A note on the expectations hypothesis at the founding of the Fed

One of the most influential tests of the expectations hypothesis is Mankiw and Miron (1986), who found that the spread between the long-term and short-term rates provided predictive power for the short-term rate before the Fed's founding but not after. They suggested that the failure of the expectations hypothesis after the Fed's founding was due to the Fed's practice of smoothing short-term interest rates. We show that their finding that the expectations hypothesis fares better prior to the Fed's founding is due to the fact that the test they employ tends to generate results that are more favorable to the expectations hypothesis during periods when there is extreme volatility in the short-term rate. (Earlier version titled: The expectations theory and the founding of the Fed: another look at the evidence)Interest rates ; Rational expectations (Economic theory) ; Federal Reserve System - History

Dutch corporate liquidity mangement: New evidence on aggregation

In this paper we investigate Dutch corporate liquidity management in general, and target adjustment behaviour in particular. To this purpose, we use a simple error correction model of corporate liquidity holdings applied to firm-level data for the period 1977-1997. We confirm the existence of long-run liquidity targets at the firm level. We also find that changes in liquidity holdings are driven by short-run shocks as well as the urge to converge towards targeted liquidity levels. The rate of target convergence is higher when we include more firm-specific information in the target. This result supports the idea that increased precision in defining liquidity targets associates with a faster observed rate of target convergence. It also suggests that the slow speeds of adjustment obtained in many macro studies on money demand are artefacts of aggregation bias.corporate liquidity demand, precautionary liquidity

Industries and the bank lending effects of bank credit demand and monetary policy in Germany

This paper presents evidence on the industry effects of bank lending in Germany and identifies the industry effects of bank lending associated with changes in monetary policy and industryspecific bank credit demand. To this end, we estimate individual bank lending functions for 13 manufacturing and non-manufacturing industries and five banking groups using quarterly bank balance sheet and bank lending data for the period 1992:1-2002:4. The evidence from dynamic panel data models shows that industry-specific bank lending growth predominantly responds to changes in industry-specific bank credit demand rather than to changes in monetary policy. In fact, conclusions regarding the bank lending effects of monetary policy are very sensitive to the choice of industry. The empirical results lend strong support to the existence of industry effects of bank lending. Because industries are a prominent source of variation in the bank lending effects of bank credit demand and monetary policy, the paper concludes that the industry composition of bank credit portfolios is an important determinant of bank lending growth and monetary policy effectiveness. --Monetary policy transmission,credit channel,industry structure,dynamic panel data

Inefficient or just different? Effects of heterogeneity on bank efficiency scores

In this paper, we show the importance of accounting for heterogeneity among sample firms in stochastic frontier analysis. For a fairly homogenous sample of German savings and cooperative banks, we analyze how alternative theoretical assumptions regarding the nature of heterogeneity can be modeled and the extent to which the respective empirical specifications affect estimated efficiency levels and rankings. We find that the level of efficiency scores is affected in the case of both cost and profitmodels. On the cost side especially, level and rank correlations show that different specifications identify different banks as being best or worst performers. Our main conclusion is that efficiency studies in general and bank efficiency studies in particular should account for heterogeneity across sample firms. Especially when efficiency measures are employed for policy purposes, a careful choice of models and transparency regarding maximization methods are essential to be able to make inferences about managerial behavior. --Heterogeneity,X-efficiency,benchmarking,bank production

Brown Dwarfs and the Cataclysmic Variable Period Minimum

Using improved, up-to-date stellar input physics tested against observations of low-mass stars and brown dwarfs we calculate the secular evolution of low-mass donor cataclysmic variables (CVs), including those which form with a brown dwarf donor. Our models confirm the mismatch between the calculated minimum period (Pmin ~ 70 min) and the observed short-period cut-off (~ 80 min) in the CV period histogram. We find that tidal and rotational corrections applied to the one-dimensional stellar structure equations have no significant effect on the period minimum. Theoretical period distributions synthesized from our model sequences always show an accumulation of systems at the minimum period, a feature absent from the observed distribution. We suggest that non-magnetic CVs become unobservable as they are effectively trapped in permanent quiescence before they reach Pmin, and that small-number statistics may hide the period spike for magnetic CVs.Comment: 10 pages; accepted for publication in MNRA

Abstract: Inflation persistence under semi-fixed exchange rate regimes: the European evidence 1974-1998

In this paper, we empirically investigate the link between exchange rate accommodation and inflation persistence in Europe. We introduce the lagged level of the real exchange rate as an appropriate indicator of monetary (exchange rate) accommodation. We correspondingly estimate a non-linear autoregressive inflation equation for ten European countries (excluding Germany) for the period 1974:1-1998:2. In the estimation procedure we allow for the presence of an unknown number of shifts in the mean of inflation. Our results provide supportive evidence for the existence of a positive link between exchange rate accommodation and inflation persistence for the smaller and more dependent ERM countries. For the larger countries and the countries that remained outside the ERM for most of the period we find hardly any evidence of such positive link. Overall, our results provide modest support for the existence of the theoretically hypothesized positive link between exchange rate accommodation and inflation persistence. ∗ Kool is at the University Maastricht, while Lammertsma is at the Netherlands Bureau for Economic Policy Analysis (CPB), the Hague, the Netherlands. The authors gratefully acknowledge fruitful discussions and comments on previous drafts of the paper from Kee