black market exchange rate and the productivity bias hypothesis abstract previous studies that tested the productivity bias hypothesis employed the official nominal exchange rate in constructing the real rate hence in testing the productivity bias hypothesis in this paper we show that if official real exchange rate does not support the productivity bias hypothesis the real black market rate does this conjecture is tested by using data from chile colombia and costa rica

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

knowledge proximity and r d exodus abstract we explore not only how technological leaders and laggards react to agglomeration but within an agglomeration we look at how the relative presence of other leaders laggards and foreign firms affects these firms existing literature argues that technological leaders experience net knowledge outflows and are therefore losers in agglomerations however we do not know if they avoid locations with laggards more so than locations with leaders or vice versa thus we examine how the relative presence of each affects leaders location decisions for technologically lagging firms we argue they will prefer locations with leaders over locations with laggards we further posit that an increasing presence of foreign firms will have a particularly detrimental effect on technologically leading domestic firms as these lose out in the contest for talent contextualized in an emerging market with weak intellectual property rights protection we examine whether these concerns about knowledge spillovers and competition for talent prompt firms to close their r d facilities or remain open using 5798 observations of r d laboratories in india during 2003 2011 we find that while technologically leading firms are more likely to close their r d facilities as the presence of other domestic labs increases laggards are less likely to do so these findings suggest concerns over knowledge spillovers are present especially on the part of technologically leading firms moreover leaders are more concerned by the presence of other leaders technologically lagging firms by contrast are less likely to close r d facilities in the face of these concerns and will prefer staying near leaders over laggards finally we find evidence of foreign firms crowding out domestic technological leaders but not laggards in the competition for talent

instability in short run adjustments to purchasing power parity results for selected latin american countries according to the theory of purchasing power parity ppp there is a tendency toward equalization of different countries price levels in common currency terms however even assuming that a long run ppp relationship exists its relevance for policy makers in less developed countries ldcs will depend not only on the average speed of adjustment toward this relationship but also on the variability of such short run adjustments we present evidence of extreme volatility in adjustments toward ppp for four latin american countries based on time varying parameter estimates of error correction models

new blood as an elixir of youth effects of human capital tenure on the explorative capability of aging firms the relationship between firm age and innovation has been an enduring topic of interest we contribute to this research by studying how the effect of firm age on the quality of explorative and exploitative innovations is affected by the firm specific and industry tenure of the talent resources employees that the firm utilizes we start with the baseline predictions that firm age is related to the development of better exploitative innovations and worse explorative innovations however the tenure of employees intervenes in these relationships by way of bringing in new knowledge mental models and beliefs we predict that longer firm specific and industry tenure of employees enhances the positive effect of firm age on the quality of exploitative innovations while amplifying the negative effect of firm age on the quality of explorative innovations in addition for both the baseline and the moderating effect we also formulate a prediction comparing the quality of explorative innovations with those of

relative price determination in the medium run the influence of wages productivity and international prices this work explores three critical assumptions of the balassa samuelson productivity differential model for the short and medium run wage equalization competitive labor markets and purchasing power parity the data reveal violations in these assumptions for france germany japan the u k and the u s significant wage and unit labor cost differentials exist across industries and traded and nontraded sectors and these differentials do not diminish over time the findings are consistent with the presence of industry and or sectoral specific human capital

determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

a tale of tax policies in open economies recent financial crises in europe as well as the periodic battles in the u s over the debt ceiling point to the importance of fiscal discipline among developed countries this paper develops an open economy model calibrated to the u s and a subset of the emu to evaluate the impact of various permanent tax changes the first set of experiments considers a targeted one percentage point reduction in the government deficit to gdp ratio through raising one of the consumption tax the labor income tax or the capital income tax in terms of welfare the consumption tax is found to be the least costly of the tax increases a second set of experiments looks at deficit neutral tax changes partially replacing the capital income tax with either a higher labor income tax or higher consumption tax and partially replacing the labor income tax with an increased consumption tax reducing reliance on capital income taxation is welfare enhancing although it leads to short term losses reducing labor income taxation improves international competitiveness and is welfare improving

excess volatility of real exchange rates in the ems some evidence from structural vars this paper argues that the effectiveness of the exchange rate mechanism erm of the european monetary system ems should be gauged by its impact on the monetary component of real exchange rate variability nominal and real shocks are separated using a bivariate structural var applied to real exchange rate data of the six original member countries participating in the erm and a control group consisting of britain and the united states the findings suggest that monetary shocks have been an important source of real exchange rate variability and that the erm has been successful in reducing the incidence of monetary shocks across its member countries prior to the ems currency crises of 1992 93 while being less successful thereafter

