causes of the forward bias non rational expectations versus risk premia the sources of the systematic forward bias in the foreign exchange market are sought a theoretical framework based on some well known international parity conditions is developed in order to derive testable hypotheses these are a only risk premia account for the observed deviations between forward and future sport rate c anticipated real exchange rate changes explain part of the bias the provided evidence is not consistent with any of these hypotheses which in turn implies that part of the bias may be due to non rational expectations

flexibility and uncertainty the preserving of flexibility when faced with uncertainty is a neglected aspect of behaviour under risk yet it is an important factor in decisions to hold liquid assets or delay irreversible investment this paper formalizes the notion of flexibility in a sequential decision context and relates its value to the amount of information an agent expects to receive a rudimentary money demand model is developed embodying these ideas and the history of flexibility as an economic concept is traced choices are frequently made between alternatives that imply different degrees of future commitment between a short term investment that leaves future options open for example and a long term one that by its very nature forecloses those options the relative attractiveness of the two depends on their probability distributions of payoffs over time a basic consideration in this choice is the recognition that beliefs about the risks governing these payoffs may change current doubts may be partially resolved in the near future this prospect decreases the attractiveness of the longer term commitment in that one is able to respond less fully to new information and even if it does not directly affect the risks associated with shorter term choices enhances their appeal this paper formalizes the above remarks by establishing connections between the following two partial orderings the first is an ordering based on variability of beliefs one set of beliefs is more variable than another if more final risk is resolved at an intermediate stage the more one expects to learn by an intermediate period relative to what one knows today the more variation one is anticipating in beliefs about the final outcome the second is an ordering of current actions or positions based on flexibility one position is more flexible than another if it leaves available a larger set of future positions at any given level of cost these two orderings are incorporated in a simple sequential decision model to suggest the following behavioural principle the more variable are a decision maker s beliefs the more flexible is the position he will choose this principle potentially applies whenever i there will be opportunities to act after further information is received and ii current actions influence either the attractiveness or availability of different future actions

self enforcing exchange among generations implications for consumption and mobility abstract a three generation olg model with one directional altruism and two directional intra family transfers is presented adults invest in their children s education and make transfers to their elderly parents however due to lack of altruism adults with high earnings do not share consumption equally with their elderly parents but spend a larger share of their earnings on own consumption and on their children s education this allows the model to be consistent with three empirical observations that are difficult to reconcile with traditional altruistic frameworks of intergenerational social interactions and mobility i consumption is not perfectly shared between members of an extended family ii consumption is not equally persistent over the lifecycle as across generations and iii the intergenerational persistence of earnings is particularly high at the top end of the earnings distribution

competitive incentives for manufacturing flexibility abstract a game theoretic model is used in this paper to analyze firms incentives to acquire product flexibility the degree of product flexibility is determined by the cost a firm must incur to produce a new product the model helps to identify characteristics of industries which are likely to encourage product flexibility strategies the model suggests that firms in industries where the ratio of price to variable cost is high are likely to expend more effort to increase product flexibility this hypothesis is then tested empirically

looking for a guide to protect the environment the development of the precautionary principle abstract if the precautionary principle is to become the guide of the international community for environmental protection policies an economic interpretation of the principle is in order the analysis of case studies and a survey of the recent decision theoretic literature show the lack of a fully satisfactory economic model more generally various theoretical and empirical results show that the principle cannot be assumed to apply a priori though it has been proposed by international treaties as a rule of thumb for situations of scientific uncertainty the precautionary principle could actually be inefficient

regulatory actions under adjustment costs and the resolution of scientific uncertainty food system regulators often decide whether to ban existing practices or approve new technologies without conclusive scientific evidence on possible damage and knowing that resolution is likely in the future in a model with three decision points and stochastic resolution of uncertainty we study interactions between expected losses due to regulation and information availability when a regulator is deciding on an early reversible ban and on a later reversible ban adjustment costs create inertia concerning intermediate signals such that earlier decisions are not overturned and also a bias against imposing an early ban the prospect of more later stage information can increase or decrease the incentive to ban early but research decreases the incentive to ban early

using survey data to test standard propositions regarding exchange rate expectations survey data provide a measure of exchange rate expectations superior to the forward rate in that no risk premium interferes we estimate extrapolative adaptive and regressive models of expectations static or random walk expectations and bandwagon expectations are rejected current appreciation generates the expectation of future depreciation because variables other than the contemporaneous spot rate receive weight in comparing expectations to the process governing the spot rate we find statistically significant bias no variable is as ubiquitous in international financial theory and yet as elusive empirically as investors expectations regarding exchange rates in the past expectations have been modeled in an ad hoc way often by using the forward exchange rate there is however a serious problem with using the forward discount as the measure of the expected change in the exchange rate in that the two may not be equal the gap that may separate the forward discount and expected depreciation is generally interpreted as a risk premium most of the large empirical literature testing the unbiasedness of the forward exchange rate for example has found it necessary either arbitrarily to assume away the existence of the risk premium if the aim

did lower unionization in the united states result in more flexible industries do unions really impede manufacturers output flexibility if so in what ways the authors propose a methodology for quantifying george stigler s concept of output flexibility and for decomposing the effects of unionization on average cost differences between union and non union plants using a recently compiled data set on u s three digit manufacturing industries from 1973 to 1996 they adapt this methodology to simulate the effects of unionization on flexibility and average costs for average size plants simulation results indicate that higher unionization was associated with higher average costs and lower flexibility than low unionization higher average costs appear to have been primarily due to higher fixed costs such as higher benefits

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

on the consistency of short run and long run exchange rate expectations abstract this paper examines whether short term exchange rate expectations overreact by comparing them with long term expectations we develop a set of nonlinear restrictions linking expectations at different forecast horizons the restrictions impose consistency a property weaker than rationality we use exchange rate survey data to measure expectations and then test whether consistency holds the data show that a current positive exchange rate shock leads investors to expect a higher long run future spot rate when iterating forward their short term expectations than when thinking directly about the long run in this sense short horizon expectations may overreact to current exchange rate changes

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

in flexibility and the level of output a word of caution abstract it is widely believed that more flexibility stimulates output and investment in this letter we show that this view is too optimistic indeed with the help of a simple model improvements in flexibility are shown to have opposite effects on the level of output

pre commitment and flexibility abstract this paper considers several related strategic duopoly settings in which uncertainty creates an option value from retaining flexibility by delaying investment or output decisions until after uncertainty is resolved this value of flexibility must be weighed against the strategic value of pre commitment yielding a trade off between flexibility and pre commitment we obtain a simple characterization of the timing of output decisions as a consequence of the degree of uncertainty particular attention is paid to the implications for entry deterrence by an incumbent firm and to the possible flexibility enhancing effects of investment in capital

inefficiency of foreign exchange markets and expectations survey evidence in recent years the finding of a bias has cast doubts on the efficiency of the forward exchange market a large survey of exchange rate expectations in the danish market shows that this inefficiency is mainly due to risk aversion in the market the results contradict the findings of surveys of us and uk forward exchange markets where contribution from biased expectations has been large

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

are foreign exchange forecasts rational new evidence from survey data abstract tests of rationality in foreign exchange markets have been inconclusive because of disagreement over the relevant asset pricing model this paper uses a newly available set of data on foreign exchange expectations to directly test the rationality of four foreign currency markets overall the results reject the rational expectations hypothesis

foreign exchange rate expectations micro survey data this paper analyzes the panel data of biweekly surveys on the yen dollar exchange rate expectations of forty four institutions for two years and contains four major findings first market participants are heterogeneous that is significant individual effects exist in their expectation formation second the individual effects have a characteristic of wishful expectations exporters expect yen depreciation and importers expect yen appreciation relative to others third many violate the rational expectations hypothesis fourth forecasts with long horizons show less yen appreciation than those with short horizons cross equation constraints implied by the consistency of the forecast term structure are strongly rejected in the data copyright 1990 by american economic association

do multinationals operate flexibly theory and evidence do multinational enterprises operate flexibly i e do they shift production in response to currency changes three theoretical perspectives are developed flexibility optimism premised on information and sunk cost advantages takes a macro efficiency perspective and predicts sizable responses flexibility pessimism premised on inertia and internal opportunism takes an organizational perspective and predicts sticky responses flexibility realism premised on the view that to be flexible in the current period multinational enterprises need to have planned and invested accordingly in previous periods predicts positive but relatively modest responses empirical analysis spanning the period 1977 1993 finds that multinational enterprises systematically exploit currency shifts but even in the face of large exchange rate changes their operational responses are relatively modest the results appear most consistent with flexibility realism and this hypothesis is selected over the alternatives considered

decision making under environmental uncertainty abstract the paper s main concern is with different decision making models for environmental issues and with the hypotheses of rationality underlying such models the hypothesis supported here is that most environmental problems are in a context of uncertainty of irreversibility and of complexity we shall explain why stressing the role of these elements implies a reversal of the traditional attitude towards decision making this presupposes a paradigm of economic rationality much broader that that of orthodox economics called procedural rationality our paper is in two parts the first part concerns the limits of the stochastic environmental approaches based on the bayesian decision theory and on a substantive rationality hypothesis the second part concerns the decision making analyses based upon a procedural rationality as well as their ability to take account of the interactions between uncertainty irreversibility and complexity

technological competition uncertainty and oligopoly abstract in an oligopoly context the present technological choice of a firm which expects to receive private revelant information just prior to the uncertain market stage has both a flexibility value and a strategic commitment value in contrast to some common wisdom ideas we provide a natural two stage competition framework in which an increase in uncertainty always raises the commitment value of the technological choice of the firm and may decrease its flexibility value when the increased uncertainty takes the form of more variable beliefs the first result tends to reinforce therefore the findings of the strategic commitment literature under certainty

an operational measure of liquidity embedding the process of selling an asset in a search environment enables one to provide an exact definition of liquidity an asset s liquidity is the expected time until it is sold while pursuing an optimal in the sense of maximization of expected discounted net proceeds policy this analysis reveals that this definition is compatible with most other notions of liquidity and in particular with those of john maynard keynes impatience the discount associatedwith a quick sale predictability and flexibility copyright 1986 by american economic association