strategic capacity rationing to induce early purchases dynamic pricing offers the potential to increase revenues at the same time it creates an incentive for customers to strategize over the timing of their purchases a firm should ideally account for this behavior when making its pricing and stocking decisions in particular we investigate whether it is optimal for a firm to create rationing risk by deliberately understocking products then the resulting threat of shortages creates an incentive for customers to purchase early at higher prices but when does such a strategy make sense if it is profitable to create shortages what is the optimal amount of rationing risk to create we develop a stylized model to study this problem in our model customers have heterogeneous valuations for the firm s product and face declining prices over two periods customers are assumed to have identical risk preferences and know the price path and fill rate in each period via its capacity choice the firm is able to control the fill rate and hence the rationing risk faced by customers customers behave strategically and weigh the payoff of immediate purchases against the expected payoff of delaying their purchases we analyze the capacity choice that maximizes the firm s profits first we consider a monopoly market and characterize conditions under which rationing is optimal we examine how the optimal amount of rationing is affected by the magnitude of price changes over time and the degree of risk aversion among customers we then analyze an oligopoly version of the model and show that competition reduces the firms ability to profit from rationing indeed there exists a critical number of firms beyond which a rationing equilibrium cannot be supported

rational panics and stock market crashes abstract this paper offers an explanation for stock market crashes which focuses on the role of rational but uninformed traders we show that uninformed traders can precipitate a price crash because as prices decline they surmise that informed traders received negative information which leads them to reduce their demand for assets and drive the price of stocks even lower the model yields several implications such as that crashes can occur even when the fundamentals are strong and that the magnitude of the crash depends on the fraction of uninformed investors and the amount of unsophisticated passive investing present in the market

efficient mechanisms for bilateral trading we consider bargaining problems between one buyer and one seller for a single object the seller s valuation and the buyer s valuation for the object are assumed to be independent random variables and each individual s valuation is unknown to the other we characterize the set of allocation mechanisms that are bayesian incentive compatible and individually rational and show the general impossibility of ex post efficient mechanisms without outside subsidies for a wide class of problems we show how to compute mechanisms that maximize expected total gains from trade and mechanisms that can maximize a broker s expected profit journal of economic literature classification number 026

riding free on the signals of others abstract this paper looks at the incentives to free ride on the information signaling of others and shows how this can lead to delay in productive activity and to a cascade of activity once information is signaled in the presence of increasing returns to scale to a profitable project an initial pioneer may have to incur short term losses to signal the opportunity to others agents may prefer to defer entry in the hope that others will incur those losses and thereby convey the information free riding is worsened when potential entrants must first choose to acquire a signal about the project even a costless signal and this information acquisition is observed

real and money wages output and inflation in the semi industrialized world recent structuralist ideas about real and money wage changes are reviewed addressing six questions 1 in an economy closed to trade do real wage increases cause output to rise or fall 2 if output is at an upper bound what are the roles of real wage and wealth movements in macro adjustment 3 taking effective demand into account do money wage cuts stimulate employment 4 in an open economy does money wage reduction or devaluation make output rise 5 at an output bound what are the respective roles of wage reduction and monetary restraint in slowing inflation 6 if inflation is driven by cost with output below capacity how do wage dynamics affect stabilization programmes based on de indexation and price freezes institutional factors suggest that wage cutting may be a counterproductive answer to all these policy questions in semi industrialized economies

speculative trading in mean reverting markets mean reversion is a feature largely recognized for the price processes of many financial securities and especially commodities in the literature there are examples where some simple speculative strategies before transaction costs were devised to earn excess returns from such price processes actually the gain opportunities of mean reversion must be corrected to account for transaction costs which may represent a major issue in this work we try to determine sufficient conditions for the parameters of a mean reverting price process as a function of transaction costs to allow a speculative trader to have positive expectations when deciding to take a position we estimate the mean reverting parameters for some commodities and correct them for transaction costs to assess whether the potential inefficiency is actually relevant for speculative purposes

using first price auctions to sell heterogeneous licenses abstract this paper considers three alternative ways to sell heterogeneous licenses via a first price format when there is single unit demand it has been suggested that incorporating a first price element may bolster competition in this case klemperer paul d 2002 what really matters in auction design journal of economic perspectives 16 169 189 in a controlled laboratory setting we compare the performance of the simultaneous first price auction the sequential first price auction and the simultaneous descending auction with that of the simultaneous ascending auction the experiments involve several bidding environments of varying complexity we find that the simultaneous ascending auction achieves the highest levels of efficiency but also has drawbacks i its revenues are low and variable ii per license profits vary and iii the incidence of winner s curse outcomes is high seller s revenues are highest when the licenses are sold in a sequential first price auction in decreasing order of quality

