how to beat the random walk an empirical model of real exchange rates abstract an econometric model is developed for all possible bilateral real exchange rates between the united states the united kingdom germany and japan for the period february 1977 to june 1987 we extend the standard dornbusch frankel type of models using an error correction approach with an observable macro economic determinant of the long run real exchange rate for the econometric analysis we develop an efficient estimator by pooling the data for all currencies contrary to previous empirical tests on the long run behaviour of real exchange rates we find a notable and significant mean reversion component

the norman conquest of 4 86 and the asset approach to the exchange rate in this paper the asset approach to the exchange rate is tested for the pound dollar exchange rate using quarterly data over the period 1921 to 1925 the out of sample forecasting performance of the asset approach is compared to a purchasing power parity model and random walk representation of the exchange rate the results are shown to be broadly supportive of similar tests conducted for the 1970s experience with floating exchange rates

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

the asset market model of the balance of payments and the exchange rate a survey of empirical evidence abstract the purpose of this survey is to assemble and evaluate empirical evidence on the asset market model of the balance of payments and the exchange rate in section i the distinctive features of asset market models are compared with earlier keynesian models particular attention is directed to the assumptions and predictions of the monetary model which is a special and well known case of more general asset market models and thereby serves as a useful benchmark for discussion in sections ii and iii the empirical evidence under fixed and flexible exchange rates is evaluated the paper is concluded in section iv with an assessment of our current state of knowledge

exchange rate overshooting the trade balance and rational expectations abstract this paper presents a model of exchange rate determination characterized by imperfect asset substitutability between domestic and foreign bonds sticky goods market prices and rational expectations the model is used to analyze the response of the exchange rate to a step change in relative money supplies the assumption of imperfect asset substitutability permits introduction into the analysis of trade flows which respond to relative price changes these flows create non monotonic exchange rate adjustments to long run equilibrium these non monotonic adjustments are consistent with rationality and may lead to short run undershooting or overshooting

tariff policy income distribution and long run structural adjustment in a dual economy a numerical analysis in this paper we examine the effects of unilateral tariff reduction in a dual economy kenya using a dynamic computable general equilibrium model the major differences from past research are that tariffs are distinguished by end use of the imports and income distribution effects are analysed extensively without relying on either increasing returns to scale or perfect substitutability between domestic and imported goods the aggregate results are much stronger than in previous studies especially if tariff reduction is restricted to intermediate goods only the income distribution effects are regressive as the poorer classes do not consume imported goods or use them in production however after 9 or 10 years the trickle down effect starts to take effect

empirical tests of the monetary approach to exchange rate determination there has been much discussion as to whether or not the turbulence in foreign exchange rates that has existed since 1973 is consistent with an efficient foreign exchange market this empirical question can only be tested relative to an equilibrium exchange rate model in this paper we conduct variance tests and efficient markets tests of three different models of exchange rate determination the equilibrium rational expectations model ere the currency substitution model cs and dornbusch s exchange rate dynamics model erd we find that the uncertainty in realised exchange rate movements can only be explained by the erd model and that actual exchange rates could have been predicted in a manner that is inconsistent with the efficient markets hypothesis

historical frontiers and the rise of inequality the case of the frontier of granada the authors acknowledge financial support from the spanish ministry of science and technology grant eco2009 13357 the spanish ministry of economics and competitiveness grant eco2012 35430 and the andalusian council of innovation and science excellence project sej 4546

endogenous risk in a portfolio balance rational expectations model of the deutschemark dollar rate abstract a portfolio balance model of the dm s rate under rational expectations is specified in which systematic risk induced deviations from uncovered interest parity are allowed this leads to a reduced from containing a potentially time varying risk premium which we approximate and estimate using an arch in mean approach the maximum likelihood estimator and a lagrande multiplier test for arch in mean are developed the estimation results indicate a small but non negligible time varying risk premium

the monetary approach to the exchange rate in this paper the monetary approach to the exchange rate is re examined for three key currencies using data for the recent experience with flexible exchange rates two important findings are reported in the paper first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analysing the long run exchange rate second we find inter alia that the proportionality of the exchange rate to relative money supplies is valid for the german mark

