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

optimal liberalization of financial markets abstract as financial markets become completely liberalized countries gain from improved risk sharing but less wealthy countries can no longer profit from borrowing abroad at the lower rate and reinvesting at home at the higher rate with decreasing rather than constant returns to capital the gain from risk sharing is more likely to dominate the loss of the difference between the borrowing rate abroad and the decreasing reinvestment rate at home complete liberalization is likely to be optimal for less wealthy countries unless their labor endowment is large their productivity is large or holdings by foreigners are small as in china

deviations from purchasing power parity and capital flows abstract this article examines the implications of deviations from purchasing power parity ppp for an investor s portfolio decision and the consequent capital flows in a two country intertemporal model with complete financial markets in the presence of deviations form ppp investors from different nations hold disparate portfolios and the equilibrium that results is not a pooling one we solve eplicitly for asset demands and derive the relationship between the direction of capital flows and deviations from ppp in contrast to the small country assumption in the existing literature the world interest rate in this model is determined endogenously

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

indeterminacy and stabilization policy abstract it has been shown that a one sector real business cycle model with sufficient increasing returns in production may possess an indeterminate steady state that can be exploited to generate business cycles driven by animal spirits of agents this paper shows how an income tax schedule that exhibits a progressivity feature can ensure saddle path stability in such a framework and thereby stabilize the economy against sunspot fluctuations conversely an economy with a flat or regressive tax schedule is more susceptible to indeterminacy journal of economic literature classification numbers e32 e62

indeterminacy in a dynamic small open economy abstract we show that even under socially constant returns to scale indeterminacy i e continuum of dynamic general equilibrium paths converging to a common steady state can arise in a dynamic small open economy with production externalities and endogenous time preferences in which production is incompletely specialized

capital mobility and the current account abstract this paper analyzes the effect of unanticipated changes in the terms of trade on consumption expenditures and the current account in a small open economy simple formulas are obtained for the covariances of changes in consumption expenditures the current account and the expected current account with changes in the terms of trade it is shown that if investment is uncorrelated with the terms of trade a necessary condition for unanticipated changes in the terms of trade to be correlated with changes in consumption expenditures and the expected current account is that the real expected return on foreign bonds differs from the real expected return on domestic bonds

dynamic effects of government expenditure in a finance constrained economy abstract this paper introduces constant government expenditure in woodford s finance constrained model j econ theory 1986 with capital labor substitution as presented in grandmont pintus and de vilder j econ theory 1998 and investigates how government expenditure influences local dynamics near multiple steady states depending upon the elasticity of substitution between capital and labor in production

an intertemporal model of international capital market segmentation this paper develops an intertemporal model of international capital market segmentation within the model under various forms of segmentation integration the equilibrium asset prices and allocations the risk free interest rate and the intertemporal consumption behavior and welfares of two countries are derived and compared it is shown that the equilibrium interest rate is increased on integration and that integrating markets may be significantly welfare decreasing for one of the countries conditions that may lead to a decrease in welfare are investigated the conclusions as to the effects of segmentation on asset prices in the mean variance model of the existing finance segmentation literature are also shown to break down in an intertemporal model

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

international good market segmentation and financial innovation abstract while international capital flows are now well liberalized markets for goods remain segmented to investigate how financial innovation may relieve the effects of this segmentation on risk sharing we examine a series of two country economies with internationally segmented good markets distinguished by the available financial securities sufficient conditions for efficiency include complete international financial markets together with liberalized international financial flows under these conditions heterogeneous agents from the same country may use securities as a substitute for the international shipment of goods this allows them to partially circumvent the segmentation allowing for efficient risk sharing

on the ineffectiveness of tax policy in altering long run growth harberger s superneutrality conjecture abstract in 1964 harberger conjectured that although theory predicts that changes in tax rates affect investment and growth in the long run in practice tax policy is an ineffective instrument to influence growth this paper provides theoretical and empirical evidence in favor of this view the growth effects of tax policy in the class of endogenous growth models driven by human capital accumulation are examined and numerical simulations of these models confirm the results harberger predicted cross country panel regressions estimated using a new method for measuring effective tax rates produce significant investment effects from taxes that are consistent with negligible growth effects these results are robust to the introduction of other growth determinants

balanced budget rules and macroeconomic in stability abstract it has been shown that under perfect competition and constant returns to scale a one sector real business cycle model may exhibit indeterminacy and sunspots when income tax rates are determined by a balanced budget rule with a pre set level of government expenditures this paper shows that indeterminacy disappears if the government finances endogenous public spending and transfers with fixed income tax rates under this type of balanced budget formulation the economy exhibits saddle path stability and equilibrium uniqueness regardless of the source of government revenue and or the existence of lump sum transfers