a reexamination of balassa s productivity bias hypothesis rency by ri s the price level in country i by pi and the price level in the united states by pu s the ppp theory postulates that ri u s pi pu s many studies have tried to verify whether exchange rates follow the path outlined by the ppp equation the empirical results at best are inconclusive for example j a frenkel tested the ppp by drawing data from the 1970s and showed that the ppp failed on the other hand n davutyan and j pippenger criticized frenkel s work and reversed his conclusion 2 both studies used ordinary least squares and two stage least squares methods even recent studies that have used a relatively modern econometric technique cointegration analysis have mostly rejected the ppp 3 several reasons have been given in the literature for the failure of the ppp or deviation of the ppp based exchange rates from equilibrium exchange rates including lack of free trade existence of transaction costs existence of nontradables simultaneity problems different weights used in constructing different national price indexes money and asset prices and real factors or real variables among the real variables the productivity differential between two countries has received most of the attention in the literature if we denote the market determined equilibrium exchange rate by re and the ppp based rate by pi pu s following the literature we

sources procedures and microeconomic effects of innovation fabio arcangeli paul david frank engelman christopher freeman massimo moggi richard nelson luigi orsenigo nathan rosenberg michele salvati g n von tunzelman two anonymous referees and the participants at the meeting of the committee on distribution growth and technical progress of the italian national research council cnr rome november 16 1985 have helped with various redraftings a particularly grateful acknowledgment is for the insightful and patient help of moses abramovitz this work has been undertaken at the science policy research unit spru university of sussex as part of the research program of the designated research centre sponsored by the economic and social research council esrc earlier support to the research that led to this paper by the italian national research council cnr is also gratefully acknowledged the statistical research has been undertaken with the assistance of stephano brioschi ilaria fornari and giovannu prennushi

the pricing of forward contracts for foreign exchange this paper investigates the nature of observed deviations from the unbiased expectations hypothesis in the forward foreign exchange market if these deviations are due to risk premia then the same premia should be observed in nominal bonds denominated in different currencies this condition imposes testable restrictions on the parameters of a multivariate regression model the empirical results are consistent with a world in which time varying risk premia cause the observed deviations from unbiased expectations

the response of real exchange rates to various economic shocks substantial fluctuations in real exchange rates i e deviations from purchasing power parity ppp which closely mirror movements in nominal rates have been one of the most notable international economic events since the breakdown of the bretton woods system dornbusch s disequilibrium theory 9 which presumes different speeds of adjustment in assets and goods markets offers an explanation for temporary deviations from ppp only models assuming ppp as a long run relationship have not been successful in interpreting the movements of the real exchange rates although studies conducted for countries experiencing high or hyper inflation provide evidence favoring ppp 42 30 29 the empirical evidence on ppp for industrialized low inflation countries is not generally favorable 1 this is consistent with the view that ppp may hold better in high inflation countries where the disturbances to their economies are mostly monetary in origin 31 123 24 but ppp may not hold well when the real disturbances which change equilibrium relative prices dominate statistical evidence indicates that the real exchange rates of many countries are likely to be nonstationary or have long memory that is changes in the real values of many currencies tend to persist for very long period of time this persistence implies that fluctuations in the real exchange rates are largely due to long lasting effect of real disturbances after revealing that ppp does not hold as a long run concept for several exchange rates flynn and boucher 12 121 suggest that one possible explanation is that there are time varying real factors that are omitted from the ppp relationship there are several well established reasons why the real exchange rates may change in response to real disturbances in the first place permanent exogenous shocks to the tradable sector of the economy call for changes in competitiveness for instance a rise in the real price of oil will worsen the balance of trade position of a net oil importing country and therefore call for a real depreciation of the currency of the country in order to improve its competitive position 32 second when countries are growing at different rates productivity bias will typically result in

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

international portfolio nondiversification and exchange rate variability abstract incomplete international portfolio diversification is implied by an equilibrium models of exchange rates with nontraded goods the model can also explain the greater correlation between consumption and income within a country than between consumption across countries nontraded goods make more stringent the elasticity conditions required to explain exchange rate variability resulting from current productivity disturbances though not from disturbances to fiscal policies or the prospective return to investment the model is also consistent with international real interest rate differentials changes over time in the current account and relative wealth across nations and observed time series properties of exchange rates

tacitness learning and international expansion a study of foreign direct investment in a knowledge intensive industry this paper examines the impact of knowledge tacitness on a firm s propensity to establish plants in foreign rather than domestic locations our predictions build on knowledge based internalization and evolutionary theories of foreign direct investment we argue that the tacitness of technology has an inverted u effect on the propensity to undertake foreign investment we also expect that as a firm learns about a technology it will become more likely to make foreign investments we examine two forms of learning that which accumulates as a function of the number of plants previously built by the firm transfer based learning and that which accumulates as a function of time since the firm started using a technology time based learning we investigate empirical effects in a sample of investments in the memory segment of the semiconductor industry our predictions about the curvilinear effect of tacitness are supported the results also suggest that learning is a matter of taking time to become acquainted with the use of the technology and of gaining experience through successive foreign plant investments the study adds to the understanding of the effects of knowledge on corporate expansion

