answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

pricing in a customer market in standard pricing models movements in demand are partially offset by price responses in a customer market however price markups may decrease with high demand thus price may magnify rather than stabilize demand movements i consider a monopolist selling a good of which first time consumers are uncertain repeat customers know that the product works the monopolist trades the objectives of exploiting past customers and attracting new ones in a period with many new potential customers the monopolist gives more weight to attracting and lowers its markup last i examine some evidence on whether expansions are periods with disproportionately many new customers

fair pay and a wage bill argument for low real wage cyclicality and excessive employment variability this article considers a two period optimal contracting model in which firms make new hires in the second period subject to the constraint that they cannot pay discriminate either against or in favour of the new hires in the absence of fully contingent contracts it is shown that wages are less flexible than needed for efficient employment levels with the result that too few hires are made in bad states of the world unemployment is involuntary in an extension to the model there may also be involuntary and excessive layoffs in some states of the world this article investigates the consequences for wage and employment outcomes of assuming that firms follow a fair wage policy by a fair wage policy is meant that workers receive equal pay for equal work irrespective of when they were hired the fair wage restriction is combined with the assumption that wage contracts are not state contingent while both of these features have much empirical support there has been no previous attempt to analyse their interaction it is shown to lead to reduced wage volatility and increased employment variability as well as the possibility of involuntary unemployment the essential idea of the article is simple if the wage paid to new hires is

the informational content of implied volatility implied volatility is widely believed to be informationally superior to historical volatility because it is the markets forecast of future volatility but for s p 100 index options the most actively traded contract in the united states we find implied volatility in aggregate and across subsamples separated by maturity and strike price implied volatility has virtually no correlation with future volatility and it does not incorporate the information contained in recent observed volatility article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

a model of nominal contracts a model is produced in which labor contracts that prespecify unindexed nominal wage payments arise endogenously these contracts function as a self selection mechanism under appropriately different attitudes toward price level risk which can either arise directly from preferences or be induced by different patterns of asset holdings nominal contracts allow high productivity workers to signal their type by their willingness to accept unindexed contracts this explanation of nominal contracts does not require that money be used in any particular set of transactions and nominal contracts enhance the risk faced by all parties accepting them

nominal wage flexibility wage indexation and monetary union membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non membership this counteracts the stabilisation policy cost of giving up monetary independence but more wage flexibility is only an imperfect substitute for an individual monetary policy it is possible that an increase in wage flexibility is welfare decreasing because of the accompanying rise in price variability the interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full indexation equilibrium

on real and sticky price theories of the business cycle after presenting some facts about the growth of government in western industrialized countries possible causes of this development are analyzed from a public choice perspective next some empirically tested theories which seek to explain this growth are discussed finally possible consequences for efficiency and individual liberty are examined it is shown that both the number and size of interest groups age of democracy as stated by mancur olson 1982 and the increasing share of government expenditure in gdp seem to exert a negative influence on the growth rate of gdp copyright 1986 by ohio state university press

are prices too sticky nominal price rigidity has a negative externality rigidity in one firm s price increases the variability of aggregate real spending which harms all firms this paper investigates whether this externality is large which would imply that stabilization policy can be highly beneficial even if the costs of making prices flexible are small there are three conclusions first both the private cost of price rigidity and the externality are second order in the size of fluctuations second the externality can nonetheless be arbitrarily large third in a simple model the externality is small for plausible parameter values

pay and employment determination in britain what are labour contracts really like the recent growth of unemployment in western economies has prompted new research on the workings of the labour market there has been much interest in particular in the questions what determines the level of real pay and why is it apparently so insensitive to changes in aggregate demand and unemployment european economists now find it hard to take seriously the notion still taught to many undergraduate that wages are determined by the intersection of demand and supply curves roughly half of all british employees belong to trade unions a much higher percentage have their pay fixed by some kind of collective bargain in this country it is negotiations not impersonal com petitive markets which decide what most of us will be paid the difficult problem is that of how to understand this process or to put it differently of how to think up the right model of the world

