asymmetric price adjustment and economic fluctuations this paper considers a possible explanation for asymmetric adjustment of nominal prices the authors present a menu cost model in which positive trend inflation causes firms relative prices to decline automatically between price adjustments in this environment shocks that raise firms desired prices trigger larger price responses than shocks that lower desired prices the authors use this model of asymmetric adjustment to address three issues in macroeconomics the effects of aggregate demand the effects of sectoral shocks and the optimal rate of inflation copyright 1994 by royal economic society

unraveling the complex interrelationships between exchange rates and fundamentals abstract this research investigates the intrinsic characteristics of currency values by fundamentally decomposing investor expectations on 16 currencies the results on 195 exchange rates over several decades indicate investors perceive countries to be more likely to choose devaluation solutions to bop problems when inflation is lower and when an alternative drop in real income growth is more painful in addition empirical support is provided for the hypothesis that forward rates often appear biased because the distributional expectations incorporated into them include for a country with a current account deficit a small probability of a large spot decline that does not actually occur in most finite samples

information aggregation around macroeconomic announcements revisions matter abstract i show that an empirical relation exists between stock returns on macroeconomic news announcement days and the future revisions of the released data but that this link differs across the business cycle using three major macroeconomic series that undergo significant revisions nonfarm payroll gross domestic product and industrial production i present evidence that daily returns on the standard poor s 500 index and revisions are positively related in expansions and negatively related in recessions the results suggest that revisions do matter i e that investors care about the final revised value of a macroeconomic series that they infer accurate information from the release of the preliminary inaccurate report and that the more precise information is aggregated into prices on the day of the initial announcement the results are consistent with the predictions of rational expectations trading models around public announcements combined with well established empirical results on the asymmetric interpretation of information across the business cycle

an economic analysis of sardine fishing in the gulf of valencia spain abstract the optimal management of a particular fishery is illustrated using data describing previous fishery exploitation relevant biological and economic relationships are estimated then the optimum levels of catches effort and stock are calculated the prices that if implemented would ensure the current efficient exploitation of the fishery are also calculated finally the welfare gains that can be achieved by a movement from the freemarket equilibrium to the socially optimum solution are demonstrated

the effects of macroeconomic news on high frequency exchange rate behavior this paper studies the high frequency reaction of the dem usd exchange rate to publicly announced macroeconomic information emanating from germany and the u s by us ing data sampled at a five minute frequency we are able to identify significant impacts of most announcements on the exchange rate change in the 15 minutes post announcement although the significance of these effects decreases rapidly as the interval over which the post announcement change in exchange rates is increased the direction of the exchange rate response conforms in general with a reaction function interpretation whereby reac tions to macroeconomic news are driven by the likely operations of monetary authorities in domestic money markets further we detect influences of german monetary policy deci sions on the reaction of the exchange rate and also differences between u s and german announcements in the exchange rate reaction time pattern i introduction this paper studies the high frequency reaction of the dem usd exchange rate to macroeconomic information emanating from germany and the u s specif ically we utilize exchange rate data covering the period 1 1 92 to 31 12 94 sam pled at a five minute frequency to investigate how the major monthly macroe conomic releases from these two countries impact the dem usd the infor mation contained in announcements over this three year period is extracted via a set of market expectation series supplied by money market services interna tional mms 1 our analysis improves on previous work in this area in two main respects first our study is conducted using very high frequency data whereas most earlier work has used exchange rate data sampled at a frequency of a number of hours or more this allows us to construct a very precise characterization of

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

the effect of macroeconomic news on stock returns new evidence from newspaper coverage abstract previous literature has produced weak evidence to support the hypothesis that real economic news affects stock returns this is in part attributed to the difficulty of measuring how investors interpret macroeconomic announcements in different economic environments in this paper we choose a different approach of measuring macroeconomic news to better estimate its effect on stock returns since newspaper stories provide an interpretation of the statistical releases we choose newspaper stories as our measure of news our findings indicate that news about gdp and unemployment does affect stock returns

