determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

market segmentation strategies of multiproduct firms we analyze a multiproduct duopoly and ask whether firms should offer general purpose products or tailor their offerings to fit specific consumer needs offering a targeted product has two effects utility increases for some consumers due to increased fit whereas utility decreases for others due to increased misfit previous work has not considered these two effects jointly and has therefore not been able to capture the tradeoff inherent in market segmentation we show that in addition to the degree of fit and misfit the intensity of competition and the fixed cost of offering an additional product determine firms market segmentation strategies extending product lines to target more narrowly defined consumer segments has been a favorite strategy of brand managers for years popular buzzwords like one on one marketing and niche marketing underline its importance in practice in this context we ask to what extent market segmentation is justified from a profitability point of view consider a competitive environment in which each firm can either offer a general purpose product or segment the market by offering products that are tailored to consumers needs while a consumer ceteris paribus prefers a product that is targeted at her own segment she would rather buy a general purpose product than a product that is targeted at another segment segmenting the market therefore has two effects first if a consumer s preferred product is offered she is better off because she is able to buy a product that exactly fits her needs we call this positive aspect of market segmentation fit second if the consumer s preferred product is not offered she is worse off because she ends up with a product that does not satisfy her needs at all this negative aspect of market segmentation is denoted as misfit

real exchange rate and openness in emerging economies argentina in the long run argentina s economic policies since the beginning of the century give an interesting background to the study of real exchange rate rer management in emerging countries in this article four types of rer overvaluation are identified in the 1920s argentina provides a short example of overvaluation in a context of a fixed exchange rate policy moreover the estimations show that import substitution regimes can lead to a misalignment of rer argentina illustrates also the difficult management of rer in a volatile environment the results allow in addition to better understand the failure of the trade liberalization attempts of the country and remind that successfully integrating the world economy asks for an appropriate rer policy

mean reversion in long horizon real exchange rates evidence from latin america abstract this paper examines mean reversion in real effective exchange rates in six leading latin american economies during the xxth century using a new data set a unit root approach is complemented by an error correction model including key fundamentals such as terms of trade trade openness and relative productivities unit root testing shows a very slow process of reversion if any to a constant mean in the original series rejecting the strict ppp hypothesis however mean reversion is found after allowing for trends and structural breaks with a half life average of 1 years for the six countries we also found reversion to a conditional mean defined by the co integrating relationship with an average half life of 2 years our estimates although lower than the 3 5 year range that motivated the rogoff s puzzle still indicate the presence of important obstacles to the adjustment process that need further investigation

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

the organization and scope of agents regulating multiproduct industries abstract a mechanism design problem with two dimensional uncertainty is solved to derive the optimal policy for regulating a monopolist with private information about the marginal cost of producing two different goods the paper establishes that informational economies of scope or incentive complementarities arise when one firm produces both goods the regulator should weigh these economies against the benefits of relative performance incentives when choosing between integrated and decentralized organizations unless the marginal costs of the two products are sufficiently positively correlated the optimal ex ante policy gives control of both markets to a single firm journal of economic literature classification number s d82 l22 l51

multiproduct activity in an experimental differentiated oligopoly in a symmetric differentiated experimental oligopoly with multiproduct firms we test the predictive power of the corresponding bertrand nash equilibria subjects are not informed on the specification of the underlying demand model in the presence of intense multiproduct activity and provided that a parallel pricing rule is imposed to multiproduct firms strategies tend to confirm the non cooperative multiproduct solution

shrouded attributes consumer myopia and information suppression in competitive markets bayesian consumers infer that hidden add on prices e g the cost of ink for a printer are likely to be high prices if consumers are bayesian firms will not shroud information in equilibrium however shrouding may occur in an economy with some myopic or unaware consumers such shrouding creates an inefficiency which firms may have an incentive to eliminate by educating their competitors customers however if add ons have close substitutes a curse of debiasing arises and firms will not be able to profitably debias consumers by unshrouding add ons in equilibrium two kinds of exploitation coexist optimizing firms exploit myopic consumers through marketing schemes that shroud high priced add ons in turn sophisticated consumers exploit these marketing schemes it is not possible to profitably drive away the business of sophisticates it is also not possible to profitably lure either myopes or sophisticates to nonexploitative firms we show that informational shrouding flourishes even in highly competitive markets even in markets with costless advertising and even when the shrouding generates allocational inefficiencies

