trying to explain home bias in equities and consumption investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest a phenomenon called equity home bias in the absence of this bias investors would optimally diversify domestic output risk using foreign equities therefore consumption growth rates would tend to co move across countries even when output growth rates do not empirically however consumption growth rates tend to have a lower correlation across countries than do output growth rates a phenomenon i call consumption home bias in this paper i discuss these two biases and their potential relationship as suggested by the literature

nontraded assets and the capm abstract asset pricing models that rely on the presence of non tradable assets such as human wealth to solve the equity premium puzzle have to confront the effect of decreasing absolute risk aversion rich investors who according to micro data hold the stock market and whose behavior is the one that matters at the margin for the determination of equilibrium asset prices are less risk averse ceteris paribus than the average consumer this paper highlights a channel through which the effect of decreasing absolute risk aversion can be overcome the existence of a positive correlation between the rates of return on traded assets and on the human capital of marginal investors

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

price and output responsiveness to nominal changes under differential information abstract the paper considers how changes in nominal income are transmitted into price and output changes within a setting where the traditional assumption of instantaneous market clearing costless coordination is given up in favour of a more realistic setting where price decisions are made by numerous agents firms acting independently on their private decentralized information the responsiveness of firm specific prices is considered and it is shown how absolute or nominal price rigidity can be explained building this into a theory of the general price level it is proved that heterogenously perceived nominal changes affect the price level less than proportionally moreover it is shown how a phillips curve relation between inflation and output can be rationalized within the model finally the issue of relative price variability is considered and related to misallocation of economic resources under differential information

monetary fiscal and exchange intervention policy in a two country intertemporal disequilibrium model abstract a symmetric two country two period model with flexible exchange rates and rigid first period money wages is constructed there is a single world output and perfect capital mobility agents have perfect foresight and optimise intertemporally aoki s method of sums and differences is used to analyse the model and to relate it to closed and small open versions a key structural feature is that the intertemporal budget contraint not the lm equation determines a country s output international shocks are transmitted through the real interest rate anticipated future spending increases are contractionary abroad so a permanent increase may be too this modifies mundell s findings

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

disequilibrium dynamics with inventories and anticipatory price setting this paper studies the sequence of short run quantity constrained equilibria of a model with a single storable output labor and money the durability of output gives rise to inventory fluctuations which influence the course of the equilibria attained one special feature of interest is the assumption that prices are not at the level which would equilibrate all markets if there were no stochastic shocks to the economy with prices frozen at this level the nature of the realized shocks determines the type of disequilibrium realized and the unintended component of inventory change the analysis concentrates on two questions what is the statistical nature of the process governing the real wage output employment and inventories and is it possible to test this model against the alternative hypothesis that prices are continually flexible even after the shocks have disturbed the system we find that although these theories are similar in their qualitative structure tests can be developed we also show how the frequencies of different types of quantity constrained equilibria vary with the stochastic specification this may shed some insight on why it is commonly believed that some types of disequilibrium phenomena have not been observed this abstract was borrowed from another version of this item

the resurgence of inventory research what have we learned abstract recent empirical and theoretical research on business inventories is surveyed and critically evaluated while most inventory research has had macroeconomic motivations we focus on its microtheoretic basis and on potential conflicts between theory and evidence the paper asks two principal questions first how can inventories which are allegedly used by firms to stabilize production nonetheless be a destabilizing factor at the macroeconomic level second why if firms are following the production smoothing model is production more variable than sales in many industries we suggest that the so called s s model may help answer both questions

external public debt trade linkages and contagion during the eurozone crisis against the backdrop of the contagion literature the paper analyses the impact of financial and trade linkages on sovereign bond spreads in the eurozone crisis using quarterly data for a sample of emu countries during the period 2000 13 we estimate fixed effect panel models with driscoll and kraay standard errors that are robust to general forms of spatial and temporal dependence our main results can be summarised as follows first we suggest that the sudden stop of capital inflow towards the peripheral sovereign debt triggered a re segmentation of financial markets and economic systems along national borders with negative implications for risk sharing and the efficient allocation of capital the home bias effect that is the increase in the share of sovereign debt held by domestic banks worsened the country specific risk because the twin crisis sovereign and banking began to be conceived as more closely intertwined within countries than before second the structure of international trade helps to account for the geographic scope of contagion even after controlling for macroeconomic and fiscal vulnerabilities finally the substitution effect of public debt securities of stand alone emerging countries has affected more the sovereign spreads in the core than in the periphery

strategic monetary policy in interdependent economies gains from coordination reconsidered abstract there is a wide acceptance that gains to international monetary policy coordination are small at best and that the need of policy coordination is questionable this conclusion however follows from the underlying presumption that monetary policy is concerned with the stabilization of macroeconomic fluctuations only this paper presents a general short run monetary policy analysis within a familiar two country new open economy macroeconomics noem framework where national monetary policy involves the choice of a deterministic growth trend of money supply average inflation rate and stochastic state dependent deviations of actual money supply from the deterministic trend stabilization strategic beggar thy neighbor considerations induce the deviation of both policy choices from their socially optimal values the gains from international coordination of the average inflation rate are of first order and hence larger than the gains from the coordination of the stabilization policies which are of second order

do credit markets discipline sovereign borrowers evidence from u s states the degree to which credit markets discipline sovereign borrowers is investigated by estimating the supply curve for debt faced by u s states the results generally support an optimistic view of the market discipline hypothesis with credit markets providing incentives for sovereign borrowers to restrain borrowing while the risk premium on bond yields is estimated to increase only gradually at low levels of debt this effect appears to become much larger as debt rises there is also some evidence that credit markets may withhold access to credit at very high levels of debt copyright 1995 by ohio state university press