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

news announcements and price discovery in foreign exchange spot and futures markets abstract this paper studies competition in price discovery between spot and futures rates for the eur usd and jpy usd markets around scheduled macroeconomic announcements using both the information shares approach and the common factor component weight approach for futures prices from the chicago mercantile exchange cme as well as deal prices from spot trading on the electronic broking services ebs we gauge how foreign exchange spot and futures markets respond to news surprises the results show that the spot rates provide more price discovery than do the cme futures rates overall however the contribution of the futures rates to price discovery increases in the time surrounding macroeconomic announcement releases

unravelling financial market linkages during crises an empirical model of multiple asset classes across countries is formulated in a latent factor framework a special feature of the model is that financial market linkages during periods of financial crises including spillover and contagion effects are formally specified the model also captures a range of common factors including global shocks country and market shocks and idiosyncratic shocks the framework is applied to modelling linkages between currency and equity markets during the east asian financial crisis of 1997 98 the results provide strong evidence that cross market links are important spillovers have a relatively larger effect on volatility than contagion but both are statistically significant

the joint response of stock and foreign exchange markets to macroeconomic surprises using us and japanese data abstract this paper investigates the joint response of stock and foreign exchange fx market returns to macroeconomic surprises employing a system method of estimation that allows for the cross country and cross market interaction for asset returns and risk premia using us and japanese data we find that us stock markets are asymmetrically responsive to domestic developments in output growth and interest rates but are not influenced by macroeconomic surprises from japan the surprise in the fx market seems to affect stock markets in the us and japan respectively in particular we find that the interest rate surprise in the us and inflation surprise in japan tend to overstate the impact that these surprises would have on the respective stock market the impact of the surprises would appear smaller if macroeconomic developments induced by the fx market were incorporated into the model

network effects on cash card substitution in transactions and low interest rate regimes we develop a nash game on the adoption of a new eftpos electronic fund transfer at point of sale card payment media given cash is dispensed by a competitive atm automated teller machine network equilibrium conditions when cash and card use coexist entail a specific relationship between the card network coverage parameter super k and the proportion of cash financed expenditures we derive a payments innovation technology constrained transactions demand for money which is highly interest rate sensitive in low interest rate regimes data on cash card use in the uk 1990 97 is used to calibrate the model

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

macroeconomic news announcements and stock market jump intensity dynamics abstract this paper examines the effect of macroeconomic releases on stock market volatility through a poisson gaussian garch process with time varying jump intensity which is allowed to respond to such information the day of the announcement per se is found to have little impact on jump intensities employment releases are an exception however when macroeconomic surprises are considered inflation shocks show persistent effects while monetary policy and employment shocks reveal only short lived effects also the jump intensity responds asymmetrically to macroeconomic shocks evidence on macroeconomic variables relevance in explaining jump dynamics and improving volatility forecasts on event days is provided

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

asymmetric effects of money supply shocks and trend inflation in recent years a number of empirical studies have presented evidence that money supply shocks have asymmetric effects that is unexpected negative changes in the money supply slow the economy more than unexpected positive changes accelerate the economy evidence of asymmetry was documented by cover 1992 for the postwar u s economy and his finding was confirmed by de long and summers 1988 morgan 1993 rhee and rich 1995 and karras 1996a b stimulated by these empirical works several attempts have been made to provide microeconomic foundations for the asymmetric effects of money supply shocks 1 among those theories this paper examines the one that focuses on asymmetric price adjustment and let us call it a sticky price theory money supply shocks will have asymmetric effects on real output if prices are less flexible downward than upward this sticky price theory was proposed by tsiddon 1993 ball and mankiw 1994 and caballero and engel 1992 by employing a menu cost model the above researchers show that positive trend inflation can produce the asymmetric effects of money supply shocks the logic of their theory is the following along with price adjustment costs positive trend infla

