target zones and interest rate variability abstract for narrow exchange rate bands and for reasonable parameter values the interest rate differential s asymptotic unconditional variability is increasing in the width of the exchange rate band whereas for wide exchange rate bands it is slowly decreasing in the exchange rate band the interest rate differential s instantaneous conditional variability is decreasing in the width of the exchange rate band a narrow target zone differs from a completely fixed exchange rate regime in that the interest rate differential s instantaneous standard deviation is high and even increases when the zone narrows

virtual and composite fundamentals in the erm a latent variable approach is applied to identify the appropriate driving process for fundamental exchange rates in the erm from the time series characteristics of so called virtual fundamentals and composite fundamentals a significant degree of mean reversion can be asserted the relative degree of mean reversion across countries closely corresponds to often assumed degrees of economic integration vis a vis germany as well as documented degrees of credibility of the exchange rate policies pursued convergence in fundamentals appears to be larger under the new ems than in the previous years but has again diminished after german unification and the subsequent widening of the erm bands in 1993

the fundamental determinants of interest rate differentials in the erm the paper analyses the sources of persistent interest rate differentials vis a vis germany that have existed in belgium denmark france ireland italy and the netherlands in a target zone system like the erm interest rate differentials mainly reflect devaluation expectations which are measured here by raw 1 month euromarket interest rate differentials drift adjusted 1 month differentials and differentials in long term government bond yields the role of a large set of fundamental macroeconomic variables that may have affected these devaluation expectations is investigated within a vector autoregressive var setting by means of granger causality tests impulse response functions and variance decompositions we find no evidence that fundamentals are more relevant to drift adjusted devaluation risk than for unadjusted interest rate differentials a significant impact of inflation budget deficits and unemployment becomes evident for almost all erm participants

intraurban wage gradients evidence by race gender occupational class and sector abstract a general functional form is used to estimate intraurban wage gradients for various groups of workers with 1980 data from the philadelphia detroit and boston metropolitan areas as predicted by the standard monocentric model of urban land use the following results are obtained for most groups of white workers negative and statistically significant wage gradients steeper wage gradients for higher wage earners and an increase in the steepness of wage gradients as the cbd is approached positive wage gradients are not found for black workers despite the fact that suburban employers hire large numbers of these workers who reside within the central city this result is taken as support for the hypothesis that blacks have been disadvantaged by job suburbanization and continued housing market segregation

credibility debt and unemployment ireland s failed stabilization ireland s disinflation rudiger dornbusch disinflation requires a switch to tough policies if these are fully and immediately reflected in expectations and actual prices there need be little output cost of disinflation this paper analyses the stabilization programme in ireland in the 1980s it may be that ems membership offers a credibility bonus by joining the ems playing by the rules of fixed exchange rates and tying the currency to german price stability a country can achieve a dramatic turnaround in expectations inflation and long interest rates but the evidence shows international disinflation in the 1980s was not limited to ems members the irish example demonstrates a second lesson disinflation and tight money have been accompanied by a serious public debt problem and soaring unemployment unless these problems can be tackled it may become necessary in future to resort once more to inflation and the printing press long interest rates suggest that the bond market does not yet take such fear seriously

lag length selection and tests of granger causality between money and income one of the most widely accepred relationships in macroeconomics is the positive relationship between the rate of growth of the money supply and the rate of growth of income a diversity of opinion arises however with the attempt to identify a causal relationship between these variables while friedman and schwartz 1963 initiated the empirical investigation of money income causality sims 1972 made the most significant contribution to this literature with a practical application of the criterion developed by granger 1969 for identifying a causal relationship since the appearance of sims s approach and an alternative one advanced by sargent 1976 many researchers have applied these techniques to the investigation of the causal relationship between money and income l with two exceptions hsiao 1981 and mcmillin and fackler 1984 these researchers have arbitrarily chosen the lengths of their distributed lags the purpose of this paper is to test for granger causality between money and income this paper differs from previous work in that considerably more attention is focused on the effect of the lag specification on the test results in particular we investigate the extent to which rules of thumb arbitrary lag specifications and

commuting congestion and employment dispersal in cities with mixed land use abstract for centuries cities have been modeled as having centered employment scarce access to which generates land rent this paper first presents some new empirical evidence that in us cities actual employment turns out to be almost as dispersed as residences this range of urban forms is generated with analytic ease in a model that assumes land can have mixed rather than exclusive use at any location the model has firms trading off a central agglomeration force against the lower wages that accompany shorter commuting distances in peripheral locations at one extreme with very high agglomerative forces employment is approximately centered with long commute distances and high congestion levels at the other extreme lower agglomerative forces lead to employment that is completely dispersed commute distances of zero and the absence of congestion maximizing output minus congestion never leads to a pattern of land mixing where employment is fully dispersed a market model however often does if the mix at each location is based on the relative magnitude of the land rent offered from residential as opposed to commercial uses

interest rate differentials and exchange rate policies in austria the netherlands and belgium in this paper the small but persistent interest rate differentials via a vis germany which have existed in austria the netherlands and belgium are analysed these interest differentials may be thought of to consist of three parts expected exchange rate movements within the band expected changes of the central rates and a risk premium following a similar test as proposed by svensson we examine the credibility of the exchange rate policy in these countries according to this test the belgian exchange rate policy clearly lacks credibility for most of the period under consideration there are however serious problems applying this test to belgium due to the dual exchange rate system for austria and the netherlands we calculate interest differentials which are adjusted for expected exchange rate movements within the band it appears that the differences between the adjusted and the unadjusted interest differentials can be substantial the granger causal relationship between fundamentals like the rate of inflation the government budget deficit and the current account is also quite different for the adjusted and the unadjusted interest differential where the fundamentals have the highest explanatory power for the latter measure

optimal spatial growth of employment and residences abstract this paper examines the location patterns of employment and residences in an urban area characterized by irreversible land use commitments and smoothly growing population it is assumed that all output is shipped to the center of the urban area and that workers have commuting costs of getting to work the optimal solution which is also the equilibrium solution minimizes the present discounted value of aggregate shipping costs plus commuting costs the residential area expands outward over time but a constant fraction of the land is always reserved for future employment development

have large budget deficits caused rising trade deficits for the united states the 1980s have been years of both large and unprecedented trade deficits as well as massive federal budget deficits the trade deficit rose from 25 billion in 1980 to 124 billion in 1985 during this same period federal budget deficits soared from 74 billion in 1980 to more than 212 billion in 1985 it is widely believed that the u s trade deficit rose mainly because of the skyrocketing federal budget deficit presenting such a view are for example hutchison and pigott 25 hutchison and pyle 26 clark 11 modigliani 30 and aschauer 2 besides economists many labor unions i e afl cio and official government documents see the economic report of the president particularly of 1984 have all shared similar views the issues involved have important policy implications suppose that the basic reason for rising trade deficits is indeed the escalating federal budget deficit in this case policy makers may focus on curtailing the budget deficit in order to resolve the trade deficit problem that has adversely affected several sectors such as manufacturing industries and agriculture however if such a view concerning the causal role of the budget deficit is incorrect then reductions in the federal budget deficit may not resolve the trade deficit dilemma and moreover attention will be diverted from more relevant and urgently needed policy options 6 the purpose of this paper is to empirically investigate the conventional argument that high federal budget deficit has been the prime cause of the escalating u s trade deficit finding only partial empirical evidence to support it in section ii i argue that most of previous studies in this area appear flawed by a methodological error rendering their tests unreliable for discriminating between a number of equally plausible hypotheses section iii describes the data and methodology used in the paper section iv presents the empirical results section v summarizes and concludes the paper

the time variation of risk and return in the foreign exchange and stock markets this paper attempts to determine whether the fluctuations of conditional first and second moments which are observed for many assets are consistent with the sharpelintner mossin capital asset pricing model we test the mean variance model under several different assumptions about the time variation of conditional second moments of returns using weekly data from july 1974 to december 1986 that include returns on a portfolio composed of dollar deutsche mark sterling and swiss franc assets together with the u s stock market the results indicate that estimated conditional variances cannot explain the observed time variation of risk premia rates of return on international financial assets are characterized by statistical properties that are quite common to all financial markets they are highly volatile and largely unpredictable these properties make it very difficult to extract statistically reliable estimates of systematic exchange rate and assetprice movements and are at the root of the generally poor empirical performance of international asset pricing models nevertheless two important results have been uncovered by empirical researchers and can be considered a fair characterization of the data a expected returns on foreign assets vary over time cumby and obstfeld 1981 and the numerous articles that followed recently surveyed by frankel and meese 1987 b the volatility of returns of foreign assets also changes over time cumby and obstfeld 1984 hodrick and srivastava 1984 and hsieh 1988 among others as giovannini and jorion 1987 suggest the

