intervention policy of the boj a unified approach intervening in the fx market implies a complex decision process for central banks monetary authorities have to decide whether to intervene or not and if so when and how since the successive steps of this procedure are likely to be highly interdependent we adopt a nested logit approach to capture their relationships and to characterize the prominent features of the various steps of the intervention decision process our estimations based on japanese data from 1991 to 2004 indicate that the bank of japan i mainly reacted to deviations of the exchange rate with respect to fundamentals and ii tended to favour secrecy when its credibility was low we also provide new insights on the so called secrecy puzzle by modeling explicitly the risk for a secret intervention to be detected our results have important implications in terms of exchange rate policy such as the emergence of a trade off between intervention size communication policy and secrecy our results tend to provide some explanation for the observed persistence of ineffective intervention policy during some sub periods c 2008 elsevier b v all rights reserved

optimal consumption and investment with transaction costs and multiple risky assets we consider the optimal intertemporal consumption and investment policy of a constant absolute risk aversion cara investor who faces fixed and proportional transaction costs when trading multiple risky assets we show that when asset returns are uncorrelated the optimal investment policy is to keep the dollar amount invested in each risky asset between two constant levels and upon reaching either of these thresholds to trade to the corresponding optimal targets an extensive analysis suggests that transaction cost is an important factor in affecting trading volume and that it can significantly diminish the importance of stock return predictability as reported in the literature this paper studies the optimal intertemporal consumption and investment policy of an investor with a constant absolute risk aversion cara preference and an infinite horizon the investor can trade in one risk free asset and n 1 risky assets in contrast to the standard setting the investor faces both fixed and proportional transaction costs in trading any of these risky assets in the absence of transaction costs and when risky asset prices follow geometric brownian motions the optimal investment policy is to keep a constant dollar amount in each risky asset as shown by merton 1971 this trading strategy requires continuous trading in all the risky assets in addition the optimal consumption is affine in the total wealth in the presence of transaction costs however trading continuously in a risky asset would incur infinite transaction costs therefore risky assets are traded only infrequently in this case the literature on optimal consumption and investment with multiple risky assets subject to transaction costs is limited leland 2000 examines a multiasset investment fund that is subject to transaction costs and capital gains taxes under the assumption that the fund has an exogenous target for each risky asset he develops a relatively simple numerical procedure to compute the no transaction region akian menaldi and sulem 1996 consider an optimal consumption and investment problem with proportional transaction costs for

nash implementation a complete characterization the authors extend e maskin s results on nash implementation first they establish a condition that is both necessary and sufficient for nash implementability if there are three or more agents the case covered by maskin s sufficiency result second and more important they examine the two agent case for which there existed no general sufficiency results the two agent model is the leading case for applications to contracting and bargaining for this case too they establish a condition that is both necessary and sufficient the authors use their theorems to derive simpler sufficiency conditions that are applicable in a wide variety of economic environments copyright 1990 by the econometric society

structural change in an open economy we study the importance of international trade in structural change our framework has both productivity and trade cost shocks and allows for non unitary income and substitution elasticities we calibrate our model to investigate south korea s structural change between 1971 and 2005 we nd that the shock processes propagated through the model s two main transmission mechanisms non homothetic preferences and the open economy explain virtually all of the evolution of agriculture and services labor shares and the rising part of the hump shape in manufacturing counterfactual exercises show that the role of the open economy is quantitatively important for explaining south korea s structural change

target zone models with stochastic realignments an econometric evaluation abstract this paper provides empirical support for the second generation of target zone models with stochastic devaluation risk i propose a simple non linear framework with a time varying probability of exchange rate realignment this model nests alternatives i with no devaluation risk ii with constant devaluation risk and iii the random walk i reject these three in favor of a stochastic realignment model where devaluation risk varies with economic fundamentals the model predicts 13 of 17 realignments for the franc and lira including an out of sample episode in august 1993

a model of the term structure of interest rates in an open economy with regime shifts abstract this paper presents a term structure model driven by three factors the foreign real interest rate the domestic inflation rate and the real exchange rate the model is designed to capture effects originating from exchange rate fluctuations and actions by central banks special attention is paid to regime shifts such as changes in the target inflation rate and devaluations an interesting result is that imperfect credibility of a target zone for the exchange rate mainly affects short term interest rates whereas a loss in an inflation target s credibility is likely to increase long term interest rates jel e43 f3 1997 elsevier science ltd

on platforms incomplete contracts and open source software abstract we analyze investment incentives for a firm a owning a software platform and an application and a firm b deciding whether to develop a new application for the platform while b s entry helps the success of the platform b fears ex post expropriation by a and is hence reluctant to enter and invest we show that different platform governance structures prevalent in the information and communication technology industry integrated proprietary standardized open source platform serve to balance investment incentives for the platform and for the applications