relative price changes and exchange rate determination with slow price adjustment an empirical analysis the general purpose of this paper is to analyze empirically sectoral price adjustment in the exchange rate adjustment process relative price changes may occur within a sector between countries and within a country between sectors our main objective is to test the hypothesis that both kinds of relative price changes occur in the adjustment process to disturbances in money demand and supply in particular we expect that the relative prices among goods of different tradedness ranging from perfectly traded to non traded goods are affected by such disturbances our second objective is to test empirically whether the nature of exchange rate adjustment is affected by the average speed of sectoral price adjustment towards the law of one price and whether the exchange rate overshoots purchasing power parity after monetary disturbances we build on a model developed by dornbusch 6 and extended by mussa 17 they argue that the exchange rate may overshoot its purchasing power parity level after monetary disturbances as a result of slow price adjustment in the market for domestically produced goods the price of imported goods follows the law of one price we modify the dornbusch mussa model to distinguish between domestically produced goods for which the law of one price may hold to different degrees relative price changes in the adjustment process to monetary disturbances have gained

the economic cost of the cap revisited this paper reports estimates of the domestic economic cost of the common agricultural policy cap from computable general equilibrium simulations which incorporate imperfect competition in the non primary sectors as well as explicit modelling of agricultural protection imperfect competition is characterised to include hierarchical preferences addressing the notion of varietal diversity as an important decision variable in consumer behaviour results indicate that repeal of the cap would reduce varietal diversity in food processing in the eu causing utility losses however these would be countered by positive varietal effects in other sectors and by strong allocative effects the net cost of the cap to the eu is estimated at 0 2 of gross domestic product gdp for an individual member state the cost can be considerably larger as with the uk where the estimate is above 0 5 of gdp

inequality in landownership the emergence of human capital promoting institutions and the great divergence this paper suggests that inequality in the distribution of landownership adversely affected the emergence of human capital promoting institutions e g public schooling and thus the pace and the nature of the transition from an agricultural to an industrial economy contributing to the emergence of the great divergence in income per capita across countries the prediction of the theory regarding the adverse effect of the concentration of landownership on education expenditure is established empirically based on evidence from the beginning of the 20th century in the u s

spurious tests and sign reversals in international economics empirical tests of numerous theories in international economics e g the monetary explanation of the balance of payments exchange rate the portfolio balance model of capital flows purchasing power parity and covered interest rate arbitrage usually impose the subtractive linear constraint that corresponding foreign and domestic explanatory variables have equal but opposite effects on the dependent variable rasulo and wilford 15 investigate empirically the bias in general caused by such a restriction in monetary models of the balance of payments exchange rate 2 what is not recognized however is the peculiar nature and potential severity of the bias including sign reversals which results from subtracting as opposed to aggregating explanatory variables and the wide range of tests in international economics which may be spurious because of this type of bias

the relationship between bilateral and multilateral models of exchange rates abstract bilateral specifications of exchange rate models are expedient and widely used but their appropriateness in a multilateral world has not been examined formally this paper demonstrates that bilateral specifications are appropriate if i cross exchange rates are consistent ii multilateral weights are symmetric iii exchange rates are linear functions of domestic and foreign variables and iv coefficients on corresponding domestic and foreign variables are equal but opposite in sign conditions i iii and iv are common assumptions and evidence suggests that condition ii is met in approximate terms among most of the g 7 countries with the exceptions involving canada and japan

integrated water and economic modelling of the impacts of water market instruments on the south african economy a static computable general equilibrium model of south africa is adapted to compare new taxes on water demand by two industries namely forestry and irrigated field crops comparisons are made with respect to both the short and the long run in terms of three target variables namely i the environment ii the economy and iii equity since the taxes on the two industries do not raise the same amount of revenue the target variables are calculated per unit of real government revenue raised by the new taxes also referred to as the marginal excess burdens of the taxes the model results are robust for moderate values of the water elasticity of demand in the two industries in both the long and the short run the tax on irrigated field crops performs better in terms of all three the target variables in the short run in the long run the tax on irrigated filed crops is better in terms of water saving but reduces real gdp and the consumption by poor households

some evidence in favor of a monetary rational expectations exchange rate model with imperfect capital substitutability the authors develop and test a monetary rational expectations model of the swiss u s exchange rate two salient features of the model are the assumption that domestic and foreign currency denominated assets are imperfect substitues and that purchasing power parity need not hold the authors fail to reject overidentifying restrictions imposed on the model by the rational expectations hypothesis their point estimates especially for the income elasticity of the demand for money are plausible finally the model outperforms the random walk model established as a benchmark by r a meese and k s rogoff 1983 copyright 1992 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

is the sticky price assumption reasonable for exchange rate models abstract the testable implications of sticky price exchange rate models are discussed the empirical examples suggest that the predetermined or sticky price assumption employed in recent asset models of exchange rate determination appears to be appropriate for germany japan the united states and the united kingdom