customer markets credit market imperfections and real price rigidity according to standard theory an increase in demand should raise prices of goods given factor prices empirically however prices appear to be unaffected by short run variations in demand this paper suggests an explanation of this observation if customers react slowly to price changes and credit markets are imperfect prices may be unchanged or even fall when demand increases the reason is that when demand is high profits are high and firms can compete more intensely for customers without increasing their borrowing copyright 1991 by the london school of economics and political science

rational expectations and price rigidity in a monopolistically competitive market this paper analyses monopolistically competitive markets under incomplete information facing unanticipated disturbances firms determine their prices before they have information about other firms prices and form their expectations about the average price rationally if the market becomes very competitive in the sense that the price elasticity of individual demand is close to infinity then the average price is completely insensitive to short run unanticipated disturbances in the intermediate case if a cost disturbances are uniform and b demand and cost disturbances are correlated then the average price is sensitive to cost and insensitive to demand

on union preferences and labour market models insiders and outsiders this paper constructs a model of trade union behavior in which there is a distinction between insiders and outsiders this is used to examine one of the most troublesome issues in macroeconomic theory namely the extent to which a rise in aggregate demand might generate wage increases rather than growth in employment a generalization of the most widely used union utility function is presented the analysis reveals the conditions under which insiders will agree to let outsiders into employment derives two step wage preferences and proves a new result on wage rigidity copyright 1987 by royal economic society

nominal wage contracts and the persistent effects of monetary policy we consider an efficiency wage model where wages affect turnover and firms choose optimal labor contracts under uncertainty about demand and productivity we show that there may be an equilibrium with nominal wage contracts where monetary shocks affect output furthermore monetary shocks have persistent effects on output because the previous state of the labor market affects the reemployment probability of quitting workers persistence increases if workers have bargaining power with endogenous policy a credibility problem arises naturally in the model equilibrium inflation increases with persistence but decreases with the natural rate of unemployment for given persistence

the relation between implied and realized volatility abstract previous research finds the volatility implied by s p 100 index option prices to be a biased and inefficient forecast of future volatility and to contain little or no incremental information beyond that in past realized volatility in contrast we find that implied volatility outperforms past volatility in forecasting future volatility and even subsumes the information content of past volatility in some of our specifications our results differ from previous studies because we use longer time series and nonoverlapping data a regime shift around the october 1987 crash explains why implied volatility is more biased in previous work

is equilibrium indexation efficient this paper investigates the welfare properties of equilibrium indexation in a decentralized economy if indexation is costless so all firms index then the equilibrium degree of indexation is efficient but if indexation is costly and this leads some firms not to index equilibrium indexation is inefficient because indexation has externalities for nonindexed firms firms choose too little indexation if labor demand is more responsive to movements in real money than to movements in real wages the results do not depend on the relative importance of real and nominal shocks

forecasting stock return variance toward an understanding of stochastic implied volatilities we examine the behavior of measured variances from the options market and the underlying stock market under the joint hypotheses that markets are informationally efficient and that option prices are explained by a particular asset pricing model forecasts from time series models of the stockreturn process should not have predictive content given the market forecast as embodied in option prices both in sample and out of sample tests suggest that this hypothesis can be rejected using simulations we show that biases inherent in the procedure we use to imply variances cannot explain this result thus we provide evidence inconsistent with the orthogonality restrictions of option pricing models that assume that variance risk is unpriced these results also have implicationsfor optimal variance forecast rules

trade union efficiency and overemployment with seniority wage scales inefficient unemployment of union members depends upon the inability of the union to bargain over employment as well as wages the issue of union membership limitations has received less attention as seen in the survey by oswald i 983 grossman i983 considers endogenous membership size with mixed efficiency results but he imposes a number of severe restrictions on allowable contracts in the current paper we examine the issue of union membership size under very general contracts where unions negotiate over wage rates employment levels and compensation payments to laid off workers and further can negotiate differential treatment of seniority groups these general contracts represent a useful benchmark case recognising that the results will change as various limitations on the contract are imposed the treatment of seniority is crucial and we model this by an overlapping generations approach continuing workers at the firm negotiate the contract to be applicable to the following period new hires over that period in the number stipulated in the contract then gain seniority and negotiate the contract for the period after the formulation of the problem with the exception of the treatment of new hirings is similar to that in the implicit contracting literature and many of the results will be familiar unemployment of union members only occurs when the marginal value product of labour fails below the opportunity cost leisure value

