bounded price variation and rational expectations in endogenous switching model of the u s corn market a model that includes bounded price variation and rational expectations by producers is estimated for the u s corn market the resulting model specification is highly nonlinear though since the probability of market equilibrium must be determined endogenously unlike previous research the cross equation restrictions implied by the rational expectations hypothesis are incorporated in the bounded prices model by using fair and taylor s 1983 procedure for obtaining maximum likelihood estimates of nonlinear rational expectations models the resulting model is compared against a standard equilibrium model with naive expectations the results show the bounded prices model is a superior specification copyright 1989 by mit press

a search theoretic model of the retail market for illicit drugs a search theoretic model of the retail market for illegal drugs is developed trade occurs in bilateral potentially long lived matches between sellers and buyers buyers incur search costs when experimenting with a new seller moral hazard is present because buyers learn purity only after a trade is made this model is consistent with some new stylized facts about the drugs market and it is informative for policy design the effectiveness of different enforcement strategies is evaluated including some novel ones that leverage the moral hazard present in the market copyright oxford university press

variable probability of realignment in a target zone the target zone model presented here encompasses a realignment probability that increases as the fundamental deviates from the center of the zone the analysis is carried out for cases where the fundamental follows either a brownian motion or an ornstein uhlenbeck process the simplest version of the model yields tractable results which prove to be robust when its most restrictive assumption is relaxed the solution obtained is dubbed the steeper s in accordance with its most relevant feature copyright 1994 by the editors of the scandinavian journal of economics

user cost changes unemployment and home ownership evidence from spain this paper develops a macroeconomic model that permits analysis of the relationship between unemployment and home ownership rates using aggregate data at the provincial level within spain besides other influential variables such as the changes of the relative user costs of owning and renting or household life cycle attributes the model constructed permits the authors to question the evidence of oswald nickell and layard and partially of green and hendershott that home ownership leads to higher unemployment the results point out that taking into account the simultaneity determination issue and reducing the omitted variable bias a higher unemployment discourages home ownership

the demand for beer wine and spirits a survey of the literature the demand for alcohol literature is vast and much conflicting information about the nature of the demand for alcoholic beverages has been published this paper presents a survey of the literature and then uses the technique of meta regression analysis to establish insights into the nature of the demand for beer wine and spirits unlike previous meta studies of the demand for alcoholic beverages this study adjusts for the precision of each elasticity estimate the analysis presented suggests reported elasticity estimates will be influenced by such factors as estimation technique data frequency and time period under consideration with respect to time the findings suggest that the demand for alcoholic beverages has become less inelastic since the mid 1950s and that the income elasticity has been falling since the mid 1960s the analysis also found support for the idea that alcohol as a commodity group is a necessity and that consumers respond to price discounting with inventory behaviour rather than true substitution behaviour little support is found for the idea that the demand for alcoholic beverages varies fundamentally across most countries although wine may be an exception language en

a model of target changes and the term structure of interest rates abstract we investigate the effects of short term rate targeting by the federal reserve on the term structure of interest rates and make contributions at two levels using a new series of interest rate targets made available by the federal reserve bank of new york we develop a family of models that highlight the implications of discrete changes in interest rate targets for the term structure of interest rates we show that spreads between short term rates and the overnight federal reserve funds rate are mainly driven by expectations of changes in the target not by the transitory dynamics of the overnight rate around the target hence the bias in tests of the expectations hypothesis that we document can be mainly attributed to the erroneous anticipation of future changes in monetary policy our modeling assumptions and newly available data make it possible to extract a series of market expectations of the next target change which are compared with a series of realized target changes

target zone models with stochastic realignments an econometric evaluation abstract this paper provides empirical support for the second generation of target zone models with stochastic devaluation risk i propose a simple non linear framework with a time varying probability of exchange rate realignment this model nests alternatives i with no devaluation risk ii with constant devaluation risk and iii the random walk i reject these three in favor of a stochastic realignment model where devaluation risk varies with economic fundamentals the model predicts 13 of 17 realignments for the franc and lira including an out of sample episode in august 1993