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

a computable general equilibrium model of energy economy and equity interactions in pakistan this article introduces a computable general equilibrium model of the pakistan economy some major extensions to a standard neoclassical model have been made to capture the interlinkages between economy energy and equity the model has been designed mainly to carry out policy oriented short term studies especially for the energy sector an illustrative application of the model shows its capability to provide detailed information which are useful in analysis of a policy issue

exchange rate dynamics an empirical investigation this paper estimates a reduced form exchange rate equation whose estimates are used to address questions on exchange rate overshooting intermediate run exchange rate dynamics and long run proportionality relationships between relative money supplies and exchange rates based on swiss u s data from the period 1973 79 the major findings are that following a monetary shock there is short run exchange rate overshooting by a factor of about two and that subsequent exchange rate adjustments to a new long run equilibrium take longer than 2 years and exhibit nonmonotonic patterns

foreign exchange market interventions and the exchange rate in the long run this article examines whether foreign exchange market interventions conducted by the bank of japan are important for the dollar yen exchange rate in the long run we rely on a re examination of the empirical performance of a monetary exchange rate model this is basically not a new topic however we focus on two new questions first does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long run relationship between the exchange rate and its fundamentals second do forex interventions support the adjustment towards a long run equilibrium value our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long run relationship to a significant degree furthermore forex interventions increase the speed of adjustment towards long run equilibrium in some periods particularly in periods of coordinated forex interventions our results indicate that only coordinated inter

the singapore dollar tests of the efficient markets hypothesis and the role of news in this paper the efficient markets hypothesis emh is tested for the singapore dollar over the period from january 1978 to march 1983 the tests are conducted using the relationship between the spot foreign exchange rate and the corresponding lagged forward foreign exchange rate the tests consist of an unbiasedness test an error orthogonality test and a test of the impact of news in the singapore foreign exchange market the results indicate a certain degree of independence in the implementation of monetary policy for the singapore monetary authority

the canadian us dollar exchange rate a test of alternative models for the seventies abstract three basic models of bilateral exchange rate determination are evaluated on the basis of the canadian experience in the 1970s we examine wealth effects and incorporate consistent expectations in the traditional models based on reduced form equations empirical results reject a simple monetary approach and the stickly price asset market model but concur with a version of the stock flow model of exchange rate determination

the real interest differential model after 20 years abstract two decades ago frankel reported empirical results favoring the dornbusch overshooting model despite an important theoretical and empirical critique by driskill and sheffrin frankel s classic empirical results spawned a huge literature we attempt to replicate the frankel and the driskill and sheffrin results we also offer an update and an extended critique of their work while specialists in international finance generally accept that the initial promise of frankel s real interest differential model has not been realized we believe that many will be surprised nevertheless by our bleak findings

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

factor endowments inequality and paths of development among new world economies whereas traditional explanations of differences in long run paths of development across the americas generally point to the significance of differences in national heritage or religion we highlight the relevance of stark contrasts in the degree of inequality in wealth human capital and political power in accounting for how fundamental economic institutions evolved over time we argue moreover that the roots of these disparities in the extent of inequality lay in differences in the initial factor endowments dating back to the era of european colonization we document through comparative studies of suffrage public land and schooling policies systematic patterns by which societies in the americas that began with more extreme inequality or heterogeneity in the population were more likely to develop institutional structures that greatly advantaged members of elite classes and disadvantaging the bulk of the population by providing them with more political influence and access to economic opportunities the clear implication is that institutions should not be presumed to be exogenous economists need to learn more about where they come from to understand their relation to economic development our findings not only contribute to our knowledge of why extreme differences in the extent of inequality across new world economies have persisted for centuries but also to the study of processes of long run economic growth past and present

the consequences of persistent inequality on social capital a municipal level analysis of blood donation data this paper advances the hypothesis that persistent inequality affects cultural traits and undermines social capital we use blood donation data at the local level in southern spain to document that indeed persistent inequality as measured by land inequality negatively affects blood donation which indicates that it harms social capital this evidence sheds new light into the debates on the consequences of inequality and the determinants of culture

