on the robustness of robustness checks of the environmental kuznets curve hypothesis since its first inception in the debate on the relationship between environment and growth in 1992 the environmental kuznets curve hypothesis ekc hereafter has been subject of continuous and intense scrutiny the most recent line of investigation criticizes the ekc hypothesis on more fundamental grounds in that it stresses the lack of sufficient statistical testing of the empirical relationship and questions the very existence of the notion of ekc attention is in particular drawn on the stationarity properties of the series involved per capita emissions or concentrations and per capita gdp and in case of presence of unit roots on the cointegration property that must be present for the ekc to be a well defined concept only at that point can the researcher ask whether the long run relationship exhibits an inverted u pattern on the basis of panel integration and cointegration tests for sulfur stern 2004 and perman and stern 1999 2003 have presented evidence and forcefully stated that the ekc hypothesis does not exist in this paper we ask whether similar strong conclusions can be arrived at when carrying out tests of system fractional integration and cointegration as an example we use the controversial case of carbon dioxide emissions the results show that more ekcs come back into life relative to traditional integration cointegration tests however we confirm that the ekc hypothesis remains a fragile concept

winners losers and the nuclear waste dilemma this paper explores how property right assignment affects social efficiency when a public program has both public good and public bad components we show that when willingness to accept a public bad exceeds the willingness to pay the net benefit is unambiguously lower when the property right supports the status quo institutional structure thus kaldor hicks efficiency tests tend to favor public programs and mitigation over the status quo even when mitigation negatively affects another group to illustrate the result we develop social cost estimates for moving nuclear waste from current temporary storage facilities to a permanent central repository at yucca mountain nv usa for a representative city with a population of 226 195 the present value of the external cost of shipping waste is 1 42 billion when those living near temporary nuclear waste storage facilities are assigned the property right to health and safety that number swells to 5 95 billion when those living near the transport route are assigned the property right thus property right assignment affects the efficient level of nuclear waste and thus nuclear energy produced

a review of wta wtp studies abstract willingness to accept wta is usually substantially higher than willingness to pay wtp these constructs have been studied for roughly 30 years and with a wide variety of goods this paper reviews those studies we find that the less the good is like an ordinary market good the higher is the ratio the ratio is highest for non market goods next highest for ordinary private goods and lowest for experiments involving forms of money a generalization of this pattern holds even when we account for differences in survey design ordinary goods have lower ratios than non ordinary ones we also find that ratios in real experiments are not significantly different from hypothetical experiments and that incentive compatible elicitation yields higher ratios

resolving differences in willingness to pay and willingness to accept reply gwendolyn c morrison 1997 raises a logical point regarding our experimental test of the divergence between willingness to pay wtp and willingness to accept wta measures of economic value shogren et al 1994 she argues that our design does not provide a true test of the existence of a fundamental endowment effect since we did not control for the potential of a pivoting indifference map daniel kahneman et al 1990 she concludes that even though our ev idence shows that the mean wtp and wta bids for market goods with close substitutes e g candy bars and coffee mugs converge after market experience the endowment effect might still be alive and well albeit at statisti cally insignificant levels

individual option prices for climate change mitigation abstract willingness to pay for climate change mitigation depends on people s perceptions about just how bad things will get if nothing is done individual subjective distributions for future climate conditions are combined with stated choices over alternative climate policies to estimate individual option prices the appropriate ex ante welfare measure in the face of uncertainty for climate change mitigation we find statistically significant sensitivity of estimated option prices to both expected future conditions and uncertainty about future conditions

a test of the theory of reference dependent preferences eight alternative methods of eliciting preferences between money and a consumption good are identified two of these are standard willingness to accept and willingness to pay measures these methods differ with respect to the reference point used and the dimension in which responses are expressed the loss aversion hypothesis of tversky and kahneman s theory of reference dependent preferences predicts systematic differences between the preferences elicited by these methods these predictions are tested by eliciting individuals preferences for two private consumption goods the experimental design is incentive compatible and controls for income and substitution effects the theory s predictions are broadly confirmed

