Mark Zaporowski

Interest Rates and the Subjective Probability Distribution of Inflation Forecasts

The interst rate effects of the first four moments of the subjective probability distribution of inflation forecasts from the ASA-NBER survey are examined over the period 1968:4-1985:4. Using Tre asury bill yields as the nominal rate variable in the context of a re duced form Fisher equation, the authors find that inflation uncertain ty, as measured by the average variance of the probability distributi ons of inflation forecasts, to be insignificant. However, the average skewness and kurtosis variables which result from these probability distributions do significantly affect interest rates. They interpret these effects as accounting for the level of risk or uncertainty abou t future inflation. Copyright 1988 by Ohio State University Press.

Determinants of Municipal Bond Ratings for General-Purpose Governments: An Empirical Analysis

In the wake of the destabilization of the tax-exempt bond insurance industry, this paper presents an ordered probit model of the determinants of the credit ratings of 965 county and city governments from throughout the nation. The underlying Moodys rating of these governments is posited as a function of a vector of publicly available economic, demographic, governmental, fiscal, and financial variables. The empirical results demonstrate the relative importance of economic base diversity, the growth rates of earnings, and population as well as existing full faith and credit debt on credit ratings. Additionally, our findings support the proposition that the existence of tax limits reduce the perception of credit quality, while expenditure limits raise credit ratings.

More Flexible Use of Survey Data on Expectations in Macroeconomic Models

A flexible procedure is proposed whereby both the random and systematic errors in measurement of survey data on inflation expectations can be appropriately handled when these surveys are used in the estimation of macroeconomic models. During the period 1952–1980, Livingstons two expectations series and the SRC series systematically underestimated inflation expectations by nearly 25%. The ASA–NBER survey, however, does not exhibit such underestimation. Thus, the use of the Livingston or SRC data as an unbiased measure of the true expectations of inflation would result in overestimation of the Fisher effect and the ex ante real interest rate.

A note on the variability of real interest rates, business cycles, and the livingston data*

In the context of a structural model of interest rate determination, we show how the separate impacts of business cycles on the nominal rate through their effects on the ex ante real rate and inflation forecast errors can be consistently estimated. Ours is a generalization of Tanzis (1980) model and demonstrates that over 1952–1980, the Livingston data has significantly underestimated the underlying price expectations by nearly 25%.