heterogeneous preferences and equilibrium trading volume abstract the representative agent lucas model stresses aggregate risk and hence does not allow us to study the impact of agents heterogeneity on the dynamics of equilibrium trading volume in this paper we investigate under what conditions non informational heterogeneity i e differences in preferences and endowments leads to nontrivial trading volume in equilibrium we present a non informational no trade theorem that provides necessary and sufficient conditions for zero equilibrium trading volume in a continuous time lucas market model with heterogeneous agents multiple goods and multiple securities we explain in detail how no trade equilibria are related to autarky equilibria portfolio autarky equilibria and peculiar financial market equilibria which play an important role in the literature on international risk sharing

anticipatory pricing with negligible uncertainty abstract if firms precommit to output and price equates either expected excess demand or excess demand when demand takes its expected value to zero then equilibrium price and output typically do not converge to their walrasian levels as demand becomes decreasingly risky

white certificates for energy efficiency improvement with energy taxes a theoretical economic model in this paper we analyze interactions of two energy policy instruments namely a white certificates whc scheme as an innovative policy instrument for energy efficiency improvement and energy taxation these policy instruments differ in terms of objectives and final impacts on the price of electricity we examine the effect of these policy instruments in the electricity sector focusing on electricity producers and suppliers in a competitive market using microeconomic theory we identify synergies between market players and demonstrate the total effect on the electricity price when suppliers internalize the behaviour of producers in their decisions this model refers to an ideal market situation of full liberalization the cases we examine consist of electricity producers with and without a carbon tax electricity suppliers with and without an electricity tax and with whc obligations furthermore we present a parallel implementation of whc for electricity suppliers with carbon tax on electricity producers and an electricity tax with whc obligations to electricity suppliers we demonstrate differences in optimization behaviour of producers and suppliers based on a couple of cases of whc with carbon and electricity taxes various positive and negative effects of both schemes in terms of target achievement and efficiency are present which can lead to an added value of such schemes in the policy mix although uncertainties of outcomes are quite high a basic finding is that in a merit order several parameters can increase final electricity price after the implementation of different policies demand for electricity and electricity supply cost at a large scale and then follow the level of level of obligation for energy saving level of penalty and price of whc representing the marginal costs of energy saving projects the impact magnitude of parameters depends on the values chosen and on the initial position of suppliers i e if their actual behaviour deviates from full compliance with targets

asset pricing implications of a new keynesian model to match the stylised facts of goods and labour markets the canonical new keynesian model augments the optimising neoclassical growth model with nominal and real rigidities we ask what the implications of this type of model are for asset prices using a second order numerical solution to the model we examine bond and equity returns the equity risk premium and the behaviour of the real and nominal term structure we catalogue the factors that are most important for determining the size of risk premia and the slope and level of the yield curve in a world of technology shocks only increasing the degree of real rigidities raises risk premia and increasing nominal rigidities reduces risk premia in a world of monetary policy shocks only both real and nominal rigidities raise risk premia the results indicate that the implications of the new keynesian model for average asset returns depend critically on the

buffer stocks and naive expectations in a non walrasian dynamic macromodel stability cyclicity and chaos in their pioneering work honkapohja ito 1980 constructed a non walrasian macromodel with inventory dynamics some of their assumptions are modified in this paper e g the expected demand for goods is defined by previous rather than actual demand the modified model yields results which are both similar and dissimilar to those of honkapohja and ito for example the keynesian unemployment equilibrium remains invariant but the corresponding stability condition becomes milder the chaotic behavior of the unstable systems is also analyzed

energy and carbon taxes and their distributional implications this paper studies the equity effects of energy and carbon taxes as policy instruments to reduce greenhouse gas emissions and fulfil the legally binding reduction targets adopted in the 1997 kyoto protocol to the united nations framework convention on climate change unfccc the equity effects of taxes on energy products are studied in the broader context of a revenue neutral environmental fiscal reform the paper shows that carbon or energy taxes are mildly regressive and that impacts on low income households are less than expected the distributional implications depend on various issues such as whether the type of fuel being taxed heating transport and in particular how the revenues are recycled back to the economy the importance of compensation and mitigation measures is also discussed

intertemporal price speculation and the optimal current account deficit abstract the paper studies the effects of terms of trade fluctuations in an infinite horizon optimizing model of a small open economy while the current account response to a transitory terms of trade shock is in part explicable by intertemporal smoothing an important additional factor is the effect of anticipated future terms of trade shifts on the ral value of the external debt in terms of the home consumption basket when foreign borrowing is indexed to the import good a temporary worsening of the terms of trade creates the expectation of a decline in the real value of external debt this fall in the relevant real interest rate leads households to increase consumption while export prices are low and to decrease consumption sharply once the terms of trade recover if an adverse price shock is of sufficiently brief duration instantaneous utility will rise initially