noxious facilities environmental damages and efficient randomized siting this paper considers the efficient siting of a noxious facility that causes environmental damages for example increased pollution in the host community the analysis shows that there can be multiple efficient locations without transfers and that an efficient location need not have the smallest wta or wtp in general there exist randomized outcomes that are ex ante efficient and that pareto dominate efficient outcomes the analysis also shows that a community s most preferred lottery never provides full insurance under some conditions lotteries with no host compensation are pareto superior to those with compensation

willingness to accept willingness to pay and the income effect abstract the gap between willingness to pay wtp and willingness to accept wta has previously been studied by searching for evidence of substitutability the neoclassical hypothesis or status quo bias testing for neoclassical versus psychological theories of preferences we study the gap differently asking whether the observed pairs of wta and wtp are consistent with neoclassical preferences we use sugden s alternatives to the neoclassical theory of choice in i bateman k g willis eds valuing environmental preferences theory and practice of the contingent valuation method in the us eu and developing countries oxford university press oxford pp 152 180 chapter 6 result showing that the effect of income on wtp can be approximated from information on the ratio wta wtp drawing inferences from a meta analysis of 201 wta wtp ratios we conclude that the data are not consistent with neoclassical preferences

mean reversion in g 10 nominal exchange rates according to conventional wisdom industrial country floating exchange rates contain unit roots sur tests on panels of monthly group of ten g 10 log nominal rates reject the null of unit roots for various samples over the current float with significance levels from 0 5 to 15 on average in out of sample forecasts mean reversion models beat random walks significantly in some forecast periods for monthly data the range of expected usd dem appreciation rates exceeds 15 per year in the mean reversion model mean reversion places strong restrictions on international models over the sample period the g 10 had to run monetary policies consistent with stable long run nominal rates

he who has the pipeline calls the tune russia s energy power against the background of the shale revolutions abstract russian energy policy is usually considered in the regional context in terms of its energy power capability and strength vis a vis the eu and the post soviet states this study shows that in order to understand russia s energy power even in the regional context of its relations with the eu it is necessary to consider the impact of international changes in the energy sector the oil and gas shale revolutions represent such a global factor of influence even if their consequences are not yet clear they have already become an important challenge for russian energy policy and power this policy oriented article guided by neoclassical realism analyzes what the shale revolutions mean for russia s energy policy and its power capabilities vis a vis the eu how the russian political elite perceive this development and how russia reacts to it in this context russian power capabilities look more moderate

long memory and persistence in aggregate output abstract we examine persistence in u s aggregate output by estimating fractionally integrated arima models these models provide better low frequency approximations to the wold representation than previous stochastic specifications and earlier results on the importance of a permanent component emerge as special cases we find evidence of long memory which induces persistence though this long memory need not be associated with a unit root our point estimates indicate that macroeconomic shocks while persistent are distinctly less persistent than many earlier studies suggest however confidence intervals associated with the long run response are quite wide

substitutability experience and the value disparity evidence from the marketplace abstract recent empirical evidence suggests that important disparities exist between willingness to pay and compensation demanded for the same good these results which clearly contradict closely held economic doctrines have led some influential commentators to call for an entirely new economic paradigm to displace conventional neoclassical theory this study examines the generality of these experimental findings by going to a well functioning marketplace and examining more than 350 individual decisions across two incentive compatible elicitation mechanisms the data suggest that behavior of individuals with intense experience approaches neoclassical predictions any observed wta wtp disparity amongst this group is negligible

financial development and economic growth the role of stock markets utilizing time series methods and data from five developed economies we examine the relationship between stock market development and economic growth controlling for the effects of the banking system and stock market volatility our results support the view that although both banks and stock markets may be able to promote economic growth the erects of the former are more powerful they also suggest that the contribution of stock markets on economic growth may have been exaggerated by studies that utilize cross country growth regressions

