What is the short-run effect of an unexpected and temporary monetary policy tightening on inflation? The conventional view suggests that inflation should have a negative reaction to such a monetary policy move (see e.g. Woodford (2003a)). However, empirical investigations based on the VAR-methodology cast doubts on this prediction. Figure 1 makes this point. In a trivariate VAR for the U.S. that considers inflation, output gap, and the federal funds rate, an unexpected one-shot increase in the policy rate leads to a positive and significant reaction of inflation. As said, this result hardly squares with the predictions offered by standard models of the business cycle. This is the reason why Eichenbaum (1992) labeled as the "price puzzle" this empirical conditional correlation.
Cash savings are the single greatest use of share issuance cash flows among U.S. firms, which on average save $0.49 per $1 of share issuance; as a comparison, these firms save $0.03 per $1 of debt issuance, and $0.29 per $1 of cash flows from operations. Moreover, the share issuance savings rate has more than doubled over the past thirty-five years, from $0.23 per $1 in 1971, to $0.62 per $1 in 2005. Hence, when firms issue shares today, they tend to save the majority of the proceeds. In this paper I try to explain why firms save such a large portion of their share issuance proceeds as cash; doing so should deepen our understandings of why firms issue shares, and whether the U.S. equity market is an efficient allocator of financial resources.
Borrowers and lenders have at their disposal a number of contracting mechanisms to help ensure a healthy lending relationship, including, for example, security classes, maturities, and covenants. This study examines the contracting consequences of one of those mechanisms, the covenant contracting package. Specifically, the study analyzes the association between the inclusion of accounting-based financial (ABF) covenants in public debt and the likelihood of substantive default and credit rating downgrade. Covenants are intended to protect the interests of lenders who wish to avoid substantive default and minimize losses and economic inefficiencies associated with such outcomes.
