jurisdiction size political participation and the allocation of resources this paper analyzes the effect of population size on politicalparticipation and allocative efficiency increasing populationis generally found to reduce political participation however since participation is not evenly spread throughout thepopulation this will have consequences for allocation namely we argue that increasing population size shifts powerto the rich we discuss the consequences for the optimal sizeof jurisdictions the size of government and the measurementof publicness

central bank intervention and risk in the forward market abstract a two country inter temporal asset pricing model is developed which implies that central bank foreign exchange intervention affects the forward exchange risk premium the model is estimated from daily foreign exchange intervention data for the us german and japanese central banks considerable empirical support is found for the theoretical model with intervention influencing the risk premium in the forward market purchases of dollars by the federal reserve bank are found to be associated with excess denominated returns there is evidence that intervention has increased rather than reduced exchange rate volatility

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

methodical madness technical analysis and the irrationality of exchange rate forecasts substantial empirical research documents that exchange rate forecasts are not formed rationally this paper identifies a common technical trading signal the head and shoulders pattern as a potential source of departures from rationality in exchange rate forecasts forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994 using two criteria for rationality profitability and efficiency resulting profits replicable in real time are tested for statistical significance using a bootstrap technique we find that the rule is profitable but not efficient since it is dominated by simpler trading rules

testing the unbiasedness hypothesis in the forward foreign exchange market a specification analysis abstract this paper evaluates two popular regression methods of testing the unbiasedness hypothesis in the forward foreign exchange market for the 30 day canada united states forward foreign exchange market the evidence overwhelmingly indicates that it is inappropriate to treat the structure of the systematic and stochastic components of the test relations as constant over time hence conclusions inferred from parameter significance testing based upon full sample estimation can be very misleading accordingly we argue for a specification analysis of the test relations and more explicit modelling of market fundamentals

u s bilateral trade flows and exchange risk during the floating period abstract this paper tests for real exchange rate risk effects on u s bilateral trade flows during the floating period using several new as well as previously used risk measures significant negative effects occur in five of six u s import flows and in two of six u s export flows with one export flow showing a significant positive effect these results are consistent with several previous findings for aggregate u s trade two risk measures using the forward exchange rate and assuming a time varying risk premium provide marginally more significant results than the others

fractionalization and the size of government i study the effect of voters with a group based social conscience voters care more about the well being of those belonging to their own group than the rest of the population within a model of political tax determination both fractionalization and group antagonism reduce the support for redistribution whereas within group inequality increases support for redistribution inequality between groups has the opposite effect these results hold even if a poor group forms a majority using a panel constructed from us micro data i find support for the hypothesis that within race inequality increases redistribution while between race inequality decreases redistribution

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

the breakdown of hierarchies in the soviet union and china a neoinstitutional perspective why did modest attempts to decentralize the centrally administered soviet system lead to its collapse while more far reaching decentralization in china left central political and administrative hierarchies intact this article analyzes the disintegration of centrally planned organizations in the context of a neoinstitutional model of the breakdown of authority within hierarchies an agency model of hierarchy is presented that incorporates the ambiguous property rights authority relations and risk sharing conditions that prevailed under central planning and then persist during postcommunist transitions this model suggests that decentralizing reforms could trigger an organizational bank run prompting local agents to seize organizational assets under their control the article also considers reputation preserving strategies that central authorities might use to avert disintegration as an application of this model the collapse of soviet political industrial and state fiscal hierarchies are considered and compared with the experience of analogous sectors in china reforms in both states transferred significant autonomy from the center to local field agents in the soviet case these agents appropriated organizational assets with little interference from the center in china by contrast the center preserved both its capacity for monitoring and its reputation for disciplining transgressions and the rise of hybrid ownership forms made expropriation of state and party assets far less attractive

ems exchange rate expectations and time varying risk premia abstract in this paper we examine exchange risk premia employing a survey dataset of ems exchange rates we are able to test a risk premium model directly i e without having to rely on the rational expectations assumption our results indicate that time varying risk premia are present in almost all cases and that a garch in mean specification for the premium is often appropriate

theoretical relations between risk premiums and conditional variances many statistical models of time varying risk premiums including the autoregressive conditional heteroscedasticity arch in mean attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns we examine this relation in numerical versions of a dynamic asset pricing theory and show that it can be increasing decreasing flat or nonmonotonic its shape depends on both the preferences of the representative agent and the stochastic structure of the economy without additional structure the theory does not provide either a general foundation for arch in mean specifications or a simple interpretation of their parameters

a political economy theory of the soft budget constraint why do soft budget constraints exist and persist in this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness we develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal we show that because of the dynamic commitment problem inherent in the soft budget constraint politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do this encourages such entrepreneurs to support them politically though the soft budget constraint may induce economic inefficiency it may be politically rational because it influences the probability of political survival in consequence even when information is complete politicians may fund bad projects which they anticipate they will have to bail out in the future we show that maybe somewhat surprisingly dictators who are less likely to lose power are more likely to use the soft budget constraint as a strategy to gain political support