state governance evolution in resource rich transition economies an application to russia and kazakhstan following a decade of transition in the former soviet union fsu governance of the oil and gas sectors has evolved to economic nationalism in the newly independent states this has manifested itself through greater direct state ownership or participation in oil and gas production at the expense of both domestic in the case of russia and international oil companies as well as legislative developments that increase the flow of oil and gas value to the state here we analyse some of the dynamics giving rise to economic nationalism within a model of a state capacity and the ability to implement policy and extract value our analysis is based on the institutional and economic functioning of the oil and gas sector we analyse a vector of institutions and examine production sharing agreements and national oil companies

the nature of occupational unemployment rates in the united states hysteresis or structural this article provides new evidence on the nature of occupational differences in unemployment dynamics which is relevant for the debate between the structural or hysteresis hypotheses we develop a procedure that permits us to test for the presence of a structural break at unknown date our approach allows the investigation of a broader range of persistence than the 0 1 paradigm about the order of integration usually implemented for testing the hypothesis of hysteresis in occupational unemployment in almost all occupations we find support for both the structuralist and the hysteresis hypotheses but stress the importance of estimating the degree of persistence of seasonal shocks along with the degree of long run persistence on raw data without applying seasonal filters indeed hysteresis appears to be underestimated when data are initially adjusted using traditional seasonal filters

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

a fractional cointegration analysis of purchasing power parity a generalized notion of cointegration called fractional cointegration is introduced to examine the long run purchasing power parity ppp hypothesis by allowing deviations from equilibrium to follow a fractionally integrated process the fractional cointegration analysis can capture a wider range of mean reversion behavior than standard cointegration analyses this gain is flexibility in modeling subtle mean reverting dynamics is found to be important for a proper evaluation of long run ppp empirical results based on historical data for the 1914 1989 period show that ppp reversion exists and can be characterized by a fractionally integrated process in three out of five countries studied the results support ppp as a long run phenomenon though significant short run deviations from ppp can exist

a new explanation for the wtp wta disparity abstract we propose a new explanation for the wtp wta disparity in experiments and surveys uncertainty irreversibility and limited learning opportunities can generate commitment costs driving a wedge between wtp and wta we present experimental evidence that supports our hypothesis

on the power of dickey fuller tests against fractional alternatives abstract we examine the properties of dickey fuller unit root tests under fractionally integrated alternatives and find that these tests have quite low power

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

real exchange rates under the gold standard purchasing power parity is one of the most important equilibrium conditions in international macroeconomics empirically it is also one of the most hotly contested numerous recent studies for example have sought to determine the validity of purchasing power parity using data from the post bretton woods float and have reached different conclusions we assert that most such studies are flawed for two reasons first the post 1973 data contain by definition only a very limited amount of the low frequency information relevant for examination of long run parity second the dynamic econometric techniques used to model deviations from parity are typically quite crude with respect to admissible low frequency dynamics both deficiencies are rectified in the present paper with dramatic results we construct a new data set of 16 real exchange rates covering more than a century of the classic gold standard period and we study deviations from parity using long memory models that allow for subtle forms of mean