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

rationing of sales and price setting abstract casual empiricism suggests that firms are more often constrained by lack of demand than production capacity can this evidence be interpreted as indicating that activity is demand constrained implying that there is room for demand management policies this is not necessarily the case in a setting with imperfect competition where firms choose prices and production before the actual level of demand is known it is found that the more elastic is demand the more likely is excess demand to prevail and vice versa however demand management policies do not affect the prevalence of imbalances between demand and supply although real policies may affect the level of production i e discrepancies between demand and supply are not necessarily a reliable indicator for the scope of demand management policies

capital tax competition under a common currency abstract we re examine the view that capital taxes are too low when capital is mobile across tax jurisdictions we do so by emphasising a previously neglected implication of decentralised capital tax setting when jurisdictions share a common currency namely capital taxes give rise to a vertical externality by affecting the revenues of the over arching central bank from issuing the common currency this externality may lead ceteris paribus to too high regional capital taxes and may more than offset the usual effects of tax competition in this case and contrary to conventional wisdom decentralised capital taxes will be too high

what drives spreads in the euro area government bond market spreads between euro area government bond yields are related to short term interest rates which are in turn related to market liquidity to cyclical conditions and to investors incentives to take risk in theory lower interest rates are associated with lower degrees of risk aversion and smaller government bond spreads empirically the eurosystem s short term interest rates are positively related to those spreads which our econometric model finds to include significant and policy relevant default risk and liquidity risk components simone manganelli and guido wolswijk

global observation of ekc hypothesis for co2 sox and nox emission a policy understanding for climate change mitigation in bangladesh abstract environmental kuznets curve ekc hypothesis is critical to understanding the developmental path of a nation in relation to its environment how the effects of economic development processes dictate environmental changes can be found through the study of ekc to understand the ekc phenomena for climate change this study was undertaken by reviewing the available literature as co2 sox and nox are the significant greenhouse gases ghg responsible for global warming thus leading to climate change the study focused on those ghgs for ekc consideration with an understanding of the different ekc trajectories an attempt was made to determine the implications for the economic development of bangladesh in regards to the ekc it was shown that ekc for co2 was following a monotonous straight line in most cases sox were shown to follow the full trajectory of the ekc in most situations and nox was shown the hope only for the developed countries getting the low income turning point the type of economic policy that bangladesh should follow in regards to the discussed pollutants and sources is also revealed from these discussions contributions to policy stimulation in bangladesh are likely to be made

relative vs absolute price rigidity abstract it is shown that to explain some nominal price rigidity it is sufficient to assume changes in costs to be imperfect signals on nominal changes and not necessary to assume nominal costs to respond less than proportionally to nominal changes

the term structure of interest rates over the business cycle abstract whether real gnp is assumed to be trend stationary or difference stationary which implies that shocks have transitory or permanent effects is critically important in explaining the behavior of the forward risk premium the term risk premium and changes in the yield curve over the business cycle while this is the main result there are two additional results of interest first although movements in the nominal yield spread are useful in predicting future economic activity these movements are not enough to separate real from nominal shocks the source of the shock can be determined if movements in the spread and shifts in the nominal yield curve are used jointly second the yield differential which is defined as the difference between the yields on inflation indexed bonds and nominal bonds is generally a biased predictor of expected inflation and may signal the wrong information about changes in expected inflation

a fundamental theory of exchange rates and direct currency trades in this paper we construct a two country search model to determine the nominal exchange rate between two fiat monies our model allows agents to use any currency to trade for goods in all countries however search frictions restrict agents opportunities for instantaneous arbitrage and hence make the nominal exchange rate determinate the nominal exchange rate depends on the two countries economic fundamentals including the stocks and growth rates of the two monies direct exchanges between currencies are essential and they imply a nominal exchange rate that is different from the relative price between the two currencies in the goods markets there are persistent violations of the law of one price and purchasing power parity in equilibrium despite the fact that prices are perfectly flexible and all goods are tradeable between countries nominal and real exchange rates can move together in the steady state in response to money growth shocks

competition between biomass and food production in the presence of energy policies a partial equilibrium analysis abstract bioenergy has several advantages over fossil fuels for example it delivers energy at low net co 2 emission levels and contributes to sustaining future energy supplies the concern however is that an increase in biomass plantations will reduce the land available for agricultural production the aim of this study is to investigate the effect of taxing conventional electricity production or carbon use in combination with subsidizing biomass or bioelectricity production on the production of biomass and agricultural commodities and on the share of bioelectricity in total electricity production we develop a partial equilibrium model to illustrate some of the potential impacts of these policies on greenhouse gas emissions land reallocation and food and electricity prices as a case study we use data for poland which has a large potential for biomass production results show that combining a conventional electricity tax of 10 with a 25 subsidy on bioelectricity production increases the share of bioelectricity to 7 5 under this policy regime biomass as well as agricultural production increase a carbon tax that gives equal net tax yields has better environmental results however at higher welfare costs and resulting in 1 to 4 reduction of agricultural production

an extension of the maximum score estimator for disequilibrium models abstract mayer and dorsey 1998 mayer w j dorsey r e 1998 maximum score estimation of disequilibrium models and the role of anticipatory price setting journal of econometrics 87 1 4 propose a maximum score estimator for disequilibrium models with anticipatory pricing models here i prove consistency under assumptions that allow for more general price adjustment processes i also show that the smoothing function used in mayer and dorsey 1998 can be replaced with a simpler function that requires fewer arbitrary choices by the researcher

a future for carbon taxes abstract carbon taxes have been frequently advocated as a cost effective instrument for reducing emissions however in the practice of environmental policies only six countries have implemented taxes based on the carbon content of the energy products in this paper we evaluate carbon taxes with regard to their competitiveness distributional and environmental impacts the evidence shows that carbon taxes may be an interesting policy option and that their main negative impacts may be compensated through the design of the tax and the use of the generated fiscal revenues

disequilibrium econometrics on micro data estimation of macro disequilibrium models is by now well developed see r quandt 1982 j j laffont 1983 for recent surveys though the empirical macro results are interesting they suffer from an excessive aggregation which prevents a sufficiently precise discussion of the nature of unemployment this paper brings some empirical evidence to the construction of a more disaggregated view of disequilibrium individual data on firms collected by insee through periodic business surveys is used to construct the distribution of firms over the four possible disequilibrium regimes then the behavior of this distribution over time is analyzed effects of some macro variables which are suggested by a simple micro disequilibrium model in the spirit of j muellbauer 1978 and e malinvaud 1981 are assessed through the estimation of a conditional logit model on panel data

