Security markets and the information content of monetary policy turning points

Substantial evidence shows that a significant relationship exists between Federal Reserve monetary policy signals and subsequent security returns. Recent evidence, however, suggests that Fed rate changes do not signal shifts in monetary policy and therefore have no real policy significance. In this study, we investigate whether certain Fed signals, characterized as turning points in the monetary cycle, have real policy significance. Our evidence suggests that the Fed's signal that a turning point is occurring is unambiguous, predicts a substantial shift in Fed monetary policy, and provides costless and meaningful information about future security market returns.     

Dynamics of the federal funds target rate: a nonstationary discrete choice approach

We apply a discrete choice approach to model the empirical behaviour of the Federal Reserve in changing the federal funds target rate, the benchmark of short‐term market interest rates in the US. Our methods allow the explanatory variables to be nonstationary as well as stationary. This feature is particularly useful in the present application as many economic fundamentals that are monitored by the Fed and are believed to affect decisions to adjust interest rate targets display some nonstationarity over time. The chosen model successfully predicts the majority of the target rate changes during the time period considered (1994–2001) and helps to explain strings of similar intervention decisions by the Fed. Based on the model‐implied optimal interest rate, our findings suggest that there is a lag in the Fed's reaction to economic shocks during this period. Copyright © 2004 John Wiley & Sons, Ltd.     

An explanation of why shareholders' losses are so large after drug recalls

Recent studies show firms suffering drug recalls experience security losses many times larger than any reasonable measure of their direct cost. We discover that the implied standard deviation of stock returns from the Black-Scholes option pricing model significantly increases after a drug recall. The implied standard deviation provides a good proxy for the stock's ex ante beta. The higher systematic risk after a product recall must raise the discount rate used by investors. After a recall, stock prices are reduced in line with the lower expected future earnings and are further reduced because of a higher discount rate.     

Liberal Reformism and Declining Capital Formation in Hungary: The Developing Capitalist Sector Is Its Only Frontier But This Threatens the Party Dictatorship

Abstract . Of countries noted for having an Eastern type of economic system, Hungary is commonly touted for the successful, market-type reforms applied to the management of its economy. The commonly held notion that these reforms have been successful is challenged. It is argued that the reforms have never been implemented as was intended, and this has consequently resulted in macro and microeconomic planning policy to be administered in a varying fashion; also that the new direction in planning policy is seeking to implement fundamental changes regarding the formation and growth of private eriteprise a response to the problems facing Hungary's State-owned sector. This development is noted to be causing profound changes in Hungary's economy, while also having a disequilibrating effect on the composition of classes in Hungarian society.     

China's Interest Rate Pass‐through to Commercial Banks Before and After Interest Rate Liberalisation

On 23 October 2015, the People's Bank of China (PBoC) completed the process of interest rate liberalisation. This study examines China's interest rate pass‐through to the lending rate of commercial banks before and after interest rate liberalisation. Based on data from Q3, 2007 to Q2, 2016, the study shows that the interest rate pass‐through from policy rate to lending rate, which was effective before October 2015, lost effectiveness thereafter. PBoC interventions, the ‘Impossible Trinity’ theory and institutional factors may contribute to this ineffectiveness of the policy rate pass‐through, which may also be related to the higher premium for risk required by banks and to the worsening of their financial condition. The study also offers policy advice in response to the declining effectiveness of China's interest rate pass‐through.     

Major liquidity drain may fuel bond market vulnerabilities

• ? It is plausible that cross‐border bond purchases will average
  • ? It is plausible that cross‐border bond purchases will average $0.5trn in 2018 and 2019, a dramatic fall from $1.2trn in 2017, driven mainly by reductions in European and US purchases. This will exacerbate upward pressure on bond yields over and above those associated with traditional macroeconomic drivers. The US bond market (and the dollar) are particularly vulnerable .
  • ? This article is part of a long‐term research project, whose intricate analysis of global fixed income flows has revealed strong implications for global bond valuations that could be inconsistent with consensus expectations for the global economy.
  • ? The termination of net purchases under the ECB's asset purchase programme (APP) will have important implications for global bond markets, which may be larger than those associated with the end of the Fed's QE programme. The unwind will prompt a reversal in European investors' aggressive rotation of portfolios from domestic to foreign fixed income securities and other asset classes. This could reduce cross‐border purchases by European investors by €200bn per year.
  • ? US investors are also expected to buy fewer foreign bonds as they are likely to have to absorb an increase in the supply of domestic bonds because of (i) a larger fiscal deficit; (ii) the Fed's portfolio unwinding; (iii) corporate sector liquidation of holdings abroad; and (iv) greater financial sector issuance tied to household re‐leveraging.
  • ? Emerging markets' (EM) purchases of foreign bonds are expected to continue to be subdued in the short‐term after recent steep declines. Our baseline view is that, on the back of the return of capital flows into emerging markets, EM purchases of advanced market securities will bounce back but not by enough to offset the retrenchment of American and European investors. However, the risks to the downside are considerable given shifting global policy developments.
       

