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We analyse the impact of Covid-19 on productivity using data from an innovative monthly firm survey that asks for quantitative impacts of Covid-19 on inputs and outputs. We find total factor productivity (TFP) fell by up to 6% during 2020-21. The overall impact combined large reductions in ‘within-firm’ productivity, with offsetting positive ‘between-firm’ effects as less productive sectors, and less productive firms within them, contracted. Despite these large pandemic effects, firms' post-Covid forecasts imply surprisingly little lasting impact on aggregate TFP. We also see significant heterogeneity over firms and sectors, with the greatest impacts in those requiring extensive in-person activity.

In this paper, we focus on the surprising phenomenon in which firms face difficulty\ud issuing in domestic currency even in the home market, especially in emerging markets.\ud Could this be due to “original sin” which has been familiar to sovereign bond issuance?\ud In its new incarnation, original sin refers to the difficulty firms in many emerging\ud markets have in borrowing domestically long-term, even in the local currency. We infer\ud the nature of original sin from 5,901 financing decisions by firms in seven Asian emerging\ud markets over a period of 20 years. Our sample period covers an episode when bond\ud issuers had a choice between a less developed but growing onshore market, which varied\ud across countries in the level of development, and a deep and liquid offshore market. We\ud find that even in countries with onshore markets, it is often easier for unseasoned firms\ud to issue offshore (in foreign currency) than to issue onshore, but changes in market\ud development reverses this effect. In addition, once such a firm becomes a seasoned\ud issuer, it is absolved from domestic original sin and is then able to act opportunistically\ud and go to the market favored by interest differentials.

The impact of an economic shock depends both on its severity and the resilience of the economic response. Resilience can include the ability to relocate factors, for example, even when new technologies or skills are not yet at the ready. This resilience per se buffers production and has an economic value, which we estimate. The COVID-19 pandemic caused a widespread decline in recorded GDP. Yet, as catastrophic as the collapse was, it was buffered by an unprecedented and spontaneous deployment of what we call “Potential Capital,” the dwelling/residential capital and connective technologies used alongside working from home. Together potential capital and labor working from home provided additional output margins and capacity. We estimate the contribution of this capital, and the remote work that it facilitated, to have roughly halved the decline in GDP in the US reducing the fall in GDP to 9.4 log points in 2020Q2 at the trough of the recession. Similar effects are seen in the 6 OECD countries for which data are available, output fell by 14 log points, but would have fallen by 26 log points had only workplace inputs been available. Accounting for the contribution of “Potential Capital” also revises downwards estimated total productivity gains in the business sector during the pandemic from 8 log points to 5 log points in 2020Q2. We also find an output elasticity of domestic non-dwellings capital to be similar to that of workplace ICT capital, reflecting its role as productive capital. Turning to the future, changes in working from home depend upon relative costs, relative technologies and, crucially, the elasticity of substitution between home and work tasks. We estimate that that elasticity to be more than unity, meaning that the growth of ICT will raise the share of work done remotely.

This paper presents a new method to analyze the effect of shocks on time series using a quantile impulse response function (QIRF). While conventional impulse response analysis is restricted to evaluation using the conditional mean function, here, we propose an alternative impulse response analysis that traces the effect of economic shocks on the conditional quantile function. By changing the quantile index over the unit interval, it is possible to measure the effect of shocks on the entire conditional distribution of a variable of interest in our framework. Therefore we can observe the complete distributional consequences of policy interventions, especially at the upper and lower tails of the distribution as well as at the mean. Using the new approach, it becomes possible to evaluate two distinct features (called “distributional effects”): (i) a change in the dispersion of the conditional distribution of interest after a shock, and (ii) a change in the degree of skewness of the conditional distribution caused by a policy intervention. None of these features can be observed in the conventional impulse response analysis exclusively based on the conditional mean function. In addition to proposing the QIRF, our second contribution is to present a new way to jointly estimate a system of multiple quantile functions. Our proposed system quantile estimator is obtained by extending the result of Jun and Pinkse (2009) to the time series context. We illustrate the QIRF on a VAR model in a manner similar to Romer and Romer (2004) in order to assess the impact of a monetary policy shock on the US economy.

