the random walk hypothesis of the exchange rate abstract we show that the exchange rate can follow a random walk without assuming risk neutrality we are thus able to derive a random walk hypothesis for the exchange rate which is associated with a risk premium that may differ from zero

stochastic saddlepoint systems stabilization policy and the stock market abstract we examine the effects of introducing stochastic shocks into a linear rational expectations model with saddlepoint dynamics generated by a forward looking asset price we derive the fundamental differential equation governing the path of the asset price as a function of the sluggish variable the equation does not admit closed form solutions in general but we provide a complete qualitative characterization of the solution paths which are symmetric about equilibrium these are the relevant solutions to consider in the presence of symmetric boundary conditions we present an application of the analysis to fiscal stabilization policy where public expenditures are only adjusted when gnp moves outside a threshold around a target level the impact of such a policy on the level of the stock market is considered and it is shown how the market will anticipate such state contingent policy changes whether the expectations are stabilizing or not is shown to depend on whether the stock market is positively or negatively correlated with gnp

understanding the inventory cycle abstract careful examination of aggregate data from the u s and other oecd countries reveals that production and inventory behavior exhibit paradoxical features 1 inventory investment is strongly countercyclical at very high frequencies e g 2 3 quarters per cycle it is procyclical only at relatively low cyclical frequencies such as the business cycle frequencies e g 8 40 quarters per cycle 2 production is less volatile than sales around the high frequencies it is more volatile than sales only around business cycle or lower frequencies 3 unlike capital investment or gdp the bulk of the variance of inventory investment is concentrated around high frequencies rather than around business cycle frequencies these features of production and inventory behavior at the low and high frequencies provide a litmus test for inventory theories this paper shows that the stockout avoidance theory kahn j 1987 inventories and the volatility of production american economic review 77 667 679 has much better potential than other competing theories for explaining the seemingly paradoxical features of inventory fluctuations observed at different cyclical frequencies my analysis suggests that demand shocks are the main source of the business cycle

some empirical dimensions of countertrade this paper discusses some of the recent theories of why countries impose countertrade obligations and compares some of the implications of these theories with data obtained from a comprehensive database of countertrade transactions

can the new forms of investment substitute for the old forms a transaction costs perspective this paper uses transaction costs theory is used to explain the features of the new contractual alternatives to foreign direct investment the new forms to assess their efficiency and to forecast their future development

trade wedges inventories and international business cycles abstract the large persistent fluctuations in international trade that cannot be explained in standard models by changes in expenditures and relative prices are often attributed to trade wedges we show that these trade wedges can reflect the decisions of importers to change their inventory holdings we find that a two country model of international business cycles with an inventory management decision can generate trade flows and wedges consistent with the data moreover matching trade flows alters the international transmission of business cycles specifically real net exports become countercyclical and consumption is less correlated across countries than in standard models we also show that ignoring inventories as a source of trade wedges substantially overstates the role of trade wedges in business cycle fluctuations

foreign interest rate disturbance financial flows and physical capital accumulation in a small open economy this paper focuses on the interaction of financial capital movements and accumulation of physical capital in a small open economy faced with a foreign interest disturbance it is shown that endogenizing physical capital has important implications for the exchange rate dynamics not captured by models which assume a fixed capital stock an increase in the foreign interest rate leads to decumulation of physical capital reduces the full employment level of output increases foreign debt and depreciates the currency appropriate monetary and fiscal policies could counteract the effects on domestic wealth and the reduction in the stock of capital

short term and long term interest rates in a monetary model of a small open economy abstract this paper analyzes the effects of both anticipated and unanticipated monetary and fiscal disturbances on the dynamic behavior of a monetary model of a small open economy it focuses on the adjustment of the short term and long term interest rates and the divergence of their transitional paths particularly in anticipation of these disturbances the analysis demonstrates how anticipation of a future policy change can generate perverse short run behavior the essential reason for the divergence between the short and long rates is that the latter is dominated by long term expectations while the former is primarily determined by current influences

effects of anticipated central bank actions on tobin s q share prices and exchange rate in a small open economy abstract qualitative features of response patterns of domestic share price the exchange rate and tobin s q are analyzed to compare the effects of three types of anticipated central bank policies in a small open economy exchange of domestic money with domestic shares exchange of domestic money with foreign bonds and exchange of domestic shares with foreign bonds all of equal values in domestic currency tobin s q adjusts monotonically to a new equilibrium in response to all three anticipated actions aside from the initial discontinuous changes when anticipated actions are first announced under a set of plausible assumptions on the model parameters the exchange rate and the share price are shown to respond non monotonically to the announced exchange of domestic money with foreign bonds if the announcement is made sufficiently far in advance the paper also demonstrates that the exchange of domestic shares with foreign bonds is most effective in moving the terms of trade the paper establishes conditions for nonmonotone response patterns in terms of real rate of return to the domestic shares after distinguishing overshooting response pattern from another non monotone pattern called misadjusting in this paper where the initial response of a variable to a shock is a movement away from equilibrium these response patterns are characterized in terms of two parameters and their relative sizes with respect to the implementation lags of announced actions

equilibrium in a durable goods market with lumpy adjustment abstract durable goods are an important component of the business cycle equilibrium models of durable goods markets are made difficult by the lumpy nature of individual purchases we show that a straightforward approximation of the distribution of durable goods holdings gives rise to a tractable equilibrium model we analyze the case of competition as well as that of a monopoly producer

east west joint ventures and buyback contracts abstract contractual joint ventures cjvs and the buyback form of countertrade are popular methods that socialist countries use to attract foreign investment in this paper we explore some reasons why this is so and also explain two predominant characteristics of these contracts the existence of sharing rules and minimum standard requirements on inputs the model stresses the incentive problems involved when a socialist host country which does not allow foreign direct investment uses a cjv to obtain the fruits of some knowledge based production process from a multinational enterprise

a general tce model of international business institutions market failure and reciprocity in this study i propose a general transaction cost economics tce model of international business institutions in which cross border transactions can be conducted at multiple market levels e g output asset and equity and the buyer seller relationship can go both ways a sells to b and b sells to a this general model addresses two major gaps in the literature first although market failure is the driving force behind the rise of multinational enterprises mnes most researchers have focused on the failure of a single market without exploring the presence of substitute markets for cross border transactions second many previous studies have begun their analysis with a bilateral setup between an mne and an indigenous firm for example a licensing agreement but concluded with a unilateral decision made by the mne to evade the indigenous firm in the case of direct investment in bridging the two literature gaps i propose a general tce model to integrate all institutional modes available to firms for governing international business such as licensing outsourcing acquisitions and joint ventures built on a multi market framework my analysis reveals that the choice of the optimal international business institution is tantamount to the selection of the most efficient market to conduct cross border transactions drawing on a bilateral setup it explicitly recognizes the power of reciprocity in solving the problem of market failure this distinct approach points out promising directions for future researchers to advance international business studies particularly after my transaction level analysis has been expanded to also consider institutional contexts and firm capabilities

economic incentives for countertrade this paper examines countertrade using standard economic theory we show that in many circumstances countertrade is a rational response to transaction costs information asymmetry moral hazard agency problems and other market imperfections this paper also integrates countertrade into international business theories some preliminary hypotheses that may be empirically testable after refinement are developed as reports of countertrade arrangements have become frequent academic interest has increased many popular explanations have been advanced among them shortage of foreign exchange balance of payments difficulties exercise of monopsony power and imposition of trade barriers it has also been alleged that countertrade is an inefficient form of international trade and that iitepresents a retrograde development most of these arguments have not been established theoretically nor have they been tested empirically

money demand and the effects of fiscal policies this paper reexamines the choice of the scale variable in the money demand function a variety of evidence suggests that consumer spending is a better scale variable than gnp changing the money demand specification along these lines can profoundly affect the standard keynesian analysis of a tax cut copyright 1986 by ohio state university press

the effects of government expenditure on the term structure of interest rates most formal macroeconomic models treat all assets as being of common maturity typically this is assumed to be either extremely infinitesimally short a short term bill or infinitely long a perpetuity in reality of course there is a whole spectrum of assets in existence having varying times to maturity moreover different agents in the markets are concerned with rates of return extending over different time horizons participants in asset markets can typically adjust their portfolios virtually instantaneously so that some short run rate of return is appropriate as an argument of the relevant asset demand functions on the other hand investors in physical equipment are typically locked into some longterm financial arrangement in which case it is some long term rate that is the appropriate argument of the investment function provided that the financial markets operate efficiently arbitrage by participants in the asset markets will bring the instantaneous rates of return on assets of varying maturities into equality l in this paper we introduce both a short rate and a long rate into a simple dynamic macroeconomic model the framework we employ is the familiar blinder solow 1973 model it is shown how through arbitrage the current long rate at any point

