the mirage of floating exchange rates this note summarizes some of the highlights of my longer paper with guillermo calvo fear of floating many emerging market countries have suffered financial crises one view blames soft pegs for these crises adherents to that view suggest that countries move to corner solutions hard pegs or floating exchange rates we analyze the behavior of exchange rates reserves and interest rates to assess whether there is evidence that country practice is moving toward corner solutions we focus on whether countries that claim they are floating are indeed doing so we find that countries that say they allow their exchange rate to float mostly do not there seems to be an epidemic case of fear of floating

why have private savings rates in the united states and canada diverged abstract one of the central questions in macroeconomics for many years has been whether government policy can affect private saving rates and if so to what extent and through what channels the question has remained controversial because as with other macroeconomic questions experiments to check divergent hypotheses cannot be deliberately performed so economists must rely upon the often dubious evidence from the limited experiments with which nature and history have endowed us this paper discusses the results of an exceptionally good natural experiment that has been provided by canada and the u s over the past thirty five years after moving in tandem for almost twenty five years american and canadian private saving rates have diverged dramatically over the last decade the primary conclusion emerging from our analysis of this phenomenon is that tax policies can have a potent impact on private savings behavior differences in tax structures and in the interactions of taxation and inflation appear to be important factors explaining the divergent behavior of the american and canadian private savings rates recognizing the importance of asset revaluations caused partially but not entirely by tax effects also helps to explain the different behavior of u s and canadian savings there may also be a relationship between government deficits and the private savings differential

the link between inflation and output variability in canada one of the costs of high levels of inflation may be misperceptions of relative prices and excessive volatility in sectoral output this paper therefore examines the relationship between the level of inflation and sectoral output growth variability in canada from 1961 1 to 1995 4 despite the substantial variation in inflation over this period the authors find little evidence of an impact of the level of inflation on variability of sectoral output growth their results indicate that the oil price and the real exchange rate are significantly correlated with the variability of output growth across sectors

product variety and the inefficiency of monopoly in this note the authors extend earlier work that examined the distortions in product quality created by a monopolist selling to consumers with different and unobservable tastes when consumers have differing absolute and marginal willingness to pay for quality they demonstrate that the monopolist may find it profitable to distort quality either at the low end or at the high end of a quality array this latter result has not previously been demonstrated the authors also provide intuitive comparative statics and discuss policy implications copyright 1988 by the london school of economics and political science

intercity trade and the industrial diversification of cities abstract the industrial diversification of cities is explained without imposing linkages among industries in each of two city industries a manufacture is produced competitively as the final good using labor and industry specific differentiated services manufacturers import the services of their industry from all cities that produce them since their technology favors variety in specialized cities the city industry is large and many services are locally available but the two manufactures have to be traded among cities in diversified cities the two manufactures are produced in the same city and each industry crowds out half the local services of the other but manufactures need not be imported a lower cost of trading manufactures e g railroads and intercity highways favors a system of specialized cities while a lower cost of trading services e g telephone the internet favors a system of diversified cities since the latter cities rely more on imported services having fewer locally a larger cost share of services favors specialization and high intra city commuting cost and population growth favor diversification

in search of the exchange risk premium a six currency test assuming mean variance optimization abstract a number of authors examining deviations of actual rates of currency depreciation from forward discounts have claimed to find evidence of risk premiums if these deviations are indeed partly due to risk premiums rather than being entirely due to expectational errors then they should be systematically related to those variables on which risk premiums are thought to depend finance theory tells us that if investors optimize with respect to mean and variance the risk premium depends in a specific way on 1 the supplies of assets denominated in the various currencies 2 the variance covariance matrix of the rates of return and 3 the coefficient of risk aversion the null hypothesis of this paper is that the coefficient of risk aversion is zero countries assets are perfect substitutes and risk premiums are nonexistent the alternative hypothesis is that rates of return are systematically related to asset supplies by a macroeconomic portfolio balance function the maximum likelihood technique used dominates previous attempts to find such a relationship in that the parameters of the portfolio balance function are constrained to depend on the variance covariance matrix as the finance theory says they should on the other hand the technique also dominates previous applications of the finance theory in that the expected returns are allowed to vary over time as the macroeconomic portfolio balance theory says they should the paper s finding is a statistical inability to reject the null hypothesis for a portfolio of six currencies although this could be due to low power in the test

