the kinds of changes in policy that the analyst may wish to contemplate some argue that these two desiderata remain in considerable tension with one another that one cannot insist upon optimizing foundations at least under the current state of knowledge without substantial sacrifice of quantitative realism it is somewhat unfair however to present the quest for a model with optimizing foundations as a retreat from full insistence upon empirical realism given the fact that models with clear behavioral interpretations can be checked against a wider range of types of empirical evidence which should ultimately allow greater confidence in the realism of the specification that can withstand such scrutiny for example the exhaustive recent study of evidence on price setting in the euro area undertaken by the eurosystem s inflation persistence network compares alternative models in the light of three distinct

trade policy home market effect versus terms of trade externality we study trade policy in a two sector krugman 1980 trade model allowing for wage import and export subsidies taxes we study non cooperative trade policies first for each individual instrument and then for the situation where all instruments can be set simultaneously and contrast those with the efficient allocation we show that in this general context there are four motives for non cooperative trade policies the correction of monopolistic distortions the terms of trade manipulation the delocation motive for protection home market effect the fiscal burden shifting motive the nash equilibrium when all instruments are available is characterized by first best level wage subsidies and inefficient import subsidies and export taxes which aim at relocating firms to the other economy and improving terms of trade thus the dominating incentives for non cooperative trade policies are the fiscal burden shifting motives and terms of trade effects

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

golden fetters the gold standard and the great depression barry eichengreen oxford university press new york 1992 pp xix 448 39 95

small island developing states and their economic vulnerabilities abstract many small island developing states sids face special disadvantages associated with small size insularity remoteness and proneness to natural disasters these factors render the economies of these states very vulnerable to forces outside their control a condition which sometimes threatens their very economic viability the gdp or gnp per capita of these states often conceals this reality in this paper the major vulnerabilities faced by sids are discussed and when possible quantified in the form of an index an attempt is also made to construct a composite index of vulnerability

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

the persistence of inflation in the united states abstract has the persistence of inflation in the united states changed since 1965 we estimate the persistence of inflation over time using different measures and estimation procedures and we produce confidence intervals for our estimates as well as formal tests of unchanged persistence we find that inflation persistence has been high and approximately unchanged in the u s over our sample period we reconcile our results with other studies that reached different conclusions

purchasing power parity and the behavior of prices and nominal exchange rates across exchange rate regimes abstract the evidence presented in this paper shows that purchasing power parity as a long run proposition is indeed a very useful approximation we see this quite clearly in the panel data for three historical periods examined here the classical gold standard era from 1870 to 1914 the interwar period from 1921 to 1939 and the period after world war ii from 1959 to 1998 price level behavior across countries differs in the way that ppp suggests when monetary arrangements differ and is highly similar when monetary arrangements are themselves similar inflation rates adjusted for exchange rate changes in general are highly correlated and bear a one to one relation to one another within and across the three periods and the varied monetary regimes that prevailed

bank regulation and macroeconomic fluctuations over the last two decades macroeconomic cycles were frequently associated with boom bust cycles in bank lending and asset prices often followed by financial instability in this paper we argue that i the new pattern of macroeconomic cycles is partly the result of banking sector liberalization since the early mid 1970s which has increased the procyclicality of the financial system ii the regulation of bank capital in the form of capital adequacy requirements is itself inherently procyclical and may therefore amplify business cycle fluctuations iii the new basel 11 accord may considerably accentuate the procyclicality of the regulatory system

real wage rigidities and disinflation dynamics calvo vs rotemberg pricing abstract calvo pricing implies output gains while rotemberg pricing implies output losses after a disinflation introducing real wage rigidities has opposite effects it generates a long lasting boom in output in calvo and a moderate output slump in rotemberg

inflation and monetary regimes abstract correlations of inflation with the growth rate of money increase when data are averaged over longer time periods correlations of inflation with the growth of money also are higher when high inflation as well as low inflation countries are included in the analysis we show that serial correlation in the underlying inflation rate ties these two observations together and explains them we present evidence that averaging increases the correlation of inflation and money growth in more when the underlying inflation rate has higher serial correlation

