The results presented below demonstrate that the structural modeling approach to interest rate determination not only stands apart from the sectoral disaggregation question conceptually but also performs fairly well without sectoral disaggregation empirically. This paper presents estimation and dynamic simulation results for an aggregated equivalent to the disaggregated model of the determination of bond yields developed in Friedman (1977; 1979). Instead of six bond demand and two bond supply equations, here there are but one demand and one supply equation. The empirical results show that, while disaggregation is of value in structural interest rate modeling (that is, the disaggregated model outperforms the aggregated one), even the aggregated structural model performs very well in comparison with familiar unrestricted reduced-form term structure equations.

The use of iterative algorithms, based on the Gauss-Seidel method or a similar approach, to solve systems of nonlinear simultaneous equations may lead to problematical situations which in theory are not surprising, but in practice are unexpected by the user. In particular, such situations may arise in the solution of econometric models for simulation purposes. One source of the problem lies in the failure of these algorithms, which repeatedly solve single equations according to some sequential ordering,1 to deal with the interaction properties of specific higher-order subsystems of closely related equations. One illustration of such a subsystem is the set of equations which determines unemployment and labor force in the Wharton Econometric Forecasting Model [1].

A feature of U.S. postwar business cycle experience that is by now widely documented is the tendency of the spread between the respective interest rates on commercial paper and Treasury bills to widen shortly before the onset of recessions. By contrast, the paper—bill spread did not anticipate the 1990–1991 recession. Empirical work presented in this paper supports two (not mutually exclusive) explanations for this departure from past experience. First, at least part of the paper—bill spread's predictive content with respect to business cycle fluctuations stems from its role as an indicator of monetary policy, but the 1990–1991 recession was unusual in postwar U.S. experience in not being immediately precipitated by tight monetary policy. Second, movements of the spread during the few years just prior to the 1990–1991 recession were strongly influenced by changes in the relative quantities of commercial paper, bank CDs, and Treasury bills that occurred for reasons unrelated to the business cycle. This latter finding in particular sheds light on the important role of imperfect substitutability of different short-term debt instruments in investors' portfolios, and highlights the burdens associated with using relative interest rate relationships as business cycle indicators.

ONE of the most important relationships I in economics is that between the production of real output on the one side and the employment and unemployment of labor on the other. In the familiar breakdown of an economy into its simplest functions a goods market, a labor market, and one or more financing markets1 this relationship comprises the interface between the goods market and the labor market. The relationship is all the more important in that a number of researchers have connected price movements in the goods market directly to quantity movements in the labor market, relying upon both theories of administered pricing and empirical observations of Phillips curve phenomena. Much of current economic thinking relies on the same approach to incorporating the outputunemployment relationship into a macroeconomic framework: Both Keynesians and Chicago school monetarists typically apply their varied apparati to explaining or forecasting movements in real output, and then rely on some type of Okun's Law (1962) formulation to move from real output to a discussion of unemployment. A variant adopted by some neoclassical theorists is to use prices, wages and expectational variables to explain movements in labor market variables -employment or unemployment; these writers then revert, however, to some simplified structure such as the inverse of Okun's Law to move from the labor market to the goods market. For either group, the behavior of whichever market is of primary interest takes precedence over the relationship between the two markets. The object of this paper is to focus clearly on the goods market -labor market nexus. The paper derives and estimates an empirical relationship of Okun's form and shows that this relationship is more complex and merits more explicit attention than the current literature implies. In particular, Okun's approach of estimating the unemployment rate directly constitutes an alternative to estimating employment and labor force separately, and using an identity to solve for the unemployment rate, apart from Okun's paper; this approach has largely predominated in the literature of labor market economics.2 Especially from the standpoint of economic forecasting, at least one revealed weakness of the more commonly used indirect approach has been, in recent experience, its inability to generate accurate predictions of the unemployment rate. Errors made in the various equations of the analysis apparently have not been on the whole sufficiently offsetting to render the indirect approach adequate for forecasting and applied policy work. In this context a single direct unemployment equation may have appeal over a model in which the unemployment forecast is the residual which represents the difference between the labor demand forecast and the labor supply forecast.3 The primary output of the paper is, therefore, an unemployment equation which takes real output as given and introduces other independent variables to improve the specification of the goods market labor market relationship. Hence it is also necessary to