price and enforcement effects on cocaine and marijuana demand this article estimates equations for past year cocaine and marijuana use among adult and juvenile respondents of the 1990 97 national household surveys on drug abuse unlike most previous studies we control for the monetary price of marijuana probabilities of arrest for marijuana and cocaine possession and state fixed effects results indicate that cocaine prices are inversely related to adult cocaine and marijuana demand but are unrelated to juvenile drug demand marijuana price effects are always statistically insignificant estimated price effects are inflated when state effects are omitted and increases in each arrest probability diminish both types of drug use jel k42 118 d12 i introduction the responsiveness of cocaine and marijuana demand to changes in their prices is a key determinant of the effectiveness of illegal drug enforcement policy by harassing sellers and seizing drugs enforcement attempts to reduce the consumption of illegal drugs by restricting their supply and thereby raising their prices even if enforcement is able to increase drug prices its success in reducing illegal drug use depends on the elasticity of drug demand with respect to drug prices reciprocally unless this elasticity is close to zero legalization of cocaine and marijuana would likely increase their consumption substantially by drastically reducing their prices a complementary goal of enforcing cocaine and marijuana possession violations is to reduce their demand at prevailing prices this occurs through both incarceration of drug users who will no longer be able to purchase drugs and deterrence of drug consumption by potential users price and enforcement effects may be dissimilar if consumers respond differently to changes in their budget constraints than to changes in expected punishment in particular the relative magnitudes of the responses in drug demand to changes in possession arrest probabilities and prices is an important determinant of how enforcement resources can most efficiently be allocated between buyers and sellers but in spite of this policy relevance there is little direct evidence on the relationship between arrest probabilities for cocaine and marijuana possession and demand for these drugs meanwhile the relationship between the consumption of cocaine and marijuana is both theoretically and empirically uncertain in theory cocaine and marijuana act as substitutes in the production of intoxication but also can provide complementary intoxicating effects empirically this relationship determines whether policies designed to reduce demand for one drug have effects on the other that reinforce or counteract the impacts of policies designed specifically for that other drug for instance marijuana possession arrests more than doubled nationally between 1990 and 1997 both in number and as a fraction of total arrests this might have reinforced any effect of cocaine possession enforcement on cocaine use if the two drugs are complements but had an unintended counteractive effect if they are substitutes this study provides evidence on the impacts of cocaine and marijuana prices and possession violation enforcement on the demand for these drugs we analyze data on past year cocaine and marijuana use among 12 to 39 year old respondents to the annual 1990 97 national household surveys on drug abuse nhsda along with various individual characteristics the set of explanatory variables includes regional prices of cocaine and marijuana state level measures of the probability of arrest for cocaine and marijuana possession and fixed effects for states and years our goals are to estimate the size of the response in the demand for cocaine and marijuana to changes in their prices to do the same with respect to changes in possession violation enforcement intensity and to examine whether unmeasured state characteristics can potentially bias estimated price and enforcement effects

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

target zones and exchange rates an empirical investigation this paper develops an empirical model of exchange rates in a target zone the distribution of exchange rate changes is conditioned on a latent jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables when there is no jump the target zone is credible and exchange rate changes are constrained to remain within the target zone band the paper revisits the empirical evidence from the european monetary system regarding the conditional distribution of exchange rate changes the credibility of the system and the size of the foreign exchange risk premia in contrast to some previous findings we conclude that the french franc deutschmark rate exhibits considerable nonlinearities realignments are somewhat predictable and the credibility of the system did not increase substantially after 1987 moreover our model implies that the foreign exchange risk premium becomes large during speculative crises