speculative profit opportunities in the canadian foreign exchange market 1974 78 this paper shows that a number of simple theoretically based exchange rate models could have been used to speculate profitably in the canada united states exchange market over the period 1974 78 and that these unexploited profits were surprisingly large estimated models and autoregressive forecasts of their explanatory variables based only on information available at each point in time were used to take uncovered positions based on the forecasted direction of forward rate error these unexploited profits provide strong evidence of market inefficiency and or the existence of a time varying risk premium possibilites de profits speculatifs sur le marche des changes canada etats unis 1974 78 ce memoire montre qu on aurait pu faire bon usage d un certain nombre de modeles theoriques simples du taux de change entre le canada et les etats unis pour speculer avec profit sur le marche des changes canada etats unis entre 1974 et 1978 il semble que la taille de ces profits non encaisses est etonnamment considerable l auteur utilise des modeles et des previsions a partir de specifications autoregressives pour obtenir la valeur des variables independantes en utilisant seulement les renseignements disponibles a tout moment donne afin de definir les positions speculatives a decouvert suggerees par la direction prevue de l erreur dans le taux de change sur le marche a terme l existence de tels profits non exploites suggere l existence d inefficacite dans le inarche et ou l existence d une prime de risque qui varie avec le temps

have structural changes eliminated the out of sample ability of financial variables to forecast real activity after the mid 1980s evidence from the canadian economy this article evaluates how consistently reliable the information content of individual financial variables is for canada s future output growth we estimate the timing of structural changes in linear growth models and check robustness to specification changes multiple breaks and business cycle asymmetry our simulated out of sample forecast evaluation strategy using the mean square error f type mse f and the new encompassing enc new tests shows that the leading information content of most financial variables for canada s future gross domestic product gdp growth has deteriorated substantially after 1984 04 but the 1 3 year term spread exhibits a consistently reliable predictive ability at the 1 and 2 quarter horizons and has significant forecasting ability at the 8 quarter horizon also the real m1 money growth has regained its ability to forecast output growth since 1991 01

bank commercial loan markets and the role of market structure evidence from surveys of commercial lending abstract this paper seeks to test two tenets that underlie the current practice of antitrust analysis in banking the first is the view that bank commercial loan markets are local in nature and the second is the view that banks in more concentrated markets are more likely to engage in some form of noncompetitive behavior tests of both of these tenets are conducted using an extensive set of loan specific survey information not previously employed to address these issues results consistent with the existence of local banking markets and the dominance of competitive differences as an explanation for observed differences in loan rates are found

real exchange rates under alternative nominal exchange rate systems abstract the paper develops an equilibrium model of the determination of exchange rates the relative price of nontraded goods and the current account the focus is on the effects of various real and nominal disturbances and the conditions under which the nominal exchange rate system is neutral with respect to real variables in the economy the model demonstrates an assymetry in the roles of trade and nontraded goods in affecting exchange rates an econometric investigation of the raltion between the exchange rate system and the variability of real exchange rates provides some evidence against the neutrality hypothesis

the statistical distribution of exchange rates empirical evidence and economic implications the abundant evidence that changes in exchange rates have distributions with fatter tails than the normal distribution has led researchers to consider non normal distributions including the student the stable paretian and mixtures of distributions this paper compares the empirical fits of three non normal candidates and the normal distribution for daily changes in the logarithms of exchange rates using maximum likelihood estimation of the parameters and chi square goodness of fit tests the student and mixture of two normals provide the best fits but there is evidence that the distribution parameters may vary over time

