THE MISSING LINK BETWEEN INFLATION UNCERTAINTY AND INTEREST RATES

In the literature, there is no consensus about the direction of the effects of inflation uncertainty on interest rates. This paper states that such a result may stem from differentiation in the sources of the uncertainties and analyzes the effects of different types of inflation uncertainties on a set of interest rates for the UK within an interest rate rule framework. Three types of inflation uncertainties – impulse uncertainty, structural uncertainty and steady‐state uncertainty – are derived by using a time‐varying parameter model with a Generalized Autoregressive Conditional Heteroskedasticity specification. It is shown that the impulse uncertainty is positively and the structural uncertainty is negatively correlated with the interest rates. Moreover, these two uncertainties are important to explain short‐term interest rates for the period of inflation targeting era. However, this time, the impulse uncertainty is negatively and the structural uncertainty is positively correlated with the overnight interbank interest rates, which is consistent with the general characteristic of the inflation targeting regimes. Lastly, the evidence concerning the effect of the steady‐state inflation uncertainty on interest rates is not conclusive.     

THE IMPACT OF GOVERNMENT DEFICITS ON PERSONAL AND NATIONAL SAVING RATES

This study provides fresh evidence on the responsiveness of private consumption and, by implication, saving to government deficits. It focuses on consumption and saving from 1981 to 1989, a period during which the personal saving rate was characterized as surprisingly unresponsive to high federal budget deficits. The authors attempt to determine whether this experience is consistent with previous behavior. They also test whether this experience refutes the Ricardian Equivalence Proposition (REP), under which consumers incorporate the government's intertemporal budget constraint into their own.
The analysis involves estimating two consumer expenditure functions based on two measures of current income capable not only of explaining expenditure behavior during the postwar period but also of successfully forecasting out of sample into the 1981–1989 period. Only one model is consistent with the REP, but neither model indicates that high government deficits caused the drop in the national saving rate experienced during the 1980s. Both models predict similar short-run responses to shifts in the government deficit. The responses depend crucially on the mix of tax and expenditure changes used to achieve the deficit shift. Both consumption and saving are more responsive to changes in government expenditures on goods and services than they are to changes in taxes.     

FEDERAL BUDGET DEFICITS, MONEY, AND EXCHANGE RATES

The dollar's strength during the 1980s appears to many—particularly as reported in the financial press—to have been directly linked to the decade's large budget deficits and the subsequent increase in the stock of federal debt outstanding. The popular argument is that the budget deficit and the growth of federal government credit market demand caused U.S. interest rates to rise over that period, inducing large capital inflows from abroad to finance the deficit. According to the argument, the capital inflows caused the dollar to appreciate. Despite the argument's popularity, the empirical literature does not strongly support it. Evidence on the relationship between the federal deficit and the dollar is at best mixed.
This article reconsiders the effects of federal budget deficits on the exchange rate. The analysis involves estimating a vector autoregressive (VAR) model of exchange rates that includes monetary, fiscal, and price level variables. Within the VAR framework, impulse analysis traces the dynamic response of exchange rates to various budget deficit measures.
The analysis finds that deficits do not directly Granger cause exchange rates, but it also finds evidence of an indirect effect working through the money supply and price level. Moreover, the analysis reveals some evidence that foreign exchange markets are forward looking and react to expected budget deficits. The innovations accounting and impulse analysis also suggest a forward-looking dynamic relationship between deficits and exchange rates, but the relationship is sensitive to the ordering of the variables.     

中国金融发展与外贸关系的面板协整检验和因果分析

基于跨省面板数据,运用面板协整理论和面板因果检验方法分析了中国金融发展与对外贸易之间的关系.多种协整检验方法一致表明,金融发展与出口贸易、金融发展与进口贸易之间都存在长期均衡稳定关系;而基于面板误差修正模型的Granger因果检验则表明金融发展与对外贸易之间同时存在长、短期双向因果关系.这意味着在金融深化改革和贸易增长方式调整的特殊历史时期,保持金融和贸易政策的有效组合具有十分重要的意义.     

THE EBB AND FLOW OF FISCAL ACTIVISM

During the last quarter of the 20th Century, the conventionalwisdom prevailing in academic, political and financial circleswas definitely against government deficits. At the turn of thecentury, however, a substantial recourse to deficit spendingpractices in the United States reopened the debate on the usefulnessof countercyclical fiscal policies. This essay discusses themain contents of this debate, reviewing the contributions tovarious symposiums held at a number of U.S. Federal ReserveBanks. A comparison with the views on this issue prevailingin Europe is also provided.     

MONETARY POLICY AND LONG-TERM INTEREST RATES: A SURVEY OF EMPIRICAL LITERATURE

This paper surveys recent empirical literature on effects of monetary policy on long-term interest rates. Most studies reviewed here suggest that tightening monetary policy results in higher long-term interest rates. But available evidence suffers from conceptual and empirical problems and fails to indicate the magnitude of short-run and long-run policy effects on long rates. Also, recent studies have not investigated the possibility of shifts in recent-year effects of monetary policy on long rates. Finally, the paper offers a policy perspective on limitations of existing evidence and suggests future research on monetary policy effects on long rates.     

CONSUMER DURABLES AND THE INTEREST RATE

This paper investigates the relationship between consumption of a durable good and the interest rate. According to the standard Permanent Income Hypothesis (PIH), a rise in the interest rate is expected to decrease durables consumption, and the magnitude of the interest rate effect should meet certain restrictions. This implication of the PIH is tested using US data. Empirical results of this paper indicate that, although durables consumption is negatively correlated with the interest rate, the magnitude of the estimated effect is substantially smaller than requested by the standard theory. This suggests that the influence of monetary policy on durables expenditure may not be as large as previous authors claim. In attempts to explain the small effects of the interest rate, frictions such as adjustment costs and liquidity constraints are examined. [E21]     

THE RELATIONSHIP BETWEEN THE BLACK MARKET AND OFFICIAL EXCHANGE RATES: AN EXAMINATION OF LONG-RUN DYNAMICS IN INDIA

This study is the first to use Johansen's cointegration approach for India in the analysis of the long‐term dynamics between the black and official exchange rates for the period 1953–1993. The study also estimates the long‐run elasticity of the official rate with respect to the black market rate. As monthly data over 40 years are used, and a more robust methodology is employed, the results are likely to be more reliable as compared with the earlier work on India. The results of our study suggest that while there is a long‐term relationship between the two rates, the direction of causality is from the black rate to the official exchange rate. This is plausible in the Indian context where policy has generally lagged behind events in the black market. The hypothesis of a constant black market premium is rejected, implying that there is a mismatch between the percentage change in the official exchange rate and the percentage change in the black market rate.     

FURTHER ANALYSIS OF THE TWIN DEFICITS

In a 1989 Contemporary Policy Issues article Miller and Russek published findings of a causal relation between the fiscal deficit and the trade deficit. However, they found no overwhelming support for reverse causation between the twin deficits. The authors of the analysis here gathered annual data on U.S. federal budget deficits and net exports for 1950–1988 and deflated the nominal values by the GDP deflators to examine the causal relation based on real values. They made a distinction between structural and actual budget deficits. Instead of an arbitrary choice of lag structure, they used Hsiao (1979, 1981) minimum final prediction error criterion to determine the optimum lag lengths of the explanatory variables. The analysis reveals a unidirectional causal relation running from structural budget deficits to net exports, confirming some of Miller and Russek's findings. Contrary to Miller and Russek's conclusions, however, findings here indicate a bi-directional causal relation between actual budget deficits and net exports. These findings suggest important policy implications.