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

price and income elasticities of demand for housing characteristics in the city of barcelona garcia j and raya j m price and income elasticities of demand for housing characteristics in the city of barcelona regional studies this paper estimates price and income elasticities of demand for housing characteristics using the information of properties appraised in the city of barcelona 1998 2001 it employs a two stage approach estimating hedonic price equations for different districts in order to estimate subsequently the corresponding demand equations the results allow an analysis to be made of the complementarity or substitutability relationships among the characteristics analysed and also to catalogue these characteristics as goods by knowing the price cross and income elasticities of housing characteristics policy recommendations can be made about the type of housing units that are the most desirable to be subsidized garcia j et raya j m les elasticites par rapport au prix et au revenu de la demande de caracteristiques particulieres du logement a barcelone regional studies a p

assessing target zone credibility mean reversion and devaluation expectations in the erm 1979 1992 abstract the paper presents estimates of devaluation expectations for six erm currencies relative to the deutsche mark for the period march 1979 april 1992 both the simplest test and the drift adjustment method are used the simplest test adjusts interest rate differentials for the maximum and minimum expected rate of depreciation within the exchange rate band the drift adjustment method adjusts interest rate differentials by the estimated expected rate of depreciation within the band the latter method gives more precise estimates especially for short horizons and allows statistical inference and hypothesis testing expected rates of devaluation have generally fallen during the period still some devaluation expectations relative to the deutsche mark remain in 1992 except for the belgian luxembourg franc and the netherlands guilder expected rates of devaluation have fluctuated more than interest rate differentials

an empirical analysis of alcohol addiction results from the monitoring the future panels in a panel of young adults we find that alcohol consumption is addictive in the sense that increases in past or future consumption cause current consumption to rise the positive and significant future consumption effect is consistent with the hypothesis of rational addiction the long run price elasticity is approximately 60 larger than the short run price elasticity and twice as large as the elasticity that ignores addiction thus a tax hike policy to curtail consumption or abuse may not have a favorable cost benefit ratio unless it is based on the long run price elasticity jel 110

international narcotics trade foreign aid and enforcement i introduction it is widely accepted that the problems that a country may face as a direct result of narcotics related activities are numerous 1 moreover drug production and trade are intimately tied to other serious international concerns notably the financing of insurgencies and terrorist activities shughart 2006 keefer loayza and soares 2008 intriligator 2010 piazza 2011 a prime example is the involvement of the taliban in afghanistan in the production and trafficking of heroin see blanchard 2009 clemens 2013a 2013b similar issues are observed in colombia and mexico hence the indirect costs of narcotics related activities are also substantial nonetheless the enforcement of prohibitions on the production consumption and movement of narcotics remains among the most controversial issues in international relations not least because the global response has met with somewhat limited success 2 even taking the objective of reducing global consumption of narcotics as given it is unclear which of the available policy tools are likely to be the most effective at meeting the objective the consumption and distribution in narcotics importing countries can be targeted directly although the history of the past one and a half centuries indicates that it is very difficult alternatively and more realistically the supply side can be targeted law enforcement authorities in narcotics exporting countries can be used to eradicate production facilities and to interdict trafficking and alternative production activities can be encouraged by providing technical assistance or by direct subsidization in all cases involving the supply side however it must be recognized that the global production of narcotics is concentrated in developing economies many of these countries lack the enforcement resources to engage effectively against well funded producers and well armed traffickers and their supporting terrorist and rebel groups therefore foreign aid to finance law enforcement activities is essential 3 alternative development policies may also be supported through foreign technical assistance or by directing foreign aid toward alternative production subsidies the effects of these policies on narcotics exporting economies have not however been adequately addressed in the literature our work adds a new dimension to the existing literature on the economics of narcotics 4 we construct a theoretical model that explores the effects of foreign financing of anti narcotics enforcement activities in narcotics producing exporting countries along with other potential policy interventions while previous literature has taken a partial equilibrium approach to analyzing related issues our work differs substantially in adopting general equilibrium methods as martin and symansky 2006 note opium production in afghanistan for example accounted for approximately 27 of economic activity in 2005 2006 given this fact substantial general equilibrium effects must be present and deserve full exploration we focus attention on the consequences of the multitude of severe distortions that narcotics production and enforcement introduce to factor markets we envisage an economy where workers engage in both licit and illicit activities are paid a premium for the risk of incarceration or seizure of their marginal product involved in the latter and a nonproductive law enforcement sector uses real resources to combat illicit activity our work draws on a number of strands of economic theory including tied aid factor market distortions dual economies illicit markets and law enforcement a number of important new results emerge from our analysis foreign aid will increase enforcement activity and will generally lower narcotics production the more market power the narcotics producing country has the less effective foreign aid will be however in fact aid intended for anti narcotics enforcement may effectively be siphoned into the wages of narcotics workers