gdp growth and currency valuation the case of the dollar abstract one popular view on the strength of the us dollar around the turn of the century is that the higher growth in the us compared to europe had stimulated foreigners to buy american assets thereby driving up the exchange rate in this paper a modified portfolio balance model is presented in which it is shown that the impact of output growth on the exchange rate depends crucially on the origin of this growth an improvement of the output gap is shown to actually depress the exchange rate whereas an increase in potential output growth leads to an appreciation especially if this improvement is likely to be persistent in an empirical example it is shown that the equilibrium real dollar rate is indeed positively affected by high trend growth in the us whereas it is negatively affected by a positive output gap the model outperforms the random walk in forecasting future real dollar rates one to eight quarters ahead

the time varying volatility of macroeconomic fluctuations we investigate the sources of the important shifts in the volatility of us mac roeconomic variables in the postwar period to this end we propose the esti mation of dsge models allowing for time variation in the volatility of the structural innovations we apply our estimation strategy to a large scale model of the business cycle and find that shocks specific to the equilibrium condition of investment account for most of the sharp decline in volatility of the last two decades jel c51 e32

how well can the new open economy macroeconomics explain the exchange rate and current account abstract this paper advances the new open economy macroeconomic literature in an empirical direction estimating and testing a two country model fit to u s and g7 data the model performs moderately well for the exchange rate and current account results offer guidance for future theoretical work parameter estimates lend support to the assumption of local currency pricing estimates are found for key parameters commonly calibrated in the theoretical literature such as the elasticity of substitution between home and foreign composite goods and the response of a country s risk premium to the net foreign asset position results also indicate that deviations from interest rate parity are not closely related to monetary policy shocks as recently hypothesized but that these deviations are strongly related to shifts in the current account

exchange rate exposure abstract in this paper we examine the relationship between exchange rate movements and firm value we estimate the exchange rate exposure of publicly listed firms in a sample of eight non us industrialized and emerging markets we find that exchange rate movements do matter for a significant fraction of firms though which firms are affected and the direction of exposure depends on the specific exchange rate and varies over time suggesting that firms dynamically adjust their behavior in response to exchange rate risk exposure is correlated with firm size multinational status foreign sales international assets and competitiveness and trade at the industry level

an open economy macro finance model of international interdependence the oecd us and the uk abstract this paper develops a multi country macro finance model to study international economic and financial linkages this approach models the economy and financial markets jointly using both types of data to throw light on such issues the world economy is modelled using data for the us and aggregate oecd economies as well as the us treasury bond market using latent variables to represent a common inflation trend and a us real interest rate factor we find strong evidence of global effects on both the us and uk calling into question the standard closed economy macro finance specification these economic linkages also help to explain the co movement of yields in the us and uk treasury bond markets

news good or bad and its impact on volatility predictions over multiple horizons we examine whether the sign and magnitude of intra daily returns have impact on expected volatility the next day or over longer future horizons we first let the data speak namely with minimal interference we capture the mapping between intra daily returns and future volatility we revisit the concept of news impact curves introduced by engle and ng 1993 overall we find that moderately good intra daily news reduces volatility the next day while both very good news unusual high intra daily positive returns and bad news negative returns increase volatility with the latter having a more severe impact the asymmetries disappear over longer horizons we also introduce a new class of parametric models which feature asymmetries and with close ties to arch type models albeit applicable to a mixture of high and low frequency data models featuring asymmetries dominate especially during the 2007 2008 financial crisis

macroeconomic cycles and the stock market s reaction to monetary policy abstract this paper examines cyclical variation in the effect of fed policy on the stock market we find a much stronger response of stock returns to unexpected changes in the federal funds target rate in recession and in tight credit market conditions using firm level data we also show that firms that face financial constraints are more affected by monetary shocks in tight credit conditions than the relatively unconstrained firms overall the results are consistent with the credit channel of monetary policy transmission