dynamic entry and exit with uncertain cost positions abstract we study the dynamics of entry and exit based on firms learning about their relative cost positions each firm s marginal cost of production is its own private information thereby facing ex ante uncertainty about its cost position the inelastic market demand can accommodate only a fraction of firms to operate and thus only firms with relatively lower costs are viable in the long run some firms in the market will exit if excessive entry or overshooting occurs we derive the unique symmetric sequential equilibrium the equilibrium properties are consistent with empirical observations i entry occurs gradually over time with lower cost firms entering earlier than higher cost firms ii exiting firms are among the ones that entered later indeed in the last period moreover equilibrium overshooting probability is shown to always be positive and decreasing over time

interest profits and suboptimality in a demand constrained macro model keynes argues that under pessimistic expectations investment demand falls short of full employment savings consequently income adjusts to bring savings into line with investment resulting in unemployment and or excess capacity classical theory as reconstituted in postwar textbooks counters that investment and full employment savings are equilibrated by adjustment of the interest rate thus current output will obtain its optimal level at full employment and full capacity despite pessimistic expectations of future demand the only way this can fail is if some type of wage or price rigidity prevents the stock of real money balances from accommodating the demand for them at the fullemployment interest rate fig i illustrates the keynesian and classical views in a traditional loanable funds diagram here the full employment supply of savingsis given by s investment demand under optimistic expectations is i and the full employment interest factor unity plus the interest rate is r pessimistic expectations shift investment demand to it reducing the full employment interest factor to r in the classical model or reducing employment income and hence savings to s in the simplest keynesian model general equilibrium theory provides a third view on interest rate determination here competition over prospective profits leads the interest rate to adjust to the return on capital adjusted for risk so prospective profits are eliminated provided capital is mobile to reconcile this view with either the keynesian or classical view depicted in fig i it should first be noted that the general equilibrium model of interest rates is a multi period model while the textbook models of fig i are not they are one period models with views of the future imprecisely summarised in the investment demand function furthermore in those models views of the future are not analysed for prospective profits or their consequences graphically the inframarginal triangle between the investment demand curve and the interest rate line is not analysed or explained how can such prospective profits survive competitive activities the present paper proposes to examine this issue in as simple a model as possible the key simplifications are as follows first the simplest multi period

optimal dynamic auctions for revenue management we analyze a dynamic auction in which a seller withc units to sell faces a sequence of buyers separated intot time periods each group of buyers has independent private values for a single unit buyers compete directly against each other within a period as in a traditional auction and indirectly with buyers in other periods through the opportunity cost of capacity assessed by the seller the number of buyers in each period as well as the individual buyers valuations are random the model is a variation of the traditional single leg multiperiod revenue management problem in which consumers act strategically and bid for units of a fixed capacity over time for this setting we prove that dynamic variants of the first price and second price auction mechanisms maximize the seller s expected revenue we also show explicitly how to compute and implement these optimal auctions the optimal auctions are then compared to a traditional revenue management mechanism in which list prices are used in each period together with capacity controls and to a simple auction heuristic that consists of allocating units to each period and running a sequence of standard multiunit auctions with fixed reserve prices in each period the traditional revenue management mechanism is proven to be optimal in the limiting cases when there is at most one buyer per period when capacity is not constraining and asymptotically when the number of buyers and the capacity increases the optimal auction significantly outperforms both suboptimal mechanisms when there are a moderate number of periods capacity is constrained and the total volume of sales is not too large the benefit also increases when variability in the dispersion in buyers valuations or in the number of buyers per period increases

multifractality in asset returns theory and evidence this paper investigates the multifractal model of asset returns mmar a class of continuous time processes that incorporate the thick tails and volatility persistence exhibited by many financial time series the simplest version of the mmar compounds a brownian motion with a multifractal time deformation prices follow a semi martingale which precludes arbitrage in a standard two asset economy volatility has long memory and the highest finite moments of returns can take any value greater than 2 the local variability of a sample path is highly heterogeneous and is usefully characterized by the local holder exponent at every instant in contrast with earlier processes this exponent takes a continuum of values in any time interval the mmar predicts that the moments of returns vary as a power law of the time horizon we confirm this property for deutsche mark u s dollar exchange rates and several equity series we develop an estimation procedure and infer a parsimonious generating mechanism for the e

a disequilibrium model with smooth regime transitions and a keynesian spillover for switzerland s labor market abstract this paper presents a disequilibrium labor market model in which aggregation over a continuum of micro markets with different demand supply ratios produces smooth macro relationships mapping aggregate demand and supply onto actual employment and regime proportions aggregate labor demand consists of a classical part derived on a putty clay assumption and a keynesian spillover from the goods market the specification of labor supply incorporates intertemporal substitution the degree of aggregate imbalances on labor and goods markets is measured by business survey data the estimated model indicates a growing mismatch between the micro structures of demand and supply of labor the short run fluctuations of employment are primarily traced back to the keynesian spillover classical determinants of labor demand are relevant as well but only in the medium term labor supply is rather inert and thus absorbs the swings of labor demand only partly

