Inflation Expectations and Risk Premiums in an Arbitrage‐Free Model of Nominal and Real Bond Yields

Differences between yields on comparable‐maturity U.S. Treasury nominal and real debt, the so‐called breakeven inflation (BEI) rates, are widely used indicators of inflation expectations. However, better measures of inflation expectations could be obtained by subtracting inflation risk premiums (IRP) from the BEI rates. We provide such decompositions using an affine arbitrage‐free model of the term structure that captures the pricing of both nominal and real Treasury securities. Our empirical results suggest that long‐term inflation expectations have been well anchored over the past few years, and IRP, although volatile, have been close to zero on average.     

SMOKE-FREE LAWS AND EMPLOYEE TURNOVER

This study examines how smoke-free laws influence turnover among restaurant workers. The study uses a unique data set of payroll records of a franchisee of a national full-service restaurant chain operating 23 restaurants in the state of Arizona, a state where several communities have adopted smoke-free laws. Municipal smoke-free laws did not, on average, have a statistically significant effect on the probability of employee separation in the years after implementation. These results suggest that training costs associated with employee turnover would not rise for full-service restaurants in municipalities that adopt smoke-free laws. ( JEL I18, J63)     

Do Consumers Care about Ethics? Willingness to Pay for Fair‐Trade Coffee

Consumers’ buying behavior is not consistent with their positive attitude toward ethical products. In a survey of 808 Belgian respondents, the actual willingness to pay for fair‐trade coffee was measured. It was found that the average price premium that the consumers were willing to pay for a fair‐trade label was 10%. Ten percent of the sample was prepared to pay the current price premium of 27% in Belgium. Fair‐trade lovers (11%) were more idealistic, aged between 31 and 44 years and less “conventional.” Fair‐trade likers (40%) were more idealistic but sociodemographically not significantly different from the average consumer.     

Monetary Targeting: The International Experience*

This paper examines the experience of nine industrial countries with monetary targeting. The paper suggests that monetary targets were adopted as a tactical response to a particular economic situation, not as monetary rules. Other objectives were given precedence over targets when thought desirable. Most countries changed the targeted aggregate, and two dropped targets altogether. While inflation fell in most countries, the extent to which this was due to the pursuit of monetary targets is unclear. The place of monetary aggregates in many countries now appears to be as one among a number of indicators considered by the authorities in the setting of monetary policy.     

Monetary Policy Expectations at the Zero Lower Bound

We show that conventional dynamic term structure models (DTSMs) estimated on recent U.S. data severely violate the zero lower bound (ZLB) on nominal interest rates and deliver poor forecasts of future short rates. In contrast, shadow‐rate DTSMs account for the ZLB by construction, capture the resulting distributional asymmetry of future short rates, and achieve good forecast performance. These models provide more accurate estimates of the most likely path for future monetary policy—including the timing of policy liftoff from the ZLB and the pace of subsequent policy tightening. We also demonstrate the benefits of including macroeconomic factors in a shadow‐rate DTSM when yields are constrained near the ZLB.