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

target zones and exchange rates an empirical investigation this paper develops an empirical model of exchange rates in a target zone the distribution of exchange rate changes is conditioned on a latent jump variable where the probability and size of a jump vary over time as a function of financial and macroeconomic variables when there is no jump the target zone is credible and exchange rate changes are constrained to remain within the target zone band the paper revisits the empirical evidence from the european monetary system regarding the conditional distribution of exchange rate changes the credibility of the system and the size of the foreign exchange risk premia in contrast to some previous findings we conclude that the french franc deutschmark rate exhibits considerable nonlinearities realignments are somewhat predictable and the credibility of the system did not increase substantially after 1987 moreover our model implies that the foreign exchange risk premium becomes large during speculative crises

should central bankers talk to the foreign exchange markets in this paper we study the role of official statements and speeches given by central bank authorities in charge of foreign exchange policy we investigate the impact of statements that comment on and confirm such interventions on the day of the intervention on the two major foreign exchange markets over an extended period 1989 2003 we also study the impact in terms of policy effectiveness of central bank communication before the actual operations our results suggest that appropriate speeches clarifying the current intervention policy can have marginally virtuous effects both in terms of exchange rate level and exchange rate volatility this leads us to conclude that in general actual interventions on the market should still be employed provided that official statements are used to clarify the nature and purpose of these interventions c 2008 elsevier ltd all rights reserved

structural transformation and the deterioration of european labor market outcomes this paper examines hours worked in continental europe and the united states from 1956 to 2003 the empirical work establishes two results first hours worked in europe decline by almost 45 percent compared to the united states over this period second this decline is almost entirely accounted for by the fact that europe develops a much smaller market service sector than the united states a simple model of time allocation is used to understand these patterns i find that relative increases in taxes and technological catch up can account for most of the differences between the european and american time allocations over this period

on the mean reverting properties of target zone exchange rates a cautionary note abstract we estimate a franc mark target zone model and find a very limited honeymoon effect monte carlo experiments calibrated with the estimates caution against the use of standard linear tests for non mean reversion as indirect tests of the target zone model

central bank interventions and exchange rate band regimes abstract this paper presents an endogenous switching regression model for the exchange rate process where the switch is defined by the central bank criteria functions for intervening we study the signal effect of interventions on the exchange rate using norwegian daily data on official interventions we first find that interventions seemed to have been more effective in moving the exchange rate in the expected desired direction in the regime when the exchange rate was kept away from the edges of the band this type of intervention regime also reduces significantly the conditional volatility of the exchange rate thus when the exchange rate was near the weakest edge of the currency band its conditional variance was significantly larger than when it was moving around its central parity finally we show that in order to obtain consistent estimates intervention variables cannot enter as exogenous variables in the conditional mean or conditional variance of the exchange rate

bargaining and sharing innovative knowledge we consider the problem of bargaining over the disclosure of interimresearch knowledge between two participants in an r d race for an ultimate patentable invention licence fee schedules that are functions of the amount of knowledge disclosed by the leading to the laggingagent are examined for their abilities to attain efficient outcomes andvarying shares of the surplus arising from disclosure in hersequential offers bargaining games the uninformed buyer is able to elicitfull disclosures without sharing the incremental surplus with any type ofthe licensor and thus do as well as a perfectly informed and discriminatingknowledge licensee

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

modelling probabilities of devaluations i show why when the realized rates of depreciation within the exchange rate band are regressed on a given information set and conditioned on ex post actual no realignment a la drift adjustment a peso problem is still encountered the reason is that the frequency of realignments in the data need not be the same as the frequency of the even small subjective probabilities that a realignment may take place i suggest an alternative approach to solve the peso problem and provide consistent estimates my estimates of the expected realignment rates are greater than the ones obtained using the drift adjustment method

assessing target zone credibility mean reversion and devaluation expectations in the erm 1979 1992 abstract the paper presents estimates of devaluation expectations for six erm currencies relative to the deutsche mark for the period march 1979 april 1992 both the simplest test and the drift adjustment method are used the simplest test adjusts interest rate differentials for the maximum and minimum expected rate of depreciation within the exchange rate band the drift adjustment method adjusts interest rate differentials by the estimated expected rate of depreciation within the band the latter method gives more precise estimates especially for short horizons and allows statistical inference and hypothesis testing expected rates of devaluation have generally fallen during the period still some devaluation expectations relative to the deutsche mark remain in 1992 except for the belgian luxembourg franc and the netherlands guilder expected rates of devaluation have fluctuated more than interest rate differentials

are exchange rate bands better than fixed exchange rates the imported credibility approach this paper explicitly incorporates exchange rate bands into the barro gordon model of inflation this is a non trivial extension focusing on markov perfect equilibria we specify the properties of the optimal policy functions exchange rate dynamics and hence the arguments for and against target zones the attractiveness of alternative exchange rate regimes i e fixed flexible and target zones and the position of exchange rates inside the band depend on the inflationary performance of the center country

classical and restricted impulse control for the exchange rate under a stochastic trend model abstract building on cadenillas and zapatero 2000 and bertola et al 2016 we consider the problem faced by a central bank to optimally control the exchange rate whereby the control is composed of a direct impulse control intervention and an indirect continuously acting intervention given by the control of the domestic interest rate similarly to cadenillas and zapatero 2000 and bertola et al 2016 we formulate the problem as a mixed classical impulse control problem and the approach is based on a quasi variational inequality by considering a specific class of the optimal value functions and controls as in bertola et al 2016 but differently from cadenillas and zapatero 2000 we consider a finite horizon that makes the problem time inhomogeneous and we do not have to impose a smooth fit condition so that a fully analytical solution is possible with respect to bertola et al 2016 we generalize the problem by letting more realistically the drift in the dynamics of the exchange rate to be time varying or even unobservable so that it has to be filter estimated from observable data numerical illustrations are presented as well