Revealing the preferences of the US Federal Reserve

We use Bayesian methods to estimate changes in US post‐war monetary policy in the Smets and Wouters model. We perform the estimations by allowing for a break in monetary policy at the time of Volcker's appointment as chairman. This enables us to capture changes in the monetary policy regime introduced by Volcker during the Volcker–Greenspan period. We find support for the assumption that monetary policy in the Volcker–Greenspan period performed optimally under commitment. Our estimation strategy allows us to estimate the preferences of the US Federal Reserve in the Volcker–Greenspan period, where the main objective of policy appears to be inflation, followed by interest rate stabilization, output growth and interest rate smoothing. We find that the Great Moderation of output growth is explained by a combination of two factors: the decrease in the volatility of the structural shocks and the improved monetary policy conduct. Inflation Stabilization, however, is mainly due to the change in monetary policy that took place at the beginning of Volcker's mandate. Copyright © 2010 John Wiley & Sons, Ltd.     

Nonlinearity in the Fed's monetary policy rule

This paper investigates the nature of nonlinearities in the monetary policy rule of the US Federal Reserve (Fed) using the flexible approach to nonlinear inference. We find that while there is significant evidence of nonlinearity for the period to 1979, there is little such evidence for the subsequent period. Possible asymmetries in the Fed's reactions to inflation deviations from target and the output gap in the 1960s and 1970s may tell part of the story, but do not capture the entire nature of the nonlinearity. The inclusion of the interaction between inflation deviations and the output gap, as recently proposed, appears to characterize the nonlinear policy rule more adequately. Copyright © 2005 John Wiley & Sons, Ltd.     

The optimality of (s,S) inventory policies in the infinite period model*

Summary The infinite period stationary inventory model is considered. There is a constant lead time, a nonnegative set-up cost, a linear purchase cost, a holding and shortage cost function, a fixed discount factor β, 0 < β < 1, and total backlogging of unfilled demand. Both the total discounted cost (β < 1) and the average cost (β= 1) criteria are considered. Under the assumption that the negatives of the one period holding and shortage costs are unimodal, a unified proof of the existence of an optimal (s.S) policy is given. As a by-product of the proof upper and lower bounds on the optimal values of s and S are found. New results simplify the algorithm of Veinott and Wagner for finding an optimal (s, S) policy for the case β< 1. Further it is shown that the conditions imposed on the one period holding and shortage costs can be weakened slightly.     

Multinational Corporations and Culture in Liberia

The proportion of multinational corporations (MCs) in a developing country (DC) has little to do with the degree of corruption of local culture that takes place. Rather, policy decisions taken by governments of DCs determine whether or not multinationals have a positive or negative impact, according to the author's research in Liberia among foreign managers, African supervisors, and Liberian workers. Even though Liberia has an “open door” policy toward MCs, very little violence has been done to Liberian culture. The reason is two-fold: 1) multinationals have maintained tight enclaves and have generally refused to integrate their values, managerial and otherwise, with those of the Liberian society; and 2) Liberian government officials have done little to generate Liberian interest in the business field or to force multinationals to play a more participative role in the society. The result has been “growth without development,” in the sense that the country's growth rate has increased over the years, but the Liberian people remain very much underdeveloped. A change of policy could bring about continued growth with development and without cultural disintegration.     

India's Evolving Economic Model:

Abstract Over the course of the past 50 years, India has developed as a stable economy. Economic policies of the Indian government have guided and shaped India into a mixed economy. Political stability has been a significant factor in this process. The United States and European economic and political systems had a significant impact on evolution of India's economic model. Financial and economic reforms since 1991 have accelerated the pace of change toward an open market economy both in its internal operations and in its linkages with the global markets. India's economic future is now promising as it moves forward on its unique path of economic policy.     

