Martin D. D. Evans

Inflation regimes and the sources of inflation uncertainty

This paper develops new time series measures of inflation uncertainty in the United States in the postwar period that account for the prospect of changing inflation regimes. The measures are constructed from estimates of a Markov switching model for inflation. Importantly, we show that rational forecasts derived from the Markov model are consistent with survey measures of inflation expectations. Our Markov model allows us to decompose uncertainty about future inflation into two components; a certainty equivalent component that ignores uncertainty about future inflation regimes, and a regime uncertainty component that reflects this uncertainty. Survey measures of inflation uncertainty, based on the dispersion of forecasts, appear more closely associated to the regime uncertainty component than the certainty equivalent component of inflation uncertainty. The regime uncertainty component also appears to have significant explanatory power in forecasting unemployment while the certainty equivalent component does not. Copyright 1993 by Ohio State University Press.

Real Rates, Expected Inflation, and Inflation Risk Premia

This paper studies the term structure of real rates, expected inflation, and inflation risk premia. The analysis is based on new estimates of the real term structure derived from the prices of index-linked and nominal debt in the U.K. I find strong evidence to reject both the Fisher Hypothesis and versions of the Expectations Hypothesis for real rates. The estimates also imply the presence of time-varying inflation risk premia throughout the term structure. Copyright The American Finance Association 1998.

Discovering the Link between Inflation Rates and Inflation Uncertainty

A new time-series model is used to reassess the strength of the link between inflation uncertainty and the level of inflation in the United States. The model provides several statistical measures that can be used to examine different aspects of uncertainty. The main finding is that uncertainty about the long rather than short-term prospects for inflation moved strongly with the rate of inflation since the early 1970s. Copyright 1991 by Ohio State University Press.

Do stationary risk premia explain it all?: Evidence from the term structure

Most studies of the expectations theory of the term structure reject the model. However, the significance of the rejections depend strongly upon the form of the test. In this paper, we use the pattern of rejection across maturities to back out the implied behavior of time-varying risk premia and/or market forecasts. We then use a new technique to test whether stationary risk premia alone can be responsible for these rejections. Surprisirj1y, this test is rejected for short maturities up to 6 months, suggesting that time-varying risk premia do not explain it all. We also describe hew this method can be used to test other asset pricing relationships.

International Capital Flows, Returns and World Financial Integration

International capital flows have increased dramatically since the 1980s, with much of the increase being due to trade in equity and debt markets. Such developments are often attributed to the increased integration of world financial markets. We present a model that allows us to examine how greater integration in world financial markets affects the behavior of international capital flows and financial returns. Our model predicts that international capital flows are large (in absolute value) and very volatile during the early stages of financial integration when international asset trading is concentrated in bonds. As integration progresses and households gain access to world equity markets, the size and volatility of international bond flows fall dramatically but continue to exceed the size and volatility of international equity flows. This is the natural outcome of greater risk sharing facilitated by increased integration. We find that the equilibrium flows in bonds and stocks are larger than their empirical counterparts, and are largely driven by variations in equity risk premia. The paper also makes a methodological contribution to the literature on dynamic general equilibrium asset-pricing. We implement a new technique for solving a dynamic general equilibrium model with production, portfolio choice and incomplete markets.

Real Risk, Inflation Risk, and the Term Structure

This disclosure relates to a system for fluidizing and transporting particulate material. The particulate material is fed into a fluidizing container from a hopper through two independently operated, serially arranged valves. The valves are controlled such that the closest valve to the container is opened first and closed last, after a charge has been delivered to the container to prevent flow of pressurized air through the hopper. Special blending nozzles are disclosed for an optional blending operation during the fluidizing and transporting process, particularly of certain materials. The outlet conduit from the container has an isolating valve, upstream from a fluid conveyor means, to permit the container to be filled with a new charge while the previous charge is being transported to its destination. Special control means are provided to operate the valves in proper timed sequence to minimize the time cycle for each charge.

Do currency markets absorb news quickly

Abstract This paper addresses whether macro news arrivals affect currency markets over time. The null from macro exchange rate theory is that they do not: macro news is impounded in exchange rates instantaneously. We test this by examining the effects of news on subsequent trades by end-user participants (such as hedge funds, mutual funds, and non-financial corporations). News arrivals induce subsequent changes in trading in all of the major end-user segments. These induced changes remain significant for days. Induced trades also have persistent effects on prices. Currency markets are not responding to news instantaneously.

The response of exchange rates to permanent and transitory shocks under floating exchange rates

Abstract Using the joint behavior of inflation and real exchange rates, we develop an empirical model to uncover the sources of the fluctuations in the real dollar exchange rates of four major industrial countries under the current float. This model allows us to construct two time series for each country pair, one representing the permanent component of each real exchange rate, and the other the purely transitory component. Over the period as a whole, transitory shocks played a relatively small but statistically significant role. Real dollar exchange rates therefore did not simply evolve in response to permanent shocks. Instead, there are instances in which temporary shocks made a substantial contribution. We conclude that the random walk model, though an approximate statistical description of real-exchange-rate behavior, is a poor guide to model structure. (JEL F31).

Were Price Changes during the Great Depression Anticipated? Evidence from Nominal Interest Rates

Abstract This paper reassesses whether the large swings in prices during the 1930s were anticipated. We argue that uncertainty about monetary, fiscal, and exchange rate policies induced systematic differences between the rate of price change expected by economic agents at the time and the time series forecasts of inflation. Our analysis of nominal interest rates and ex post inflation strongly supports this view. In fact. our results suggest that the deflation of the early Depression years and the inflation that followed were both largely unanticipated.

A Method for Solving General Equilibrium Models with Incomplete Markets and Many Financial Assets

This paper presents a numerical method for solving stochastic general equilibrium models with dynamic portfolio choice. The method can be applied to models with heterogeneous agents, time-varying investment opportunity sets, and incomplete asset markets. We illustrate the method using a two-country model with production. We check the accuracy of our method by comparing the numerical solution to a complete markets version of the model against its known analytic properties. We then apply the method to an incomplete markets version where no analytic solution is available. In all versions the standard accuracy tests confirm the effectiveness of our method.