an empirical model of wage indexation provisions in union contracts this paper describes the responses of index linked wage rates to concurrent price increases for a sample of canadian union contracts and then analyzes theseresponses in terms of a simple model of indexation to the aggregate price level the model highlights the importance of aggregate price movements in conveying information about industry specific prices the empirical analysis confirms that industry specific correlations between input and output prices and the consumer price index are important determinants of the flexibility of wages to prices across indexed contracts

a near rational model of the business cycle with wage and price inertia this paper presents a model in which insignificantly suboptimal behavior causes aggregate demand shocks to have significant real effects the individual loss to agents with inertial price wage behavior is second order in terms of the parameter describing the shock while the effect on real economic variables is first order thus significant changes in business activity can be generated by anticipated money supply changes provided that some agents are willing to engage in nonmaximizing behavior which results in small losses

predicting volatility in the foreign exchange market measures of volatility implied in option prices are widely believed to be the best available volatility forecasts in this article we examine the information content and predictive power of implied standard deviations isds derived from chicago mercantile exchange options on foreign currency futures the article finds that statistical time series models even when given the advantage of ex post parameter estimates are outperformed by isds isds however also appear to be biased volatility forecasts using simulations to investigate the robustness of these results the article finds that measurement errors and statistical problems can substantially distort inferences even accounting for these however isds appear to be too variable relative to future volatility it is widely believed that the volatility implied in option prices is the market s best estimate of future volatility after all if it were not one could devise a trading strategy that could generate profits by identifying mispriced options the purpose of this article is to investigate the information content and predictive power of volatility implied in options on foreign currencies the paper focuses on options on currency futures traded on the chicago mercantile exchange cme because of the depth and liquidity of cme futures and options traded side by side in the same market implied standard deviations isds allow for clean tests of the predictive power of implied volatilities early studies of the information content of isds have generally found that these contain substantial information for future volatility latane and rendleman 1976 chiras and manaster 1978 and beckers 1981 for example regress future volatility on the weighted implied volatility across a broad sample of chicago board options exchange cboe stocks and find that options contain volatility forecasts that are more accurate than historical measures 1 these studies performed shortly after the 1973 beginning of the cboe option market could only use a relatively short time span and therefore focused on cross sections rather than time series predictions

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

insiders and outsiders in wage determination a firm starts with a group of insiders or seasoned workers there is also a large pool of outsiders who are initially less productive but are transformed into insiders after one period of employment the firm gains from having a large pool of insiders some of whom may be laid off in bad years insiders gain from keeping their numbers small if the insiders set their wage unilaterally they will choose a path that in this extreme case prevents employment of outsiders even if future employment prospects are good if the wage path is set by bilateral bargaining the extra advantage to the firm permits employment of some outsiders in some situations

how high is the private gain from wage indexation the effects of firm specific shocks on the gain from writing state contingent wage contracts are examine in an extension of the model in gottfries 1992 it is shown that the introduction of firm specific uncertainty increases the gain from indexation to prices only moderately moreover nominal wage contracts should be more prevalent when unemployment benefits are high or unemployment spells are short

the clash of central bankers with labour market insiders and the persistence of inflation and unemployment this paper analyses the implications of monetary policy for the dynamic behaviour of inflation in a natural rate model characterized by endogenous unemployment persistence we present evidence for the main industrial economies that suggests that inflation displays persistence which is of the same order of magnitude as the persistence of deviations of unemployment from its natural rate we provide a theoretical explanation of this fact based on a model of the dynamic interactions between central bankers and labour market insiders the clash in the objectives of central bankers and labour market insiders is what causes both inflation and unemployment to display the same persistence in this model the analysis suggests that inflation persistence could be addressed in a welfare improving way if central banks adopted monetary policy rules that targeted unanticipated changes in unemployment rates instead of deviations of unemployment from its natural rate

underemployment equilibrium with rational expectations in this paper i use some recent work in the microeconomics of imperfect information to construct a macro model the microeconomic theory suggests that atomistically competitive firms face kinked demand curves in this model there is a range of aggregate equilibria consistent with correct information i then show that individual firms can face a free rider problem in trying to move from one equilibrium to another by changing the price level monetary policy is not subject to this problem even if the policy is fully anticipated