on the performance of nominal income targeting as a strategy for monetary policy in a small open economy abstract there is a great deal of support for nominal income targeting in the literature on strategies for monetary policy in a closed economy framework is nominal income targeting equally attractive in a small open economy this paper compares nominal income targeting to alternative monetary policy rules in a stochastic macro model for a small open economy we find that both the weighting in the overall price level of the exchange rate and foreign prices and the elasticity of output supplied with respect to the real exchange rate are important factors in assessing the attractiveness of nominal income targeting in a small open economy where the size of both parameters is not negligible a rule targeting the overall price level may actually be preferred to nominal income targeting

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

fundamentals versus the leading index the forecasting of canada s output growth since 1991 an encompassing approach we evaluate the ability of statistics canada s composite leading index to forecast canada s real gross domestic product gdp growth rate in the backdrop of the duguay 1994 jme model and also the dynamic and the error correction variants of the duguay model that already include the fundamentals of the canadian business cycle the results show that integrating the index in these models substantially improve the in sample fit of the models and also provide an explanation for the perplexingly large influence of the us real gdp on aggregate spending in the canadian economy out of sample forecasts over the inflation targeting regime january 1991 april 2004 evaluated using the forecast encompassing tests confirm that the index contains an important amount of new information about the future growth rate quite apart from the information contained in the fundamentals

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

the s l debacle public policy lessons for bank and thrift regulation this book describes the period of failures of savings and loan associations and sets out a program of policies to prevent future debacles it explains the regulatory actions and inactions that created the incentives for large numbers of thrifts to make excessively risky and ill conceived and in some cases fraudulent and criminal investments it describes the failure of the accounting system to provide adequate information to regulators and in many cases even to the managers of the thrifts themselves concerning the health and riskiness of individual thrifts it also discusses how the regulatory system that had been conceived in an earlier and highly regulated era was overwhelmed in the deregulated environment of the early 1980s it shows how the reforms that were made in response to the growing crisis were too little and too late and finally it offers a set of policy reforms that could prevent future crises in the savings and loan industry this work should be of interest to political and financial economists

bank runs as an equilibrium phenomenon a standard demand deposit contract in which individuals are entitled to their full deposit at any time provided the bank is solvent is analyzed in a context in which there are no exogenous events on which agents condition their behavior and a unique equilibrium involving a bank run with positive probability is shown to exist

the real interest rate and aggregate supply abstract this paper analyzes the effects of the anticipated real interest rate on aggregate supply variables in a model where time to produce and variable capital utilization play a crucial role the potential importance of the present mechanism for business cycle theory lies in its ability to generate positive co movements of employment capital utilization labor productivity output and investment these variables are predicted to be affected negatively by the real interest rate reduced forms for output and employment are derived and tested with canadian data taking estimates of the real interest rate prevailing in the united states as the relevant exogenous price

covered interest arbitrage in the 1970 s abstract this paper provides an empirical overview on covered interest arbitrage during the flexible exchange rate regime of the 1970 s it estimates the cost of transactions in foreign exchange and security markets and shows that these costs account for most of the deviations from parity

international interest rate linkages and the exchange rate regime abstract return differentials between instruments denominated in canadian dollars and instruments denominated in american dollars are investigated the study compares the properties of return differentials in the period of fixed exchange rates during the 1960s and in the period of flexible exchange rates during the 1970s and 1980s both real and nominal return differentials are investigated the results indicate that the change in exchange rate regime is not associated with a change in the average level of ex post return differentials between canada and the united states models which predict ex ante return differentials from available information in a rational expectations framework show a surprisingly large amount of structural stability across the regime change the major impact of the flexible exchange rate regime is on the variance of ex post return differentials and not on the average level of ex post or ex ante return differentials jel e42 e58 g15

