Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected.asset returns and expected inflation, and it predicts that the inflation-asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.

Alfred Marshall, J. Laurence Laughlin; Note by Professor Marshall and Reply by Laughlin, The Quarterly Journal of Economics, Volume 1, Issue 3, 1 April 1887, Pa

IN contrast to the extensive empirical work on the income elasticity on demand for housing services, the relation between tenure choice and income has received relatively little attention. Those studies which have been completed have generally involved only a single housing market, and the method, data used, and the markets studied have been so diverse as to make comparison of the resultant estimates extremely difficult. Further, one of the major shortcomings of earlier efforts has been the lack of a proper theoretical framework underlying the estimated models.' The purpose of the present paper is to develop and test a model of aggregate tenure choice based on the household tenure decision. The tenure-choice estimates are based on a sample of metropolitan areas and are obtained for six household types by race using income data for eight income intervals. The principal value of the research is the rigorous definition of the aggregate tenure-income relation and the provision of estimates that can serve as benchmarks with which to compare similar estimates for individual housing markets.' The estimates might also serve as an input into the evaluation of public policies involving home ownership, such as the effect on home ownership rates of changes in the treatment of certain ownership related expenses under the Internal Revenue Code. The main findings are the estimates of the income elasticity of demand for owner occupancy. The elasticity at the mean for all households combined is about 0.18. Wide variation among household types was found: elasticities larger than the mean were obtained for husband-wife family types with heads under age 45 and for non husband-wife families and primary individuals. There are substantial differences between races in the elasticities, although the overall pattern for household types just described remains generally valid for both races. The mean income elasticity of all black households combined is somewhat larger than for all white households, 0.25 vs. 0.18. The remainder of the paper consists of two sections. In section II the theoretical model is developed and its empirical specification given. Section III presents the estimates of the aggregate cross-cities model and contrasts them with fairly comparable estimates for a single housing market.

The three papers of this session link financial crises (explicitly or implicitly) to coordination failure. In Bryant (Journal of Banking and Finance, 2002), the possibility of coordination failure is due to complementarity in the productive technology. In Chui et al. (Journal of Banking and Finance, 2002), foreign lenders to a small country fail to coordinate on the optimal strategy rolling over short-term loans. Finally, Amable et al. (Journal of Banking and Finance, 2002) implicitly introduce coordination failure through a production function with external increasing returns to scale. This sort of “thick markets” externality can be viewed as a reduced form that stands for coordination problems in a non-Walrasian economy.

We investigate Grossman and Laroque's (1990) conjecture that costs of adjusting consumption can account, in part, for the empirical failure of the consumption‐based capital asset pricing model (CCAPM). We incorporate small fixed costs of consumption adjustment into a CCAPM with heterogeneous agents. We find that undetectably small consumption adjustment costs can account for much of the discrepancy between the observed variance of nondurable aggregate consumption growth and the predictions of the CCAPM, and can partially reconcile nondurable consumption data with the observed equity premium. We conclude that the CCAPM's implications are nonrobust to extremely small adjustment costs.

Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected asset returns and expected inflation, and it predicts that the inflation-asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.

ABSTRACT Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected asset returns and expected inflation, and it predicts that the inflation‐asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.

We investigate Grossman and Laroque's (1990) conjecture that costs of adjusting consumption can account, in part, for the empirical failure of the consumption‐based capital asset pricing model (CCAPM). We incorporate small fixed costs of consumption adjustment into a CCAPM with heterogeneous agents. We find that undetectably small consumption adjustment costs can account for much of the discrepancy between the observed variance of nondurable aggregate consumption growth and the predictions of the CCAPM, and can partially reconcile nondurable consumption data with the observed equity premium. We conclude that the CCAPM's implications are nonrobust to extremely small adjustment costs.

We document extreme bias and dispersion in the small-sample distributions of four standard regression-based tests of the expectations hypothesis of the term structure of interest rates. The biases arise because of the extreme persistence in short interest rates. We derive approximate analytic expressions for the biases under a simple first-order autoregressive data generating process for the short rate. We then conduct Monte Carlo experiments based on a bias-adjusted first-order autoregressive process for the short rate and for a more realistic bias-adjusted VAR-GARCH model incorporating the short rate and three term spreads. Conducting inference with the small-sample distributions of test statistics rather than with their asymptotic distributions provides a more consistent rejection of the expectations hypothesis. Plausible sources of measurement error in short and long yields do not salvage the expectations hypothesis.