effects of enforcement on illegal markets evidence from migrant smuggling along the southwestern border abstract the paper analyzes the effects of tighter border control on the illegal crossing market between mexico and the united states combining panel data on illegal migrants with enforcement statistics the effects of enforcement are found to be moderate prices of border smugglers coyotes increased by only 17 while the demand for smugglers has remained unchanged enforcement has however shifted illegal migrants to remote crossing places border crossing is now more time intensive with higher prices for coyotes and risk of death this geographic substitution raised migration costs by 140 more than twice the effect of enforcement on smuggling prices

devaluations and depreciation expectations in the ems this paper proposes a method to estimate separately the size of the expected depreciation in an eventual devaluation of the central parity in the erm and the probability assigned by agents to this devaluation occurring in the short run the proposed method complements the information provided by the jumps observed in market exchange rates around realignments with the information contained in interest rate differentials on the future behaviour of exchange rates the separation of probability and size allows a richer analysis of the effects of devaluations on exchange rate credibility in the erm

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

illicit drug use among arrestees prices and policy abstract prior studies by relying on nationally representative surveys have overlooked the important fact that use of addictive substances is not uniformly distributed subgroups of hardcore users account for most of the drug consumption this study employs the arrestee drug abuse monitoring system to analyze the demand for cocaine and heroin by urban arrestees employing objective indicators of use based on urinalysis the data are repeated city cross sections and panel data methodology is employed to account for endogeneity cocaine and heroin prices have a negative effect on the probability of use even among this group of heavy users results indicate that subjective self reported measures of participation are likely to be under reported which may impart bias to estimates of the price elasticity the own price cocaine participation elasticity is about 0 15 and the own price heroin participation elasticity is about 0 10 for arrestees this contemporaneous elasticity understates the full effect and the long run price elasticity is about twice the magnitude the magnitude of the price response is substantially smaller relative to the estimates in the prior literature and calculations suggest that further enforcement and interdiction driven increases in drug prices may not be cost effective

a new indicator to assess the credibility of the ems abstract this paper proposes a new credibility indicator for the ems based on the realignment expectations calculated using the inferred probabilities derived from the estimation of a markov switching regimes model this indicator avoids most of the problems presented by the so called drift adjusted method and in particular it accounts in a natural manner for ex ante expectations instead of using ex post realignment times in order to deal with the jumps in the exchange rates the periods of high probability of realignment match very closely the crisis of the ems

rational expectations in limited dependent variable models abstract the appropriate characterizations of rational expectations solutions in one limit and two limit models are derived we prove the existence and uniqueness of the rational expectations solution for each model our analysis is general without imposing serial independence and the parametric distributional assumption

bounded price variation models with rational expectations and price risk abstract the bounded price variation model under rational expectations is extended to include higher moments of price in the supply equation the resulting framework is then used to estimate a disequilibrium model of the u s corn market that includes price risk

price and quantity controlled agricultural markets and disequilibrium econometrics a survey abstract this survey reviews the literature on estimating single markets in disequilibrium in the presence of regulated price and or quantity controls e g minimum price regimes and or marketing quotas most of the literature is found to describe pure econometric technique with only a few applications having emerged to date various reasons for the broad non acceptance of this literature are offered including a perceived lack of realism proposals to close this econometric theory application gap are put forward including the use of effective demand concepts in specifying demand and supply functions synthesizing some closely related literature on agricultural price quantity controls with disequilibrium econometrics i e endogenous government policy and the effects controls have on yield uncertainty and price risk and outlining more applicable econometric technique extensions

