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____________ Review____________
Vol. 68, No. 6




June/July 1986

5 Forward Exchange Hates in Efficient
Markets: The Effects o f N ew s and
Changes in M onetary Policy Regimes
16 H ow Federal Farm Spending Distorts
M easures o f Econom ic Activity




Federal Reserve Bank of St. Louis
Review
June/July 1986

In This Issue . . .




Recent theoretical explanations and em pirical analyses o f exch an ge rates
em p h a size the role o f asset m arkets rather than trade flow s. M a n y argue that
forw a rd exch an ge rates and the future spot exch an ge rates th e y m a y p red ict are
prim arily d eterm in ed b y interest and inflation rate differentials b etw een co u n ­
tries. In the first article in this Review , “ F orw ard Exchange Rates in Efficient
M a rk ets:T h e Effects o f N ew s an d Changes in M o n eta ry P o licy Regim es,” M ack Ott
and Paul T.W .M. V eugelers investigate the extent to w h ic h errors in fo rw ard
exch an ge rate p red ictio n s o f future spot exch an ge rates have been in flu enced, on
the on e hand, b y changes in interest and in flation rates and, on the other, by
changes in the p o lic y stance o f the U.S. m o n etary authority.
T h e authors fin d that changes in interest differentials explain a p o rtio n o f
fo rw a rd rate forecast errors, esp ecia lly d u rin g the p e rio d o f U.S. m on etary aggre­
gate targeting, O ctober 1979 to S eptem ber 1982, and that changes in the U.S.
m on etary p o lic y regim e alter the risk p rem iu m in fo rw a rd exch an ge rates. T h e
significant divergen cies betw een the fo rw ard and spot exch an ge rate relations
u n d er differen t U.S. m on etary p o lic y regim es suggest that cred ib le goals fo r
m on etary p o lic y m a y be as im portan t as the m ech an ical details o f that p o lic y ’s
execution.
*

*

*

In recen t years, fed eral paym en ts to farm ers fo r both loans and pu rchases o f
farm produ cts have set n e w records. In the secon d article in this issue, “ H o w
Federal Farm S pen ding Distorts M easures o f E con om ic A ctivity,” John A. T atom
explains h o w transactions b y the C o m m o d ity Credit C o rp oration (CCC) are
treated in the National In co m e and Produ ct A ccou n ts (NIPA).
T a tom sh ow s that the volatile, qu arter-to-qu arter p attern o f CCC paym en ts to
farm ers affects m easures o f farm, business, govern m en t and overall e co n o m ic
activity. A cco rd in g to th e author, the recen t unusual d evelop m en ts have c o m p li­
cated the in terpretation o f som e key m easures o f e co n o m ic p erform an ce. He
points out that a dju sting fo r these m ovem en ts can alter significan tly con clu sion s
about the short-term perfo rm a n ce and eco n o m ic ou tlook fo r fed era l purchases,
business in ven to iy investm ent and final sales in the econ om y.
T a tom explains that analysts are likely to be m isled about the e c o n o m y ’s shortrun eco n o m ic p erform a n ce unless th ey p ro p e rly adjust the N IP A m easures w h e n
large changes in CCC purchases occur.

3




JUNE/JULY 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Forward Exchange Rates in
Efficient Markets: The Effects of
News and Changes in Monetary
Policy Regimes
Mack Ott and Paul T. W. M. Veugelers

s
L - J lN C E the late 1970s, theoretical explanations o f
exchange rate determ in ation have em p h a sized the
asset approach rather than the exp en d itu re a p ­
p ro a ch .1 M ost o f the em pirical research ap p lyin g the
asset m odels o f exch an ge rate d eterm in ation also sub­
sum e the efficient market hypothesis. In this article,
w e test three efficien t m arket h ypoth eses bearin g on
forw ard exchange rates: First, are fo rw a rd rates u nbi­
ased forecasts o f future spot exch an ge rates? Second,
does “ n e w s ” — in particu lar u nan ticipated changes in
n om inal or real interest differentials — explain for-

Mack Ott is a senior economist at the Federal Reserve Bank of St. Louis
and Paul T. W. M. Veugelers, formerly a professor in the Department of
Monetary Economics, Erasmus University, is a private consultant in the
Netherlands. This article is the result of research undertaken in 1985
during an exchange o f visits — Mr. Veugelers to this Bank and Mr. Ott
to Erasmus University. The authors acknowledge the research assis­
tance of James C. Poletti and the helpful comments of Clemens Kool.
'One rationale for this shift is the observation that the interest rate
parity (IRP) postulate of the asset view has held up substantially
better than the purchasing power parity (PPP) postulate of the
expenditure view; see Mussa (1979) and Frenkel (1981b). The
former refers to the equality of asset yields across currencies, while
the latter refers to the equality of purchasing power across curren­
cies. PPP frequently, and for protracted periods, has been violated
by exchange rates; see Frenkel (1981b). Thus, analysts have been
faced with either modifying the PPP assumption and diluting its
relevance, or accepting the evidence and developing theories to
explain it. Indeed, some authors, Bomhoff and Korteweg (1983) and
Darby (1981), argue that changing real exchange rates vitiate the
relevance of PPP.




w a rd rate forecast errors? Th ird, are fo rw a rd rate fo re ­
cast errors affected b y change in the U.S. m on etary
p o lic y regim e? Th ese h ypotheses are tested b y exam ­
in ing the forecast errors (the differen ce b etw een the
fo rw a rd rate and the su bsequ ently ob served spot rate)
fo r the U.S. dolla r fo rw a rd rate against the cu rren cies
o f eight in du strialized cou ntries o ver the latest floating-rate era (1973-85).

EFFICIENT MARKETS AND FORWARD
EXCHANGE RATES
T h e fo rw ard exchange rate in an efficien t market
reflects all the in form ation possessed by individuals
active in that market. Thus, in an o p en market, the
fo rw ard rate sh ou ld be an u nbiased p re d ic to r o f the
future spot rate.- Hence, a regression o f the observed
spot rate at tim e t on the fo rw a rd rate at tim e t — 1
(w h ere exch an ge rates are m easured by natural loga ­
rithm s o f the dolla r prices o f foreign exchange),
(11 s, = a + b f,_, + e,,
sh ou ld result in an estim ated constant not signifi­
cantly d ifferen t from zero, an estim ated coefficien t on

2See Dornbusch (1976), Mussa (1979), Frenkel (1981a), Bomhoff
and Korteweg (1983) and Edwards (1983b).

5

FEDERAL RESERVE BANK OF ST. LOUIS

the fo rw a rd rate; not significantly differen t from 1 .0,
and serially u n correlated errors (e,).:l

Risk Premium
T h e em pirical fin din g o f a significant in tercept has
been su fficiently frequent in recent research that it is
no lo n g er in terp reted as a departure from market
efficiency. T h e question, then, is, w hat d oes the signifi­
cant in tercep t represent?
T h e current v ie w is that the in tercep t represents a
return to specu lation .4 For exam ple, if real interest
rates on U.S. securities are h igh er than those on fo r­
eign securities, investors w ill shift th eir p o rtfolios to ­
w a rd the h igh er-yield in g securities d en o m in a ted in
U.S. currency; if these investors are risk-averse to un­
foreseen changes in cu rren cy values, th ey can h edge
bv sellin g the h igh er-yield in g U.S. cu rren cy forw ard
and bu yin g th eir o w n cu rren cy forw ard. By IRP, the
resulting u p w a rd pressu re on the fo rw a rd rate must
just offset the h igh er y ie ld o b tain ed o n the U.S. secu ri­
ties.3 Thus, the fo rw a rd rate in equ ation 1 , in such
cases, w o u ld overestim ate the future sp ot rate so that
the estim ated in tercep t w o u ld be negative. C on ­
versely, a h igh er rate on non-U.S. securities, by the
sam e logic, w o u ld im p ly a positive intercept.

3These propositions about the forward exchange rate have not been
supported by recent empirical work. For example, Hansen and
Hodrick (1980) find significant evidence of risk premia and explana­
tory power in lagged errors in both the 1920s and 1970s in one- and
three-month forward markets. Baillie, Lippens and McMahon
(1983), using a time series model on weekly data reject the hypothe­
sis that the forward rate is an unbiased predictor of the future spot
rate in weekly data. Fama (1984) argues that the risk premium
explains much of the error in the forward rate’s forecasts and finds
that the risk premium and expected future spot rate are negatively
correlated. Jacobs (1982) argued that the forward rate is an imper­
fect proxy for the expected rate and constructs a time series proxy
for the expected rate. Unlike Fama, however, Jacobs found informa­
tion in the past variables, that is, information not included in the
efficiently constructed forward rate at time t - 1 . Jacobs’ emphasis
on omitted information is analogous to the decomposition sug­
gested by Frenkel (1981a) and elaborated in Isard (1983) and
Edwards (1983a, 1983b). Edwards (1983b) finds that market effi­
ciency is not rejected in three out of four currencies in his study once
news is included.
4Fama (1984) and Hodrick and Srivastava (1985). Hodrick and
Hansen (1983) find that significant premia are both common and
time varying. Frenkel (1981a) finds that news explains some of the
risk premium while Edwards (1983b) finds that the combination of
news and a system estimation technique eliminates the significant
intercept.
investors are concerned about after-tax real rates of return; through­
out this article we ignore the possibility that long-run real interest
differentials may persist due to different tax rates on interest and
investment income. Since our tests are on the effects of unantici­
pated changes in interest differentials, this possibility does not affect
our results.




