Showing papers in "Econometric Reviews in 1992"

Quasi-maximum likelihood estimation and inference in dynamic models with time-varying covariances

Abstract: We study the properties of the quasi-maximum likelihood estimator (QMLE) and related test statistics in dynamic models that jointly parameterize conditional means and conditional covariances, when a normal log-likelihood os maximized but the assumption of normality is violated. Because the score of the normal log-likelihood has the martingale difference property when the forst two conditional moments are correctly specified, the QMLE is generally Consistent and has a limiting normal destribution. We provide easily computable formulas for asymptotic standard errors that are valid under nonnormality. Further, we show how robust LM tests for the adequacy of the jointly parameterized mean and variance can be computed from simple auxiliary regressions. An appealing feature of these robyst inference procedures is that only first derivatives of the conditional mean and variance functions are needed. A monte Carlo study indicates that the asymptotic results carry over to finite samples. Estimation of several AR a...

Testing the lucas critique: A review

Abstract: Claims that the parameters of an econometric model are invariant under changes in either policy rules or expectations processes entail super exogeneity and encompassing implications. Super exogeneity is always potentially refutable, and when both implications are involved, the Lucas critique is also refutable. We review the methodological background; the applicability of the Lucas critique; super exogeneity tests; the encompassing implications of feedback and feedforward models; and the role of incomplete information. The approach is applied to money demand in the u.S.A. to examine constancy, exogeneity, and encompassing, and reveals the Lucas critique to be inapplicable to the model under analysis.

Amemiya's Generalized Least Squares and Tests of Overidentification in Simultaneous Equation Models with Qualitative or Limited Dependent Variables

Abstract: Amemiya's generalized least squares method for the estimation of simultaneous equation modeis with qualitative or limited dependent variables is known to be efficient relative to many popular two stage estimators. This note points out that test statistics for overidentification restrictions can be obtained as by-products of Amerniya's generalized least squares procedure. Amemiya's procedure is shown to be a minimum chisquare method. The Amemiya procedure is valuable both for efficient estimation and for model evaluation of such models.

Consumer sentiment: its causes and effects

Abstract: This paper finds that consumer attitudes, as reflected in surveys of consumer sentiment, have a significant influence on household purchases of durable goods. Normally, consumer sentiment moves with current economic conditions and bears a stable relationship to a few economic variables. At times of a major economic or political event like the Gulf War, however, consumer sentiment can move independently from current economic conditions. At such times it provides useful information about future consumer expenditures that is not otherwise available.

The econometrics of female labor supply and children

Abstract: This is a survey of applied econometric research on the effects of children on female labor supply. Reasons for interest in the topic, and a basic model and terminology, are reviewed. Concerns are raised about the possible endogeneity of child status variables, and about the instrumental variables approach for dealing with this problem. Alternative ways of conceptualizing and estimating child status effects are considered, together with selected empirical evidence. Relevant developments from the household demand literature are summarized. Basic issues of model choice are also discussed.

Capital regulation and bank lending

Abstract: Bank regulation in general and capital regulation in particular are widely perceived as having become stiffer in the 1990s. The stiffer regulatory environment in turn is argued to have curtailed bank lending. This article determines the extent to which capital standards changed in the 1990s and examines the relationship between capital positions and the bank lending. The empirical results suggest that capital standards did increase in the 1990s. The analysis also shows that bank loan growth rates are positively related to capital-to-assets ratios. Moreover, sensitivity of bank lending to capital positions appears to have increased in the 1990s. Regionally, capital regulation likely had the most pronounced. effect on bank lending in New England.

A comparison of model selection criteria

Abstract: There has been significant new work published recently on the subject of model selection. Notably Rissanen (1986, 1987, 1988) has introduced new criteria based on the notion of stochastic complexity and Hurvich and Tsai(1989) have introduced a bias corrected version of Akaike's information criterion. In this paper, a Monte Carlo study is conducted to evaluate the relative performance of these new model selection criteria against the commonly used alternatives. In addition, we compare the performance of all the criteria in a number of situations not considered in earlier studies: robustness to distributional assumptions, collinearity among regressors, and non-stationarity in a time series. The evaluation is based on the number of times the correct model is chosen and the out of sample prediction error. The results of this study suggest that Rissanen's criteria are sensitive to the assumptions and choices that need to made in their application, and so are sometimes unreliable. While many of the criteria oft...

