Recent evidence on the impact of government budget deficits on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds

This study provides recent empirical evidence on the impact of the federal budget deficit on the ex ante real interest rate yield on Moody’s Baa-rated corporate bonds. The study is couched within an open loanable funds model that includes the ex ante real short term real interest rate, the M1 money supply, net international capital inflows, and the unemployment rate. Using quarterly data for the period 1973.1–2007.4, two-stage least squares estimation reveals that the federal budget deficit, expressed as a percent of GDP, exercised a positive and statistically significant impact on the ex ante real interest rate yield on these corporate issues.     

New and Current Evidence on Determinants of Aggregate Federal Personal Income Tax Evasion in the United States

Using the most current data available, this study seeks to identify any new as well as traditional determinants of personal income tax evasion. A variety of empirical estimates find that income tax rates, the IRS audit rate and IRS penalty interest rates, and the unemployment rate all influence tax evasion. In addition, rarely investigated variables including the tax‐free interest rate, the public's job approval rating of the president, and the public's dissatisfaction with government, along with previously unstudied variables, namely, the real interest rate yield on Moody's Baa‐rated long‐term corporate bonds and the real interest rate yield on three‐year Treasury notes, also affect income tax evasion.     

The causal structure of bond yields

This paper implements an emerging data-driven method of directed acyclic graphs to study the contemporaneous causal structure among the federal funds rate and U.S. Treasury bond yields of various maturities. Using high frequency daily data from 1994 to 2009, we find that innovations in the two-year Treasury bond yield play a central role. They contemporaneously cause most other bond yields. Therefore, monetary policy makers would benefit from closely monitoring the two-year yield in setting the interest rate target, a result echoing the policy rule suggested by Piazzesi (Journal of Political Economy, 2005). Both Fed and investors should also watch the seven-year bond yield because it explains significant portions of variability in many other yields.     

基于AR模型的存款利率水平实证研究

本文建立了通货膨胀率、储蓄存款、消费对存款实际利率长期影响的AR模型,并通过实证检验发现四大现象:实际利率与名义利率的巨大差别;通货膨胀率是影响实际利率的最重要因素;储蓄存款和实际利率存在异象;消费膨胀促进加息。建议制定利率水平应更加及时,加速利率市场化改革,利用利率工具来抑制流动性过剩与通货膨胀。     

The maturity structure of term premia with time-varying expected returns

This paper analyzes the maturity structure of term premia using McCulloch’s US Treasury yield curve data from 1953–91, allowing expected returns to vary across time. One, 3, 6, and 12 month holding period returns on maturities up to 5 years are projected on 3 ex ante variables to compute time-varying expected returns, and simulations are employed to generate distributions of conditionally expected return premia. The likelihood of expected returns monotonically increasing in maturity (as implied by the liquidity preference hypothesis) is relatively high when the yield curve is steep and interest rates are high, and with longer holding periods, but low in other cases. The hypothesis that intermediate maturity bonds have the highest expected returns (a “hump-shaped” maturity-return pattern) around the onset of recessions does not receive much support.     

Nonlinear dynamics of interest rate and inflation

According to several empirical studies US inflation and nominal interest rates as well as the real interest rate can be described as unit root processes. These results imply that nominal interest rates and expected inflation do not move one‐for‐one in the long run, which is incongruent with theoretical models. In this paper we introduce a new nonlinear bivariate mixture autoregressive model that seems to fit quarterly US data (1953 : II–2004 : IV) reasonably well. It is found that the three‐month Treasury bill rate and inflation share a common nonlinear component that explains a large part of their persistence. The real interest rate is devoid of this component, indicating one‐for‐one movement of the nominal interest rate and inflation in the long run and, hence, stationarity of the real interest rate. Copyright © 2006 John Wiley & Sons, Ltd.     

Bond risk, bond return volatility, and the term structure of interest rates

This paper explores the time variation in the bond risk, as measured by the covariation of bond returns with stock returns and consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yields on long- and short-term bonds forecasts future excess returns on bonds at varying horizons positively; in addition, the short-term nominal interest rate forecasts both the stock return volatility and the exchange rate volatility positively. This paper presents evidence that movements in both the short-term nominal interest rate and the yield spread are positively related to changes in the subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with a reduced cash-flow (or inflationary) risk for bonds, but it is also correlated with a larger discount rate risk for bonds. The short rate only forecasts the discount rate component of the bond beta.     