modeling expectations of bounded prices an application to the market for corn the presence of farm programs should directly affect the expectations of producers this paper analyzes the formation of price expectations when price supports constitute an effective lower bound on the distribution of the expectations we first investigate what the expected price would be if the usual rational expectations formula is used this leads to a relationship that is not estimable we suggest two alternatives one based on a tobit approximation and the other based on a perfect prediction of when the support is going to be effective using a simplified model of the u s corn market the methodology is demonstrated and compared to an alternative method of using futures prices as the expectation of harvest price the analysis of supply response for the major u s field crops is made difficult due to government intervention in these markets this intervention has been characterized by the use of price supports acreage diversion storage incentives etc during the last thirty years many studies have analyzed producer behavior in the presence of governmental involvement such studies have typically been concerned with modeling the effect of supports and diversions in an ex post sense rather than with how producers used the knowledge of farm programs to form their expectations if producers are rational economic agents their expectations of harvest prices should be conditioned both by free market forces and the type and degree of governmental intervention in the market of course farm programs have varied in nature and extent during the past thirty years and it is doubtful that any structural model could capture their complexities in this paper we attempt to introduce rational expectations in a simplified model of the u s corn market in essence we focus on the formation of price expectations when price supports constitute an effective lower bound on the distribution of the expectations we proceed by developing a theoretical model that connects the rational expectations model with a model of bounded price variation it is shown that one representation that may characterize the corn market is a triangular structural system with endogenous switching a full information maximum likelihood estimator is proposed for the system next an empirical model is specified and estimated the model is evaluated in comparison to an augmented model that contains a futures price so that some inferences may be made concerning the rational expectations model s success in summarizing relevant market information expectations under bounded prices consider a market that may be represented by a simple supply and demand system q a pt a2w el supply function pt b qt b2xt e2t demand function 1 where p and q represent market price and quantity w and x represent supply and demand shifters and p represents the rational expectation of product price at the time production decisions are made note that this system has a familiar recursive structure when the expected price variable is specified in terms of one or more lagged prices when the restricted reduced form of the structural system is solved for in terms of the expected price and this expression is used to replace pj wallis 1980 then models similar to those of goodwin and sheifrin 1982 and shonkwiler and emerson 1982

limited dependent rational expectations models with stochastic thresholds abstract this paper extends the standard limited dependent rational expectations model to allow for stochastic variations in the bounds we show that the degree of non linearity relating expectations to fundamentals tends to decline as the band becomes less predictable monte carlo experiments indicate that the assumption that the band is perfectly predictable by the agents when inappropriate can seriously bias the estimates and the inferences based on them

prohibition and the market for illegal drugs over the past 25 years in the united states enforcement of drug prohibition has expanded dramatically over the same period however the trends in drug production and consumption have been essentially flat and the real purityadjusted prices of both cocaine and heroin have more than halved this combination of facts raises questions about the effectiveness of prohibition enforcement and it constitutes a puzzle that is interesting to explain in this paper the authors document these facts and explore possible explanations they do not claim to provide a complete answer but shed light on which explanations are likely to be important

the linkage between speculative attack and target zone models of exchange rates in this paper we generalize the target zone exchange rate as model formalized by krugman 1988b to include finite sized interventions in defense of the zone the main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the smooth pasting condition usually invoked as a terminal condition this abstract was borrowed from another version of this item

the expectations hypothesis of the term structure when interest rates are close to zero abstract in an economy where cash can be stored costlessly in nominal terms the nominal interest rate is bounded below by zero this paper derives the implications of this non negativity constraint for the term structure and shows that it induces a nonlinear and convex relation between short and long term interest rates the long term rate responds asymmetrically to changes in the short term rate and by less than that is predicted by the benchmark linear model in particular a decrease in the short term rate produces a smaller response in the long term rate than an increase of the same magnitude the empirical predictions of the model are examined using data from japan

the economic case against drug prohibition this paper discusses the costs and benefits of drug prohibition it offers a detailed outline of the economic consequences of drug prohibition and a systematic analysis of the relevant empirical evidence the bottom line is that a relatively free market in drugs is likely to be vastly superior to the current policy of prohibition