in search of the exchange risk premium a six currency test assuming mean variance optimization abstract a number of authors examining deviations of actual rates of currency depreciation from forward discounts have claimed to find evidence of risk premiums if these deviations are indeed partly due to risk premiums rather than being entirely due to expectational errors then they should be systematically related to those variables on which risk premiums are thought to depend finance theory tells us that if investors optimize with respect to mean and variance the risk premium depends in a specific way on 1 the supplies of assets denominated in the various currencies 2 the variance covariance matrix of the rates of return and 3 the coefficient of risk aversion the null hypothesis of this paper is that the coefficient of risk aversion is zero countries assets are perfect substitutes and risk premiums are nonexistent the alternative hypothesis is that rates of return are systematically related to asset supplies by a macroeconomic portfolio balance function the maximum likelihood technique used dominates previous attempts to find such a relationship in that the parameters of the portfolio balance function are constrained to depend on the variance covariance matrix as the finance theory says they should on the other hand the technique also dominates previous applications of the finance theory in that the expected returns are allowed to vary over time as the macroeconomic portfolio balance theory says they should the paper s finding is a statistical inability to reject the null hypothesis for a portfolio of six currencies although this could be due to low power in the test

market efficiency in agricultural futures markets market efficiency and unbiasedness are tested in four agricultural commodity futures markets live cattle hogs corn and soybean meal using cointegration and error correction models with gqarch in mean processes results indicate each market is unbiased in the long run although cattle hogs and corn futures markets exhibit short run inefficiencies and pricing biases models for cattle and corn outperform futures prices in out of sample forecasting results also suggest short run time varying risk premiums in cattle and hog futures markets

common marketing agency as a device for facilitating collusion in a variety of markets firms voluntarily and independently delegate control over certain aspects of marketing to common agents in this article we present an explicit model of agency delegation where firms noncooperatively select agents name output prices and choose compensation schemes we exhibit an equilibrium in which all strategic variables not merely the marketing choices delegated to agents but prices as well are selected perfectly cooperatively this cooperative equilibrium is very simple and attractive each firm sets the collusive output price and employs a commission scheme to compensate the agent although each

central bank interventions and exchange rate band regimes abstract this paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening we study the signal effect of interventions on the exchange rate using norwegian daily data on official interventions we first find that interventions seemed to have been more effective in moving the exchange rate in the expected desired direction in the regime when the exchange rate was kept away from the edges of the band this type of intervention regime also reduces significantly the conditional volatility of the exchange rate thus when the exchange rate was near the weakest edge of the currency band its conditional variance was significantly larger than when it was moving around its central parity finally we show that in order to obtain consistent estimates intervention variables cannot enter as exogenous variables in the conditional mean or conditional variance of the exchange rate

a theory of credibility this paper presents models in which one agent must decide whether to trust another whose motives are uncertain reliability can only be communicated through actions in this context it pays for people to build a reputation based on reliable behaviour someone becomes credible by consistently providing accurate and valuable information or by performing useful services the theory provides a justification for long term arrangements without binding contracts it also describes those situations where it pays an agent to cash in on his reputation many decisions depend on trusting someone consumers must decide whether to believe advertisements banks need to judge the reliability of loan applicants and employers must decide how much responsibility to delegate to their employees this paper attempts to model situations that arise when someone is uncertain about whether to trust the people he deals with in this context reputations for reliability are valuable an agent becomes credible by consistently providing accurate valuable information or by always acting responsibly i analyse a series of simple abstract models of information transmission in the basic model there are two agents the sender s and the receiver r who are to play the game a known finite number of times at each stage both players learn the value of a parameter measuring the importance of that period s play of the game that is the value of making a correct decision and s obtains payoff relevant information s then sends a signal to r who makes a decision that affects the welfare of both players after both players learn the consequences of r s decision the process repeats at each stage r must decide what action to take in order to do that he must assess the credibility of s the difficulty arises because r is uncertain about s s preferences when play begins i model this by assuming that with positive probability s has identical preferences to r s is a friend and with positive probability s has completely opposed preferences to r s is an enemy this uncertainty creates a trade off for enemy senders at each stage providing honest information enhances s s reputation but only at the expense of foregoing an opportunity for immediate gain by duping r the possibility that s is a friend lends credibility to what he says but this credibility may also be exploited by an enemy s the principal equilibrium has the following form in the basic model where s has no control over the importance of a given play s typically conveys accurate information for the first several periods r raises the probability he places on s being friendly after receiving accurate information if he believes that an enemy would have lied to him with positive probability the more important the information the more likely an enemy will attempt to deceive r an enemy will eventually take advantage of r by misleading him when this happens the sender loses all opportunities for deception in the future i

a class of nonlinear arch models a class of nonlinear arch models is suggested the proposed class encompasses several functional forms for arch which have been put forth in the literature a lagrange multiplier test is developed to test engle s arch specification against the wider class of models this test provides an easily computed diagnostic check of the adequacy of an arch model after it has been estimated the theory is applied to a number of weekly exchange rate series and we find strong evidence of nonlinear arch