foreign exchange exposure of exporting and importing firms abstract the existing literature reports insignificant total exposure for multinational or exporting firms where total exposure incorporates both firm specific and macroeconomic effects we propose a dual effect hypothesis to explain this result which seemingly contradicts conventional wisdom according to our proposed hypothesis firms are affected by both the domestic economy and foreign markets these effects are at least partially offsetting for exporters and additive for importers the resulting predictions of insignificant total exposure for exporters and positive total exposure for importers are borne out in our tests the literature also reports insignificant residual exposure for multinationals or exporting firms where residual exposure estimates the firm specific exposure this result is explained by biases in the residual exposure estimates introduced by the choice of the value weighted market index as the control portfolio we propose an equally weighted portfolio of purely domestic firms as an alternative portfolio to reduce such biases and report significantly negative exposure for exporters and significantly positive exposure for importers as predicted by theory

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

does monetary policy have asymmetric effects on stock returns this paper investigates whether monetary policy has asymmetric effects on stock returns using markov switching models different measures of a monetary policy stance are adopted empirical evidence from monthly returns on the standard poor s 500 price index suggests that monetary policy has larger effects on stock returns in bear markets furthermore it is shown that a contractionary monetary policy leads to a higher probability of switching to the bear market regime

explaining exchange rate risk in world stock markets a panel approach using a garch approach we estimate a time varying two factor international asset pricing model for weekly equity index returns of 16 oecd countries a trade weighted basket of exchange rates and the msci world market index are used as risk factors we find significant currency risk exposures in country equity index returns we then explain these currency betas using several country specific macroeconomic variables with a panel approach we find that imports exports credit ratings and tax revenues significantly affect currency risks in a way that is consistent with some economic hypotheses similar conclusions are obtained by using lagged explanatory variables and thus these macroeconomic variables may be useful as predictors of currency risk exposures our results are robust to a number of alternative specifications

price discovery in illiquid markets do financial asset prices rise faster than they fall we study price discovery in municipal bonds an important otc market as in markets for consumer goods prices rise faster than they fall round trip profits to dealers on retail trades increase in rising markets but do not decrease in falling markets further effective half spreads increase or decrease more when movements in fundamentals favor dealers yield spreads relative to treasuries also adjust with asymmetric speed in rising and falling markets finally intraday price dispersion is asymmetric in rising and falling markets as consumer search theory would predict in a wide variety of consumer markets prices for retail goods rise faster than they fall 1 this asymmetric price adjustment referred to as rockets and feathers is generally understood by economists to be inconsistent with perfect competition between sellers sellers appear to exploit local market power due to the search frictions that their customers face we document asymmetric price adjustment in a major over the counter otc financial market using a comprehensive sample of all trades in municipal bonds over a 5 year period we provide evidence that the asymmetric price adjustment is associated with opportunistic timing by the broker dealers who intermediate trades in the market movements in fundamentals that increase spreads earned by broker dealers are reflected quickly in prices while prices respond more slowly to changes that reduce their spreads further the asymmetries are more pronounced in states where tax treatment of the bonds would induce market segmentation we also document asymmetries in withinday price dispersion as implied by theoretical models of rockets and feathers price adjustments based on costly consumer search and learning

the impact of macroeconomic surprises on spot and forward foreign exchange markets abstract this paper evaluates the effects of surprises in 23 types of macroeconomic announcements on foreign exchange rates and on the forward premium several findings emerge first as in the balance of payment framework announcements that convey a decline in consumer demand increase foreign exchange rates second the ppp hypothesis is rejected in favor of portfolio balance effects in determining exchange rates third the behavior of forward premiums is consistent with covered interest rate parity fourth exchange rates respond to announcements related to consumer demand inflation and interest rates but not to the announcements directly related to the general strength of the economy finally among the news releases considered surprises in the treasury budget trade balance and capacity utilization have the strongest influence in the currency market