political vs currency premia in international real interest differentials a study of forward rates for 24 countries abstract different approaches to quantifying the degree of capital mobility for a cross section of currencies particularly saving investment correlations and tests of real interest parity have appeared to show a surprisingly low degree of financial integration we use a new data set forward rate data for 24 countries including many small industrialized countries and seven ldcs to decompose the real interest differential into two parts the covered interest differential or political premium and the real forward discount or currency premium the latter in turn can be decomposed into the exchange risk premium and expected real depreciation we find a high degree of capital mobility across political boundaries for most of the g 11 countries plus hong kong and singapore for our sample period of 1982 to 1987 even for most of the other ldcs and smaller industrialized countries for which covered interest parity clearly fails the political premium is not as big a component of the real interest differential as the currency premium france would appear to have higher capital mobility than most by the criterion of real interest differentials but is seen in fact to have low capital mobility by the criterion of covered interest differentials a clear example of the superiority of the latter criterion

the risk premium in the foreign exchange market this paper presents a dynamic optimizing model of the risk premium in the forward foreign exchange market agents face random endowments and money growth rates complete insurance markets do not exist and foreign exchange is held to hedge against risk in some examples with log linear preferences the size of the risk premium in the forward market is related to the variability of output and money growth an interesting conclusion of the model is that for plausible examples the convexity component of the nominal risk premium due to siegel s paradox may be quite large relative to the total risk premium copyright 1989 by ohio state university press

economic geography and contemporary rural dynamics an empirical test on some french regions schmitt b 1999 economic geography and contemporary rural dynamics an empirical test on some french regions reg studies 33 697 711 this paper presents an economic geography framework used to account for rural population and employment changes besides agglomerative forces these models introduce factors which induce household or firm dispersion that are identified as operative in rural areas population dispersion can be the outcome of increased urban land rents comparative advantages can affect the location of land related activities technological externalities may lead to the dispersion of specific industrial sectors and job increases attract new residents leading to the dispersion of some firms we show that all these factors do not act at the same level and a distinction can be made between forces acting within labour market areas and those acting between labour market areas a simultaneous equation system is built to model the effect of these forces on population and job changes it dis

the adjustment of expectations to a change in regime a study of the founding of the federal reserve the founding of the federal reserve system in 1914 led to a substantial change in the behavior of nominal interest rates the authors examine the timing of this change and the speed with which it was effected they then use data on the term structure of interest rates to determine how expectations responded their results indicate that the change in policy regime was rapid and that individuals quickly understood the new environment they were facing copyright 1987 by american economic association

testing interest rate parity and rational expectations for canada and the united states the purpose of this paper is to examine the joint hypothesis of interest rate parity and rational expectations for canada and the united states using monthly data two approaches to testing are considered 1 the substitution method and 2 testing the cross equation non linear rational expectations restrictions from solving the interest rate parity equation it is demonstrated that standard application of the substitution method requires the assumption that the interest rate parity equation holds deterministically tests for unit roots in the spot exchange rate and interest rate differentials are also investigated

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

a test of a keynesian alternative to hercowitz s aggregate supply theory abstract hercowitz 1986 estimates aggregate output and hours equations which are derived from a new classical model of aggregate supply under an alternative interpretation his aggregate supply equation is in fact an is curve with one omitted variable while his hours equation is best interpreted as an okun s law relationship when the hercowitz equations are nested in more general formulations which incorporate these alternatives the new classical restrictions are rejected resoundingly

mcis and monetary policy abstract several central banks have recently adopted a monetary conditions index mci to guide monetary policy under floating exchange rates this paper discusses some analytical and practical questions raised by mcis furthermore using data for australia canada and new zealand which all operate monetary policy under floating rates and with an inflation target it estimates the responses of the central banks to exchange rate changes the results reveal clear differences between central banks while the reserve bank of australia does not appear to respond the bank of canada and the reserve bank of new zealand who use the mci as an operating target do respond quite strongly to movements in the exchange rate

