Showing papers by "Federal Reserve System published in 1984"
TL;DR: This paper developed a forecasting procedure based on a Bayesian method for estimating vector autoregressions, which is applied to 10 macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations.
Abstract: This paper develops a forecasting procedure based on a Bayesian method for estimating vector autoregressions. The procedure is applied t o 10 macroeconomic variables and is shown to improve out-of-sample forecasts relative to univariate equations. Although cross-variable responses are damped by the prior, considerable interaction among the variables is shown to be captured by the estimates We provide unconditional forecasts as of 1982:12 and 1983:3. We also describe how a model such as this can be used to make conditional projections and to analyze policy alternatives. As an example, we analyze a Congressional Budget Office forecast made in 1982: 12 Although no automatic causal interpretations arise from models like ours, they provide a detailed characterization of the dynamic statistical interdependence of a set of economic variables, information that may help in evaluating causal hypotheses without containing any such hypotheses.
1,539 citations
TL;DR: The authors surveys the literature on the specification of models of asset markets and the implications of differences in specification for the macroeconomic adjustment process, and analyzes micro-economic theory of asset demands using stochastic calculus.
Abstract: This paper is a chapter in the forthcoming Handbook of International Economics. It surveys the literature on the specification of models of asset markets and the implications of differences in specification for the macroeconomic adjustment process. Builders of portfolio balance models have generally employed "postulated" asset demand functions, rather than deriving these directly from micro foundations. The first major sec-tion of the paper lays out a postulated general specification of asset markets and summarizes the fundamental short-run results of portfolio balance models using a very basic specification of asset markets. Then,rudimentary specifications of a balance of payments equation and goods market equilibrium conditions are supplied, so that the dynamic distribution effects of the trade account under static and rational expectations with both fixed goods prices and flexible goods prices can be analyzed.The second major section of the paper surveys and analyzes microfoundation models of asset demands using stochastic calculus. The microeconomic theory of asset demands implies some but not all of the properties of the basic specification of postulated asset demands at the macrolevel. Since the conclusions of macroeconomic analysis depend crucially on the form of asset demand functions, it is important to continue to explore the implications of micro foundations for macro specification.
408 citations
TL;DR: In this article, U.S. and Canadian data were used to detect evidence of portfolio balance effect in exchange rate risk premium, and the existence of such an effect was shown to be necessary and sufficient for sterilized intervention to be a genuinely independent tool of monetary policy.
191 citations
TL;DR: In this paper, a new explanation of bank behavior during the Free Banking Era, 1837-1863, was proposed and tested using a new and detailed data set developed from state auditor reports, and the falling asset price explanation of free bank failures explains far more failures than does the wildcatting hypothesis.
147 citations
TL;DR: In this paper, the authors used available daily data on official intervention to test the joint hypotheses of perfect asset substitutability and exchange market efficiency, and the joint hypothesis was generally soundly rejected for six exchange rates over various sample periods.
103 citations
TL;DR: In this paper, the authors discuss the role of the central bank lender of last resort (LLR) in solving financial crisis and its role in monetary and central bank policy, respectively.
Abstract: The theme of this conference relates to causes and cures of debt crisis. The current international debt situation has led some analysts to suggest the possibility of a scenario whereby international debt defaults quickly lead to severe strains on domestic commercial banks. In this context, monetary and central bank policy become especially important. And in such circumstances references are often made to the central bank lender of last resort function. In considering the theme of this session - i.e., stopgap vs. permanent solutions to financial crises - the role of the lender of last resort (LLR) assumes special pertinence.
98 citations
TL;DR: The evidence presented in this article suggests that the European Monetary System has coincided with more predictable exchange rates (nominal and real) between France, Germany and Italy, but it is surprising that the conditional variance of real interest differentials between these countries does not appear to have fallen (unless the disturbances are mostly real, in which case fixed rates are suboptimal).
82 citations
TL;DR: This paper argued that the best strategy for improving economic forecasts was to build bigger, more detailed models, as the cost of computing plummeted, considerable detail was added to models and more elaborate statistical techniques became feasible.