Survivorship in the US hospital services industry

Over the last two decades, changing state and federal regulations and increased price competition have dramatically changed the environment in which hospitals compete. This paper uses observations drawn at 5‐year intervals from 1973 to 1993 for each of the 50 states to examine the specific effect of these factors on the size distribution of hospitals. It finds that Certificate of Need (CON) laws and rate review regulations have tended to favor large hospitals. The paper also finds that hospitals have responded to increased payer price sensitivity by seeking a medium bed‐size capacity. Copyright © 2000 John Wiley & Sons, Ltd.     

The supply of mortgage lending

This paper estimates the elasticity of supply of mortgage lending and tests the impact of the “availability” of funds on the markets for new housing and mortgage loans. Depending upon whether mortgage relative to total lending or the mortgage, Aaa bond yield differential is taken as the left-hand variable, the supply elasticity is found to be about 1 or about 5. No compelling evidence is found, however, that either federal agency purchases of mortgages or disintermediation has had an impact upon the supply of mortgage loans. The latter is more consistent with a relatively elastic supply of mortgage funds than with segmented mortgage markets. Examination of the determinants of both real house prices and of private residential construction also fails to reveal any significant impact of federal agency purchases or of disintermediation. It would appear, however, that real house prices are highly responsive to interest rates and that the elasticity of supply of new housing is about 5. Fluctuations in new construction would thus appear to be explainable by fluctuations in interest rates.     

The time-varying behaviour of real interest rates: a re-evaluation of the recent evidence

A time-varying parameter model with Markov-switching conditional heteroscedasticity is employed to investigate two sources of shifts in real interest rates: (1) shifts in the coefficients relating the ex ante real rate to the nominal rate, the inflation rate and a supply shock variable and (2) unconditional shifts in the variance of the stochastic process. The results underscore the importance of modelling continual change in the ex ante real rate in terms of other economic variables rather than relying on a statistical characterization that permits only a limited number of discrete jumps in the mean of the process. Copyright © 1999 John Wiley & Sons, Ltd.     

Investigating the PPP hypothesis using constructed U.S. dollar equilibrium exchange rate misalignments over the post-bretton woods period

This paper investigates the PPP-hypothesis over the post-Bretton Woods period using a representation of the equilibrium exchange rate (EER) that is an alternative to the real exchange rate. The results provide evidence in support of the relative-PPP hypothesis over the current period of floating exchange rates (1974–2005); while stronger evidence is found for the post-Plaza Accord period (1986–2005). EERs based on export price indexes (EPI) and constructed traded goods price indexes (TPI) best demonstrate the mean reverting behavior of the spot exchange rate as opposed to those EERs based on CPI, PPI, or the GDP-deflator. This mean reverting behavior is slightly improved if one takes international interest rate differentials into account; however EERs extended by productivity differentials do not indicate any improvements over the base model. Over the post-Plaza Accord period average half-lives of less than 1 year are reported using TPI-based EERs, adjusted by interest rate differentials. For large misalignments, we find probabilities that the spot exchange rate will converge towards the constructed CPI-based equilibrium exchange rate of up to 80%. Lastly, over the post-Plaza Accord period, the TPI-based EERs are able to statistically significantly outperform the pure random walk at short-term forecast horizons of less than 1 year for some spot exchange rates.     

国债投资的利率风险免疫研究

亚洲金融危机后，我国国债发行和交易利率逐步下降，国债投资收益率也随之下降。但是，目前我国的宏观经济面临新一轮过热的压力，中央银行也面临提高利率的压力，也极大地增加了国债投资的利率风险。本文从利率期限结构承受线性冲击和非线性冲击以及随机利率期限结构条件下，利用免疫理论研究如何防范国债投资的利率风险。     

What's Unique About the Federal Funds Rate? Evidence from a Spectral Perspective*

This paper compares the behaviour of the effective federal funds rate to 10 US interest rates with maturities ranging from overnight to 10 years. Using spectral estimation methods, we identified idiosyncratic shocks to the funds rate and provided evidence on their impact on other rates at various frequencies. Our results suggest that, while all of the interest rates examined have common shocks at low frequencies, the federal funds rate contains some unique information at high frequency, although this information appears to be relevant only at the short end of the term structure. In turn, these results are open to various alternative interpretations.     

Persistent deficits and the market value of government debt

This paper investigates whether postwar Canadian public financial policy satisfies a borrowing constraint. Direct tests of the present-value relation suggested by this constraint shed light on the sustainability of current policy. We examine monthly data on Canadian federal government finances using tests for cointegration. The finding is that the joint behaviour of real debt and real surpluses is inconsistent with intertemporal budget balance for the government. One interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt. Alternatively, bondholders may expect the government to finance future interest payments from a source other than primary surpluses, e.g. the sale of physical assets.     