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

does centralization increase the size of government abstract are fiscal programs larger or smaller if they are run centrally rather than locally in a prospective federation we abstract completely from well understood economic issues and focus instead on the political effects of centralization for fiscal programs with benefits broadly spread in the population such as redistributive transfer schemes social insurance and general government consumption centralization changes the coalition of voters who favor a large program in a direction that depends on the nature of the redistributive instrument for fiscal programs with localized benefits such as provision of local public goods centralization creates opportunities for rent seeking which increases the size of government

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

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

uncertainty in sales and inventory behaviour in the u s trade sectors this paper investigates uncertainty in sales and inventory behavior for the u s wholesale and retail trade sectors first using a vector error correction model with garch m the authors find that the uncertainty measured by forecast error variance in sales does not affect inventory behavior in both trade sectors second using forecast error variance decomposition and estimated permanent components they observe that the uncertainty may be attributed more to demand shocks than to cost shocks

fundamentals and exchange rate prediction revisited this paper measures latent fundamental exchange rates with independent component based rates constructed from a cross section of exchange rates and then uses their deviations from exchange rates to forecast empirical results indicate that the independent component based model and its taylor rule and purchasing power parity augmented models are superior to the random walk in predicting exchange rates these results are robust to several scenarios and are likely to be observed if the us sources and the recursive scheme are applied our results reveal that information regarding the third moment of exchange rate changes is helpful to explain exchange rate movements

fiscal federalism in europe lessons from the united states experience the existing political and legal institutions of fiscal policy making are under challenge as the united states and the eastern european and soviet states experiment with policy decentralization the states of western europe are looking to a more centralized policy structure via the e e c this paper seeks to raise issues of importance to all such reform efforts notably the need to consider and balance the inefficiencies of fiscal policy decentralization spillovers and wasteful fiscal competition against the inefficiencies of fiscal policy centralization policy cycles and localized pork barrel spending and taxes the need to develop new fiscal policy institutions emphasizing voluntary agreements and responsive agenda setters is stressed robert p inman daniel l rubinfeld department of finance and economics school of law and the wharton school of management department of economics university of pennsylvania university of california philadelphia pa 19104 berkeley ca 94720 and neer fiscal federalism in europe lessons from the united states e perienc by robert p inman and daniel l rubinfeld2 in democratic and totalitarian regimes alike the existing political and legal institutions of economic policy making are under challenge the wisdom of centralized fiscal regimes is now being questioned quietly under the banner of the new federalism in the united states and vocally if not violently through the secessionist movements of eastern europe and the soviet states as these nations experiment with decentralized fiscal institutions the countries of western europe are now looking to the potential of a more centralized economic order within the new european economic community this paper seeks to raise issues of importance to all such reform efforts and within that context to offer some cautionary advise for the design of e e c fiscal institutions based upon the recent american experience with centralized fiscal policy making ii the role for central government fiscal policies in economic unions the european community s progress towards an economic and monetary union the authors wish to thank allesandra casella and barry eichengreen for helpful comments and discussions 2 the authors are professor of finance and economics university of pennsylvania and research associate of the nber and professor of law and economics university of california at berkeley respectively professor rubinfeld gratefully acknowledges the support of the center for real estate and urban economics at the university of california berkeley based upon a common currency will create new demands for the design of fiscal policy 3 perhaps most importantly with a common currency and thus a common monetary policy member states will no longer be able to influence their local economies through exchange rate or monetary policies when state specific economic shocks occur 4 state specific fiscal policies stand as an alternative three questions arise 1 can member state fiscal policies be effective in offsetting local economic shocks in an integrated economic union 2 if effective are such policies likely to be optimally managed at the state level and 3 if ineffective or non optimal what central government policies might be then preferred the recent united states experience is instructive on each point can member state fiscal policies be effective in open integrated economies deficit financed demand creation may be of only limited usefulness to small member states first the demand stimulus of deficit financing is dissipated through import demands from other union states gramlich 1987 has shown that the effectiveness of deficit policies in the smallest u s states is significantly import constrained though larger states may be able to use own deficits to affect state employment prospects second in member states the use of such deficits to combat local shocks may be significantly limited by what the capital markets will allow while deficits may be see eichengreen 1990 there is growing evidence of the economic importance of state specific economic shocks to the short run and long run prospects of states and regions in integrated economic unions see bernard and durlauf 1991 for a study of oecd countries many of which are in the eec and brown coulson and engle 1990 for a study of u s states member states which manage these shocks well are likely to enjoy higher long run growth beneficial to the local economy during downturns and while member states may promise to repay those deficits with surpluses during the upswing such promises are difficult to enforce the u s capital market has appeared reluctant to accept a state s promise of a balanced budget over a business cycle such promises lack credibility when temporary economic downturns are not easily distinguished from long run structural declines when good deficits cannot be distinguished from bad the only credible local government promise may be a balanced budget in each fiscal year the stringent u s state budgets for the recessionary 1992 fiscal year balanced through major tax increases and deep spending cuts offer evidence on the point 5 even if member state deficit policies are economically feasible their management may be non optimal in interdependent economic unions the benefits from local demand creation through deficit financing may spillover to other member states via import expansion while the interest costs of deficits remain with the borrowing state the result will be an under provision of expansionary fiscal policies by member states using the arguments of hart 1982 central government fiscal policies stand as the policy