dynamics of intra ems interest rate linkages anumber of previous studies have questioned the dominant role of germany within the european monetary system ems these conclusions are often based on empirical findings that the interest rates of ems member countries are not affected by german interest rates even in the long run in this study we demonstrate that intra ems interest rate differentials vis a vis germany exhibit mean reverting behavior characterized by long memory dynamics in a system incorporating six ems countries and one non ems country the u s a estimates from a fractional error correction model suggest the presence of short run intra ems monetary policy interdependencies but validate the german dominance hypothesis in the long run

capital flows investment and exchange rates abstract this paper incorporates international capital flows into a two country monetary general equilibrium model of asset prices with investment and production we calculate theoretical covariances between investment the current account the exchange rate and the terms of trade these covariances depend upon the coefficient of relative risk aversion the magnitude and sign of a country s net international indebtedness other properties of tastes and technologies and the stochastic processes on disturbances to productivity and monetary growth rates international capital flows arise from changes in world wealth and its relative composition in foreign and domestic assets

the credibility of a fixed exchange rate how reputation is gained or lost we examine the interest rate differential between each of the four largest nordic countries and the countries of their foreign currency baskets on monthly data for the period 1978 79 92 the interest rate differential is assumed to reflect devaluation expectations which partly depend on government reputation we investigate the formation of the reputation of the government assuming that reputation is updated using bayes s formula it is shown theoretically that when there is no devaluation the improvement in government reputation is larger the larger the prior devaluation expectations for norway the evidence gives support to this assertion

international evidence on tradables and nontradables inflation abstract using 1970 1985 sectoral data for the oecd we find that inflation in nontradable goods exceeds inflation in tradables we identify a demand shift towards nontradables and faster growth of total factor productivity in the tradable goods sector as the prime causes of the differential inflation in addition disinflation attempts and the exchange rate regime appear to have exerted significant influence on the relative inflation rate

on the equilibrium yen dollar rate this paper presents a definition of the long run equilibrium exchange rate that emphasizes the role of supply factors in addition to the more traditional price differential variables using this definition we estimate the long run equilibrium yen dollar rate during the period of 1973 87 this calculation demonstrates that supply factors are in fact very important determinants of the long run movement of the exchange rate despite the central role the exchange rates play in the economy economists seem to doubt their own ability to explain let alone predict exchange rate movements the reason is that in many cases structural exchange rate equations do not significantly outperform various other models that do not appeal to economic theory such as the random walk see for example richard meese and kenneth rogoff 1983 while we also share this pessimism concerning our ability to forecast exchange rates in the short run intradaily to monthly or quarterly we argue that it is possible to reasonably explain if not predict long run movements the long run equilibrium rate is most often thought to be determined by purchasing power parity ppp which tends to focus only on price differentials medium run divergences of the exchange rate from the long run equilibrium are therefore commonly identified with fluctuations in the inflation adjusted real exchange rate this paper demonstrates however that the simple ppp is unsatisfactory because it emphasizes only the inflation differential in the more elaborated theory of purchasing power parity of course the potential importance of supply side real factors as critical determinants of the exchange rate has been well recognized see for example john m keynes 1923 rudiger dornbusch stanley fischer and paul a samuelson 1977 alan stockman 1980 nevertheless in empirical applications and policy discussions these supply side real factors have been curiously ignored to our knowledge an exception is david hsieh 1982 the main point of this paper is to show that these supply side factors actually have been very important determinants of the yen dollar rate over the period of 1973 to 1987

why real interest rates cost of capital and price earnings ratios vary across countries abstract this paper examines how productivity changes affect real rates of return and price earnings ratios in a small open economy the model provides conditions under which increased productivity in a country s traded goods sector causes prices of non traded goods to increase relative to the price of traded goods under these conditions real rates of interest decline and the production of certain non traded durable goods such as capital equipment and housing immediately increase this overconstruction has two effects first the increase in capital relative to labor in these sectors increases the marginal product of labor and hence immediately causes an increase in wages and the prices of non traded goods second an oversupply of capital goods and housing depresses their rental rates in the current period thereby increasing their price to rental ratios or equivalently their price earnings ratios

focusing firm evolution the impact of information infrastructure on market entry by u s telecommunications companies 1984 1998 organization structure acts as a lens on the environment gathering information and shaping its flow through a firm to inform managers choices this shaping of information flow happens through an organization s operating units which selectively process information from the environment and through the links between them which pass information between units we explore the relationship between this information infrastructure and firm strategy using structure and service information from the eight largest telephone service providers in the united states from 1984 to 1998 we find that firms with more units that scan areas of opportunity are more likely to enter a market while firms with more units that scan nonfocal areas are less likely to enter the market we also find that personnel links between units and the corporate level of the firm often constrain entry to new markets by dampening a unit s appetite for risk personnel links between operating units on the other hand can make a firm more likely to enter new markets particularly when the cooperating units combine different sets of information thus a firm s information infrastructure plays a dual role in shaping firm evolution leading toward some paths and away from others

