J. Peter Ferderer

Oil price volatility and the macroeconomy

Abstract Recent theoretical work suggests that oil price shocks may have an adverse impact on the macroeconomy, not only because they increase the level of oil prices, but also because they raise oil price volatility. This paper provides empirical support for this proposition by showing that oil price volatility, measured by monthly standard deviations of daily oil prices, helps to forecast aggregate output movements in the U.S. Moreover, part of the asymmetric relationship between oil price changes and output growth found in previous studies can be explained by the economys response to oil price volatility.

Uncertainty as a Propagating Force in The Great Depression

This article argues that the banking crises and collapse of the international gold standard in the early 1930s contributed to the severity of the Great Depression by increasing interest-rate uncertainty. Two pieces of evidence support this conclusion. First, uncertainty (as measured by the risk premium embedded in the term structure of interest rates) rises during the banking crises and is positively linked to financial-market volatility associated with the breakdown in the gold standard. Second, the risk premium explains a significant proportion of the variation in aggregate investment spending during the Great Depression. All the notions we thought solid, all the values of civilized life, all that made for stability in international relations, all that made for regularity in the economy. . . in a word, all that tended happily to limit the uncertainty of the

To raise the golden anchor? Financial crises and uncertainty during the Great Depression

This study examines the interplay between financial crises, uncertainty, and economic growth during the interwar period. Comparing the experiences of ten countries, we provide evidence that reductions in the credibility of a countrys commitment to the gold standard generated capital flight and higher interest rate volatility. This volatility, in turn, was inversely correlated with economic growth. These results suggest that financial crises helped propagate the Great Depression, in part, by increasing uncertainty.

Increasing liquidity and the declining informational content of the paper-bill spread

Abstract The paper constructs a theoretical model to show that the reduced-form relationship between the paper-bill spread and its determinants is sensitive to the substitutability between paper and bills in investors’ portfolios. Using the trend ratio of bill to paper volume outstanding as a proxy for relative liquidity of commercial paper, we provide evidence that the ability of the spread to embody important information fell as liquidity of the paper market increased during the 1980s.

A comparison of alternative term premium estimates

Abstract This paper compares rational term premia obtained by projecting ex post excess returns on the slope of the yield curve and survey term premia isolated using the Goldsmith-Nagan interest rate forecasts. The analysis demonstrates that: 1) the survey term premia exhibit a strong positive relationship with conditional interest rate variances while the rational term premia do not, and 2) the survey forecasts are less accurate than the forecasts implied by the rational term premia and persistently under predict (over predict) interest rate levels following the monetary policy rule change in the fourth quarter of 1979 (the third quarter of 1982). The first finding suggests that the survey forecasts reflect market beliefs more accurately than do the implied rational forecasts. Taken together, findings one and two provide evidence that market participants gradually learned about changes in the monetary policy rule.

Building research skills in the Macalester economics major

ABSTRACT Economics majors at Macalester College have won numerous awards for their research papers, and this success has helped them land jobs in finance, consulting, and the nonprofit sector, as well as gain admission to top graduate programs. This article describes how the Economics Department at Macalester promotes economic research among its students.

Liquidity, Uncertainty, and the Declining Predictive Power of the Paper-bill Spread

This paper addresses two questions. First, what causes the paper-bill spread to vary over time in anticipation of income fluctuations’? Second, why has the predictive power of the spread declined in recent years? Consistent with previous empirical work, the paper provides evidence for the default-risk, monetary, and cash-flow hypotheses. Moreover, new evidence is provided for the liquidity hypothesis by showing that uncertainty has a strong impact on the paper-bill spread. This finding holds for two different approaches used to measure uncertainty - financial market volatility and forecaster discord - and for uncertainty about five different variables: the federal funds rate, the Treasury bill rate, the long-term corporate bond rate, stock returns, and industrial production. Using a Kalman filter to recursively estimate the reduced-form model for the paper-bill spread, the paper shows that the impact of monetary policy and uncertainty on the spread declined during the 1980s, while the impact of default risk increased. These findings are explained by two financial market developments occurring during the 1980s: 1) the rapid growth in the volume and liquidity of the commercial paper market, and 2) increased financial fragility of commercial paper issuers.

The determinants of monetary target credibility

This paper examines the impact of several different factors on the credibility of the Federal Reserves monetary targets. Two factors appear to explain why the targets became less credible during the 1980s. First, the Feds shift from M1 to M2 targets reduced credibility because the latter aggregate is less controllable. Second, velocity instability caused the Fed to widen the target ranges, and this action signaled that they were placing less weight on monetary targets in the conduct of monetary policy.