soft versus hard targets for exchange rate intervention when targeting money prices or credit monetary authorities typically follow rules that combine flexibility over short horizons with discipline over longer horizons usually by committing to average targets for monetary aggregates or inflation over pre specified periods yet when targeting exchange rates monetary authorities typically follow rules that require strict adherence to announced targets in both the short and the long run in this paper we explore the implications of a policy for exchange rate intervention that combines flexibility over short horizons with discipline over long horizons our version of this soft target zone related to an idea ofjohn williamson 1985 requires a monetary authority to maintain the exchange rate on average rather than at all times as in the erm within a pre announced band we study the implications of this policy for the volatility of exchange rates and for the vulnerability of the exchange rate arrangement to speculative attacks practical reasons including the difficulty of targeting money and inflation on a continuous basis contribute to common use of soft i e average rules when targeting these aggregates more important however average targets allow

political and institutional factors in regime changes in the erm an application of duration analysis this paper analyses the functioning of the european exchange rate mechanism erm to that end we apply duration models to estimate an augmented target zone model explicitly incorporating political and institutional factors into the explanation of european exchange rate policies the estimations are based on quarterly data of eight currencies participating in the erm covering the complete history of the european monetary system our results suggest that both economic and political factors are important determinants of erm currency policies concerning economic factors the money supply the real exchange rate the interest rate in germany and the central parity deviation would have negatively affected the duration of a given central parity while credibility and the price level in germany would have positively influenced such duration regarding political variables elections central bank independence and left wing administrations would have increased the probability of maintaining the current regime while unstable governments would have been associated with more frequent regime changes moreover we show how the political augmented model outperforms the model which just incorporates pure economic determinants both in terms of explanatory power and goodness of fit

optimal target zones how an exchange rate mechanism can improve upon discretion abstract using krugman s 1991 target zone model we find an explicit subgame perfect solution for a central bank wishing to stabilise the exchange rate given proportional costs of intervention we demonstrate however that precommitment to narrower bands would yield a welfare gain which provides a theoretical rationale for an exchange rate mechanism erm numerical simulations suggest that the optimal currency band with precommitment via an erm is only half as wide as that under discretion and that the welfare benefits are sufficient to sustain the system

an arbitrage free trilateral target zone model abstract this paper proposes an arbitrage free trilateral model of a credible target zone regime with bands on each bilateral exchange rate the no arbitrage condition reduces the system to only two dimensions any two rates must obey their own boundaries but in addition the free rein for movements is restricted by the band of the redundant rate therefore target zone models defined in bilateral settings do not apply to general systems with a cobweb of bilateral bands such as the european monetary system since the model has no known analytical solution it is estimated by the method of simulated moments

modelling the ff mm rate by threshold cointegration analysis this paper investigates a sticky price model of exchange rate determination extension of krugman s target zone model with price inertia applied to the french franc a novel theoretical argument is considered threshold cointegration such that the long run relationship between the parity and its fundamentals is dormant within a certain range of disequilibria but is restored when the system crosses the boundaries over the period 1987 1993 nonlinearities in the ff dm rate consistent with the credibility of this target zone were detected by pointing out a band reversion mechanism a shock persistence analysis which highlights a nonlinear reversion of the exchange rate deviation is also implemented

assessing the credibility of a target zone evidence from the ems this paper provides some new evidence on the credibility of the exchange rate mechanism erm of the european monetary system ems the study differs from previous research in the literature in three main respects first the main contribution is the use of several credibility indicators some of which have never been applied before to all of the currencies under study this allows one to strengthen the results obtained in this paper second a longer period than that of previous studies is analysed covering the complete ems history third a comparison has been made of the prediction qualities of the different indicators in order to explore their ability to capture the main erm events realignments changes in the fluctuations bands and speculative pressures fourth the indicators are applied to the experience of the new modified erm linking the currencies of non euro area member states to the euro showing the relevance of this approach in the near future with the enlargement of the european union

openness open source and the veil of ignorance author s scotchmer suzanne abstract the open source movement evolved in the one industrial context where openness is not required by intellectual property law 1 nevertheless openness itself cannot be the driving force behind the open source movement this is because openness can be achieved in many ways other than the gpl for example with proprietary licenses or licenses that are even more permissive than the gpl such as the bsd license early commentators explained this new development model by focussing on the motives of the programmer such as to demonstrate skills see the survey by stephen m maurer and suzanne scotchmer 2006 but firms also participate in open source collaborations sometimes contributing significant resources joachim henkel 2006 dirk riehle 2009 doing so can be profitable even if the contributors are rivals in the market the quality improvements or cost reductions provided by a rival s open source contributions may outweigh the deleterious effect of empowering the rival to be a better competitor

is the general public licence a rational choice open source projects are networks of developers distributors and end users of non proprietary created knowledge goods it has been argued that this form of organization has some advantages over the firm or market coordination i show that for sufficiently convex and modular projects proprietary licences are not able to sustain sequential knowledge production which however can be carried out if the project is run on the open source basis

the effectiveness of central bank intervention in the ems the post 1993 experience abstract we analyze the effectiveness of intervention in the european monetary system by using data on the dem intervention activity of six european central banks covering the period from august 1993 to april 1998 to allow for regime specific intervention effects we estimate markov switching autoregressive conditional heteroscedasticity models we find that interventions have only limited effects on the conditional means and variances