are real exchange rates nonstationary evidence from a panel data test it is well documented that real exchange rates between the united states and many industrialized countries in the post bretton woods period are integrated this result implies that purchasing power parity ppp does not hold even as a long run relationship this paper demonstrates that the failure to reject the unit root hypothesis may result from the low power of existing univariate test procedures i test for unit roots in real exchange rates by employing a more powerful panel based procedure using both cpi and wpi real dollar exchange rate data i strongly reject the null hypothesis of a unit root my results provide overwhelming support for the long run ppp under the current float copyright 1996 by ohio state university press

the relative price of nontraded goods and sectoral total factor productivity an empirical investigation this paper examines the relationship between the relative price of nontraded goods and sectoral total factor productivities tfps in the context of the balassa samuelson model with perfect capita

systematic movements in real exchange rates in the g 5 evidence on theintegration of internal and external markets abstract many recent studies have documented the random behavior of real exchange rates this paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component the sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy any differences between real exchange rates which develop moreover can be explained almost entirely by productivity differentials at least in the long run this paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries

a quantitative reassessment of the purchasing power parity hypothesis evidence from norway and the united kingdom summary annual data from norway and the united kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity ppp doctrine the simple version of the ppp relationship is supported by the data only if different short run dynamics during a floating rate period 1914 1928 is allowed for two sets of factors were found to be important in amending the simple ppp model these were short run cyclical variables affecting the adjustment towards the ppp equilibrium relationship and long run structural factors such as productivity and terms of trade within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected

letting rivals come close or warding them off the effects of substitution threat on imitation deterrence a resource based theory postulate is that firms must defend their resources against imitation to sustain competitive advantage however by deterring imitation firms may induce rivals to create su

incumbent entry into new market niches the role of experience and managerial choice in the creation of dynamic capabilities increasingly technological innovation creates markets for new products and services to survive firms must respond to these new markets how do firms develop the capabilities necessary to succeed in such changing conditions some suggest that experience with previous entry builds such capabilities others suggest that capabilities arise from experience producing and selling to existing markets the role of managers is also debated some argue that experience with existing markets causes managers to miss entry opportunities others argue that managers enter new markets when their firm possesses the experience needed to compete effectively in this paper we explore these issues by investigating entry patterns in the disk drive industry we investigate the effect of experience in existing markets and experience with previous market entry we find that experience in previous markets increased the probability that a firm would enter a new market we show that this experience had greater value if the firm entered the new market we infer that managers chose to enter these markets to obtain this increase in value

real and nominal exchange rates in the long run an empirical investigation abstract this paper reports on econometric tests of the hypothesis that purchasing power parity holds as a long run relationship using data on eight industrialized countries during the flexible exchange rate period the empirical work proceeds by i testing whether nominal exchange rates and relative price levels are co integrated and ii conducting impulse response analysis of long run exchange rate and relative price level changes to explain the data keynesian models suggest that shocks during the estimation period were due principally to exogenous shifts in aggregate demand while equilibrium models suggest that monetary factors have been relatively more important

the balassa samuelson hypothesis in the developed and developing countries revisited abstract this paper aims at examining the balassa samuelson bs hypothesis in 20 developed and 20 developing countries respectively given the cross sectional dependence and structural breaks we develop a new panel cointegration technique which allows for multiple heterogeneous unknown breaks and non stationary factors the empirical results show that the bs hypothesis holds in the developed countries implying that higher productivity growth leads to a real appreciation but they are cointegrated up to a number of cross sectional unobserved stochastic trends as factors are non stationary however we find little evidence to support the bs hypothesis in the developing countries and a further research is needed for the reason

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

productivity differentials the relative price of non tradables and real exchange rates abstract this paper reconciles the apparent contradiction between recent panel unit root tests of real exchange rates and the productivity differential model proposing an alternative view that explains the coexistence of such findings real exchange rates and the relative price of non tradables reflect the gradual adjustment of mean reverting and endogenously competing factors supply and demand shocks as well as traded goods arbitrage granger causality and variance decomposition results indicate substantial simultaneity and feedback effects between real exchange rates the relative price of non tradables and productivity differentials

keep searching and you ll find what do we know about variety creation through firms search activities for innovation this article critically reviews and synthesizes the contributions found in theoretical and empirical studies of firm level innovation search processes it explores the advantages and disadvantages of local and non local search discusses organizational responses and identifies potential exogenous triggers for different kinds of search it argues that the initial focus on local search was a consequence in part of the attention in evolutionary economics to path dependent behavior but that as localized behavior was increasingly accepted as the standard mode studies began to question whether local search was the best solution in all cases more recently the literature has focused on the trade offs being created by firms having to balance local and non local search we account also for the apparent variety paradox in the stylized fact that organizations within the same industry tend to follow different search strategies but end up with very similar technological profiles in fast growing technologies the article concludes by highlighting what we have learnt from the literature and suggesting some new avenues for research

