Financial Variables and the Simulated Out-of-Sample Forecastability of U.S. Output Growth Since 1985: An Encompassing Approach

We reconsider the out-of-sample forecasting ability of a large number of financial variables with respect to real output growth over the 1985:1–1999:4 period. We show that models including financial variables display almost no forecasting ability relative to an autoregressive benchmark model over this period according to a mean squared forecast error metric. However, tests based on forecast encompassing indicate that many financial variables do, in fact, contain information that is useful for forecasting real output growth over the 1985:1–1999:4 out-of-sample period. Our results suggest that the extant literature exaggerates the demise of the forecasting power of financial variables with respect to real activity since the mid-1980s.     

THE FINANCIAL AND TAX EFFECTS OF MONETARY POLICY ON INTEREST RATES

Standard analysis of monetary policy effects on interest rates in terms of liquidity, income, and expectations effects is incomplete. After a change in monetary policy, substitution among securities will increase as time elapses and so reduce or eliminate financial effects caused by short-run financial market segmentation. Also, the standard expectations effect omits the transfer of income tax liability on that part of the interest payment representing a return of real capital. So a 1 percentage point increase in the expected inflation rate should increase the nominal interest rate by 1/(1 —τ) percentage points, τ being the marginal tax rate.     

ECONOMIES OF SCALE IN BANKING,INDETERMINACY, AND MONETARY POLICY

This paper investigates economies of scale (ES) in financial intermediation as a source of equilibrium indeterminacy. Financial intermediation is embedded into a standard flexible‐price monetary model, and provides deposits (inside money) that substitute with currency to purchase consumption. The results indicate that equilibrium indeterminacy does not depend on a large degree of ES in intermediation nor a large intermediation sector, but on monetary policy and the determination of nominal interest rates. Monetary policies not targeting nominal rates allow for indeterminacy to arise for any positive degree of ES, while policies targeting nominal rates eliminate indeterminacy for all degrees of ES. (JEL C62, E44, E52)     

Structural Decomposition of Exchange Rate Shocks in Pakistan: An Empirical Investigation using SVAR Methodology

This study is an attempt to decompose nominal and real exchange rate movements in Pakistan into components induced by real and nominal shocks. Using the Blanchard and Quah (1989), famously known as B-Q, methodology for the period 2000:1–2009:12, the study finds that real shocks affect both nominal and real exchange rate. Similarly, the nominal shocks have a permanent effect on nominal exchange rate but have temporary effect on real exchange rate. Moreover, speed of convergence is different between the two rates affected by the same shock. These results put forward that nominal devaluation is not followed by real devaluation and resultantly will not improve trade balance situation. The policy makers, therefore, need to be careful while taking any decision regarding nominal devaluation as it may also lead to worsening of, instead of improvement in, trade balance.     

THE RELATIVE STICKINESS OF WAGES AND PRICES

While many modern business cycle theories posit the existence of nominal wage and/or output price stickiness, their relative importance remains an unsettled issue. Using a structural VAR model, this paper exploits evidence on the behavior of real wages to assess the relative importance of these two sources of stickiness. The empirical results suggest that a positive shock to aggregate demand causes a significant temporary fall in real wages. This is taken as evidence that sticky wages have played a more important role than sticky prices in transmitting aggregate demand shocks to real economic activity in the post-war U.S. (JEL E32)     

REAL VERSUS NOMINAL SPECIFICATION OF THE DEMAND FOR MONEY FUNCTION

This paper re-examines the issue of real versus nominal specification of the money demand function and presents evidence in favor of the nominal specification. A series of experiments with U.S. quarterly data show that the money demand function specified in nominal terms is more stable and generates more accurate forecasts than that specified in real terms. "The case of the missing money" also is discussed.     

ACROSS TIME AND REGIMES: 212 YEARS OF THE US‐UK REAL EXCHANGE RATE

The behavior of the US‐UK real exchange rate over the period 1794–2005 is examined. This series includes five intervals of floating nominal exchange rates and four fixed exchange rate regime periods. A consistent pattern of higher real exchange rate volatility under floating nominal rates is shown. Over time, real exchange rate movements have increasingly been driven by movements in the nominal exchange rate rather than relative prices. The persistence of the real exchange rate has been considerably higher in the postwar period. (JEL F31, N20)     

OPTIMAL MONETARY POLICY AND IMPERFECT FINANCIAL MARKETS: A CASE FOR NEGATIVE NOMINAL INTEREST RATES?