the demand for illicit drugs i introduction illicit drug use and alcohol abuse imposes significant costs on society and on the individual users these costs include increased crime health problems and employment problems because of these considerable costs government at all levels has made drug control and the control of alcohol abuse important priorities the federal government has undertaken an aggressive program of interdiction of drug shipments and eradication of drug crops in the field the federal government and the state governments have also increased their criminal justice efforts in analyzing the effect of government drug control programs economists have applied the conventional supply and demand model to illicit drug markets the model includes a demand function that is downward sloping with respect to price and a supply function that is upward sloping or horizontal with respect to price drug programs like interdiction and drug sanctions are assumed to reduce supply and raise equilibrium price other policy options such as some form of drug legalization could increase supply and reduce equilibrium price the effect of these policies on equilibrium quantity is dependent on the elasticity of demand and on whether demand shifts since not much is known about drug price elasticities the potential effects of various drug control policies remain a speculative exercise the purpose of this paper is to estimate the effects of alcohol and drug prices on alcohol use and drug participation both own price and cross price effects are estimated there are few prior empirical studies of the effect of drug prices because data have been difficult to acquire this paper makes use of newly available data on drug prices and is the first paper to link these data to a nationally representative drug use data set of 49 802 individuals estimates of drug price elasticities are important empirical evidence that drug sales can be characterized by market forces drug price elasticities are also important in estimating the likely impact of policies that affect drug prices and in estimating the effects of drug prohibition cross price elasticities are important to estimate since they suggest the likely effects of policies such as an increase in alcohol taxes on illicit drug participation and the effects of marijuana decriminalization on alcohol cocaine and heroin use ii prior studies while there are a number of prior studies of the effects of alcohol prices and policies there are few prior studies of drug prices and polices the reason for so few prior drug studies is the limited amount of data on drug prices and the limited options for linking these data to an individual record by residential area this study uses a new data set of cocaine and heroin prices from the drug enforcement agency that was linked to individual records by the office of applied studies at the substance abuse and mental health services administration leung and phelps 1993 provide a review of a number of recent alcohol demand studies the empirical literature provides considerable evidence that shows increasing the price of alcoholic beverages to decrease alcohol use alcohol demand studies generally estimate price elasticities for beer wine and spirits separately most studies employ aggregate data but a few use individual data studies using aggregate data find price elasticities for beer from about 2 to about 1 0 for wine from about 3 to about 1 8 and for spirits from about 3 to about 1 8 studies using individual data estimate price elasticities for beer from about 5 to about 3 0 for wine at about 5 and for spirits from about 5 to about 4 0 the few prior studies of the effect of decriminalization on marijuana use generally find that marijuana decriminalization has no effect on participation pacula 1994 thies and register 1993 dinardo and lemieux 1992 and johnston o malley and bachman 1981 all used samples of young people and found no effect of marijuana decriminalization

an analysis of the determination of deutsche mark french franc exchange rate in a discrete time target zone model following krugman 1 99 i recent models of exchange rates within a target zone have paid particular attention to the effect of the band on exchange rate expectations see for example miller and weller i 989 and froot and obstfeld i 989 the basic idea is that the band as long as it is credible has a stabilising effect on the exchange rate not only because the authorities when necessary would control the fundamentals in order to contain the movements of the exchange rate but also because expectations are influenced by the band these studiesby employing the continuous time stochastic setting of regulated brownian motion familiar from option pricing theory cf merton 1973 have also made a significant contribution to the theoretical analysis of the exchange rate the advantage of the continuous time framework is that in a multiperiod setting it makes the analysis of bands algebraically more manageable than a discrete formulation to illustrate the approach consider the following simple model from the literature