determinants of sovereign bond yield spreads in the emu an optimal currency area perspective in the light of the recent financial crisis we take a panel cointegration approach that allows for structural breaks to the analysis of the determinants of sovereign bond yield spreads in nine economies of the european monetary union we find evidence for a level break in the cointegrating relationship moreover results show that i fiscal imbalances namely expected government debt to gdp differentials are the main long run drivers of sovereign spreads ii liquidity risks and cumulated inflation differentials have non negligible weights but iii all conclusions are ultimately connected to whether or not the sample of countries is composed of members of an optimal currency area oca in particular we establish i that results are overall driven by those countries not passing the oca test and ii that investors closely monitor and severely punish the deterioration of expected debt positions of those economies exhibiting significant gaps in competitiveness

the forward premium puzzle in a model of imperfect information abstract this paper studies the forward premium puzzle in a model with imperfect information the model predicts fixed effects and conditional heteroskedasticity in the forward premium regression and provides a rationale for the evidence in mayfield and murphy mayfield e s murphy r g 1992 interest rate parity and the exchange risk premium economics letters 40 319 324

disequilibrium dynamics with monetarist price expectations abstract in this note we sketch the main features of the dynamic evolution of a rationed equilibrium macroeconomic model in which prices and wages respond to excess demands and inflation expectations and the money stock is endogenous we postulate monetarist inflation expectations i e expected inflation is assumed to be equal to the current percentage rate of change of the money stock if the system is stable monetarist inflation expectations are asymptotically rational

seasonal flutuations and equilibrium models of exchange rate most of the evidence on dynamic equilibrium exchange rate models is based on seasonally adjusted consumption data equilibrium models have not worked well in explaining the actual exchange rate however the use of seasonally adjusted data might be responsible for the spurious rejection of the model this article presents a new equilibrium model for the exchange rates that incorporates seasonal preferences the fit of the model to the data is evaluated for five industrialized countries using seasonally unadjusted data our findings indicate that a model with seasonal preferences can generate monthly time series of the exchange rate without seasonality even when the variables that theoretically determine the exchange rate show clear seasonal behaviours further the model can generate theoretical exchange rates with the same order of integration than actual exchange rates and in some cases with the same stochastic trend

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

toward a theory of competitive price adjustment in his 1959 essay toward a theory of price adjustment arrow argued that there exists a logical gap in the usual formulations of the theory of perfectly competitive economy namely that there is no place for a rational decision with respect to prices as there is with respect to quantities see also koopmans 1957 this gap is especially felt in macroeconomics where the basic framework is that of perfect competition and many results depend on the existence of some lag in the adjustment of prices here i propose a first step toward a theory of price adjustment in a competitive environment i shall consider here a simple exchange economy with no money the application to the question of the real effects of changes in the money supply is discussed in a separate paper eden 1980 the main cost of adjustment considered here is the cost of information about changes in aggregate excess demand the question is who will gather and pay for the information this public good problem is analysed in a model in which the artificial entity of the auctioneer is replaced by firms sellers who seek information about excess demand and announce the prices of their products the public good aspect of the problem emerges when there is a unique optimal price which would be announced on the basis of old information shared by all participants then if a single firm buys new information and announces a different price all firms which are aware of this revised price will rightly think that it is based on updated information and will therefore follow the lead in this case the announced price transmits all the relevant new information to all firms and the firm that updates the information therefore provides that public good which in the walrasian model is provided by the auctioneer 2 the question is which firm will undertake the function of the auctioneer the solution suggested here is that all firms will adopt a mixed strategy in which they undertake this function with a certain probability it is shown however that there is always a positive probability that the prices advertised in a particular market will not be based on updated information since otherwise there would be no incentive to buy information in the second section i describe the process of advertising prices for the case in which the aggregate demand that sellers in a particular market face is exogenously given and infinitely elastic i then discuss the type of framework required to justify such demand curves and show that in general the walrasian price is not the average of advertised prices

do trade costs in goods market lead to home bias in equities abstract two of the main puzzles in international economics are the consumption and the portfolio home biases we solve for international equity portfolios in a two country two good stochastic equilibrium model with trade costs in goods markets we show that introducing trade costs as suggested by obstfeld and rogoff obstfeld m rogoff k 2000a the six major puzzles in international macroeconomics is there a common cause nber macroeconomics annual 15 is not sufficient to explain these two puzzles simultaneously on the contrary we find that trade costs create a foreign bias in portfolios for reasonable parameter values this result is robust to the addition of non tradable goods for standard calibrations of the preferences

liquidity exchange rates and business cycles abstract this paper presents a two country two good two currency model to study the role of liquidity effects in exchange rate determination and the international transmission of economic fluctuations the model provides an exchange rate equation which is different from the simple purchasing powerparity law of exchange rate determination both monetary injections and real disturbances can lead to exchange rate fluctuations and comovements of interest rates prices and output of the two economies whether the covariances of variables in the two countries are positive negative or zero depends critically upon the substitutability of the two consumption goods in consumers preferences