JUNE/JULY 1986

News o f Interest Rate Changes
Frenkel (1981a) argues that ch anges in exp ecta tion s
b etw een the tim e that the fo rw a rd rate p red ictio n is
m ade and the spot rate is o b s e iv e d explain the for­
w a rd errors. T h ese changes in expectation s, w h ic h he
calls n ew s, are based o n in form ation revealed after the
fo rw a rd contracts are m ade but before the spot rates
are realized . Thus, u n an ticipated ch anges in interest
rate differentials b etw een tim e t — 1 and t, — on e
exam ple o f n ew s — explain part o f the residu al b e ­
tw een the fo rw a rd rate forecast fj_, an d the re a lized
spot rate s,. In co rp o ra tin g this m o d ifica tio n in to eq u a ­
tion 1 yie ld s
(21 s, =

a + b f, _, +

c|(i — i*l, -

K ,_ ,li -

i*),l +

ej,

w h e re i is an interest rate o f the sam e term as the
fo rw a rd rate w ith asterisks in d ica tin g non-U.S. vari­
ables (interest rates are not in logs). O n ce again, riskneutrality a n d efficien t m arkets w o u ld im p ly an in sig­
nificant in tercep t and a slop e coefficien t o f unity; the
sign o f the co efficien t on the n ew s variable, how ever,
w o u ld d e p e n d u p o n w h e th e r the rise in the interest
differential w e re du e to a relative rise in U.S. inflation
— in w h ic h case it w o u ld be positive — o r a relative
rise in U.S. real interest rates — in w h ic h case it w o u ld
be n egative.'1
Fren kel’s p rox y fo r the e x p ected interest rate d iffer­
ential w as obtain ed from a regression o f the interest
differential on its o w n lagged values a n d the lagged
fo rw a rd exch an ge rate. Estim ating this m o d e l o ver
1973-79 fo r the p o u n d sterling, deu tsch em ark and
franc, he fo u n d the in tercep t to be insignificant and
the coefficien t o f the la gged fo rw a rd rate not signifi­
can tly differen t from one; these findings are consistent
w ith the efficient m arket hypothesis. M oreover, the
coefficien ts on the n ew s variable — the u nan ticipated
interest rate ch ange — w e re positive, w h ic h he in ter­
p reted as prim arily reflectin g the relatively h igh and
rising U.S. ex p ected inflation rate d u rin g this period .

THE ROLE OF NEWS IN THE
FORWARD EXCHANGE MARKET
An im portan t insight o f the asset-m arket approach
to exchange rate determ in ation is the em phasis on
expectations. A sset prices are m u ch m o re d ep en d en t

6An increase in the expected inflation rate differential implies that, in
the future, the dollar price of foreign currency will rise faster, and
fewer dollars will be demanded because of their higher holding cost;
hence, s, would rise. An increase in the U.S. real interest rate
relative to foreign rates would increase the value of the dollar;
hence, s, would fall.

FEDERAL RESERVE BANK OF ST. LOUIS

than current go o d s prices on the an ticip ated cou rse o f
future events. Consequently, the role o f n ew s is m ost
aptly captu red in the change o f expectations, not the
error b etw een the ex p ected and realized y ie ld d iffer­
entials.
By an application o f IRP and the efficien t fo rw ard
market h ypothesis for foreign exchange, w e can obtain
an alternative form o f the n ew s equ ation 2 estim ated
by Frenkel. T h e alternative m o d el takes the form (see
sh aded insert on the next p a g e ):
(3) s, -

f,_, = a + p A fp , + a>,.

This m o d el has the advantage o f u sing a marketim p lied interest differential as w e ll as d irectly em ­
b o d yin g the change in expectation s rather than the
em p irica lly derived, exp ecta tion erro r p ro x y u sed b y
Frenkel.

The Distinction Between Real and
Nominal News
Frenkel claim ed that the positive coefficien t on the
interest rate n ew s he fou nd du rin g 1973-79 reflected
the relatively high and rising U.S. inflation rate du rin g
this p eriod . Since the U.S. inflation rate has fallen both
absolutely and relative to o th er nations in the years
since 1979, the estim ated coefficien t on the ex p ected
n om inal interest differential sh ou ld be unstable o ver
the full p erio d 1973-85. O ne w a y to deal w ith this
problem is to break the p erio d into sm aller units, each
o f w h ic h have u niform relative U.S. inflation rates. W e,
instead, separate the real and inflation com p o n en ts o f
the n om inal n ew s variable. Th at is, w e w ill v ie w the
change in the nom inal interest differential as the sum
o f a change in the ex p ected real y ie ld differential and
the change in the ex p ected inflation differential. Th ese
co m p on en ts o f the n ew s sh ou ld have differen t effects
on the fo rw ard rate errors.
A rise in the real y ie ld on investm ents in on e countiy relative to those elsew h ere, in the absence o f ca p i­
tal restrictions, w ill cause an im m ediate appreciation
in its exch an ge rate and result in a negative error in
equation 3. Such appreciation s are transitory because
capital in flow s w ill bring d o w n the in itially h igh er
yields, w h ile the con com ita n t ou tflow s raise the yield s
elsew here, until equ ality o f yie ld s is re sto red .7 C on se­
q u e n tly the very rise in the relative y ie ld that causes a

7See Dornbusch (1976), Isard (1983), and Edwards (1983a). None­
theless, the existence of risk premia implies that interest differences
have persisted for some time in open capital markets; see Fama
(1984). Hodrick and Hansen (1983) find these risk premia to be
nonconstant and that their time variation is not summarized by
nominal interest rate movements.




JUNE/JULY 1986

cu rren cy to a ppreciate also creates the an ticip ation o f
its subsequent d ep recia tion as y ie ld d ifferen ces go to
zero.
In contrast, an in crease in the ex p ected inflation
differential prim arily alters the rate o f d ep recia tio n o f
the exchange rate b y ch anging its PPP level; a rise in
the inflation differential causes the exch an ge rate to
rise faster o ver tim e bv the am ount o f the inflation
increase. T h e d ep recia tion o f the spot rate also w ill
reflect the p erceived in crease in the h o ld in g costs o f
the cou ntry's cu rren cy w h ich redu ces the quantity
d em anded.
Thus, express the n om in al n ew s as the sum o f its
real and inflation com pon ents,
(4 1 A lp , =

A ir, -

r,*l +

A l 77 —

i t *),

w h e re r, = ex p ected real interest rate, and
it, =
ex p ected in flation rate.
Then, substitute the right-hand-side o f equ ation 4 into
equ ation 3, to obtain
(51 s, — l',_,

= a + (3, All', — r*l + [3, A l77, — 77*1 + f,,.

In equ ation 5, a is n on -zero in the p resen ce o f a risk
prem ium , (3, is negative (since an u n an ticipated rela­
tive rise in U.S. real rates lo w ers s„ im p lyin g s, — f,_, <
01, [3, is positive but sm aller than (3, (since a rise in the
relative U.S. inflation rate w ill cause a ch ange in the
rate o f dep recia tio n o f the dollar, and, throu gh d e ­
creased dem an ds fo r transaction balances, som e d e ­
clin e in its level), and e, is a serially u n correla ted
disturbance term .

Another Kind o f News: Changes in
Monetary Policy Regimes
T h e estim ated param eters o f an e co n o m ic relation
reflect the p erceived p o licy stance o f the govern m en t
and m on etary authorities. Thus, as Lucas (19741 ar­
gued, changes in policy, e ith er b roa d goals such as the
d esired inflation rate o r n a rro w er ones such as the
m eth o d in w h ic h the p o licy is im p lem en ted , m a y alter
the p u b lic’s respon se to prices and o th er in fo rm a tio n .'1

8We abstract from changes in the long-run real exchange rate in this
analysis. That is, different rates of capital or human capital invest­
ment will cause different rates of productivity growth, or resource
price changes that can alter the real exchange rate; see Darby
(1980), Bomhoff and Korteweg (1983). Also, a reduction in the
security of property rights can make investment in one currency less
attractive than investments in other currencies, depreciating the
currency and raising its real yields; see Dooley and Isard (1980). An
apt application of the Dooley-lsard hypothesis may be the change in
the French government in 1981, which was followed by significant
nationalizations — especially in the banking sector. In our analysis,
the only structural change considered is the U.S. monetary policy
regime.

7

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Forward Exchange Rate Errors, Efficient Markets and
the News: the Role of the Forward Premium
In its strong form , the efficien t market h ypothesis
im p lies that the in tercep t in equ ation 1 w ill b e z ero
and the coefficien t o f the lagged forw a rd rate w ill be
unity. Consequently, the e rro r term, e„ is sim p ly the
error o f the fo rw ard rate’s forecast o f the spot rate,
(2.1) s, — f,_, = e,.
Frenkel's insight co n cern in g the role o f n ew s is to
argue that this erro r is du e to in form ation revealed
after t — 1 (but before t) w h ic h alters expectation s
and, hence, s,:
... current exchange rates already reflect current
expectations about the future, while changes in the
current exchange rate reflect primarily, changes in
these expectations which, by definition, arise from
new information.1
Frenkel’s specification, equ ation 2, em p loys the d if­
feren ce b etw een the re a liz e d interest differential
and the exp ected differential; h ow ever, his argu­
m ent im p lies that the n ew s variable sh ou ld be the
ch ange in the ex p ected differential b etw een t — 1
and t. That is,

'Frenkel (1981b), pp. 700-701, emphasis added. Frenkel notes
(see footnote 31, p. 701) that Gustav Cassel, “the most recog­
nized proponent of the purchasing power parity doctrine” also
recognized this forward-looking aspect:
The international valuation of the currency will, then gener­
ally show a tendency to anticipate events, so to speak, and
become more an expression of the internal value that the
currency is expected to possess in a few months, or per­
haps in a year’s time (Cassel 1930, pp. 149-50).