© 2018 Bank of England. Fiscal Studies © 2018 Institute for Fiscal Studies. The UK's decision to leave the EU in the 2016 referendum created substantial uncertainty for UK businesses. The nature of this uncertainty is different from that of a typical uncertainty shock because of its length, breadth and political complexity. Consequently, a new firm-level survey, the Decision Maker Panel (DMP), was created to investigate this, finding three key results. First, Brexit was reported to be one of the top three sources of uncertainty for around 40percent of UK businesses in the two years after the vote in the June 2016 referendum, and this proportion increased further in Autumn 2018. Hence, Brexit provided both a major and persistent uncertainty shock. Second, uncertainty has been higher in industries that are more dependent on trade with the EU and on EU migrant labour. Third, the uncertainties around Brexit are primarily about the impact on businesses over the longer term rather than shorter term, including uncertainty about the timing of any transition arrangements and around the nature of Brexit.

Productivity is a key determinant of the sustainability of the public finances. While the initial impact of Covid-19 on labor productivity growth shows a surprisingly positive impact, the impact on total factor productivity (TFP) is less clear. We evaluate this with new survey data on labor and capital inputs, outputs and prices from a UK firm panel survey. We find that Covid-19 reduced private sector TFP by up to 4% during the pandemic, with a projected 1% reduction over the medium term. These numbers comprise a large reduction in ‘within-firm’ productivity as intermediate costs increased due to measures like protective equipment, screens, hand sanitizer and lower capacity utilization. This was partly offset, however, by a positive ‘between-firm’ effects as less productive sectors, and less productive firms within them, contracted. This highlights how the Covid-19 shock has had large, but offsetting, within and between firm impacts on aggregate TFP.

International audience; We consider several economic uncertainty indicators for the US and UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based policy uncertainty, Twitter chatter about economic uncertainty, subjective uncertainty about business growth, forecaster disagreement about future GDP growth, and a model-based measure of macro uncertainty. Four results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly – from a 35% rise for the model-based measure of US economic uncertainty (relative to January 2020) to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: Implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting differences between Wall Street and Main Street uncertainty measures. Fourth, in Cholesky-identified VAR models fit to monthly U.S. data, a COVID-size uncertainty shock foreshadows peak drops in industrial production of 12–19%.

We consider several economic uncertainty indicators for the US and UK before and during the COVID-19 pandemic: implied stock market volatility, newspaper-based economic policy uncertainty, twitter chatter about economic uncertainty, subjective uncertainty about future business growth, and disagreement among professional forecasters about future GDP growth. Three results emerge. First, all indicators show huge uncertainty jumps in reaction to the pandemic and its economic fallout. Indeed, most indicators reach their highest values on record. Second, peak amplitudes differ greatly – from a rise of around 100% (relative to January 2020) in two-year implied volatility on the S&P 500 and subjective uncertainty around year-ahead sales for UK firms to a 20-fold rise in forecaster disagreement about UK growth. Third, time paths also differ: Implied volatility rose rapidly from late February, peaked in mid-March, and fell back by late March as stock prices began to recover. In contrast, broader measures of uncertainty peaked later and then plateaued, as job losses mounted, highlighting the difference in uncertainty measures between Wall Street and Main Street.

This paper develops a simple signaling model of foreign currency borrowing that yields predictions about firm survival and performance during a currency crisis. Using a large panel of firm level data for South Korea we offer empirical support for many of the predictions of our model, while others support predictions that cannot be tested using our data. Our paper demonstrates that although firms that borrow in foreign currency are more likely to exit after the currency collapses, those that continue to produce perform better. Among them, the best performers are exporters whose foreign sales are more competitively priced under a devalued currency.

After the global financial crisis, policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between monetary policy and lending rates, how should central banks view the post-crisis transmission? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over traditional approaches. It confirms central banks should focus on the cost and composition of bank liabilities, as many are now doing, to better understand and steer the dynamics of lending rates.

The UK’s decision to leave the EU in the 2016 referendum created substantial uncertainty for UK businesses. The nature of this uncertainty is different from that of a typical uncertainty shock because of its length, breadth and political complexity. Consequently, a new firm-level survey, the Decision Maker Panel (DMP), was created to investigate this, finding three key results. First, Brexit was reported to be one of the top three sources of uncertainty for around 40% of UK businesses in the two years after the vote in June 2016 referendum. This proportion increased further in Autumn 2018. Hence, Brexit provided both a major and persistent uncertainty shock. Second, uncertainty has been higher in industries that are more dependent on trade with the EU and on EU migrant labour. Third, the uncertainties around Brexit have been primarily about the impact on businesses over the longer term rather than shorter term, including uncertainty about the timing of any transition arrangements and around the nature of Brexit.