supervising cross border banks theory evidence and policy this paper analyses the distortions that banks cross border activities such as foreign assets deposits and equity can introduce into regulatory interventions we find that while each individual dimension of cross border activities distorts the incentives of a domestic regulator a balanced amount of cross border activities does not necessarily cause inefficiencies as the various distortions can offset each other empirical analysis using bank level data from the recent crisis provides support to our theoretical findings specifically banks with a higher share of foreign deposits and assets and a lower foreign equity share were intervened at a more fragile state reflecting the distorted incentives of national regulators we discuss several implications for the supervision of cross border banks in europe thorsten beck radomir todorov and wolf wagner

playing with the band dynamic effects of target zones in an open economy this paper applies techniques of regulated brownian motion to a model of a small open economy to investigate how bands on fundamental driving variables affect the realization of the nominal exchange rate the real exchange rate prices and output the author shows that these bands mitigate the relationship between exogenous fundamentals and endogenous variables through their effects on expectations he also considers the effects of changing the width of the band and finds greater stabilization of endogenous variables with more narrow bands on exogenous fundamentals copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

empirical evidence on the strength of the monetary transmission mechanism in canada an aggregate approach abstract this paper examines the transmission of monetary policy in canada it emphasizes the transmission through interest rates and the exchange rate rather than through changes in monetary aggregates and provides empirical evidence on the strength of these channels using a highly aggregated structural model implications of these structural equations for the dynamic effects of monetary policy are explored through a simulation analysis

outsourcing labor market pooling and labor contracts this paper considers the interaction between input sharing and labor market pooling in urban areas in particular it examines the impact of the size of a city and business risks on the organizational structures of firms located in urban agglomerations and it also discusses the impact of organizational structure on incentives to insure workers against income risks it is shown that manufacturing firms suffer from a coordination game in their decision to outsource production the existence of idiosyncratic risks causes manufacturers to refrain from outsourcing the incentives to offer wage and employment protection to workers are more pronounced when manufacturers outsource the production of their inputs to a local market which mitigates the impact of labor market pooling

ambiguous changes in product quality economic goods are frequently sold according to a price per unit quantity where the quantity characteristic does not measure all the economically important characteristics of the good milk is sold by the quart automobiles rented by the mile physicians services bought by the visit and tennis lessons by the hour in all cases heterogeneous units are available in the market and the price per unit quantity depends upon the amount of the unpriced characteristic contained in each unit the per quart price of milk depends upon the butterfat content the mileage costs of automobile rentals on the cars make and the price per unit time for personal services on the providers skill and training the common distinction made between these variants of the same good is that they differ in quality where quality refers to the amounts of the unpriced attributes contained in each unit of the priced attribute thus milk is packaged according to the attribute milk liquid and the quality of milk refers to the ratio of butterfat per unit of liquid 2 this paper considers some of the unique aspects of the economics of supply and demand under this situation where products contain at least two desired attributes only one of which is quantified and measured prior to purchase product quality is here defined by the ratio of the second quality attribute per unit of the measured quantity attribute 3 this simple specification of quality allows a direct link between standard economic models of related products and the economics of variable product quality previous analyses which treat quality simply as a shift parameter in the demand function are shown to obscure the actual subtleties of supply and demand with variable endogenous quality 4 the paper proceeds by first examining the efficient quality and quantity and the competitive equilibrium the market equilibrium under monopoly is then contrasted in the second section the general theme of the

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

are foreign exchange forecasts rational new evidence from survey data abstract tests of rationality in foreign exchange markets have been inconclusive because of disagreement over the relevant asset pricing model this paper uses a newly available set of data on foreign exchange expectations to directly test the rationality of four foreign currency markets overall the results reject the rational expectations hypothesis