(2.2) e, = <t>(E, (i - i*)M+1 - E,_, (i - i*),
IRP im p lies that the an n u alized o n e-m on th fo rw ard
prem ium ,
(2.3) fp, = 12(f, - S,),
is equal to the interest differen tial ex p ected to p re­
vail du rin g t through t + 1 ,
(2.4) fp, = E, (i - i*),.1+„
w h ere the term to m aturity o f the interest rates is
equal to the h old in g p eriod in fp. If this equ ality d id
not hold, riskless opportu n ities fo r profitable arbi­
trage w o u ld exist.2 Thus, substituting the relevant
fo rw ard prem ia from equ ation 2.4 fo r the exp ected
interest differentials in equ ation 2.2 and then sub­
stituting this expression fo r the erro r term in eq u a ­
tion 2 .1 , w e obtain
(2.5) s, — f,_, = 4> (Afp,),
w h ich can be w ritten in an estim able form as
(3) s, — f,_, = a + |3 Afp, + co,.

2This is known as the covered arbitrage condition. For example, if
the fp, < (ius - iJK)„ an investor could sell pounds and buy dollars
at time t, use the proceeds to buy a U.S. security; by buying
forward pounds at t, the investor removes any exchange rate risk
and obtains a higher yield than he would have in U.K. securities.
Since this yield differential is riskless, arbitrage should drive it to
zero and, in the process, ensure the equality shown in equation
2.4. For a fuller discussion and many instructive examples, see
Wood and Wood (1985), pp. 378ff.

Therefore, regression estim ates o f equ ations 2, 3 o r 5

such a m o n e ta iy p o licy regim e, the Fisher h ypothesis

m ay be sensitive to changes in p o lic y goals and re­

holds, so that real interest rates are sim ply the d iffer­

gim es.

en ce b etw een n om inal interest rates and an ticipated

In particular, the h ypotheses fo r real and inflation
n ew s su m m arized above are d ep en d en t on the m o n e ­
tary p o lic y regim e. F or exam ple, w h e n the m on etary
authority targets m o n eta iy grow th , interest rates w ill
be d eterm in ed b y the private and public d em a n d fo r
loanable funds; u n foreseen changes in that d em an d
w ill cause changes in interest rates. Interest rates also
w ill reflect private expectation s about inflation. In



inflation; consequently, equ ation 4 holds, w h ile equ a­
tion 5 fo llo w s as an im p lica tion o f equ ations 3 and 4.'J
In contrast, co n s id er a m o n e ta iy p o licy regim e o f

“However, a critical caveat in evaluating equation 5 (or 5', see below)
is Fama’s assertion that, when complete PPP does not hold, uncer­
tainty and differential tastes combine “to strip the Fisher equation of
its meaning” (1984, p. 323).

FEDERAL RESERVE BANK OF ST. LOUIS

targeting interest rates."’ U n d er such a p o lic y stance,
m ovem en ts in interest rates are, to som e extent, p o licy
determ in ed in the short run since changes in the
n om inal interest rate in d u ce offsettin g changes in the
m o n ey su pply throu gh a p o licy-rea ction feedback.
Consequently, changes in interest rates u n d er a
regim e o f targetin g interest rates co n vey differen t in ­
form ation than d o interest rate changes u n d er a re­
gim e o f targeting m on etary aggregates. A real interest
differential u n d er interest-rate targetin g cannot be
clo sed b y capital flow s alon e if the m o n e ta iy authority
ch ooses to m aintain a particu lar n om inal target rate
w h ic h m aintains the differential. O ver tim e, an interest
rate target b e lo w the market rate w ill in crease the
inflation differential. T h e adjustm ent process then
dep en d s totally u p o n the relative inflation rates to
restore PPP. And, again, the risk p rem iu m em b o d ie d in
the in tercep t shou ld be sm aller du rin g an interest-rate
regim e d u e to the red u ced short-run, interest-rate
uncertainty.
This p o licy regim e h ypothesis can be tested by an Ftest on the restriction im p licit in both equ ation 3 and 5
that the coefficien ts — a, (3, {$,, (3, — are stable o ver
changes in m on etary p o licy regim es. T h e restriction is
tested b y a d d in g in tercep t and slope d u m m y variables
to get equations 3' and 5', com p u tin g the F-statistic on
the change in the residuals b etw een the estim ates o f
the restricted and u nrestricted equations:
(3'I s, - f, , = a„ + a„,D + P„Afp, + p,„ DAlp, + co,'
(5') s, = f,_, = a„ + a,,,]) + p, A(r, - if) + P,,DA(r, - r*)
+ p . A ( tt, — tt*) + P ,,D A ( tt, — it *) + e ',

( 1 if October 197!) =£ t « September 1982
where D = <
0 otherwise.

Summary o f Testable Implications
T h e im plication s o f the analysis in equ ations 3' and
5' are w o rth su m m arizing before rep ortin g the estim a­
tion results. First, n ew s about the real interest differ­

10Only two U.S. monetary policy regimes are distinguished in this
study— the October 1979-September 1982 period and the remain­
ing period before and after. Implicitly, this assumes that both the
pre-October-1979 and the post-September-1982 periods are based
on interest-rate targeting procedures; support for this characteriza­
tion of these two periods is offered in Gilbert (1985), Kaufman (1982)
and Rasche (1985). The foreign monetary policy stance might also
be argued to be relevant; while this is a possibility for a refinement
on the estimates reported in this study, there do not appear to have
been substantial changes during the period 1974-83 in six of the
eight countries. The policy procedures of six of the eight non-U.S.
countries (excluding Italy and Netherlands) are reviewed in Johnson
(1983).




JUNE/JULY 1986

ential causes negative forecast errors, s, — f,_„ w h ile
changes in the inflation differential cause positive
forecast errors. I f there are p eriod s d o m in a ted by
relative volatility in inflation and o th er p eriod s d o m i­
nated b y real y ie ld volatility, then equ ation 3, w h ich
restricts the coefficien ts to equality, sh ou ld be re­
jected b y an F-test in com p a rison w ith equ ation 5
w h ich d oes not restrict these coefficien ts to equality.
Second, the th e o iy u n d erlyin g equ ation 5 im plies
that n ew s about the e x p ected inflation differential w ill
cause forecast errors, s, — f,_„ w h o se m agn itu de d e ­
pen ds on the sensitivity o f m o n ey d em a n d to changes
in the inflation rate. T h e co efficien t sh ou ld have the
sam e sign as the ch ange in the inflation differential.
Given the shortness o f the observation p e rio d — one
m on th — the regression co efficien t fi, in equ ation 5
sh ou ld be positive but m a y n ot b e significant.
Third, since the interest rates (hence, fo rw a rd p re­
mia) are assum ed to be d eterm in ed w ith o u t a m o n e ­
tary p o licy reaction fu n ction in the analysis re p re­
sented in equ ation 5, m o n eta iy p o lic y based on
interest-rate targets affects these h ypotheses. If the
m o n e ta iy p o licy regim e affects the market valuations,
i.e., spot and fo iw a rd exch an ge rates, h en ce forw ardrate forecast errors, then the restrictions in equ ation 5
w h ic h are rem o ved in equ ation 5' w ill be rejected by
an F-test on the im p roved fit o f equ ation 5' relative to
equ ation 5.
Fourth, since it is w e ll k n ow n that the variances o f
U.S. interest rates, both n om inal and real, have been
h igh er du rin g m on etary target regim es than alterna­
tive regim es, there is a greater lik elih o od o f m isforecasting interest rates u n d er a m o n e ta iy target re­
gim e." T h e risk prem iu m m easured b y the intercept,
w h ich prim arily is d eterm in ed b y this risk, sh ou ld be
negative, larger and m o re significant du rin g p eriod s o f
m o n eta iy targeting than du rin g period s o f interestrate targeting. This h ypothesis can be tested b y the
significance o f the in te rcep t’s d u m m y variable in
equations 3' or 5'.
Finally, u n d er the efficien t market h ypoth esis e m ­
b o d ied in equations 3, 5, 3' and 5', the erro r term s
should be serially u ncorrelated. C orrelation in the
disturbance term im p lies in co m p lete use o f past in for­
m ation and failure to exhaust p rofit opportu nities.
Alternatively, if markets are efficient, serially co rre­
lated residuals im p ly a m isspecification o f the estim at­
in g equation.

"S ee Roley (1983) and Rasche (1985).

9

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

EMPIRICAL TESTS

Tests o f Forward Market Efficiency

T h e m od els sp ecified in equations 1, 3, 5, 3' and 5'
w ere estim ated using m o n th ly data from O cto b er 1973

Table 1 reports the results o f estim atin g equ ation 1
du rin g the fu ll sam ple p eriod , O cto b er 1973 throu gh
June 1985. For six o f the eight cu rren cies con sidered,
market efficien cy is not rejected; fo r Japan a n d S w itz­
erland, how ever, the m arket efficien cy h yp oth esis is
rejected at the 5 p ercen t level. F o r all eight, th e Durbin-W atson statistic in dicates that h ypoth esis o f seri­
ally u n correla ted disturbances is n ot rejected . Thus,
ex cep t fo r Japan and Switzerland, the results in table 1
in dicate that the n ew s m o d e l sp ecified in eq u a tion 3 is
an a ppropriate em p irica l m odel.

throu gh June 1985, using the U.S. d olla r spot and onem on th -forw ard p rices o f the cu rren cies o f Canada,
France, Germ any, Italy, Japan, the Netherlands, S w itz­
erland and the U nited K in gdom . T h e tests are n ested
in that equ ation 3 is obtain ed from equ ation 1 by
im p osition o f the efficien t m arket h ypothesis. Equa­
tion 1 also contains both the restriction to suppress
the real interest rate vs. inflation rate d e c o m p o s itio n
and the restriction to suppress the effects o f ch anging
m on etary p o lic y regim es on the regression c o e f­
ficien ts’ values. W e first test the sim ple efficien t market
h ypothesis bv estim atin g equ ation 1. Next, w e esti­
m ate the sim ple n ew s m o d el w ith the ch ange in the
n om inal fo rw a rd prem iu m , equ ation 3. Th is m o d el
contains both the n om in al n ew s and the p o lic y regim e
restrictions above. W e can then test these restrictions
b y estim atin g 5', w h ic h is u n restricted and c o m p a rin g
it through F-tests w ith equ ations 5 and 3'. F-tests on
equ ation 5' vs. equ ation 5 and 5' vs. 3' determ ine,
respectively, w h e th e r the p o licy regim e o r n om inal
fo rw a rd prem iu m restrictions can be rejected.