how are product demand changes transmitted to the labour market in the traditional keynesian and classical models the transmission of product demand changes to the labor market generally involves wage price sluggishness or countercyclical real wage movements in practice however real wages are often acyclical or procyclical and wages and prices are flexible over periods of several years this paper examines the main channels whereby product demand can affect employment under these conditions the analysis suggests that the effectiveness of demand management policies under wage price flexibility depends significantly on the availability of a limited number of supply side transmission channels copyright 1994 by royal economic society

rational asset price movements without news this paper argues that an important part of movements in asset prices may be caused by neither external news nor irrationality but by the revelation of information by the trading process itself two models are developed that illustrate this general idea one model is based on investor uncertainty about the quality of other investors information the other is based on dispersion of information and small costs to trading the analysis is used to suggest a possible rational explanation of the october 1987 crash copyright 1993 by american economic association

rational herding in financial economics abstract this paper briefly describes recent papers on the economics of rational herding in financial markets some models can predict perfect herding in which rational agents all act alike without any countervailing force such herding typically arises either from direct payoff externalities negative externalities in bank runs positive externalities in the generation of trading liquidity or in information acquisition principal agent problems based on managerial desire to protect or signal reputation or informational learning cascades the paper also provides a few pointers to related literature and suggests issues to be addressed in future research

fiscal policy in a small open economy an integration of the short run heckscher ohlin and capital accumulation models this paper incorporates the response to fiscal policies described by the heckscher ohllin and sector specific capital models within a more general framework of two sector growth for a small open e

the nairu and wages in local labor markets unemployment in the united states has been below its presumed nairu nonaccelerating inflation rate of unemployment of 6 percent for more than four years the doctrine or dogma of the nairu led to the expectation that an unemployment rate below the nairu would make accelerating inflation inevitable but by all measures inflation has if anything declined and shows no signs of increasing the nairu doctrine has had a major role in macroeconomic theory and monetary policy for several decades for example the seven hikes in interest rates by the fed in 1994 1995 seem to have been motivated not by concerns about existing inflation cpi u inflation was steady and below 3 percent but by fears that an unemployment rate falling toward the 6 percent level and then below 6 percent in september 1994 would foster future inflation theoretical and statistical criticisms of the nairu have been growing see e g robert solow 1986 james tobin 1993 eisner 1994 rod cross 1995 essays by cross frank hahn and tobin ray fair 1996 olivier blanchard and lawrence katz 1997

remaining puzzles and neglected issues in macroeconomics this paper analyses the chain of transmission mechanisms of economic policy actions to financial markets output and employment and finally unemployment in an attempt to identify remaining puzzles and neglected issues in macroeconomics the paper emphasizes the consequences of fiscal and monetary policy actions on real variables including real interest rates and real exchange rates an attempt is made to explain why product demand shocks often tend to have faster effects on output and employment than on prices the paper also discusses why demand induced increases in output and employment are not systematically connected with a reduction in the product wage rate the paper ends with a discussion of various supply side considerations in macroeconomics

market power and unemployment abstract this paper explores the under consumptionist idea that market power can preclude the existence of a full employment equilibrium within the framework of the modern theory of economic growth it is shown that the introduction of market power can indeed eliminate the full employment equilibrium in an attempt to assess the importance of this possibility maximum values for the market power parameters consistent with a full employment equilibrium existing are computed in some plausible cases these maxima are uncomfortably low suggesting that market power has significant potential for causing unemployment

bibliography of robert m solow s publications 1950 1987 1952 6 an econometric model of interindustry flows with k j arrow and r shephard abstract econometrica july 1952 7 on the structure of linear models econometrica january 1952 8 review of w e deming some theory of sampling review of econometrics and statistics may 1952 9 review of r dorfman application of linear programming to the theory of the firm journal of american statistical association june 1952 10 review of t c koopmans ed activity analysis of production and allocation journal of american statistical association june 1952 11 review of r roy ed cahiers dii seminaire deconometrie no 1 journal of american statisticalassociation december 1952

to grab for the market or to bide one s time a dynamic model of entry we consider a simultaneous move dynamic entry game the fixed cost of entry is private information entering earlier increases the likelihood of being the monopolist but also increases the likelihood of coordination failure and simultaneous entry we consider general continuous distributions for the fixed cost and we characterize the unique symmetric sequential equilibrium in pure strategies comparative statics results are derived as the time between rounds approaches zero all of the action occurs during an arbitrarily small amount of time for the bertrand model we extend the analysis to allow for n firms