the price stability oriented monetary policy of the ecb an assessment the definition of price stability adopted by the ecb has recently been criticized in the literature particularly for being unable to fully anchor inflation expectations and creating a deflation risk in the paper empirical evidence is provided against these claims despite the unfavourable macroeconomic conditions for the euro area since 2001 monetary policy management has lead to the setting of the policy rate at levels compatible with trend inflation the long run inflation forecast in the range 1 3 and therefore without affecting negatively the inflation outlook

inventories markups and real rigidities in menu cost models a growing consensus in new keynesian macroeconomics is that nominal cost rigidities rather than countercyclical markups account for the bulk of the real effects of monetary policy shocks we revisit these conclusions using theory and data on inventories we study an economy with nominal rigidities in which goods are storable our theory predicts that if costs of production are sticky and markups do not vary much in response to say expansionary monetary policy firms react by excessively accumulating inventories in anticipation of future cost increases in contrast if the data inventories are fairly constant over the cycle and in response to changes in monetary policy we show that costs must increase and markups must decline sufficiently in times of a monetary expansion in order to reduce firm s incentive to hold inventories and thus bring the model s inventory predictions in line with the data versions of the model consistent with the dynamics of inventories in the data imply that countercyclical markups account for a sizable fraction of the response of real variables to monetary shocks

the management of countertrade factors influencing success countertrade success was found to be higher for large firms that were experienced in exporting and in countertrade operations could accommodate countertrade takebacks and valued vertical integration exported high value high visibility complex products had a low reputation for quality and had excess capacity success was also higher if the importer valued quality had low technical proficiency was inexperienced in exporting faced barriers in export markets had a high cost of forward contracts foreign exchange constraints and faced a disequilibrium exchange rate

product quality market signaling and the development of east west trade countertrade a contractual form in which there is a two way flow of goods occupies a position of significance in east west trade in this paper it is shown that countertrade can solve problems which arise when the quality of eastern european products is unknown using the market signaling literature a theory is formulated in order to make predictions concerning the use of countertrade countertrade will be particularly useful when quality information is important but cannot be obtained directly and when a country has a poor quality reputation these predictions are supported by empirical tests

commodity currencies and the real exchange rate abstract this paper examines whether the real exchange rates of commodity exporting countries and the real prices of their commodity exports move together over time using international monetary fund imf data on the world prices of 44 commodities and national commodity export shares we construct new monthly indices of national commodity export prices for 58 commodity exporting countries over 1980 2002 evidence of a long run relationship between national real exchange rate and real commodity prices is found for about one third of the commodity exporting countries the long run real exchange rate of these commodity currencies is not constant as would be implied by purchasing power parity based models but is time varying being dependent on movements in the real price of commodity exports

inventories and the volatility of production a stylized fact associated with inventory behavior is that the variance of production exceeds the variance of sales this paper presents a model of production decisions with demand uncertainty that incorporates no nnegativity constraints on inventories even with no productivity shocks optimal behavior by the firm is consistent with this stylized fact either if demand exhibits positive serial correlation or if the firm can backlog excess demand the reason is that a demand shock affects both the actual inventory level given unchanged production and the desired level production must replenish the stock and adjust to the new desired level copyright 1987 by american economic association

the assessment emu four years on this paper reviews the functioning of the economic and monetary union over the first 4 years of its existence monetary policy is viewed as having been of the inflation targeting type but with a tendency towards delay and conservatism in adjustment which may also reflect over optimistic output growth forecasts the resulting pressure on the stability and growth pact sgp illustrates the weakness in the consensus view of the harmonious interaction of monetary fiscal and supply side policies which requires policy in all three areas to be correct in discussing reform of the sgp a looser but still constraining form of fiscal agreement is advocated the supply side and balance of payments issues involved in inter country adjustment also interact importantly with the sgp and are identified as key areas of difficulty in a still immature monetary union with separate labour market structures here the mechanisms for coordination are more or less absent copyright 2003 oxford university press