Data
T h e spot and 30-day fo rw a rd exch an ge rates u sed in
the estim ates are N e w York o p en in g market (10 a.m.
m idpoin ts) fo r the last business day o f the m on th as
co m p ile d b y the Bank o f Am erica. T h e change in the
real interest d ifferential w as o btain ed from the change
in the fo rw a rd p rem iu m : First, the fo rw a rd prem iu m
w as con verted to an a n n u alized rate; the ch ange in
this ann u alized fo rw ard prem iu m is the n ew s — that
is, the change in the ex p ected n om in al interest differ­
ential. Second, an ex p ected an n u alized inflation rate
fo r the one-m on th h orizo n w as co m p u ted fo r each
cou n try from its m o n th ly CPI series.12 T h e change in
the differential, U.S. m inus foreign inflation, is the
change in the inflation differential u sed in estim ating
equations 5 and 5'. T h e change in the real interest
differential is then the ch ange in the ann u alized, n o m ­

F o r Japan an d Sw itzerland, eq u a tion 1 w as reesti­
m ated b y su bperiods before, du rin g and sin ce the U.S.
m on etary aggregate target regim e o f O cto b er 1979
throu gh S eptem b er 1982. For each country, the h y ­
pothesis o f serially u n correla ted residuals w as not
rejected in any su bperiod. F o r each o f the subperiods,
the efficien t m arket h yp oth eses bearin g on th e c o e f­
ficients fo r S w itzerlan d w ere not rejected . F or Japan,
the earlier tw o su b p eriod estim ates d o n ot reject m ar­
ket efficiency, but the recen t su b p erio d rejects m arket
efficien cy both in term s o f a significant in tercep t and
the deviation from u nity o f the la gged forw ard rate
co effic ien t.13
Consequently, fo r n eith er S w itzerlan d n o r Japan is
the estim ation o f equ ation 3 ju stified sin ce equ ation 3
is d erived from equ ation 1 assum ing a u nit co efficien t
on f,_,. Yet, equ ation 3' o r equ ation 5' m ay be ju stified
fo r Sw itzerlan d since the d u m m y variables can a c­
cou nt fo r the nonstable coefficient. F or Japan, the
failure o f the efficien t m arket h ypoth esis in the last
su bperiod is not offset by any o f o u r variables, and it is
consistent w ith this failure that Japan rejects each o f
the specification s equ ation s 3', 5 and 5' as re p orted in
tables 2 and 3.

Tests o f News Model with U.S. Monetary
Regimes Not Distinguished
Table 2 reports the results o f estim atin g equ ation 3,

inal, one-m on th -forw ard p rem iu m m inu s the change

the n ew s m o d el w ith the ch ange in the n om inal fo r­
w a rd prem ium , o ver the full period , O cto b er 1973-

in the ex p ected inflation differential.

June 1985. In sharp contrast to the results in table 1,
w h ic h su pport this specification, the estim ates u n i­
form ly reject this m o d el: n o co efficien t is significant at

l2Clemens Kool of Erasmus University computed this series using a
multi-state Kalman filter. A simple Kalman filter is a forecasting
method based on assumptions about the forecasted variable’s
relation to current and lagged data on itself and or other series. A
multi-state Kalman filter allows this relation to vary according to a
feedback or adaptive error loop; the multi-state modifier refers to the
alternative sets of assumed weights. A concise description and
illustrative example are contained in the statistical appendix to
Bomhoff and Korteweg (1983).

Digitized for
10FRASER


13The October 1982-June 1985 estimates for Japan are very curious.
The estimated intercept is huge in comparison with the earlierperiod Japanese estimates, the Swiss estimates or any of the
estimates in table 1:
a = - 1.192 (s.e. = 0.548), (i = 0.783 (s.e. = 0.100).

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Table 1
Tests of Forward Exchange Market Efficiency for U.S. Dollar,
October 1973-June 1985 (U.S. Monetary Regimes Not
Distinguished)
Summary
Statistics

Coefficients1
Currency

Intercept

Canada

-0 .0 0 2
(0.002)
-0 .0 0 2
(0.018)
-0 .0 2 0
(0.016)
0.012
(0.052)
-0 .2 9 8
(0.112)*
-0 .0 1 3
(0.017)
-0 .0 3 4
(0.013)*
0.001
(0.009)

France
Germany
Italy
Japan
Netherlands
Switzerland
United Kingdom

Test

f.-.

R2

DW

0.998
(0.012)
1.001
(0.010)
0.981
(0.018)
1.002
(0.007)
0.946
(0.020)*
0.991
(0.018)
0.961
(0.016)*
0.994
(0.014)

0.981

2.16

0.730

0.985

2.07

0.573

0.954

2.03

1.800

0.992

1.87

0.500

0.940

1.80

3.734*

0.957

2.01

1.486

0.962

1.92

3.537*

0.974

1.82

0.483

F2

'Standard errors of estimated coefficients appear in parentheses; asterisks indicate rejection at 5
percent level of individual efficient market hypotheses — intercept is zero, slope coefficient = 1.0.
2F-test of joint efficient market hypothesis that intercept is zero and slope coefficient is unity; asterisk
indicates rejection at 5 percent level.

any reasonable co n fid en ce level and the adju sted R- is
negative fo r six o f the eight cu rren cies tested. C onsis­
tent w ith the efficien t market h ypothesis, h ow ever, the
h ypothesis o f serially u n correlated disturbances is not
rejected. N onetheless, the results requ ire an investiga­
tion o f alternative explanations fo r this m o d e l’s u ni­
form failure.

Decomposition o f Nominal Forward
Premium
Also rep orted in table 2 is the F-statistic fo r testing
w h eth er d e c o m p o s in g the change in the n om inal for­
w a rd prem iu m in to innovations in its ex p ected real

Tests o f News Model with U.S. Monetary
Regimes Distinguished
As d iscussed above, the U.S. m on etary p o licy regim e
can be ex p ected to affect the relationship b etw een the
d olla r’s exchange rates and U.S.-foreign interest differ­
entials. Thus, the statistical results rep orted in table 2
m ay be invalid because th ey d o not distinguish
changes in the U.S. m on etary p o licy stance. T o test fo r
such p o licy regim e effects, equations 3' and 5', w ere
estim ated to isolate the p erio d o f U.S. m on etary aggr e ­
gate targeting, from O cto b er 1979 to S eptem b er 1982,
w ith slope and in tercept dum m ies.

and inflation co m p on en ts is statistically w arranted.

Table 3 reports estim ates o f equ ation 5' and the F-

T h e F-statistic is obtain ed from the d ifferen ce in the

statistics to test the effect o f m on etary regim e changes

explanatory p o w e r o f equ ation 5 w ith respect to equ a­
tion 3; the critical value fo r rejectin g the restriction in
equation 3 (that fi,, (3, in equ ation 5 are equal) is 3.92.

and the equ ality restriction im p licit in equ ation 3' and
rem oved in equ ation 5'. T h e estim ates presen t a sub­
stantia] contrast to those in table 2. Canada and Italy

O nly the N eth erlan ds result rejects the restriction.

reject the nom inal forw a rd prem iu m restriction (last




11

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Table 2
Tests of News Model Using Change in Nominal Annualized
Forward Premium on U.S. Dollar, October 1973-June 1985
(U.S. Monetary Regimes Not Distinguished)
Coefficients'

Summary Statistics

Test

Currency

Intercept

Afp

R2

DW

F

Canada

-0.00 1
(0.001)
-0 .0 0 3
(0.003)
-0 .0 0 4
(0.003)
-0 .0 0 2
(0.002)
-0 .0 0 2
(0.003)
-0 .0 0 5
(0.003)
-0 .0 0 4
(0.003)
-0 .0 0 2
(0.003)

-0 .0 6 9
(0.102)
-0 .0 7 6
(0.066)
-0 .1 4 6
(0.188)
-0 .0 1 6
(0.027)
-0 .0 1 7
(0.035)
0.031
(0.031)
-0.011
(0.179)
0.006
(0.123)

-0 .0 0 4

2.16

0.455

2.059

0.002

2.04

1.347

2.937

-0 .0 0 3

2.06

0.600

1.898

-0 .0 0 5

1.86

0.332

0.053

-0 .0 0 6

1.80

0.236

1.254

0.000

2.03

1.004

4.164*

-0 .0 0 7

1.92

0.004

0.326

-0 .0 0 7

1.83

0.002

1.888

France
Germany
Italy
Japan
Netherlands
Switzerland
United Kingdom

F2

'Standard errors of estimated coefficients appear in parentheses.
?F-statistic for testing the equality restriction on the coefficients of the change in the real and the inflation
differentials (components of the change in the nominal forward premium); asterisk indicates rejection at
5 percent level.

colum n, F-test) but, in contrast to table 2, the N eth er­
lands does not w h e n the U.S. m on etary regim e shift is
accou n ted for. C on sid erin g the a ppropriate sp ecifica ­
tion, equations 3' o r 5', six o f the eight equ ations are
significant in term s o f their overall fit (F-statistics) at
the 5 percen t level, France is significant at the 6 per­
cent level, and seven o f eight cou ntries reject the
restriction o f stable coefficients across m on etary re­
gim e changes at the 10 p ercen t level o r better. O nly
Japan fails the F-test fo r the significance o f the m odel.