Macroeconomic Policy and Long-Run Growth

Abstract: The long-run trend of productivity growth is the sole important determinant of the evolution of living standards. The current recession has seen as large a fall in American consumption per capita as any post-World War II recessions year-over-year decline of about 2.3 percent. Yet the post-1973 productivity slowdown in the United States has been an order of magnitude more significant, reducing current consumption by nearly 30 percent. And the post-1973 productivity slowdown has been more severe outside than inside the United States. While the growth rate of output per worker in the United States slowed by 1.4 percentage points per year comparing the 1950-73 with the 1973-90 period, productivity growth has slowed by 4.5 percentage points per year in Japan, 4.2 percentage points per year in Germany, and by 1.9 percentage points for the Organization for Economic Cooperation and Development (OECD) as a whole. This paper addresses the role of macroeconomic policies in determining long-run rates of productivity growth. We begin by highlighting aspects of the interspatial and intertemporal variation in productivity growth which suggest that much of what is important for raising growth rate lies in the domain of structural policy, since macroeconomic policies are less than dominant in determining rates of productivity growth. We then take up what we regard as the two fundamental macroeconomic decisions any society makes: how aggregate demand (or its near-equivalent nominal income) will be managed, and how total output will be allocated between consumption ad various forms of investment. Our policy conclusions can be stated succinctly: * Much of the variation in productivity growth rates cannot be traced to macroeconomic policies and must be attributed to structural and external factors. It is implausible that the deterioration in productivity performance between the 1970s and 1980s is the result of macroeconomic policies that were inferior in the 1980s. Bad macroeconomic policies can insure dismal performance. But good macroeconomic policies, while necessary, are not sufficient for outstanding productivity performance. * Monetary policy that either encourages high inflation or permits large-scale financial collapse can inflict severe damage on productivity growth. Countries in which workers, investors, and entrepreneurs have confidence in the political independence of an inflation-fighting central bank have attained significantly more price stability. There is some evidence, however, of productivity costs from excessively zealous anti-inflation policies. * Even substantial increases in investments that yield social returns of even 15 percent per year will have only modest effects on observed rates of productivity growth. Only increases in specific investments with very high social returns well in excess of private returns have a prospect of arresting any substantial part of the productivity slowdown. * International comparisons suggest a special role for equipment investment as a trigger of productivity growth. This suggests that neutrality across assets is an inappropriate goal for tax policies, and that equipment investment should receive special incentives. The paper is organized as follows. The first section examines the productivity growth record, focusing on the extent of variations in productivity growth across countries and across decades. The second section considers the role of nominal demand management policy. The third section examines the relationship between rates of investment and rates of return. It highlights the difficulty of raising growth rates by magnitudes comparable to the extent of the productivity slowdown through general increases in investment, and emphasizes the importance of strategic high-return investments. The fourth section highlights the special role of equipment investment in spurring growth. The article concludes by commenting further on the policy implications of our analysis. …

Oil shocks, monetary policy, and economic activity

Abstract: Various reasons have been given to explain downturns in U.S. economic activity since World War II. Romer and Romer (1989) argued that these recessions were primarily associated with monetary contractions, while Hamilton (1983) and others attributed them to oil price increases. We investigate these competing hypotheses and find that when measures of oil prices are included, the Romers’ measure of monetary policy does not significantly explain economic downturns. However, alternative measures of monetary policy, specifically the federal funds rate the spread between the ten-year Treasury rate and the federal funds rate, are significantly linked to economic activity. We also find that Hamilton’s result that oil prices significantly influence real activity are robust to the inclusion of these alternative indicators of monetary policy.

