spurious volatility in historical unemployment data this paper shows that the stabilization of the unemployment rate between the pre 1930 and post 1948 eras is an artifact of improvements in data collection procedures prewar methods are used to construct postwar unemployment data that are consistent with the historical data the constructed postwar series is nearly as volatile as the pre 1930 unemployment data the constructed postwar data are systematically more volatile than the actual postwar data because the cyclical behavior of the labor force and productivity are misspecified in the construction procedures the relationship between the actual and constructed postwar unemployment series is used to construct new historical data

what explains recent changes in international monetary policy attitudes toward inflation evidence from developed countries abstract this paper identifies source s contributing to the recent international shift in monetary policy attitudes toward inflation data from 18 developed countries suggests that this shift is connected to the universal increase in policy responses to economic openness in the 1990s

asymmetric transmission mechanisms and the rise in european unemployment a case of structural differences or of policy failures abstract recent literature has emphasised how asymmetries in the relationship between inflation and unemployment make it more difficult to stabilise prices or reach full employment the same problem arises in europe due to large disparities in the rates of unemployment this time because of the integration of product markets coupled with imperfect factor mobility are these unemployment disparities due to an inappropriate choice of policies or to structural differences in market fundamentals we show that it is the latter which imposes the bulk of the inefficiencies in europe and that during the new ems period the european economies were characterised by a centering tendency in labour costs but a two speed regime has emerged since 1991

a simplified jump process for common stock returns the specification of a statistical distribution which accurately models the behavior of stock returns continues to be a salient issue in financial economics with the introduction of arithmetic and geometric brownian motion models much attention has recently focused on a poisson mixture of distributions as an appropriate specification of stock returns for example see 12 3 8 10 5 and 1 consistent with empirical evidence these models yield leptokurtic security return distributions and furthermore the specification has much economic intuition in particular one may always decompose the total change in stock price into normal and abnormal components the normal change may be due to variation in capitalization rates a temporary imbalance between supply and demand or the receipt of any other information which causes marginal price changes this component is modelled as a lognormal diffusion process the abnormal change is due to the receipt of any information which causes a more than marginal change in the price of the stock and is usually modeled as a poisson process

monetary integration and economic reform recent research in contract theory views ownership as a substitute for complete contracts here this approach is applied to monetary integration countries face a coordination problem conducting monetary policy negative spillovers ensure uncoordinated policy generates too high inflation ex ante policy makers can undertake politically costly economic reform this has a positive spillover because it improves the outcome of the monetary policy game ex post contracting over policy may be possible but it supposed that ex ante contracting over reform and monetary policy is not this paper analyses when monetary union is a good substitute for this inability to commit

a tale of two regimes theory and empirical evidence for a markov modulated jump diffusion model of equity returns and derivative pricing implications abstract we provide closed form solutions for a continuous time markov modulated jump diffusion model in a general equilibrium framework for options prices under a variety of jump diffusion specifications we further demonstrate that the two state model provides the leptokurtic return features volatility smile and volatility clustering observed empirically for the dow jones industrial average djia and its component stocks using 10 years of stock return data we confirm the existence of jump intensity switching and clustering illustrate transition probabilities and verify superior empirical fit over competing poisson style models

negotiation and renegotiation of optimal financial contracts under the threat of predation this paper examines the effect of renegotiation on the ability of financial contracts between a lender and entrant to deter an incumbent s predation in the presence of renegotiation it is more difficult for the entrant to obtain financing and more difficult for the contract to deter predation contracts successfully deter predation in some cases however even if renegotiation occurs at a stage with symmetric information between the entrant and lender giving the entrant constrained by limited liability stronger bargaining power vis a vis the lender improves the efficiency of the optimal contract but the results concerning renegotiation are unchanged copyright 1996 by blackwell publishing ltd

monetary accommodation exchange rate regimes and inflation persistence stable url http links jstor org sici sici 0013 0133 28199205 29102 3a412 3c461 3amaerra 3e2 0 co 3b2 lthe economic journal is currently published by royal economic society your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals res html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgwed feb 13 07 34 49 2008

dynamic limit pricing i study a multiperiod model of limit pricing under one sided incomplete information i characterize pooling and separating equilibria and their existence and determine when these involve limit pricing for some parameter constellations the unique equilibrium surviving a d1 type refinement involves immediate separation on monopoly prices for others there are limit price equilibria surviving the refinement in which different types may initially pool and then possibly separate separation involves setting prices such that the inefficient incumbent s profits from mimicking are negative as the horizon increases or as firms become more patient limit pricing becomes increasingly difficult to sustain in equilibrium

the pricing of options on assets with stochastic volatilities one option pricing problem that has hitherto been unsolved is the pricing of a european call on an asset that has a stochastic volatility this paper examines this problem the option price is determined in series form for the case in which the stochastic volatility is independent of the stock price numerical solutions are also produced for the case in which the volatility is correlated with the stock price it is found that the black scholes price frequently overprices options and that the degree of overpricing increases with the time to maturity one option pricing problem that has hitherto remained unsolved is the pricing of a european call on a stock that has a stochastic volatility from the work of merton 12 garman 6 and cox ingersoll and ross 3 the differential equation that the option must satisfy is known the solution of this differential equation is independent of risk preferences if a the volatility is a traded asset or b the volatility is uncorrelated with aggregate consumption if either of these conditions holds the risk neutral valuation arguments of cox and ross 4 can be used in a straightfoward way this paper produces a solution in series form for the situation in which the stock price is instantaneously uncorrelated with the volatility we do not assume that the volatility is a traded asset also a constant correlation between the instantaneous rate of change of the volatility and the rate of change of aggregate consumption can be accommodated the option price is lower than the blackscholes b s 1 price when the option is close to being at the money and higher when it is deep in or deep out of the money the exercise prices for which overpricing by b s takes place are within about ten percent of the security price this is the range of exercise prices over which most option trading takes place so we may in general expect the b s price to overprice options this effect is exaggerated as the time to maturity increases one of the most surprising implications of this is that if the b s equation is used to determine the implied volatility of a near the money option the longer the time to maturity the lower the implied volatility numerical solutions for the case in which the volatility is correlated with the stock price are also examined the stochastic volatility problem has been examined by merton 13 geske 7 johnson 10 johnson and shanno 11 eisenberg 5 wiggins 16 and

harvests and business cycles in nineteenth century america most major american industrial business cycles from around 1880 to the first world war were caused by fluctuations in the size of the cotton harvest due to economically exogenous factors such as weather wheat and corn harvests did not affect industrial production nor did the cotton harvest before the late 1870s the unique effect of the cotton harvest in this period can be explained as an essentially monetary phenomenon the result of interactions between harvests international gold flows and high powered money demand under america s goldstandard regime of 1879 1914

monetary union and labor market reform abstract policy makers incentives to undertake costly labor market reform depend on the international monetary system a regime of noncooperative monetary policy is compared with monetary union we find that noncooperative policy leads to more reform of factors that affect the inflation bias which regime leads to more reform of factors affecting labor market flexibility depends on the size of monetary policy spillovers and the degree of correlation of supply shocks we show that monetary union produces higher expected inflation but a lower variance of inflation welfare can be higher or lower with monetary union

strategic behavior and the problem of storming in a centrally planned economy abstract it is shown that if the common knowledge assumption is properly utilized then it is possible to dispose of some unnecessary restrictions on the game theoretic account of storming presented by alexeev

the lucas critique and the volcker deflation this paper examines in light of the lucas critique the behavior of the phillips curve and of the term structure of interest rates after october 1979 it starts with an informal account of the policy change and then discusses how we might expect these two relations to shift after such a change it finds little evidence of a direct effect of the policy change on the phillips curve at least until 1982 it finds substantial evidence of a direct effect on term structure this abstract was borrowed from another version of this item

international monetary regimes and incidence and transmission of macroeconomic shocks evidence from the bretton woods and modern floating periods this paper investigates the relationship between international monetary regimes and incidence and transmission of macroeconomic shocks within the context of an open economy macro model empirical results confirm monetary interdependence and lower incidence of monetary discretion under fixed exchange rates the average magnitude and dispersion of supply shocks in bretton woods and the subsequent float is comparable however the average magnitude and dispersion of real demand shocks under bretton woods seems higher overall the international monetary regime may pose important constraints to policymakers in open economies economists have long recognized the role of a flexible exchange rate regime in insulating economies and allowing independent pursuit of monetary policy however experience with floating rates in the post bretton woods period led many to question the merits of flexible rates with increased volatility in nominal and real exchange rates and the implied effects of this volatility on international trade flows although fixed rates reduce uncertainty and transaction costs compared with flexible rates these benefits may be outweighed by increased output volatility due to sticky prices and increased international interdependence if countries face idiosyncratic shocks independent monetary policy is needed to stabilize the domestic economy theoretical work on the effects of international monetary regimes has been inconclusive helpman 1981 dornbusch 1983 turnovsky 1983 and others provide evidence that exchange rate arrangements cannot be ranked unambiguously in terms of their impact on macroeconomic stability or domestic welfare instead several studies have analyzed macroeconomic performance under different historical exchange rate arrangements using macroeconomic data from the bretton woods and the subsequent floating regime baxter and stockman 1988 found no clear relationship between exchange rate flexibility and output stability or synchronization of the business cycle using bivariate vector autoregressions vars bayoumi and eichengreen 1994 analyzed the standard

exchange rate rules and macroeconomic stability this paper discusses exchange rate rules in their role as macroeconomic instruments we abstract throughout from the trend part of exchange rate behaviour a crawling peg necessitated by differences in trend inflation and emphasise instead the implications of exchange rate rules in providing flexibility of real wages or in affecting the stability of output or prices

cooperatives as entrants a potential shortcoming of game theoretic models in industrial organization is their failure to consider consumers as players we introduce a customer coalition a cooperative as a potential entrant and compare the cooperative entry threat with that posed by the usualforprofit entrant we identify four fundamental distinctions between cooperative andfor profit entrants and demonstrate that the strategic interplay between a cooperative and an incumbent firm may differ markedly from that between the incumbent and a for profit entrant the results impart a prospectively powerful role to potential cooperatives in beneficially regulating free market performance

regional inequalities and the business cycle an explanation of the rise in european unemployment demertzis m and hughes hallett a 1996 regional inequalities and the business cycle an explanation of the rise in european unemployment reg studies 30 15 29 the introduction of a system of fixed exchange rates in europe has succeeded in inducing price convergence amongst its participants but at the same time has increased the divergence between their rates of unemployment in this paper we attempt to measure the level of the inefficiency imposed on the labour markets as a result of having different labour market structures under one monetary policy and then use these results to provide a new explanation for the secular rise in european unemployment based on the degree of labour market heterogeneities and the asymmetries in wage settings in each market as a closer monetary union of its own regions the uk is used as a comparison for the europe wide results demertzis m et hughes hallet a 1996 les inegalites regionales et le cycle economique une explication de la montee du chomage en europe

on jumps in common stock prices and their impact on call option pricing the black scholes call option pricing model exhibits systematic empirical biases the merton call option pricing model which explicitly admits jumps in the underlying security return process may potentially eliminate these biases we provide statistical evidence consistent with the existence of lognormally distributed jumps in a majority of the daily returns of a sample of nyse listed common stocks however we find no operationally significant differences between the black scholes and merton model prices of the call options written on the sampled common stocks

the phillips curve parameter instability and the lucas critique empirical estimation of phillips curve relationships typically indicates the presence of parameter instability this is argued to be due to the fact that the parameters of these equations are reduced form rather than structural parameters estimation of a phillips curve model by methods which allow for time varying parameters permits investigation of the nature and timing of the structural breaks which generate instability this paper estimates such a model by the kalman filter using quarterly data over the period 1972 4 to 1993 3 we find evidence of a gradual decline in the private sector s assessment of the steady state inflation rate during the 1980s but little evidence of the sort of dramatic regime shift predicted by some of the more extreme rational expectations models

reputation and imperfect information abstract a common observation in the informal literature of economics and elsewhere is that is multistage games players may seek early in the game to acquire a reputation for being tough or benevolent or something else but this phenomenon is not observed in some formal game theoretic analyses of finite games such as selten s finitely repeated chain store game or in the finitely repeated prisoners dilemma we reexamine selten s model adding to it a small amount of imperfect or incomplete information about players payoffs and we find that this addition is sufficient to give rise to the reputation effect that one intuitively expects

european monetary unification a tour d horizon this article takes stock of the literature and debate over european monetary unification in contrast to other papers where it is argued that the issues and prospects remain shrouded in uncertainty i argue that in a number of important areas a reasonable degree of consensus now exists as the result of a decade of scholarship the subsequent stock taking concentrates on areas where significant questions remain starting with the implications of surrendering the exchange rate and an independent national monetary policy as instruments of adjustment the conduct of fiscal policy under the excessive deficit procedure and the stability pact and how quickly the european union is likely to develop an eu wide system of fiscal federalism to accompany its monetary union turning from fiscal to monetary issues i ask whether the european central bank ecb will be as inflation averse as the bundesbank what exchange rate policy the ecb will pursue and whether the euro will be a leading reserve currency i conclude with what may be the most contentious issue of all namely whether europe s monetary union could collapse after it begins

recent developments in macroeconomics underlying the existence of macroeconomics as a separate field of study are the phenomena of economy wide fluctuations of output and prices and sometimes persistent high levels of unemployment two basic views of macroeconomic behavior have persisted even as conceptual innovati ons and the application of more powerful analytic and empirical techn iques have brought significant changes in understanding of the macroe conomy copyright 1988 by royal economic society

how will emu affect inflation and unemployment in europe this paper explores how european monetary union will change the wage setting behavior of national labor unions we derive the impact of national inflation aversion and labor militancy on the performance of national labor markets under different monetary arrangements a common central bank raises inflation and unemployment if it acts as conservatively as national central banks however unemployment falls in countries that previously tied their monetary policy to the bundesbank we also examine the composition of emu and the influence of national labor market legislation jel classification e24 f02 f33

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

is the growth of small firms constrained by internal finance this paper examines the long standing theory that the growth of small firms is often constrained by the quantity of internal finance under plausible assumptions when financing constraints are binding an additional dollar of internal finance should generate slightly more than an additional dollar of growth in assets this quantitative prediction should not hold for the relatively small number of firms which access external equity we test these predictions with a panel of more than 1 600 small firms and find that the growth of most firms is constrained by internal finance our results have implications for several different research literatures including models of firm growth

stock price distributions with stochastic volatility an analytic approach we study the stock price distributions that arise when prices follow a diffusion process with a stochastically varying volatility parameter we use analytic techniques to derive an explicit closed form solution for the case where volatility is driven by an arithmetic ornstein ublenbeck or ar1 process we then apply our results to two related problems in the finance literature 1 options pricing in a world of stochastic volatility and 2 the relationship between stochastic volatility and the nature of fat tailes in stock price distributions article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the assessment economic policy for transport this paper considers the economic principles underlying contemporary british transport policy issues and the contributions that recent theoretical and empirical work can make to assessing policy solutions it discusses two alternative highly stylised approaches to transport policy 1 transport services supplied by privately owned companies and financed by charges to users 2 statutory publicly owned transport monopolies it considers the corresponding problems of market failure and regulatory failure types of market failures include circumstances where competitive solutions are either 1 feasible but not achieved because of actions by companies or 2 achieved but undesirable for various reasons or 3 not feasible because the relevant sectors have natural monopolies and high entry costs the authors conclude that both the stylised approaches that they analysed have serious drawbacks the most important consequence of the nationalisation of uk transport in the late 1940s was significant inefficiency in production and pricing the public transport deregulation of the 1980s resulted in significant product innovation and changes in the level and structure of prices however artificial restriction of competitive outcomes seems to be the most important source of regulatory failure

does exchange rate pegging enhance credibility evidence from the european monetary system the european monetary system ems has been credited with immediately enhancing the credibility of onetary policy among its member countries however there is little empirical evidence to support this view this study provides evidence from exchange rate data that political actions taken to support the ems enhanced rate arangement further empirical results were sensitive to the specification of the estimating equations and varied dramatically if risk premia discounts were absent from estimating equations

monetary policy for inattentive economies we offer a contribution to the analysis of optimal monetary policy we begin with a critical assessment of the existing literature arguing that most work is based on implausible models of inflation output dynamics we then suggest that this problem may be solved with some recent behavioral models which assume that price setters are slow to incorporate macroeconomic information into the prices they set a specific such model is developed and used to derive optimal policy in response to shocks to productivity and aggregate demand optimal policy is price level targeting base drift in the price level which is implicit in the inflation targeting regimes currently used in many central banks is not desirable in this model when shocks to desired markups are added optimal policy is flexible targeting of the price level that is the central bank should allow the price level to deviate from its target for a while in response to these supply shocks but it should eventually return the price level to its target path optimal policy can also be described as an elastic price standard the central bank allows the price level to deviate from its target when output is expected to deviate from its natural rate

on the strategic role of high leverage in entry deterrence abstract this paper examines the strategic role of high levels of debt and bankruptcy threats in deterring entry into monopolistic markets in the context of an infinite horizon entry game we show that if a potential entrant has access to debt financing with limited liability the unique sub game perfect equilibrium involves the entrant successfully issuing a high level of debt entering the market and being met with cooperation if in addition to the entrant the incumbent also has access to debt with limited liability it will be highly levered and will completely pre empt any entry in equilibrium finally if the incumbent faces a variety of potential entrants with differing abilities to capture market shares its optimal capital structure will help pre empt the entry of the tougher entrants while allowing the weaker ones to share the market the results of extreme leverage are also shown to hold in an alternative formulation analyzed by kreps and wilson 1982 and milgrom and roberts 1982 and thus are robust to model specifications the empirical implications and possible application to high leverage industries are briefly discussed

on non uniqueness in rational expectations models an attempt at perspective abstract many macroeconomic models involving rational expectations give rise to an infinity of solution paths even when the models are linear in all variables some writers have suggested that this non uniqueness constitutes a serious weakness for the rational expectations hypothesis one purpose of the present paper is to argue that the non uniqueness in question is not properly attributable to the rationality hypothesis but instead is a general feature of dynamic models involving expectations it is also argued that there typically exists in a very wide class of linear rational expectations models a single solution that excludes bubble or bootstrap effects one that occur only because they are arbitrarily expected to occur a systematic procedure for obtaining solutions free from such effects is introduced and discussed in addition this procedure is used to interpret and reconsider several prominent examples with solution multiplicities including ones developed by fischer black and john b taylor

chronicle of a deflation unforetold suppose the nominal money supply could be cut literally overnight by say 20 what would happen to prices wages output the answer can be found in 1720s france where just such an experiment was carried out repeatedly prices adjusted instantaneously and fully on one market only that for foreign exchange prices on other markets such as commodities as well as prices of manufactured goods and industrial wages fell slowly over many months and not by the full amount of the nominal reduction coincidentally or not the industrial sector as represented by manufacturing of woolen cloths experienced a contraction of 30 when the government changed course and increased the nominal money supply overnight by 20 prices responded much more and the woolen industry rebounded

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

persistence in real variables under alternative exchange rate regimes some multi country evidence abstract in this paper we try to establish empirically whether a different degree of persistence is found in real variables under alternative nominal exchange rate systems the measure of persistence employed is the modified rescaled range statistic proposed by lo econometrica 1991 59 1279 1313 which tests for the presence of long range dependence after having accounted for a wide class of short memory processes the empirical results indicate a systematic increase in persistence in real variables under floating

inflation and wage indexation in the postwar united states this paper examines the relationship between inflation and wage indexation in the postwar united states using data on the prevalence of cost of living adjustments in major collective bargaining agreements the author finds that increases in inflation precede increases in wage indexation but reductions in inflation do not precede reductions in wage indexation there is virtually no evidence that wage indexation affects inflation copyright 1995 by mit press

the crash of ʼ87 was it expected the evidence from options markets transactions prices of s p 500 futures options over 1985 1987 are examined for evidence of expectations prior to october 1987 of an impending stock market crash first it is shown that out of the money puts became unusually expensive during the year preceding the crash second a model is derived for pricing american options on jump diffusion processes with systematic jump risk the jump diffusion parameters implicit in options prices indicate that a crash was expected and that implicit distributions were negatively skewed during october 1986 to august 1987 both approaches indicate no strong crash fears during the 2 months immediately preceding the crash attempts to explain what caused the stock market crashes around the world in october 1987 have suffered from the paucity of major economic developments occurring around that time that could have triggered the crashes shifting expectations regarding monetary policy foreign investors fears of a dollar decline increasing riskiness of assets none of these appeared major enough if present at all to explain the magnitude of the crashes and although portfolio insurance strategies could conceivably magnify the effects of a jump in fundamentals the initiating jump in fundamentals appears to be lacking

interest rate seasonals and the federal reserve it is widely believed that one of the federal reserve s first important monetary policy achievements was the deseasonalization of interest rates the federal reserve supposedly accomplished this by introducing appropriate seasonal movements into the supplies of currency and high powered money this view implicitly assumes that there was no interaction between american and foreign financial markets two findings are reported that challenge this conventional view first interest rate seasonals disappeared in the united states and other countries at approximately the same time second interest rate seasonal ended approximately 3 years before the seasonal movements of currency and high powered money changed

when does predation dominate collusion i study repeated competition among oligopolists the only novelty is that firms may go bankrupt and permanently exit the probability that a firm survives a price war depends on its financial strength which varies stochastically over time under some conditions including no entry an anti folk theorem holds when firms are patient so that strength levels change relatively quickly every nash equilibrium involves an immediate price war that lasts until at most one firm remains surprisingly the possibility of entry may facilitate collusion as may impatience the model can explain some observed patterns of collusion and predation

price inertia and policy ineffectiveness in the united states 1890 1980 this paper introduces a new approach to the empirical testing of the lucas sargent wallace lsw policy ineffectiveness proposition which compares the lsw hypothesis with an alternative that states that prices respond fully in the long run but only gradually in the short run to nominal aggregate demand disturbances the empirical equations estimated for a new set of quarterly data extending back to 1890 exhibit uniformly high responses of real output and low responses of price changes to anticipated changes in nominal gnp the paper compares and tests three alternative methods of introducing persistence effects into the lsw framework

the rules of the game international money in historical perspective no world central bank issues a separate currency for commerce across national boundaries instead a system of national monies works more or less well in providing a medium of exchange and unit of account for current international transactions as well as a store of value and standard of deferred payment for longer term borrowing and lending how do national governments and banking institutions interact to provide international money for merchants and investors by necessity this monetary interaction changes with time place political circumstances and financial technology to better understand its historical evolution let us follow robert mundell and distinguish between a monetary system and a monetary order

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

exchange rate regimes and inflation only hard pegs make a difference abstract using data from a large sample of developing countries from 1985 to 2001 we confirm that hard pegs currency boards or a shared currency reduce inflation and money growth there is no evidence that soft pegs confer any monetary discipline after other factors are controlled for inflation triggers regime switches under hard pegs monetary growth is unaffected by fiscal deficits or by inflation shocks under soft pegs as under floats increased fiscal deficits and positive inflation shocks are associated with higher monetary growth the apparently slower per capita output growth under hard pegs is explained by their geographical distribution jel classification f41

predation mergers and incomplete information this article examines the strategic pricing of duopolists in anticipation of a takeover of one by the other in equilibrium the acquiring firm may expand its output to signal that it is a low cost rival and thereby improve the takeover terms if the merged firm willface potential entry a premerger expansion of output may be necessary to deter entry and to make the merger profitable in that case the acquiringjirm s output expansion increases industry concentration by facilitating the takeover and by deterring entry this establishes the rationality of predatory output expansions even when a merger or a takeover is possible and indeed anticipated a voluminous literature is devoted to exploring the role of pricing in altering industry structure to achieve monopoly power that literature discusses both price cutting to drive existing rivals from the industry predatory pricing and setting low prices to deter potential entrants limit pricing the former has received the lion s share of the attention of antitrust commentators and enforcers but the rationality of predatory pricing has been seriously questioned the major criticism has two parts i takeovers are a superior means of achieving monopoly power and where legal should therefore be used instead of price cutting and ii if a takeover is anticipated premerger price cutting merely dissipates some of the value of the merging parties and would thus be irrational the first argument was originally advanced by mcgee 1958 and later by telser 1965 and bork 1978 the essential idea is that since predation is costly firms should realize that a more profitable arrangement in the form of a merger exists and ought to be negotiated the second argument is a natural extension of the first in response to this criticism yamey 1972 provides two arguments first the aggressor knows that he may face other rivals in the future entrants into this or other markets those potential rivals may draw inferences from his current behavior about the response they will face if they enter in that case the aggressor may wish to develop a reputation for aggressive behavior second even if a takeover is anticipated the terms of the takeover may be affected by the pretakeover pricing

the advantage of tying one s hands ems discipline and central bank credibility abstract it is often argued that the ems is an effective disciplinary device for inflation prone countries in europe since it forces the respective policy makers to pursue more restrictive monetary policies than they would otherwise it is not clear however why these countries should submit themselves to such discipline this paper argues that to answer this question appropriately one must consider that ems membership brings potentially large credibility gains policy makers in inflation prone countries the reason is that not only it attaches an extra penalty to inflation in terms of real appreciation but makes the public aware that the policy maker is faced with such penalty and thus helps to overcome the inefficiency stemming from the public s mistrust of the authorities

a jump diffusion model for option pricing brownian motion and normal distribution have been widely used in the black scholes option pricing framework to model the return of assets however two puzzles emerge from many empirical investigations the leptokurtic feature that the return distribution of assets may have a higher peak and two asymmetric heavier tails than those of the normal distribution and an empirical phenomenon called volatility smile in option markets to incorporate both of them and to strike a balance between reality and tractability this paper proposes for the purpose of option pricing a double exponential jump diffusion model in particular the model is simple enough to produce analytical solutions for a variety of option pricing problems including call and put options interest rate derivatives and path dependent options equilibrium analysis and a psychological interpretation of the model are also presented

changing inflation dynamics and uncertainty in the united states garch estimation we investigate recent changes in the level persistence and uncertainty of u s inflation despite the great strides in lowering inflation in the 1980s and 1990s we find that uncertainty has risen palpably in the current decade this is disturbing given the aforementioned findings of the negative impact of inflation uncertainty on output moreover analyzing both the standard consumer price index cpi and the cpi minus energy our results suggest that volatile energy costs contribute to the higher inflation uncertainty in the united states in the current decade

predation reputation and entry deterrence abstract economists often argue that predatory practices are irrational since there exist cheaper or more certain means to gain or maintain a monopoly our gametheoretic equilibrium analysis suggests that if a firm is threatened by several potential entrants then predation may be rational against early entrants even if it is costly when viewed in isolation because it yields a reputation which deters other entrants asymmetric information plays a crucial role in our analysis since it provides the rationale for entrants to base their expectations of the firm s future behavior on its past actions the analysis also suggests methods to treat general reputational phenomena

collusion under financial constraints collusion or predation when the discount factor is near one abstract this paper considers the possibility of collusion between financially constrained firms it is found that they cannot collude when the discount factor is sufficiently close to one while collusion emerges at lower discount factors

oil shocks competition and corporate investment evidence from china abstract this paper aims to investigate the impact of three classical oil shocks on the chinese corporate investment by using firm level data moreover we assess the role of product market competition in the relationship between oil shocks and corporate investment our empirical results show that oil aggregate demand and specific demand shocks negatively affect corporate investment while oil supply shocks show a positive effect notably compared to the non energy related industry the corporate investment of energy related industry is more sensitive to these oil shocks furthermore we find high competitive pressure can mitigate the impact of oil specific demand shocks on the corporate investment of energy related industry but competition presents a limited effect on the relationship between other oil shocks and corporate investment

testing monetary policy intentions in open economies 1 introductionthis article examines the relationship between economic openness and inflation performance among the most prominent research on this topic is the work by romer 1993 he demonstrates a negative relationship between economic openness and the inflation level his finding has also been viewed as supportive albeit indirectly of time consistency theory kydland and prescott 1977 1 romer 1993 argues that policymakers in more open economies have less incentive to adopt an expansionary monetary policy his argument is based on the assumption that monetary surprises in more open economies result in higher inflation for a given increase in output romer s finding that more open economies have lower inflation levels leads him to infer that this is evidence of time consistency in monetary policy practices however romer s work has not been generally accepted temple 2002 provides evidence that the openness inflation correlation does not stem from time consistency theory because the inflation level may not properly reveal the monetary authorities policy intentions temple questions this inference because it starts from a strong but unjustified assumption more open economies possess a relatively steeper phillips curve consequently temple proposes that the examination of the positive relationship between openness and the slope of the phillips curve is a fundamental condition for romer s argument he however finds little support for the positive relationship between economic openness and the slope of the phillips curve further work on the relationship of openness and monetary policy intentions comes from clarida gali and gertler 2001 2002 hereafter cgg in cgg 2001 the authors present a simple open economy model with a taylor type interest rate policy rule taylor 1993 the article concludes that the optimal monetary policy in an open economy has the same solution as that in a closed economy derived in cgg 1999 the authors also suggest that there is a direct link between the degree of economic openness and the aggressiveness of monetary policy they state that o penness does affect the parameters of the model suggesting a quantitative implication h ow aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness cgg 2001 p 248 in subsequent work cgg 2002 revisit the issue based on a dynamic open economy new keynesian model and the role of monetary policy in open economies is refined consistent with the argument in cgg 2001 they find that the optimal monetary policy rule in an open economy is isomorphic to that in a closed economy in the nash equilibrium they also suggest that openness does not affect the optimality of a policy rule in such a scenario on the other hand economic openness does affect optimal monetary policy when the foreign optimal policy is endogenous in the domestic country s objective function this effect however is ambiguous in direction because the relationship between the degree of economic openness and the aggressiveness of monetary policy is determined by the relative size of trade and wealth effects of changes in foreign output this line of theoretical literature is limited and does not offer a definitive conclusion on the relationship between economic openness and monetary policy intentions our article provides an alternative empirical evaluation of the relationship based on prior literature we use inflation variability and persistence as the measures of monetary policy intentions one branch of the literature such as taylor 1999 cgg 2000 and owyang 2001 argues that aggressive monetary policy reduces the volatility of inflation for instance cgg 2000 estimate a forward looking taylor rule for the period between 1960 i and 1996 iv they use paul volcker s appointment as chairman of the federal reserve system as a regime shift to a more aggressive anti inflation policy stance

the strategic impact of resource flexibility in business groups we show that in business groups with efficient internal capital markets resources may be channelled to either more or less profitable units depending on the amount of internal resources a group may exit a market in response to increased competition or channel funds to the subsidiary operating in that market this has important implications for the strategic impact of group membership affiliation to a monopolistic subsidiary can make a cash rich poor firm more less vulnerable to entry deterrence also resource flexibility within a group makes subsidiaries reaction functions flatter thus discouraging rivals strategic commitments when entry is accommodated

a test of price sluggishness in the simple rational expectations model u k i950 i980 a recurrent feature of the empirical output and price equations derived from simple rational expectations models is that the effects of nominal shocks persist for a long period of time in barro s i977 a unemployment equation unanticipated monetary growth influences unemployment with lags of up to 2 years in his price equation barro i 98 i unanticipated money has a lag of up to 5 years in the price equation fitted to uk data by attfield et al i 98i real money balances influence prices with a one year lag and unanticipated monetary growth influences them with a 2 year lag of course the existence of lags is neither necessary nor sufficient for the negation of the neutrality proposition of rational expectations models lucas i975 sargent 1979 and blinder and fischer i98i have provided rationales for the existence of lags in the supply equation and demonstrated their consistency with the neutrality proposition similarly the work of attfield et al i98i has indicated that lagged adjustments in the demand for money are also consistent with neutrality in both cases the combination of lagged adjustments with perfectly flexible market clearing prices yields all the neutrality propositions of the models of lucas and others however it is also the case that traditional keynesian type models with sluggish price adjustment imply lags in output and price equations the final equations with keynesian type lags may look very similar to the equations derived by lucas barro and others but their implications about the effectiveness of policy may be very different in the model with sluggish price adjustment supply is not equal to demand so some other rule will have to be found to determine employment and output anticipated monetary policy may be able to influence real economic variables if the employment and output rules are not specifically designed to offset the effects of anticipated policy for this reason a strong test of the neutrality proposition should be able to differentiate between different sources of lags and be able to identify them empirically if the test consists merely of a reduced form equation that identifies the lags and a rationalisation of them that is consistent with the neutrality proposition it can provide only weak evidence which may also be consistent

financially constrained entry in a game with incomplete information in an earlier paper we presented an entry game with a monopolist and a potential entrant facing financial constraints in which the unique perfect equilibrium involved no entry here we consider a one sided incomplete information variant of the game in which the monopolist allows for the possibility that the entrant is committed to endure a price war to the limit of his capability we find a unique sequentially perfect equilibrium in which entry sometimes occurs when it does predatory price wars may result with the incumbent sometimes driving out the entrant but other times eventually abandoning the fight

working capital and fixed investment new evidence on financing constraints this article presents new tests for finance constraints on investment by emphasizing the often neglected role of working capital as both a use and a source of funds the coefficient of endogenous working capital investment is negative in a fixed investment regression as expected if working capital competes with fixed investment for a limited pool of finance this finding addresses a criticism of previous research on finance constraints that cash flows may simply proxy shifts in investment demand in addition previous studies may have underestimated the impact of finance constraints on growth and investment because firms smooth fixed investment in the short run with working capital

games of survival in the us newspaper industry 1989 games of survival in the us newspaper industry applied economics vol 21 no 5 pp 631 649

capital accumulation and unemployment a tale of two continents in contrast to much recent work regarding the causes of european unemployment in this paper we emphasize the importance of capital accumulation but unlike the few previous studies which have examined the relationship between capital accumulation and unemployment we argue that what matters for the evolution of employment and the unemployment rate is not the absolute growth rate of a country s capital stock but its evolution relative to other countries capital stock the empirical validity of the above statement is demonstrated for almost all oecd countries using quarterly time series data for the period 1961 1995 more detailed evidence is also presented for germany japan and the united kingdom

conglomerate entrenchment under optimal financial contracting we provide a formal analysis of the notion that conglomerates are more entrenched as they have deeper pockets using the financial contracting model of bolton and scharfstein 1990 we can isolate two effects that confirm this conjecture the pooling of cash flows which allows to smooth out repayments and the ability to obtain better credit terms for less profitable business segments the internal capital market operated in a conglomerate may however work in the opposite direction increasing the sensitivity of operations to own cash flows and increasing the likelihood of exit

nominal exchange rate regimes and the stochastic behavior of real variables abstract this paper examines the behavior of some key macroeconomic variables under alternative exchange rate regimes by looking at persistence volatility and the relative importance of symmetric worldwide versus asymmetric nation specific shocks as a driving force of business cycles the empirical evidence is not supportive of the nominal exchange rate neutrality hypothesis unemployment and real interest rates are more persistent under floating whereas industrial production and real exchange rates are less persistent also the conditional variance of the two latter variables and of the unemployment rate exhibits higher variability in the post bretton woods era furthermore principal components analysis shows that the flexible rate regime is characterized by increased international correlation of business cycles and that cyclic movements have become less country specific

how the gold standard functioned in portugal an analysis of some macroeconomic aspects portugal was the first country in europe to join great britain in the gold standard in 1854 having abandoned the principle of free gold convertibility in 1891 by elucidating the historical choice of the gold standard by the portuguese authorities and analysing its macroeconomic behaviour we prove that it is a mistake to compare different monetary systems with the same indicators our examination of demand supply and monetary shocks in the context of a vector autoregression var model confirm the idea of appropriate application of the principles of classical economics to the gold standard in portugal we also prove that the principles of demand management were not compatible with the functioning of the gold standard

on the robustness of contestability theory abstract the robustness of contestability theory is discussed with special attention to the role of price response lags the possibility of collusion in the post entry game is examined by modeling an infinitely repeated game moreover the hit and run strategy is obtained as the unique subgame perfect equilibrium of a repeated game with infinite horizon under certain conditions

competitiveness through disinflation an assessment of the french macroeconomic strategy france olivier jean blanchard and pierre alain muet over most of the last decade france has followed increasingly rigorous policies the hard franc approach has meant that external competitiveness is no longer sought through devaluation instead the new policy is to achieve a lower inflation rate than abroad in principle the competitiveness through disinflation approach should work and eventually bring down the unemployment rate which has remained broadly unchanged at a high level for many years while maintaining external balance this article investigates whether the policy is working inflation is lower than in germany profits have steadily increased and trade balance has been reestablished but unemployment is higher than in 1983 the policy has been more successful at bringing down inflation than at returning the economy to lower unemployment the adjustment process has been protracted credibility effects have not been fulfilled but nor however have fears that the drastic change of policy might prove unusually disruptive it simply turns out that the policy is working very slowly it would take an improbable 30 accumulated competitiveness gain to bring unemployment down by 3 which does not seem acceptable to france s trading partners

general equilibrium pricing of options on the market portfolio with discontinuous returns when the price process for a long lived asset is of a mixed jump diffusion type pricing of options on that asset by arbitrage is not possible if trading is allowed only in the underlaying asset and a risk less bond using a general equilibrium framework we derive and analyze option prices when the underlying asset is the market portfolio with discontinuous returns the premium for the risk of jumps and the diffusion risks forms a significant part of the prices of the options in this economy an attempted replication of call and put options by the black scholes type of trading strategies may require substantial infusion of funds when jumps occur we study the cost and risk implications of such dynamic hedging plans article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

the phillips curve the persistence of inflation and the lucas critique evidence from exchange rate regimes comment we present evidence from the united states and the united kingdom that the persistence of price inflation is significantly higher under managed exchange rate regimes than under gold based fixed exchange rate regimes these differences are also reflected in expectations augmented phillips curves we use a two country macro model with forward looking price setters to demonstrate that higher monetary accommodation of inflation and exchange rate accommodation of inflation differentials increase inflation persistence the evidence does not contradict this hypothesis it supports the hypothesis of forward looking price setters and highlights the empirical significance of the lucas critique jel e31 e42 f33

bankruptcy costs and the theory of oligopoly this paper examines the relationship between financial decisions and output decisions in oligopolistic markets assuming a duopoly market structure in which financial decisions and output decisions follow in sequence the authors analyze how bankrupt cy costs which are incurred when the firm is unable to meet current debt obligations affect the firm s behavior in output markets with fixed bankruptcy costs firms have an incentive to increase output le vels if they take on more debt proportional bankruptcy costs lead to a u shaped relationship between output and debt foresighted owners of firms are led to take into account the strategic output effects of financial structure when considering an optimal financial structure for the firm

causality links between consumer and producer prices some empirical evidence this paper reexamines the relationship between consumer and producer prices in the g7 countries united states canada germany france italy united kingdom and japan and it improves on the existing literature in two ways first it takes into account causality links arising from the transmission mechanism of monetary policy which are generally overlooked second it employs the causality testing method for unstable systems recently introduced by toda and yamamato 1995 which results in standard asymptotics thereby obtaining valid statistical inference the empirical results are consistent with the conventional wisdom according to which there is unidirectional causality running from producer to consumer prices bidirectional causality or even no significant links only being found when the causality links reflecting the monetary transmission mechanism are ignored