Background We examined the prevalence of acute kidney injury (AKI) risk factors in the emergency medical unit, generated a modified risk assessment tool and tested its ability to predict AKI. \ud \ud \ud Methods A total of 1196 patients admitted to medical admission units were assessed for patient-associated AKI risk factors. Subsequently, 898 patients were assessed for a limited number of fixed risk factors with the addition of hypotension and sepsis. This was correlated to AKI episodes. \ud \ud \ud Results In the first cohort, the prevalence of AKI risk factors was 2.1 ± 2.0 per patient, with a positive relationship between age and the number of risk factors and a higher number of risk factors in patients ≥65 years. In the second cohort, 12.3% presented with or developed AKI. Patients with AKI were older and had a higher number of AKI risk factors. In the AKI cohort, 72% of the patients had two or more AKI risk factors compared with 43% of the cohort with no AKI. When age ≥65 years was added as an independent risk factor, 84% of those with AKI had two or more AKI risk factors compared with 55% of those with no AKI. Receiver operating characteristic analysis suggests that the use of common patient-associated known AKI risk factors performs no better than age alone as a predictor of AKI. \ud \ud \ud Conclusions Detailed assessment of well-established patient-associated AKI risk factors may not facilitate clinicians to apportion risk. This suggests that additional work is required to develop a more sensitive validated AKI-predictive tool that would be useful in this clinical setting.

Empirical investigation of the external finance premium has been conducted on the margin between internal finance and bank borrowing or equities but little attention has been given to corporate bonds, especially for the emerging Asian market. In this paper, we hypothesize that balance sheet indicators of creditworthiness could affect the external finance premium for bonds as they do for premia in other markets. Using bond-specific and firm-specific data for China, Hong Kong, Indonesia, Korea, Philippines, Singapore and Thailand during 1995–2009 we find that firms with better financial health face lower external finance premia in all countries. When we introduce firm-level heterogeneity, we show that financial variables appear to be both statistically and quantitatively more important for financially constrained firms. Finally, when we examine the effects of the 1997–1998 Asian crisis and the 2007–2009 global financial crisis, we find that the sensitivity of the premium is greater for constrained firms during the Asian crisis compared to other times.

In this paper we investigate the ability of a number of different ordered probit models to predict ratings based on firm-specific data on business and financial risks. We investigate models which are based on momentum, drift and ageing, and compare them with alternatives which take the initial rating of the firm and its previous actual rating into account. Using data on US bond issuing firms, as rated by Fitch, over the years 2000 to 2007, we compare the performances of these models for predicting the ratings both in-sample and out-of-sample using root mean squared errors, Diebold-Mariano tests of forecast performance and contingency tables. We conclude that both initial and previous states have a substantial influence on rating prediction.

The importance of truncated distributions for bias in estimation is demonstrated for a Japanese policy reaction function. Due to the proximity of a zero lower bound (ZLB) on interest rates, coefficient estimates can be biased upwards. This paper illustrates the importance of measuring and correcting estimates for this bias using Japan's unique experience of prolonged low inflation/deflation.

This paper offers a new approach that estimates the response of interest rates to inflation and the output gap at various points (quantiles) on the conditional distribution of interest rates. This offers an improvement on empirical estimates conducted only at the mean and also allows us to test the propositions that policy shows greater aggression to inflation in the reaction function in terms of a greater response coefficient as interest rates reach low levels, and increasing aggression as the lower bound is approached. We find support for the Taylor principle, a more aggressive response to inflation than under a Taylor rule, but no detectable evidence of increasing aggression as the zero lower bound is approached in the US and Japan.

This paper provides non-parametric tests of the correspondence between the ‘words’ on price stability from the ECB President's statement and future interest rate changes. It also indicates the commonality of the signal between these indicators of pressure on price stability.

Trade credit is an important source of finance for firms and has been well researched, but the focus has been on financial trade-offs. In this paper, we consider the trade-offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit. Our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories, profitability, risk and liquidity, and importantly, this influence operates through a production channel. Our results support the model and complement many existing studies focused on explaining the financial terms of trade credit.

This paper considers the functional relationship between relative price variability (RPV) and inflation using quarterly personal consumer expenditure data in the US over 1967q1–2003q1, deriving some implications for monetary policy. Non-parametric regression techniques are used to explore the shape of the RPV function, and this shape is related to the theory outlined by Rotemberg (1982, 1983). The empirical RPV function yields a plausible ‘optimal’ value of inflation in the region of five percentage points, which is consistent with this theory and lies within the range of values cited by recent evaluations of ‘sand’ and ‘grease’ effects.

