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

the ems and the dollar the ems and the dollar francesco giavazzi and alberto giovannini this paper examines the behaviour of exchange rates prior to and since the inception of the european monetary system ems movements in bilateral european exchange rates tend to be associated with fluctuations in the dollar in particular the mark tends to appreciate against other european currencies when the dollar depreciates further most realignments of currencies in the ems have generally occurred after sharp movements in the dollar conventional explanations relying on portfolio diversification by investors do not seem to explain the facts fully a more satisfactory explanation is provided by the existence of capital controls these limit the mobility of assets and ensure an asymmetric response by european currencies to movements in the dollar these capital controls are in the absence of coordinated monetary policy essential to the smooth working of the ems however at the same time they limit the scope for the further integration of european capital markets thus the ems is not a step on the road to greater financial integration indeed it is a cul de sac

a two tiered earnings frontier estimation of employer and employee information in the labor market this pap er develops a two tiered frontier estimation procedure to decompose the residual of an earnings function into three components the first component can be interpreted as being purely random search theory is used to show that the other two components represent employee and employer ignorance of offer and reservation wages respectively relative employee and employer ignorance estimates are presented for various population strata copyright 1987 by mit press

currency crises sunspots and markov switching regimes abstract this paper investigates the theoretical properties of a class of escape clause models of currency crises as well as their applicability to empirical work we show that under some conditions these models give rise to an arbitrarily large number of equilibria as well as cyclic or chaotic dynamics for the devaluation expectations we then propose an econometric technique based on the markov switching regimes framework by which these models can be brought to the data we illustrate this empirical approach by studying the experience of the french franc between 1987 and 1993 and find that the model performs significantly better when it allows the devaluation expectations to be influenced by sunspots

the estimation of a joint wage hours labor supply model in this paper the standard cross sectional static model of labor supply is modified to make the wage endogenous and a joint wage hours model is estimated the econometric technique addresses the non linearity of the budget constraint by approximating the constraint by a series of discrete points the results show that the budget constraint is indeed nonlinear that hours affect the wage quadratically that true wage elasticities are lower as a result and that the model fits the hours distribution much better than the standard tobit model

unique equilibrium in a model of self fulfilling currency attacks even though self fulfilling currency attacks lead to multiple equilibria when fundamentals are common knowledge we demonstrate the uniqueness of equilibrium when speculators face a small amount of noise in their signals about the fundamentals this unique equilibrium depends not only on the fundamentals but also on financial variables such as the quantity of hot money in circulation and the costs of speculative trading in contrast to multiple equilibrium models our model allows analysis of policy proposals directed at curtailing currency attacks

a markov switching analysis of contagion in the ems abstract this paper applies the multivariate version of the forbes and rigobon 2002 contagion test as proposed by dungey et al 2005a to detect contagion effects in the exchange rate mechanism erm of the european monetary system ems crisis and non crisis observations are determined endogenously via a markov switching vector autoregression msvar we show that the msvar is suitable for this purpose as it does particularly well in identifying the 11 realignments of the erm we examine whether denmark s rejection of the maastricht treaty and italy s competitiveness problems affected other ems participants and find evidence for contagion

are currency crises self fulfilling abstract this paper studies the respective roles of the fundamentals and self fulfilling speculation in currency crises we first present a model of a fixed exchange rate system in which self fulfilling speculation can arise following a bifurcation in the fundamentals we then estimate the model in the case of the 1992 3 crisis of the french franc and find some evidence that self fulfilling speculation was at work

comparing features of convenient estimators for binary choice models with endogenous regressors abstract we discuss the relative advantages and disadvantages of four types of convenient estimators of binary choice models when regressors may be endogenous or mismeasured or when errors are likely to be heteroscedastic for example such models arise when treatment is not randomly assigned and outcomes are binary the estimators we compare are the two stage least squares linear probability model maximum likelihood estimation control function estimators and special regressor methods we specifically focus on models and associated estimators that are easy to implement also for calculating choice probabilities and regressor marginal effects we propose the average index function aif which unlike the average structural function asf is always easy to estimate

renewables diffusion and contagion effect in italian regional electricity markets assessment and policy implications abstract in the electricity market sudden price jumps occur more frequently than in other markets due to the peculiarity of electricity furthermore the structural spot characteristics of the electricity market determine high price variability all these characteristics have been accentuated by the dramatic increase of renewable energy supply in italy starting in 2010 these features suggest the possibility of contagion effects across italian regional electricity markets considering contagion such as a sudden and significant increase in cross market links arising from a shock to a specific market in this paper we investigate whether such a renewable energy increase has affected the contagion behavior in the italian electricity spot market taking into account both the difference between interdependence and contagion and the direction of the shock we find empirical evidence with significant tests that no changes have occurred in interdependence mechanism nor in contagion effects due to renewable energy sources development in italy