rational expectations risk and efficiency in the london metal exchange an empirical analysis there now exists a number of studies which reject efficiency of the london metal exchange as a joint null hypothesis of rational expectations and risk neutrality in this paper we investigate the presence of time varying risk premia in a number of metal price series conditional on the assumption of rationality our findings include evidence to suggest that forward prices contain information on future spot prices over and above the information contained in current spot prices that there is some evidence of time varying premia in the forward prices for tin and zinc and that the behaviour of these premia are intuitively plausible in particular there appears to be significant covariation between risk premia and the expected spot price change

on government centralization and fiscal referendums abstract several authors have argued that a centralization of fiscal powers in a federation is less likely to occur if citizens have to approve a change in the assignments of responsibilities by a popular referendum this outcome may be due to the fact that logrolling is more difficult under direct than under representative democracy it may also be caused by citizens fear that a centralization of fiscal authority facilitates the extraction of rents by the government or the legislature in this paper we test the hypothesis that centralization is less likely under referendum decision making in the unique institutional setting of switzerland using a panel of swiss cantons from 1980 to 1998 the empirical analysis provides evidence that referendums induce less centralization of fiscal activities

moral hazard and nonmarket institutions dysfunctional crowding out or peer monitoring the authors examine a situation in which insurance is characterized by moral hazard when market insurance is provided supplementary mutual assistance between family and friends unobservable to market insurers will occur when nonmarket insurers have no better information than market insurers the mutual assistance not only crowds out market insurance but is also harmful and therefore dysfunctional alternatively when nonmarket insurers can observe each other s effort perfectly mutual assistance is beneficial these results point to the potential importance of peer monitoring mechanisms in mitigating moral hazard copyright 1991 by american economic association

asset pricing and foreign exchange risk econometric evidence for the g 7 abstract this paper uses an error correction model ecm to examine the dynamic behavioural relationship between the excess returns of foreign exchange and the variables that measure the stock market risk factor the test results for the major currencies of the g 7 over the period january 1982 to january 1994 support the hypothesis that the excess foreign exchange returns are related to relative risks of the two national equity markets and hence supports the notion of a risk premium in foreign exchange markets in addition we find evidence of non monotonic adjustment in some of the equations with respect to the us dollar which suggests some short run exchange rate overshooting

economic theories of the break up and integration of nations abstract this paper surveys the recent political economy literature on the size distribution of nations the main themes of this literature are 1 a the spread of democracy leads to the creation of too many sovereign states 2 b the extent of factor mobility plays a key role in determining the incentives towards separation or integration 3 c economic integration through the development of international trade may require greater political integration to create and effectively maintain a level playing field in international trade at the same time economic integration by reducing the economic costs of separation increases the incentives towards political separation

testing the martingale hypothesis in deutsche mark futures with models specifying the form of heteroscedasticity summary we examine the form of heteroscedasticity in deutsche mark futures price data and compare different specifications of the particular way that the variance is changing over time the martingale hypothesis is tested with daily and weekly rates of change of futures prices for the deutsche mark and some evidence is found against this hypothesis in analyses of daily data from 1981 to 1985 this rejection of the martingale hypothesis may be attributed to trading day effects in foreign currency prices and the resulting day of the week patterns in futures prices when the martingale hypothesis is tested with weekly data the null hypothesis is retained

decentralized taxation and the size of government evidence from swiss state and local governments according to the leviathan model fiscal federalism is seen as a binding constraint on a revenue maximizing government the competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states however empirical results concerning the leviathan hypothesis are mixed this study uses a state and local level panel data set of swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue because of the considerable tax autonomy of sub national swiss governments it is possible to investigate different mechanisms by which fiscal federalism may influence government size the results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government fragmentation has essentially no effect on the size of government revenue for swiss cantons the overall effect of revenue decentralization leads to fewer tax revenue but higher user charges thus revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges

does foreign aid promote the expansion of government building on the literature on public finance i seek to advance our understanding of variations in government size by exploring the impact of official development assistance on fiscal policy i hypothesize that foreign aid operates in accordance with the flypaper effect systematically generating incentives and opportunities for the expansion of government spending results from a time series cross sectional regression analysis of growth in government spending over the 1970 99 time period are consistent with the hypothesis for middle and lower income nations aid represents an important determinant of government expansion looking at the tax and revenue side of the equation however reveals a more perverse pattern of response aid promotes not only increased spending but also reduced revenue generation the results have important implications from both a theoretical and policy perspective inter alia they point to the potentially self defeating nature of efforts to promote market oriented programs of state retrenchment via development assistance as well as to the importance of incorporating international transfers into future research on government spending