boom and bust patterns in the adoption of financial innovations we develop a dynamic model of the adoption of financial innovations each period firms decide whether or not to adopt an innovation of uncertain value and the profitability of each period s adoptions reveals information about the innovation s value we show that characteristics of financial innovation waves cited by critics as evidence of irrational excess are in fact consistent with fully rational behavior we also show that social welfare is enhanced when more firms adopt innovations of questionable value and that financial intermediaries base an incentive to encourage such adoption article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a comparison of multiple unit all pay and winner pay auctions under incomplete information this article examines the properties of independent private value all pay and winner pay auctions when there are multiple units sold we study bidding behavior efficiency and revenue in a set of 23 experimental sessions our data show that the all pay auction and the winner pay auction are empirically revenue equivalent though both yield higher revenue than the risk neutral bayesian equilibrium our evidence also suggests that the winner pay auction is more likely to lead to a pareto efficient allocation than the all pay auction

market crashes and informational avalanches this paper analyses a security market with transaction costs and a sequential trading structure transaction costs may prevent many traders from revealing their private information if they trade in a sequential fashion due to the information aggregation failure hidden information gets accumulated in the market which may be revealed by a small trigger yielding a high volatility in the absence of an accompanying event the paper first characterizes the optimal trading strategy of the agent which constitute the unique equilibrium further properties of the price sequence are obtained using the concepts of informational cascade and informational avalanche the results are applied to the explanation of market crashes in particular the dynamics of market crashes are illustrated as evolving through the following four phases 1 boom 2 euphoria 3 trigger and 4 panic where the euphoria corresponds to the informational cascade and the panic corresponds to the informational avalanche

how natural is canada s high unemployment rate abstract a reduced form price equation for canada 1956 1984 yields a stable estimate of 4 9 percent for the natural unemployment rate of men aged 25 and over with strong evidence against hysteresis once structural influences are accounted for the resulting profile for the aggregate natural unemployment rate rises smoothly from 5 5 percent in 1961 to a maximum of 8 0 percent in 1977 1978 and then declines rapidly to 6 4 percent in 1985 calculations based on an estimated production structure for the aggregate non energy sector of canada provide additional evidence against the excess real wage hypothesis and for the view that the recent fluctuations in canada s unemployment rate are mostly of the keynesian variety

pairs trading performance of a relative value arbitrage rule we test a wall street investment strategy pairs trading with daily data over 1962 2002 stocks are matched into pairs with minimum distance between normalized historical prices a simple trading rule yields average annualized excess returns of up to 11 for self financing portfolios of pairs the profits typically exceed conservative transaction cost estimates bootstrap results suggest that the pairs effect differs from previously documented reversal profits robustness of the excess returns indicates that pairs trading profits from temporary mispricing of close substitutes we link the profitability to the presence of a common factor in the returns different from conventional risk measures wall street has long been interested in quantitative methods of speculation one popular short term speculation strategy is known as pairs trading the strategy has at least a 20 year history on wall street and is among the proprietary statistical arbitrage tools currently used by hedge funds as well as investment banks the concept of pairs trading is disarmingly simple find two stocks whose prices have moved together historically when the spread between them widens short the winner and buy the loser if history repeats itself prices will converge and the arbi

risk aversion and the winner s curse this article analyzes an auction in which bidders see independent components of a common prize value the nash equilibrium for two rational bidders is shown to be independent of risk attitudes the information structure allows explicit calculation of an alternative equilibrium in which naive bidders do not correctly discount the value of the prize contingent on winning and thus they suffer the winner s curse subjects in a laboratory experiment clearly fall prey to the winner s curse the data conform most closely to the predictions of the naive model moreover the level of risk aversion implied by fitting the naive model is similar to an independent risk aversion measure obtained in a separate private value bidding exercise

labour surplus as a signal for real wage adjustment austria 1968 1984 unemployment figures for austria have been running well below the oecd average since the late 1960s in fact before 1981 there was hardly any unemployment problem in austria in 1982 and 1983 unemployment rates doubled since then the upward movement has slowed down but there are no indications that austrian unemployment could drop substantially below the 5 per cent level during the second half of the 1980s see figure 1

real wages and unemployment in australia this paper estimates a three equation model of the australian labor market for employment real wages and the participation rate it uses the model to study the role of incomes policies in containing real wage growth and the reasons behind the changes in unemployment since 1970 it finds that incomes policies have not been important in controlling real wages the rise in unemployment in the 1970s was due to the rise in tax rates and unemployment benefits and the changes in unemployment in the 1980s were connected with changes in investment and aggregate demand copyright 1991 by the london school of economics and political science

the structure of interdependence in international stock markets abstract this study investigates the dynamic structure of nine major stock markets using an error correction model and directed acyclic graphs dag the dag representation provides a structure of causality among these markets in contemporaneous time building on this contemporaneous structure and the estimated error correction model innovation accounting techniques are applied the results show that the japanese market is among the most highly exogenous and the canadian and french markets among the least exogenous in our nine market study the us market is highly influenced by its own historical innovations but it is also influenced by market innovations from the uk switzerland hong kong france and germany the us market is the only market that has a consistently strong impact on price movements in other major stock markets in the longer run