the term structure with semi credible targeting the federal reserve sets targets for interest rates which it enforces through direct market intervention these targets are changed periodically in this paper we develop a term structure model in which the short rate is subject to a control which keeps it close to a target which changes from time to time the probability of target changes is not constant in the model but changes as a function of observables the model performs well at explaining the shifts in the yield curve that accompany target changes in u s financial markets the federal reserve bank the fed is a unique player usually we assume that market participants are price takers in financial markets however there is evidence that this is not true of the fed in fact the fed sets targets for short term rates which it attempts to maintain by market intervention injecting or withdrawing funds from the market to keep the rates near their targets targets are changed from time to time and market participants know when such a target change occurs they may in fact have some limited ability to forecast such target changes several recent papers have provided evidence that models which allow the short rate to revert toward a mean which is itself a random process perform

the burden of intervention externalities in multilateral exchange rates arrangements abstract in this paper we consider a multilateral target zone model that generalizes krugman s model of a bilateral target zone parities are defended by manipulating money supplies in participating countries this means that interventions aimed at one given exchange rate influence other exchange rates as well as a result of these externalities shocks on each fundamental affect the whole range of exchange rates involved moreover intra marginal interventions arise endogenously and the exchange rate distribution does not exhibit the u shaped pattern which is typical of traditional target zones instead our model gives rise to intra marginal targets to which exchange rates tend to return the location of these targets is shown to depend on the intervention sterilization mix adopted by monetary authorities

interest rate speculative attacks and target zones abstract we study the behavior of the interest rate differential in a non sustainable exchange rate target zone we show that the relation between the interest rate differential and the fundamentals before the speculative attack is dependent on the expected post attack monetary policy

a dynamic model of open source vs proprietary r d abstract we propose a dynamic model in which firms compete to produce sequential and cumulative innovations and in which the more firms do research in one sector the more likely it is that one of them innovates firms choose research effort and whether to patent innovations or to use an open source license like the general public license we show that i patents generate a larger stationary reward but foreclose research within a sector and that ii open source generates a smaller stationary reward but allows everyone to use the technology and therefore by attracting firms to the sector it induces a faster pace of innovation we characterize all the equilibria of the model and show that in equilibrium an open source sector appears only after a proprietary sector we also find conditions under which the model has a unique equilibrium in which a proprietary and an open source sector coexist and compete in the short run but the open source sector dominates the industry in the long run we use our model to study whether patents are inefficient and to explain firms behavior in the software and the biomedical industry

optimal central bank intervention in the foreign exchange market abstract we consider a currency with exchange rate dynamics modeled as a geometric brownian motion the objective of the central bank is to keep this exchange rate as close as possible to a given target so there is a running cost associated to the difference between the exchange rate and the target additionally there are also fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal level of intervention and the optimal sizes of the interventions so as to minimize the total cost we solve this problem by applying the theory of stochastic impulse controls journal of economic literature classification numbers c61 d81 f31 g15

a new breed of exchange rate bands chile israel and mexico following inflation stabilization programmes where a fixed exchange rate is used as an anchor a number of countries have gradually shifted towards a regime of increased flexibility in particular chile israel and mexico have adopted for a few years a regime of crawling exchange rate bands this article documents and analyzes their unique experience of immediate concern is the question whether the shift from fixed to crawling bands is perceived as the signal of a tilt towards policy relaxation on the contrary it could be seen as a way of restoring external competitiveness after a period of real appreciation the evidence collected in this article supports the latter view as a way of moving towards a sustainable equilibrium the shift to crawling bands is found to have a stabilizing influence on financial markets on inflation expectations and on the passthrough from exchange rates to prices

optimal dividend and capital injection problem in the dual model with proportional and fixed transaction costs in this paper we consider the dividend payments and capital injections control problem in a dual risk model such a model might be appropriate for a company that specializes in inventions and discoveries which pays costs continuously and has occasional profits the objective is to maximize the expected present value of the dividends minus the discounted costs of capital injections this paper can be considered as an extension of yao et al 2010 we include fixed transaction costs incurred by capital injections in this paper this leads to an impulse control problem using the techniques of quasi variational inequalities qvi this optimal control problem is solved numerical solutions are provided to illustrate the idea and methodologies and some interesting economic insights are included

structural change accounting with labor market distortions abstract this paper quantifies the relative importance of sectoral productivity and labor market distortions for structural change in the u s india mexico and brazil between 1960 and 2005 i use census data to compute human capital by sector and infer labor market distortions as sectoral gaps in wage per unit of human capital i incorporate these distortions into a model of structural change and calibrate the model to reproduce the time paths of sectoral shares of labor and value added for each country counterfactuals reveal that 1 tfp growth in agriculture drives most of the decline in its share of labor 2 the role of labor market distortions is limited

government debt control optimal currency portfolio and payments motivated by empirical facts we develop a theoretical model for optimal currency government debt portfolio and debt payments which allows both government debt aversion and jumps in the exchange rates we obtain first a realistic stochastic differential equation for public debt and then solve explicitly the optimal currency debt problem we show that higher debt aversion and jumps in the exchange rates lead to a lower proportion of optimal debt in foreign currencies furthermore we show that for a government with extreme debt aversion it is optimal not to issue debt in foreign currencies to the best of our knowledge this is the first theoretical model that provides a rigorous explanation of why developing countries have reduced consistently their proportion of foreign debt in their debt portfolios