Making accurate forecasts of the future direction of interest rates is a vital element when making economic decisions. The focus on central banks as they make decisions about the future direction of interest rates requires the forecaster to assess the likely outcome of committee decisions based on new information since the previous meeting. We characterize this process as a dynamic ordered probit process that uses information to decide between three possible outcomes for interest rates: an increase, decrease or no-change. When we analyze the predictive ability of two information sets, we find that the approach has predictive ability both in-sample and out-of-sample that helps forecast the direction of future rates.

This paper links two separate empirical literatures on inflation, relative price variability (RPV) and the price–cost markup. Measures constructed from annual and quarterly data for the US and UK are used to examine the nature of the relationships among these variables. The results show that two long-run relationships can be identified from the data: a negative relationship between inflation and the markup and a positive relationship between inflation and RPV. We eliminate the possibility that inflation is a proxy for RPV in the inflation–markup relationship and show systems estimates to be superior to single-equation estimates.

Many studies consider the aggregate impact of crises on output and the fiscal cost of reconstruction, but few studies of the impact of a crisis at the level of the firm. In this paper we consider the impact of the Brazilian crisis of 1999 on the extensive and intensive margin of exporters versus non-exporters. Using a unified theoretical framework based on a two-sector extension of the combined fixed and variable investment versions of the Holmström and Tirole (1997) closed-economy model, we explore predictors that firms will engage in global markets and export more intensively. Our results based on a detailed firm-level panel of data for Brazilian 52,667 firms from 1995-2007, show that the decision to export and increase export sales is driven by size, the debt ratio, the current ratio and operating costs as well as the direct impact of the crisis itself. The findings suggest that the mechanism is driven by the response of the credit market to the creditworthiness of the firm as it is by changing terms of trade.

After the global finance crisis short-term policy rates were cut to near-zero levels, yet, bank lending rates did not fall as much as the decline in policy rates would have suggested. If the crisis represents a structural break in the relationship between policy rates and lending rates, how should central banks view the post-crisis transmission of policy to lending rates? This poses a major puzzle for monetary policymakers. Using a new weighted average cost of liabilities to measure banks’ effective funding costs we show a model of interest rate pass-through with dynamic panel data methods solves this puzzle, and has many other advantages over policy rates. It suggests central banks should focus on the cost of bank liabilities more broadly to understand the dynamics of lending rates.

This paper investigates the role of trade credit in the transmission of monetary policy. Most models of the transmission mechanism allow the firm to access only financial markets or bank lending according to some net worth criterion. In our model we introduce trade credit as an additional source of funding. We predict that when monetary policy tightens there will be a reduction in market and bank lending, and an increase in trade credit. This is confirmed with an empirical investigation of 16,000 manufacturing firms.

In emerging Asia's local-currency bond market, the government bond segments have largely come of age while the corporate bond markets have remained immature. This paper focuses on the question of what drives corporate bond issuance, an issue of great practical relevance for policymakers in the region. We analyse the financing decisions of some 4,600 firms in eight countries in emerging Asia. We analyse these decisions within the context of the firms'capital structure. We also analyse the effect of market depth, relying on market-wide indicators from the BIS. We find that for both seasoned and unseasoned issuers, size and leverage both matter for the decision to issue. The availability of tangible assets matters for the decision to issue in foreign currency. At the level of the markets, the depth of the market and interest differentials matter.

Previous research has investigated consumers' expenditure and money demand as separable equations. We estimate them jointly as driven by the same influences. Credit is also included as a potential third variable that might provide a source of additional information about the monetary transmission mechanism. Consumption, money, and lending equations are modelled as an interdependent system, and the significance of lending for consumption andmoney is tested. Theresults using UK household sector data show that a stable credit equation does exist in parallel with money demand and consumption equations, and that interactions modelled in a conditional vector equilibrium correction system are favoured over independent equations.

This paper reports estimates of an econometric model of the determinants of OFCs’ broad money holding and M4 lending to OFCs. This is of interest both as providing information about a component of UK money and credit aggregates and because it provides some evidence of the link between financial activity and growth of the real economy. We model the long-run equilibria for money holding and lending to this sector as being driven by GDP, wealth, the return to financial services and various interest spreads. The dynamics of OFCs’ money and lending are shown to be interdependent. We then consider the evidence for interactions between OFCs and other sectors. Our results indicate that M4 lending to OFCs is significantly related to aggregate investment in the long run, but is largely unrelated to the spending of households. Copyright # 2005 John Wiley & Sons, Ltd.

Official interest rate changes should influence short rates on money market instruments and retail products, such as deposit accounts and mortgages, but complete pass-through is often taken for granted. This paper provides a theoretical and econometric framework for assessing the evidence for this assumption using seventeen years of monthly data for rates on thirteen deposit and mortgage products offered by individual UK financial institutions. The methodology allows for asymmetries and non-linearities in adjustment and the results show that the speed of adjustment in retail rates depends on whether the perceived 'gap' between retail and base rates is widening or narrowing.

This paper examines the impact of monetary policy on firms' access to bank and market finance when allowance is made for differences in firm-specific characteristics. A theoretical model determines the cut-off values for project profitability that would allow firms to access bank or market finance. This model predicts that specific characteristics in terms of size, age, risk and debt can make a firm more vulnerable to tightening credit when interest rates increase. Empirically, the paper shows, using a panel of 16,000 UK firm records over 10 years, that firms distributed according to their type (asset size, rating etc) do have differing access to bank lending and market finance. Small, young and risky firms are more significantly affected by tight monetary conditions than large, old and secure firms. The evidence is consistent with a credit channel, and demonstrates that there are distributional implications from tightening monetary policy.

The literatures on net corporate borrowing and stockbuilding by firms are both based on a simple linear-quadratic (L-Q) model, but they have been developed independently. This paper explores the possibility that a firm may jointly optimise its borrowing and stockbuilding decisions, where previous papers have imposed ‘decision rule decompositions’. The resulting model is estimated using UK corporate data and demonstrates that net corporate borrowing and stockbuilding are indeed used as substitutes in production smoothing.

This paper investigates bond market development in Asia by exploring the determinants of firms' decisions to issue public debt in a range of Asian economies. Using a novel database covering the period 1995 to 2007, we use comparable micro level panel of nine countries--China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines, Singapore, Taiwan, and Thailand--to explore factors that promote bond issuance by firms. We control for firm characteristics and market features such as bond market depth and liquidity; we also consider supra-national policy initiatives to improve bond market function. Our paper demonstrates that regional initiatives have been an important step towards greater bond issuance by firms in Asia, mostly by fostering market deepening and improving liquidity. Copyright 2014 Oxford University Press 2013, Oxford University Press.

Attention that has been directed toward the effect of trade on foreigner’s holdings of domestic currency comes exclusiely from time-series eidence. Here we extend a model of currency substitution that incorporates a trade motie for foreigners to hold domestic currency. It uses time-series and cross-sectional information for a panel of 17 industrialized countries testing two-way fixed-effects models against pooled and random-effects alternaties. The cross-sectional information is significant, reealing that pooling of data could result in misleading inferences, since country-specific effects, regional group effects, and distance are all important determinants of Ž.

The relationship between inflation and the relative variability of prices has been the subject of careful investigation in the United States using data for product groups at the city level. Yet in Europe, where the relationship could have profound effects on the viability of monetary integration, no attempt has been made to study the relationship. This paper fills the gap by examining data disaggregated to the commodity level across 10 EU countries. Evidence is found for logistic smooth transitions in the relative price variability measures within countries and within product groups. When this deterministic component is removed, the stochastic element is not persistent and does not always have the positive relationship with inflation commonly found in US city data.

The determination of long-run aggregate supply is a feature which short-run models of macroeconomic policy coordination tend to neglect but which has implications for the setting of interest rates. In this paper, the authors develop an open-economy model of output maximization, where investment and capital flows are crucial determinants of output and are in turn influenced by interest rate policy and credible control of inflation. The model represents an extension to short-run models of government policy-making and emphasizes that coordination of relative interest rates is as important as control of inflation. Copyright 1997 by Royal Economic Society.