willingness to pay and willingness to accept how much can they differ comment i agree with the point made by edoh y amiran and daniel a hagen 2003 that there can be a substantial or even infinite divergence between the wta and wtp for a public good even where there is a nonzero elasticity of substitution between market goods and the public good provided that the indifference curves are asymptotically bounded with respect to market goods in the manner they describe this is an important point they are also correct to point out that the elasticity of substitution is a local concept whereas their asymptotic boundedness condition applies also for discrete changes my 1991 paper used a local analysis because it was following the structure of the analysis in robert d willig 1976 and alan randall and john r stoll 1980 i wanted to show that while randall and stoll appeared to extend willig s local result on wta versus wtp from price changes to changes in the quantity of a public good the relevant elasticity was in fact different and involved the substitution elasticity as well as the income elasticity i view these points by amiran and hagen as not two separate results but essentially the same result their asymptotic boundedness condition generalizes my zero elasticity of substitution condition to discrete changes the asymptotic boundedness condition can be expressed as follows assuming a bivariate utility function u x q and given a reference point x q associated with a reference utility level u u x q there exists some q q such that for all q q there exists no x such that u x q u in other words no amount of x can substitute for the reduction in public good from q to q q in the case of a zero elasticity of substitution q q but as amiran and hagen show in their theorem 1 this is unnecessarily restrictive when dealing with a discrete reduction in q furthermore their theorem 2 can be viewed as a special case of their theorem 1 in which q 0 which makes q an essential commodity it is well known in consumer theory that the wta to avoid the loss of an essential market good is infinite their theorem 2 extends this result to the case of an essential nonmarket good but as their theorem 1 shows essentialness is not necessary for an infinite wta the boundedness condition is the key and this implies a fundamental lack of substitutability between money market goods and the public good

uncertainty and measurement error in welfare models for risk changes abstract most welfare models of environmental or mortality risk reductions assume that risks are exogenously determined and known with certainty however a growing body of research suggests that uncertainty about risks can affect choices over risky prospects i present a decision weighted random utility model that decomposes welfare losses into those attributable to an increase in the deterministic component of risk and those attributable to uncertainty about risk i apply the model to an illustrative dataset of subjects perceived mortality risk and willingness to accept the risk of nuclear waste transport i estimate the model using lewbel s 2000 strictly exogenous regressor approach to account for endogeneity bias and measurement error subjects display aversion to both risk and uncertainty about the risk of a transport accident so that increases in either leads to social welfare losses roughly 12 of the external cost of nuclear waste transport is attributable to the public s uncertainty about transport risk

hybrid renewable energy support policy in the power sector the contracts for difference and capacity market case study abstract the article employs qualitative methods in contextualizing and conceptualizing the hybrid renewable energy support policy it claims that hybrid policies may combine distinct mechanisms to drive desirable objectives better than traditional policies a policy cycle helps to frame the united kingdom s contracts for difference and capacity market cfd cm scheme as a case study the cfd cm policy emerged to address environmental and energy challenges through the deployment of renewable energy re in a low carbon economy employing liberalization environmental protection is foremost in this scheme the policy combines and improves on the elements of feed in tariff fit and quota obligation qo and strives to solve the problems of these traditional policies it addresses regulatory uncertainty under fit by employing private law mechanics to guarantee above loss reward for low carbon generation and addresses market uncertainty under qo by incentivizing the capacity to supply future low carbon energy based on projected demand hence creating a predictable and stable market it also accommodates other important commitments overall the cfd cm scheme is a hybrid policy that engages the energy market mainly for advancing the end goal of environmental protection to thrive however it needs to meet private sector interests substantially

on a political solution to the nimby conflict scale economy in the construction and operation of public facilities such as landfills calls for cooperation among communities to build a common facility arthur o sullivan 1993 such a facility is a mixture of a public good and a private bad and hence leads to strong opposition by communities to locate it in their vicinity bruno s frey et al 1996 this is one of the most serious environmental concerns of recent years and is known as nimby not in my backyard in this paper we study the hypothesis that a democratic political process creates an adequate mechanism for the resolution of the nimby conflict the intuitive explanation is simple a nimby conflict is likely to induce lobbying and symmetric pressures by all threatened communities in the relevant region as is well known gene m grossman and elhanan helpman 1994 when subject to symmetric pressures politicians stick firmly to principles and function most efficiently the existing literature on the siting of noxious facilities focuses mainly on normative issues such as welfare maximizing siting via decentralized community based mechanisms e g howard kunreuther and paul r kleindorfer 1986 robert c mitchell and richard t carson 1986 and deborah minehart and zvika neeman 2002 evidently however such mechanisms have seldom been practiced e g stephen k swallow et al 1992 the current study adopts a positive approach integrating a political economic framework with a model of a competitive real estate market in the theoretical section a government of a linear two city economy determines the location of a noxious facility which affects the equilibrium in the real estate market and induces the spatial distributions of price and population the government is subject to political pressures by city level lobbies of landowners both landlords and home owners in general the political equilibrium and the socially optimal siting differ however the more equitable the distribution of landownership in the region the smaller the difference at the limit when property distribution is perfectly equitable and all cities participate in the political arena the government locates the facility at the socially optimal site the analysis proceeds by identifying additional conditions under which the political equilibrium siting coincides with the socially optimal location and with an empirical analysis in the empirical section the theoretical framework is extended to account for a multiple city region and is calibrated to assess the prospects of the political system for resolving the nimby conflict in the context of landfill siting in israel it is shown that if all cities in the region form political lobbies and the politicians are not extremely corrupt the political siting is close geographically to the socially optimal location and the difference entails a less than 0 1 percent reduction in social welfare moreover even if the formation of lobbying in the region is incomplete as long as the weight the politicians assign to social welfare is larger than 0 7 the proximity of the politically and socially optimal locations is preserved we interpret the above results as supportive of the hypothesis of an effective political solution to the nimby conflict