equilibrium valuation of foreign exchange claims this article studies the equilibrium valuation of foreign exchange contingent claims within a continuous time lucas 1982 two country model exchange rates interest rates and in particular factor risk prices are all endogenously and jointly determined this guarantees the internal consistency of these price processes with a general equilibrium in the same model closed form valuation formulas are presented for currency options and currency futures options common to these formulas is that stochastic volatility and stochastic interest rates are admitted hedge ratios and other comparative statics are also provided analytically it is shown that most existing currency option models are included as special cases this article studies the equilibrium valuation and hedging of foreign exchange contingent claims the framework for analysis is the continuous time counterpart of the well known two country monetary model of lucas 1982 1 that is we use the modeling structure of lucas 1982 and adopt his representativeagent perfect pooling equilibrium notion rather than extending the lucas setup to a cox ingersoll and ross 1985a henceforth cir production economy as is done in nielsen and saa requejo 1993 for our purpose the lucas framework offers the desired simplicity and tractability we assume a stochastic structure for the international economy such that the resulting nominal interest rates and exchange rate dynamics exhibit similar empirically plausible features as the corresponding ones in nielsen and saa requejo 1993 for example the endogenous interest rates are positively correlated across national borders campbell and clarida 1987 and ilmanen 1995 as a predictor of future spot exchange rates the equilibrium forward exchange rate is biased in a direction consistent with the forward premium puzzle

the impact of supply shocks on exchange rates and interest rates does the marshall lerner condition matter we examine the dynamic response of the exchange rate the terms of trade and interest rates to supply shocks in a rational expectation stochastic environment we establish the proposition that the marshall lerner elasticity condition is sufficient to guarantee that an exogenous increase in real economic growth will appreciate the exchange rate regardless of assumptions concerning market clearing and price flexibility in specialized cases the traditional marshall lerner condition is sufficient to establish propositions concerning exchange rate overshooting the direction and magnitude of financial asset price movements and relative volatilities under flexible versus anticipatory pricing regimes

exporting recessions international links and the business cycle abstract empirical evidence of decoupling typically focuses on declining business cycle correlations at low frequencies at higher frequencies business cycles strongly co move during recessions but are largely independent during non recessionary periods

capital market equilibrium with externalities production and heterogeneous agents abstract the paper studies general equilibrium in an economy with externalities production and heterogeneous agents the model developed builds on brock brock w a 1982 asset prices in a production economy in mccall j j ed the economics of information and uncertainty university of chicago press chicago pp 1 43 and merton merton r c 1987 a simple model of capital market equilibrium with incomplete information journal of finance 42 483 510 it involves both a stock market and a market for loans together with negative externalities produced by a subset of firms importantly the technological production structure of the firms is reflected in the properties of the shares traded in the stock market agents are heterogeneous in their financial choices potentially discriminating against the firms producing a negative externality the model sheds light on the utility costs of the discriminating behavior and on the impact on the price of the stock issued by the firm which is responsible for the externality the model is used to study the factors which may magnify or reduce the impact of discrimination a set of discriminated firms may be seriously affected only if the discriminating investors command a large portion of overall wealth and or they do not represent important diversification instruments the model can be applied to understanding the effects of socially responsible investment whereby investors discriminate against companies belonging to some sectors which are perceived as socially dangerous or unethical

in defense of the finance constraint simple models of monetary trade commonly impose a finance constraint on expenditure it is often suggested that this finance constraint is artificial a result of money s being the only asset of the absence of credit and of the special time structure of such models this paper shows that the finance constraint on aggregate expenditure remains in force when other assets and credit are introduced and when the time structure is generalized to allow overlapping income periods of differing lengths most of the objections to the finance constraint are shown to involve fallacies of composition there are economists to whom a constraint of the form pc m in units t must appear unthinkable r e lucas jr 1980

monetary growth innovations in a simple cash in advance asset pricing model abstract this paper contributes to the existing literature in the rational expectations cash in advance asset pricing general equilibrium model in two directions first we show that by allowing a variable velocity of circulation an increase in the conditional variance of the money growth process triggers an increase in the demand for money relative to stocks and bonds with a consequent reduction in stock and bond prices which is the opposite of the current result in the literature with constant unitary velocity second we explicitly show how the sequential markets and specific timing of information fits exactly into the notion of irreversibility in the sense that when faced with uncertainty agents might find optimal to delay decisions in order to wait for the arrival of new information

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

environmental taxes on fuels and electricity some experiences from the nordic countries in economic theory environment based energy taxation provides a direct financial incentive for environmentally sound economic behaviour in the energy field in practice only a few countries have implemented such taxes unilaterally in the 1990s to be effective environment based energy taxes seem to need international implementation the eu commission has made three proposals in 1992 1995 and 1997 but so far none of them has proceeded in the negotiations in this article we focus on implemented environmental taxes on fuels and electricity in the nordic countries firstly the idea of environment based taxes as a part of sustainable energy policy is presented secondly we review the impacts of this kind of taxes on the environment energy production and consumption income distribution and competitiveness via estimates presented in the literal sources thirdly we review comparative studies of environmental taxes on energy from a methodological perspective and finally we analyse the use of energy tax comparisons in political decision making a recent energy tax reform in finland is used as an example

fiscal policy and interest rates in europe the appetite for fiscal discipline has been steadily declining among most industrial countries in the past fiscal profligacy would have been punished by markets with higher interest rates and in some cases also exchange rate depreciation however in post emu europe exchange rate markets no longer discipline the fiscal behaviour of national governments perhaps more crucially even the interest rate punishment to fiscal indiscipline is highly uncertain with academic opinions being quite divided on this issue this paper takes a close look at the link between fiscal policy and interest rates in the european context the key finding is that an expansionary fiscal policy in one emu member will have an effect both on its spreads and on the overall level of interest rates for the currency union as a whole with the second effect however being quantitatively much more significant this suggests that there are indeed substantial spillovers through the interest rate channel among fiscal policies of member countries to limit countries incentive to run expansionary fiscal policies a set of rules like those embedded in the stability and growth pact is then needed some weak evidence is also found that after emu interest rate spillovers seem to be more significant for high debt countries with unsustainable fiscal policies reflecting perhaps market concerns about a possible sovereign bail out or the impact of financial distress there may be a case then for imposing tighter rules on high debt countries riccardo faini