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

a note on the determinants of unexpected exchange rate movements abstract in this paper we study the relative importance of surprises in fundamentals in explaining unexpected exchange rate movements employing a unique survey dataset that contains matched exchange rate and interest rate expectations we are able to derive a number of interesting conclusions a variance decomposition of unexpected exchange rate movements into various components reveals that interest rate news is relatively unimportant but that changes in perceptions about risk premia and more importantly revisions of expectations with regard to future exchange rate levels are crucial in explaining unexpected exchange rate movements

a failure inducement model of research and development expenditure abstract empirical evidence for the schumpeterian suggestion of a positive relationship between profitability and innovative effort is slim in fact the opposite is often suggested an alternative failure inducement hypothesis argues that firms make innovative efforts when performance falls below a minimum threshold resulting in a negative relationship between profitability and r d expenditures data on r d expenditures in italian industry in the early 1980s a period of severe economic crisis show that both hypotheses are relevant for firms whose profits are well above or well below average respectively

are real interest rates equal across countries an empirical investigation of international parity conditions this paper conducts empirical tests of the equality of real interest rates across countries the empirical evidence strongly rejects the hypothesis of real rate equality and the joint hypotheses of uncovered interest parity and ex ante relative ppp or the unbiasedness of forward rate forecasts and ex ante relative ppp the evidence suggests that it is worth studying open economy macroeconomic models which allow 1 domestic real rates to differ from world rates 2 time varying risk premiums in the forward market or 3 deviations from ex ante relative ppp the relationship of real interest rates across countries is of central importance to our understanding of open economy macroeconomics in some models where there is costless international arbitrage in goods and financial assets real interest rates for comparable securities should be equal across countries this has been a feature of much of the early research in the monetary approach to exchange rates e g frenkel 11 and bilson 2 on the other hand finance theory indicates that risk premia may well differ for comparable securities denominated in different currencies solnick 27 roll and solnick 26 stulz 28 fama and farber 7 hansen and hodrick 17 and dornbusch 6 and more recent theoretical models in the exchange rate literature such as dornbusch 5 frankel 10 and mussa 24 depend on real rates differing between countries in the short run the proposition that real rates are equal across countries is worth studying

the relationship between interest rate differentials and macroeconomic variables a panel data study for european countries abstract based on panel data regressions the relationship between 12 month interest rate differentials and macroeconomic variables is analyzed for nine european countries relative to germany stationarity properties of the variables are examined by tests developed for panel data models the distribution of the test statistic is not normal and is bootstrapped from the sample at hand all significant regression coefficients are estimated with the predicted sign in particular the inflation differential the real income growth differential relative labor costs and the current account have a strong effect on the interest rate differential hence the results indicate that governments have some scope for influencing the interest rate differential by conducting the appropriate macroeconomic policy these results are considerably more optimistic compared to earlier studies where interest rate differentials are frequently measured at 1 month and 3 months maturity included also is an analysis of whether the erm countries have gained more credibility in exchange rate policy through the exchange rate system

productivity bias hypothesis and the purchasing power parity a review article abstract productivity differentials among countries are said to be one of the major sources that contribute to the deviation of the purchasing power parity based exchange rate from the equilibrium rate hence the productivity bias hypothesis prior to last review article on the productivity bias hypothesis in 1976 almost all studies relied upon cross sectional regression analysis since then two groups of empirical studies have emerged while one group has employed time series data the other one has used panel data these two later groups have provided more support to the hypothesis than the earlier cross sectional studies this paper reviews and criticizes each group separately and provides tables that summarize main features of each study

an equilibrium model of exchange rate determination and asset pricing with nontraded goods and imperfect information this paper presents a two country model with maximizing households stochastic production stochastic money growth and perfect capital mobility because of the presence of nontraded goods households in different countries consume different goods analytic solutions are presented for the nominal exchange rate the real exchange rate nominal interest rates and real interest rates it is shown that the model is compatible with some important features of the real world behavior of exchange rates when households are imperfectly informed about the distribution of money growth the exchange rate exhibits patterns of overshooting and is more volatile than the ratio of the money stocks copyright 1987 by university of chicago press

the multifaceted nature of exploration and exploitation value of supply demand and spatial search for innovation in this paper exploration and exploitation are conceptualized in terms of a nonlocal local search continuum in three dimensional supply demand and geographic space using cross sectional data from a wide range of manufacturing industries we develop and validate an operational measure of the exploration exploitation concept in line with theory based arguments our analysis suggests that the value of supply side demand side and spatial exploration and exploitation is contingent on the environment while boundary spanning supply side search is found to be positively associated with innovation in more dynamic environments typical of the entrepreneurial regime phase of technology evolution such exploration appears to hurt innovation in less dynamic environments in a reverse fashion while boundary spanning demand side search is found to be favorably associated with innovation in less dynamic environments it appears to harm innovation in a more dynamic context interestingly spatial boundary spanning search seems to contribute to innovation in more as well as less dynamic environments with the caveat that the substantive findings of this study are based on cross sectional data we discuss the implications of our work and future research directions

budget deficits and interest rates a fresh perspective we extend the literature on budget deficits and interest rates in three ways we examine both advanced and emerging economies and for the first time a large emerging market panel explore interactions to explain some of the heterogeneity in the literature and apply system gmm there is overall a highly significant positive effect of budget deficits on interest rates but the effect depends on interaction terms and is only significant under one of several conditions deficits are high mostly domestically financed or interact with high domestic debt financial openness is low interest rates are liberalized or financial depth is low