intergovernmental political competition in american federalism many policies in the united states are jointly determined by federal and state actions in the game theoretic model offered here politicians in both the state and national governments seek credit for providing goods desired by the public and avoid blame for the taxes necessary to provide the goods in line with peterson s 1995 theory of functional federalism the level of government that is better able to supply particular goods and services tends to take the lead in their provision even to the extent of fully crowding out much less efficient governments however under a broad set of circumstances both state and national politicians seek credit via public spending and their joint provision leads to a relative oversupply of public goods and services and thus to overtaxation under joint provision states vary in their responses to changing federal spending patterns based both on the causes of the national changes and on state characteristics

the covariation of risk premiums and expected future spot exchange rates abstract eugene fama 1984 analyzed the variability and the covariation of risk premiums and expected rates of depreciation we employ three statistical techniques that do not suffer from a potential bias in fama s analysis but we nevertheless conffirms his findings in contrast to his interpretation the results are not necessarily at variance with the predictions of a theoretical model of the risk premium increases in expected rates of depreciation of the dollar relative to five foreign currencies are positively correlated with increases in the expected profitability of purchasing these currencies in the forward market and risk premiums have larger variancies than expected rates of depreciation

multivariate nearest neighbour forecasts of ems exchange rates exchange rate modelling has been a persistent puzzle for international economists forecasts from popular models for the exchange rate generally fail to improve upon the random walk out of sample while a multivariate nonparametric approach provides useful information about exchange rates the model produces forecasts superior to the random walk for only one of the three ems currencies examined using a statistic developed in mizrach 1991 i find that the forecast improvement a 4 5 percent reduction in mean squared error for the lira in daily returns is not statistically significant a cross validation exercise suggests that the improvement is also not robust

macroeconomic sources of foreign exchange risk in new eu members abstract we address the issue of foreign exchange risk and its macroeconomic determinants in several new eu members we derive the observable macroeconomic factors consumption and inflation using the stochastic discount factor sdf approach the joint distribution of excess returns in the foreign exchange market and the factors are modeled using a multivariate garch in mean specification our findings show that both real and nominal factors play important roles in explaining the variability of the foreign exchange risk premium both types of factors should be included in monetary general equilibrium models employed to study excess returns to contribute to the further stability of domestic currencies the new eu members should strive to implement stabilization policies aimed at achieving nominal as well as real convergence with the core eu members

the multicontract organization this paper starts by discussing some nonstandard issues in organization theory bou nded rationality incomplete contracting and collusive behavior on which the rest of the paper focuses it then contrasts the comprehens ive contracting and game theoretic approaches to collusion and it li sts tentative conclusions and some unresolved issues

using non linear methods to search for risk premia in currency futures abstract this paper uses currency futures prices to test the joint null hypotheses of rational expectations and absence of a time varying risk premium in the foreign exchange market we find no linear predictability in the logarithm of futures price changes either using its own past or past interest differentials also we establish that there is no non linear predictability in log price changes conditioning on its own past or past interest rate differentials thus if a time varying risk premium exists in currency futures market it is not related to its own past or past interest rate differentials

the siting of hazardous waste facilities in federal systems the political economy of nimby this paper offers a new political economy explanation for thepervasive problem of siting hazardous waste treatment facilitiesin federal system we first show that a decentralized systemyields the first best waste treatment capacity level and that acentralized structure gives rise to free riding behavior amonglocal jurisdictions in our model each community seeks toinfluence the central government through political contributions this leads to suboptimal levels of treatment capacity thecapacity is increasing in the compensation level if the marginalbenefit of treatment capacity is sufficiently large and in thegovernment s weight on aggregate social welfare relative tolobbying activities the centralized system can replicate thedecentralized system with a sufficiently high compensation level since compensation has proved difficult a centralized systemfaces greater obstacles than a decentralized system

the political economy of policy centralization direct versus representative democracy abstract this paper analyzes policy centralization outcomes in a two jurisdiction model of public good provision choices with heterogeneous policy preferences and interjurisdictional policy spillovers under two alternative political procedures direct referendum and representative democracy we show that policy centralization is more likely to occur if the choice to centralize is made by elected policymakers rather than by referendum in these situations centralized policies converge to the preferred level of the jurisdiction that least favours centralization rather than to a compromise between the two jurisdictions preferred levels

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

arch models properties estimation and testing abstract the aim of this survey paper is to provide an account of some of the important developments in the autoregressive conditional heteroskedasticity arch model since its inception in a seminal paper by engle 1982 this model takes account of many observed properties of asset prices and therefore various interpretations can be attributed to it we start with the basic arch models and discuss their different interpretations arch models have been generalized in different directions to accommodate more and more features of the real world we provide a comprehensive treatment of many of the extensions of the original arch model next we discuss estimation and testing for arch models and note that these models lead to some interesting and unique problems there have been numerous applications and we mention some of these as we present different models the paper includes a glossary of the acronyms for the models we describe

environmental policy in majoritarian systems abstract this paper sheds new light on the determination of environmental tax policies in majoritarian federal electoral systems such as the u s and derives implications for the environmental federalism debate on whether the national or local government should have authority over environmental taxes in the absence of majority bias the socially preferred policy would be federal district level taxation which accounts both for cross boundary pollution and differences in industry concentration across districts in majoritarian systems however where the legislature consists of geographically distinct electoral districts the majority party at the national or state level favors home districts depending on the location of polluting industries and the associated damages the majority party may therefore impose sub optimally high or low pollution taxes due to a majority bias majority bias can influence the social welfare ranking of alternative environmental tax policies in some cases majority bias may make decentralized or federal uniform taxation the preferred solution