This article studies optimal monetary policy in a model with credit frictions and money demand. We show that augmenting a standard New Keynesian model with money demand and financial frictions generates a mechanism that, in equilibrium, gives rise to optimal negative nominal interest rates. In addition, we find that the tighter credit markets are, the lower the optimal nominal policy interest rate and the more likely it is to be negative. Quantitatively, when credit constraints are binding, a standard calibration of the model generates an optimal nominal policy interest rate that is roughly ?4% annually. (JEL E31, E41, E43, E44, E52, E58)     

FINANCIAL INNOVATION, PRICE SMOOTHING, AND MONETARY POLICY

This paper examines an unregulated transaction services market that is subject to financial innovation in an economy that experiences aggregate supply and demand shocks. The availability of this unregulated market to transactors smooths the price response to these shocks. However, financial innovations act as money supply shocks that increase price disturbances. If there is persistence in the real aggregate supply shocks and in the rate of adoption of financial innovations, then the central bank can forecast some portion of the changes in transaction requirements that accompany these shocks and damp the residual variation in prices by accommodating these anticipated needs.     

WAGE DIFFERENTIALS ACROSS LABOR MARKETS AND WORKERS: DOES COST OF LIVING MATTER?

Wage differential studies rarely account for interarea differences in cost of living, owing both to data limitations and theoretical ambiguity. This study develops a price index for 185 metropolitan areas comprising about 70% of the U.S. labor force. Current Population Survey data for 1985–95 and data on site-specific amenities are used to estimate earnings differentials based on nominal wages, wages fully adjusted for measured cost of living, and a simple approximation of "real" wages with partial adjustment for price-level differences. Dispersion in approximate real wages across 185 labor markets and differentials by region and city size are substantially lower than dispersion in nominal or full adjustment wages. Estimates of racial and ethnic differentials display moderate sensitivity to choice of a wage measure, whereas other standard differentials do not. Both nominal wages and wages fully adjusted for cost of living may provide misleading estimates of real wage differentials. Absent data on interarea prices and amenities, researchers should include detailed controls for region and city size in nominal wage equations. ( JEL J31, R23)     

THE ROLE OF NATIONAL DEBTS IN THE DETERMINATION OF THE YEN‐DOLLAR EXCHANGE RATE

An intertemporal optimization model is developed to examine the determinants of the long‐run nominal yen‐dollar exchange rate in the presence of national debts. The model is tested empirically using data from Japan and the United States. The proposed theoretical specification is well supported by the data and shows that relative national debts as well as monetary and financial factors may play a significant role in the determination of the long‐run nominal exchange rate between the yen and the dollar. (JEL F31, G11, G15)     

CYCLICAL COMOVEMENTS IN INDUSTRIAL LABOR AND PRODUCT MARKETS: THEORY AND EVIDENCE

We establish the theoretical connection between industrial labor and product markets within the contractual wage-rigidity new Keynesian explanation of business cycles. We estimate time-series and cross-sectional regressions for 28 private two-digit (S.I.C.) industries and find: (i) greater uncertainty is associated with upward flexibility of the nominal wage and moderates the countercyclical response of the real wage to aggregate demand shocks; (ii) an upwardly rigid nominal wage response to energy price shocks reduces the real contractionary effects of these shocks; (Hi) downwardly inflexible nominal wages are associated with downwardly rigid prices in response to productivity shocks.     

THE IMPACT OF MONEY ON SHORT-TERM INTEREST RATES

This study reviews empirical evidence from four research methods related to the impact of money on short-term nominal rates. The studies consistently fail to find evidence supporting the much hypothesized short-term, negative relationship between money and nominal rates since at least April 1975. Reasons for the absence of a negative relationship include the tendency of financial markets to anticipate corrective action by the Fed whenever Ml deviates from targeted growth ranges and a rapid adjustment of inflationary expectations to changes in money growth.     