Evaluating Point and Density Forecasts of DSGE Models

This paper investigates the accuracy of forecasts from four dynamic stochastic general equilibrium (DSGE) models for inflation, output growth and the federal funds rate using a real‐time dataset synchronized with the Fed's Greenbook projections. Conditioning the model forecasts on the Greenbook nowcasts leads to forecasts that are as accurate as the Greenbook projections for output growth and the federal funds rate. Only for inflation are the model forecasts dominated by the Greenbook projections. A comparison with forecasts from Bayesian vector autoregressions shows that the economic structure of the DSGE models which is useful for the interpretation of forecasts does not lower the accuracy of forecasts. Combining forecasts of several DSGE models increases precision in comparison to individual model forecasts. Comparing density forecasts with the actual distribution of observations shows that DSGE models overestimate uncertainty around point forecasts. Copyright © 2013 John Wiley & Sons, Ltd.     

The fiscal and monetary response to COVID‐19: What the Great Depression has – and hasn't – taught us

Although some regard the New Deal of the 1930s as exemplifying an aggressive fiscal and monetary response to a severe economic crisis, the US fiscal and monetary policy responses to the COVID‐19 crisis have actually been far more substantial – and, so far, much more effective in reviving aggregate spending. Although many fear that these responses, and the large‐scale increase in bank reserves especially, must eventually cause unwanted inflation, the concurrent sharp decline in money's velocity has thus far more than offset any inflationary effects of money growth, while forward bond prices reflect a general belief that inflation will remain below 2 per cent for at least another decade. Notwithstanding the growth of the Fed's balance sheet, Fed authorities can always check inflation by sufficiently raising the interest return on bank reserves. Nonetheless, recent developments have heightened the risk of ‘fiscal dominance’ of monetary policy at some point in the future.     

A generalization that makes useful the dorfman–steiner theorem with respect to advertising

Dorfman and Steiner's theorem is trivial with respect to advertising because it deals with only one period. It simply says that a firm should stop with that volume of advertising at which an additional dollar of advertising just produces an additional dollar of net revenue. This note generalizes the theorem to the meaningful multi-period situation in which the effect of advertising is lagged. The optimizing decision rule is to advertise up to the point at which f′(A_t) = 1 - bd, where A stands for advertising, b for the customer-rentention factor, and d for the cost-of capital discount factor.     

An Incomes Policy for the Professions: the Dutch Experience

Abstract . In 1951 the United States began moving toward an incomes policy, an attempt to end postwar wage and price inflation by linking changes in these prices to gains in productivity. Other countries later followed suit; some countries had already adopted wage and price control policies. The Netherlands moved toward an incomes policy immediately after World War II. Initially, the Dutch program involved wages only, but in the 1970s it became an accepted principle that private professional income should be comparable with the salaries of government officials and civil servants with comparable training and responsibilities. In the Netherlands (as in the United States and, before medicine was socialized, the United Kingdom) health professionals operate on a fee-for service basis and their incomes escalated as a result of both inflation and monopoly power. So they were subjected to the incomes policy. The policy's effectiveness in curbing income escalation cannot be determined with certainty—reliable data are lacking. However, the evidence indicates that the policy failed to achieve its original purpose.     

China's Approach to Social Market Economics: The Chinese variant of Market Socialism Seeks to Escape from the Difficulties of Central Command Planning

Abstract . The paradigm of a social market economy provides a rational basis for resolving structural socioeconomic changes, as presently evidenced in the People's Republic of China. China's approach to socioeconomic change, labeled as “Socialism with Chinese Characteristics,” resembles a modified version of Eucken's paradigm of a social market economy.¹ The Chinese paradigm, leaning on that of Walter Eucken, provides for a “limited”free market, which not only accommodates economic growth and change, but which also makes allowance for some degree of human, especially economic freedom, and dignity. Eucken's model is based on a sound institutional and legal framework which he considered to be essential for a viable modern market economy. China's new socioeconomic program is moving the country in this direction. It takes into account people's desire for a useful and Just socioeconomic order (however defined), characterized by stable socioeconomic and political policies and by a flexible price mechanism, to enable them to live a life in dignity, free of economic deprivation.     