on jump processes in the foreign exchange and stock markets exchange rates exhibit systematic discontinuities even after allowingfor conditional heteroskedasticity in the diffusion process the results are much more significant in theforeign exchange market than in the stock market which suggests differences in the structure of these markets finally this jump component is shown to explain some of the empirically observed mispricings in the currency options market the objective of this article is to analyze and compare the empirical distribution of returns in the stock market and in the foreign exchange market there are a number of reasons why a better understanding of the stochastic processes driving prices in these markets would be useful many financial models rely heavily on the assumption of a particular stochastic process while relatively little attention is paid to the empirical fit of the postulated distribution as a result models like option pricing models are applied indiscriminately to various markets such as the stock market and the foreign exchange market when the underlying processes may be fundamentally different the foreign exchange market for instance is characterized by active exchange rate man

decentralization as a constraint to leviathan a panel cointegration analysis this paper extends the empirical literature about the effects of fiscal decentralization on the growth of government along three dimensions it distinguishes between the effects of the level of decentralization from the way local governments finance their expenditures common pool versus own resources it uses a panel cointegration approach to separate the long run effects of decentralization from the short run dynamics and it extends and revises the datasets generally used in these empirical analyses the results show that the amount of revenue raised by sub national governments leads to a long term fall in the size of government but grants have the opposite effect in addition a greater decentralization of expenditure leads to greater overall spending when the short term is considered these influences work slowly as the speed of adjustment towards the desired government size is relatively sluggish in addition in the short run there is also a clear effect from the role of local revenue raising powers that stimulates the growth of government these results appear robust to changes in the composition of the variables countries and periods included the sample

on biases in the measurement of foreign exchange risk premiums abstract the hypothesis that the forward rate is an unbiased predictor of the future spot rate has been consistently rejected in recent empirical studies this paper examines several sources of measurement error and misspecification that might induce biases in such studies although previous inferences are shown to be robust to a failure to construct true returns and to omitted variable bias arising from conditional heteroskedasticity in spot rates we show that the parameters were not stable over the 1975 89 sample period estimation that allows for endogenous regime shifts in the parameters demonstrates that deviations from unbiasedness were more severe in the 1980s jel f31

forward foreign exchange rates expected spot rates and premia a signal extraction approach in this paper we implement a methodology to identify and measure premia in the pricing of forward foreign exchange that involves application of signal extraction techniques from the engineering literature diagnostic tests indicate that these methods are quite successful in capturing the essence of the time series properties of premium terms the estimated premium models indicate that premia show a certain degree of persistence over time and that more than half the variance in the forecast error that results from the use of current forward rates as predictors of future spot rates is accounted for by variation in premium terms the methodology can be applied straightforwardly to the measurement of unobservables in other financial markets there exists a growing body of empirical research on premia in the pricing of forward foreign exchange conditional on the hypothesis that the foreign exchange market is efficient or rational the existence of time varying premia has been documented in the literature by fama 6 hansen and hodrick 10 11 hodrick and srivastava 15 16 hsieh 171 and korajczyk 20 frankel 9 fails to identify such premia and domowitz and hakkio 51 obtain different results for different currencies

reviving leviathan fiscal federalism and the growth of government this article revisits the influential leviathan hypothesis which pos its that tax competition limits the growth of government spending in decentralized countries i use panel data to examine the effect of fiscal decentralization over time within countries attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation first i explore the logic whereby decentralization should restrict government spending if state and local governments have wide ranging authority to set the tax base and rate especially on mobile assets in countries where this is most clearly the case decentralization is associated with smaller government second consistent with theoretical arguments drawn from wel fare economics and positive political economy i show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers

exchange rate risk premiums abstract a state space model which allows for the covariation of risk premiums and unexpected rates of depreciation is used to study exchange rate risk premiums we find that exchange rate risk premiums have a high degree of persistence and the covariance of risk premiums and unexpected rates of depreciation is negative regressions of the estimated risk premium on its determinants implied by the equilibrium model of lucas 1982 show limited support for the model jel f31

short run fluctuations in foreign exchange rates evidence from the data 1973 1979 abstract the paper examines the statistical properties of daily changes in foreign exchange fx rates for nine currencies it finds that these changes are leptokurtotic i e have long tailed and sharp peaked histograms the evidence suggests that this leptokurtosis does not arise from an underlying paretian stable distribution nor from a stationary mixture of normal distributions but rather from normal processes with time varying parameters this finding casts doubt on the validity of many standard techniques t stats arima methods some moving statistics for estimating the time varying parameters are also presented