U nited Kingdom , this entails a sw itch from a positive
and significant co efficien t du rin g the U.S. n on -m on etary targeting regim e.
Thus, fo r each o f the seven cu rren cies fo r w h ic h the
market efficien cy criteria are met, the U.S. m on etary
p o licy regim e has a significant effect on the errors in
the fo rw a rd rate forecasts. M o re specifically, tw o g e n ­
eralizations can be advan ced based on the results in
table 3. First, the greater interest rate volatility du rin g
U.S. m on etary aggregate targetin g sh ow s up in a sig­

In term s o f the in dividu al coefficients, six o f the
eight countries evid en ce a significant negative risk

nificant risk p rem iu m ten d in g to strength en the d olla r
against six o f the eight currencies. Second, given the

p rem iu m (10 p ercen t o r better) du rin g the U.S. m o n e­

failure to reject the n om in al fo rw a rd p rem iu m restric­

tary aggregate targetin g period, w h ile the in tercep t is

tion o f equ ation 3', the negative significan ce o f the
slope d u m m y im p lies that the interest differential

u n iform ly non sign ifican t du rin g the o th er U.S. m o n e ­
tary p o licy regim e, O cto b er 1973—S eptem b er 1979 and
O ctober 1982-June 1985. T h e im pact o f the different
regim es is also notable in the slop e in teraction
dum m y. Th e coefficien t on the change in the real
fo rw a rd p rem iu m is negative and significant fo r Can­
ada, Germany, the Netherlands, S w itzerlan d and the
U nited K in gdom . F or Germany, S w itzerlan d an d the
Digitized for12
FRASER


n ew s w as prim arily in terp reted as an increase in the
inflation differential du rin g U.S. n on -m on etary aggre­
gate targeting p eriod s and as an in crease in real in ter­
est differentials d u rin g U.S. m on etary aggregate target­
ing. In o th er w ords, the d olla r a p p recia ted a lon g w ith
unan ticipated increases in the fo rw ard prem iu m d u r­
in g O ctober 1979 to S eptem b er 1982, but d ep recia ted

JUNE/JULY 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Table 3
Tests of News Model Using Unrestricted Specification, October 1973-June 1985
(U.S. Monetary Regimes Distinguished)______________
Coefficients'

Canada

-0 .0 0 2
(0.001)
0.001
(0.003)
-0.001
(0.003)
0.000
(0.003)
0.001
(0.003)
-0.001
(0.003)
0.001
(0.004)
-0.001
(0.003)

France
Germany
Italy
Japan
Netherlands
Switzerland
United Kingdom

Dl2

A (r-r*)

0.000
0.299
(0.003)
(0.188)
-0 .0 1 5
-0 .0 2 3
(0.105)
(0.006)*
-0 .0 1 4
0.540
(0.299)*
(0.006)*
0.012
-0.011
(0.006) + (0.033)
-0 .0 1 2
0.029
(0.006) + (0.044)
0.047
-0 .0 1 3
(0.006)*
(0.029)
-0 .0 1 8
0.433
(0.007)*
(0.218)*
0.382
-0 .0 0 6
(0.149)*
(0.006)

Dr2
-0 .4 3 6
(0.223) +
-0 .0 7 7
(0.135)
-1 .1 3 7
(0.382)*
-0 .0 6 7
(0.056)
-0 .2 5 5
(0.200)
-0 .8 1 6
(0.243)*
-1 .2 1 7
(0.356)*
-0 .9 5 0
(0.238)*

*
t=
I

Intercept

<

Currency

Summary Statistics

-0 .3 4 3
(0.209) +
-0 .3 6 8
(0.193) +
-0.31 1
(0.395)
0.139
(0.100)
0.163
(0.124)
-0 .2 8 0
(0.161) +
0.506
(0.263) +
0.319
(0.180) +

Tests

Dtt2

R2

DW

F

F3

F4

- 0.776
(0.253)*
0.211
(0.282)
- 0.980
(0.511) +
-0 .5 6 8
(0.181)*
-0 .4 3 4
(0.292)
-0 .5 3 6
(0.343)
-1.19 1
(0.437)*
-1 .0 8 7
(0.296)*

0.056

2.19

2.728*

3.658*

0.045

2.12

2.297*

2.352 + 2.133

0.081

2.10

3.445**

4.837**

0.605

0.059

1.92

2.731*

4.415**

3.990*

0.016

1.89

1.443

1.899

1.093

0.107

2.06

4.324**

5.313**

2.098

0.088

2.03

3.688**

6.025**

0.162

0.097

1.79

3.979**

5.933**

1.052

4.027*

'Standard errors of estimated coefficients appear in parentheses; asterisk indicates significance at 5 percent level and plus sign indicates
significance at 10 percent level.
2DI, Dr and Dir equal 1.0 during period of U.S. monetary-target policy regime, October 1979-September 1982 and zero otherwise.
3F-statistic for testing restriction that coefficients are stable across different monetary regimes; double asterisk indicates rejection at 1
percent level, asterisk indicates rejection at 5 percent level, and plus indicates rejection at 10 percent level.
4F-statistic for testing the equality restriction on the coefficients of the change in the real and the inflation differentials (components of the
change in the nominal forward premium); asterisk indicates rejection at 5 percent level, plus indicates rejection at 10 percent level.

w ith such n ew s du rin g the rest o f the floatin g rate
p eriod . This is consistent w ith F ren kel’s (1981a) results
fo r 1973-79. Finally, tin: D u rbin-W atson statistics in
table 3 d o not in d ica te serial correlation in the re sid ­
uals, consistent w ith the m ain tain ed h ypoth esis o f
market efficiency.
T h ere rem ain tw o p u zzlin g results: (1) T h e esti­
m ated coefficien ts o f the change in the inflation d iffer­
ential du rin g the m on etary regim e are gen era lly n ega­
tive, refuting the h ypoth esis em b o d ie d in equ ation 5;
this negative coefficien t is significant at the 10 percen t
level or better in five countries. (2) M oreover, the d e ­
co m p o sitio n o f the n om inal interest differential is sig­
nificant o n ly fo r Canada and Italy. Th is irrelevan ce o f
the distin ction b etw een real and n om inal interest
differentials m ay sim p ly be a con firm ation o f Fam a’s
(1984) assertion that, w ith risk aversion o r w ith o u t PPP,
the Fisher equ ation d oes not h old (see fo o tn o te 9).



In deed, fo r six o f the eight currencies, the F-test does
not reject the im p licit restriction o f equ ality o f
changes in the n om inal interest differential s tw o
com p o n en ts d isp layed in table 3.

The Implications o f Monetary Regimes:
A Closer Look
T h e negative coefficien t on the inflation differential
du rin g the 1979-82 m o n e ta iv regim e is b oth pervasive
and p u zzlin g. T w o possible explanations are w orth
considerin g. First, the o n e-m on th h o rizo n o f the esti­
mated, an ticip ated CPI inflation rates u sed in estim at­
ing equ ation 5' m ay be too short, o r the estim ated
ex p ected inflation series sim p ly m ay be bad proxies.
Second, the market 11133' have d eterm in ed that the
U.S. m o n eta iy au th ority and the adm inistration w ere
co m m itted to lo w e rin g the U.S. inflation rate. C on se­

13

FEDERAL RESERVE BANK OF ST. LOUIS

quently, a short-term increase in the U.S. ex p ected
inflation rate w o u ld lead market participants to expect
a tigh ten in g o f m o n e ta iy g r o w th .14 I f so, a short-term
increase in U.S. inflation w ou ld lead to increases in the
U.S. real interest rate as the market an ticip ated the
m onetary au th ority’s reaction. This explanation, co n ­
sistent w ith research by C orn ell (1982), has not been
tested here, but it is consistent w ith the d e c o m p o s i­
tion o f changes in the n om in al interest differential
generally not in creasin g the ex p la n a to iy p o w e r o f the
equation for six o f the eight cu rren cies.1''

CONCLUSION
W e have tested the efficien cy o f fo rw a rd exchange
markets fo r the dolla r against eight m a jo r cu rren cies
during the floating period. T h e regression estim ates
clearly dem on strate that failing to accou nt fo r changes
in the p o licy procedu res o f the U.S. m o n e ta iy au thor­
ity entails m isspecification. M o n e ta iy regim e changes
alter the risk prem ia that market participants require
on fo iw a rd contracts and affect the d irection o f errors
im p lied b y n om inal and real news, that is, u n foreseen
events occu rrin g b etw een the tim e o f contract and its
maturity. T h e im p lication s o f the standard m o d el o f
exchange rate beh avior w'ere substantiated fo r n om i­
nal n ew s u n d er a m on etary target regim e, but its
im p lication for inflation differentials w as refuted.
W h ile a closer m o d elin g o f the p o lic y p roced u re m ay
explain this rejection, it rem ains a p rom in en t p u zzle
in this study. N onetheless, on e in terpretation o f these
results is that market participants regarded the U.S.
m o n e t a r y p o lic y r e g im e o f 197 9-82 as ant i inflationaiy. I f this is correct, it fo llow s that credible
goals o f m on etary p o lic y m a y be as significant fo r
market participants as the m echan ical details o f that
p o lic y ’s execution.