methods of estimation for models of markets with bounded price variation introduction there has been a considerable amount of literature on the estimation of models which are in disequilibrium see fair and jaffe 1972 fair and kelejian 1974 amemiya 1974 maddala and nelson 1974 goldfeld and quandt 1975 laffont and garcia 1977 bowden 1978 etc the main feature of these models is that there is a demand function a supply function a min condition and in some models a price adjustment equation the cornerstone equation in these models is q1 min d1 s where d t quantity demanded at time t s t quantity supplied at time t q t quantity transacted at time t this equation which says that the short side of the market always prevails separates the sample points into those belonging to demand and those belonging to supply one can classify the models into two categories those with sample separation known and those with sample separation unknown but the important point is that the min condition implies under the usual assumptions that the probability of equilibrium is zero for any t however there are many practical cases where some of the observations refer to equilibrium points and some to disequilibrium points this is because trading in many markets is confined to some limits on price and the disequilibrium occurs only when these limits are violated there are minimum wage laws in labor markets usury laws in credit markets and trading limits in commodity markets in all such cases the markets are sometimes in equilibrium and sometimes in disequilibrium the present paper discusses methods of estimation for models of such markets

the effect of arrests on the employment and earnings of young men many young men commit crime and many are arrested i estimate the effect of arrests on the employment and earnings of arrestees using a large longitudinal data set constructed by merging police records with ui earnings data i find that the effects of arrests are moderate in magnitude and rather short lived

labor income uncertainty skewness and homeownership a panel data study for germany and spain abstract in this paper we empirically investigate the effect of labor income uncertainty on the probability of homeownership in germany and spain this study is motivated by two facts firstly theoretical models tend to provide ambiguous results on this issue secondly previous empirical evidence focuses exclusively on the us housing market to carry out our analysis we propose more precise income uncertainty measures based on panel data labor income equations we observe that households facing high levels of income uncertainty display a preference for renting while those located in more positively skewed income distributions show a greater propensity for homeownership

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

are supply side drug control efforts effective evaluating otc regulations targeting methamphetamine precursors abstract enforcement efforts are the primary approach to reduce illegal drug use in the u s but evidence on their effectiveness is mixed we provide new evidence on the effectiveness of enforcement efforts by using rich administrative records and the staggered implementation of state laws targeting over the counter medicines that can be used to produce methamphetamine we estimate that the regulations reduced the number of methamphetamine laboratories operating in a state by 36 we find no evidence of changes in methamphetamine consumption or arrests for drug possession suggesting people were able to find methamphetamine produced elsewhere though we find evidence suggesting methamphetamine producers responded to regulation by obtaining precursors from neighboring states that lacked laws they do not appear to have systematically moved production to neighboring states this suggests that production shifted over national borders

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

sterling s erm credibility abstract this paper examines the recent credibility of the currencies participating in the erm since 1987 focusing on sterling in 1992 it shows that there is little market evidence that sterling s credibility was in serious doubt until mid september 1992

explaining the transition between exchange rate regimes this paper studies the transition between exchange rate regimes using a markov chain model with time varying transition probabilities the probabilities are parameterized as nonlinear functions of variables suggested by the currency crisis and optimal currency area literature results using annual data indicate that inflation and to a lesser extent output growth and trade openness help explain the exchange rate regime transition dynamics

the effect of drug prohibition on drug prices evidence from the markets for cocaine and heroin this paper examines the effect of drug prohibition on the black market prices of cocaine and heroin the paper examines the ratio of retail to farmgate price for cocaine heroin and several legal goods and it compares legal versus black market prices for cocaine and heroin the results suggest that cocaine and heroin are substantially more expensive than they would be in a legalized market but to a lesser degree than suggested in previous research

general trends in financing social housing in spain the affordability of houses has become one of the main problems for spanish families in recent decades the government has been actively involved in designing policies to solve this problem theoretically the characteristics of the housing stock and population always determine the type of public intervention in the spanish case there are some features that give rise to a particular approach which is slightly different from that of the rest of europe the following elements among other things have been taken into account when designing housing policies in spain the cultural importance of home ownership the evolution of prices the distinct condition of large cities such as barcelona and madrid the high proportion of mortgage burdens in relation to family income and the role played by the several levels of government in present spanish housing policy it is possible to identify at least two main trends both the 1992 95 scheme and the 1996 99 scheme seek to provide financial support basically to t

uncovering financial markets beliefs about inflation targets this paper exploits the term structure of interest rates to develop testable economic restrictions on the joint process of long term interest rates and inflation when the latter is subject to a targeting policy by the central bank in an empirical application to the canadian inflation target zone results indicate that financial markets perceive the band to be of approximately the same width as announced but asymmetrically distributed around the official target this finding suggests that in practice the monetary authority might attach different weights to positive and negative inflation deviations from the target copyright 2000 john wiley sons ltd