on the effects of barriers to international investment a simple model is presented in which it is costly for domestic investors to hold foreign assets the implications of the model for the composition of optimal portfolios at home and abroad are derived it is shown that all foreign assets with a beta larger than some beta plot on either one of two security market lines some foreign assets with a beta smaller than are not held by domestic investors even if their expected return is increased slightly while it is obviously not true that asset markets are completely segmented between countries there is evidence of barriers to international investment although reality seems to lie in that grey area between complete segmentation and no segmentation at all most international asset pricing models are concerned with the extreme case of no barriers to international investment no effort seems to have been made to study the effect on portfolio choice of such barriers which make it costly to hold foreign securities as opposed to domestic securities but which do not in general render international diversification so onerous that investors avoid foreign securities completely casual empiricism suggests that models without barriers to international investment should be suspect those models cannot explain why it appears that in every country investors on average hold more domestic securities than would be required if they held the world market portfolio 2 this paper constructs a model of international asset pricing in which there is a cost associated with holding either long or short risky foreign securities for the sake of simplicity in most of the paper we assume that while domestic investors face barriers to international investment foreign investors face no such barriers it turns out that nothing significant is lost with such an assumption the main conclusions of this paper for the case in which foreign investors face no barriers to international investment are 1 in the presence of barriers to international investment some risky foreign

market imperfections and the instability of open economies in the presence of small market imperfections the transitional dynamics of an open economy can become indeterminate in that there exist an infinite number of equilibrium paths converging to a unique steady state in contrast to closed economy models in the open economy such indeterminacy can arise independently of the curvature of the utility function in consumption the results suggest that with market imperfections open economies can be subject to fluctuations caused by randomness unrelated to the economy s fundamentals

balanced budget rules distortionary taxes and aggregate instability a traditional argument against a balanced budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction this paper suggests an additional source of instability that may arise from this type of fiscal policy rule it shows that within the standard neoclassical growth model a balanced budget rule can make expectations of higher tax rates self fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the u s economy and other group of seven countries

understanding self fulfilling rational expectations equilibria in real business cycle models abstract necessary conditions for indeterminacy in standard rbc models have been extensively studied but intuitive understanding of the economic mechanism that generates indeterminacy has yet to be fully explored following the permanent income theory this paper provides an alternative framework for understanding and deriving the technical conditions of indeterminacy in rbc models a virtue of this approach is that in deriving the conditions of indeterminacy one can see clearly not only how indeterminacy arises but also how robust the indeterminacy is to structural perturbations in preferences technologies and market structures

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

exchange risk exposure and the option to trade rather than impeding trade increased exchange rate uncertainty may on average create trade as it implies a higher probability that ex post deviations from commodity price parity will exceed tariffs and transportation costs we demonstrate such an effect in a small country short term model under the alternative assumptions of perfect competition and of a monopolist trader producer the proofs rely on the fact that such firms exposures can be replicated and hedged by standard options under partial monopoly scenarios the effect of volatility is ex ante unclear though jel f31

preferences endogenous discount rate and indeterminacy in a small open economy model abstract this paper characterizes indeterminacy conditions for a small open economy business cycle model the preferences are the utility function commonly used in closed economy models in the literature coupled with an endogenously determined discount rate it shows that indeterminacy can occur under arbitrarily small external effects independently of the intertemporal elasticities in consumption and labor supply

embracing digital networks entrepreneurs social capital online abstract this paper presents a research agenda for understanding how entrepreneurs accrue social capital in the digital age we develop a conceptual framework with 12 research propositions that specify how the unique technical capabilities of social network sites impact entrepreneurs bridging and bonding social capital online these propositions are informed by anecdotal evidence from founders that finds entrepreneurs social capital accrual differs online we include theoretical and methodological insights for overcoming research challenges concerning context dynamism intertwined networks and unclear behavioral norms this agenda addresses a growing gap between contemporary entrepreneurial practices and existing social capital theory and research in entrepreneurship

sticky goods prices flexible asset prices monopolistic competition and monetary policy a monetary general equilibrium asset pricing model with sticky goods prices is developed goods prices are set by monopolistically competitive firms that maximize stock market value equilibria with underutilization of resources excess capacity in some states result in contrast to previous monetary asset pricing models the degree of competition affects capacity utilization monetary policy can affect output and resource utilization in addition to real asset prices depending upon the amount of information available to the monetary authority

balanced budget income taxes and aggregate stability in a small open economy abstract in a closed economy a balanced budget fiscal policy rule with endogenous income tax rates can generate aggregate instability due to self fulfilling expectations e g schmitt grohe and uribe 1997 this paper shows both analytically and numerically that beliefs driven aggregate instability associated with such a balanced budget rule is less of a problem in a small open economy integrated in the world asset and goods markets this is because cross border capital flows and endogenous international price adjustments produce income effects that reduce the likelihood of sunspot equilibria from a policy perspective our results relieve possible concerns that balanced budget rules and reliance on income taxes to achieve budget objective could have destabilizing effects on the economy