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

price dynamics under imperfect information abstract the paper considers the pricing decision of a monopolist firm having demand and costs exposed to nominal and real shocks which include both permanent and transitory changes the firm obtains information through both price and quantity signals and the price equation is found by use of a filtering technique it is shown that imperfect information implies nominal price smoothing where the price adjusts only partially relative to the past price by incorporating new information observed through price and quantity signals

the importance of lifetime jobs in the u s economy though the u s labor market is justly notorious for high turnover and consequent high unemployment it also provides stable near lifetime employment to an important fraction of the labor force this paper investigates patterns of job duration by age race and sex with the following major conclusions 1 the typical worker today is holding a job which has lasted or will last about eight years over a quarter of all workers are holding jobs which will last twenty years or more sixty percent hold jobs which will last five years or more 2 the jobs held by middle aged workers with more than ten years of tenure are extremely stable over the span of a decade only twenty to thirty percent come to an end 3 among workers aged thirty and above about forty percent are currently working in jobs which eventually will last twenty years or more three quarters are in jobs which will last five years or more 4 the duration of employment among blacks is just as long as among whites even though the jobs held by blacks are worse in almost every other dimension they are no more unstable than those held by whites 5 women s jobs are substantially shorter than men s on the average only about a quarter of all women over the age of thirty are employed in jobs which will last over twenty years whereas over half of men over thirty are holding these near lifetime jobs this abstract was borrowed from another version of this item

insider bargaining power starting wages and involuntary unemployment recent analyses of wage bargaining has emphasized the distinction between insiders and outsiders yet one typically assumes that insiders and recently hired outsiders are paid the same wage we con

a new look at the ui effect on transitions from unemployment into wage employment in spain the limited duration of the ui benefits entitlement this article is a new look at the study of the unemployment insurance effect on the transition probability from unemployment into wage employment in spain it is found that individuals increase their search effort and reduce their reservation wage as the unemployment insurance benefit entitlement exhaustion approaches and their exit rate equals that of the unemployed who never got benefits from the exhaustion moment financial constraints are not important in spain business cycle affects more to long term unemployed and finally it is found that the probability of being offered a vacancy decreases with time spent in unemployment having allowed for unobservable heterogeneity

microfoundations of macroeconomic price adjustment survey evidence from swedish firms this paper presents the results of a survey on price setting behavior conducted on a large random sample of swedish firms the median firm adjusts the price once a year state and time dependent price setting are about equally important the four highest ranked explanations for price rigidity in this study implicit contracts sluggish costs explicit contracts and the kinked demand curve have close correspondents among the top five places in two similar large scale surveys carried out in the uk and the u s the results point to the importance of the long term relations with customers for the rigidity of prices the estimated share of sales that go to regular customers is more than 80

implicit contracts a survey 7mplicit contracts resolve the distribution of uncertainty and utilization of specific human capital between risk averse workers and less risk averse firms incomplete contracts are required to yield involuntary layoffs in contract markets otherwise contracts are efficient and pareto optimal by construction there is a close relation between contract theory and neoclassical labor market theory contracts smooth consumption but increase the volatility of labor supply and labor utilization to demand disturbances because contractural insurance eliminates the income effects of socially diversifiable risks this result is similar to the intertemporal substitution hypothesis however the price mechanism in a contract is substantially different contracts embody a nonlinear two part pricing scheme the lump sum part allocates the income consumption consequences of risks and the marginal pricing part allocates production and labor utilization this implicit pricing mechanism is in all respects flexible though the observed average hourly wage combines both parts and may give the outward appearanceof rigidity furthermore the observed average wage rate in a contract does not reflect marginal conditions necessary for structural econometric estimation indivisibilities appear necessary to account for the split between work sharing and layoffs contracts with private information are also considered in the nonlinear pricing context this abstract was borrowed from another version of this item