Is Purchasing Power Parity a Useful Guide to the Dollar

Abstract: Some academic and business economists use the concept of purchasing power parity to help predict the foreign exchange value of the dollar. Purchasing power parity (PPP) is a measure of the dollar's equilibrium value--the exchange rate toward which the dollar moves over time. Because the value of the dollar is currently below its PPP value, PPP advocates argue that the dollar is undervalued and therefore likely to rise. Other economists acknowledge that PPP may help forecast the value of the dollar over the long run but doubt its usefulness as a short-run guide. They often cite the 1970s, when the dollar frequently strayed from its PPP value and sometimes took years to return. They also note that economic and political forces regularly buffet the dollar, keeping its value away from equilibrium. Thus, even though the dollar is currently below its PPP value, these economists maintain there is no guarantee it will rise in value in the near term. This article argues that PPP is a useful guide to the dollar in the long run and--to a lesser extent--in the short run. The first section of the article defines the concept and discusses why most economists believe it is a useful long-run guide. The second section shows the dollar generally moves toward its PPP value in the long run. The third section shows that in the short run the dollar generally moves toward its PPP value only when deviations from PPP are unusually large. Because today's dollar is not unusually low relative to PPP, the measure says little about whether the dollar will rise in the near term. WHAT IS PURCHASING POWER PARITY? Economists use three concepts of purchasing power parity to explain why goods in one country should cost the same as identical goods in another country. The law of one price relates exchange rates to prices of individual goods in different countries. Absolute PPP relates exchange rates to overall price levels. And relative PPP relates exchange rates to inflation rates. While the law of one price and absolute PPP are intuitively appealing as theories of exchange rates, relative PPP is more useful empirically. THE LAW OF ONE PRICE The law of one price is the simplest concept of PPP. It states that identical goods should cost the same in all countries, assuming it is costless to move goods between countries and there are no impediments to trade, such as tariffs or quotas. Before the costs of goods in different countries can be compared, however, prices must first be converted to a common currency. Once converted at the going market exchange rate, the prices of identical goods from any two countries should be the same. After converting pounds into dollars, for example, a sweater bought in the United Kingdom should cost the same as an identical sweater bought in the United States. In theory, markets enforce the law of one price. Specifically, the pursuit of profits tends to equalize the price of identical goods in different countries. Suppose the sweater bought in the United States was cheaper than the sweater bought in the United Kingdom after converting pounds into dollars. A U.S. exporter could make a profit by buying the U.S. sweater and selling it in the United Kingdom. Such profit opportunities would persist until the law of one price held. Exploiting these opportunities should ensure that the price of the sweater eventually equalizes in both countries, whether prices are expressed in dollars or pounds.(1) In practice, however, the law of one price does not always hold. International trade is far more complicated than suggested by simple economic theories. For example, the cost of transporting goods from one country to another limits the potential profit from buying and selling identical goods with different prices. In addition, tariffs and other impediments to trade potentially drive a wedge between the prices of identical goods in different countries. As a result, instead of focusing on a particular good or service when applying the PPP concept, most analysts focus on market baskets consisting of many goods and services. …

