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This paper extends the work of Barro and Gordon (1983) to general linear models with rational expectations. We examine the question whether the optimal policy rule, i.e. the one that a government which could pre-commit itself would use, can be sustained as a consistent rule in the sense defined...
Persistent link: https://www.econbiz.de/10005504552
Dynamic inconsistency provides a theoretical basis for discussions of policy credibility: when the government cannot commit its future policies, the incentive to deviate from the 'optimal' plan renders it incredible. We derive the best policy in the absence of precommitment as the feedback Nash...
Persistent link: https://www.econbiz.de/10005504772
From 2004 to 2006, the FOMC raised the target federal funds rate by 4.25 percentage points, yet long-maturity yields and forward rates fell. We consider several possible explanations for this "conundrum." The most likely, in our view, is a fall in the term premium, probably associated with some...
Persistent link: https://www.econbiz.de/10005513067
Persistent link: https://www.econbiz.de/10005522062
Persistent link: https://www.econbiz.de/10005478250
Various popular exchange rate models (a standard monetary model, a portfolio balance model, and sticky-price models) are estimated and evaluated using U.S.-Canadian data for the 1970s. Nonnested hypothesis tests demonstrate that none are correctly specified. The data suggest: 1) the exchange...
Persistent link: https://www.econbiz.de/10005490212
We provide a new interpretation of the statistical relation between the trade balance and the terms of trade. This relation includes the J-curve, the tendency for trade balances to be negatively correlated with contemporaneous movements in the terms of trade, positively correlated with lagged...
Persistent link: https://www.econbiz.de/10005498960
Persistent link: https://www.econbiz.de/10005444931
We use prices of equity index options to quantify the impact of extreme events on asset returns. We define extreme events as departures from normality of the log of the pricing kernel and summarize their impact with high-order cumulants: skewness, kurtosis, and so on. We show that high-order...
Persistent link: https://www.econbiz.de/10004976797
We inject aggregate uncertainty - risk and ambiguity - into an otherwise standard business cycle model and describe its consequences. We find that increases in uncertainty generally reduce consumption, but they do not account, in this model, for either the magnitude or the persistence of the...
Persistent link: https://www.econbiz.de/10011265740