bank loan portfolios and the canadian monetary transmission mechanism following a monetary tightening bank loans to consumers decrease this is true for both mortgage and non mortgage loans and it is true for a tightening by the bank of canada that is and is not a response to a tightening by the federal reserve system in contrast business loans increase following a monetary tightening the per verse response of business loans cannot be explained by an increase in the demand for funds due to a reduction in real activity these results are consistent with a change in bank portfolio behaviour in favour of business loans in response to a monetary tightening portefeuilles de prets bancaires et le mecanisme de transmission monetaire canadien a la suite d une restriction monetaire les prets bancaires aux consommateurs chutent c est vrai tant pour les prets hypothecaires que non hypothecaires et c est vrai pour une restric

a comment on the great canadian slump in this comment on fortin 1996 the authors argue that the sluggishness in economic activity in canada in the 1990s is better explained by a combination of factors than by monetary policy alone they find that 1 it is difficult to explain the sluggishness on the basis of the historical relationship between monetary conditions and real activity 2 fortin s evidence of downward nominal wage rigidity is seriously overstated 3 there are several reasons why technological change may have had a larger impact on employment in canada in the 1990s than in the united states and 4 the build up of government debt in the 1980s and 1990s was much more than a cyclical problem associated with monetary policy

consumption permanent income and financial wealth in canada empirical evidence on the intertemporal approach to the current account the intertemporal approach to the current account is rejected as a complete explanation of the canadian current account federal government fiscal policy plays an important role in the determination of the current account a private sector agent that treats its holdings of net liabilities of the federal government as net wealth accumulates the sum of these liabilities and the net liabilities of non residents as part of an intertemporally optimal plan this result indicates both fiscal policy and intertemporal considerations are important determinants of current account behaviour consommation revenu permanent et richesse financiere au canada resultats empiriques d une approche au compte courant mettant l accent sur la dimension intertemporelle cet article montre que l approche mettant l accent sur la dimension intertemporelle ne produit pas une explication complte du comportement du compte courant canadien i1 semble que la politique fiscale du gouvernement federal joue un r6le important dans la conformation du compte courant un agent economique prive composite qui traite son portefeuille de dettes nettes du gouvernement federal comme richesse nette va accumuler la somme de ces dettes et des dettes nettes des non residents dans le cadre de son plan intertemporel optimal les resultats montrent que la politique fiscale et des considerations intertemporelles sont des elements determinants du comportement du compte courant

the immediate challenges for the european central bank immediate challenges for the ecb issues in formulating a single monetary policy this paper discusses a number of issues that the newly constituted board of the ecb will face early on conducting a european monetary policy will be very different from living under the protective umbrella of the bundesbank we discuss voting on the ecb board and argue that the ability to communicate with the public will be critical for the success of the new institution we also ask how a single monetary policy a common change in the interest rate controlled by the ecb is transmitted to the economy of each member country we show that the monetary process differs significantly inside emu initially at least the cost of a disinflation episode could fall disproportionately on a few member countries those with both a financial structure that spreads a monetary contraction widely and a wage price structure that is relatively inflexible this process moreover is sure to evolve in part as a result of financial industry restructuring already under way but in part accentuated by the common money furthermore as the lucas principle suggests the wage price process itself will adapt to the changing focus of european monetary policy rudi dornbusch carlo favero and francesco giavazzi

international transmission of aggregate shocks under fixed and flexible exchange rate regimes united kingdom france and germany 1959 to 1985 abstract this paper analyzes the transmission of aggregate shocks between the usa and three major european economies the uk france and germany under fixed and flexible exchange rate regimes using time series techniques short run linkages are investigated in the context of vector autoregression models while long run relations are analyzed by testing for cointegration empirical findings indicate that flexible exchange rates have not in general completely insulated domestic economies from foreign shocks and that the degree of insulation and interdependence across exchange rate regimes and over the long and short runs differs substantially across the european countries