Are Bank Loans Still Special

Abstract: During the recent recession, many businesses had problems getting new bank loans. Increases in problem loans, the need to raise capital, and stricter regulatory oversight combined to discourage banks from extending new credit, particularly to businesses. The weakness in bank lending to businesses, some believe, contributed importantly to the downturn in economic activity. Those who blame the recession on weak bank lending believe that banks are the only source of credit for most business firms--that is, bank loans are special. In recent years, however, rapid growth of nonbank sources of business credit has led others to believe that bank loans have become less special. Finance companies now vie with banks to meet firms' financing needs, and commercial paper allows many firms to raise funds directly from credit markets rather than through banks. If these other sources of business credit are in fact good substitutes for bank loans, then a slowdown in bank lending is not as damaging to the economy. This article examines evidence on whether other sources of business credit have recently become better substitutes for bank loans--that is, whether bank loans are less special than they used to be. The results of the examination suggest that bank loans are becoming less special. The first section of the article explains why bank loans have traditionally been special. The second section examines the rise of substitutes for bank loans. The third section presents evidence that nonbank sources of credit are becoming better substitutes for bank loans. WHY HAVE BANK LOANS BEEN SPECIAL? Business firms get credit either by issuing debt securities to investors or by taking out a loan from a financial intermediary. Loans have been the source of credit for most firms because financial intermediaries have cost advantages over individual investors in gathering information about borrowers. And banks have been the source of most loans because they have had other cost advantages over other financial intermediaries. Thus, bank loans have been the source of credit for most firms--that is, bank loans have been special. Before making a loan, all lenders--whether investors in bonds, nonbank lenders, or banks--need information about borrowers due to the risk that the loan might not be repaid. To determine the creditworthiness of a borrower, a lender gets information about the borrower's character, financial strength, business prospects, management skill, and any other factors that might affect the likelihood of repayment. After collecting the information, the lender then decides whether the loan is worth the risk. After a loan is made, lenders must monitor the borrower because the likelihood of repayment can fall. For example, the borrower's business prospects or financial condition may deteriorate, or the borrower may engage in activities that decrease the likelihood of repayment. By monitoring the borrower, the lender can recognize these events and can call the loan or refuse to renew it when it matures. Most businesses obtain funds by taking out a loan from a financial intermediary rather than by issuing bonds to a number of investors. In general, businesses want to borrow more than an individual investor is willing to lend. As a result, a business must borrow from a number of investors either directly or indirectly through a single financial intermediary that pools their funds.(1) If investors provide the funds directly, each investor has to gather information about and monitor the borrower. In this case, each investor bears the full cost of information gathering and monitoring.(2) But if a financial intermediary provides the funds, the information gathering and monitoring are done only once, and each investor bears only a small fraction of the cost.(3) Thus, most businesses take out loans because it is cheaper to get loans from financial intermediaries than to sell bonds to individual investors. …

Positivity conditions for stochastic state space modelling of time series

Abstract: This short paper clarifies some aspects of the balancing method for state space modelling of observed time series. This method may fail to satisfy the so-called positive real condition for stochastic processes. We illustrate this by theoretical spectral analysis and also by simulating univariate ARMA (1,1) models.

The Changing Role of Reserve Requirements in Monetary Policy

Abstract: Reserve requirements have traditionally been viewed as an integral part of the monetary control process In conjunction with central bank control over the supply of reserves, reserve requirements have been seen as placing an upper limit on deposit creation, helping central banks directly control the growth of money and credit Yet, reserve requirements are on the wane worldwide Central banks have been reducing or eliminating them in an effort to make banks and other subjected depository institutions more competitive In the past two years, for example, the Federal Reserve has lowered requirements on transactions deposits and eliminated requirements on time deposits The central banks of Switzerland, New Zealand, Australia, and Canada have eliminated their requirements And the German Bundesbank reportedly has considered lowering its requirements How does one reconcile these actions with the traditional view of reserve requirements and monetary control? The answer is, in many countries the traditional view no longer holds Reserve requirements are no longer seen as a vehicle to directly control the money stock but rather as a vehicle to facilitate control over short-term interest rates As such, depending on a country's institutional framework, there may be scope for reducing or even eliminating reserve requirements This article examines the monetary policy implications of lower reserve requirements The article focuses on the United States, Canada, and Germany The first section outlines the traditional "multiplier" view of reserve requirements, showing that in this context the recent reductions in requirements would be cause for concern The second section shows, however, that in a broader context, one in which most central banks now operate, the recent reductions are not necessarily cause for concern Indeed, one can view the reductions as secondary to more fundamental policy decisions made much earlier The third section provides a more detailed analysis of current operating procedures, stressing that reserve requirements may still have an important, albeit different, role to play in the monetary policy process RESERVE REQUIREMENTS IN A MULTIPLIER FRAMEWORK Discussions of reserve requirements and monetary policy have typically taken place in the context of the multiplier model of the money supply This model has come to provide the basic textbook framework for examining many monetary control issues In this framework, reserve requirements play a crucial role THE MULTIPLIER MODEL The multiplier model emphasizes the direct link between reserve requirements and monetary control The simplest version of the model assumes that all money, M, is held in the form of bank demand deposits, D, that is, (1) M = D Banks are required to hold a fraction of their assets as required reserves, RR, against these deposits, (2) RR = rrr*D The central bank sets the required reserve ratio, rrr, at a value between 0 and 100 percent and also supplies the reserves Rewriting (2) yields (3) D = (1/rrr)*RR And, substituting (1) into (3) implies (4) M = (1/rrr)*RR Thus, the money supply is a multiple of reserves If the central bank wishes to expand the money supply, it adds reserves; if it wishes to contract the money supply, it drains reserves The "multiplier," 1/rrr provides the link between changes in reserves and changes in the money supply The multiplier, in turn, is determined by the level of reserve requirements The higher the required reserve ratio, the smaller the multiplier, and vice versa(1) Reserve requirements clearly play an important role in this model First, for a given level of reserves, they impose an upper limit on the money supply Algebraically, the money supply can be no higher than (1/rrr) times RR In practical terms, what this is saying is that banks face a limit on the amount of deposits they can create for a given amount of reserves …