Scientific revolutions seldom occur when the prevailing theories appear to be performing well: it is only when the accepted theory fails to offer a satisfactory explanation of events that new and more robust theories are proposed. Of these new theories the one which can explain the successful performance of the previous theory and also the events which led to its demise becomes the replacement. So it is in the history of modern monetary economics. The failure of the partial adjustment model in the mid-I970s is well documented in the United Kingdom and the United States and the search for a replacement has been the main point on the agenda since that time. There are many contending theories, some of which are advocated by the other contributors to this controversy, but the mark of a truly better theory which can be claimed to supersede the partial adjustment model is one that can explain the success and the breakdown of the previous theory as well as the events subsequently. Central to the argument of this paper is the importance of individual behaviour in the context of a market for monetary assets. Only by means of careful investigation of the microeconomic behaviour underpinning monetary economics at the individual and the market level can the stability of the money demand function be restored. It is the purpose of this paper to suggest that the buffer stock approach has gone further than other approaches in dealing with the fundamental micro-foundations of the demand for money. It does not suggest that other approaches have no microfoundations but they tend to concentrate exclusively on specific aspects of the micro-structure such as separability and ignore others relating to the behaviour of individual optimisers in a monetary market. The buffer stock model has firm micro-foundations which can explain the events both before and after the breakdown of the partial adjustment model. Section I provides an historical background to the debate and Section II gives a brief overview of buffer stock models which shows that, unlike other approaches, they have been able to reconcile the past success of the partial adjustment model with its present failure: The nature of the microfoundations of buffer stock models are the source of the success and are discussed in more detail in Section III. The final section evaluates the buffer stock approach in the light of the other alternatives.

Many recent studies have pointed out that firms with cash stocks or strong cash flow are financially resilient, enabling them to continue to invest and grow even when they experience economic shocks. In this paper we ask whether Asian firms were resilient to the recent financial crisis. Using firm level data for eight Asian countries from 2001-2009, we explore the relationship between asset growth, investment, and cash flow and find that firms use all available internal funds to channel towards asset growth even during the financial crisis. We conclude that firms in Asia were resilient to the financial crisis because they continued to use internal funds to invest and grow as they had done prior to the crisis.

Corporate bond issuers in emerging economies in Asia have often had a choice between an onshore market and an offshore one. Since 1998, however, many of these issuers have increasingly turned to the onshore market. This paper investigates systematically what factors have influenced this choice between markets for issuers in eight emerging economies – China, Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore and Thailand. For variables measuring market depth and liquidity, the availability of hedging instruments, and the size of the investor base, we rely on BIS statistics that have not been used in this literature before. We combine these market-level data with firm-level data in an unbalanced panel for the eight countries covering the period 1995 to 2007. We control for variables representing agency, static trade-off and risk management theories of the capital structure. Our results show that the choice between domestic and foreign markets has changed over time in large part because of the increased depth of the onshore market. The firms that benefit from such market development tend to be the unseasoned issuers rather than the seasoned ones.

Since the development of cointegration and unit root tests, these procedures have been applied widely to the relationship between nominal exchange rates and relative prices. The findings vary considerably for different time periods, exchange rate regimes and test procedures. These results have not previously been the subject of a comprehensive survey or evaluation. Suggestions are offered for the future development of research in this area.

In this paper we argue that banks anticipate short-term market rates when setting interest rates on loans and deposits. In order to include anticipated rates in an empirical model, we use two methods to forecast market rates - a level, slope, curvature model and a principal components model - before including them in a model of retail rate adjustment for four retail rates in four major euro area economies. Using both aggregate data and data from individual French banks, we find a significant role for forecasts of market rates in determining retail rates; alternative specifications with futures information yield comparable results.

Much of the literature on interest rate pass through assumes banks set retail rates by observing current market rates. We argue instead that banks anticipate the direction of short-term market rates when setting interest rates on loans, mortgages and deposits. If anticipated rates - captured by forecasts of short-term interest rates or future markets - are important, the empirical specifications of many previous studies that omit them could be misspecified. Including such forecasts requires a detailed consideration of the information in the yield curve and alternative forecasting models. In this paper we use two methods to extract anticipated changes to short-term market rates - a level, slope, curvature model and a principal components model - at many horizons, before including them in a model of retail rate adjustment for four interest rates in four major euro area economies. We find a significant role for forecasts of market rates in determining interest rate pass through; alternative specifications with futures information yield comparable results. We conclude that it is important to include anticipated changes in market rates to avoid misspecification in pass through estimation.

This paper examines the forward-looking rational expectations buffer stock model of Cuthbertson and Taylor (1987) in the context of the personal sector of the UK. The buffer stock model is evaluated for both narrow and broad money definitions in the UK using the encompassing the VAR methodology of Mizon (1984). This suggests that the buffer stock model is a congruent model, and that the broad definition is the most appropriate aggregate with which to model buffering behaviour — in line with previous studies, Mizen (1992). Further analysis of the models, in the light of Hendry (1988), confirms this view.