price barriers in the dow jones industrial average this study tests the popular claim that the djia s movements around key reference points affect investor sentiment and thus price behavior it is found that the djia s rise and fall is indeed restrained by support and resistance levels at multiples of 100 e g 2800 2900 3000 etc but that having broken through a 100 level the djia then moves by more than otherwise warranted a monte carlo study and comparisons with other indices confirm the significance of these findings this suggests that some agents may trade on the basis of the djia but does not necessarily suggest that the market is inefficient

the linkage between speculative attack and target zone models of exchange rates in this paper we generalize the target zone exchange rate as model formalized by krugman 1988b to include finite sized interventions in defense of the zone the main contributions of these pages consist of linking the recent developments in the theory of target zones to the mirror image theory of speculative attacks on asset price fixing regimes and in using aspects of that linkage to give an intuitive interpretation to the smooth pasting condition usually invoked as a terminal condition this abstract was borrowed from another version of this item

financial markets views about the euro swiss franc floor exchange rates and option prices incorporate market participants views about the credibility and the effects of exchange rate targets i present a model to determine exchange rates under policy targets that can be used to price options the model is estimated with euro swiss franc exchange rate and options price data in the first few months of the minimum exchange rate policy the implied survival probability of the policy for a 3 month horizon was typically less than 75 over time the credibility increased and this probability reached 95 in august 2014

voluntary contributions to a joint project with asymmetric agents we revisit admati and perry 1991 s model of voluntary contributions to a joint project their main result that equilibrium contributions are small appears not to be robust to the introduction of asymmetries

implicit bands in the yen dollar exchange rate this article attempts to identify implicit exchange rate regimes for the yen dollar exchange rate to that end we apply a sequential procedure that considers both the dynamics of exchange rates and central bank interventions to data covering the period from 1971 to 2003 our results suggest that implicit bands existed in two subperiods april december 1980 and march october 1987 the latter coinciding with the louvre accord furthermore the study of the credibility of such implicit bands indicates the high degree of confidence attributed by economic agents to the evolution of the yen dollar exchange rate within the detected implicit band rate thus lending further support to the relevance of such implicit bands

urban influences on rural schooling in india abstract many believe that low levels of schooling in rural areas of developing economies are a consequence of the low rate of return to schooling in agriculture this belies the possibility that rural schooling decisions are undertaken in response to the possibility of employment in urban areas this paper tests this hypothesis using three cross sections of household data for rural india it finds that urban rates of return do influence rural schooling particularly amongst households who are most likely to seek urban employment such as the landless the results suggest that low levels of rural schooling may reflect not just conditions in the local village economy but also the functioning and size of the relevant labor market

structural change in a multisector model of growth we study a multi sector model of growth with differences in tfp growth rates across sectors and derive sufficient conditions for the coexistence of structural change characterized by sectoral labour reallocation and constant aggregate growth path the conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists we present evidence from us two digit industries that is consistent with our predictions about structural change and successfully calibrate the historical shift from agriculture to manufacturing and services we show quantitatively that reasonable deviations from our conditions do not have a big impact on the properties of the model

a univariate analysis of ems exchange rates using a target zone model summary the models in the literature on exchange rate target zones imply a non linear time series model for the exchange rate we show how the parameters of such models can be estimated and develop maximum likelihood and method of simulated moments estimators for the target zone model of krugman 1991 the maximum likelihood estimator is based on a computationally attractive approximation to the exact predictive density of the continuous time model monte carlo experiments are used to assess the properties of this estimator in the empirical part we estimate the model with data on recent ems exchange rates we find that the krugman 1991 target zone model is not able to explain the full observed kurtosis and conditional heteroscedasticity of the exchange rate returns

the impact of fx central bank intervention in a noise trading framework abstract in this paper we analyse the effectiveness of the direct central bank interventions using a new effectiveness criterion to this aim we investigate the effects of central bank interventions cbi in a noise trading model with chartists and fundamentalists we first estimate a model in which chartists extrapolate past returns and fundamentalists forecast a mean reverting dynamics of the exchange rate towards a fundamental value then we investigate the role of central bank interventions for explaining the switching properties between the two types of agents we find evidence that in the medium run interventions increase the proportion of fundamentalists and therefore exert some stabilizing influence on the exchange rate

target zones and realignments recent contributions emphasize that the presence of exchange rate target zones has important effects on the within band behavior of exchange rates when agents are forward looking the authors find that the implications of available models are inconsistent with european exchange rate data and they suggest that the frequent realignments occurring in the period they consider may be responsible for this they construct a model in which the likelihood of a realignment in the near future increases as the exchange rate approaches the limits of its fluctuation band and show that its implications are broadly consistent with the evidence copyright 1992 by american economic association

stochastic trends and jumps in ems exchange rates abstract in this paper we study the statistical properties of ems exchange rate returns our findings show that jumps time varying parameters and conditional leptokurtosis are pertinent features in the empirical distributions of ems exchange rate returns allowance for fat tails however tends to reduce the measured frequency of jumps in the distributions to more realistic proportions most successful in capturing the relevant features of ems exchange rate returns is a combined jump garch model with conditionally t distributed innovations jel f31