the loss leader is a turkey targeted discounts from multi product competitors abstract i show that multi product firms can compete for their more profitable customers by setting lower margins on goods that are purchased primarily by them effectively offering them discounts without offering these discounts to less profitable customers this suggests a theory of multi product pricing in which a good s profit margin is inversely related to the profitability of the customers who purchase it this theory i provides one explanation for firms offering lower prices to larger customers and ii suggests that loss leader pricing may allow firms to compete more vigorously for more profitable customers this can explain why stores sell turkeys as loss leaders at thanksgiving but may not discount flowers on mother s day or candy on valentines day

commodity currencies and the real exchange rate abstract this paper examines whether the real exchange rates of commodity exporting countries and the real prices of their commodity exports move together over time using international monetary fund imf data on the world prices of 44 commodities and national commodity export shares we construct new monthly indices of national commodity export prices for 58 commodity exporting countries over 1980 2002 evidence of a long run relationship between national real exchange rate and real commodity prices is found for about one third of the commodity exporting countries the long run real exchange rate of these commodity currencies is not constant as would be implied by purchasing power parity based models but is time varying being dependent on movements in the real price of commodity exports

real and nominal determinants of real exchange rates in latin america short run dynamics and long run equilibrium this article analyses the factors that determine the long run real exchange rate in argentina colombia and mexico distinguishing between real and nominal determinants cointegration analysis is utilised to establish that the real exchange rate has an equilibrium relationship with real variables the terms of trade capital flows productivity and government share of gdp which excludes nominal variables nominal exchange rate money and central bank intervention variance decompositions reveal that among the real variables that determine the real exchange rate the terms of trade and productivity explain much of the variation in the real exchange rates when nominal variables are included in the model the nominal exchange rate accounts for most of the variation in the real exchange rates of all three countries the impulse response functions are broadly consistent with theoretical predictions and shocks to the nominal variables have only transitory effects on the real exchange rate

price competition in multimarket duopolies in this article we analyze the pricing strategies offirms that compete for the demand of an assortment of goods in a complete information static framework in particular we model the competition between two symmetric firms in a market that consists of two types of consumers each of which may buy one unit of both goods sold by the two firms we show that all nash equilibria are such that neither firm charges the same price for both goods interestingly under certain conditions thefirms jointly price discriminate between the two types of consumers and may even achieve the same level of profits as if they maximized joint profits for another set of conditions the unique equilibrium is such that the price for one of the goods and the price for the bundle are the same as the price of the good in a standard hotelling model with one good finally we show that if these equilibria exist both firms prefer to sell both goods rather than specialize in either one of them these results are a direct consequence of the interplay between the multimarket rivalry and the existence of more than one market segment as modelled in this article

arima and cointegration tests of ppp under fixed and flexible exchange rate regimes real exchange rates between the united states and its major trading partners were calculated for the bretton woods and flexible exchange rate periods unit root tests indicate that purchasing power parity performed poorly in both periods tests for cointegration reveal limited instances in which it is possible to estimate the deviations from ppp as an error correcting model the estimated error correcting models indicate that foreign but not u s prices responded to deviations from ppp frenkel s 1981b finding that purchasing power parity ppp worked better during the 1920s than the 1970s caused considerable controversy for example davutyan and pippenger 1985 contend that the socalled collapse of ppp is a result of an increase in the relative importance of real versus monetary shocks they argue that the 1970s as opposed to the 1920s was characterized by real supply shocks and the international coordination of monetary policies the argument is that ppp did not fail rather there was an increase in the volatility of those factors giving rise to deviations from ppp hakkio 1984 reestimated ppp over the 1920s and 1970s using cross country tests i e sure estimates to improve the efficiency of his estimates he was able to support the hypothesis that ppp worked better in the 1970s than in the 1920s on the other hand papers by adler and lehman 1983 dornbusch 1980 frenkel 1981a junge 1985 and krugman 1978 report findings contrary to the ppp hypothesis moreover kenen and rodrik 1986 find that the volatility of real exchange rates has increased throughout the flexible rate period this paper tries to shed some light on the importance and persistence of the observed deviations from purchasing power parity under alternative exchange rate systems while it is interesting to compare ppp in the 1920s versus the 1970s it is equally useful to compare the 1960s versus the 1970s and 1980s if real supply shocks and lack of monetary coordination are characteristic of the latter period ppp should perform better in the 1960s to illustrate the issues involved consider the following econometric model of relative purchasing power