FEDERAL DEFICITS, MACRO-STABILIZATION GOALS, AND FEDERAL RESERVE BEHAVIOR

The effects of federal deficits on Federal Reserve behavior as proxied by changes in the growth rate of the monetary base are analyzed in this study. Multivariate Granger-causality tests are employed in the analysis. The deficit measure that is the focus of the analysis is the change in the real market value of privately held federal debt. The tests indicate that the deficit Granger-causes the monetary base. Additionally, concerns for financial market stability, real output, and exchange rate movements in the period of floating rates also affect Federal Reserve behavior.     

FINANCIAL MARKET VARIABLES DO NOT PREDICT REAL ACTIVITY

The past decade has seen an extensive empirical reassessment of the information content of financial market variables sensitive to monetary policy. Particularly provocative are recent papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates. This paper reviews important methodological pitfalls in these studies. We then show that none of the commonly employed measures of monetary policy contain incremental information useful in forecasting real economic activity. Two conclusions are possible. Either monetary policy innovations have no significant real effects, or we (collectively) have failed in our efforts to measure monetary policy. ( JEL E52)     

STOCHASTIC INFLATION AND THE OPTIMAL POLICY OF PRICE ADJUSTMENT

This paper analyzes the optimal policy of price adjustment for a monopolistic firm in the presence of stochastic inflation. It shows that an increase in the expected rate of inflation or in the cost of price adjustment leads to an increase in the initial real price and a decrease in the terminal real price in each period with a fixed nominal price. It also shows that the effects of increased riskiness of inflation are ambiguous.     

False Economy: Financialization,Crises and Socio‐Economic Polarisation

Over the last few decades, a range of profound and widely recognised changes have affected the global economy and global labour markets, driven by a growing imbalance of power between financier dominated capital and labour, a scenario facilitated by the extended availability of labour due to the process of globalisation of itself and, to some degree, by labour supplanting technologies (Standing, 2011, Brynjolfsson and McAfee, 2011). However, arguably, what is less clearly understood is that the financial sector's role in this overall process and, indeed, increasing power rests to no small extent on its capacity to ‘conjure’ wealth from credit creation and, often, opaque practices that are highly abstracted and/or only tenuously connected to real economic activity (Korten, 2009). This shift, and the latter in particular, it is argued, in addition to producing a sequence of financial crises culminating (thus far) with the crash and recession of 2007/8, has fundamental implications for the future shape of the global economy, labour markets and, as a consequence, the life chances and opportunities that potentially confront succeeding generations, assuming that trends continue on their present course. This piece considers these issues with particular emphasis on their implications for the UK and its citizens.     

上海国际金融中心建设与产业结构转型升级的互动机制研究

成熟国际金融中心的发展历程证明,国际金融中心的成长必然伴随着当地产业结构的高端化。这反映了二者之间相互促进、相互支撑的逻辑关系和内在要求,也是国际金融中心依托并服务于实体经济的根本表现。然而从上海国际金融中心建设和产业发展的实践来看,二者本质上仍然处于一种外生联系下的多重不匹配状态,从而一定程度上形成了对彼此的制约。未来深化完善二者的良性互动机制,应成为上海实践创新驱动、转型发展以及迈向全球城市目标的战略选择。     

Finances of American Unions in the 1970s

The aggregate finances of American unions in the 1970s are examined and compared with their state in 1962. We find that unions’ real financial wealth declined in the 1970s to the levels of the previous decade, while their real income grew at a much slower rate than during the 1960s. These results suggest that unions may face financial as well as operational problems in the future.     

NOMINAL COSTS AND THE DEMAND FOR REAL TRANSACTIONS BALANCES

The standard specification of constant real transactions costs assumes that over the sample period transactions costs move in lock-step with the GNP deflator; our model assumes that transactions costs move negligibly compared to the GNP deflator. That is, nominal transactions costs are assumed constant here rather than real transactions costs as in other estimates of money demand. We find with this nominal-transactions-cost specification that the real money demand function is more stable in terms of the stability of the coefficients and the accuracy of out of sample predictions than indicated by earlier studies.