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

long run purchasing power parity in the 1920s abstract this paper presents an empirical analysis of long run purchasing power parity ppp during the 1920s float using recently developed methodology on the cointegration of economic time series our results are generally supportive of ppp as a long run equilibrium condition on which exchange rates tended to converge over the period for dollar sterling however there is some evidence of a non stationary drift away from fundamentals during the last year or so before britain s return to the gold standard perhaps due to speculation our results also appear to reconcile some apparently conflicting evidence in the literature

testing the long run neutrality of money in a developing economy the case of india abstract seasonal integration and cointegration techniques are used to test the hypothesis of long run money neutrality using indian data on the basis of money real output and price level quarterly data empirical evidence is presented showing that money is cointegrated with prices but not with output at the zero frequency this evidence is interpreted to imply that money affects nominal but not real variables in the long run it is concluded that money is neutral in the long run

equilibrium relationships between money and other economic variables central to the quantity theory of money are a number of important propositions about the long run equilibrium effects of changes in the nominal stock of money on other economic variables a standard way of testing these propositions is to use quarterly or annual data explicitly model the lag structure and then derive the long run solution of the model from the empirical estimates an alternative is to use some type of smoothing procedure to approximate positions of equilibrium and then to use these transformed data directly in testing hypotheses the national bureau technique of averaging data over reference cycle phases is one such method robert lucas s application of fourier transforms in two illustrations of the quantity theory of money 1980 is another and john geweke s method 1982 of frequency decomposition is a third an entirely different way of approaching the problem is to use cross country average rather than time series data as the basic units of observation the advantage according to lucas is that since the two quantity theoretic laws that he examines are obtained as characteristics of steady states or limiting distributions of theoretical models the ideal experiment for testing them would be a comparison of long term average behavior across economies with different monetary policies but similar in other respects p 1006 in this paper i conduct such an experiment the data that i use are for 20 oecd countries over the period 1956 80 the specific relationships that i examine are those between money and the price level money and real income money and interest rates and money and exchange rates in the main the data accord well with the quantity theoretic model classical neutrality holds there is evidence of a fisher effect albeit a less than complete effect on interest rates finally the data are consistent with long run purchasing power parity and hence correspondingly with a long run monetary approach to exchange rate determination

the search for equilibrium relationships in international finance the case of the monetary model abstract this paper considers some of the main long run equilibrium relationships in international finance we supplement the phillips perron test which has a unit root under the null with the new kps test statistic which is based on a stationary null and apply them to the various exchange rate fundamentals the application of the johansen test for multiple cointegrating factors finds evidence of the existence of stable money demand functions in both the usa and uk with relatively short lived perturbations however there appears to be insufficient information in the data to distinguish whether the real exchange rate has a unit root or is persistent and mean reverting the consequent persistent deviations from purchasing power parity appears the only source of rejection of the equilibrium monetary model

money growth output growth and inflation estimation of a modern quantity theory 1 introduction during the years 1980 1993 annual inflation averaged 81 5 in latin america 12 3 in africa but only 6 4 among 16 countries in the oecd within latin america inflation ranged from 8 2 in honduras to 374 3 in argentina and in africa from 0 6 in the republic of the congo to 61 6 in sierra leone what are the reasons for these large differences if cross country differences in inflation can be linked closely to corresponding differences in money growth the reason is clear but if the link is weak then other reasons must be sought several authors have recently rejected money growth as an explanation of inflation there are three lines of criticism the first typified by baba hendry and starr 1992 estrella and mishkin 1997 and cochrane 1998 argues that the income velocity of and thus the demand for monetary aggregates is so unstable that money growth is an unreliable explanation a second criticism closely related to the first is a time series issue if money the price level and output are not cointegrated then there is no stable long run relationship among them some researchers find evidence of cointegration hoffman and rasche 1991 baba hendry and starr 1992 stock and watson 1993 hoffman rasche and tieslau 1995 swanson 1998 carlson et al 2000 dutkowsky and atesoglu 2001 but others do not stock and watson 1989 hafer and jansen 1991 friedman and kuttner 1993 thoma 1994 the cointegration question remains unsettled a third criticism is quite distinct from the first two it argues that in dynamic general equilibrium models with infinitely lived households money in the household utility function and rational expectations there is a class of policy rules with a unique solution that shows that the price level is independent of monetary policy but dependent strictly on fiscal policy this fiscal theory of price level determination breaks any link between money growth and inflation the key fiscalist models were developed by leeper 1991 sims 1994 1996 and woodford 1994 1995 1998 a simple version is summarized succinctly by mccallum 2001 who demonstrates an alternative mathematical solution to a fiscalist model that yields a monetary explanation of the price level but the monetarist foundations are under vigorous attack 1 this paper specifies and estimates a modern version of the quantity theory of money growth real gdp growth and inflation its traditional feature is that a country s long run inflation rate increases with its money growth rate the modern wrinkle is that inflation is mitigated by real gdp growth i assume that real gdp growth is governed by exogenous forces such as growth in human capital physical capital formation and technological progress the model makes no attempt to explain gdp growth rates long run neutrality is presupposed i show that the quantity theory can be written as a regression model whose theoretical implications can easily be tested section 3 this paper then makes three empirical contributions the first is to estimate a long run version of the quantity theory and test its implications statistically sections 5 and 6 the estimates are long run in the important sense that inflation money growth and real gdp growth rates are annual averages computed for 81 countries over the 14 years from 1980 to 1993 short run changes in the series are excluded by design the second is to partition statistically the roles of money and real gdp growth as determinants of inflation section 7 the third is to conduct out of sample forecasts section 8 here we discover how well the model estimated for one group of countries predicts inflation in others this paper differs from previous work in three important ways first earlier research has not been based on theoretically grounded regression models friedman 1956 1968 klein 1956 friedman and friedman 1980 friedman and schwartz 1982 mccandless and weber 1995 rolnick and weber 1997