exit in duopoly under uncertainty this paper examines a declining duopoly where the firms must choose when to exit from the market the uncertainty is modeled by letting the revenue stream follow a geometric brownian motion we consider the markovperfect equilibrium in firms exit strategies with a low degree of uncertainty there is a unique equilibrium where one of the fi rms always exits before the other however when uncertainty is increased another equilibrium with the reversed order of exit may appear ruining the uniqueness whether this happens or not depends on the degree of asymmetry in the firm specifi cp arameters

official exchange rate arrangements and real exchange rate behavior we study the behavior of real exchange rates under various official designations of exchange rate arrangements examining many currencies we find important differences across the designations most notably real exchange rate mean reversion is fastest when nominal exchange rates are officially pegged we also find a large nonlinear effect adjustment is fastest when the real exchange rate deviates greatly from its mean this nonlinear effect is also most striking among officially pegged currencies finally we find that nominal exchange rates rather than prices do most of the adjusting

can more consumers lead to lower profits a model of multi product competition abstract the article analyzes the optimal pricing strategy of duopoly retailers who sell two goods to three consumer segments two segments that are interested in one good and one that wants to buy both goods the analysis suggests that the markup on one of the goods might be negative and that the existence of consumers who buy both goods can either increase or decrease markups surprisingly the addition of the consumers who buy both goods unchanging the number of the other consumers might decrease profits and increasing the number of consumers who buy one good might also reduce profits this suggests that firms should consider carefully how additional customers might affect the competitive environment and the equilibrium before attempting to attract them to the market

loss leader pricing and rain check policy loss leader pricing and rain check policies are common in retail markets yet research on these topics is surprisingly scarce in this paper we study the effects of leader pricing and rain check policy on stores profits and market outcomes suppose stores can accurately predict demand might they still run out of stock we investigate whether such a result is plausible when stores can offer rain checks the paper also helps resolve an issue that has recently attracted much attention should the ftc repeal its rule prohibiting stock outs of advertised sale items

inflation and monetary stabilization in mexico during the revolution abstract the mexican revolution like in so many cases of war witnessed a large inflationary process which appeared in early 1913 the group in power and other revolutionary factions resorted to seizing bank reserves and to printing money the exchange rate these various monies depreciated steadily until mid 1916 the new government tried to stabilize prices and the exchange rate by having a low level of reserves but the effort failed shortly after the government repudiated its own money by demanding that a growing amount of the various taxes to be paid in hard currency at the same time some sectors of the ecnomy also demanded their salaries to be paid in gold money finally as if by magic gold and silver coins returned to circulation reversing gresham s law and the gold standard was reassumed thus stabilizing the exchange rate and level of prices some of these results are also compared with those experienced by various countries in similar situations

a model of add on pricing this paper examines competitive price discrimination with horizontal and vertical taste differences consumers with higher valuations for quality are assumed to have stronger brand preferences two models are considered a standard competitive price discrimination model in which consumers observe all prices and an add on pricing game in which add on prices are naturally unobserved and firms may advertise a base good at a low price in hopes of selling add ons at high unadvertised prices in the standard game price discrimination is self reinforcing the model sometimes has both equilibria in which the firms practice price discrimination and equilibria in which they do not the analysis of the add on pricing game focuses on the chicago school argument that profits earned on add ons will be competed away via lower prices for advertised goods a conclusion is that add on practices can raise equilibrium profits by creating an adverse selection problem that makes price cutting unappealing although profitable when jointly adopted using add on pricing is not individually rational in a simple extension with endogenous advertising practices and costless advertising several models that could account for add on pricing are discussed

a structural equations analysis of the impact of price promotions on store performance guided by past research conventional wisdom in the retailing area and microeconomic theory the authors develop a series of hypotheses about the effects of loss leaders in store price specials