National natural rates of interest and the single monetary policy in the euro area

We estimate time‐varying national natural real rates of interest (r^?) for the four largest economies of the euro area over 1999–2016. We further derive the associated national real interest rate gaps, which gauge the perceived monetary policy stance in each country. We find that the average r^? have been lower after 2008. Furthermore, national r^? were significantly negative in southern countries during the sovereign crisis. As their effective real rates soared, national rate gaps across the euro area diverged. However, a common policy stance has been restored since 2014 as the European Central Bank's unconventional programs gathered pace.     

A time series analysis of real wages,consumption and asset returns

This paper re-examines whether the time series properties of aggregate consumption, real wages, and asset returns can be explained by a neoclassical model. Previous empirical rejections of the model have suggested that the optimal labour contract model might be appropriate for understanding the time series properties of the real wage rate and consumption. We show that an optimal contract model restricts the long-run relation of the real wage rate and consumption. We exploit this long-run restriction (cointegration restriction) for estimating and testing the model, using Ogaki and Park's (1989) cointegration approach. This long-run restriction involves a parameter that we call the long-run intertemporal elasticity of substitution (IES) for non-durable consumption but does not involve the IES for leisure. This allows us to estimate the long-run IES for non-durable consumption from a cointegrating regression. Tests for the null of cointegration do not reject our model. As a further analysis, our estimates of the long-run IES for non-durable consumption are used to estimate the discount factor and a coefficient of time-nonseparability using Hansen's (1982) Generalized Method of Moments. We form a specification test for our model à la Hausman (1978) from these two steps. This specification test does not reject our model. © 1996 John Wiley & Sons, Ltd.     

Monetary Targets and the World Economy: A Progress Report

The recent changes in the value of the dollar and the talk of an interest rate ‘war’ demonstrate again that the world finds it difficult to cope with rapid exchange rate movements. In some ways the experience - and the reactions to it - are similar to the events of 1978. As now, the world was in a recession (though on a milder scale) and there were fears that exchange rate problems would obstruct economic recovery. The main difference is that in 1978 it was the strength of the Deutschmark which caused concern whereas this time the problems are associated with the rise in the value of the dollar. In a Briefing Paper in Economic Outlook, February 1978, ‘Monetary Targets and the World Economy’ we suggested that the problem arose from inconsistencies between national monetary policies and exchange rate objectives. In general, countries dislike exchange rate changes - in either direction - and there were problems because countries would not accept the exchange rate consequences of their own or other countries' monetary policies. We estimated the required monetary policies for stable exchange rates and suggested specific national monetary targets for 1978 which would at least move the world economy towards consistent monetary policies. In this Economic Viewpoint we return to those ideas. We consider what happened in 1978 and we also revise the underlying monetary rules. More recent experience suggests that although there has been some progress towards the convergence of monetary policies there will continue to be trend changes in exchange rates. It is also clear that there will be short-term fluctuations around these trends. We believe that greater convergence of monetary policies would be desirable but failing that it is important that countries should avoid abrupt changes in monetary policy. It is also important that countries should become accustomed to exchange rate changes. They should direct monetary policy towards their objectives for inflation and should not be diverted from it by temporary or permanent changes in their exchange rates.     

Sunken Cities: Climate Change,Urban Futures and the Imagination of Submergence

Climate change presents multiple challenges to cities—not only in terms of the resilience and sustainability of the urban fabric, but also in relation to how urban inhabitants imagine they might adapt to a future transformed environment. This article explores imaginative modes of thinking in relation to future cities and climate change, focusing on representations of urban drowning or submergence. It considers, in turn, climate‐change fictions—from J.G. Ballard's 1962 novel The Drowned World to Paulo Bacigalupi's The Drowned Cities, published in 2012; visual representations from Gustave Doré's The New Zealander in 1872 to Alexis Rockman's 2004 Manifest Destiny; and architectural conjecture, from Wolf Hilbertz's Autopia Ampere project from 1970 onwards to CRAB Studio's Soak City in 2009. The article draws out how these imaginaries intersect with theoretical understandings of science fiction and ecology, contending that an emphasis on multiple imaginaries of climate change is critical to expanding the narrow range of possibilities that currently characterize the literature on cities and climate change. Imaginative texts, images and designs mutually inform each other to encourage holistic ways of approaching how we think about the prospect of urban submergence and to incubate radical responses to it.