V. Vance Roley

Monetary Policy Actions, Intervention, and Exchange Rates: A Reexamination of the Empirical Relationships Using Federal Funds Rate Target Data

The authors reexamine the relationships among Federal Reserve monetary-policy actions, U.S. interventions in currency markets, and exchange rates using an alternative measure of monetary policy actions, the Federal Reserves federal funds rate target. They find that exchange rates generally respond immediately to U.S. monetary policy actions and that these responses are usually consistent with the overshooting hypothesis. The authors also find evidence of signaling and leaning-against-the-wind U.S. intervention policies over the sample; however, controlling for such interventions do not alter their estimates of exchange rate responses to federal funds rate target changes. Copyright 1998 by University of Chicago Press.

Aspects of Investor Behavior Under Risk

The three sections of this paper support three related conclusions. First, asset demands with the familiar properties of wealth homogeneity and linearity in expected returns follow as close approximations from expected utility maximizing behavior under the assumptions of constant relative risk aversion and joint normally distributed asset returns. Second, although such asset demands exhibit a symmetric coefficient matrix with respect to the relevant vector of expected asset returns, symmetry is not a general property, and the available empirical evidence warrants rejecting it for both institutional and individual investors in the United States. Finally, in a manner analogous to the finite maximum exhibited by quadratic utility, a broad class of mean-variance utility functions also exhibits a form of wealth satiation which necessarily restricts it range of applicability.

Federal Reserve Behavior Since 1980: a Financial Markets Perspective

The financial markets understanding of Federal Reserve behavior is used to examine recent changes in monetary policy. Changes in the level of interest rats in response to specific types of economic information are primarily considered. Differences in the volatility of interest rates across period provide additional evidence on changes in monetary policy regimes. The results indicate that monetary policy changed several times since 1980 with respect to either the Federal Reserves targets, its desire to achieve its targets, or its operating procedures. The different regimes correspond to Federal Reserve statements about changes in policy. In this context, then, the evidence suggests that policy was credible.

Forecasting interest rates with a structural model

Management, Benjamin Friedman and I compared disaggregated structural models of long-term interest rates to unrestricted reduced-form models. We argued that the advantages of a structural model include (a) its ability to use the theory of portfolio behavior to restrict the implied equations for interest rates, and (b) the facility that it provides for directly investigating hypotheses about portfolio behavior. We also reported that, despite the explicit market-clearing supplydemand construct, the restricted reduced forms of long-term interest rates in our models performed surprisingly well as historical “predictors” of interest rates in dynamic simulations. For example, in comparison to the unrestricted reduced-form models advanced by Feldstein and Eckstein [SI, Modigliani and Shiller [27], and Feldstein and Chamberlain [7], Friedman’s [lo, 111 disaggregated structural model of the U.S. corporate bond market exhibited withinsample prediction errors comparable to those of the “best” unrestricted reduced-form model. While a disaggregated structural model is most appropriate for investigating hypotheses about portfolio behavior and shifts in financial structure within the sample period used to estimate the model, we can also adapt the model so that we can generate post-sample predictions. A distinct advantage of this forecasting approach is that we may obtain not only security yields but also flow demands and supplies by individual categories of investors. Moreover, in a dis-