tests of exchange market efficiency fragile evidence from cointegration tests abstract several recent papers have employed engle and granger 1987 cointegration tests to determine whether or not markets are efficient we use a new test for cointegration due to johansen 1988 to examine market efficiency with respect to the us dollar exchange rates for canadian japanese and west german currencies the fragile nature of the test indications suggests that cointegration methodologies cannot be relied upon to provide reliable evidence on market efficiency

cointegration fractional cointegration and exchange rate dynamics multivariate tests due to johansen 1988 1991 as implemented by baillie and bollerslev 1989a and diebold gardeazabal and yilmaz 1994 reveal mixed evidence on whether a group of exchange rates are cointegrated further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process hence the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons in the article by baillie and bollerslev 1989a it is argued that seven different nominal spot and forward exchange rates all contain unit roots in their univariate time series representations at the same time however the spot exchange rates appear to be tied together in the long run through a cointegration type relationship the latter finding of baillie and bollerslev has attracted particular interest and several studies such as those by hakkio and rush 1991 and sephton and larsen 1991 have already addressed this issue using the same data as the baillie and bollerslev article sephton and larsen 1991 describe the evidence for the presence of cointegration as being fragile and note that mixed conclusions are reached by truncating the baillie and bollerslev sample at different points in time diebold gardeazabal and yilmaz 1994 henceforth diebold et al provide interesting evidence that application of the johansen 1988 1991 tests with and without an intercept will result in different inferences on the baillie and bollerslev data set furthermore diebold et al carry out an ex ante forecasting experiment and find that the addition of an error correction term to the martingale model as implied by the standard cointegration paradigm fails to reduce the prediction mean square error when compared to a simple martingale model this therefore leads diebold et al to conclude that there exists substantial uncertainty regarding the existence of cointegration relationships among nominal dollar exchange rates this article provides some additional evidence on the existence of such a long run relationship among the same seven nominal spot exchange rates after further analysis it appears that a form of cointegration does exist between the exchange rates so that they do not drift apart in the long run we argue that this form of cointegration is

the russian oil industry between public and private governance obstacles to international oil companies investment strategies the low level of involvement by international oil companies in russia seems difficult to explain given what development of its resources and production has to offer there are still many restrictions and contradictions born of the particular institutional and political environment of the russian oil industry at the end of 15 years of transition that act as a bar to international integration three factors currently define the establishment of relations with foreign investors first because of the many different levels of negotiation with russian companies the state and the regions the decisions are based on complex relations between the various forces second the reforms and especially privatisation and the allocation of rights of ownership to deposits are considered by sizeable sections of public opinion and many political classes to be illegitimate thus making the issue of international investment and foreign presence still more complicated finally the state s wish to take back the oil industry in order to use it to fulfil its economic and foreign policies is creating further uncertainty these three elements seriously restrict the entry of international oil companies to the russian market