Abstract: Thirty years ago it appeared that the best strategy for improving economic forecasts was to build bigger, more detailed models. As the cost of computing plummeted, considerable detail was added to models and more elaborate statistical techniques became feasible. Yet dissatisfaction with conventional macroeconometrics has grown steadily in recent years. One outgrowth of this dissatisfaction has been increasing interest in atheoretical forecasting techniques, which in a sense represent a return to "measurement without theory."
72 citations
TL;DR: In this paper, the relationship between the prime and money market rates is examined over the last decade to determine if the prime rate behaves more like a competitive money market rate than an oligopolistic price.
Abstract: Commercial banking's institutional setting can make one bank's profits dependent upon the pricing strategies of its rivals. In this environment, widely disseminated prime rate quotes, loan contracts with “most-favored-customer” clauses, and rule-of-thumb pricing techniques can result in prime rate outcomes that jointly maximize banks' market values. In this paper the relationship between the prime and money market rates is examined over the last decade to determine if the prime rate behaves more like a competitive money market rate than an oligopolistic price.
43 citations
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01 Jan 1984TL;DR: In this paper, the problem is formulated as a model pooling procedure (equivalent to non-recursive Kalman filtering) where a baseline quarterly model forecast is modified through add-factors or constant adjustments.
Abstract: This paper shows how monthly data and forecasts can be used in a systematic way to improve the predictive accuracy of a quarterly macroeconometric model. The problem is formulated as a model pooling procedure (equivalent to non-recursive Kalman filtering) where a baseline quarterly model forecast is modified through ‘add-factors’ or ‘constant adjustments’. The procedure ‘automatically’ constructs these adjustments in a covariance-minimizing fashion to reflect the revised expectation of the quarterly model's forecast errors, conditional on the monthly information set. Results obtained using Federal Reserve Board models indicate the potential for significant reduction in forecast error variance through application of these procedures.
31 citations
TL;DR: In this article, the authors compare interest rate and money supply rules within a rational expectations macro model that incorporates flexible prices and informational frictions, and show that when the policy authority has incomplete information about the state of the economic system, it faces a discrete choice between an interest rate peg and strict money stock control; depending on the parameters of the model, either of these policies may be optimal, given the informational constraints faced by the monetary authority.
Abstract: Returning to a topic first systematically treated by Poole (1970) in a textbook Keynesian model, this paper compares interest rate and money supply rules. Our analysis, by contrast, is conducted within a rational expectations macro model that incorporates flexible prices and informational frictions. With differential information, interest rate targets can affect the information content of market prices and real activity, but these real consequences can always be replicated by an appropriately chosen money stock rule with feedback to economic activity. However, when the policy authority has incomplete information about the state of the economic system, it faces a discrete choice between an interest rate peg and strict money stock control; Depending on the parameters of the model, either of these policies may be optimal, given the informational constraints faced by the monetary authority.
TL;DR: In this paper, the authors examine the issue of the interest rate sensitivity of commercial bank profitability at a theoretical level and attempt to measure empirically the extent to which the profitability of different size classes of banks has been affected by periods of changing interest rates since 1976.
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TL;DR: This article examined the historical accuracy of economic forecasts and found that historical accuracy was not the best predictor of future economic performance, but rather predictive of economic forecasting errors and overestimation of economic performance.
Abstract: There are two important reasons for examining the historical accuracy of economic forecasts.
TL;DR: In this article, the authors examined the effect of non-borrowed reserve-oriented operating procedures on the prediction and short-run control of the money stock and found that neither a total reserve nor a monetary base operating target would have enhanced the precision of short-term monetary control relative to a non-bank reserve operating target.
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TL;DR: The authors examines the Austrian School's contention that monetarists invariably ignore relative price and real output effects in the monetary transmission mechanism, and deals with a key misconception concerning that view; in particular, it deals with the monetarist version of the monetary mechanism as expounded by Friedman and his late-19th and 20th century American quantity theory predecessors.