impatience and equilibrium indeterminacy abstract this paper extends the neoclassical one sector optimal growth model by postulating that individual agents time preference impatience depends on the economy wide average consumption and average income which are social factors taken as external by individual agents the paper shows that with the socially determined individual time preference local equilibrium indeterminacy can arise moreover local indeterminacy can also be associated with global indeterminacy in many cases the results hold in models with bounded and unbounded growth

aggregate instability under balanced budget consumption taxes a re examination we re examine the destabilizing role of balanced budget fiscal policy rules based on consumption taxation using a one sector model with infinitely lived households we consider a specification of preferences derived from jaimovich 2008 14 and jaimovich and rebelo 2009 15 which is flexible enough to encompass varying degrees of income effect when the income effect is not too large we show that there exists a laffer curve which explains the multiplicity of steady states and that non linear consumption taxation may destabilize the economy promoting expectation driven fluctuations if the elasticity of intertemporal substitution in consumption is sufficiently larger than one and the tax rate is counter cyclical with respect to consumption numerical illustrations also show that consumption taxation may be a source of instability for most oecd countries for a wide range of structural parameters configurations we finally prove the robustness of our conclusions if we consider a discrete time setup

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

trade structure and belief driven fluctuations in a global economy abstract this paper constructs a dynamic two country model with country specific production externalities and inspects the presence of equilibrium indeterminacy under alternative trade structures it is shown that the presence of belief driven economic fluctuations caused by equilibrium indeterminacy is closely related to the specified trade structure if investment goods are not internationally traded and international lending and borrowing are allowed then indeterminacy arises in a wider set of parameter space than in the corresponding closed economy by contrast either if both consumption and investment goods are traded in the absence of international lending and borrowing or if only investment goods are traded with financial transactions then the indeterminacy conditions are the same as those for the closed economy counterpart

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

trade and indeterminacy in a dynamic general equilibrium model this study investigates the dynamic behavior of multiple countries economic activities in a two good two factor model in which factors are internationally immobile and countries technologies are subject to sector specific external effects

indeterminacy in a small open economy ramsey growth model abstract this paper presents a small open economy version of the j benhabib and r e a farmer 1996 j monet econ 37 421 443 two sector optimal growth model with production externalities it is shown that indeterminacy is considerably easier to obtain under a regime of perfect world capital markets than in the closed economy variant furthermore the result is not dependent on a high labor supply elasticity since that input is fixed the paper also examines a variant which takes into account external borrowing constraints and it is shown that the qualitative results on indeterminacy remain basically unaffected by this extension journal of economic literature classification numbers e32 f12

international risk sharing and capital mobility abstract under certain assumptions pareto efficient risk sharing implies that changes in consumption across nations will be perfectly correlated this result leads to an indicator of the welfare loss due to imperfect sharing of consumption risks across nations this indicator is used to evaluate the welfare implications of restrictions on various components of the international capital flow holding constant other components of the flow and domestic investment we find that variability in national consumption growth rates would have been considerably greater if capital flows had been restricted and that welfare would have been reduced significantly

balanced budget rules and aggregate instability the role of consumption taxes it is known that in a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule steady state indeterminacy may arise due to endogenous labour income tax rates this article shows that when the government finances its expenditures via an endogenous consumption tax instead a steady state is always saddle path stable consequently combining income taxes with consumption taxes makes the ranges of indeterminacy shrink thus reducing the possibility of aggregate instability from a policy perspective the results provide an additional argument in favour of consumption taxes in place of capital taxes

what does purchasing power parity mean this paper examines the theoretical and empirical content of purchasing power parity ppp in efficient markets it analyzes the sources of deviations from the strictest version of ppp that exchange adjusted price levels are everywhere identical focusing on the role played by uncertainty relative price changes inappropriate price data transaction costs and government intervention in creating these deviations it then identifies and addresses the key issue involving purchasing power parity are the deviations from ppp that occur sufficiently large persistent and predictable as to enable individuals or governments to successfully exploit them an answer of no is shown to be consistent with both economic theory and the empirical evidence

alternative government financing and aggregate fluctuations driven by self fulfilling expectations abstract using woodford s finance constrained model woodford m 1986 stationary sunspot equilibria in a finance constrained economy journal of economic theory 40 128 137 with external effects in production as in barinci and cheron 2001 sunspots and business cycle in a finance constrained economy journal of economic theory 97 30 49 this paper investigates the effects of alternative government financing methods on the range of values of increasing returns leading to an indeterminate steady state it will be shown that indeterminacy may easily arise at a wide range of values of increasing returns if constant government expenditure is financed through labor income taxes and with difficulty if constant government expenditure is financed by taxes on capital in addition we explore how the consequences of endogenous income taxes are changed if tax rates on labor and capital income are kept constant and government expenditure is endogenously adjusted to satisfy the budget constraint