forecasting the exchange rate a monetary or random walk phenomenon abstract this paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate instrumental variable estimates of the simple monetary model are not supported by the data while the full information maximum liklihood estimates of its rational expectations counterpart are the rational expectations monetary model is operationalized using the results of hansen and sargent 1980 and flavin 1981 and box jenkins time series techniques monthly data on the us and uk economics over the recent flexible exchange rate period serve as the case study

the dynamic efficiency of capitalism abstract variants of lancaster s original model on the inefficiency of capitalism have continued to interest scholars in a slight extension of the original finite horizon model of lancaster the possibility of more or less completely efficient outcomes is shown in the present paper such results are effected by the introduction of standard trigger strategies and soft trigger strategies defined in the present paper

the monetary approach to exchange rate determination under rational expectations the dollar deutschmark rate abstract this paper reformulates the monetary approach after ascertaining that a money demand function with a partial adjustment mechanism had more empirical support than a money demand function which assumed instantaneous stock adjustment the resulting exchange rate equation is estimated by two rational expectations techniques the parameter estimates are reasonable and are robust to the estimation technique used to different specifications of the driving processes and to changes in the estimation period the structural model outperforms the random walk model and its own unconstrained equivalent a pure time series equation in outof sample forecasts

nash and stackelberg solutions in a differential game model of capitalism abstract this paper examines two noncooperative open loop solution concepts in a simple model of economic growth and distribution formulated as a differential game between workers who may save or consume and capitalists who may consume or invest it is demonstrated that both players prefer the stackelberg game to the nash game furthermore it is shown that under fairly realistic assumptions about the parameters of the model both workers and capitalists would prefer to act as the follower in the stackelberg game this means that capitalism is in a stalemate i e in a position where neither class wants to take the initiative and announce its strategy first the result is interpreted as an explanation of the difficulties met in designing and implementing incomes policies and social contracts

on the dominance of capitalists leadership in a feedback stackelberg solution of a differential game model of capitalism abstract this paper deals with a modified version of the lancaster model of capitalism where it is assumed that there is a cost jointly borne by the two groups of players workers versus capitalists and associated with the bargaining of a larger share of consumption for the workers it is shown that a feedback stackelberg solution with the capitalists acting as leaders and announcing their investment policy at the beginning of each period is a solution dominating the feedback nash solution the paper is also intended to be a tutorial on the feedback stackelberg solution a concept not so often used by economic modelers

efficient equilibria in a differential game of capitalism abstract one considers a differential game of capitalism a la lancaster feedback nash equilibria and pareto optimal solutions are characterized under the assumption that the planning horizon is infinite it is then shown that by combining a pareto optimal solution with the nash feedback equilibrium strategy pair which plays the role of a threat one can obtain an efficient equilibrium which is also subgame perfect in the sense of selten this result modifies sensibly the previous interpretation of the inherent inefficiency of capitalism

the collapse of purchasing power parities during the 1970 s one of the striking facts concerning the relationship beiveen prices and exchange rates during the 1970 s has been the dismal performance of the predictions of the simple versions of the purchasing power parity doctrine ppp that doctrine in its absolute version states that the equilibrium exchange rate between domestic and foreign currencies equals the ratio of domestic to foreign price levels the relative version of the doctrine relates equilibrium changes in exchange rates to changes in the ratio of domestic to foreign prices during the 1970 s short run changes in exchange rates bore little relationship to short run differentials in national inflation rates and frequently divergences from purchasing power parities have been cumulative this paper reviews and analyzes the empirical record of exchange rates and prices during the 1970 s and the analysis is based on the experience of the dollar pound the dollar frecch franc and the dollar dm exchange rates section 2 presents the evidence on ppp during the 1970 s and contrasts it with the evidence from the 1920 s a period during which the doctrine held up reasonably well this analysis is relevant for assessing whether the flexible exchange rate system was successful in providing national economies with an added degree of insulation from foreign shocks and whether it provided policymakers with an added instrument for the conduct of macroeconomic policy the evidence regarding devia tions from purchasing power parities is also relevant for determining whether there is a case for managed float section 3 attempts to explain what went wrong with

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

rational expectations and monetary models of exchange rate determination an empirical examination abstract one asset model of exchange rate determination that has received substantial attention in the literature is the monetary model as with other asset models expectations of future exchange rates play a key role usually these expectations are assumed to be formed rationally however to date there has been no attempt to empirically estimate a complete monetary model with rational expectations in this paper such a model is estimated and the restrictions implicity imposed by the rational expectation hypothesis tested the results suggest that both the parameter constraints associated with the monetary model and those implied by the reh are consistent with recent exchange rate behavior

tests of the performance of reduced form exchange rate models this study analyzes the performance of reduced form exchange rate models through a number of tests of specification stability and prediction it confirms earlier tests showing that monetary models do not perform well but it finds more positive results for other models some portfoliobalance models are sufficiently stable to do better than a random walk in post sample tests the study concludes that monetary models are unduly restrictive in the way they incorporate purchasing power parity and perfect asset substitutability

exchange rates in the oecd interlink model specification and simulation properties international financial linkages with endogenised exchange rates were introduced into the interlink model to permit simulation analysis of the transmission of financial impulses from one country to another apart from simulation analysis the chief use of the model is in checking the international consistency of the oecd secretariat s twice yearly forecasts these proceed on the technical assumption of unchanged nominal exchange rates the model s role in this context is to help check the consistency of national forecasts with each other and with the exchange rate assumption the international financial linkages a subset of the model s equations were conceived as a complete and consistent world system international identities governing financial flows are binding and 16 exchange rates are determined simultaneously the interlink system itself consists of 23 country models with sub models of eight non oecd zones grouped around a trade model which has a five commodity breakdown the country models are generally income expenditure systems with some parameters estimated econometrically and others imposed to reproduce national model properties for six of the larger oecd countries the models are relatively more

how uncertain is household income in china abstract this paper studies the stochastic processes of household income in china using longitudinal data from chns 1989 2009 we consider both labor income and total household income we find that i compared with the us households in psid income of the chinese households is much more uncertain ii compared with the 1990s degree of income uncertainty in the 2000s is substantially higher in china

why countries with the same technology and preferences can have different growth rates abstract a standard ak model of endogenous growth has been extended to allow for an intertemporal conflict between capitalists and workers for the dynamic game thus obtained an equilibrium solution in feedback nash markovian strategies have been computed however many equilibria in trigger strategies can dominate the former there are dominating strategies that depend on the country specific bargaining power of the workers versus capitalists they are both pareto optimal and subgame perfect this provides an explanation why countries which are completely identical in preferences technology and factor endowments can experience different long term growth rates

efficient exchange rate forecasts lagged models better than the random walk abstract the evidence of meese amd rogoff 1983 on the out of sample forecasting performance of structural exchange rate models in comparison to the random walk model portrays a disappointing picture of structural models this paper re considers the issue for the german mark for an updated period to include a larger set of structural models and lagged adjustment besides out of sample evidence in sample evidence is also examined we conclude that while some stuctural models dominate the random walk a lagged adjustment consideration can contribute towards better performance

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

stackelberg versus cournot a differential game approach abstract we propose an infinite horizon differential oligopoly game where at each point in time m stackelberg leaders and n m stackelberg followers exploit a common pool renewable resource and sell their harvest in the marketplace at a price that depends on total harvest we derive a feedback generalized stackelberg nash cournot equilibrium a generalization of the feedback stackelberg equilibrium nesting feedback stackelberg and feedback cournot as special cases we proceed with a comparison between the feedback stackelberg and the feedback cournot equilibria and find a number of interesting results in contrast with static oligopoly theory as to the relative efficiency of the two equilibria we show that the cournot equilibrium can be more efficient than the stackelberg equilibrium this holds true in the short run at the steady state and in terms of discounted welfare

the impact of news and alternative theories of exchange rate determination over the last decade two of the more important developments in the area of exchange rate determination are the construction of the asset market model and the recognition that news is a key factor affecting exchange rates the asset market model has evolved as an alternative to the traditional flow model of exchange rate determination in contrast to the flow model where the exchange rate is determined by the flow demand for and flow supply of foreign exchange exchange rates adjust to allocate the total stock of foreign exchange in question in the asset market model this model may be presented in one of two forms the monetary approach or the portfolio balance approach the former is summarized in the work of bilson 1978a dornbusch 1976 frenkel 1976 johnson 1976 and mussa 1976 1979 while the latter stems from the efforts of branson 1981 branson halttunen and masson 1977 dooley and isard 1982 kouri 1976 kouri and de macedo 1978 and rodriguez 1980 while the logical consistency of these models has enhanced their popularity empirical support has been limited the importance of unanticipated shocks or news in explaining exchange rate behavior has been suggested by dornbusch 1980 frenkel 1981 isard 1983 and mussa 1979 the basis for this suggestion is the efelcient markets approach that suggests securities prices in a capital market should reflect all available information therefore the predominant cause of exchange rate movements is news that could

the feedback equilibria of a differential game of capitalism abstract the feedback equilibria of a capitalistic game described by kelvin lancaster are derived under concave utility functions with a constant degree of absolute risk aversion and standard production function it is shown that the equilibrium solution is unique if the rate of time preference and the constant degree of absolute risk aversion are sufficiently great some properties of the equilibrium solution are reported

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

empirical models of the exchange rate separating the wheat from the chaff various popular exchange rate models a standard monetary model a portfolio balance model and sticky price models are estimated and evaluated using u s canadian data for the 1970s nonnested hypothesis tests demonstrate that none are correctly specified the data suggest 1 the exchange rate persistence observed is not fully explained by any of the models 2 the small durbin watson statistics indicate longer lags are required 3 the current account is a useful explanatory variable 4 the portfolio balance model fits the data well but has potentially serious problems measuring the stock of foreign assets this abstract was borrowed from another version of this item