Abstract: The resurgence of monetarism has been one of the more Celebrated developments in postwar macroeconomic thought. Since Milton Friedman’s influential 1956 restatement of the quantity theory of money, monetarism has become increasingly prominent in policy deliberations and academic theorizing alike. Matching this rise has been a corresponding revival of interest in the monetarist view of the monetary transmission mechanism-i.e., the mechanism or process that links money to nominal income and through which the economy adjusts to, monetary changes.This article deals with the monetarist version of the monetary mechanism as expounded by Friedman and his late-19th and 20th century American quantity theory predecessors; in particular, it deals with a key misconception concerning that view. More precisely, it examines the Austrian School’s contention that monetarists invariably ignore relative price and real output effects in the monetary mechanism. The term Austrian here of course refers to those modern followers of the monetary overinvestment business cycle theories of Ludwig von Mises and Friedrich A. Hayek. Those theories explain how monetaryinduced declines in the rate of interest from its real equilibrium level stimulate overinvestment of capital in projects that prove unsustainable once the rate returns to equilibrium.
TL;DR: In this article, it is shown that unless strong restrictions are placed on an agent's utility function, the incentive properties of truthful summary reporting about a multidimensional parameter (e.g., reporting of its first coordinate) are extremely fragile.
TL;DR: In this paper, the influence of foreign exchange constraints on output growth in the LDCs by studying the effect that these constraints have on the speed of adjustment of both investment and import activities is analyzed.
TL;DR: The authors discusses and contrasts different approaches to the construction of dynamic models containing unobservables, arguing that some analysis is easy to carry out using Dynamic Factor Analysis (DFA), a frequency domain technique, while other analysis is easier to carry on in the context of a Dynamic Multiple Indicator-Multiple Cause Model (DYMIMIC), a time domain technique.
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TL;DR: In this article, the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events is studied, and it is shown that a financial institution can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes.
Abstract: This paper studies the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events. The information structure precludes conventional insurance arrangements. However, a financial institution -- perhaps best viewed as a savings bank -- can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes, resulting in a level of expected utility higher than that achievable in simple security markets. Insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives.
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TL;DR: In this paper, the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events is studied, and it is shown that a financial institution can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes.
Abstract: This paper studies the economic role of financial institutions in economies where agents' incomes are subject to privately observable, idiosyncratic random events. The information structure precludes conventional insurance arrangements. However, a financial institution -- perhaps best viewed as a savings bank -- can provide partial insurance by generating a time pattern of deposit returns that redistributes wealth from agents with high incomes to those with low incomes, resulting in a level of expected utility higher than that achievable in simple security markets. Insurance is incomplete because the bank faces a tradeoff between provision of insurance and maintenance of private incentives.
TL;DR: In this article, the formulation and implementation of monetary policy for the period Oct. 1979 to Dec. 1983 are discussed, with particular emphasis on understanding the operating procedures of the New York Desk and the way in which operating procedures derived endogenously from the nature of the monetary policy the Fed desires to implement.
Abstract: The formulation and implementation of monetary policy is discussed for the period Oct. 1979 to Dec. 1983. Particular emphasis is placed upon understanding the operating procedures of the New York Desk. In this regard, two aspects are stressed. First, the way in which operating procedures derive endogenously from the nature of the monetary policy the Fed desires to implement. Second, the way in which the operating procedures adopted in Oct. 1979 became themselves a source of economic instability and contributed to cyclical behavior in market rates and the money supply.
TL;DR: In this article, the authors discuss the way the Fed's desire to avoid precommitment influences its use of analytical procedures for formulating policy, as well as the use of money supply targets.
Abstract: The purpose of this paper is to elucidate the way in which current institutional arrangements shape the character of monetary policy. It is emphasized that the Fed, in order to preserve its independence, formulates monetary policy in a way that prevents the formation of coalitions within the government that could threaten its independence. As a consequence, the Fed, in general, attempts to balance multiple, changing objectives. This attempt leads to the demand for "flexibility," an absence of precommitment. Much of the paper is devoted to a discussion of the way in which the Fed's desire to avoid precommitment influences its use of analytical procedures for formulating policy and its use of money supply targets.