the third oil price surge what s different this time the period from 2003 to 2008 was marked by an oil price increase comparable to the two oil price crises in the 1970s this paper looks in detail at the situation of the oil price crises 30 years ago and compares them along various aspects on the demand and supply side with the recent price increase to identify similarities and differences while both oil price crises in 1973 and 1979 1980 were ultimately caused by supply actions of members of the organisation of petroleum exporting countries opec all three oil price crises were preceded by high demand growth other aspects that favoured a high oil price in all three cases were low investments in new oil fields as a consequence low spare capacity and a weak us dollar in addition the recent oil price surge has been characterised by a high global refinery utilisation and refineries that did not adapt fast enough to the rising demand for lighter oil products moreover broader geopolitical uncertainties combined with risks associated with the oil trade helped push the oil price into a triple digit zone speculation played only a limited and temporary role in accelerating price movements during the recent price increase

option wealth and bequest values the value of protecting future generations from the health risks of nuclear waste storage to assess the relative importance of current costs and future benefits of nuclear waste storage we develop a simple model of bequest value the basic model of nonparternalistic altruism is extended to account for the uncertain nature of the externality the model is applied estimating the social costs of storing high level nuclear waste at a central repository at yucca mountain nevada we find that the total ex ante social cost per household associated with health and safety risks is 17 128 annually over half is attributed to a desire to protect future generations from the risk of nuclear waste storage

willingness to pay and compensation demanded experimental evidence of an unexpected disparity in measures of value aside from possible income effects measures of the maximum amounts people will pay to avoid a loss and the minimum compensation necessary for them to accept it are generally assumed to be equivalent unexpectedly wide variations between these sums however have been noted in survey responses to hypothetical options this paper reports the results of a series of experiments that confronted people with actual money payments and cash compensations the results indicate that the compensation measure of value seems to exceed significantly the willingness to pay measure which would appear to call into some question various rules of entitlement damage assessments and interpretations of indifference curves

on cointegration and exchange rate dynamics baillie and bollerslev 1989 have recently argued that nominal dollar spot exchange rates are cointegrated here we examine an immediate implication of their finding namely that cointegration implies an error correction representation yielding forecasts superior to those from a martingale benchmark in light of a large earlier literature highlighting the predictive superiority of the martingale in an out of sample forecasting exercise we find the martingale model to be superior we then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought a result consistent with the outcome of the forecasting exercise

are risk benefit tradeoffs possible in siting hazardous facilities ever since alfred marshall introduced the notion of consumer s surplus into the literature as a measure of well being economists have been interested in determining the amount of compensation required to leave individuals indifferent between the status quo and a new situation where less of a commodity can be consumed for example due to an increase in prices the hicksian and kaldor hicks criteria of specifying compensation variations may be appropriate for normal market goods where there is a wellspecified demand curve the analysis is less applicable for dealing with environmental resources where elements of risk are involved or there exist public good features that make it difficult to estimate people s values for different amenities v kerry smith 1989 this paper investigates the question of the appropriate role that providing benefits to a host community possibly in the form of compensation can play in improving the chances of siting a facility that is perceived to be potentially hazardous in section i we develop a simple twoperiod expected utility model to explain preferences for benefit packages the empirical analysis examining the predictive power of this model will be related to the following problem of current interest the u s congress is attempting to locate a site for storing high level radioactive waste from commercial nuclear power plants in the united states an underground repository is to be constructed 2000 feet below the earth s surface for the purpose of permanently storing nuclear waste shipped in casks from power plants around the country once filled to capacity the repository would be sealed to minimize any radiation leakage based on the results of a telephone survey of residents of nevada regarding their attitudes toward a high level nuclear waste repository we suggest ways that the expected utility model might be modified to take into account behavioral factors that are not normally considered part of individual models of choice under uncertainty these factors may be useful in determining when compensation will be a useful tool in facilitating the siting process

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14