developing countries and environmental protection the effects of budget balance and pollution ceiling constraints abstract i analyze the problem faced by an asymmetrically informed supra national governmental authority snga with limited financial resources who wishes to design an international environmental agreement iea the snga cannot contract directly with polluting firms in the various ldcs and he must deal with such firms through their governments i study this tripartite hierarchical interaction and focus on the properties of the optimal ex post contracts ieas which can be implemented by the snga in turn in the case where governments and firms in each nation do not collude and then in the case where governments and firms do collude i find that the monetary transfers necessary to induce optimal behavior by governments and firms are not very sensitive to the presence of collusion however because the optimal contracts satisfy budget balance and because there is a ceiling on the amount of pollution reduction that an iea can require the level and pattern of pollution abatement are typically not ideal my analysis suggests that ieas are not inherently doomed due to a basic monitoring and enforcement problem arising from national sovereignty however the success of ieas is fundamentally contingent on the funds available for environmental protection and the pollution reduction ceiling negotiated by the snga and the ldc government

the efficiency of the forward exchange market in this note we test the efficiency of the forward market for foreign exchange for the uk pound us dollar exchange rate using residuals from the lus class we show that previous rejections of efficiency in the forward market have not been due to the use of residuals from the ols class

government size decentralization and growth empirical evidence from italian regions abstractthe aim of this study is to empirically assess the relationship among government size decentralization and economic growth in italian ordinary regions the empirical analysis based on a panel dataset on italian regions provides evidence in support of the existence of an inverted u shaped relationship between public expenditure and economic growth that depends on the degree of fiscal decentralization in particular according to our estimates on the specific italian case the optimal degree of decentralization is around 32 while the optimal government size value is approximately 52

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

lobbying under political uncertainty abstract this paper considers a model of lobbying described as a common agency game it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge we characterize equilibria when the choice set of the politician consists of two policies we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence we also offer some results for the general case including disjoint necessary and sufficient conditions for the equilibria to be efficient

the multiprincipal nature of government abstract one of the theoretical tools required to open the black box of the government organization is the theory of multiprincipals which describes how different incentive mechanisms compete with each others in viewing the set of relationships between several government bodies and the entities they regulate as a set of competing contracts in which the control of the regulatory process is shared amongst these different regulators we can address the question of the costs and the possible benefits of such structural separation first this paper surveys the previous literature on the topic then it traces out the possible benefits of such structures to the non benevolence of regulators we discuss also how regulatory rights of control and communication channels must be designed all together to deal with this problem

an endogenous policy model of hierarchical government endogenous policy models usually neglect that government policies are frequently the result of decisions taken at different tiers by different agents each enjoying some degree of autonomy in this paper policies are the outcome of the choices made by two agents within a hierarchy a legislator decides on the budget to be successively spent by a bureaucrat both agents are lobbied by one or two interest groups the combination of sequential decisionmaking and lobbying implies that the interaction between the agent at one tier and the interest group s depends on the exchange between the same interest group s and the agent at the other tier our results concerning multi tier lobbying and legislatorial oversight substantially qualify the conventional wisdom related to one tier lobbying in particular the reaction of the legislator to lobbying at the bureaucratic tier may make lobbying wasteful even when there is no competition from other lobbies moreover the legislator benefits from lobbying only when there is competition between interest groups at the upper tier it is also shown that competition for influence at the bureaucratic tier may work as a perfect substitute for legislatorial oversight extensions of the model indicate its usefulness for the analysis of decisionmaking in other multilevel governance structures like federations or firms

uncovered interest parity and policy behavior new evidence abstract mccallum j monet econ 33 1994 105 132 introduces policy behavior to resolve previous empirical rejections of the uncovered interest parity uip theory in this note we reexamine his policy behavior argument first we extend the data set used by mccallum to include the recent 8 years and contrary to the analysis provided by mccallum we make a thorough econometric analysis of his uip specification it is shown that in most cases his theory is supported by the data as well as it passes conventional econometric tests we then take a closer look at his policy behavioral relationship but unfortunately it turns out that this specification is inconsistent with the uip specification suggested by mccallum

risk premia carry trade dynamics and economic value of currency speculation in this paper we derive the dynamics and assess the economic value of currency speculation by formalizing the concept of a trader inaction range we show that exchange rate returns comprise a time varying risk premium and that uncovered interest parity uip holds in a speculative sense the often cited forward bias puzzle originates from the omission of the risk premium in standard uip tests consistent with its popularity among market professionals the carry trade strategy can be rationalized as it systematically collects risk premia and generates economic value when applied in multi currency portfolios

bilateral exchange rates and risk premia abstract the paper develops a theoretical model of the risk premium in a bilateral exchange rate representative agents in both countries are assumed to hold open positions in foreign exchange together with risky assets denominated in their own currencies also past surpluses in the current account of the balance of payments lead to net foreign asset positions which may partially be covered in the forward markets our two period mean variance model for optimizing investors is combined with standard assumption about the behavior of real exchange rates to give a reduced form equation for the discrepancies between spot rates and lagged forward rates the model is tested for the dollar dm dollar sterling and dollar yen exchange rates using monthly data for the period 1976 86 the null hypothesis of no risk premium is rejected for each of the currencies reported

