Douglas K. Pearce

Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects

THE MEASUREMENT OF EXPECTED INFLATION continues to be an important and perplexing issue in empirical studies of macroeconomic relations. Although most researchers have followed Fisher [10] in assuming that a distributed lag of past price changes serves as an adequate proxy for anticipated inflation, several recent investigations employ instead direct observations on inflation forecasts from surveys. Simultaneously with this work, there has been a growing emphasis, particularly in the theoretical literature, that expectation formation should conform to the notion of rationality advanced by Muth [17]. A potential conflict thus arises if the survey data violate the rationality hypothesis. The main survey source is the Livingston survey of professional economists, which iIlcludes their forecasts of future price levels. These data have often been used in empirical tests of the effects of anticipated inflation on interest rates [ 1 1, 19, 13, 5]. Tests by Pesando [18] and Carlson [6] the latter using his reworking of the survey responses indicate, however, that the survey data are indeed in-

Does a Bias in FOMC Policy Directives Help Predict Intermeeting Policy Changes

Since 1984 the FOMC has issued directives indicating a bias toward easing or tightening. This paper investigates the information content of these asymmetric directives for the likelihood of inter-meeting changes in policy during the Greenspan chairmanship. If policy is measured by the change in the average daily federal funds rate after a directive is issued, the results indicate that a bias predicts a significant change in the average funds rate. If policy is measured qualitatively by whether the target for the federal funds rate changed, a bias significantly affects the probability that the target will be changed.

Uncertainty and the inflation bias of monetary policy

Abstract The dynamic inconsistency model predicts that monetary policy will produce a positive inflation rate. The introduction of multiplicative uncertainty into the model suggests that this bias towards inflation will be lower the more uncertain the effects of monetary policy.

Discount rate policy under alternative operating procedures: An empirical investigation

Abstract This paper shows that the Federal Reserves discount rate policy changes when the Federal Reserve changes operating procedures. Operating procedures have changed twice in the last 15 years-once in October 1979 and again in October 1982. Using a limited dependent variable approach, we estimate the probability that the Federal Reserve will change its discount rate over a one-week horizon. Discount rate changes were reasonably predictable when the Federal Reserve was targeting the federal funds rate. However, discount rate changes became less predictable when the Federal Reserve changed to a nonborrowed reserves target in October 1979. Furthermore, discount rate changes became even less predictable after October 1982 when the Federal Reserve changed to a borrowed reserves target.

The Predictability of FOMC Decisions: Evidence from the Volcker and Greenspan Chairmanships

This paper examines whether there is a systematic relationship between FOMC decisions and publicly available data that would potentially allow the public to anticipate FOMC policy changes. We characterize each FOMC decision as a move to tighten, ease, or leave policy unchanged and use ordered probit to estimate models of the probabilities of each choice. We find a statistically significant relationship between FOMC decisions and measures of inflation and real activity, but this relationship does not accurately predict the directions of FOMC decisions. While short-term interest rate changes prior to FOMC meetings have predictive power, suggesting that the financial market can anticipate FOMC decisions somewhat, other financial variables such as stock price movements appear unrelated to FOMC policy changes. Overall, FOMC decisions are not highly predictable using publicly available data, and adding the private information contained in the FOMCs Greenbook does not significantly increase the predictive accuracy.

The robustness of calendar anomalies in daily stock returns

This paper investigates the robustness of the major calendar anomalies in stock returns with respect to the choice of return measure, estimation procedure, and time period. For daily returns from 1972 to 1994, the size and statistical significance of the anomalies differ more across return measure than across estimation procedure. For the returns on small-firm stocks, there is robust evidence of weekend effects, pre-holiday effects, and January effects. For the returns on large-firm stocks, calendar anomalies are weaker and essentially disappear after 1986.

Discount window borrowing across federal reserve districts: Evidence under contemporaneous reserve accounting☆

Abstract In recent years, bank borrowing at the discount window has been less reliably related to the spread between the Federal funds rate and the discount rate, complicating the implementation of the borrowed reserves targeting procedure of the Federal Reserve. This paper investigates borrowing across Federal Reserve districts to see if there are significant differences in borrowing behavior across bank size and discount window administrations. The results suggest that borrowing behavior does differ across districts, that standard borrowing models are least satisfactory in explaining the borrowing of large banks, and that borrowing behavior changed after the 1987 stock market crash. The gains in explanatory power from disaggregation, however, are not large.

The Regulation of Occupations and the Earnings of Women

In this paper, a human capital model is used to investigate the effects of occupational licensing and occupational certification on the wage rates of individual women. When we analyzed micro data available from the National Longitudinal Surveys of mature and young women, we found that licensed women earn about 20 percent more per hour after controlling for personal characteristics, regional location, human capital factors, and occupational category. No statistically significant premium was found for certified women.

Regression Strategies When Multicollinearity Is A Problem - A Methodological Note

Researchers in accounting often find that the high degree of multicollinearity in financial data prevents them from obtaining precise estimates of coefficients of specific variables in regression applications. In response to this problem, several investigators have adopted regression strategies which presumably circumvent the problem of multicollinearity. One approach, employed by Brown and Ball [1967] and Beaver, Griffin, and Landsman [1982], among others, transforms the correlated explanatory variables into orthogonal variables.1 A second strategy, used recently by Wilson and Howard [1984], involves a two-stage procedure. Unfortunately, these strategies do not solve the multicollinearity problem since they lead to estimated coefficients which either are identical to those from ordinary least squares, or they are biased. Assume that the model we wish to estimate is:

Asset prices and expected monetary policy: evidence from daily data

This article explores the relationships among Libor, gold prices, the exchange rate, oil prices, fed funds futures prices and stock prices at a daily frequency. This article examines whether expected monetary policy, measured by changes in the prices of fed funds futures contracts, reacts to high frequency changes in asset prices and, in turn, whether asset prices respond to changes in expected monetary policy. The article reveals that there are statistically significant relationships between expected US monetary policy and shocks to Libor and exchange rates. It also reveals that there is no evidence of a systematic relationship between stock prices and expected monetary policy changes. Splitting the data into expansionary and recessionary periods using NBER dating, we find results for the expansionary periods that are very similar to the results for the entire period. For the periods of recession, we find little evidence of significant linkages between markets.