new developments in applied general equilibrium analysis 1 introduction john piggott 2 hidden challenges in recent applied general equilibrium exercises john whalley 3 the measurement of waste and welfare in applied general equilibrium models erwin diewert 4 sensitivity analysis for linearized computable general equilibrium models adrian pagan and john shannon 5 the european economic community general equilibrium computations and the economic implications of membership john spencer 6 economic interdependence in the pacific basin a general equilibrium approach glenn harrison and larry kimbell 7 regional impacts of tariffs in canada preliminary results from a small dimensional numerical general equilibrium model richard jones john whalley and randall wigle 8 agricultural protection and market insulation policies applications of a dynamic multisectoral model tony chisholm and rodney tyers 9 a general equilibrium model of taxation that uses micro unit data with an application to the impact of instituting a flat rate income tax joel slemrod 10 consumption taxes foresight and welfare a computable general equilibrium analysis charles ballard and larry goulder 11 special purpose versions of a general purpose multisectoral model tax issues and the australian wine industry tony meagher brian parmenter russel rimmer and ken clements 12 general equilibrium analysis of economic policy dale jorgenson and daniel slesnick 13 the welfare cost of interest rate ceilings in developing countries a general equilibrium approach hasan imam 14 general equilibrium with price rigidities trien nguyen 15 short run macroeconomic closure in applied general equilibrium modelling experience from orani and agenda for further research russel cooper keith mclaren and alan powell 16 new developments in the application of general equilibrium models to economic history john james

unstable money demand and the monetary model of the exchange rate in this paper the authors investigate the importance for the monetary model of exchange rate determination of j frankel 1979 of allowing unrestricted dynamics and of accounting for shifts in the demand for money due to financial innovation based on estimation and simulation results for the canada u s bilateral exchange rate over the 1970 85 period the aut hors find strong evidence in favor of a generalized approach to dynamic specification but find that the shif t adjustment of official money supply data has only minor implications for the empirical results moreover neither modification is sufficient to generate a monetary model that is well supported by the data

econometric approaches to empirical models of exchange rate determination abstract this paper identifies four principal econometric approaches to the estimation and testing of asset market models of exchange rate determination the traditional static reduced form approach the error correction and co integration dynamic reduced form approaches the simultaneous equations approach and large scale multi equation macroeconometric simulation models each of these econometric approaches is evaluated with respect to its theoretical validity and the comparative properties of the empirical results obtained this leads to the conclusion that although there may be little to choose between the different theoretical exchange rate models there may be grounds for favouring a multi equation simultaneous estimation procedure for this class of models

on empirical exchange rate models what does a rejection of the symmetry restriction on short run interest rates mean abstract the purpose of this paper is to interpret the well documented rejection of reduced form symmetry restrictions on short run interest rates and to show that such a rejection implies a rejection of rational expectations re and or uncovered interest rate parity uip the paper also shows that if this rejection is due to failure of uip it cannot be explained by the presence of a standard risk premium in order to provide for well specified alternatives the paper explores the reduced form implications of imperfect capital mobility and a recent alternative to re called the theories consistent expectations framework

exchange rate overshooting in turkey abstract exchange rate overshooting is said to be a short run phenomenon however when a currency like turkish lira depreciates from 13 to almost 400 000 lira per dollar over three decades one wonders whether it has overshot its long run value as well in this paper we employ a relatively new method of error correction modeling to show how one could test for overshooting in the short run as well as in the long run

inequality does cause underdevelopment insights from a new instrument consistent with the provocative hypothesis of engerman and sokoloff 1997 2000 this paper confirms with cross country data that agricultural endowments predict inequality and inequality predicts development the use of agricultural endowments specifically the abundance of land suitable for growing wheat relative to that suitable for growing sugarcane as an instrument for inequality is this paper s approach to problems of measurement and endogeneity of inequality the paper finds inequality also affects other development outcomes institutions and schooling which the literature has emphasized as mechanisms by which higher inequality lowers per capita income it tests the inequality hypothesis for development institutional quality and schooling against other recent hypotheses in the literature while finding some evidence consistent with other development fundamentals the paper finds high inequality to independently be a large and statistically significant barrier to prosperity good quality institutions and high schooling