Budget deficits and real interest rates: a regime-switching reflection on Ricardian Equivalence

This paper investigates the relevance of the Ricardian Equivalence theorem for the relationship between the budget deficit and real interest rate. In contrast to the existing literature, we focus on regime-change over a long study period and consider nonlinearities. Using a Markov regime-switching model applied to two centuries of annual data, we find evidence that the US economy switches between a Ricardian Equivalence regime, characterized by an insignificant relationship between the adjusted primary budget deficit and real long-term interest rate, and a regime characterized by the traditional view of a positive relationship. We also find evidence that the transition probabilities between regimes are time-varying insofar as a weaker level of economic activity, a lower real interest rate differential between the US and abroad, or higher national debts, is associated with a weaker relationship between budget deficits and interest rates.     

Inflation illusion and the Taylor principle: An experimental study

We develop a simple experimental setting to evaluate the role of the Taylor principle, which holds that the nominal interest rate has to respond more than one-for-one to fluctuations in the inflation rate to exert a stabilizing effect. In our setting, the average inflation rate fluctuates around the inflation target if the computerized central bank obeys the Taylor principle. If the Taylor principle is violated, the average inflation rate persistently deviates from the target. These deviations from the target are less pronounced, if inflation rates cannot be as readily observed as nominal interest rates. This result is consistent with the interpretation that subjects underestimate the influence of inflation on the real return to savings if the inflation rate is only observed ex post.     

ESTIMATING FISCAL LIMITS: THE CASE OF GREECE

This paper uses Bayesian methods to estimate a real business cycle model that allows for interactions among fiscal policy instruments, the stochastic ‘fiscal limit’ and sovereign default. Using the particle filter to perform likelihood‐based inference, we estimate the full nonlinear model with post‐EMU data until 2010:Q4. We find that (i) the probability of default on Greek debt was in the range of 5–10% in 2010:Q4 and (ii) the 2011 surge in the Greek real interest rate is within model forecast bands. The results suggest that a nonlinear rational expectations environment can account for the Greek interest rate path. Copyright © 2014 John Wiley & Sons, Ltd.     

The London Business School with Gower Publishing

The Autumn Statement updated the government's spending plans and its forecast from those announced in the Budget in March. On both counts there is very little difference between the Treasury view and our own forecast released in October. The Treasury supports our projection that output and demand will decelerate in 1989, that inflation will peak in the first half of the year at about 7 per cent and fall back to 5 per cent by the end of the year and that the deficit on the current account of the balance of payments will narrow only marginally over the next 12 months. On public spending in 1989–90, our October forecast was close to the unchanged official figures. It was clear to us - though not to most City commentators - that savings on unemployment benefit, debt interest and elsewhere would enable greater spending on programmes within an unchanged planning total. In later years the government has upped its expenditure plans from those announced a year ago, as we had assumed it would. As a result, the Autumn Statement projects significant increases in real public spending from now on. We show that, under a more appropriate inflation forecast, public spending rises nearly 2 per cent next year but falls back in 1990–92. Finally we argue that, unless the Chancellor decides to run an even larger PSDR (public sector debt repayment) than the £12bn built into our forecast - and the Autumn Statement forecast assumes a PSDR in 1989–90 similar to the expected outturn in 1988–9 of £10bn - the scope for tax cuts remains intact.     

Unconventional monetary policy and the stock market’s reaction to Federal Reserve policy actions

We examine the change in the effect of Federal Reserve’s policy actions on stock returns after the Fed started to use unconventional policy actions. We find that the response of stock returns to monetary policy actions are almost seven times higher after the federal funds rate hit the zero lower bound. We conduct additional analysis to examine the underlying causes of the increase in the impact of monetary policy actions of stock returns. We show that investors rebalance their portfolios towards equity after selling Treasury securities to the Federal Reserve during large scale asset purchases.     

SALES,INVENTORIES AND REAL INTEREST RATES: A CENTURY OF STYLIZED FACTS

We use Bayesian time‐varying parameter structural vector autoregressions with stochastic volatility to investigate changes in reduced‐form and structural correlations between inventories and either sales growth or the real interest rate in the USA during both the inter‐war and post‐World War II periods. We identify four structural shocks by combining a single long‐run restriction to identify a permanent output shock with three sign restrictions to identify demand‐ and supply‐side transitory shocks. We show that during both the inter‐war and post‐war periods the structural correlation between inventories and real interest rate conditional on identified interest rate shocks is systematically positive; the reduced‐form correlation between the two series is positive during the post‐war period, but in line with the predictions of theory it is robustly negative during the inter‐war era; during that era the correlations between inventories and either of the two other series exhibit a remarkably strong co‐movement with output at business cycle frequencies. Copyright © 2014 John Wiley & Sons, Ltd.