some colonial evidence on two theories of money maryland and the carolinas recent developments in monetary economics stress the nature of monetary injections emphasizing that they have implications for the relationship between money and prices in contrast traditional approaches posit stable money demand functions that are independent of how money is injected the former approach implies that certain proportionality relations between money and prices need not obtain this permits the two approaches to be empirically distinguished but only if an appropriate experiment is conducted the colonial period is one such experiment colonial evidence suggests that the nature of injections is crucial to the effect on prices of changes in the money supply

flattening of the phillips curve under low trend inflation abstract this study indicates why the phillips curve is flattened in an environment of low trend inflation the key is the curvature of the demand curve

imperfect credibility and inflation persistence in this paper we formulate a dynamic general equilibrium model with staggered nominal contracts in which households and rms use optimal ltering to disentangle persistent and transitory shifts in the monetary policy rule the calibrated model accounts quite well for the dynamics of output and insation during the volcker disinsation and implies a sacri ce ratio very close to the estimated value our approach indicates that insation persistence and substantial costs of disinsation can be generated in an optimizing agent framework without relaxing the assumption of rational expectations or relying on arbitrary modi cations to the aggregate supply relation jel classi cation e31 e32 e52

multi country evidence on the behavior of purchasing power parity under the current float abstract using panel data for the united states and 22 other oecd countries for the current float this paper presents evidence that despite substantial short term perturbations purchasing power parity actually performed much better than commonly believed average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials thus implying a close to one to one relation between average rates of growth of nominal exchange rates and average inflation differentials panel data variants of standard unit root tests suggest that the real exchange rates of these countries can be characterized as mean reverting

is deflation costly after all the perils of erroneous historical classifications i estimate average economic activity during periods of inflation and deflation while accounting for measurement errors in 19th century prices these measurement errors lead to underestimation overestimation of economic activity during periods of inflation deflation by exploiting multiple deflation indicators it is possible to recover the true relationship the shortfall of us industrial production growth during periods of deflation ranges from 4 5 pp to 7 6 pp instead of 2 pp i also find a negative relationship between deflation and real activity in the uk i then examine the cross country variation in the estimates for eleven countries the patterns are consistent with stronger biases for countries with more serious measurement errors in prices

causes of nonlinearities in low order models of the real exchange rate abstract this paper investigates the extent to which modern dsge models which feature local currency pricing home bias nontraded goods and incomplete markets can generate nonlinear real exchange rate dynamics that are consistent with those found in the time series literature using data from the current floating period our key findings are as follows first if the true model can be appropriately characterized as a set of linear equations then linearity tests that utilize univariate autoregressions of the real exchange rate suffer from an omitted variables problem which leads them to overestimate the true incidence of nonlinearity consequently studies that fail to control for this problem may spuriously find evidence of nonlinearities in the data despite the fact that the data generating process may be linear second we propose a strategy that can largely eliminate this distortion finally we find that dsge models solved using higher order approximations are capable of generating true structural nonlinearities in real exchange rates both asymptotically and in short samples

the fisher hypothesis a multi country analysis this paper tests whether the fisher hypothesis holds for a sample of 26 countries by assessing the long run relationship between nominal interest rates and inflation rates taking into consideration the short run dynamics of interest rates the empirical evidence supports the hypothesis that there is a one to one relationship between the interest rate and inflation for more than half of the countries under study

monetary facts revisited abstract this paper uses data from 46 economies over the post war period to revisit two key monetary facts i the link between money growth and inflation and ii the link between credit growth and financial crises the analysis reveals that the former has weakened over time while the latter has become stronger this suggests that there is an inverse relationship between the two monetary facts the money inflation link is weak and the credit crisis nexus is strong when inflation is low and financial systems are liberalised while the reverse holds true in environments of high inflation and less liberalised financial systems