an empirical disequilibrium model of labor consumption and investment a macroeconomic disequilibrium model of the u s economy is constructed with three markets one each for labor consumption goods and investment goods demand and supply in each market are obtained from underlying microeconomic theory with adjustment costs and possible intermarket spillovers from quantity rationing taken into account indicators of excess demand for each market aid in estimation no evidence is found for walrasian market equilibrium copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

nominal rigidity and monetary uncertainty in a small open economy temporary nominal rigidity is introduced into a dynamic stochastic general equilibrium model of a small open economy the foreign country is also modelled and is the closed economy counterpart of the domestic country we examine whether a small open economy is more vulnerable than a closed economy to uncertainty over its monetary policy a signal of an increase in future variability which was not previously foreseen as a risk by agents is shown to weaken the current exchange rate and boost current output in the small open economy in the equivalent closed economy it has no effect on current variables

trade in nominal assets monetary policy and price level and exchange rate risk in a previous paper trade in risky assets i have analyzed the pattern of international trade in risky real assets between barter economies relying on the law of comparative advantage and using autarky asset price differences to predict the pattern of asset trade in this paper the analysis is extended to international trade in nominal assets assets with returns paid in currencies between monetary economies the risk chracteristics of real returns on nominal assets depend on price level and exchange rate risk and therefore on monetary policy it is examined how different combinations of monetary policies and exchange rate regimes affect nominal assets return risk characteristics their autarky perices and hence their trade pattern when countries differ with respect to their outputs or their attitudes towards risk when world asset markets are incomplete different monetary policies and exchange rate regimes have dramatic effects on risk characteristics of home and foreign currency bonds and on the trade pattern in these assets as well as on aggregate capital and current accounts

on the theory of international currency portfolios abstract the paper develops a general equilibrium theory of the optimal currency composition of international bond portfolios like the partial equilibrium portfolio balance literature of the 1980s the theory emphasizes the critical roles of government debt and government balance sheet operations in the determination of portfolios prices and allocations consistent with empirical findings optimal foreign currency positions are found to be small with their size decreasing with exchange rate volatility while optimal domestic currency positions are large and increasing with domestic interest rates a large open market purchase of domestic currency bonds from private households lowers domestic interest rates

inventories in a dynamic macro model with flexible prices this paper presents a disequilibrium macro model with inventories rational expectations and flexible prices it is found that less than full employment equilibria are possible even highly likely in the intermediate term and that wage reductions will cause employment to drop increasing aggregate demand will raise employment only if it is done gradually on a technical level we have multiple switching lines disconnected regimes and a connected equilibrium set which borders on a switching iline and otherwise lies in a single region

excess volatility of real exchange rates in the ems some evidence from structural vars this paper argues that the effectiveness of the exchange rate mechanism erm of the european monetary system ems should be gauged by its impact on the monetary component of real exchange rate variability nominal and real shocks are separated using a bivariate structural var applied to real exchange rate data of the six original member countries participating in the erm and a control group consisting of britain and the united states the findings suggest that monetary shocks have been an important source of real exchange rate variability and that the erm has been successful in reducing the incidence of monetary shocks across its member countries prior to the ems currency crises of 1992 93 while being less successful thereafter

current account imbalances and financial integration in the euro area abstract while the current account of the euro area as a whole has remained almost balanced in the past two decades several member countries have sizeable deficits or surpluses in this paper we interpret these imbalances as indicators of net capital flows among the euro area countries we distinguish between balances against the euro zone and the rest of the world and examine these for the eu 15 countries we find that for euro members the net flows follow differences in per capita incomes even before the introduction of the euro our results show further that with the introduction of the common currency the elasticity with respect to per capita incomes of net capital flows within the euro area has increased for the members of the euro zone this increase can neither be observed for the flows between the euro members and the rest of the world nor for the flows between the countries that stayed outside the monetary union and the euro zone we interpret this as evidence for increasing financial integration in the euro area there is also some evidence suggesting that the introduction of the euro has led to some financial diversion

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

money and liquidity effects separating demand from supply in the canonical monetary policy model money is endogenous to the optimal path for interest rates and output but when liquidity provision by banks dominates the demand for transactions money from the real economy money is likely to contain information for future output because of its impact on financial spreads and so we decompose broad money into primitive demand and supply shocks we find that supply shocks have played a significant role in the time series in each of the usa uk and eurozone in the short to medium term we further consider to what extent the supply of broad money is related to policy or to liquidity effects from financial intermediation

european environmental taxes and charges recent experience issues and trends abstract the use of environmental taxes and charges in oecd countries increased by over 50 between 1987 and 1994 while revenues raised by environmental taxes and charges remain small relative to overall taxation they comprise a rising proportion in most european countries several european countries have either undertaken or are considering systematic shifts in taxes away from labour and onto the use of environmental resources potential negative effects on competitiveness and regressive distributional effects are the major cause of concern with regard to the introduction of environmental taxes a number of ways of mitigating such effects exist and have been implemented

common factors and local factors implications for term structures and exchange rates this paper studies a multi factor two country term structure and exchange rate model when a diversification effect for an international bond portfolio is expected it shows that the diversification gain calls upon certain restrictions on the process of the stochastic discount factor in a factor structured economy existence of local factors is shown to be a necessary condition for the gains from investing in foreign bonds further the exchange rate risk premia are shown to be a function of the differentials of the risk premia of the factors in bond returns empirical results reveal the tendency for investors to respond sensitively to rare shocks which is shown to be a potential solution to the forward premium puzzle