JUNE/JULY 1986

REFERENCES
Baillie, Richard T., Robert E. Lippens and Patrick C. McMahon.
“Testing Rational Expectations and Efficiency in the Foreign Ex­
change Market,” Econometrica (May 1983), p. 553-63.
Bomhoff, Eduard, and Pieter Korteweg. “ Exchange Rate Variability
and Monetary Policy Under Rational Expectations,” Journal of
Monetary Economics, 1983.
Cassel, Gustav. Money and Foreign Exchange After 1914 (New
York: McMillan, 1922).
Cornell, Bradford. “ Money Supply Announcements, Interest Rates
and Foreign Exchange,” Journal of International Money and Fi­
nance (August 1982), pp. 201-08.
Darby, Michael R. “ Does Purchasing Power Parity W ork?” Pro­
ceedings of Fifth West Coast Academic/Federal Reserve Eco­
nomic Research Conference, University of California-Los An­
geles, National Bureau of Economic Research (December 1981).
Dooley, Michael P., and Peter Isard. "Capital Controls, Political
Risk and Deviations from Interest Rate Parity,” Journal of Political
Economy (April 1980), pp. 370-84.
Dornbusch, Rudiger. "Expectations and Exchange Rate Dy­
namics,” Journal of Political Economy (December 1976), pp. 1161—
76.
Edwards, Sebastian. “ Comment on Isard,” Jacob A. Frenkel, in
Exchange Rates in International Macroeconomics (University of
Chicago Press, 1983).
________ _ “ Floating Exchange Rates, Expectations and New In­
formation,” Journal of Monetary Economics (May 1983b), pp. 3 2 1 36.
Fama, Eugene F. “ Forward and Spot Exchange Rates,” Journal of
Monetary Economics (November 1984), pp. 320-38.
Frenkel, Jacob A. “ Flexible Exchange Rates, Prices and The Role
of “ News": Lessons From the 1970s,” Journal of Political Economy
(August 1981a), pp. 665-705.
________ _ “ The Collapse of PPP in the 1970s,” European Eco­
nomic Review (1981b), pp. 145-65.
Gilbert, Alton. “ Operating Procedures for Conducting M onetary Pol­
icy,” this Review (February 1985), pp. 13-21.

Hansen, Lars Peter and Robert J. Hodrick. “ Forward Exchange
Rates as Optimal Predictors of Future Spot Rates: An Econometric
Analysis," Journal of Political Economy (October 1980), pp. 8 2 953.
________ _ “ Risk Averse Speculation in the Forward Foreign Ex­
change Market: An Econometric Analysis of Linear Models” in
Frenkel, Ed., Exchange Rates in International Macroeconomics
(University of Chicago Press, 1983).

14The U.S. CPI inflation rate was 13.3 percent in 1979,12.4 percent in
1980, 8.9 percent in 1981 and 3.9 percent in 1982. There is also
some support for this view in the impact of lagged reserve account­
ing during the monetary targeting period. As Kaufman (1982) notes,
this results in more volatility of both money and interest rates since a
decision to maintain a target growth path when the money supply
has exceeded the path requires a subsequent reduction of reserve
growth. Since banks already will have increased their required
reserves, real rates will vary with the money supply errors and,
perhaps, short-run inflation expectations.
15Cornell (1982) finds that unexpected monetary supply increases are
correlated with an appreciation in the dollar, not the depreciation
that an anticipated simple link with increased inflation would imply.
Cornell suggests that the explanation is an anticipated policy reac­
tion, a tightening of the money supply growth rate.

Digitized for14
FRASER


Hodrick, Robert J., and Sanjay Srivastava. “ The Covariation of Risk
Premiums and Expected Future Spot Exchange Rates,” Journal of
International Money and Finance (March 1986 Supplement), pp. 5 -

21.
Isard, Peter. “ An Accounting Framework and Some Issues for
Modelling How Exchange Rates Respond to News,” in Jacob A.
Frenkel, Exchange Rates in International Macroeconomics (Univer­
sity of Chicago Press, 1983).
Jacobs, Rodney L. “The Effect of Errors in Variables on Tests for a
Risk Premium in Forward Exchange Rates,” Journal of Finance
(June 1982), pp. 667-77.
Johnson, Karen. “ Foreign Experience with Targets for Monetary
Growth,” Federal Reserve Bulletin (October 1983), pp. 745-54.
Kaufman, George. “The Fed’s Post-October 1979 Technical Oper­
ating Procedures Under Lagged Reserve Requirements: Reduced

FEDERAL RESERVE BANK OF ST. LOUIS
Ability to Control Money,” The Financial Review (November 1982),
pp. 279-94.
Lucas, Robert E., Jr. Eds. Karl Brunner and Alan Meltzer, 1974,
“ Econometric Policy Evaluation: A Critique,” The Phillips Curve
and Labor Markets, Carnegie-Rochester Conference on Public
Policy, Vol. 1, pp. 19-46.
Mussa, Michael L. “ Empirical Regularities in the Behavior of Ex­
change Rates and Theories of the Foreign Exchange Market,” Vol.
II Carnegie-Rochester Conference Series on Public Policy, 1979.




JUNE/JULY 1986
Rasche, Robert H. “ Interest Rate Volatility and Alternative Mone­
tary Control Procedures,” Economic Review, Federal Reserve
Bank of San Francisco (Summer 1985), pp. 46-63.
Roley, Vance. “ The Response of Short-Term Interest Rates to
Weekly Money Announcements,” Journal of Money, Credit and
Banking (August 1983), pp. 344-54.
Wood, John, and Norma L. Wood. Financial Markets (Harcourt
Brace Jovanovich, Inc., New York) 1985.

15

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

How Federal Farm Spending
Distorts Measures of Economic
Activity
John A. Tatom

D

URING the 1980s, federal purchases o f farm
produ cts b y the C o m m od ity Credit C orp oration (CCC)
have exhibited relatively large qu arterly sw ings that
have significantly affected h o w w e in terpret eco n om ic
d evelop m en ts.1 A lthou gh these purchases increase
the g o vern m en t’s in ven to iy o f farm products, they are
treated as final sales to the governm en t, instead o f
in ven to iy transactions, in the National In co m e and
Product A ccou nts (NIPA). As a result, a CCC purchase
increases federal purchases and final sales in the
eco n o m y and redu ces m easured investm ent in farm
inventory. Similar private sector transactions, w h ich
redistribute farm produ cts from one o w n e r to an­
other, result in offsettin g changes in farm and busi­
ness in ven toiy; these transactions affect n eith er bu si­
ness in ven tory investm ent n or final sales.
This article explains the im pact o f CCC] purchases
and exam ines the d istortions that th ey can p rod u ce in
quarter-to-quarter m ovem en ts o f som e im portant
N IPA measures. It show s that a dju sting fo r the effect o f
CCC purchases can alter conclu sion s about the sh ort­
term perform a n ce and ou tlook fo r federal purchases,
the farm sector and aggregate p rod u ctio n and em ­
ploym ent. T h e largest sw ings in CCC purchases on
record w ere record ed at the en d o f 1985 and early this
year; hence, these recent sw ings have h ad the greatest
im pact on m easures o f in ven to iy investm ent, federal
purchases and overall final sales. A m o re useful p er­
spective on N IPA m easures can be o btain ed by adjust­
in g these

m easures

du rin g quarters w h e n

large

changes in CCC purchases occur.

John A. Tatom is an assistant vice president at the Federal Reserve
Bank of St. Louis. Michael L. Durbin provided research assistance.
’The significance of such swings, especially as a major source of
changes in federal purchases, was first noted by the Bureau of
Economic Analysis (1982).


16


CCC PURCHASES, SALES AND
INVENTORY CHANGES
T h e C o m m od ity Credit C orporation, establish ed in
1933 as part o f the D epartm ent o f Agriculture, carries
out the federal go vern m en t’s p rice su pport p rogra m s.2
T h ese program s in clu d e both “ n on recou rse loan s”
and direct purchases o f farm produ cts. T h e fo rm er are
called n on recou rse loans becau se the fa rm er is free to
deliver the p le d g e d crop, w h ic h serves as collateral, in
o rd er to settle the loan :' T h e p rice o f the c o m m o d ity at
w h ic h the loan is advanced is called the loan rate; it
establishes a m in im u m p rice fo r the com m od ity.
W h en the govern m en t m akes such a loan, the transac­
tion is treated in the NIPA as a pu rchase o f farm
products. As a result, these loans in crease federal
purchases and redu ce farm in v e n to iy h oldin gs. Re­
paym en t
en tries.4

o f the

loan

reverses

these

a cco u n tin g

Direct purchases o f farm produ cts are treated in the

2More extensive discussion of the CCC can be found in the Council of
Economic Advisers (1986), Herman (1978), Bureau of Economic
Analysis (1982) and Wakefield (1986). The former also details other
features of U.S. agricultural policy.
Nonrecourse loans to farmers are based on the government-set
loan rate for each farm product and the amount of the current or past
product pledged against the loan as collateral. If the producerborrower cannot sell his product for more than the loan rate plus the
accumulated storage costs and interest on the loan, the farmer
forfeits the pledged crop and the loan obligation is discharged. The
farm products that are covered by the loan program include wheat,
corn, barley, oats, rice, cotton, honey, peanuts, sorghum, soybeans,
rye, tobacco and sugar.
“Even when the farmer pays off the loan, he reaps a benefit in the
form of a short-term credit subsidy, since the interest rate on such
loans is less than market rates. The CCC also supports prices of
farm products by directly purchasing certain products at official
support prices when such prices exceed market levels. Chief among
these are such dairy products as cheese, butter and dry milk.