Controlling inflation with an interest rate instrument

Abstract: In this paper we examine the effectiveness in controlling long-run inflation of feedback rules for monetary policy that link changes in a short-term interest rate to an intermediate target for either nominal GDP or M2. We conclude that a rule aimed at controlling the growth rate of nominal GDP with an interest rate instrument could be an improvement over a purely discretionary policy. Our results suggest that the rule could provide better long-run control of inflation without increasing the volatility of real GDP or interest rates. Moreover, such a rule could assist policymakers even if it were used only as an important source of information to guide a discretionary approach.

History of and Rationales for the Reconstruction Finance Corporation

Abstract: The creation of the Resolution Trust Corporation (RTC) in 1989, the evolution of a "too-big-to-fail" doctrine within the bank regulatory community in the 1980s, and more recent recommendations that means of regular government intervention be created to support some financial institutions all recall the history of the Reconstruction Finance Corporation (RFC) during the Great Depression. This paper explores the lessons learned from our nation's previous largescale effort to rescue financial institutions and discusses their current relevance.

Marshallian Cross Diagrams and Their Uses Before Alfred Marshall: The Origins of Supply and Demand Geometry

Abstract: Undoubtedly the simplest. and most frequently used tool of microeconomic analysis is the conventional partial equilibrium demand-and-supply-curve diagram of the textbooks. Economics professors and their students put the diagram to at least six main uses. They use it to depict the equilibrium or market-clearing price and quantity of any particular good or factor input. They employ it to show how (Walrasian) price or (Marshallian) quantity adjustments ensure this equilibrium: the first by eliminating excess supply and demand, the second by eradicating disparities between supply price and demand price. They use it to illustrate how parametric shifts in demand and supply curves induced by changes in tastes, incomes, technology, factor prices, and prices of related goods operate to alter a good’s equilibrium price and quantity. They apply it to show how the shifting and incidence of a tax or tariff on buyers and sellers depends on elasticities of demand and supply. With it they demonstrate that price ceilings and price floors generate shortages and surpluses, respectively. Finally, they employ it to compare the allocative effects of competitive versus monopoly pricing and to indicate the welfare costs of market imperfections.