a retrospective on the bretton woods system lessons for international monetary reform at the close of the second world war when industrialized nations faced serious trade and financial imbalances delegates from forty four countries met in bretton woods new hampshire in order to reconstruct the international monetary system over the next 25 years with currencies fixed to the american dollar world trade expanded vigorously inflation remained moderate and national income in industrialized countries rose faster than during any other period in this volume three generations of scholars and policy makers some of whom participated in the 1944 conference consider how the bretton woods system contributed to economic stability and rapid growth between 1945 and 1971 and discuss the future of the international monetary system in light of the bretton woods experience since president richard m nixon ended the bretton woods system in 1971 exchange rates have exhibited increasing flexibility after twenty years of floating rates however there is considerable interest in once again limiting exchange rate flexibility the apparent success of the european monetary system a fixed rate arrangement loosely based on the postwar system and the prospect of european monetary unification increase interest in a new internationally stable exchange rate moreover some academics and government officials see fixed rates as a way to help eastern europe and the former soviet union cope with pressing economic and political problems the economists historians political scientists and policy makers who contribute to this volume relate the bretton woods system to earlier fixed rate schemes and consider the political background of the original new hampshire meeting using recenteconomic theory for example work on time consistency and credibility they explore adjustment liquidity and transmission under the system the way it affected developing countries and the role of the international monetary fund in maintaining a stable rate the authors examine th

insularity and economies of density analyzing the efficiency of a logistic network using an econometric simulation based approach abstractthis paper explores the challenges posed by insularity to economic development and overall welfare from a novel viewpoint using a multidisciplinary approach we investigated the additional

openness government size and the terms of trade this paper investigates the relationship between trade openness and the size ofngovernments both theoretically and empirically we argue that openness can increase the size of governments through two channels 1 a terms of trade externality whereby trade lowers the domestic cost of taxation and 2 the demand for insurance whereby trade raises risk and public transfers we provide a unified framework for studying and testing these two mechanisms our main theoretical prediction is that the relative strength of the two explanations depends on a key parameter namely the elasticity of substitution between domestic and foreign goods moreover while the first mechanism is inefficient from the standpoint of world welfare the second is instead optimal in the empirical part of the paper we provide new evidence on the positive association between openness and government size and we explore its determinants consistently with the terms of trade externality channel we show that the correlation is contingent on a low elasticity of substitution between domestic and foreign goods our findings raise warnings that globalization may have led to inefficiently large governments

yesterday s bad times are today s good old times retail price changes are more frequent today than in the 1890s this paper documents differences in the nominal rigidity of retail prices across two 28 month periods 1889 91 and 1997 99 the most striking finding is that prices changed much less frequently in 1889 91 in the late 1800s when price changes did occur they were smaller on average and more narrowly distributed with fewer small or large price changes further price changes were more permanent 100 plus years ago these differences are consistent with a high occurrence of temporary price shocks and a higher cost of changing prices in 1889 91 than in 1997 99

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

real dollar exchange rate under the bretton woods and floating exchange rate regimes abstract the focus of the paper is on real exchange rates for the dollar over the period 1957 to 1985 most such exchange rates followed an almost steplike pattern showing relatively little movement in the late 1950s and 1960s falling abruptly and then remaining low in the 1970s and finally in the 1980s rising back to levels close to those that prevailed initially contrary to much recent commentary therefore the period that appears different is not the last five years but the decade that preceded them an important factor underlying this pattern of exchange rate movement according to results presented in the paper was the behavior of monetary policy and hence inflation in the united states what remains to be established is the precise mechanism linking money and real exchange rates and the relative strength of those links

posterior predictive evidence on us inflation using extended new keynesian phillips curve models with non filtered data changing time series properties of us inflation and economic activity measured as marginal costs are modeled within a set of extended new keynesian phillips curve nkpc models it is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used basic nkpc models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities forward and backward looking expectation components for inflation are incorporated and their relative importance is evaluated survey data on expected inflation are introduced to strengthen the information in the likelihood use is made of simulation based bayesian techniques for the empirical analysis no credible evidence is found on endogeneity and long run stability between inflation and marginal costs backward looking inflation appears stronger than forward looking inflation levels and volatilities of inflation are estimated more precisely using rich nkpc models the extended nkpc structures compare favorably with existing basic bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years