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Chart 1

CCC Purchases

1973

74

75

76

77

78

79

exact same w a y in the NIPA. Thus, c o m m o d ity loans
and direct co m m o d ity purchases hv the federal g o v ­
ernm ent result in offsettin g changes in federal pu r­
chases o f g o o d s and seivices and business (farm) in ­
v e n to r y in v e s tm e n t. G N P is u n a ffe c te d b v the
transactions because they result in no change in
prod u ction .3
Chart 1 show s both n om inal and real (19X2 prices)
CCC in ven to iy purchases from 1973 to the secon d
qu arter o f 1986. A lthou gh the n om inal purchases a p ­

80

81

82

83

84

85

1986

the quarter-to-quarter sw ings are som etim es quite
large in com parison to G NP m ovem ents. For exam ple,
in the fourth qu arter o f 1985, such purchases rose
$20.8 billion, o r 36.5 p ercen t o f the total increase in
GNP du rin g the sam e quarter. It is also evid en t from
the chart that m ovem en ts in CCC purchases have
b ecom e substantially larger in the 1980s, w ith the
biggest sw ings occu rrin g at the en d o f 1985 and in
early 1986. In part, these in creased fluctuations reflect
the g ro w in g role o f federal farm program s.

pea r sm all relative to current G N P o f o ver $4 trillion,

5The independence of GNP from CCC purchases is based on two
assumptions: (1) that the coverage, timing and seasonal adjustment
of changes in farm inventory and CCC purchases are consistent and
(2) that farmers, in general, cannot or do not respond to CCC
purchases within the quarter by altering production. The former
point has been made by the Bureau of Economic Analysis (1982).
These second-order considerations are ignored below in order to
focus solely on the measurement principles involved.




CCC AND FEDERAL PURCHASES OF
GOODS AND SERVICES
Q uarterly m ovem en ts in CCC purchases have had a
sizable im pact on the pattern o f g ro w th o f federal
purchases du rin g som e quarters in the 1980s. Chart 2
show s the gro w th rates o f real federal purchases and
adju sted real federal purchases (w h ich exclu d e CCC

17

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Chart 2

The G ro w th Rate of Real Federal Purchases
w ith an d w ithout CCC Purchases
Compounded annual rate

Compounded annual rate

50

i
II
n
ii

40

IIii
iii
ii
iii
ii ii
ii ii
1 i A
i
1 ii1 1
A1
1
i i fj]
/i A\ \i f !
i1 \ i1f »
I1i \iJ
19
f

30

i/

20
Real fe d e ra l lu rc h a s
10

r\

1

t

j l

A

1'

1
1 ii

A
[ \

A

f

9U V

A d ju s t ed rea

A n Ii

l\1vA\V**

*1 lh \▼V N I V\l1y,
»
Ii
fmJl

I
I

V*

\l/

-10

/V
AA\
/ \ *
\

\

\\

federa

/

iI
iii
i
i

5S
i\•
A '''

i»\\

r\

»
\i
l V
U

/ '
'' #/iI
V 1

1

40
30

lI
iI

I

II
IIII
11
II
fMl1
J 1
if 111
1
11
11
111
1
|
_

\ i \II
1 Vi
J

purch ases

20

I
l1
Ijm

-20

10

-10

■20

1

-30

1973

74

75

76

77

78

79

80

81

82

83

84

85

1986

-30

purchases) since 1973." In the 1980s, the differen ce in
the grow th rates often lu;s been qu ite large and m ore
variable. Since 11),SO, the fed eral govern m en t gen erally
has been accu m u lating in ven tory o f farm products,
but in 1983 and early 1984, the Paym en t-In-K ind IPI K)
program led to large sales fo r fou r quarters.7 T h ese
sw ings in CCC purchases had a m a jor im pact on the
grow th rate o f federal purchases, gen era lly d ep ressin g
it in 1983 and early 1984 and su bsequ ently raising it.

fed eral purchases d u rin g recession p eriods, w h ile d e ­
pressing the grow th o f federal purchases d u rin g the
initial stages o f expansions. T h is effect has resu lted in
the appearan ce o f a negative relationship b etw een
GNP and federal purchases, a relationship that disap­
pears w h e n federal purchases are adju sted fo r CCC
purchases. For exam ple, from 1/1980 to 11/1986, the
correlation b etw een the grow th rate o f real federal

T h ese sw ings m ake it difficult fo r analysts to interpret

chases and o f real GNP is negative ( — 0.15); w h e n real
CCC purchases are o m itted from govern m en t p u r­

trends in federal spending.
A n o th e r coin ciden tal effect o f CCC purchases in
recent years has been to raise the grow th rate o f

purchases o f go o d s and services in clu d in g CCC pu r­

chases, h ow ever, the correlation is positive (0.04).
W h ile n eith er correlation is statistically significant,
distortions caused by volatile CCC purchases can bias
statistical tests o f fiscal p o licy's general effectiveness.

6Since nominal and real CCC inventory changes are not substantially
different over the period since 1973, attention throughout this article
is focused on real measures. Movements in the nominal counter­
parts of real measures provide no additional insight and so are
ignored here.
7A description and analysis of the PIK program that was in effect in
1983 and early 1984 can be found in Belongia (1983) and Rosine
(1984).

Digitized for18
FRASER


CCC PURCHASES AND CHANGES IN
FARM INVENTORY
Federal purchases o f farm produ cts are offset in the

JUNE/JULY 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Table 1
The Change in Farm Inventory and CCC Purchases (billions of dollars, 1982 prices)
Change in
farm
inventory

1/1980
II
III
IV

$ - 0 .3
5.5
- 0 .2
- 2 .0

-7 .0
-1 0 .5
3.8

1/1981
II
III
IV

1.6
- 0 .8
5.5
9.1

1/1982
II
III
IV

Annual mea
standard
deviation

Annual mean/
standard
deviation

Change in
farm inventory
and CCC

$ - 4 .7
6.09

$ - 5 .3
- 1 .5
-1 0 .7
1.8

$ - 3 .9
5.37

4.6
11.2
5.0
-1 .3

4.9
5.11

6.2
10.4
10.5
7.8

8.7
2.09

10.8
0.7
7.9
17.2

-4 .1
4.0
3.2
-8 .9

- 1 .5
6.16

6.7
4.7
11.1
8.3

7.7
2.71

1/1983
II
III
IV

3.8
-0 .1
-3 .1
-1 7 .2

-9 .1
-6 .9
-1 5 .7
6.5

- 6 .3
9.32

- 5 .3
-7 .0
-1 8 .8
-1 0 .7

-1 0 .5
6.01

1/1984
II
III
IV

-1 5 .9
3.1
3.4
0.8

16.4
1.8
1.3
0.0

4.9
7.72

0.5
4.9
4.7
0.8

2.7
2.4

1/1985
II
III
IV

3.2
2.0
11.5
32.3

6.4
7.8
-0 .7
-2 1 .3

- 2 .0
13.43

9.6
9.8
10.8
11.0

10.3
0.7

1/1986
II

6.4
4.5

2.9
4.1

I
Ul
o

CCC
purchases

—

9.3
8.6

—

GNP accounts by redu ction s in farm inventory.8 Thus,
CCC purchases can distort the short-run in terpreta­
tion o f changes in farm and business in ven toiy. W hen
the CCC purchases (sells) farm goods, farm and busi­
ness in ven to iy investm ent falls (rises), giving the a p ­
pearance o f an in ven to iy change. O f course, such an

Table 1 sh ow s quarterly real CCC purchases and
changes in both real farm in ven to iy and real farm
inventory plus real CCC purchases since 1979." Th e
m ean and standard deviation o f each series also are
sh ow n for each year. T h e pattern o f changes in the
overall m easure o f farm in ven to iy is m u ch sm ooth er

appearan ce is deceptive; in fact, in ven to iy holdin gs

w h e n CCC purchases are in clu d ed than w h e n they
are not. This is esp ecia lly true w h en relatively large

have sim ply m oved from private to federal govern m en t
ow nership, or vice versa.

changes in CCC purchases o ccu r. At these times, farm
in ven tory investm ent sw ings w id e ly in the o p p o site
direction, such as in IV/1982, IV/1983, 1/1984 and the

“An inverse relationship between business inventory investment and
government purchases of goods has been noted by Weidenbaum
(1959) and (1961). His analysis emphasizes the time pattern of
production and delivery and the NIPA accounting of such programs.
The implied lack of a contemporaneous relationship of GNP and
such spending was first pointed out in these articles.




9For the period shown in table 1, the correlation between changes in
CCC purchases (1982 prices) and changes in farm inventory invest­
ment is - 0.56, which is statistically significant at the 1 percent level.

19

FEDERAL RESERVE BANK OF ST. LOUIS

en d o f 1985. T h e standard d eviation fo r farm in ven tory
investm ent each y e a r is sh arply h igh er than that fo r
the total farm p rod u ct in ven tory change. Th is occurs
because the m ovem en ts o f CCC purchases are offset
b y o p p o site m ovem en ts in farm in ven tory purchases.
O f course, this sm ooth in g effect also occu rs fo r the
overall change in in ven tory — the sum o f business
(non-farm and farm ) in ven tory change an d CCC
purchases.