a note on countertrade contractual uncertainty and transaction governance in emerging economies this paper develops a conceptual framework for analyzing organizational responses to contractual uncertainty in the context of emerging economies elaborating on hennart s 1989 transaction cost rationale for countertrade we develop a typology of exchange and transaction governance pertinent to the study of emerging economies contract trust and hostage notwithstanding the traditional explanation based on foreign exchange shortage we argue that the persistence of international countertrade illustrates organizational remedies to institutional deficiency in transaction governance

financial variables and real activity in canada in this paper we utilize canadian and u s data to investigate the relationship between financial market variables canadian and u s and canadian output growth using a non parametric technique the financial variables examined are those that are often associated with future output growth namely stock prices interest rates interest rate spreads and monetary aggregates our results show that as the number of autocovariances that are assigned a non zero weight increases the feedback from selected canadian or u s financial variables to future canadian output growth increases in particular we find that stock prices as well as yield spreads and monetary aggregates are useful predictors of output growth this is in line with earlier parametric studies in the literature that find these variables to be good predictors of economic activity variables financieres et niveau d activite reelle au canada ce memoire utilise des donnees canadiennes et americaines pour analyser la relation entre les variables des marches financiers au canada et aux e u et la croissance du produit canadien a l aide d une technique non parametrique les variables financieres analysees sont celles qui sont generalement associees a la croissance du produit national dans l avenir i e le prix des actions les taux d interet les ecarts entre taux d interets et les agregats monetaires les resultats montrent que a proportion que le nombre des auto covariances auquel on assigne une valence zero s accroit les effets d echos variables financieres sur la croissance future du produit canadien s accroissent en particulier il appert que les prix des actions les ecarts entre taux d interets et les agregats monetaires sont des predicteurs utiles de la croissance du produit voila qui confirme les resultats d etudes parametriques

macroeconomic and stock market interactions with endogenous aggregate sentiment dynamics abstract this paper studies the implications of heterogeneous capital gain expectations on output and asset prices we consider a disequilibrium macroeconomic model where agents expectations on future capital gains affect aggregate demand agents beliefs take two forms fundamentalist and chartist and the relative weight of the two types of agents is endogenously determined we show that there are two sources of instability arising from the interaction of the financial with the real part of the economy and from the heterogeneous opinion dynamics two main conclusions are derived on the one hand perhaps surprisingly the non linearity embedded in the opinion dynamics far from the steady state can play a stabilizing role by preventing the economy from moving towards an explosive path on the other hand however real financial interactions and sentiment dynamics do amplify exogenous shocks and tend to generate persistent fluctuations and the associated welfare losses we consider alternative policies to mitigate these effects

the dynamics of markups and inventories in retailing firms this paper is concerned with the interaction between price and inventory decisions in retailing firms and its implications for the dynamics of markups and the existence of sales pro motions we consider a model where a monopolistically competitive retailer decides price and inventories and assumes lump sum costs when placing orders or changing nominal prices tn this model the existence of stockout probabilities and fixed ordering costs generate a cyclical price behaviour characterized by long periods without nominal price changes and short periods with very low prices i e sales promotions we estimate this model using a unique longitudinal dataset with information about retail and wholesale prices inventories orders and sales for several brands in a supermarket chain based on the estimated model we perform several counterfactual experi ments that show the important role that inventories and fixed ordering costs play in the dynamics of retail prices and the frequency of sales promotions in this dataset

output the stock market and interest rates this paper develops a simple model of the determination of output the stock market and the term structure of interest rates the model is an extension of the is lm model and borrows from it the assumption that output is determined by aggregate demand and that the price level can only adjust over time to its equilibrium value however whereas the is lm emphasizes the interaction between the interest rate and output this model emphasizes the interaction between asset values and output asset values rather than the interest rate are the main determinants of aggregate demand and output current and anticipated output and income are in turn the main determinants of asset values it is this interaction that the model intends to capture its goal is to characterize the joint response of asset values and output to changes in the environment such as changes or announcement of changes in monetary and fiscal policy as the above brief description makes clear anticipations are central to the story the assumption made in this paper will be one of rational expectations the paper is organized as follows section i describes the model and sections ii iv characterize the behavior of the economy under the extreme but convenient assumption that prices are fixed forever sections v and vi extend the analysis to the case where prices adjust over time to their equilibrium value