causality analysis and multivariate autoregressive modelling with an application to supermarket sales analysis abstract this paper describes a modelling methodology for multivariate stochastic processes the concept of multiple causality is discussed and a procedure to detect multiple causality is suggested the data of a major canadian supermarket is analyzed and a multivariate autoregressive model for this supermarket is constructed and estimated several empirical findings are reported

does the real interest parity hypothesis hold evidence for developed and emerging markets we present empirical evidence on the real interest parity hypothesis for a set of emerging and developed countries this is done by carrying out a set of unit root tests on the real interest differentials with respect to the us our results support the hypothesis of a rapid reversion towards a zero differential for developed countries and towards a positive one for emerging markets mean reversion is faster for emerging market economies we also find that this adjustment tends to be highly asymmetric and markedly different for developed and emerging markets our evidence reveals a high degree of market integration for developed countries and highlights the importance of risk premia for emerging markets

a simple approach to interest rate option pricing a simple introduction to contingent claim valuation of risky assets in a discrete time stochastic interest rate economy is provided taking the term structure of interest rates as exogenous closed form solutions are derived for european options written on 1 treasury bills 2 interest rate forward contracts 3 interest rate futures contracts 4 treasury bonds 5 interest rate caps 6 stock options 7 equity forward contracts 8 equity futures contracts 9 eurodollar liabilities and 10 foreign exchange contracts article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

autoregressive modelling and money income causality detection abstract a step wise procedure based on granger s concept of causality and abaike s final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process the model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model it also provides a reasonably powerful test of causality the idea is applied to u s postwar money and income data it is found that between m1 and gnp a bivariate feedback model fits the data best between m2 and gnp a one way causal model from money to income performs better diagnostic checks applied to our model seem to indicate the adequacy of our approach

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

real and nominal interest rates under uncertainty the fisher theorem and the term structure this paper examines the relation between nominal and real interest rates and the nominal and real term structure under uncertainty we show that two separate risk terms cause the fisher theorem to fail one risk term is related only to the variability of money prices while the other is related to the purchasing power riskiness of the nominal bond monetary policy can affect the value of both these risk terms we also show that the pure expectations hypothesis of the term structure fails for both real and nominal bonds because of risk premia even if the economy is neutral with respect to monetary policy monetary policy can alter the nominal term structure

testing for a break in the persistence in yield spreads of emu government bonds this study tests for a break in the persistence of emu government bond yield spreads examining data from france italy and spain and using german interest rates as a kind of benchmark the results reported here provide evidence for breaks between 2006 and 2008 the persistence of the yield spreads against german government bonds has increased signicantly after this period this could be a sign of higher sovereign credit risk and possibly even redenomination risk caused by the debt crisis in the euro area we nd long memory behavior before and after the breakpoints and empirical evidence for positive excess kurtosis and garch eects when persistence

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables

testing for long horizon uip using ppp based exchange rate expectations abstract this paper revisits the uncovered interest parity relation it supplements existing work in two ways it focuses on long instead of short term interest rates and related to that employs exchange rate expectations derived from purchasing power parity ppp instead of actual outcomes among the major floating currencies over the period 1975 1997 the paper cannot support the notion of further increases in uip validation beyond that associated with the wave of financial market liberalization and deregulation in the early 1980s

empirical features of the second generation target zone models mean reverting fundamentals and endogenous devaluation risk we show that within bertola and svensson s second generation target zone model mean reverting interventions and endogenous devaluation risk are closely interrelated over the period 1983 93 we analyze the degree of mean reversion in the underlying fundamental process as well as the term structure of interest rate differentials vis a vis germany for six exchange rate mechanism currencies for austria denmark and the netherlands and for belgium after 1990 our estimates are broadly in line with the first generation target zone model whereas those for france and italy are in accordance with the model that allows for endogenous devaluation risk jel f31 e43

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential