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Bank:Federal Reserve Bank of Minneapolis  Series:Discussion Paper / Institute for Empirical Macroeconomics 

Discussion Paper
When unit roots matter: excess volatility and excess smoothness of long term interest rates

This paper reexamines volatility tests of the expectations model of the term structure of interest rates. The restrictions of the model are studied in a general multivariate MA representation of the time series process of interest rates under various assumptions on the number of unit roots and the pattern of cointegration. Test statistics are computed by Bayesian techniques. We find that the long term interest rate overreacts to transitory shocks, and underreacts to permanent shocks.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 44

Discussion Paper
Political economy of taxation in an overlapping-generations economy

This paper builds a simple but complete model of a political system to analyze the effects of intergenerational conflicts on capital and labor income tax rates, transfers, and government spending. I show how the different nature of tax liabilities for the young and the old can explain why the old receive large gross lump-sum transfers through social security, while the young receive little or none. I also show that there is a natural link between the size of the government as a provider of public goods and the magnitude of transfers that the same government will implement.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 133

Discussion Paper
Business cycles and the asset structure of foreign trade

Since the primary role of international financial linkages is to facilitate consumption smoothing in the face of country-specific shocks, the degree of international financial integration should play an important role in the international transmission of business cycles. This paper therefore studies the business cycle implications of restricting international trade in financial assets. The key restriction is that domestic residents must hold all risky claims to domestic output, trading only noncontingent bonds on the international asset markets. We find that restricting asset trade may or may ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 59

Discussion Paper
Ex-day behavior of Japanese stock prices: new insights from new methodology

We study the ex-dividend day behavior of Japanese stock prices for the period 198387. We find that, contrary to previous findings, prices of ex-day stocks drop by nearly the full amount of the dividend. However, ex-day stocks shows an abnormal return. Also, for the many ex-dividend day stocks that also go ex-rights on the same ex-day, we find that the return is on average higher than that for stocks without rights issues. We thus conclude that the ex-day behavior of Japanese stocks are qualitatively similar to that of U.S. stocks.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 30

Discussion Paper
Stochastic volatility and the distribution of exchange rate news

This paper studies the empirical performance of stochastic volatility models for twenty years of weekly exchange rate data. We concentrate on the effects of the distribution of the exchange rate innovations for parameter estimates and for estimates of the latent volatility series. We approximate the density of the log of exchange rate innovations by a mixture of normals. The major findings of the paper are that: (1) explicitly incorporating fat-tailed innovations increases the estimates of the persistence of volatility dynamics; (ii) estimates of the latent volatility series depend strongly ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 96

Discussion Paper
Private money and reserve management in a random-matching model

In this paper, we develop a model of money and reserve-holding banks. We allow for private liabilities to circulate as media of exchange in a random-matching framework. Some individuals, which we identify as banks, are endowed with a technology to issue private notes and to keep reserves with a clearinghouse. Bank liabilities are redeemed according to a stochastic process that depends on the endogenous trades. We find conditions under which note redemptions act as a force that is sufficient to stabilize note issue by the banking sector.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 128

Discussion Paper
Seasonality and equilibrium business cycle theories

Barksy-Miron [1989] find that the postwar U.S. economy exhibits a regular seasonal cycle, as well as the business cycle phenomenon. Are these findings consistent with current equilibrium business cycle theories as surveyed by Prescott [1986]? We consider a dynamic, stochastic equilibrium business cycle model which includes deterministic seasonals and nontime-separable preferences. We show how to compute a perfect foresight seasonal equilibrium path for this economy. An approximation to the stochastic equilibrium is calculated. Using postwar U.S. data, GMM estimates of the structural ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 45

Discussion Paper
The relationship of firm growth and Q with multiple capital goods: theory and evidence from panel data on Japanese firms

We develop a Q model of investment with multiple capital goods that delivers a one-to-one relation between the growth rate of the capital aggregate and the stock market-based Q. We estimate the growth-Q relation using a panel of over six hundred Japanese manufacturing firms taking into account the endogeneity of Q. Identification is achieved by combining the theoretical structure of the Q model and an assumed serial correlation structure of the technology shock that comprises the error term in the growth-Q relation. The Q variable is significantly related to firm growth. Much, but not all, of ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 13

Discussion Paper
Monetary policy regimes and beliefs

Recent monetary history has been characterized by monetary authorities that appear to shift periodically between distinct policy regimes associated with higher or lower average rates of money creation. As policy regimes are not directly observable and as the rate of monetary expansion varies for reasons other than regime changes, the general public must form beliefs over current monetary policy based on historical realizations of money growth rates. Depending on the parameters governing the behaviour of monetary policy, beliefs (and therefore inflation forecasts) may evolve very slowly in ...
Discussion Paper / Institute for Empirical Macroeconomics , Paper 118

Discussion Paper
Expectationally-driven market volatility: an experimental study

We study the existence and robustness of expectationally-driven price volatility in experimental overlapping generation economies. In the theoretical model under study there exist pure sunspot equilibria which can be learned if agents use some adaptive learning rules. Our data show the existence of expectationally-driven cycles, but only after subjects have been exposed to a sequence of real shocks and learned a real cycle. In this sense, we show evidence of path-dependent price volatility.
Discussion Paper / Institute for Empirical Macroeconomics , Paper 73




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