optimal carbon taxes for emissions targets in the electricity sector the most dangerous effects of anthropogenic climate change can be mitigated by using emissions taxes or other regulatory interventions to reduce greenhouse gas ghg emissions this paper takes a regulatory viewpoint and describes the weighted sum bisection method to determine the lowest emission tax rate that can reduce the anticipated emissions of the power sector below a prescribed regulatorily defined target this bilevel method accounts for a variety of operating conditions via stochastic programming and remains computationally tractable for realistically large planning test systems even when binary commitment decisions and multiperiod constraints on conventional generators are considered case studies on a modified iso new england test system demonstrate that this method reliably finds the minimum tax rate that meets emissions targets in addition it investigates the relationship between system investments and the tax setting process introducing ghg emissions taxes increases the value proposition for investment in new cleaner generation transmission and energy efficiency conversely investing in these technologies reduces the tax rate required to reach a given emissions target

repatriation of debt in the euro crisis with the beginning of the euro crisis the long standing trend of european financial integration reversed investors unwound cross border positions of debt obligations and increased holdings of locally issued debt in other words debt obligations were repatriated we use data on bank portfolios to document three new empirical regularities of the financial disintegration i repatriation affected mainly debt of crisis countries ii repatriation affected mainly public debt iii the public debt of crisis countries that was not repatriated was reallocated to large and politically influential countries within the euro area we read these results in light of standard theories of cross border portfolio allocation and argue that the sum of these patterns constitutes evidence for the secondary market theory of public debt

the implications of first order risk aversion for asset market risk premiums abstract in an effort to explain simultaneously the excess return predictability observed in equity bond and foreign exchange markets we incorporate preferences exhibiting first order risk aversion into a general equilibrium two country monetary model when we calibrate the model to us and japanese data we find that first order risk aversion substantially increases excess return predictability however this increased predictability is insufficient to match the data we conclude that the observed patterns of excess return predictability are unlikely to be explained purely by time varying risk premiums generated by highly risk averse agents in a complete markets economy

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

trade in nominal assets and net international capital flows abstract nominal assets play a major role in international financial markets while trade in indexed bonds is limited as a result agents are exposed to both price and exchange rate uncertainty nonetheless previous research on net capital flows has assumed the presence of a risk free vehicle to intertemporal asset trade in this paper we develop a general equilibrium intertemporal model with trade limited to nominal bonds and equity we find that exposure to nominal risk dampens net capital flows thus making economies effectively more closed

public policy as a part of transforming energy systems framing bioenergy in finnish energy policy abstract government interventions have been identified as important for energy systems change because they can either facilitate or hinder transitions toward more sustainable energy systems this article analyses how bioenergy options have been framed in finnish policy strategies and how the framing has changed over time the empirical material includes the content of 15 government programmes and nine national energy climate strategies on the basis of this assessment both the link between bioenergy framings in strategies and the actual transformation of finnish bioenergy systems are explored on the basis of bioenergy framings the development of energy policy can be divided into three phases support for domestic energy sources in 1979 1991 support for wood and industry based bioenergy in 1992 1998 and diversified bioenergy in the context of climate change in 1999 2010 for two decades primarily wood based bioenergy was supported despite alternative technological developments occurring elsewhere after the turn of the millennium the importance of climate policy increased and alternative bioenergy sources were raised on the government policy agenda also resulting in some new policy instruments rather than adopting a visionary outlook to guide system transformation climate and energy policy has strengthened those technological options that have been selected elsewhere if public policies are to enhance the shift toward low carbon sustainable energy systems they would need to be more comprehensive be more consistent over time and emphasise energy use more

sovereign spreads in the eurozone which prospects for a eurobond in this paper we provide new evidence on the determinants of sovereign yield spreads and market sentiment effects in the eurozone in order to evaluate the rationale for a common eurobond jointly guaranteed by eurozone member states we find that default risk is the main driver of yield spreads suggesting small gains from greater liquidity fiscal fundamentals matter in the pricing of default risk but only as they interact with other countries yield spreads that is with the global risk that the market perceives more importantly the impact of this global risk variable is not constant over time a clear sign of contagion driven by shifts in market sentiment this evidence points to a discontinuity in the disciplinary role of financial markets if markets can stay irrational longer than a country can stay solvent then the role of yield spreads on national bonds as a fiscal discipline device is considerably weakened and issuing eurobonds can be economically justified carlo favero and alessandro missale

yield spreads on emu government bonds government bond spreads we provide evidence that the movements in yield differentials between euro zone government bonds explained by changes in international risk factors as measured by banking and corporate risk premiums in the united states are more pronounced for bonds issued by italy and spain liquidity factors play a smaller role so policies meant to increase financial market efficiency do not appear sufficient to deliver a seamless bond market in the euro area the risk of default is a small but important component of yield differentials movements which signal market perceptions of fiscal vulnerability impose market discipline on national fiscal policies and may be reduced only by further convergence in debt ratios lorenzo codogno carlo favero and alessandro missale