TL;DR: It is shown that the Thursby-Schmidt specification test (T-S RESET) in a linear regression model is not robust to autocorrelated error terms.
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TL;DR: In this article, the authors argue that real spending decisions in the economy are based on the after-tax real rate, and that it is more appropriate to focus on the behaviour of this latter real rate.
Abstract: Recent years have witnessed very high and volatile interest rates. This has stirred a debate among analysts as to whether observed interest rates are high by historical standards. Some analysts, focusing on the before-tax real rate, argue that if the observed nominal interest rate is corrected for the effect of expected (or actual) inflation, the ex ante (or ex post) real rate has been very high in recent years. Other analysts, however, note that it is also important to consider the effect of taxes on the behaviour of the nominal interest rate. Since real spending decisions in the economy are based on the after-tax real rate, it is more appropriate to focus on the behaviour of this latter real rate. Proponents of this view argue that the after-tax real interest rate observed since 1980 does not appear to be too high.
TL;DR: In this article, a theoretical model was developed to study the effects of oil price changes on real income, prices, and international trade in a three region model (DCs, OPEC, LDCs).
TL;DR: This article examined the impact of bank use of the reserve carryover provision on the reserve adjustment process and Federal funds rate volatility and concluded that to the extent banks use carryover to express their funds rate forecasts in the market and the Federal Reserve clearly signals its intended open market course, variability in the funds rate and the monetary aggregates is reduced.
Abstract: This papers examines the impact of bank use of the reserve carryover provision on the reserveadjustment process and Federal funds rate volatility. A discussion of the newly proposed change to contemporaneous reserve accounting is also given. The empirical purposes of this paper are accomplished by specifying and estimating a model of bank reserve adjustment behavior in which the interrelatedness of reserve adjustment instruments is explicitly taken into account. We conclude that to the extent banks use carryover to express their funds rate forecasts in the market and the Federal Reserve clearly signals its intended open market course, variability in the funds rate and the monetary aggregates is reduced by the carryover provision.
TL;DR: In this article, the authors reexamine the empirical evidence on how banks use reserve carryover and find that banks use the carryover provision primarily to hedge reserves costs over time, and correct a computational error that appeared in the original paper.
Abstract: In light of Vogt's (1989) comment on our original paper, we reexamine the empirical evidence on how banks use reserve carryover. We dispute Vogt's characterization of the evidence as ‘contradictory’, and find nothing in the results to undermine our original conclusion that banks use the reserve carryover provision primarily to hedge reserves costs over time. We also correct a computational error that appeared in the original paper.
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TL;DR: This article studied the cyclical behavior of a number of industrial labor markets of the pre-war and post-war eras and found some interesting differences between the two periods in the use of layoffs and short hours in downturns.
Abstract: This paper studies the cyclical behavior of a number of industrial labor markets of the pre-war (1923-1939) and post-war (1954-1982) eras. In the spirit of Burns and Mitchell we do not test a specific structural model of the labor market but instead concentrate on describing the qualitative features of the (monthly, industry-level) data.The two principal questions we ask are: First, how is labor input (as measured by the number of workers, the hours of work, and the intensity of utilization) varied over the cycle ? Second, what is the cyclical behaviorof labor compensation (as measured by real wages, product wages, and real weekly earnings) ? We study these questions in both the frequency domain and the time domain. Many of our findings simply reinforce, or perhaps refine, existing perceptions of cyclical labor market behavior. However, we do find some interesting differences between the pre-war and the post-war periods in ther elative use of layoffs and short hours in downturns, and in the cyclical behavior of the real wage.
TL;DR: In this article, the authors endogenize OPEC's pricing policy recognizing that oil price changes affect the real income of oil importers, and that changes in the real revenue of importers affect price changes.