a fresh look at fiscal multipliers one size fits it all evidence from the mediterranean area following the adoption of important fiscal stimuli to fight the recent crisis a large literature estimated fiscal multipliers focusing on an area particularly appealing given its diversity and the diversity of the response of countries that compose it to the current crisis namely the mediterranean area we unveil major disparities regarding the significance sign and size of fiscal multipliers depending mainly on the economic characteristics the type of multiplier the time span and the type of fiscal stimulus evidence of such important heterogeneities highlights the need for better cooperation among countries particularly regarding the design of fiscal policy failing to do so might divert public resources to ineffective fiscal policies in some countries or on the contrary deprive other countries of potentially high benefits of appropriate fiscal policies including a reliable tool for exiting the current crisis

options for uk fiscal policy this article is written as the uk s chancellor of the exchequer kenneth clarke prepares his novem ber budget it will be the first unified budget with taxation and expenditure dealt with at the same time in framing this budget the chancellor must make a fine judgement between the need to restore stability to uk public finances and the need to maintain economic recovery the choice is in essence the familiar one between sound finance and the use of fiscal policy to manage demand

fiscal policy shocks and stock prices in the united states this paper uses a range of structural vars to show that the response of us stock prices to fiscal shocks changed in 1980 over the period 1955 1980 an expansionary spending or revenue shock was associated with modestly higher stock prices after 1980 along with a decline in the fiscal multiplier the response of stock prices to the same shock became negative and larger in magnitude we use an estimated dsge model to show that this change is consistent with a switch from an economy characterised by active fiscal policy and passive monetary policy to one where fiscal policy was passive and the central bank acted aggressively in response to inflationary shocks

monetary policy uncertainty and the market reaction to macroeconomic news abstract we examine whether monetary policy uncertainty influences the reaction of the equity treasury security foreign exchange and crude oil markets as well as medium term interest rates to u s macroeconomic announcements using intraday futures data we show that in the presence of higher policy uncertainty the response to macroeconomic news weakens in the stock and crude oil markets and strengthens in the treasury interest rate and foreign exchange markets in times of elevated monetary policy uncertainty macroeconomic announcements impact the financial and crude oil markets to a large extent through expectations of future monetary policy

retail sales of durable goods inventories and imports after large devaluations abstract this paper presents a general equilibrium model of a small open economy with monopolistically competitive retailers inventories and durable goods following large devaluations this model generates a collapse of imports a fall of retail sales and inventories and a gradual increase in retail prices besides the model provides an explanation for a short lived spike in retail sales of durable goods observed during the recent devaluation episode in russia in december of 2014

new directions in the economic theory of agency an accessible survey of existing results in the theory of agency is provided a general one period single agent model is presented first and the restrictions required to obtain predictions are explained environments having more than one agent and or multiple periods are considered subsequently the central conclusion is that the theory of agency as currently formulated has little operational content the new directions suggested are among those that are likely to yield more empirically relevant propositions directions nouvelles dans la theorie economique de l agence l auteur presente un survol relativement simple des principaux resultats des analyses de la theorie economique de l agence on presente d abord un modele general dans le cas d un agent et d une periode ainsi que les restrictions requises pour obtenir des previsions sans ambiguite on examine ensuite les cas oiu il y a plus d un agent et ou plus qu une periode ce qui ressort de cette analyse fondamentalement c est que la theorie de l agence telle qu elle est formulee pour le moment a un contenu operationnel limite les directions nouvelles suggerees dans le memoire sont susceptibles d engendrer un plus grand nombre de propositions pertinentes et operationnelles

backward and forward solutions for economies with rational expectations in models where anticipations of future endogenous variables influence current behavior there exists an infinity of solutions under the assumption of rational expectations this problem has been dealt with in the study of macro economic models by the implicit or explicit use of one of three additional requirements optimality consistency with alleged economic behavior or conformity of the endogenous variables to an imposed stationarity condition these requirements have coincided in existing models leading to the choice of a unique solution a forward solution the purpose of this paper is to review the problem characterize the solutions and examine whether these requirements are acceptable section i presents a simple model and derives the set of solutions the model makes no claim to generality but has the major advantage that the issues are easily understood in this simple case section ii discusses the requirement of consistency with economic behavior section iii discusses the requirement of stationarity and section iv provides some conclusions