the macroeconomic tradeoffs of price and income policies under some conditions price and income policies may succeed in reaching the objective they pursue but in all cases tradeoffs place limits on what they can achieve these tradeoffs are discussed for three kinds of objectives reducing inequalities solving the inflation unemployment dilemma and restoring business profitability the uncertainties particularly the relationship between wages and employment are emphasized copyright 1990 by the editors of the scandinavian journal of economics

strategic merger waves a theory of musical chairs this paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment a set of acquirers compete over time for scarce targets at each point in time an acquirer can either postpone a takeover attempt or raid immediately by postponing the takeover attempt an acquirer may gain from more favorable future market conditions but runs the risk of being preempted by rivals first a complete information model is considered and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly pareto ranked all these equilibria share the feature that all acquirers rush simultaneously in merger waves the model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability this game is shown to have a unique markov perfect bayesian equilibrium in monotone strategies and the timing of the merger wave can thus be predicted last the comparative dynamics predictions of the model are related to stylized facts

financial market variables do not predict real activity i introduction the past decade has seen an extensive empirical reassessment of the information content of financial market variables believed to be sensitive to monetary policy particularly provocative are papers suggesting that some interest rates and interest rate spreads contain more information about economic activity than monetary aggregates this paper reviews important methodological pitfalls in these studies we then show that none of the commonly employed indicators of monetary policy contain incremental information useful in forecasting real economic activity as measured by industrial production two conclusions are possible either monetary policy innovations have no significant real effects or we collectively have failed in our efforts to measure monetary policy the money income causality literature spawned by christopher sims in the 1970s has broadened in recent years to encompass a diverse set of measures of monetary policy more comprehensive and sophisticated empirical assessment strategies and a richer array of explanations for observed correlations between financial market variables and economic activity early contributors to this literature such as stock and watson 1989 friedman and kuttner 1992 and bernanke and blinder 1992 present evidence that particular interest rates and spreads not only dominate monetary aggregates as predictors of economic performance but are remarkably powerful predictors stock and watson 1989 and friedman and kuttner 1992 demonstrate that the spread between the interest rates on commercial paper and treasury bills is highly significant in explaining movements in real activity while bernanke and blinder 1992 made an equally convincing case for the federal funds rate these conclusions are qualified however in subsequent work both bernanke 1990 and stock and watson 1993 for example point out that the predictive power of the paper bill spread and interest rates more generally weakened during the second half of the 1980s and the early 1990s the results reported in these and related papers form the empirical core of the debate over the relative merits of various interest rates spreads and monetary aggregates as indicators of the stance of monetary policy subsequent empirical work has seen a shift from atheoretical to structural vector autoregressions strongin 1992 gordon and leeper 1994 and bernanke and mihov 1995 for example focus on more refined measures of monetary policy derived from explicit models of the reserve market and central bank operating procedures these papers address concerns that go beyond discriminating among variables on the basis of predictive power they grapple directly with the fundamentally difficult issue of identifying monetary policy shocks by positing and estimating structural models that take the form of identified vars the usefulness of these efforts as well as earlier efforts to measure monetary policy is in turn questioned by rudebusch 1996 who finds that the studies econometric results are fragile and at odds with other evidence on the nature of the fed s reaction function and monetary policy surprises the first part of our paper illustrates some of the methodological pitfalls common in the literature cited above and complements recent work by bernanke 1990 hess and porter 1993 thoma and gray 1995 rudebusch 1996 and emery 1996 we begin by demonstrating the advantages of rolling recursive regression techniques that directly and comprehensively address the question of sample sensitivity these techniques are used to illustrate the extreme sensitivity to sample period of the causality statistics and variance decompositions commonly used to assess the explanatory power of financial market variables indeed in the applications under review here such in sample measures of fit are sometimes heavily influenced by individual monthly observations

monetary policy as a process of search monetary policymakers are uncertain about the state of the economy and learn from the economy s reaction to policy private agents however anticipate any systematic attempt to incorporate this information into future policy the authors analyze this feedback in the context of a monetary authority s attempt to stimulate an economy in recession they show that modest stimuli may prove ineffectual if small reductions in interest rates are unlikely to promote a response then they may be followed by further cuts a vicious circle develops in which the expectation that the policy could fail leads investors to delay investment thereby promoting failure copyright 1996 by american economic association

searching for a will o the wisp an empirical study of the nairu in canada abstract this paper demonstrates the uncertainty surrounding estimates of the non accelerating inflation rate of unemployment nairu a reduced form phillips curve is used to develop a generic model of the nairu which nests competing hypotheses about the specific form of the inflation unemployment relationship empirical results for the canadian economy show that the range of prime age male nairu s generated by statistically satisfactory and economically reasonable estimating equations covers almost the entire range of canadian post war prime age male unemployment experience estimates of the nairu depend heavily on the form of the estimating equation the operational definition of key variables and the data sample period