panel unit root tests of purchasing power parity for price indices abstract this paper adopts four panel unit root tests to evaluate ppp over the floating period for six different price indices results generally support ppp albeit the speeds of adjustment differ considerably between price indices and test procedures the degree of contemporaneous and serial correlation as well as heterogeneity of the series in the panel affect stationarity and the speed of mean reversion

do relative prices of non traded goods determine long run real exchange rates in this paper the long run assumptions of so called equilibrium models of real exchange rates are investigated the assumption of purchasing power parity for tradable goods common to this class of models implies that the real exchange rate is a function of the relative prices of nontraded goods in the two countries while purchasing power parity for tradable goods is not directly testable exploitation of wholesale and consumer prices allows for direct estimation of the reduced form cointegration tests are performed for twenty one bilateral relationships while much of the evidence is consistent with the predictions of equilibrium models results are far from conclusive

an empirical inquiry into the nature of the forward exchange rate bias abstract this paper tests whether anticipated real exchange rate movements fully account for the systematic time varying discrepancies between forward and future spot exchange rates the data do not reject this hypothesis the results demonstrate that 1 real exchange rate changes are predictable 2 anticipated real exchange rate changes are reflected in the forward bias and 3 information available at the signing of the forward contract is useless in forecasting differences between forward and future spot prices beyond the information s ability to predict real exchange rate changes the results emphasize the importance of real exchange rates in international asset pricing

interest rates and budget deficits revisited evidence from the g7 countries this article revisits whether budget deficits affect interest rates and broadens the literature by examining whether financial globalization has changed this relationship a structural model of interest determination is extended to account for the fact that official capital flows are determined differently than private flows and is estimated for a 1960 2005 g7 panel we find that deficits have a significant but small effect on long term rates but that this result depends on the fiscal concept used moreover we find no evidence of structural change in interest rate determination in the recent decades with the exception of an increased impact of insurance related capital inflows in recent years

customer power strategic investment and the failure of leading firms why might firms be regarded as astutely managed at one point yet subsequently lose their positions of industry leadership when faced with technological change we present a model grounded in a study of the world disk drive industry that charts the process through which the demands of a firm s customers shape the allocation of resources in technological innovation a model that links theories of resource dependence and resource allocation we show that established firms led the industry in developing technologies of every sort even radical ones whenever the technologies addressed existing customers needs the same firms failed to develop simpler technologies that initially were only useful in emerging markets because impetus coalesces behind and resources are allocated to programs targeting powerful customers projects targeted at technologies for which no customers yet exist languish for lack of impetus and resources because the rate of technical progress can exceed the performance demanded in a market technologies which initially can only be used in emerging markets later can invade mainstream ones carrying entrant firms to victory over established companies

real exchange rates ppp and the relative price of nontraded goods the purchasing power parity hypothesis ppp states that nominal exchange rates move with differences in relative prices between economies the theory has received considerable attention in the economic literature since cassell 6 and is the foundation of many long run theoretical hypotheses in international finance yet its empirical validity remains in question many tests of ppp focus on the stationarity of the real exchange rate the nominal exchange rate adjusted for changes in price levels between economies if domestic and foreign price levels and the nominal exchange rate are integrated then cointegration between these variables implies the existence of both a long run equilibrium relationship and ppp the residual the real exchange rate then follows a stationary process the paper uses the multivariate cointegration methodology of johansen 16 and johansen and juselius 17 18 to examine the source of real exchange rate nonstationarity is the nonstationarity due to shifts in the domestic and foreign price of nontradeables or productivity differentials between traded and nontraded sectors or is the nonstationarity a possible outcome of difficulties in intercountry comparisons of prices movements associated with construction of these price indices most research finds the real exchange rate follows a nonstationary process due to the presence of a unit root 8 12 1 9 19 27 however the existence of a variable trend in the real exchange rate does not imply the absence of a long run relationship between relative prices levels and nominal exchange rates for two reasons first a long run relationship between price levels and nominal exchange rates may exist but not the one for one relationship implicit in the calculation of real exchange rates due to measurement differences in the construction of price indices between economies second ppp violations may occur due to the presence of permanent productivity innovations which affect the relative price of nontradeables if these shocks are not represented by measurable variables a cointegrating relationship will not exist the paper constructs traded and nontraded gdp price indices and productivity rates for 14 oecd economies and tests 1 if the variable trend the nonstationary process in the real exchange rate is due to permanent innovations in relative price of domestic and foreign nontradeables 2 if long run ppp violations are due to permanent movements in the relative price of nontradeables 3 if the nonstationarity in the real exchange rate is due to permanent innovations in domestic and foreign productivity differentials between the traded and nontraded sectors 4 if the variable trend in the relative price of nontradeables is due to permanent innovations in productivity between sectors lastly the paper constructs a cointegrating error correction model

