This paper presents a model that provides an explanation, based on regime switching in the real interest rate and learning, of why tests based on stock-adjustment models, Euler equations, or decision rules—which emphasize short-run fluctuations in inventories and the interest rate—are unlikely to uncover a negative relationship between inventories and the real interest rate. The model, however, predicts that inventories will respond to long-run movements, that is, to regime shifts in the real interest rate. Tests emphasizing cointegration techniques confirm this prediction and show a significant long-run relationship between inventories and the real interest rate.

We analyze the role of debt in persuading an entrepreneur to pay out cash flows, rather than to divert them. In the first part of the paper we study the optimal debt contract—specifically, the trade-off between the size of the loan and the repayment—under the assumption that some debt contract is optimal. In the second part we consider a more general class of (nondebt) contracts, and derive sufficient conditions for debt to be optimal among these.

We investigate the source of information advantage in inter-dealer FX trading using data on trades and counter-party identities. In liquid dollar exchange rates, information is concentrated among dealers that trade most frequently and specialize their activity in a particular rate. In cross-rates, traders that engage in triangular arbitrage are best informed. Better-informed traders are also located on larger trading floors. In cross-rates, the ability to forecast flows explains all of the advantage of the triangular arbitrageurs. In liquid dollar rates, specialist traders can forecast both order-flow and the component of exchange rate changes that is uncorrelated with flow.

Abstract We propose the rise of crack cocaine markets as a key explanation for the end to the convergence in black-white educational outcomes in the United States that began in the mid-1980s. After constructing a measure to date the arrival of crack markets in cities and states, we show that the decline in educational outcomes for black males begins with the start of the crack epidemic. We also show that there are higher murder and incarceration rates after the arrival of crack cocaine and that these are predictive of lower black high school completion rates, a result consistent with human capital theory. We estimate that effects related to crack markets can account for approximately 40% to 70% of the fall in black male high school completion rates.