Exchange Rates and Casualties During the First World War

I estimate two factor models of Swiss exchange rates during the FirstWorldWar. I have data for five of the primary belligerents: Britain, France, Italy, Germany, and Austria-Hungary. At the outbreak of the war, these nations suspended convertibility of their currencies into gold with the promise that after the war each would restore convertibility at the old par. However, once convertibility was suspended, the value of each currency depended on the outcome of the war. I decompose exchange rate movements into a common trend, a common factor, and country-specific factors. Movements in the common trend are consistent with the quantity theory of money. The common factor contains information on contemporaries' expectations about the war's resolution. Innovations to this common factor are correlated with time series on soldiers killed, wounded, and taken prisoner.

Interest rate risk and other determinants of post WWII U.S. government debt/GDP dynamics

This paper uses a sequence of government budget constraints to motivate estimates of returns on the U.S. Federal government debt. Our estimates differ conceptually and quantitatively from the interest payments reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt-GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities.Holding period returns, capital gains, inflation, growth, debt- GDP ratio, government budget constraint

Accounting for the federal government's cost of funds

This article describes and defends the authors' corrections to the federal government's flawed measure of its cost of funds. Further, it examines how the maturity structure of the debt influences the way inflation risk and interest rate risk are shared by the government and its creditors.Gross domestic product ; Inflation (Finance) ; Interest rates

Tax Smoothing Implications of the Federal Debt Paydown

Tax, Tax Smoothing Implications, Federal Debt, Federal Debt Paydown, macroeconomics

An Empirical Model of Inventory Investment by Durable Commodity Intermediaries

This paper introduces a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of these data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is substantial high-frequency variation in the firm's sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary that engages in commodity price speculation. We demonstrate that the firm's inventory investment behavior at the product level is well approximated by an optimal trading strategy from the solution to a nonlinear dynamic programming problem with two continuous state variables and one continuous control variable that is subject to frequently binding inequality constraints. We show that the optimal trading strategy is a generalized (S,s) rule. That is, whenever the firm's inventory level q falls below the order threshold s(p) the firm places an order of size S(p) - q in order to attain a target inventory level S(p) satisfying S(p) >= s(p), where p is the current spot price at which the firm can purchase unlimited amounts of the commodity after incurring a fixed order cost K. We show that the (S,s) bands are decreasing functions of p, capturing the basic intuition of commodity price speculation, namely, that it is optimal for the firm to hold higher inventories when the spot price is low than when it is high in order to profit from "buying low and selling high." We simulate a calibrated version of this model and show that the simulated data exhibit the key features of inventory investment we observe in the data.Commodities, inventories, dynamic programming

Non-convex costs and capital utilization: a study of production and inventories at automobile assembly plants

This paper studies how managers at automobile assembly plants organize production across time. Detailed data from eleven single-source automobile assembly plants display considerable cross-plant heterogeneity. At plants which make low- and medium-selling vehicles the capital stock often sits idle, production is more variable than sales, and weeklong shutdowns are often used to vary output. In contrast, at plants which make high-selling vehicles, the capital stock rarely sits idle, production is about as variable as sales, and overtime - not weeklong shutdowns - is most frequently used to vary output. To explain this difference in production scheduling, I formulate and solve a dynamic programming model of a plant manager. The solution to the dynamic program predicts that when sales are low, non-convexities at the plant level induce the manager to bunch production at points of low average cost; thus, the manager uses less than full capital utilization on average and makes production more volatile than sales. When sales are high, the plant operates in a convex region of the cost curve. Hence the manager employs high levels of capital utilization and makes production about as volatile than sales.Automobile industry and trade ; Capital ; Inventories ; Production (Economic theory)

The Response of Prices, Sales, and Output to Temporary Changes in Demand

We determine empirically how the Big Three automakers accommodate shocks to demand. They have the capability to change prices, alter labor inputs through temporary layoffs and overtime, or adjust inventories. These adjustments are interrelated, non-convex, and dynamic in nature. Combining weekly plant-level data on production schedules and output with monthly data on sales and transaction prices, we estimate a dynamic profit-maximization model of the firm. Using impulse response functions, we demonstrate that when an automaker is hit with a demand shock sales respond immediately, prices respond gradually, and production responds only after a delay. The size of the immediate sales response is linear in the size of the shock, but the delayed production response is non-convex in the size of the shock. For sufficiently large shocks the cumulative production response over the product cycle is an order of magnitude larger than the cumulative price response. We examine two recent demand shocks: the Ford Explorer/Firestone tire recall of 2000, and the September 11, 2001 terrorist attacks

An Empirical Model of Inventory Investment by Durable Commodity Intermediaries

This paper introduces a new detailed data set of high-frequency observations on inventory investment by a U.S. steel wholesaler. Our analysis of these data leads to six main conclusions: orders and sales are made infrequently; orders are more volatile than sales; order sizes vary considerably; there is substantial high-frequency variation in the firm’s sales prices; inventory/sales ratios are unstable; and there are occasional stockouts. We model the firm generically as a durable commodity intermediary that engages in commodity price speculation. We demonstrate that the firm’s inventory investment behavior at the product level is well approximated by an optimal trading strategy from the solution to a nonlinear dynamic programming problem with two continuous state variables and one continuous control variable that is subject to frequently binding inequality constraints. We show that the optimal trading strategy is a generalized ( S,s ) rule. That is, whenever the firm’s inventory level q falls below the order threshold s (p) the firm places an order of size S ( p ) - q in order to attain a target inventory level S ( p ) satisfying S ( p ) \u3e s ( p ), where p is the current spot price at which the firm can purchase unlimited amounts of the commodity after incurring a fixed order cost K . We show that the ( S,s ) bands are decreasing functions of p, capturing the basic intuition of commodity price speculation, namely, that it is optimal for the firm to hold higher inventories when the spot price is low than when it is high in order to profit from “buying low and selling high.” We simulate a calibrated version of this model and show that the simulated data exhibit the key features of inventory investment we observe in the data

Interest Rate Risk and Other Determinants of Post-WWII U.S. Government Debt/GDP Dynamics

This paper uses the sequence of government budget constraints to motivate estimates of interest payments on the U.S. Federal government debt. We explain why our estimates differ conceptually and quantitatively from those reported by the U.S. government. We use our estimates to account for contributions to the evolution of the debt to GDP ratio made by inflation, growth, and nominal returns paid on debts of different maturities.

Interest rates and the market for new light vehicles

We study the impact of interest rate changes on both the demand and supply of new light vehicles in an environment where consumers and manufacturers face their own interest rates. An increase in the consumers' interest rate raises their cost of financing and thus lowers the demand for new vehicles. An increase in the manufacturers' interest rate raises their cost of holding inventories. Both channels have equilibrium effects that are amplified and propagated over time through inventories, which serve as a way to both smooth production and facilitate greater sales at a given price. Through the estimation of a dynamic stochastic market equilibrium model, we find evidence of both channels at work and of the important role played by inventories. A temporary 100 basis point increase in both interest rates causes vehicle production to fall 12 percent and sales to fall 3.25 percent at an annual rate in the short run