selectivity and distributional assumptions in static labor supply models the technique of estimating labor supply models has drastically changed since the early 1970s while early studies 28 23 estimated a single labor supply equation the occurrence of nonworkers soon became an issue of concern that complicated both the model estimated and the estimation technique people choose to work or not to work based on their opportunity set workers are therefore special they have poorer than average alternatives or better than average wage offers 15 the sample of workers is not random anymore but rather self selected ols estimators are biased and inconsistent and new estimation techniques are needed to correct that deficiency this realization led to an expansion of the labor supply model with a wage equation as wage offers of non workers are generally unobservable 9 while at the same time an array of new econometric techniques came forth to deal with problems of self selection and dichotomous endogenous variables two step and maximum likelihood are standard estimation methods nowadays stimulated by work of heckman and others 18 19 in turn these improved techniques allowed for more sophisticated labor supply models involving tax and transfer schedules 8 cost of labor force entry and institutional constraints 12 16 29 and wage rates interactively determined by labor hours 30 all of these new studies have one assumption in common the random disturbances are assumed to be generated by the normal distribution in an appeal to the familiar central limit theorem this theorem states roughly that the combined influence of numerous independent neglected factors may be represented by a single disturbance term that is approximately normally distributed

contagion as a domino effect in global stock markets this paper shows that stock market contagion occurs as a domino effect where confined local crashes evolve into more widespread crashes using a novel framework based on ordered logit regressions we model the occurrence of local regional and global crashes as a function of their past occurrences and financial variables we find significant evidence that global crashes do not occur abruptly but are preceded by local and regional crashes besides this form of contagion interdependence shows up by the effect of interest rates bond returns and stock market volatility on crash probabilities when it comes to forecasting global crashes our model outperforms a binomial model for global crashes only

gaining and losing erm credibility the case of the united kingdom the model of this paper highlights two aspects of credibility signaling the type of government which is assumed not to be known and for any type the likelihood that if circumstances are sufficiently unfavorable a devaluation will be impossible to avoid since not to do so would go against the government s interests these two factors have opposite implications for the link between unemployment and interest differentials high unemployment signals a tough government but also makes it less likely that even a tough government will maintain an existing parity copyright 1995 by royal economic society

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

rational contagion and the globalization of securities markets this paper argues that globalization may promote contagion by weakening incentives for gathering costly information and by strengthening incentives for imitating arbitrary market portfolios in the presence of short selling constraints the gain of gathering information at a fixed cost may diminish as markets grow moreover if a portfolio manager s marginal cost for yielding below market returns exceeds the marginal gain for above market returns there is a range of optimal portfolios in which all investors imitate arbitrary market portfolios and this range widens as the market grows numerical simulations suggest that these frictions can have significant implications for capital flows in emerging markets

life cycle schooling and dynamic selection bias models and evidence for five cohorts of american males this paper examines an empirical regularity found in many societies that family influences on the probability of transiting from one grade level to the next diminish at higher levels of education we examine the statistical model used to establish the empirical regularity and the intuitive behavioral interpretation often used to rationalize it we show that the implicit economic model assumes myopia the intuitive interpretive model is identified only by imposing arbitrary distributional assumptions onto the data we produce an alternative choice theoretic model with fewer parameters that rationalizes the same data and is not based on arbitrary distributional assumptions

competitive devaluations toward a welfare based approach abstract this paper revisits the international transmission of exchange rate shocks in a multicountry economy providing a choice theoretic framework for the policy analysis of competitive devaluations as opposed to the traditional view a devaluation by one country does not necessarily have an adverse beggar thy neighbor effect on its trading partners because they can benefit from an improvement in their terms of trade furthermore a retaliatory devaluation need not be the optimal strategy for the neighbor countries as the induced terms of trade deterioration can be large enough to offset the gains from defending their export market share the concern over competitive devaluations reflected in the fund s charter and the system wide implications of changes in exchange rates still motivate fund policy recommendations a major fund concern in the asian crisis has been the fear that asian currencies would become so undervalued and current account surpluses so large as to damage the economies of other countries developing countries included this is one reason the fund has stressed the need first to stabilize and then to strengthen exchange rates in the asian countries now in crisis and for this purpose not to cut interest rates until the currency stabilizes and begins to appreciate