were japanese stock prices too high abstract this paper asks whether market fundamentals can explain the recent run up and decline of japanese equity values and price earnings ratios accounting differences explain about half of the long run disparity between u s and japanese p e s for example if japanese firms used u s accounting rules the japanese p e ratio would have been 32 6 not 53 7 in 1989 accounting differences cannot however explain the doubling of this ratio in 1986 nor its decline in 1990 similarly we are unable to isolate changes in required stock returns or growth expectations that are large enough to explain recent japanese stock price movements

the influence of local search and performance heuristics on new design introduction in a new product market abstract this study develops and tests three sets of predictions concerning new design introduction during the initial period of ferment in a new product market we root our predictions most directly in the evolutionary economic concepts of local search and performance heuristics first we argue that new entrants will introduce most designs that are new to a product market during an initial period of ferment second we argue that local search will lead most product market incumbents that introduce second or subsequent designs after their entry to introduce designs that are similar to those incorporated in their existing products third we argue that firms selling products based on designs that are losing aggregate share in the market will be likely to introduce products based on new designs while firms losing market share to firms that are selling the same design are unlikely to introduce new designs our empirical analysis examines the magnetic resonance imaging mri subfield of the diagnostic imaging equipment industry between 1980 and 1986 a period that begins with the introduction of the first mri design and ends with the emergence of widely accepted design characteristics the results support the argument that local search and performance heuristics along with other market factors and business characteristics influence design introduction during a period of ferment

the overvaluation of renminbi undervaluation we evaluate whether the renminbi rmb is misaligned relying upon conventional statistical methods of inference a framework built around the relationship between relative price and relative output levels is used we find that once sampling uncertainty and serial correlation are accounted for there is little statistical evidence that the rmb is undervalued even though the point estimates usually indicate economically significant misalignment the result is robust to various choices of country samples and sample periods as well as to the inclusion of control variables

structure learning and the speed of innovating a two phase model of collective innovation using agent based modeling continual increase in the complexity of technologies and innovations has resulted in actors i e individuals or organizations becoming more dependent on other actor s knowledge and skills to complement their own skills in the innovation process as a result networks have become more and more prominent in affecting the innovation process conceptualizing innovation as a search and learning process that results in a successful product we introduce a two phase model of collective innovation that accounts for the deliberateness of the innovation process using agent based modeling we explore how interaction structure among a group of actors affects the speed at which the group can collectively innovate in addition we present results from counterfactual simulations to highlight the importance of deliberate search and changing realized connections in modeling collective innovation process moreover we discuss the effects of the structure under different mechanisms of learning and different levels of actor s learning capabilities copyright 2010 the author 2010 published by oxford university press on behalf of associazione icc all rights reserved oxford university press

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

reputation and decision making under ambiguity a study of u s venture capital firms investments in the emerging clean energy sector this study examines the role of reputation on decision making under ambiguity drawing on social cognition and behavioral theories we propose that a firm s reputation exerts dual pressures on its decision making under ambiguity on the one hand a firm s reputation increases its aspirations for future performance and promotes its engagement in risky strategies to achieve them on the other hand preserving the already established reputation requires a firm to deliver consistent performance over time which promotes greater use of risk reduction strategies our analyses of the u s venture capital firms investments in the clean energy sector from 1990 to 2008 demonstrate that while reputable firms are more likely to invest in the emerging sector they also employ risk reduction strategies more extensively the sector s legitimation further influences these firms investment decisions both directly and through its interaction with firm reputation

the determination of the real exchange rate the productivity approach abstract this paper explains deviations of exchange rates from purchasing power parity with the differences between countries of the relative growth rates of labor productivity between traded and nontraded sectors two cases are considered germany and japan versus their respective major trading partners the results show that the time series methodology yields a more favorable confirmation of the productivity differential model than the cross section regressions in the literature

optimal cognitive distance and absorptive capacity in this paper we test the relation between cognitive distance and innovation performance of firms engaged in technology based alliances the key finding is that the hypothesis of an inverted u shaped effect of cognitive distance on innovation performance of firms is confirmed moreover as expected we found that the positive effect for firms is much higher when engaging in more radical exploratory alliances than in more exploitative alliances the effect of cumulative r d turns out to be mixed it appears to increase absorptive capacity as expected but there is clear evidence that it also reduces the effect of cognitive distance on novelty value making it increasingly difficult to find additional novelty

learning to contract evidence from the personal computer industry organizational forms involving more detailed contracts than are found in traditional spot market exchanges appear to be increasingly prevalent there has been relatively little analysis however of the extent to which firms learn how to use contracts to manage their interfirm relationships over time in this paper we conduct a detailed case study of a time series of 11 contracts concluded during 1989 1997 between the same two partners both of whom participate in the personal computer industry to explore whether and how firms learn to contract we find many changes to the structure of the contracts that cannot be fully explained by changes in the assets at risk in the relationship and evidence that these changes are largely the result of processes in which the firms were learning how to work together including learning how to contract with each other the nature of this learning appears to have been quite incremental and local that is not very far sighted we suggest how and when contracts might serve as repositories for knowledge about how to govern collaborations and suggest some boundary conditions for this phenomenon our findings also provide implications for the debate about whether contracts have a positive or negative effect on interorganizational trust we conclude with suggestions for future research