a neoclassical perspective on budget deficits i n the 1988 presidential campaign virtually every serious candidate spoke of the urgent need to trim government budget deficits public opinion polls have identified federal deficits as a key economic issue second only to unemployment while many economists are relieved by what they perceive to be a long overdue political response to a critical economic problem others regard the fuss as much ado about nothing it is indeed remarkable that economists can disagree so severely over an issue which commands such a uniform reaction from laymen of widely different ideologies and political affiliations generally speaking there are three schools of thought concerning the economic effects of budget deficits neoclassical keynesian and ricardian before proceeding further it is useful to review the basic structure and implications of each paradigm the neoclassical paradigm envisions farsighted individuals planning consumption over their own life cycles budget deficits raise total lifetime consumption by shifting taxes to subsequent generations if economic resources are fully employed increased consumption necessarily implies decreased saving interest rates must then rise to bring capital markets into balance thus persistent deficits crowd out private capital accumulation in the current economic environment most economists would agree that these consequences would be highly detrimental

some evidence on the international inequality of real interest rates abstract this paper undertakes econometric tests of the hypothesis that ex ante real interest rates are equal across countries with highly integrated capital markets the issue is of practical importance because the violation of real rate equality is a necessary condition for monetary policy to influence the open economy through the real interest rate channel although an empirical literature concerning real rate equality already exists previous investigators have focused on pre tax real rates this paper contributes to the literature by attempting to incorporate the effects of taxation into the analysis

transactions costs and covered interest arbitrage theory and evidence the extent to which deviations from covered interest parity can be attributed to transactions costs has been exaggerated in the economic literature because the swap market in foreign exchange has been ignored it is shown that such deviations should be no greater than the lowest of the transactions costs in one of three markets the swap market or either of the two relevant securities markets this reconciles the theory with the data which show spreads of no more than a few basis points however the empirical results have no direct bearing on the conventional market efficiency hypothesis

specialization and diversification in a system of cities abstract when do cities specialize in production and when do they diversify when do both specialized cities and diversified cities coexist what determines the size and number of cities of different types in an economy these questions are addressed in a general equilibrium model of a closed economy consisting of a system of cities the economy produces two goods which are traded within the system at no transportation costs in the context of this model the factor which leads to the formation of specialized cities is internal scale economies due to the existence of fixed cost in production whereas the reason for the formation of diversified cities is the existence of economies of joint production i e economies of scope the model presented generates three possible equilibrium configurations 1 pure specialization in which each city specialized in the production of one good 2 pure diversification in which all cities in the economy produce both goods 3 mixed system in which specialized and diversified cities coexist in the economy the conditions under which each configuration emerges are identified thus the model represents an explanation of urban hierarchy in spatial economies

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

persistent deficits and the market value of government debt summary this paper investigates whether postwar canadian public financial policy satisfies a borrowing constraint direct tests of the present value relation suggested by this constraint shed light on the sustainability of current policy we examine monthly data on canadian federal government finances using tests for cointegration the finding is that the joint behaviour of real debt and real surpluses is inconsistent with intertemporal budget balance for the government one interpretation of this finding is that the government is systematically paying real returns to bondholders by issuing further debt alternatively bondholders may expect the government to finance future interest payments from a source other than primary surpluses e g the sale of physical assets much empirical macroeconomics is concerned with the effects of public financial policies numerous studies have examined whether such policies affect interest rates inflation or national income and its components these examinations raise the question of the efficacy of government budget deficits they generally assume that a borrowing constraint holds in the public finances some positive theories of public debt creation also make this assumption examples include barro s 1979 history of us federal deficits and sargent s 1986 rationalizations of recent us budgetary policy lucas and stokey s 1983 discussion of optimal taxation also involves this assumption hansen roberds and sargent 1987 outline the testable implications of present value budget balance and hamilton and flavin 1986 investigate the feasibility of recurring deficits by directly testing the us federal government s borrowing constraint such tests seem natural given both the recent boom is testing more complicated first order difference equations in macroeconomics and the widespread discussion of current deficits this paper tests the present value borrowing constraint using recently constructed data on the market value of outstanding canadian federal government debt we use monthly rather than annual as in hamilton and flavin data and conduct tests of univariate integration and of bivariate cointegration to investigate the joint time series properties of debt and deficits one finding is that real debt and real surpluses are integrated processes evidence of their cointegration is mixed and point estimates of the cointegrating vector suggest that the expected real rate of return on debt is negative moreover the surplus measured to include interest payments as government spending is nonstationary these findings are inconsistent