stock market quality in the presence of a traded option we use an economic experiment to examine the implications of asymmetric information for linkages between a stock and a traded option we find the presence of the option splits price discovery across markets and changes the process by which conditional expectations are updated the time series properties of the stock price depend directly on the intrinsic value of the option when the intrinsic value of the option is positive informational efficiency is higher in the market for the stock and volatility is lower we provide evidence that the introduction of an option improves market quality in the underlying asset

network effects and welfare cultures we empirically examine the role of social networks in welfare participation using data on language spoken at home to better infer networks within an area our empirical strategy asks whether being surrounded by others who speak the same language increases welfare use more for those from high welfare using language groups this methodology allows us to include local area and language group fixed effects and to control for the direct effect of being surrounded by one s language group these controls eliminate many of the problems in previous studies the results strongly confirm the importance of networks in welfare participation

disaggregated capital flows and developing countries competitiveness summary attracting capital and foreign exchange flows is crucial for developing countries yet these flows could lead to real exchange rate appreciation and may thus have detrimental effects on competitiveness jeopardizing exports and growth we investigate this dilemma by comparing the impact of six types of flows on real exchange rate behavior in a sample of 57 developing countries covering africa europe asia latin america and the middle east the results reveal that portfolio investments foreign borrowing aid and income lead to real exchange rate appreciation while remittances have disparate effects across regions foreign direct investments have no effect on the real exchange rate contributing to resolve the above dilemma

theory ahead of language in the economics of unemployment this paper discusses from the perspective of modern theories of unemployment several unemployment concepts that have been used over the years it argues that many of these concepts are of limited value and are dominated by a few simple concepts that are basic in the analysis of stochastic general equilibrium models

when managers cover their posteriors making the decisions the market wants to see the stock market has opinions as to what choices firms should make we show that concern for current share prices may lead managers to make these choices rather than those suggested by their own superior information even when arbitrarily many privately informed firms have to make a similar decision the market s prejudices may still prevail we compare the distortions that arise from share price maximization with those due to herd behavior among profit maximizing firms and show that the former results in strictly less efficient use of information

unemployment getting the questions right in my opinion the form and conception of this conference exemplifies the right instinct for modern macroeconomics there is a fact a big unmistakable unsubtle fact essentially everywhere in the modern industrial capitalist world unemployment rates are much higher than they used to be two or three decades ago why is that if macroeconomics is good for anything it ought to be able to understand and explain that fact we should be able to produce a fairly convincing analytical account of the occurrence and persistence of unusually high unemployment rates you might think that to be a mere commonplace to what other sort of end would anyone organize a conference my experience however is that most high powered academic conferences are stimulated by purely technical developments or less often by ideological or political promotion rather than by the need to deal with an outstanding fact i do not blame anyone for this state of affairs we may not be blessed with many significant observations too big to be quibbled over and technical innovations do need to be thrashed out by experts anyway it is good to be faced by a brute fact that needs explanation it is what macroeconomics ought to be about i compliment the organizers also on a second aspect of the agenda the country by country organization of the papers we can all hope to learn something from cross country comparisons one of the few good ways we have to test analytical ideas is to see whether they can make sense of international differences in outcomes by appealing to international differences in institutional structure and historical environment the right place to start is within each country separately studied by someone who knows the peculiarities of its history and its data you might think that this too ought to be obvious but in fact the usual approach is just the opposite more often than not we fail to take institutional differences seriously one model is supposed to apply everywhere and always each country is just a point on a cross section regression or one among several essentially identical regressions leaving only grumblers to worry about what is exogenous and what is endogenous and whether simple parametrizations do justice to real differences in the way the economic mechanism functions in one place or another i have no way of knowing whether this organized effort will get anywhere in explaining high unemployment but it seems to be set up to give itself the best chance for better or worse probably for the better theoretical and empirical work are closely intertwined in macroeconomics scratch a macro theorist and you find a casual econometrician scratch a macro econometrician and you find a casual theorist usually you do not have to scratch very hard thus the discussion of the issues central to the conference has already hardened into certain characteristic forms there are questions already lying on the table that the individual country papers will be trying to answer i suspect that some

strategic trading in a two sided foreign exchange auction abstract the market microstructure chosen for foreign exchange markets can influence trading volumes and equilibrium exchange rates with emerging markets and developing countries increasingly utilizing two sided auctions we show that the choice of the discrete t tonnement auction creates incentives for strategic behavior among market participants theoretical predictions on strategic under revelation of demand or supply positions are supported empirically using detailed data from a rare example of a t tonnement market the moscow interbank currency exchange our results suggest that market microstructures should be introduced alongside more traditional asset market fundamentals in studies of foreign exchange market activity especially in developing countries