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

methods of estimation for models of markets with bounded price variation under rational expectations abstract the present paper extends the analysis in an earlier paper by maddala on estimation of disequilibrium market models with controlled prices to the case where the supply function depends on expected prices and expectations are formed rationally as suggested by muth

were the peseta exchange rate crises forecastable during target zone period during the 1990s several fixed or quasi fixed exchange rate systems collapsed currency crises have happened in both developed and emerging countries so it is necessary to forecast and avoid them however financial market crises have been extremely difficult to forecast economic agents expectations are nonobservable variables that cannot be ignored in the models in addition if it is required to study the european case during the 1990s the censored disposition of the exchange rate cannot be ignored either a discrete time target zones model is proposed where these aspects are taken into account it will be tested in a peseta deutsche mark exchange rate framework from june 1989 to december 1998 the results indicate differences between before and after the shift in band widths in august 1993

a structural model of the retail market for illicit drugs we estimate a model of illicit drugs markets using data on purchases of crack cocaine buyers are searching for high quality drugs but they determine drugs quality i e their purity only after consuming them hence sellers can rip off first time buyers or can offer higher quality drugs to induce buyers to purchase from them again in equilibrium a distribution of qualities persists the estimated model implies that if drugs were legalized in which case purity could be regulated and hence observable the average purity of drugs would increase by approximately 20 percent and the dispersion would decrease by approximately 80 percent moreover increasing penalties may raise the purity and affordability of the drugs traded by increasing sellers relative profitability of targeting loyal buyers versus first time buyers

a note on the estimation of limited dependent variable models under rational expectations abstract in this paper we derive the expressions for the expected price in a disequilibrium model with upper and lower limits on prices under rational expectation relaxing the assumption of perfect foresight made in earlier studies we prove the uniqueness of the solution to the rational expectations model and outline the estimation method and iterative procedure

analysis of exchange rate target zones using a limited dependent rational expectations model with jumps this article examines the exchange rate determination in a target zone regime when the bounds can be fixed for an extended period but are subject to occasional jumps in this case the behavior of the endogenous variable is affected by the agents expectations about both the occurrence and the size of the jump empirical results using data for the franc mark exchange rate provide support for the nonlinear model with time varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity

the term structure of interest rate differentials in a target zone theory and swedish data abstract the term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime for given time to maturity the interest rate differential is decreasing in the exchange rate and for given exchange rate the interest rate differential s absolute value and its instantaneous variability are both decreasing in the time to maturity devaluation realignment risks are incorporated and imply upward shifts of the interest rate differentials several implications of the theory are found to be broadly consistent with data on swedish exchange rates and interest differentials for the period 1986 1989

the demand for housing in spain an endogenous switching regression analysis housing demand in spain has been studied by using data disaggregated into primary and secondary housing demands it is found that demand for both types of housing area indeed related and that they are both considered necessities thus suggesting that their consumption ought to be modelled as a joint decision moreover it is found that traditional determinants of housing demand affect primary and secondary home demands differently these differences are attributable to the following economic rationales need for asset holdings diversifications relative high cost of home ownership versus rental in choice locations and differences in land demand intensity across regions in sum the findings suggest that policy makers in spain contrary to popular beliefs must consider secondary homes an integral part of households accommodation need

estimating the discount rate policy reaction function of the monetary authority this paper estimates a policy rule that explains the sign and the magnitude of the federal reserve s fed s discount rate changes it sets out a two sided type ii tobit model and develops a procedure for its estimation considering the discrete and censored nature of the changes the results suggest that the fed has conducted discount rate policy counter cyclically to influence output and to curb inflation and that the fed s response to policy indicators varies over monetary regimes furthermore consistency is found between the model prediction of the discount rate change and a classification based on whether the change is technical or non technical copyright 1999 john wiley sons ltd