on the deviations from purchasing power parity the case of the ringgit effective exchange rate the paper investigates the extent to which the ringgit exchange rate converges on its purchasing power parity level in the long run using the cointegration and variance ratio tests the results indicate that shifts in the real exchange rate are dominated by permanent stochastic shocks which prevent it from reverting to its ppp base level further analysis indicates that low frequency movements in the relative price of tradable goods and the external terms of trade cannot explain the long run swing in the real exchange rate

nontradable goods prices and per caita income an application to regional korean data pooled time series cross sectional regional data for korea over the period 1985 1991 are used to investigate points which emerged from the united nations international comparison project the results based on a regional analysis are opposite to those of the icp the prices of services do not increase more rapidly in fast growing than in slow growing regions this regional analysis provides constradictory evidence to the widely recognized stylized fact that the prices of nontradables increase with real per capital income by a larger margin than the prices of tradables increase

government expenditure real exchange rate and the decline of the manufacturing sector some empirical evidence abstract i show that the increase in government expenditure in european countries during the 1970s raise the relative price of non traded goods this relative price movement may explain why the share of manufacturing in private sector value added declined in those countries

strategic risk an ordinal approach strategic management researchers have shown increasing awareness of the importance of the concept of risk at the strategic level in recognition of this interest this research adopts a commonly used conceptualization of risk and shows how this conceptualization leads to a new measure of risk based upon the chance of loss of relative position within a set of firms this framework is shown to be particularly appropriate for strategy research information contained in probability distributions describing the relative positions of sets of firms over time is shown to be partitionable on the basis of gain or loss in position as well as on firm identity leading to the derivation of a new measure of strategic risk for an individual firm this development also provides a hierarchical quantification of risk at the levels of the industry group and individual firm the ordinal risk measure is applied to both hypothetical data for illustration and to data on the u s airline industry

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

a general equilibrium model of international portfolio choice we investigate in a two country general equilibrium model whether a bias in consumption towards domestic goods will necessarily lead to a preference for domestic securities we develop a model where investors are constrained to consume only from their domestic capital stock and where it is costly to transfer capital across countries in this model investors less risk averse than an investor with log utility bias their portfolios towards domestic assets investors more risk averse than log however prefer foreign assets thus this model suggests that it is unlikely that the portfolios observed empirically can be explained by the high proportion of domestic goods in total consumption we investigate in a two country general equilbrium model whether a bias in consumption toward domestic goods will necessarily lead to a preference for domestic assets in an investor s optimal portfolio we constrain investors to consume only from their domestic capital stock and introduce a proportional cost for transferring goods from one country this cost gives rise to endogenous deviations from the law of one price lop thus the home and foreign investors do not hold identical portfolios we show that an investor s optimal portfolio is biased towards domestic equity only if she is less risk averse than an investor with log utility investors with relative risk aversion greater than one exhibit a preference for the foreign asset this is because the exchange rate derived endogenously is negatively correlated with the return on the foreign asset and therefore the translated return on the foreign stock is less risky than that on the domestic stock thus the results of this model suggest that it is unlikely that the preference for domestic assets that is observed empirically can be explained by the high proportion of domestic goods in total consumption there exists a considerable body of literature documenting the gains from international diversification grubel 1968 was the first to propose that international diversification allows investors to attain lower return variances than those achievable by diversifying domestically this proposition relies on the correlation between stock indices across countries being significantly less

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

market incumbency and technological inertia this paper uses a case study and a simple mathematical model to study the link between the incumbency and incentives to innovate and introduce drastically new products it identifies the conditions under which fears of self cannibalization are particularly likely to lead incumbents to soft pedal such innovations

death of the lethargic effects of expansion into new technical subfields on performance in a firm s base business this paper finds that industry incumbents that do not expand into new technical subfields tend to fare poorly in their established businesses even if the market for the established products continues to exist firms that expand from their established businesses survive longer and achieve greater subsequent market share than competitors that do not expand by some measures however a failed attempt to expand into a new subfield may be even more harmful to a base business than nonexpansion the study employs conventional and accelerated event time regression models to analyze market share and survival the sample which includes 371 incumbents in four base subfields of the medical diagnostic imaging industry between 1953 and 1989 examines performance following the emergence of five new technical subfields of the industry

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential

why empirical international portfolio models fail evidence that model misspecification creates home asset bias abstract international portfolio models consistently predict that investors should put much more of their wealth into foreign assets than they actually do a result known as home asset bias we use actual international portfolio data to show how model misspecification contributes to this bias we find that three widely used simplifying assumptions produce optimal portfolio weights that are significantly different from the weights produced by an unsimplified model in particular imposing the invalid assumption that ppp holds exaggerates the degree of home asset bias these findings suggest that researchers should pay greater attention to empirical model specification in the future