herding and anti herding a model of reputational differentiation abstract we analyze a model related to the strategic herding literature where a second expert maximizes his expected second period value by conforming with a first expert herding in contrast to the herding literature we assume that an agent is most valuable if he is the only smart agent if the value of being the only smart agent is sufficiently large the second expert always opposes its predecessor s report otherwise herding may result

a discussion of belgian unemployment combining traditional concepts and disequilibrium econometrics with a gdp of less than 100 billion and exports of more than 60 billion belgium comes perhaps closer than any other country to being a small open economy consequently trends in world trade and export performance have a major impact on domestic activity whereas the impact of domestic fiscal policy is damped by import leakages table 1 presents a few figures confirming these observations

wage rigidity micro and macro evidence on labor market adjustment in the modern sector aggregate data on wages and employment may provide misleading indicators of labor market conditions they may suggest inappropriate wage policies in the face of rising unemployment experienced in many developing countries during the 1980s such increases in unemployment are often attributed to wage rigidities a cursory review of aggregate data for the modern sector in cote d ivoire would support this view suggesting that employment declined during the 1979 84 recession due to an increase in real wages examination of disaggregated data from two labor force censuses of the modern sector however shows that real wages declined for specified classes of labor the work force was characterized by greater education training and experience workers with a given level of attributes received a lower real wage by the end of the recession than before it despite this drop in real wages employment in the modern sector declined

clustering in n player preemption games we study a complete information preemption game in continuous time a finite number of firms decide when to make an irreversible observable investment upon investment a firm receives flow profits which decrease in the number of firms that have invested the cost of investment declines over time exogenously we characterize the subgame perfect equilibrium outcome which is unique up to a permutation of players when the preemption race among late investors is sufficiently intense the preemption incentive for earlier investors disappears and two or more investments occur at the same time we identify a sufficient condition in terms of model parameters clustering of investments occurs if the flow profits from consecutive investments are sufficiently close this shows how clustering can occur in the absence of coordination failures informational spillovers or positive payoff externalities

the hot toy problem abstract every year around christmas there are shortages of the hot toy why don t sellers raise the price the hot toy problem is puzzling if we assume that a big shortage implies that a 500 bill is being left on the ground i show that a big shortage does not necessarily imply large losses in profits indeed the bigger the shortage as conventionally measured the smaller the loss in profit from underpricing the analysis of the hot toy problem demonstrates that the conventional definition of a shortage can be misleading and should be modified in favor of a definition based on the difference between the marginal willingness to pay and price

rational frenzies and crashes most markets clear through a sequence of sales rather than through a walrasian auctioneer because buyers can decide whether to buy now or later rather than only now or never their current willingness to pay is much more sensitive to price than the demand curve is a consequence is that markets will be extremely sensitive to new information leading to both frenzies in which demand feeds on itself and crashes in which price drops discontinuously the paper also shows how a result from static auction theory the revenue equivalence theorem can be applied to solve for a dynamic price path

selecting a selling institution auctions versus sequential search we consider the seller s choice between sequential search and an auction when selling n homogeneous units of a good in the presence of informational asymmetries discounting and transaction costs our analysis shows that the expected return per unit from sequential selling decreases in n the number of units being sold for the auction with suitable restrictions the expected return per unit increases in n thus sequential search is the preferred institution if n is small whereas the auction is preferred if n is large historical details of the evolution of livestock markets closely fit our theoretical results

business as usual market crashes and wisdom after the fact the authors present a three stage model of market dynamics in the first stage routine behavior tends to keep information of common interest trapped in private hands in the second stage private information reaches a threshold that triggers some agents to alter their behavior these actions release information to the market the final stage involves the market s response to this news as other participants react to the initial departure from routine behavior the authors present an application to industry investment they also outline applications to the international debt crisis to bank runs and to political upheavals copyright 1994 by american economic association

the generalized war of attrition abstract we model a war of attrition with n k firms competing for n prizes in a natural oligopoly context the k 1 lowest value firms drop out instantaneously even though each firm s value is private information to itself in a standard setting context in which every competitor suffers losses until a standard is chosen even after giving up on its own preferred alternative each firm s exit time is independent both of k and of other players actions our results explain how long it takes to form a winning coalition in politics solving the model is facilitated by the revenue equivalence theorem jel d43 d44 l13 o30

wage gaps factor shares and real wages the relationships which link real wages capital intensity and factor shares are tested as a prelude to tests of the relationship between wage rigidities and labour market institutions evidence from seven countries indicates that the evolution of factor shares is well explained by changes in capital intensity which is itself well explained by product wages and technical progress a key implication is that changes in full employment capital labour ratios have been the dominant reason for the longer run decline of profit shares in europe and japan relative to the united states it follows that changes in cyclically adjusted factor shares provide little or no information regarding the gap between the actual real wage and its full employment value

learning and information aggregation in an exit game we analyze information aggregation in a stopping game with uncertain common payos players learn from their own private experiences as well as by observing the actions of other players we give a full characterization of the symmetric mixed strategy equilibrium and show that information aggregates in randomly occurring exit waves observational learning induces the players to stay in the game longer the equilibria display aggregate randomness even for large numbers of players