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

how does liquidity affect government bond yields the paper explores the determinants of yield differentials between sovereign bonds using euro area data there is a common trend in yield differentials which is correlated with a measure of aggregate risk in contrast liquidity differentials display sizeable heterogeneity and no common factor we propose a simple model with endogenous liquidity demand where a bond s liquidity premium depends both on its transaction cost and on investment opportunities the model predicts that yield differentials should increase in both liquidity and risk with an interaction term of the opposite sign testing these predictions on daily data we find that the aggregate risk factor is consistently priced liquidity differentials are priced for a subset of countries and their interaction with the risk factor is in line with the model s prediction and crucial to detect their effect

current account imbalances and systemic risk within a monetary union abstract the aim of this paper is to cast light on possible influences of current account imbalances on the escalation of systemic risk which hit the eurozone the hypothesis which was set up by examining empirical evidence points to heterogeneity across the macroeconomic conditions prevailing in different clusters of emu countries given the strengthened financial and real interconnections across the emu countries the capital flows triggered by widening distances between surplus and deficit trade balances and also between sound and deteriorating public budgets represent an important factor magnifying systemic risk and contagion the econometric estimates we conducted concern two sub periods the two decades from the launch of the ems in 1979 to 1999 and the first twelve years 1999 2010 of the monetary union the findings sound as a confirmation that the strengthened financial and real interconnections across the emu countries instead of facilitating convergence among the core and the peripheral economies have magnified and mutually reinforced imbalances the divide between surplus and deficit countries the backward emu countries running larger current account deficits and the more advanced countries accumulating larger current account surpluses have brought about increasing capital outflows from the periphery to pay for excess imports from the core conversely increasing capital flows were invested by the banks of the core countries in the periphery s public bonds

inflation and growth in a disequilibrium macroeconomic model abstract the purpose of this paper is to study the dynamics of temporary equilibria in a disequilibrium growth model dynamics rests upon adjustment mechanisms of prices capital stock money balances and labour supply wage dynamics is supposed to be influenced by indexation processes and this question is related to the investment behaviour of firms we give sufficient conditions for existence unicity and asymptotic stability of steady states of this model we also show that steady states correspond to a long run phillips curve which is vertical when inflationary expectations are fully reflected in wage and price changes

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

energy innovation and renewable energy consumption in the correction of air pollution levels abstract this study analyses the relationship between economic growth and environmental pollution specifically it investigates the presence of an environmental kuznets curve ekc in 17 oecd countries over the period of 1990 2012 the results confirm the existence of an n shaped ekc relationship between income and environmental degradation the study offers a novel methodological contribution that makes it possible to explain the environmental pollution process through the analysis of low carbon technologies this demonstrates how income levels affect energy consumption and how higher energy demand leads to a larger share of fossil sources in the energy mix and thus increased greenhouse gas ghg emissions the effect on per capita ghg emissions is explored in a model containing a dampening variable that moderates the relationship between energy consumption and income this empirical evidence helps to explain the interaction between energy regulation economic growth and carbon emissions this study also confirms the positive effect that energy innovation process exerts on environmental pollution finally it is noted that renewable energy sources help to improve air quality

the pricing of forward exchange rates abstract this paper tests the hypotheses that 1 risk premia fully account for the observed systematic discrepancies between forward and future spot exchange rates and 2 efficient markets versions of ppp holds a simple theoretical framework is used to derive testable restrictions on the parameters of a multivariate regression model the data reject the restrictions and each hypothesis in contract to past investigations the empirical analysis strongly suggest that forward exchange rates incorporate anticipated real exchange rate movements

what moves oecd real interest rates this paper conducts a structural time series analysis of ex ante real interest rates of the five major oecd economies the relationships of rates to permanent and temporary real and nominal shocks appear to be qualitatively consistent with predictions of stochastic general equilibrium business cycle models u s real and nominal shocks are found to be the most important causes of persistence in rates but only nominal shocks cause dynamic movements that are coherent across all countries the rise in real interest rates in the early 1980s was mainly due to nominal shocks real shocks played little or no role

energy related taxation as an environmental policy tool the finnish experience 1990 2003 abstract finland has over 10 years experience of environment based energy taxation the design and level of the co 2 and energy tax scheme has been changed several times on an ad hoc basis in recent years finland has introduced more and more tax departures i e deviations and exceptions from an ideal type of environmental tax examples of this include fuel specific and user specific exemptions or lowered tax levels taxes on electricity production from non fossil energy sources plus refund systems for fossil fuel and electricity users thus it is apparent that finnish energy taxation aimed at improving the environment has developed ineffectively increases in the level of co 2 tax on fossil fuels have served mostly fiscal purposes with reduced co 2 emissions being only a side benefit no systematic follow up or ex post analysis on the impacts of the co 2 and energy taxes has been carried out from the perspective of greenhouse gas mitigation the discussion on economic instruments has shifted from co 2 taxation towards emissions trading in the international context of the european union and the kyoto protocol

a dynamic specific factors model with money when the capital stock is endogenously chosen by optimizing households the predictions of the static specific factors model are modified an increase in tariffs unambiguously increases real wages whereas an expansion of the labor force does not reduce wages capital and land are not only factors of production but also assets and their shares in the household s portfolio are determined by features of the supply side time preference and inflation an increase in inflation reduces the capital stock but its impact on the price of land is ambiguous because of opposite movements in the inflation tax and in land rents

time consistent monetary policy with endogenous price rigidity abstract i characterize time consistent equilibrium in an economy with price rigidity and an optimizing monetary authority operating under discretion firms have the option to increase their frequency of price change at a cost in response to higher inflation previous studies which assume a constant degree of price rigidity across inflation regimes find two time consistent equilibria one with low inflation the other with high inflation in contrast when price rigidity is endogenous the high inflation equilibrium ceases to exist hence time consistent equilibrium is unique this result depends on two features of the analysis 1 a plausible quantitative specification of the fixed cost of price change and 2 the presence of an arbitrarily small cost of inflation that is independent of price rigidity