subgame perfect implementation this paper examines the use of stage mechanisms in implementation problems and provides a partial characterization of the set of subgam e perfect implementable choice rules it is shown that in many economic environments virtually an y choice rule can be implemented to illustrate the power of this approach the paper discusses a number of models in which it is possible to implement the first best although it wouldn t have been possible to do so without using stage mechanisms the diversity of these models suggests that subgame perfect implementation may find wide application copyright 1988 by the econometric society

beyond balanced growth balanced growth models are commonly used in macroeconomics because they are consistent with the well known kaldor facts regarding economic growth these models however are inconsistent with one of the most striking regularities of the growth process the massive reallocation of labour from agriculture into manufacturing and services this paper presents a simple model consistent with both the kaldor facts and the dynamics of sectoral labour reallocation

the paradox of indian growth a comment on kochhar et al the paradox of india s current success we learn from kochhar et al 2006 is that it is rooted in what were once seen as some of its most egregious policy failures in particular in the 1980s and even the 1990s one always heard complaints about how india invested so much more in tertiary education compared to countries at similar levels of development and how primary education by comparison was under funded and not enough of a priority and it did look like the critics were right highly qualified engineers educated at great public expense worked as bank officers or sales representatives for large multinationals or cooled their heels as minor functionaries in the overfilled bureaucracies of large public companies if they were exceptionally brilliant or fortunate they won a scholarship to do an advanced degree somewhere in the west few came back if there was one thing that has worse press in the community of economists today than india s education policy it was its policy of self reliance this meant making everything at home often behind gargantuan walls of tariffs and quotas this created an industrial sector that was enormously diversified at least compared to other economies at the same level of development and probably in many ways quite inefficient yet according to kochar and company it was the combination of these two policy errors that were instrumental in shaping the indian economy of today the two things that distinguish india from any other economy at its level of development are the skillintensity of its exports and the diversity of what it produces indeed 15 years after liberalization began the indian economy seems to be even more diversified than it used to be

games of perfect information predatory pricing and the chain store paradox the thesis of this paper is that finite noncooperative games possessing both complete and perfect information ought to be treated like one player decision problems that is players ought to assign at every move subjective probabilities to every subsequent choice in the game and ought to make decisions via backward induction this view is in contrast with the gametheoretic approach of nash equilibrium after expanding on this view for games in the abstract in sections 2 and 3 attention is turned in section 4 to an example due to reinhard selten called the chain store paradox which possesses the flavor of a situation involving a predatory pricing monopolist it is argued that for the chain store game the decision analytic approach leads under certain assumptions to more realistic outcomes than the standard nash equilibrium approach

equilibrium asset prices and exchange rates abstract in a two country two good world we construct an intertemporal international general equilibrium for two logarithmic representative agents financial markets are fully integrated and independently incomplete the equilibrium expected rate of change of the exchange rate increases with the differential of interest rates and the volatility of the domestic equity markets and decreases with the covariance between domestic and foreign equity markets the equilibrium volatility of the exchange rate is the sum of the volatilities due to idiosyncratic factors in the financial markets and a term that represents the difference of weights in the common international factor

a quantitative analysis of china s structural transformation abstract the structural transformation of china or the reallocation of resources from the agricultural sector to the nonagricultural sector between 1978 and 2003 was truly remarkable we develop a two sector neoclassical growth model to quantitatively assess the driving forces of china s recent structural transformation in addition to the forces currently emphasized in the literature sectoral productivity growth we show that china s transformation was accelerated significantly by the gradual reduction in the relative size of the chinese government we find that the reduction in the size of the chinese government accounted by itself for 15 of the reduction in the agricultural share of employment two mechanisms explain this i in our model the lower tax rate associated with reduced intervention encouraged the accumulation of physical capital which is produced in the nonagricultural sector ii lower inefficiencies induced incomes to rise and given our preferences resulted in a disproportionate increase in the demand for the nonagricultural good

changes in sectoral composition associated with economic growth in this paper the author uses dynamic general equilibrium methods to examine the interrelationship between sectoral composition and growth she shows that growth is affected by sectoral composition and vice versa the model is basically a solow model of sustained growth with multiple consumption goods and nonhomothetic preferences each consumption good is produced using different factor intensities the rate of exogenous technological change is different in each sector nonhomotheticity of preferences drives the result that sectoral composition affects growth rates copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

oral interventions versus actual interventions in fx markets an event study approach the article assesses whether exchange rate communication or oral intervention has been an effective policy tool for monetary authorities to influence exchange rates it employs an event study methodology that identifies intervention clusters or events for the euro dollar and the dollar yen exchange rates the article finds that both oral intervention events and actual intervention events have been highly successful over the short to medium run the article shows that the success of intervention events is related to market conditions and to the coordination among policy makers it also finds that the success of communication and actual interventions is largely unrelated to monetary policy thus suggesting that interventions primarily function through a coordination channel