arbitragem estatistica estrategia long short pairs trading abordagem com cointegracao aplicada ao mercado de acoes brasileiro this article applies cointegration tests to identify stocks to be used in pairs trading strategy in addition to estimating long term equilibrium and model the resulting residual we use an indicator of profitability in in sample simulations to select stock pairs to compose a pairs trading portfolio we assessed the profitability of the strategy with data from the brazilian market between january 2005 and december 2009 considering we reached an average return of 17 49 per year sharpe ratio of 1 29 and low correlation with the market the results reinforce the use of cointegration in quantitative management statistical arbitrage circumvents the joint hypothesis dilemma of traditional market eciency tests because its definition is independent of any equilibrium model and its existence is incompatible with market eciency

information revelation and strategic delay in a model of investment we model investment as an n player game with a pure informational externality each player s payoff depends only on his own action and the state of nature however because a player s action reveals his private information players wait to see what other players will do equilibrium is inefficient because delay is costly and information is imperfectly revealed we characterize the unique symmetric perfect bayesian equilibrium and study the robustness of delay which turns out to be sensitive to the reaction speed and the number of players we establish the following results i when the period length is very short the game ends very quickly and there is a form of herding or informational cascade which results in a collapse of investment ii as the period length increases the possibility of herding disappears iii as the number of players increases the rate of investment and the information flow are eventually independent of the number of players adding more players simply increases the number who delay iv in the limit the time profile of investment is extreme a period of low investment followed either by an investment surge or a collapse

sequential sales learning and cascades when ipo shares are sold sequentially later potential investors can learn from the purchasing decisions of earlier investors this can lead rapidly to cascades in which subsequent investors optimally ignore their private information and imitate earlier investors although rationing in this situation gives rise to a winner s curse it is irrelevant the model predicts that 1 offerings succeed or fail rapidly 2 demand can be so elastic that even risk neutral issuers underprice to completely avoid failure 3 issuers with good inside information can price their shares so high that they sometimes fail 4 an underwriter may want to reduce the communication among investors by spreading the selling effort over a more segmented market consider a scenario in which an issuer is selling a new security of uncertain value for example an ipo initial public offering of stock or high yield debt through an underwriter the s e c has banned variable price sales while the value of this new security is highly uncertain to individual market participants investors hold perfectly accurate information when aggregated moreover there are many potential investors and a small number of these investors can jointly determine the value of the firm or its project with high precision it would seem that in this scenario underpriced offerings would succeed and overpriced offerings would fail nevertheless this paper shows that if the distribution channels of invest ment banks are limited underpriced offerings can fail and overpriced offer ings can succeed with limited distribution channels it takes the under writer time to approach interested investors therefore later investors can observe how well an offering has sold to date or at least how successful it has sold relative to offerings previously undertaken by this underwriter

the assessment policy options for the uk previous issues of this review have generally considered particular problems or particular areas of policy the concern of this assessment is rather different to consider the broad range of policy options available to the united kingdom focussing on the main areas of disagreement where economic analysis should be helpful it draws where appropriate not only on the articles on microeconomic and macroeconomic policy included below but also on previous themes covered by the oxford review of economic policy the aim is to delineate the key questions which are or which should be on the policy agenda there is no doubt that the terms of the policy debate have shifted markedly in recent years some disagreements such as those between monetarists and keynesians seem much less important whilst others such as those about the nature and role of the market have sprung to prominance

fashion and sales abstract when there is unpredictable fashion in taste it will be optimal to limit the stock of each variety of a horizontally differentiated durable good if consumers are uncertain about one another s taste they will then accept higher first period prices for perfect matches in order to avoid finding only bad matches on sale thus there exists a mechanism which allows a monopolist to price discriminate inter temporally even when it has predictable clearance sales and consumers are infinitely patient there is no distortion in product selection when this equilibrium arises

market liquidity hedging and crashes in the absence of significant news hedging strategies were blamed for the stock market crash of october 1987 but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop the authors develop a rational expectations model in which prices play an important role in shaping expectations markets are much less liquid in their model than in traditional models discontinuities or crashes can occur even with relatively little hedging the model is consistent with theories as disparate as keynes beauty contest insights and thom s catastrophe analysis and suggests means to reduce volatility copyright 1990 by american economic association

delay and information aggregation in stopping games with private information abstract we consider equilibrium timing decisions in a model with a large number of players and informational externalities the players have private information about a common payoff parameter that determines the optimal time to invest they learn from each other in real time by observing past investment decisions we develop new methods of analysis for such large games and we give a full characterization of symmetric equilibria we show that the equilibrium statistical inferences are based on an exponential learning model although the beliefs converge to truth learning takes place too late ex ante welfare is strictly between that without observational learning and that with full information