Are Bank Loans a Force in Monetary Policy

Abstract: Federal Reserve monetary policy has eased considerably over the last two years. As policymakers have increased the supply of reserves to banks, short-term market interest rates have dropped to a 20-year low. According to the traditional money view of monetary policy, these actions should have led to a marked pickup in economic activity. Thus far, however, the economic recovery remains notably sluggish. The economy's sluggish response to monetary policy ease is nonetheless understandable from the standpoint of the credit view of monetary policy. According to this view, the force of monetary policy depends partly on the willingness of banks to lend. If banks are cautious about lending, as they have been recently, then lower market interest rates may pack a weaker economic punch than in the past. This article examines both the credit view of monetary policy and the money view. The first section explores why bank credit, not just money, may carry the force of monetary policy. The second section evaluates some new evidence on the credit view. The third section discusses the relevance of the credit view for the current economic recovery. The article concludes that while credit channels usually magnify the effects of monetary policy, the current weakness in the banking sector may have partly blocked these channels. As a result, the credit view helps explain why the economy has remained sluggish despite a considerable easing of monetary policy. WHY CREDIT MATTERS Sharp drops in bank lending have periodically staggered the economy over the last century. These episodes cast doubt on the traditional money view that only a change in the supply of money transmits monetary policy. According to the alternative credit view, changes in the supply of bank loans may also carry the force of monetary policy. CREDIT CRUNCHES Drastic declines in the supply of bank loans, or credit crunches, have punctuated economic history in America. In the past, credit crunches resulted from bank runs and from the combination of tight monetary policy and ceilings on bank deposit rates. More recently, a shortage of bank capital may have caused a credit crunch (Bernanke and Lown; Johnson).(1) Before deposit insurance was introduced, credit crunches were often triggered by "runs" on the banking system. Depositors, hearing rumors that their bank might fail, raced to withdraw their bank savings. But, with much of its money invested in long-term loans, the bank could not pay all of its depositors at once, often forcing the bank to fail. And because one bank invariably owed another bank money, bank failures "dominoed" across the country. The rampant bank failures halted bank lending and, with it, economic activity. Deposit insurance eliminated bank runs after 1933, but credit crunches continued periodically. In the 1960s and 1970s, for example, tight monetary policy caused lending to drop whenever the Federal Reserve pushed interest rates above the level banks were allowed to pay depositors. Lured to higher market interest rates elsewhere, depositors withdrew their money from banks, forcing banks to cut back their lending. Crunches such as these ceased in the early 1980s when banks were permitted to pay market interest rates to depositors. As recent events suggest, however, not even the deregulation of deposit rates has ended credit crunches. In the past several years, banks have suffered huge losses on loans to developing countries, agriculture, energy, and most recently, real estate. These losses have eroded banks' capital, while regulators have raised the minimum permissible ratio of capital to assets. The only way for many banks to increase their capital-asset ratio has been to shrink their balance sheets--that is, to sell assets, reduce deposits, and halt lending. The aftermath has resembled earlier credit crunches, only this time a capital shortage may be to blame. These episodes provide support for the credit view, reminding analysts and policymakers that bank lending appears to matter very much indeed. …

Indexed bonds as an aid to monetary policy

Abstract: A measure of the public’s expectation of inflation would assist the Fed in formulating monetary policy. In order to create such a measure, the U.S. Treasury could issue its debt in two forms: standard debt and debt indexed for inflation. The difference in yield on these two forms of debt would measure the public’s expectation of inflation.

Cross-Lender Variation in Home Mortgage Lending

Abstract: The Community Reinvestment Act of 1977 (CRA) requires depository institutions to help meet the credit needs of their communities, including low- and moderate-income neighborhoods, consistent with safe and sound lending practices. Despite the clear focus of CRA and other fair credit and housing legislation on individual lender responsibilities, consumer finance studies generally do not concede any differences in the mortgage lending activities of individual lenders; they consider variance among either individuals or neighborhoods. Virtually all of the studies draw inferences about the practices of some prototypical lender from data pooled across many lenders. Our strategy is to examine differences among individual lenders in the rates at which they receive applications fiom, and originate mortgage loans to, minority and low-income applicants. More specifically, we use the new applicant-level data gathered under the Home Mortgage Disclosure Act of 1975 -A) to examine differences in minority and low-income mortgage loan originations across the more than 8,600 U.S. lenders who received applications for single-family home purchase loans in 1990.