exchange rates under ems target zones an econometric investigation this study tests krugman s model on exchange rate target zones using four old ems exchange rates those of the currencies of belgium france italy and the netherlands against the deutsche mark vast theoretical literature is available but there are very few empirical studies testing the main results of krugman s model namely the honeymoon effect smooth pasting and the overall s curved relationship between fundamental and exchange rate the present study supports the honeymoon effect but does not find any evidence in support of smooth pasting or of an s curved relationship between the exchange rate and fundamentals for the belgian franc french franc and italian lira against the deutsche mark the dutch guilder very closely follows movements in the german mark throughout the period 1981 90 end of month exchange rates and euro currency interest rates data are used

target zone models with price inertia solutions and testable implications many recent papers suggest that the basic flex price target zone model does not perform well empirically this paper investigates the testable implications of a sticky price target zone model and finds that to a limited extent it has a better empirical performance than the simplest flex price model however in terms of nominal variables the sticky price model is found to be observationally equivalent to the flex price model when the latter is extended to include intramarginal intervention and realignments copyright 1994 by royal economic society

implied exchange rate distributions evidence from otc option markets abstract this paper uses a rich new dataset of option prices on the dollar mark dollar yen and key ems cross rates to extract the entire risk neutral probability density function pdf over horizons of 1 and 3 months we compare three alternative smoothing methods cubic splines an implied binomial tree trimmed and untrimmed and a mixture of lognormals for transforming option data into the pdf despite their methodological differences the three approaches lead to a similar pdf clearly distinct from the lognormal benchmark and typically characterized by skewness and leptokurtosis we then document a striking positive correlation between skewness in these pdfs and the spot rate the stronger a currency the more expectations are skewed towards a further appreciation of that currency we interpret this finding as a rejection that innovations in these exchange rates are independent of the level or characteristic of a credible target zone explicit or implicit instead this positive correlation is consistent with target zones with endogenous realignment risk we discuss two interpretations of our results on skewness when a currency is stronger the actual probability of further large appreciation is higher or because of risk such states are valued more highly

can traditional theories of structural change fit the data two traditional explanations for structural changes are sector biased technological progress and non homothetic preferences this paper integrates both into an otherwise standard growth model and quantitatively evaluates them vis a vis time series the exercise identifies a set of puzzles for standard theories i the model cannot account for the steep decline in manufacturing and rise in services in the later data ii the standard model requires implausibly low elasticity of substitution across goods to match the consumption and output data and iii the behavior of consumption and output shares differs significantly from that of employment shares we argue that models that incorporate home production sector specific factor distortions and differences across sectors in the accumulation of human capital are promising avenues to amend the standard models jel o11 o14 o41

intervention policy and mean reversion in exchange rate target zones the swedish the intervention policy of the swedish central bank is studied using daily intervention data for the late 1 980s in contrast to the first generation of target zone models we find that the interventions occur all over the exchange rate band and almost every day based on this evidence we estimate an exchange rate target zone model with intra marginal interventions the results go a long way towards explaining the well established hump shaped exchange rate distribution and lack of non linearities

the political economy under monetary union has the euro made a difference economic and monetary union emu has transformed europe and has created an integrated pan european economy much research has focused on understanding this integration process and what benefits and costs it entails this paper identifies a political economy channel of emu as the monetary union implies that member states had to transfer or at least curtail their policy autonomy in several areas such as monetary policy and fiscal policy the paper shows that emu has helped reduce the impact of political shocks on the domestic economy of member states but magnified the transmission of political shocks within the euro area equally importantly economies with weak domestic policies and institutions exhibited a significantly higher sensitivity to domestic political shocks before emu but not thereafter while this may entail that emu has brought benefits to countries with weaker policies and institutions by insulating them from adverse political developments at home a potential drawback is that it may provide weaker market discipline for domestic political stability marcel fratzscher and livio stracca

quantitative modelling of the eur chf exchange rate during the target zone regime of september 2011 to january 2015 krugman 1991 s target zone model for exchange rate dynamics has become the reference of a large part of this literature despite its simplicity and elegance empirical evidence has been lacking not least because it is difficult to capture the predicted non linear relationship between the observable exchange rate and the non observable fundamental value this is why we propose a different approach by inverting locally the relation between exchange rate and fundamental value we derive analytical expressions for the conditional volatility and the probability density as a function of the exchange rate this allows us to examine krugman s prediction directly from historical data and furthermore enables us to test the smooth pasting condition which is intimately related to the no arbitrage condition concretely we study the performance of the euro swiss franc exchange rate in the extraordinary period from september 6 2011 to january 15 2015 when the swiss national bank enforced a minimum exchange rate of 1 20 swiss francs per euro we show that the data are well explained by the theory and conclude that krugman s target zone model holds after all but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone

fed intervention dollar appreciation and systematic risk abstract in a four factor asset pricing model estimated on daily data fed intervention significantly affects betas of surprises in the market return expected inflation rate yield curve and corporate bond risk premium fed foreign currency sales cause economically and statistically significant increases in the systematic risk premium in appreciation and thus in the dollar s expected appreciation rate the direction the fed desires and consistent with the signaling but not the portfolio balance channel intervention s effects on actual appreciation are less reliable they depend on unpredictable risk factor realizations even successful intervention to strengthen the dollar may be costly by increasing the dollar s systematic risk intervention reduces the attractiveness of u s relative to foreign investments further uncertainty about future fed interventions may induce resource misallocation ceteris paribus investors find it harder to estimate risk adjusted discount rates and forecast the home currency value of cash flows