tests of the different variants of the monetary model in a developing economy malaysian experience in the pre and post crisis periods this study examines the validity of four different variants of the monetary model of exchange rate determination for malaysia covering both the pre and post crisis periods using the vector error correction models the findings demonstrate that for both periods the variables used are cointegrated tests tend to suggest that of the four variants of monetary model the sticky price model holds in both periods and the flexible price model holds only in the post crisis period the proportionality between the exchange rate and relative money does not hold in any period the plotted actual and fitted exchange rates for both sub samples show that the models are able to track the actual exchange rate trend quiet well

the monetary approach to the exchange rate revisited 1984 the monetary approach to the exchange rate revisited applied economics vol 16 no 5 pp 771 782

on the effects of sterilized intervention an analysis of weekly data abstract as the recent empirical studies surveyed here illustrate it is very difficult to demonstrate that the exchange rate risk premium depends through a portfolio balance channel on the currency composition of outside assets the existence of a portfolio balance effect is a necessary condition for sterilized intervention to be a genuinely independent tool of monetary policy this paper studies u s canadian data and attempts to improve on earlier studies by using higher frequency weekly data and by implementing an appropriate instrumental variables technique 2s2sls however we still fail to detect evidence of a portfolio balance effect

expectations and exchange rate dynamics after a decade of floating abstract dornbusch s model of expectations and exchange rate dynamics has been a theoretical success and an empirical failure the premise underlying this paper is that the price and exchange rate dynamics inherent in his model cannot be captured by single equation methods to capture these dynamics we estimate dornbusch s model using constrained maximum likelihood methods which incorporate cross equation restrictions derived from the structural equations and assumption of rational expectations our central result is that the estimation of dornbusch s model is much more successful than single equation methods have led us to believe

how often are propositions on the effects of regional trade agreements theoretical curiosa this paper uses computational techniques to assess whether or not various propositions that have been advanced as plausible in the literature on regional trade agreements may actually hold the idea is to make probabilistic statements as to whether propositions of interest might hold rather than to restrict assumptions so they unambiguously hold our aim is to blend theory and numerical simulation and go beyond the ambiguous analytically derived propositions that dominate the theoretical literature so as to assess the likelihood of propositions holding for particular model specifications

an empirical investigation into the causes of failure of the monetary model of the exchange rate the purpose of this paper is to attempt to provide measures of the relative importance of the principal causes of the failure of the monetary model of the exchange rate secondly the random walk hypothesis for the exchange rate is tested the methodology employed is new and has wide application elsewhere it involves explicitly modelling the misspecification by time series techniques the results confirm the importance of the breakdown of the ppp assumption but they also show that misspecification of the money market is equally important the results further show that lagged information can also improve upon the random walk model of the exchange rate

cointegration and exchange rate dynamics abstract we utilize systems methods of estimation which impose the unit root structure to estimate both the long run equilibrium relationship the cointegrating vector and the short run dynamics of an open economy macroeconomic model in which the exchange rate and the domestic price level are endogenously determined for the united states the model is estimated over the flexible exchange rate period and over two sub periods chosen by structural change tests on the exchange rate both rational and theories consistent expectations are utilized the models with theories consistent expectations outperform those with rational expectations

a takayama judge activity model applied to the analysis of allocation and trade in sweden the purpose of this article is to formulate a numerical general equilibrium model of the swedish economy and to use the model for a quantitative evaluation of the pattern of comparative advantages the model is essentially a leontief type of input output model extended with linear demand functions for final commodities foreign trade activities and capacity and resource constraints due to the linearity the model can easily be reformulated and solved as a quadratic programming model the evaluation of the pattern of comparative advantages of the swedish economy is carried out as an analysis of the choice between inport and domestic production in a temporary equilibrium framework with exogenously given world market prices exports and domestic production capacities

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

exchange rate dynamics abstract dornbusch and stock flow models are tested using time series data on the swiss u s exchange rate efficient estimates of the models are derived and the overidentifying restrictions tested in each case the restrictions implied by the dornbusch model are rejected but those of the stock flow model are not purchasing power parity in the long run is a feature of the stock flow model

is it signalling exchange intervention and the dollar deutschemark rate abstract the portfolio balance channel for sterilised intervention is tested by examining the effects of changes in relative asset supplies on the dollar deutschemark rate during the 1980s in contrast to previous studies we control for any signalling effects of central bank intervention and find a weak but statistically significant portfolio balance influence on the exchange rate