Geoffrey Woglom

Do Credit Markets Discipline Sovereign Borrowers? Evidence from the U.S. States

The degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by U.S. states. The results generally support an optimistic view of the market discipline hypothesis, with credit markets providing incentives for sovereign borrowers to restrain borrowing. While the risk premium on bond yields is estimated to increase only gradually at low levels of debt, this effect appears to become much larger as debt rises. There is also some evidence that credit markets may withhold access to credit at very high levels of debt. Copyright 1995 by Ohio State University Press.

Market-Based Fiscal Discipline in Monetary Unions: Evidence from the U.S. Municipal Bond Market

The concept of market-based fiscal discipline posits that a government which runs persistent, excessive fiscal deficits will face an increased cost of borrowing and eventually, a reduced availability of credit, and that these market actions will provide an incentive to correct irresponsible fiscal behavior. This paper presents new empirical evidence on market-based fiscal discipline by estimating the relationship between the cost of borrowing and fiscal policy behavior across U.S. states. We find that U.S. states which have followed more prudent fiscal policies are perceived by the market as having lower default risk and are therefore able to reap the benefit of lower borrowing costs.

Underemployment Equilibrium with Rational Expectations

In this paper I use some recent work in the microeconomics of imperfect information to construct a macro model. The microeconomic theory suggests that atomistically competitive firms face kinked demand curves. In this model there is a range of aggregate equilibria consistent with correct information. I then show that individual firms can face a free-rider problem in trying to move from one equilibrium to another by changing the price level. Monetary policy is not subject to this problem, even if the policy is fully anticipated.

Rational Expectations and Monetary Policy in a Simple Macroeconomic Model

I. Rational expectations and the optimal monetary instrument, 92.—II. The Feds advantage in stabilizing the economy when the private sector has the same information, 96.—III. Information differences between the Fed and the private sector, 98.—IV. Conclusions, 101.

More Results on the Exact Small Sample Properties of the Instrumental Variable Estimator

at the University of the Western Cape. Thanks to my colleague Steven Rivkin and a generous referee; remaining errors are my own.

Endowment spending rates, intergenerational equity and the sources of capital gains

Abstract This paper analyzes how James Tobin’s widely cited concept of “intergenerational equity” for university endowments relates to the economic concepts of intertemporal substitutability and risk aversion. I show that Tobin’s concept of intergenerational equity is a very special case of intertemporal substitutability; a special case that implies very low tolerance for risk. Using the more general case, I show that the observed reduction in university spending rates during the 1990s can be viewed as a reasonable response to a period of non-recurring capital gains.

Financial Changes and Optimal Spending Rates among Top Liberal Arts Colleges, 1996-2001

This article documents the changes in financial status among the top 49 liberal arts colleges between 1996 and 2001 by using Integrated Postsecondary Education Data System (IPEDS) financial and enrollment data. These data show large disparities in net assets per student, expenses per student, and the subsidies per full-paying student and the average student. Differences in comprehensive fees are considerably smaller. In addition the six wealthiest institutions have maintained relatively greater spending while still increasing their net assets faster than their peer institutions. Two views of the optimal rates of spending are then presented, and spending rates are calculated for each institution. Most of these institutions have spending rates well below the rate that would be required to achieve intergenerational equity.

The S&P 500 effect: not such good news in the long run

This paper analyzes the effect on a companys stock price when it is added to the S&P 500 Index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P500 additions upon announcement and in the long run. This model predicts that a company added to the S&P500 should experience an initial price increase followed by a reversal of this price increase owing to the predicted increased stock price volatility of companies post-addition. All of these effects should be growing over time because of the increasing importance of S&P500 indexed mutual funds. We test the predictions of the model using a sample of 303 S&P500 Index additions between 1978 and 1998. We find results generally consistent with the model, particularly in the most recent period when it appears that the post-addition increase in stock price volatility reverses almost all of the initial price increase.

The S&P 500 Effect: Not So Good in the Long Run

This is an analysis of the effect on a companys stock price of adding it to the S&P 500 index. A simple theoretical model is developed to show how trading effects and changes to fundamentals should affect the price of S&P 500 additions upon announcement and in the long run. The model predicts a company added to the S&P 500 should experience an initial price increase and then a reversal of this price increase, owing to the predicted increased stock price volatility of companies post-addition. All these effects should strengthen over time with the increasing importance of S&P 500 indexed mutual funds. Tests of the model using a sample of 303 S&P 500 index additions between 1978 and 1998 produce generally consistent with predictions, particularly in the most recent period, when it appears that a post-addition increase in stock price volatility reverses almost all the initial price increase.

Estimating Models with Rational Expectations

IN THIS PAPER we wish to examine the assumptions needed to estimate models in which expectations of future variables are formed rationally. Starting with Robert Lucas [6], there has been much criticism of traditional econometric techniques based on estimating aggregate behavioral relationships. This criticism has been primarily focused on whether the traditional estimates of macroeconomic, behavioral relationships were structural. Lucas showed that many of the coefficients in traditional macroeconometric models would vary with changes in the policy regime. Thus these estimates were of little use for policy simulations. Many economists have called for a revolution in macroeconometric methods in light of Lucass insight. One group of critics (e.g., Sims [14], Lucas and Sargent [7], Sargent and Sims [13]) proposes abandoning the use of a priori behavioral information in developing regression equations. Another group (e.g., Sargent [12] and Wallis [21]) attempts to estimate behavioral equations, but abandons the traditional Cowles Commission type of identifying restrictions. Instead, identification is achieved by the use of nonlinear cross-equation restrictions implied by rational expectations. In this paper we do not take issue with Lucass [6] basic insight; we concur with the critics who argue that macroeconometric methods need to be changed to take account of it. However, just as one must be concerned about structural instability when performing policy simulations, one must also be concerned about structural