quality distortion by a discriminating monopolist the standard model of monopolistic imperfect quality discrimination involving consumer self selection has shown that no distortion occurs at the highest quality level while all lower quality levels are degraded in order to maintain profitable market segmentation this result flows from the assumption that consumers with a higher total utility of quality also have a higher marginal utility of quality the paper develops a reasonable model in which the standard assumption is not satisfied and this alternative model yields vastly different conclusions regarding the form of quality distortion in particular quality may be enhanced not degraded to maintain profitable market segmentation copyright 1989 by american economic association

on the international harmonization of bank regulation this paper offers a three way typology of bank regulation and examines the question of international harmonization for each category for economic regulation the danger is that harmonization could support and preserve domestic protectionist regulatory regimes but it could instead be a beneficial guise for lowering protectionist barriers the latter efforts should be encouraged for prudential regulation national regulation should be adequate to handle the extra stresses of international banking harmonization efforts e g the basle accord may offer only modest help but the accord may offer indirect help by limiting national governments competitive efforts implicitly to subsidize their banks risk taking activities finally for information regulation national regulation appears to be adequate and international harmonization does not appear to be necessary copyright 1994 by oxford university press

identifying linear restrictions on the monetary exchange rate model and the uncovered interest parity cointegration evidence from the canadian u s dollar in this paper the long run validity of the monetary model for the canadian u s dollar is reexamined the time series properties of the variables are examined with the use of nonseasonal and seasonal unit root and stationarity tests and it is shown that they are i 1 processes with no seasonal effects two significant cointegration vectors are discovered using johansen s methodology but the system is found to be overidentified and hence the authors are unable to assign the monetary model with either vector parameter stability of johansen s results is tested using the recursive methodology developed by h hansen and s johansen 1993

real exchange rate overshooting and the output cost of bringing down inflation implementing a gradualist policy of monetary contraction in an open economy with a freely floating exchange rate but with nominal inertia in domestic labor costs can lead to prompt and substantial changes in the nominal and real exchange rate one of the virtues claimed for such exchange rate overshooting however is its immediate effect on the price level and so on domestic wage and price inflation in this paper we show that in a model which is super neutral and has nominal inertia in both the level of labor costs and their trend or core rate of growth this early overshooting of the exchange rate does not succeed in cutting the output costs of reducing steady state inflation those output and unemployment costs which are initially avoided by over valuing the currency have to be paid later when this overvaluation is corrected relative to other policies which achieve the same effect on steady state inflation exchange rate overshooting brings inflation down more quickly this abstract was borrowed from another version of this item

price flexiblity and output volatility the case for flexible exchange rates abstract this paper uses descriptive statistics and regression analyses to examine the relationship between exchange rate variability and output volatility in developed countries based on 1961 to 1984 data the result indicate that a flexible exchange rate system is associated with less not more dispersion in output growth across industrialized countries despite a more turbulent global environment also countries which have more exchange rate volatility experience less output volatility the relationship appears not to be spurious the results are consistent with the idea that an increase in price flexibility does not destabilize output

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

causality links between consumer and producer prices some empirical evidence this paper reexamines the relationship between consumer and producer prices in the g7 countries united states canada germany france italy united kingdom and japan and it improves on the existing literature in two ways first it takes into account causality links arising from the transmission mechanism of monetary policy which are generally overlooked second it employs the causality testing method for unstable systems recently introduced by toda and yamamato 1995 which results in standard asymptotics thereby obtaining valid statistical inference the empirical results are consistent with the conventional wisdom according to which there is unidirectional causality running from producer to consumer prices bidirectional causality or even no significant links only being found when the causality links reflecting the monetary transmission mechanism are ignored