two illustrations of the quantity theory of money breakdowns and revivals by extending his data we document the instability of low frequency regression coefficients that lucas 1980 used to express the quantity theory of money we impute the differences in these regression coefficients to differences in monetary policies across periods a dsge model estimated over a subsample like lucas s implies values of the regression coefficients that confirm lucas s results for his sample period but perturbing monetary policy rule parameters away from the values estimated over lucas s subsample alters the regression coefficients in ways that reproduce their instability over our longer sample jel c51 e23 e31 e43 e51 e52 robert e lucas jr 1980 used near unit slopes of univariate regressions of moving averages of inflation and interest rates on money growth for the united states for the period 1953 1977 to illustrate two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest lucas said that those two quantity theoretic propositions

global imbalances revisited the transfer problem and transport costs in monopolistic competition we study the welfare eects of trade imbalances in a two sector model of monop olistic competition as in perfect competition a trade surplus involves an income transfer to the de cit country and possibly a terms of trade deterioration unlike the conventional wisdom however trade imbalances do not impose any double burden on surplus countries this is because of a production delocation eect which leads to a reduction in the local price index in the presence of intermediate goods new results arise a trade surplus may lead to an appreciation of the exchange rate to a terms of trade improvement and to a welfare increase under standard parameter con gurations in addition policies that stabilize the exchange rate can make the balanced trade equilibrium unstable these results can explain why the manufac turing sector may agglomerate in countries that resist the real appreciation of their currency and suggest that a xed exchange rate and nominal rigidities may generate short run instability

on the precision of calvo parameter estimates in structural nkpc models abstract we study the extent of empirical information that can be obtained from alternative structural new keynesian inflation equations concerning the average duration of prices in the united states given that such specifications may be hard to identify using four different indexation and real wage rigidity based models in conjunction with identification robust econometric methods we evaluate the precision of calvo parameter estimates while results are sensitive to calibration and instrument selection we find confidence bounds on the average duration of prices that line up with available micro founded studies statistically significant coefficients for the forcing variables and non zero estimates on the coefficient of lagged inflation

identifying the influences of nominal and real rigidities in aggregate price setting behavior we formulate a generalized price setting framework that incorporates staggered contracts of multiple durations and that enables us to directly identify the influences of nominal vs real rigidities we estimate this framework using macroeconomic data for germany 1975 1998 and for the u s 1983 2003 in each case we find that the data are well characterized by nominal contracts with an average duration of about two to three quarters we also find that new contracts exhibit very low sensitivity to marginal cost corresponding to a relatively high degree of real rigidity finally our results indicate that backward looking price setting behavior such as indexation to lagged inflation is not needed in explaining the aggregate data at least in an environment with a stable monetary policy regime and a transparent and credible inflation objective

monetary policy and the twin crises abstract after presenting a brief overview of the recent financial crisis and the european debt crisis that followed in its wake this paper goes on discuss monetary policy in the united states the united kingdom and the euro bloc prior to and during the course of the two crises the paper presents historical evidence for the three areas on the relationships linking the volatilities of output inflation and monetary growth in all three these relations are strongly positive there is therefore no tradeoff between inflation and output volatility the two move up and down together both moreover move up and down with the volatility of monetary growth viewed from this perspective the increased volatilities of money supplies and the monetary base in the united states the united kingdom and the euro bloc over the last half decade pose problems

monetary policy rules in theory and in practice evidence from the uk and the us given the large amount of interaction between research on monetary policy and its practice this article examines whether some simple monetary policy rules that have been proposed in the academic literature part of which has originated from within central banks provide a reasonable characterization of actual policy in the united kingdom and the united states the article finds the simple rule that describes best the actual us monetary policy is a speed limit rule with dynamics whilst for the uk it is a forward looking rule the simpler dynamics in the uk s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

i discovered the peso problem irving fisher and the uip puzzle abstract irving fisher was the first economist to posit what has come to be known as uncovered interest parity relation he was also the first to offer a peso problem type explanation for important episodes in which it was violated after reviewing his theoretical and empirical work on this subject we go on to reexamine both his data and several other bodies two consisting of multi country panel data and a third consisting of a two century long time series for the united states and the united kingdom we find evidence in these data of the important role played by episodic phenomena in disturbing the uip relation like fisher we find that the influence of such phenomena dissipates over time over the long term these errors prove to be less important and uip receives empirical support

the time varying phillips correlation we use complex demodulation techniques to investigate changes in the correlation between real activity and inflation at the business cycle frequencies in the united states the united kingdom the eurozone and 10 other organization for economic cooperation and development oecd countries over the post wwii era consistent with the analysis of ball mankiw and romer 1988 we document a positive correlation between the time varying average gain of real activity onto inflation at the business cycle frequencies and inflation s hodrick prescott trend which is compatible with new keynesian theories emphasizing the link between trend inflation the frequency of price adjustments and the slope of the phillips trade off