Search Results
Working Paper
Monetary policy and stock market booms and busts in the 20th century
This paper examines the association between monetary policy and stock market booms and busts in the United States, United Kingdom, and Germany during the 20th century. Booms tended to arise when output growth was rapid and inflation was low, and end within a few months of an increase in inflation and monetary policy tightening. Latent variable VAR analysis of post-war data finds that inflation has had a particularly strong impact on market conditions, with disinflation shocks moving the market toward a boom and positive inflation shocks moving the market toward a bust. We conclude that ...
Journal Article
Discrete monetary policy changes and changing inflation targets in estimated dynamic stochastic general equilibrium models
Many estimated macroeconomic models assume interest rate smoothing in the monetary policy equation. In practice, monetary policymakers adjust a target level for the federal funds rate by discrete increments. One often-neglected consequence of using a quarterly average of the daily federal funds rate in empirical work is that any change in the target federal funds rate will affect the quarterly average in the current quarter and the subsequent quarter. Despite this clear source of predictable change in the quarterly average of the federal funds rate, the vast bulk of the literature that ...
Journal Article
Strengthening the case for the yield curve as a predictor of U.S. recessions
Past experience has led financial market participants to believe that future interest rates will be closely related to the performance of the economy. If so, the shape of the yield curve ought to summarize the implicit economic forecasts of a broad range of bond traders. Previous research has demonstrated that, relative to carefully tailored forecasting variables such as the index of leading indicators, the yield curve is an excellent predictor of recessions. In this article, Michael Dueker shows that the predictive power of the yield curve does not diminish when examined in the context of ...
Journal Article
Open mouth operations: a Swiss case study
Working Paper
Business cycle detrending of macroeconomic data via a latent business cycle index
We use Markov Chain Monte Carlo methods to augment a vector autoregressive system with a latent business cycle index that is negative during recessions and positive during expansions. We then sample counterfactual values of the macroeconomic variables in the case where the latent business cycle index is held constant at its median value. These counterfactual values represent posterior beliefs about how the economy would have evolved absent business cycle fluctuations. One advantage is that a VAR framework provides model-consistent counterfactual values in the same way that VARs provide ...
Working Paper
Non-monotonic long memory dynamics in black-market premia
The dynamic response of Black market premia to domestic shocks is an important issue in the design and implementation of stabilization and reform programs. We use a vector autoregressive fractionally integrated model to provide new evidence on the dynamics of the official and Black market exchange rates. We show that the official and Black market exchange rates in Hungary are cointegrated with a negative fractional order ofintegration in the cointegrating residuals. The new empirical finding means that the cointegrating residuals are positively autocorrelated in the short run due to ...
Journal Article
Do inflation targeters outperform non-targeters?
Ten years of empirical studies of inflation targeting have not uncovered clear evidence that monetary policy that incorporates formal targets imparts better inflation performance. The authors survey the literature and find that the "no difference" verdict concerning inflation targeting has been robust to a wide range of countries and methods of analysis, starting with a study by Dueker and Fischer (1996a). The authors present updated Markov-switching estimates from the original Dueker and Fischer (1996a) article and show that their early conclusions about inflation targeting among early ...
Working Paper
Multivariate contemporaneous threshold autoregressive models
In this paper we propose a contemporaneous threshold multivariate smooth transition autoregressive (C-MSTAR) model in which the regime weights depend on the ex ante probabilities that latent regime-specific variables exceed certain threshold values. The model is a multivariate generalization of the contemporaneous threshold autoregressive model introduced by Dueker et al. (2007). A key feature of the model is that the transition function depends on all the parameters of the model as well as on the data. The stability and distributional properties of the proposed model are investigated. The ...
Working Paper
Directly measuring early exercise premiums using American and European S&P 500 index options
The Chicago Board Options Exchange concurrently listed European-style and American-style options on the Standard and Poor's 500 Index from April 2, 1986 through June 20, 1986. This unique time period allows for a direct measurement of the early-exercise premium in American-style index options. In this study, using ask quotes, we find average early exercise premiums ranging from 5.04% to 5.90% for calls, and from 7.97% to 10.86% for puts. Additionally, we are able to depict a potentially useful functional form of the early exercise premium. As in previous studies, we find some instances of ...