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

exchange rate simulation properties of the mcm this paper describes the simulation properties of the federal reserve board staffs multicountry model mcm with emphasis on the movement of exchange rates in response to various policy shocks the particular simulations described were run in conjunction with a project to compare the simulation properties of four major multicountry models under the auspices of project link they also cover a number of multiplier simulations presented in a volume documenting the mcm as it existed at the time of the tokyo link meeting in the fall of 1983 2 the purpose of this paper and the broader project is both to contribute to the literature on comparative model properties and to examine more closely the processes of exchange rate determination in large scale linked macro models the mcm like other linked models affords the opportunity to treat as endogenous variables the structural determinants of exchange rates such as incomes prices real interest rates and current accounts such variables are frequently treated as exogenous or partially exogenous in small models of exchange rate determination in the larger model framework exchange rate movements ultimately can be traced back to shifts in monetary and fiscal policies oil prices or other relatively exogenous factors moreover the multiple country framework allows for richer analysis of the effects of either differences in or coordination of policies across countries than is possible ib the two country framework of most small models the simulations reported below were selected in part to assess these features of the mcm after providing a brief overview of the mcm and a

testing the portfolio balance model a multi lateral approach abstract this paper estimates outside bond demand equations from the portfolio balance model of exchange rate determination for five currencies the approach used in this paper differs from other structural studies of the portfolio balance model in two fundamental ways first while previous studies limit the portfolio choice to domestic assets relative to a composite foreign asset the model analyzed in this paper decomposes the foreign asset by currency second exploiting the cross equation correlation that arises from this decomposition provides more efficient estimates of the asset market parameters

a survey of some recent econometric methods this survey is written mainly for the applied economist though we hope that the specialist econometrician will find something of interest too our aim has been to try to bring the applied worker as up to date as possible and in the process to improve the quality of applied work by providing access to the latest ideas in econometrics we have tried to describe and explain in a relatively non technical way the main developments that have taken place in the last ten years partly for reasons of space the survey is by no means exhaustive but it does cover a wide range of topics in both time series and cross section analysis among the subjects covered are the followoing the nature of data including integrated and fractionally integrated data four estimation methods maximum likelihood method of moments m estimators and non parametric estimation inference with stationary and integrated regressors a comparison of various model evaluation principles the formulation of models including dynamic specification cointegration and conditional expectations in mean and variance copyright 1989 by royal economic society

cointegration and unit roots this paper provides an updated survey of a burgeoning literature on testing estimation and model specification in the presence of integrated variables integrated variables are a specific class of non stationary variables which seem to characterise faithfully the properties of many macroeconomic time series the analysis of cointegration develops out of the existence of unit roots and offers a generic route to test the validity of the equilibrium predictions of economic theories special emphasis is put on the empirical researcher s point of view

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

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

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

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

note on nash and stackelberg solutions in a differential game model of capitalism abstract pohjola 1983 derives open loop stackelberg solutions for the lancaster 1973 model of capitalism and compares the outcomes with the open loop nash outcome due to a shortcoming in the analysis only one open loop stackelberg solution with the workers as leader was found this note shows that there are in fact infinitely many solutions furthermore these solutions can be derived with standard optimal control techniques

capital accumulation and income distribution as the outcome of a dynamic game abstract this paper presents a model of an economy with two representative agents a capitalist and a worker who play an infinite horizon dynamic game about income distribution we consider three types of equilibria which correspond to joint price taking walrasian equilibrium and to wage setting by either the capitalist capitalistic equilibrium or the worker laborist equilibrium for the last two of them an inefficient feedback stackelberg solution is first analyzed afterwards we apply a version of the folk theorem and obtain a wide range of sustainable efficient equilibria one of which coincides with the nash bargaining solution

the efficient estimation of econometric models with rational expectations the efficient estimation of econometric models with rational expectations by the substitution method usually entails the use of a non linear simultaneous equations estimator and hence is not very attractive computationally it is shown that for a wide class of problems efficient estimates can also be obtained with standard estimation methods if instead an errors in variables approach is used for many other problems although not providing fully efficient estimates because rationality is not imposed the errors in variables method will still have a strong appeal because otherwise it uses all of the structural information in the model unlike the substitution method when an incomplete information set is used it guarantees consistent estimates and it is easy to compute

exchange rate and current account dynamics under rational expectations an econometric analysis an econometric portfolio balance model of an open economy incorporating exchange rate price and current account dynamics is derived and estimated the usual stability conditions do not guarantee a unique rational expectations solution and several proposals for resolving this situation are considered using constrained maximum likelihood methods the model is estimated for japan the estimation results indicate that the model is quite successful in explaining the patterns found in the data the model is estimated using several methods of resolving the question of non uniqueness and the results are compared this abstract was borrowed from another version of this item