an analysis of intertemporal pricing for forward foreign exchange contracts an asset pricing model with an unobservable time varying risk premium is used to price forward foreign exchange contracts specifically the term spectrum of forward foreign exchange contracts is examined in order to focus on country specific and maturityspecific information the testable restrictions imposed by the model are consistent with both cross country and cross maturity forward contracts except at the short end of the maturity spectrum for cross country forward exchange rates this indicates that the intertemporal model is relatively robust in valuing forward contracts of different maturities and for different exchange rates but that it may fail when there are significant short term country specific shocks theoretical and empirical studies have demonstrated that the forward exchange rate incorporates a time varying risk premium in addition to an expected future spot exchange rate recent works by fama 9 and hodrick and srivastava 21 reveal the importance of the risk premium by showing that the variability in risk premiums exceeds the variability in expected change in spot exchange rates these results are very general in that they are based on the definition that equates the forward exchange rate to the expected future spot exchange rate and a risk premium term a logical but more demanding next step is to model and conduct specification tests of the risk premium itself the purpose of this paper is to use an intertemporal latent variable assetpricing model ilvm to examine the risk return characteristics of the term structure of forward foreign exchange contracts more specifically the ilvm is used to price various bilateral dollar forward exchange contracts for each maturity as well as the different maturities for each bilateral forward exchange contract the ilvm was first utilized by hansen and hodrick 16 and hodrick and srivastava 20 to examine forward exchange risk premiums the two studies are however confined to just one month forward exchange contracts in addition the studies yield conflicting results the application of the ilvm to other

a note on intraday foreign exchange volatility and the informational role of quote arrivals abstract the conditional variance for five different hourly foreign exchange rates is modeled using a garch model with the number of incoming quotes as a regressor in the conditional variance equation we find that the number of quotes is positively and significantly related to the volatility of all rates examined the empirical findings support the conjecture of a time consuming information process

premia in forward foreign exchange as unobserved components a note we reconsider the signal extraction approach to measuring premia in the pricing of forward foreign exchange put forward by wolff in which the difference between the forward rate and the associated future spot rate is modeled as an autoregressive moving average arma model for the risk premium buried in a white noise forecast error we point out that an arma model for the risk premium is not always identifiable from information on the difference between the forward rate and the future spot rate only we present solutions to the problem of identification and show how the model for the risk premium can be estimated in a direct way provided that the identification problem is solved for reason of comparison we use the series analyzed by wolff to estimate the models for risk premia the results confirm the earlier finding that premia in forward exchange exhibit a certain degree of persistence over time

the forward premium puzzle in a model of imperfect information abstract this paper studies the forward premium puzzle in a model with imperfect information the model predicts fixed effects and conditional heteroskedasticity in the forward premium regression and provides a rationale for the evidence in mayfield and murphy mayfield e s murphy r g 1992 interest rate parity and the exchange risk premium economics letters 40 319 324

conflict and cooperation the structure of equilibrium payoffs in common agency abstract this paper is a contribution to the theory of common agency initiated by b d bernheim and m d whinston 1986 quart j econ 101 1 31 by common agency we mean the following an agent decides upon an action which affects its well being as well as the well being of n other individuals the principals each of whom offers a menu of payments contingent on the action chosen under complete information bernheim and whinston prove the existence of an interesting subset of nash equilibria they call truthful provide arguments in defense of this refinement and characterize the set of equilibrium payoffs this paper provides a set of theoretical results to identify the structure of equilibrium payoffs with special attention to the payoff of the agent by focusing on complete information we are in a position to evaluate the effects of competition per se on the magnitude of the rent obtained by the agent we illustrate this user guide on a wide and diverse family of applications including auctions competition for an input economic influence and private production of public goods journal of economic literature classification numbers c72 d72

economic policy and special interest politics a great deal of research has been done on the boundary between economics and political science in the last five to ten years this research in political economics spans many subfields such as macroeconomics trade public finance regulation rational choice politics and game theory a common denominator has been to study structural models of the political process agents behave rationally within well specified economic and political institutions where the policymaking process is formulated as an extensive form game methodologically much progress has been made relative to traditional approaches which were often based on inconsistent or irrational political and economic behaviour relying on non derived influence functions political support functions or vote functions yet the modem work has largely developed separately in each subfield without much contact with other subfields and each of the resulting literatures tends to focus on a distinct but partial aspect of the political process in this lecture i shall argue that even though the progress to date has been substantial we can gain a better understanding of policymaking in democracies by combining the insights from different strands of thinking on some economic policy issues the conflicting views both among citizens and politicians basically reduce to a single left to right dimension examples may include the politics of inflation vs unemployment capital taxation or the size of government we can think about policy issues within this domain of general interest politics as being resolved via traditional downsian electoral competition at least to a first approximation but the economic policy process also allows narrow interest groups ample opportunities to concentrate benefits to their own group at the expense of the population as a whole the resulting policy conflict is generically multi dimensional resolving it by voting alone would thus result in condorcet cycles we therefore need to go beyond the simplest electoral models to understand policy determination within this domain of special interest politics this lecture deals with special interest politics to make my point about fruitful analytical arbitrage i will stick to the same underlying policy example throughout this will be a simple model of a society where the government uses

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland