PCE and CPI inflation differentials: converting inflation forecasts

The Federal Reserve recently announced it will begin to release quarterly inflation forecasts based on the Personal Consumption Expenditure Price Index. As Chairman Bernanke said, the PCE index is generally thought to be ?the single most comprehensive and theoretically compelling measure of consumer prices.? At the same time, Bernanke said that ?no single measure of inflation is perfect, and the Committee will continue to monitor a range of measures when forming its view about inflation prospects,? including the Consumer Price Index. ; The public and private sectors alike will want to be able to convert CPI inflation forecasts released by various organizations to PCE inflation forecasts, and vice versa. But the inflation differentials for the two measures can change significantly over time. To convert between CPI and PCE inflation projections, economists must construct statistical models to explain and predict the inflation differentials (overall and core), recognizing that the differentials may change over time. ; Hakkio estimates a set of models that analysts can use to make such conversions.Inflation (Finance)

The Term Structure of the Forward Premium

Most studies of the efficiency of the foreign exchange market focus on a single maturity -- usually a one month exchange rate. However, one observes that forward contracts of many maturities are simultaneously traded in the foreign exchange market. The hypothesis that the foreign. exchange market uses all available information has implications for the joint behavior of forward exchange rates of various maturities. This paper theoretically and empirically examines these implications. The paper proposes an equilibrium theory of the term structure of the forward premium. By combining the theory of the term structure of (domestic and foreign)interest rates with the hypothesis of interest rate parity, a simple expression relating the six month forward premium to a geometric average of expected future one month forward premiums can be developed. By assuming that the one and six month forward premiums can be expressed as a bivariate stochastic process, one can derive an expression for the expected one month forward premium. The theory will then impose highly non-linear cross equation restrictions on the parameters of the model. Two methods of testing the validity of the restrictions are presented. The results indicate that the data are consistent with the theory for Germany and inconsistent with the theory for Canada.

The U.S. current account: the other deficit

Considerable attention has been focused recently on the size and persistence of the U.S. budget deficit. Somewhat lost in the headlines is growing concern among many economists and policymakers over "the other deficit"--the U.S. current account deficit. Before 1982, U.S. current account deficits were small and temporary, as imports of goods and services rarely exceeded exports for an extended period. Since 1982, however, this deficit has increased significantly and many analysts expect the deficit to remain high well into the next century.> Large current account deficits pose both a short-term risk and a long-term problem for the United States. At present, the United States depends on a commensurately large flow of foreign capital into U.S. markets to finance the current account deficit. If market sentiment were to shift against the United States, higher interest rates and a lower exchange value of the dollar might be necessary to continue to attract foreign capital. In the long term, because financing a chronic deficit requires the United States to borrow from abroad, future interest payments on this debt could lower the standard of living in the United States.> Hakkio examines the current account deficit and its implications. First, he discusses why the current account deficit became large and persistent in the early 1980s. Second, he analyzes the short-term risk that current account deficits pose for the U.S. economy. Finally, he analyzes the long-term problem associated with a chronic current account deficit.Deficit financing

Advanced Artificial Intelligence Technology Testbed

The Advanced Artificial Intelligence Technology Testbed (AAITT) is a laboratory testbed for the design, analysis, integration, evaluation, and exercising of large-scale, complex, software systems, composed of both knowledge-based and conventional components. The AAITT assists its users in the following ways: configuring various problem-solving application suites; observing and measuring the behavior of these applications and the interactions between their constituent modules; gathering and analyzing statistics about the occurrence of key events; and flexibly and quickly altering the interaction of modules within the applications for further study

The Role of Correlation in the Operation of Quantum-dot Cellular Automata

Quantum-dot Cellular Automata (QCA) may offer a viable alternative of traditional transistor-based technology at the nanoscale. When modeling a QCA circuit, the number of degrees of freedom necessary to describe the quantum mechanical state increases exponentially making modeling even modest size cell arrays difficult. The intercellular Hartree approximation largely reduces the number of state variables and still gives good results especially when the system remains near ground state. This suggests that large part of the correlation degrees of freedom are not essential from the point of view of the dynamics. In certain cases, however, such as for example the majority gate with unequal input legs, the Hartree approximation gives qualitatively wrong results. An intermediate model is constructed between the Hartree approximation and the exact model, based on the coherence vector formalism. By including correlation effects to a desired degree, it improves the results of the Hartree method and gives the approximate dynamics of the correlation terms. It also models the majority gate correctly. Beside QCA cell arrays, our findings are valid for Ising spin chains in transverse magnetic field, and can be straightforwardly generalized for coupled two-level systems with a more complicated Hamiltonian.Comment: 45 pre-print style double-spaced pages including 8 figures, accepted for Journal of Applied Physic

Should we throw sand in the gears of financial markets?

The volatility of financial markets in recent years has led to increased concern. As trading of financial assets on organized exchanges and over-the-counter markets has grown, events such as the 1987 stock market crash and the 1992 Exchange Rate Mechanism crisis in Europe have raised fundamental questions about the role these markets play in the economy. In particular, there is concern that much of the increased trading of financial assets is of a short-term, speculative nature that adds little value to the intermediation process and in the extreme case may distort the efficient functioning of financial markets.> This view has led some economists to advocate a securities transaction tax. Such a tax, it is argued, when applied to a broad range of financial transactions, would raise the cost of short-term speculative trading, reduce financial market volatility, and improve the efficiency of financial markets. This type of tax might also raise substantial revenue that could help reduce the federal budget deficit. The revenue potential has not gone unnoticed in Washington, where recent budget proposals by both the Bush and Clinton administrations have included an STT.> Hakkio explores the pros and cons of a securities transaction tax. He concludes that the proponents have overstated the likely benefits of a securities transaction tax and underestimated the potential costs.Financial markets ; Taxation ; Securities

Expectations and the Forward Exchange Rate

This paper provides an empirical examination of the hypothesis that the forward exchange rate provides an "optimal" forecast of the future spot ex-change rate, for five currencies relative to the dollar. This hypothesis provides a convenient norm for examining the erratic behavior of exchange rates; this erratic behavior represents an efficient market that is quickly incorporating new information into the current exchange rate. This hypothesis is analyzed using two distinct, but related, approaches. The first approach is based on a regression of spot rates on lagged forward rates. When using weekly data and a one month forward exchange rate, ordinary least squares regression analysis of market efficiency is incorrect. Econometric methods are proposed which allow for consistent (though not fully efficient) estimation of the parameters and their standard errors. This paper also presents a new approach for testing exchange market efficiency. This approach is based on a general time series process generating the spot and forward exchange rate. The hypothesis of efficiency implies a set of cross-equation restrictions imposed on the parameters of the time series model. This paper derives these restrictions, proposes a maximum likelihood method of estimating the constrained likelihood function, estimates the model and tests the validity of the restrictions with a likelihood ration statistic.

Characterizing bean pod rot in Arkansas and Missouri

Green beans are an important crop grown for processing in both Arkansas and Missouri. Green beans are harvested mechanically using non-selective picking fingers. Harvested beans are then transported in bulk to processing plants that are located at various locations throughout the midSouth. Thus, the crop is managed for high quality, avoiding pod blemishes caused by insects and diseases. One of the consistent quality problems that affect Arkansas and Missouri green bean crops is pod rot. Two of the causal agents of pod rot that have been reported by researchers and vegetable companies alike are Pythium aphanidermatum and an unidentified Phytophthora sp. In this study, 15 growers’ fields were selected and soil samples (at planting), pod samples (at harvest), and environmental data were taken from each field. Disease incidence for field sites ranged from 0 to 7.3%. Pathogens associated with pod rot were Sclerotinia sclerotiorum, Rhizoctonia solani, a Phytophthora sp., and Pythium spp. The two suspected causal agents for pod rot, Pythium and Phytophthora spp., were found in all but one of the 12 field sites assessed for pod rot. Pythium inoculum potential, as determined by a baiting technique, was not a good indicator of pod rot incidence. In addition, soil temperature and water were not associated with pod rot. Pods collected at harvest having symptoms of pod rot were either in direct contact with the soil, senescing leaf tissue, or other diseased pods

Effectiveness of a Rigid Grate for Excluding Pacific Halibut, Hippoglossus stenolepis, From Groundfish Trawl Catches

A rigid grate was installed in a groundfish trawl to test its effectiveness in excluding Pacific halibut, Hippoglossus stenolepis, from commercial flatfish catches in the Gulf of Alaska. The grate was located ahead of the trawl codend to direct halibut toward an escape opening while allowing target species to pass through toward the codend. In an experimental fishery, the escape rate of halibut was estimated at 94%, while 72% of the Dover sole, Microstomas pacificus, 67% of the rex sole, Glyptocephalus zachirus, and 79% of the flathead sole, Hippoglossoides elassodon, were retained