The monetary policy dilemma: Will interest rates have to rise?

UK interest rates are now at their lowest level for more than two decades, and the government is hoping that interest rates can be kept at a low and sustainable level comparable to the 1960s. Indeed, some commentators are calling for still lower interest rates to offset the risk that the £12bn tax increases and cuts in government spending that will come into effect in the next financial year will lead to stagnant consumer spending and a stalled recovery. Against this must be weighed the risk that the recent very good run of inflation figures will prove temporary. Both headline and underlying inflation will be pushed up by indirect tax increases and there is the possibility that wages will follow too, as employees seek to maintain their living standards in a tightening labour market. That risk would point to a much more cautious monetary policy stance and the possibility that the government may need to raise rates from their present level if it is to achieve its inflation objective. The Chancellor faces a clear dilemma. In this Viewpoint, we assess the evidence available to guide him in his decisions and draw out the implications for the future path of interest rates.     

A Practical Framework for the Analysis of Social Security Reform

‘When I use a word’, Humpty Dumpty said in a rather scornful tone, ‘it means just what I choose it lo mean — neither more nor less’. (Through the Looking Glass, Ch. 6)     

THE DETERMINANTS OF ILLEGAL DRUG USE

An extensive set of self-reported survey data exists on illegal drug use. The survey data show that drug use is quite frequent among the younger adult population, relatively infrequent among those of high-school age, and rare among middle-aged and older adults. Drug use varies by occupational category in ways that are difficult to rationalize. This study utilizes a model in which an individual's time is allocated among labor, non-drug consumption, leisure, and drug use, where the individual is cognizant of the effect of drug use on his wages. The study analyzes comparative static results and then uses data from the National Longitudinal Survey of Youth to estimate a probit model of the individual decision to use drugs. The findings of the study are that non-economic factors dominate the decision for both harder drugs and drugs more broadly defined. One must consider this finding tentative, however, since usable drug price data were not available.     

水资源管理制度改革、农业生产与反贫困

根据我们在黄河流域四个大型灌区的实证研究发现，传统上村级的集体水资源管理制度正在逐渐被用水协会和承包管理所代替。由于改革具有很明显的自上而下的特征。因而很多改革流于形式；而只有那些建立了有效节水激励机制的水资源管理制度才能实现节水的目标。我们进一步的实证研究表明。具有节水激励机制的水资源管理制度的改革会导致小麦单产的降低，但不会对玉米和水稻的单产以及农民收入产生显著影响，而且贫困状况也不会因此而恶化。     

水资源管理制度改革、农业生产与反贫困

根据我们在黄河流域四个大型灌区的实证研究发现,传统上村级的集体水资源管理制度正在逐渐被用水协会和承包管理所代替.由于改革具有很明显的自上而下的特征,因而很多改革流于形式;而只有那些建立了有效节水激励机制的水资源管理制度才能实现节水的目标.我们进一步的实证研究表明,具有节水激励机制的水资源管理制度的改革会导致小麦单产的降低,但下会对玉米和水稻的单产以及农民收入产生显著影响,而且贫困状况也不会因此而恶化.     

Evidence on the Timing and Determinants of Overfunded Pension Plan Termination

This paper examines the factors associated with the timing of overfunded pension plan termination.     

Trading Volume: Implications of an Intertemporal Capital Asset Pricing Model

We derive an intertemporal asset pricing model and explore its implications for trading volume and asset returns. We show that investors trade in only two portfolios: the market portfolio, and a hedging portfolio that is used to hedge the risk of changing market conditions. We empirically identify the hedging portfolio using weekly volume and returns data for U.S. stocks, and then test two of its properties implied by the theory: Its return should be an additional risk factor in explaining the cross section of asset returns, and should also be the best predictor of future market returns.     

How to Discount Cashflows with Time-Varying Expected Returns

While many studies document that the market risk premium is predictable and that betas are not constant, the dividend discount model ignores time‐varying risk premiums and betas. We develop a model to consistently value cashflows with changing risk‐free rates, predictable risk premiums, and conditional betas in the context of a conditional CAPM. Practical valuation is accomplished with an analytic term structure of discount rates, with different discount rates applied to expected cashflows at different horizons. Using constant discount rates can produce large misvaluations, which, in portfolio data, are mostly driven at short horizons by market risk premiums and at long horizons by time variation in risk‐free rates and factor loadings.     

Who Do Heterodox Economists Think They Are?1

This paper attempts to engage with the established debate on the nature of heterodox economics. However, it starts from the position that previous attempts to classify and identify heterodox economics have been biased towards a priori definition. The paper aims to inform the discussion of the nature of heterodoxy with some empirical analysis. The paper examines survey data collected from a small/medium‐sized sample of AHE members on the core concepts in economics. The paper applies factor analysis to the data. It also applies principles of biological taxonomy, and thence cluster analysis to the problem. The paper finds that within the self‐identified community of self‐identified heterodox economists there is little agreement as to whether members are pluralist, or what their attitude is to the mainstream. Indeed, there is little agreement on any core concepts or principles. The paper argues that there is little structure to heterodox economics beyond that provided by pre‐existing (or constituent) schools of thought. Based on this study, heterodox economics appears a complex web of interacting individuals and as a group is a fuzzy set. These results would lead us to question further strict distinctions between heterodox, mainstream and pluralist economists.