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

contagion and trade why are currency crises regional abstract currency crises tend to be regional they affect countries in geographic proximity this suggests that patterns of international trade are important in understanding how currency crises spread above and beyond any macroeconomic phenomena we provide empirical support for this hypothesis using data for five different currency crises in 1971 1973 1992 1994 and 1997 we show that currency crises affect clusters of countries tied together by international trade by way of contrast macroeconomic and financial influences are not closely associated with the cross country incidence of speculative attacks

endogenous binary choice models with median restrictions a comment abstract hong and tamer hong h and tamer e 2003 endogenous binary choice model with median restrictions economics letters 80 219 225 provide a sufficient condition for identification of a binary choice model with endogenous regressors for a special case of their model we show that this condition essentially requires that the endogenous regressor is degenerate conditional on the instrument with positive probability moreover under weak assumptions we show that this condition fails to rule out any possible value for the coefficient on the endogenous regressor

heteroskedastic sample selection and developing country wage equations many researchers have dealt with potential selectivity bias in developing country wage equations by employing heckman s 1979 two step method or related techniques despite the potential for such methods to produce misleading results if the assumptions on which they are based are incorrect this paper argues that the results produced even by parametric easy to implement selectivity bias correction methods can inspire more confidence than the typical applications to date when model selection testing is used to select from a specified diverse set assumptions for which there is support in the data and when sensitivity analysis is used to identify parameters whose estimates are robust across a wide range of assumptions in particular it highlights the importance of allowing for the nonlinearities implied by selection rule heteroskedasticity there is economic reason to suspect heteroskedasticity and econometric reason to believe that the nonlinearities it introduces into the first stage will improve

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

extreme coexceedances in new eu member states stock markets abstract we analyze the financial integration of the new european union eu member states stock markets using the negative positive coexceedance variable that counts the number of large negative large positive returns on a given day across the countries a similar analysis is performed for the old eu countries we use a multinomial logit model to investigate how persistence asset classes and volatility are related to the coexceedance variables we find that the effects differ a between negative and positive coexceedance variables b between old and new eu member states and c before and after the eu enlargement in 2004 suggesting a closer connection of new eu stock markets to those in western europe

predicting currency crises abstract in recent years a number of researchers have claimed success in systematically predicting which countries are more likely to suffer currency crises most notably kaminsky lizondo and reinhart 1998 this paper evaluates the klr approach to anticipating currency crises and develops and tests an alternative first we try to answer the question if we had been using the klr model in late 1996 how well armed would we have been to predict the asia crisis second we analyze a more general probit based model of predicting currency crises in the process we test several basic assumptions underlying the indicators approach

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

are currency crises predictable abstract this paper studies whether exchange rate expectations and overvaluations are predictors of currency crises the results suggest that overvaluation has predictive power in explaining the crises however although expected depreciation obtained from survey data partially takes different exchange rate misalignment measures into consideration expectations fail to anticipate currency crises

extreme interdependence and extreme contagion between emerging markets abstract this paper uses seemingly unrelated probit techniques to separate the transmission of a crisis due to broadly defined macroeconomic interdependence from contagion due to herding avoiding some of the caveats of the more traditional cross correlation approach we find that pure contagion occurred in a limited number of country pairs generally belonging to the same region a reduction in speculative pressure can also be identified between countries in different regional blocks this seems to suggest that after an initial crisis episode investors tend to discriminate on the basis of location and common macroeconomic weakness or perceived similarity

second generation models of currency crises until the beginning of the 1990s currency crises were typically analyzed within the framework of a generation of models that assumed that the foreign exchange reserves of a country that was running a fixed exchange rate policy were falling because the government was running a deficit on its budget that was financed by printing money when the foreign exchange reserves reached a lower bound a speculative attack on the fixed exchange rate was launched today this theory is no longer the benchmark when explaining the occurrence of a currency crisis actually a new generation of models that seeks to take explicitly into account the costs and benefits associated with the maintenance of a fixed exchange rate has emerged this paper surveys these second generation models of currency crises this generation of models emphasizes that it is an endogenous decision if a government chooses to abandon a policy of fixed exchange rates the survey pays special attention to the fact that the second generation of currency crises models often generates multiple equilibria for the rate of devaluation given one state of the economic fundamentals a currency crisis can thus occur even if no secular trend in economic fundamentals can be identified as in recent currency crises