Changes in Financial Intermediation: The Role of Pension and Mutual Funds

Abstract: Since the late 1970s, the U.S. financial system has undergone considerable stress. Many traditional intermediaries, such as thrifts, banks, life insurance companies, and investment banks, have suffered large losses and some have failed. Most analyses of these problems have focused on the difficulties of these institutions in adapting to the inflationary environment of the 1970s and 1980s. Some of the problems of these traditional intermediaries have deeper roots, however. Over the postwar period, the rapid growth of pension and mutual funds has increased competition for household savings. While competition has opened up new business opportunities for some traditional intermediaries, it has undermined the profitability of others. As a result, many traditional intermediaries have been forced to adapt to new roles in the financial system. This article examines the impact of pension and mutual funds on the postwar financial system. Recognizing their influence is important both for understanding the causes of recent financial problems and for deciding what regulatory changes might be appropriate to ensure the future health of the financial system. The first section of the article describes the growth of pension and mutual funds over the postwar period and their increasing importance in the financial system. The second section examines how their success has undermined or enhanced the fortunes of traditional intermediaries. The third section describes how pension and mutual funds have affected the overall intermediation process and examines some of the implications for financial regulation. THE RISE OF PENSION AND MUTUAL FUNDS By offering greater portfolio diversification and professional investment management, pension and mutual funds have dramatically altered the investment options available to the individual investor. Their success is reflected in a shift away from traditional forms of intermediation and a significant restructuring of household balance sheets. FEATURES OF PENSION AND MUTUAL FUNDS In the early 195Os, individual investors faced very limited investment options. Most households placed their savings in deposits at banks and thrifts or in life insurance policies that combined insurance with low-interest savings. Wealthier individuals also bought corporate stocks and bonds. However, purchases of the stocks and bonds of individual companies required considerably sophistication by the investor or reliance on the research and investment advice of the investment banks providing brokerage services. Pension and mutual funds substantially altered the investment landscape. By pooling funds from a large number of investors to purchase a diversified portfolio of assets, pension and mutual funds provide individual investors with a low-cost method of diversifying their asset portfolio. For example, pension funds combine employer and employee retirement contributions to purchase a large portfolio of stocks and bonds. Mutual funds allow individual investors to purchase shares of the fund that represent ownership interests in a large pool of assets selected by the fund. This proportional ownership allows investors with limited funds the opportunity to purchase assets that are available only in large denominations. Another important feature of pension and mutual funds is professional management. Because the choice of individual assets in a fund is the responsibility of investment advisors or fund managers, individual investors can participate in a broad range of investments without the need for detailed knowledge of the individual companies issuing the stocks and bonds. Despite these general similarities, pension and mutual funds have significant differences. Most importantly, pension plans have a fiduciary responsibility to deliver promised pension benefits and are subject to extensive federal and state regulation. These restrictions play a major role in guiding the investment decisions of pension plans. …

Macroeconomic shocks and business cycles in Australia

Abstract: A small vector autoregression model is estimated to assess how demand and supply shocks influence Australian output and price behavior. The model is identified by assuming that aggregate demand shocks have transitory effects on output, while aggregate supply shocks have permanent effects. The paper describes how Australian macroeconomic variables respond to demand and supply shocks in the short run and in the long run. It also finds that demand shocks are dominant in determining fluctuations in Australian output at a one-quarter horizon, but supply shocks assume the larger role at longer horizons. Supply shocks also account for most of the fluctuations in the Australian price level.

Interpreting Procyclical Productivity: Evidence from a Cross-Nation Cross-Industry Panel

Abstract: We use an international panel data set of value added by industry to see if labor productivity is procyclical in response to demand shocks. It is: holding fixed our proxy for supply-side factors - the value added levels of an industry in other nations - industry-level productivity rises when value added in the rest of manufacturing rises. Moreover, increases in unemployment are associated with a lowered degree of procyclicality in Europe. This suggests that procyclical productivity arises primarily from "labor hoarding" by firms in the U.S. that wish to avoid future training costs and primarily from "job hoarding" by workers in Europe who wish to avoid unemployment.