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3291. The Information Content of Forward and Futures Prices: Market Expectations and the Price of Risk

Author:
Jonathan H. Wright, Sergey V. Chernenko, and Krista B. Schwarz
Publication Date:
06-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Forward and futures rates are frequently used as measures of market expectations. In this paper we apply standard forecast efficiency tests, and some newer exact sign and rank tests, to a wide range of forward and futures rates, and in this way test whether these are in fact rational expectations of future actual prices. The forward and futures rates that we study under a common methodology include foreign exchange forward rates, U.S. and foreign interest rate futures and forward rates, oil futures and natural gas futures. For most, but not all, of these instruments, we find that we can reject the hypothesis that the forward or futures rates are rational expectations of actual future prices. It is well known that foreign exchange forward rates give less accurate forecasts than a random walk, but we show that this is also true for some interest rate futures and forward rates. We conclude that forward and futures prices are not generally pure measures of market expectations: they are also heavily affected by the market price of risk.
Topic:
Security, Economics, Emerging Markets, and International Trade and Finance
Political Geography:
United States

3292. Is Inflation Targeting Best-Practice Monetary Policy?

Author:
Jon Faust and Dale W. Henderson
Publication Date:
05-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We describe the inflation targeting framework (ITF) and compare it against hypothetical bestpractice based on optimization. The core requirements of the ITF are an explicit long-run inflation goal and a commitment to transparency in policymaking. Advocates and practitioners of the ITF have made many contributions to clear goal setting and communication by central banks. However, we contend that ITF communication policies both as advocated and practiced often have some elements that either obfuscate or, in some cases, explicitly contradict the dictates of optimization in a stabilization-policy paradigm. In this paradigm, the central bank has an objective function that places weight on both inflation and output-gap stabilization and faces a conventional (exploitable) Phillips-curve trade-off. We point out some problems that the ITF communication policy may generate in this setting. Our analysis leads us to make four suggestions for communication policy intended to help central banks avoid these problems.
Topic:
Security, Economics, Emerging Markets, and International Trade and Finance

3293. Optimal Monetary and Fiscal Policy: A Linear-Quadratic Approach

Author:
Pierpaolo Benigno and Michael Woodford
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We propose an integrated treatment of the problems of optimal monetary and fiscal policy, for an economy in which prices are sticky (so that the supplyside effects of tax changes are more complex than in standard fiscal analyses) and the only available sources of government revenue are distorting taxes (so that the fiscal consequences of monetary policy must be considered alongside the usual stabilization objectives). Our linear-quadratic approach allows us to nest both conventional analyses of optimal monetary stabilization policy and analyses of optimal tax-smoothing as special cases of our more general framework. We show how a linear-quadratic policy problem can be derived which yields a correct linear approximation to the optimal policy rules from the point of view of the maximization of expected discounted utility in a dynamic stochastic general-equilibrium model. Finally, in addition to characterizing the optimal dynamic responses to shocks under an optimal policy, we derive policy rules through which the monetary and fiscal authorities may implement the optimal equilibrium. These take the form of optimal targeting rules, specifying an appropriate target criterion for each authority.
Topic:
Conflict Resolution, Security, Economics, and International Trade and Finance

3294. Understanding the Effects of Government Spending on Consumption

Author:
Jordi Gali, J. David Lopez-Salido, and Javier Valles
Publication Date:
04-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
Recent evidence on the effect of government spending shocks on consumption cannot be easily reconciled with existing optimizing business cycle models. We extend the standard New Keynesian model to allow for the presence of rule-of-thumb (non- Ricardian) consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
Topic:
Security, Economics, Government, and International Trade and Finance

3295. Landmine Policy Reply by DoD to a GAO Report

Publication Date:
03-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This is the Department of Defense (DoD) response to the GAO draft report GAO-02- 1003, “MILITARY OPERATIONS: Information on U.S. Use of Land Mines in the Persian Gulf War,” dated August 6, 2002 (GAO code 350068). The Department found a number of factual inaccuracies in the draft report. These inaccuracies were pointed out to GAO representatives during the August 7, 2002 draft report meeting and in subsequent exchanges. This response addresses DoD concerns with the report in general, rather than reiterating a list of line-by- line corrections.
Topic:
Security, Defense Policy, Arms Control and Proliferation, and Human Welfare

3296. Landmine Policy

Author:
Rebecca Spyke
Publication Date:
03-2004
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
On Friday, February 27, 2004, the Administration announced a new United States policy on landmines. This policy is a significant departure from past approaches to landmines. It will ensure protection for both military forces and civilians alike, and will continue U.S. leadership in humanitarian mine action – those activities that contribute most directly toward eliminating the landmine problem.
Topic:
Security, Defense Policy, Arms Control and Proliferation, and Human Welfare

3297. Rebasing, Revisited

Author:
Thomas Donnelly
Publication Date:
12-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
One of the key questions for the second term of the Bush administration is how to reposture U.S. military forces both at home and abroad. Fifteen years after the fall of the Berlin Wall, these forces resemble nothing so much as a smaller version of their Cold War selves, in many ways improved but hardly “transformed”— to use Defense Secretary Donald Rumsfeld's mantra—let alone optimized for the missions they face today and are most likely to face in the near future. While the idea of “force posture” includes factors beyond basing, the tyrannies of time and distance still do much to shape the character of war. The value of bases is as the value of other real estate: it all comes down to location, location, location.
Topic:
Security, Foreign Policy, and National Security
Political Geography:
United States and Berlin

3298. Homeland Defense and the U.S. Military

Author:
Thomas Donnelly
Publication Date:
11-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
The defense of the American homeland has always been the core mission of the U.S. military, but the meaning of that responsibility is undergoing a transformation and demands careful rethinking. Specifically, the September 11 attacks and the global war on terror are forcing American strategists to reevaluate conventional assumptions about how missile defense and neighboring nations fit into U.S. national security.
Topic:
Security, Foreign Policy, and National Security
Political Geography:
United States and America

3299. A Strategy for Nuclear Iran

Author:
Thomas Donnelly
Publication Date:
10-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
Regardless of who is elected to the presidency in November, the growing threat posed by a nuclear Iran is certain to be at the top of the next administration's national security agenda. Unfortunately, neither a "grand bargain" with Tehran nor a conventional military strike against its nuclear facilities offers much hope of preventing one of the world's most dangerous regimes from acquiring the world's most dangerous weapons. In the short term, at least, the United States must instead work to isolate Iran not only militarily but ideologically, by succeeding in the democratic transformation of Afghanistan and Iraq.
Topic:
Security and Foreign Policy
Political Geography:
Afghanistan, United States, Iraq, and Iran

3300. The Top Ten Questions for the Post-9/11 World

Author:
Thomas Donnelly
Publication Date:
07-2004
Content Type:
Policy Brief
Institution:
American Enterprise Institute for Public Policy Research
Abstract:
As the great bureaucratic gears that will stamp out the 2005 Quadrennial Defense Review—without question, the most important appraisal of U.S. military requirements in a generation—begin to turn, the Pentagon's decisions in the months ahead will shape the post-9/11 world. As a barometer of things to come, here follow the ten most important questions today confronting U.S. military strategists and force planners.
Topic:
Security and Foreign Policy
Political Geography:
United States