small menu costs and large business cycles a macroeconomic model of monopoly i introduction the conflict between modern neoclassical and traditional keynesian theories of the business cycle centers upon the pricing mechanism in neoclassical models prices are fully flexible they represent the continuous optimization of economic agents and the continuous intersection of supply and demand in keynesian models prices are often assumed to be sticky they do not necessarily equilibrate all markets at all times one of the reasons for the resurgence of the equilibrium approach to macroeconomics has been the absence of a theoretical underpinning for this keynesian price stickiness this note shows that sticky prices can be both privately efficient and socially inefficient the business cycle results from the suboptimal adjustment of prices in response to a demand shock to the extent that policy can stabilize aggregate demand it can mitigate the social loss due to this suboptimal adjustment in some keynesian models prices are simply exogenously fixed 2 in others agents must set their prices in advance of the transaction date the act of altering a posted price is certainly costly these costs include such items as printing new catalogs and informing salesmen of the new price yet these menu costs are small and therefore generally perceived as providing only a weak foundation for these fixed price models however this inference is flawed small menu costs can cause large welfare losses the claim that price adjustment costs are small does not rebut the claim that they are central to understanding economic fluctuations

insiders outsiders and nominal wage contracts while the consequences of nominal wage contracts have been rather thoroughly analyzed there is no generally accepted theory of why such contracts prevail in this paper i argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts since most employment fluctuations take the form of fluctuations in hiring insiders are normally not affected by them since prices are primarily determined by costs demand shocks have small effects on real wages thus insiders have little incentive to change to more complicated contracts with rigid nominal wages nominal demand shocks have large effects on the employment opportunities of outsiders but outsiders have little influence on labor contracts

wages policy and unemployment in australia it is generally accepted among australian economists that high rates of growth of wages at various times over the last decade have made the achievement of full employment and lower rates of inflation more difficult fear of a further acceleration of wage growth has also been a policy constraint it is when one attempts to go further that considerable disagreement becomes evident from a labour market viewpoint there does not seem to be a consensus as to the answers to the two broad questions that should be addressed first how important are wage changes relative to other factors that depress employment and add to the inflation rate second how does government policy impinge on the process that generates wage changes to do justice to both of these in a paper as short as this one is difficult so i shall focus most of the paper on the second question the relationships between government policy and wage changes are particularly important at this time for most of the last decade successive governments have operated a national wages policy which to a large degree has been based on the indexation of wages for past price changes the latest experiment the prices and incomes accord is the centrepiece of the current government s employment and inflation policy and after almost two years of wide community and media support the key principles upon which it is based are suddenly being questioned 1 our prime endeavour therefore will be to build up sufficient understanding of the wage determination process so that some evaluation can be made as to the effectiveness of these national wage policies this turns out to be a remarkably difficult task which generates considerable concern in our mind that the data may not be sufficiently rich to serve as a basis for sound judgments it does appear however that the effect of a given level of unemployment upon wage changes has consistently weakened over the last decade why this should be so is a major unresolved puzzle i offer a loosely constructed theory that is consistent with the facts but it is by no means the only possible explanation section i provides a description of wage setting in australia and some key facts of the economy in section ii the statistical analysis of wage changes focuses on two competing theories one is the phillips curve approach and the other stresses that wage outcomes may be to a significant degree independent of the level of unemployment and may depend instead on utilization rates of labour within the firm section iii considers the efficacy of incomes policies in australia some final comments areoffered in section iv

forecasting volatility of futures market the s p 500 and ftse 100 futures using high frequency returns and implied volatility we show that historical volatility from high frequency returns outperforms implied volatility when standardized returns by historical volatility tends to be normally distributed for the ftse 100 futures we find that historical volatility using high frequency returns outperforms implied volatility in forecasting future volatility however we find that implied volatility outperforms historical volatility in forecasting future volatility for the s p 500 futures the results also indicate that historical volatility using high frequency returns could be an unbiased forecast for the ftse 100 futures 1 we thank christopher lowes for his excellent research assistance