CCC PURCHASES AND FINAL SALES
W h ile fed eral purchases o f farm p rod u cts d o not
affect GNP — the value o f final go o d s and services
p ro d u ce d in the e co n o m y — th ey d o affect the m ea­
surem ent o f final sales, w h ic h equals G NP less the
change in business in ven tory.10Analysts often focu s on
final sales in o rd er to assess the strength and ou tlook
fo r in com e, outpu t and em p loym en t. Assessm ents o f
final sales are im portan t both because in ven tory and
prod u ctio n decision s are based on expectation s o f
such sales and because u n exp ected changes in sales
are absorbed b y in ven tory fluctuations. Thus, m o ve­
m ents in final sales relative to p rod u ctio n provid e
in form ation on future p rod u ctio n changes and can
give rise to an in ven tory cy cle." W h en sales are less
than produ ction, for exam ple, the u n sold produ cts
increase inventory. If the rise in in ven tory is u n d esired
and u nplanned, it w ill be elim in ated b y redu cin g
p rod u ctio n grow th tem p orarily relative to that o f ex ­
pected sales. M oreover, if m ovem en ts in G NP reflect
tem p orary changes in p rod u ctio n to adjust inventory,
(inal sales can be a m ore useful gauge o f the ou tlook
than current p rod u ctio n o r GNP.
CCC purchases have substantial quarter-to-quarter
effects on the m easurem ent o f final sales. This occurs

JUNE/JULY 1986

because such purchases affect the ch ange in business
in ven tory but leave G NP u naffected. W h en CCC p u r­
chases increase, fo r exam ple, m easu red final sales
ten d to rise because business (farm ) in ven to ry d e ­
clines. Yet such purchases sim p ly represen t an oth er
w a y o f h o ld in g farm inventory, n ot a significant in ­
crease in overall sp en d in g on g o o d s and services that
w ill likely lea d to in creased p rod u ctio n . Thus, if the
change in business in ven tory is adju sted to in clu d e
CCC purchases, the adju sted final sales m easure o b ­
tain ed can m o re clo sely gau ge the actual final p u r­
chases o f go o d s and services b y consum ers, business,
govern m en t and foreign purchasers. Chart 3 show s
real final sales g ro w th both w ith o u t an adjustm ent
and w ith CCC purchases subtracted from final sales.
T h e largest differen ces in the grow th o f final sales,
adju sted fo r CCC purchases, o ccu r after 1981. In the
secon d h a lf o f 1982, relatively large CCC purchases
contribu ted to final sales grow th . From the secon d to
the fou rth qu arter o f 1982, real final sales ex p a n d ed at
a 2.1 p ercen t rate, h igh er than the 1.1 p ercen t rate fo r
adju sted real final sales. Subsequent redu ction s in the
go vern m en t’s h o ld in g o f farm p rod u ct in ven to ry
throu gh the PIK p rogram led to an u nd erstatem en t o f
final sales grow th . From the fou rth qu arter o f 1982 to
the fou rth qu arter o f 1983, real final sales ex p a n d ed at
a 3.7 p ercen t rate, but this w as b e lo w the 4.8 percen t
rate o f adju sted real final sales grow th . In effect, the
transfer o f farm p rod u ct in ven tory from the go vern ­
m ent to the private secto r a p p ea red o n ly as a net
business in ven tory change, w h ic h u nd erstated the
grow th o f final sales. O f c o u r se, these p eriod s m atch
the en d o f the 1981—82 recession and early part o f the
current expansion. Thus, the cyclical sw in g in m ea ­
sured final sales gro w th understates the actual a ccel­
eration in adju sted final sales that took place.
T h e m ost recen t CCC purchases, esp ecia lly in the
fou rth qu arter o f 1985, are the largest o n record. In the

10While the assumed independence of CCC purchases and farm
output within the quarter seems satisfactory, it might be argued that
such purchases contribute to higher farm output than would other­
wise occur. To test these views, “ Granger-causality" tests were
conducted on the quarterly change in farm sector output and the
change in CCC purchases, both in 1982 prices, for the period
11/1973 to 11/1986. Optimal lags on the lagged dependent variable
were chosen via sequential F-tests. The results indicate “ bidirec­
tional causality” : past CCC purchases negatively and significantly
affect farm output; past changes in farm output positively and signifi­
cantly raise CCC purchases. When the contemporaneous value of
the change in CCC purchases is included in the farm output equa­
tion, there is no significant past CCC effect and the contemporane­
ous CCC term is not significant for lags on the change in CCC
purchases up to 10 quarters earlier.
11 The inventory cycle and its significance in U.S. business cycles
from 1948 to 1976 is discussed in Tatom (1977).

Digitized for20
FRASER


secon d qu arter o f 1985 a nd the s econ d quarter- o f 1986,
real CCC purchases w e re $2 b illio n and $4.5 billion,
resp ective ^ . Thus, in each quarter, the final sales
m easure w as little affected b y CCC purchases; o ver the
w h o le year, real final sales and real final sales adju sted
fo r CCC purchases rose 2.7 and 2.6 percent, re sp ec­
tively. M oreover, the pace o f overall in ven tory in vest­
m ent w as about the sam e in each quarter, so that real
G NP g r e w at about the sam e rate o ver the year.
But the patterns o f real GNP, real final sales and
adju sted real final sales w e re qu ite differen t d u rin g the
year. Table 2 sh ow s these gro w th rates. Both final sales
series sh ow that p rod u ctio n g re w faster than sales in

FEDERAL RESERVE BANK OF ST. LOUIS

JUNE/JULY 1986

Chart 3

CCC Purchases and Real Final Sales G ro w th
Compounded annual rate

Compounded annual rate

15

the last qu arter o f 1985 and first qu arter o f 1986. So, not
surprisingly, p rod u ctio n g ro w th slo w ed tem p orarily
in the secon d qu arter o f 1986 to elim inate excess
in ven toiy. Both final sales series also sh ow that sales
grow th accelera ted in the secon d qu arter o f 1986.
T h e princip al differen ces in table 2 are that sales
grow th in 1986 w as stron ger a cco rd in g to the a dju sted
series and that it a ccelerated fo r tw o quarters rather
than one. T h e stro n ger sales g ro w th on an adju sted
basis suggests stron ger grow th in aggregate d em a n d
and m ore in cen tive fo r firm s to in crease produ ction
and em p loy m en t than the u nadju sted data indicate.
Also, the secon d qu arter acceleration in final sales
appears less likely to be a fluke using the adju sted
series. T h e acceleration sim p ly reinforces the pattern
set in the previous quarter, instead o f appearin g to be
the first sign o f positive sales grow th since the en d o f
1985, as in dicated in the u nadju sted data.



15

SUMMARY
W h ile m ovem en ts in CCC purchases can be rela­
tively large, they have had no m ajor effects on final
sales and o th er N IPA m easures until the past fe w
years. D uring recent years, the pattern o f CCC p u r­
chases has had relatively large effects on m easured
in ven to iy change, federal purchases and ex p e n d i­
tures, and final sales. In 1982 and 1983, the effect w as
to raise the grow th o f both fed eral sp en d in g and final
sales du rin g the last tw o quarters o f the recession and
to lo w e r their grow th in the fii'st five quarters o f the
subsequent expansion. M o re recently, record net pu r­
chases by the CCC in the last h a lf o f 1985 have given
rise to a distorted pattern o f sales grow th , suggesting
gen erally w eaker sales than the adju sted data in d i­
cate. Analysts w h o focus on u nadju sted data, a cco rd ­
ingly, w o u ld u nderstate the recen t strength o f aggre­
gate d em an d and the short-run prosp ects fo r grow th .

21

JUNE/JULY 1986

FEDERAL RESERVE BANK OF ST. LOUIS

Table 2
Growth Rates of GNP and Final Sales over the Previous Year
Quarter ending

Real GNP

Real
final sales

Final sales less
CCC purchases

111/1985

4.1%

6.1%

5.0%

IV/1985

2.1

2.7

0.4

1/1986

3.8

-1 .3

1.6

11/1986

0.6

3.4

3.6

11/1985-11/1986

2.6

2.7

2.6

For p o licy purposes, fluctuations in CCC purchases
can distort quarter-to-qu aiter m ovem en ts in im p o r­

Council of Economic Advisers. Economic Report of the President
(U.S. Government Printing Office, February 1986), pp. 129-58.

tant N IPA measures, p rovid in g a m islea d in g in d ica ­
tion o f the strength o r w eakness o f fed eral spending,
farm in ven tory investm ent and final sales. Fa ced w ith
such distortions, analysts w ill fin d it useful to take
m ore care in accou n tin g fo r these qu arterly m o ve­
m ents in CCC purchases and th eir effects o n key

Herman, Shelby W. “The Farm Sector,” Bureau of Economic Analy­
sis, U.S. Department of Commerce, Survey of Current Business
(November 1978), pp. 18-26.

m easures o f eco n o m ic perform an ce.

Tatom, John A. “ Inventory Investment in the Recent Recession and
Recovery,” this Review (April 1977), pp. 2-9.

REFERENCES

Wakefield, Joseph C. “ Federal Farm Programs in 1986-90,” Bu­
reau of Economic Analysis, U.S. Department of Commerce, Sur­
vey of Current Business (April 1986), pp. 31-35.

Belongia, Michael T. “ Outlook for Agriculture in 1983,” this Review
(February 1983), pp. 14-24.
Bureau of Economic Analysis, U.S. Department of Commerce.
“ Special Note — The Commodity Credit Corporation in the Na­
tional Income and Product Accounts,” Survey of Current Business
(January 1982), pp. 6-7.


22


Rosine, John. “The Farm Sector and GNP,” paper presented to the
Federal Reserve Committee on Agriculture and Rural Develop­
ment, Board of Governors of the Federal Resen/e System, June 1,
1984, processed.

Weidenbaum, Murray L. “The Timing of The Economic Impact of
Government Spending,” National Tax Journal (March 1959), pp.
79-85.
________ _ “The Government Spending Process and Economic
Activity,” The American Journal of Economics and Sociology (Janu­
ary 1961), pp. 169-79.