target zones and small realignments abstract we study the behaviour of the exchange rate in a target zone in the case where a realignment may occur at the edges of the band we show in contrast to the previous result that the stabilizing property of the target zone may remain even when the credibility is very low

were the peseta exchange rate crises forecastable during target zone period during the 1990s several fixed or quasi fixed exchange rate systems collapsed currency crises have happened in both developed and emerging countries so it is necessary to forecast and avoid them however financial market crises have been extremely difficult to forecast economic agents expectations are nonobservable variables that cannot be ignored in the models in addition if it is required to study the european case during the 1990s the censored disposition of the exchange rate cannot be ignored either a discrete time target zones model is proposed where these aspects are taken into account it will be tested in a peseta deutsche mark exchange rate framework from june 1989 to december 1998 the results indicate differences between before and after the shift in band widths in august 1993

a structural threshold model of the exchange rate under optimal intervention abstract by considering a social trade off between targeting the exchange rate and minimizing intervention costs nonlinear exchange rate dynamics can be captured by a structural threshold model this article provides a theory based empirical exchange rate model and shows how to put the model into an empirical investigation to estimate the structural threshold model we propose a two step procedure which separately estimates the permanent and temporary fundamentals of the foreign exchange market a demonstration of our approach is applied to 1981q3 2008q3 taiwan s foreign exchange market with a brief review of its monetary policies and central bank given prior estimation results are consistent with theoretical predictions and many intervention operations of taiwan s central bank are successfully identified

optimal control of a mean reverting inventory motivated by empirical observations we assume that the inventory level of a company follows a mean reverting process the objective of the management is to keep this inventory level as close as possible to a given target there is a running cost associated with the difference between the actual inventory level and the target if inventory deviates too much from the target management may perform an intervention in the form of either a purchase or a sale of an amount of the goods there are fixed and proportional costs associated with each intervention the objective of this paper is to find the optimal inventory levels at which interventions should be performed as well as the magnitudes of the interventions to minimize the total cost we solve this problem by applying the theory of stochastic impulse control our analysis yields the optimal policy which at times exhibits a behavior that is not intuitive

can total factor productivity explain value added growth in services abstract this paper examines the factors responsible for generating the services led growth witnessed in the indian economy during 1980 2005 a sectoral growth accounting exercise shows that total factor productivity tfp growth was the fastest for services moreover this tfp increase was significant in accounting for service sector value added growth a growth model with agriculture industry and services as three principal sectors is calibrated to indian data using sectoral tfp growth rates the baseline model performs well in accounting for the evolution of value added shares and their growth rates but is unable to capture sectoral employment share trends the performance of the model with respect to value added shares improves when the post 1991 increase in service sector tfp growth following the inception of market based liberalization reforms is accounted for a modified version of the model with public capital can better track trends in sectoral employment shares

analysis of exchange rate target zones using a limited dependent rational expectations model with jumps this article examines the exchange rate determination in a target zone regime when the bounds can be fixed for an extended period but are subject to occasional jumps in this case the behavior of the endogenous variable is affected by the agents expectations about both the occurrence and the size of the jump empirical results using data for the franc mark exchange rate provide support for the nonlinear model with time varying realignment probability and indicate that the agents correctly anticipated most of the observed changes in the central parity

intramarginal intervention in the ems and the target zone model of exchange rate behavior abstract exchange rate data produced by the european monetary system ems contradict important predictions made by the standard target zone model we show that the contradictions reflect a misinterpretation of policies pursued by the ems countries they intervened intramarginally to keep exchange rates will within their bands not at the edges of the bands to keep rates from crossing them in the basle nyborg agreement of 1987 however they agreed to make fuller use of the band and exchange rates behave differently thereafter the effect appears clearly in the behavior of the french franc and less decisively in the behavior of the italian lira we conclude by examining and rejecting other explanations for the observed difference in exchange rate behavior

the term structure of interest rate differentials in a target zone theory and swedish data abstract the term structure of interest rate differentials is derived in a model of a small open economy with a target zone exchange rate regime for given time to maturity the interest rate differential is decreasing in the exchange rate and for given exchange rate the interest rate differential s absolute value and its instantaneous variability are both decreasing in the time to maturity devaluation realignment risks are incorporated and imply upward shifts of the interest rate differentials several implications of the theory are found to be broadly consistent with data on swedish exchange rates and interest differentials for the period 1986 1989

target zones and forward rates in a model with repeated realignments abstract this paper studies the term structure of forward premia in a target zone with imperfect credibility the relationship between spot and forward exchange rates which reflects the possibility of realignments of the band is studied for various intervention policies with different degrees of credibility forward market data is used to estimate the implied credibility of the french german target zone during the ems parameter estimates accord with the experience of the ff dm exchange rate during the 1980s although spot exchange rates display little sensitivity to anticipated intervention forward data can be used to detect the effects of intervention on exchange rate dynamics

the welfare implications of foreign exchange intervention abstract this paper examines the welfare implications of foreign exchange intervention in a two country two currency general equilibrium model with limited participation in financial markets and cash in advance constraints on transactions both sterilized and nonsterilized intervention operations have significant impacts on the allocation of liquidity in international financial markets and therefore affect real economic activities the welfare effects of shocks to monetary policy sterilized and nonsterilized foreign exchange interventions are examined and compared the design of welfare maximizing intervention policy rules is also discussed