reassessing the gender wage gap in madagascar does labor force attachment really matter abstract in the labor economics literature it has been argued that differences in labor force attachment across gender are important to explain the extent of the gender wage gap however measures of women s work experience are particularly prone to errors given discontinuity in labor market participation using proxy measures such as potential experience may lead to biased estimates of the returns to human capital such biases cannot be ignored since these returns are used in the standard decomposition techniques to measure the extent of gender based wage discrimination by matching two original surveys conducted in madagascar in 1998 a labor force survey and a biographical survey we built a unique data set that enabled us to combine the original information gathered from each of them particularly the earnings from current employment and the entire professional trajectories our results lead to a reassessment of the returns to human capital as potential experience always exceeds actual experience for b

how useful are the forecasts of intergovernmental agencies the imf and oecd versus the consensus this study compares the accuracy and information content of economic forecasts for g7 countries made in the 1990s by the oecd and imf the benchmarks for comparison are the average forecasts of private sector economists published by consensus economics with few exceptions the private sector forecasts are less biased and more accurate in terms of mean absolute error and root mean square error formal tests show these differences are statistically significant for forecasts of real growth and production less so for forecasts of inflation and unemployment overall there appears little information in the oecd and imf forecasts that could be used to reduce significantly the error in the private sector forecasts

on the link between exchange rate regimes capital controls and monetary policy autonomy in small european countries 1979 2000 we investigate international monetary policy transmission under different exchange rate and capital account regimes in eleven small open economies during the 1980s and 1990s we find no systematic link between ex post monetary policy autonomy and exchange rate regimes capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks though not strict autonomy the results are consistent both with short term autonomy for small countries even under fixed exchange rates and an open capital account and with long term dependence under flexible exchange rates and an independent stability target results also indicate that euro area market interest rates are significantly more responsive to the development of the corresponding us rate than were the previous national rates

the determinants of realignment expectations under the ems some empirical regularities abstract the stability of the ems depends crucially on realignment expectations of the market participants in this paper we discuss how to measure such expectations and how to relate them to economic fundamentals central bank reputation and institutional arrangements of the ems we find the following empirical regularities for ff dm and il dm exchange rates 1 1 expected devaluations are positively related to the current exchange rate deviation from the central parity 2 2 expected devaluations are negatively related to the length of time since last realignment in the short and medium run 3 3 the basle nyborg agreements seem to have a stabilizing effect for both currencies examined albeit through different channels

does one soros make a difference a theory of currency crises with large and small traders do large investors increase the vulnerability of a country to speculative attacks in the foreign exchange markets to address this issue we build a model of currency crises where a single large investor and a continuum of small investors independently decide whether to attack a currency based on their private information about fundamentals even abstracting from signaling the presence of the large investor does make all other traders more aggressive in their selling relative to the case in which there is no large investors small investors attach the currency when fundamentals are stronger yet the difference can be small or null depending on the relative precision of private information of the small and large investors adding signaling makes the influence of the large trader on small traders behaviour much stronger

speculative attacks and the information role of the interest rate this paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market clearing interest rate besides affecting speculators payoffs this interest rate also provides an endogenous public signal for a plausible type of investment strategies the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals without resorting to sunspot variables this result underlies a novel policy implication an official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information jel d82 d84 f31

self fulfilling currency crises the role of interest rates abstract we develop a stylized currency crises model with heterogeneous information among investors andendogenous determination of interest rates in a noisy rational expectations equilibrium our modelcaptures three key features of interest rates the opportunity cost of attacking the currency respondsto the investors behavior the domestic interest rate may influence the central bank s preferences fora fixed exchange rate and the domestic interest rate serves as a public signal which aggregatesprivate information about fundamentals we explore the payoff and informational channels throughwhich interest rates determine devaluation outcomes and examine the implications for equilibriumselection by global games methods our main conclusion is that multiplicity is not an artifact ofcommon knowledge in particular we show that multiplicity emerges robustly either when adevaluation is triggered by the cost of high domestic interest rates as in obstfeld 1996 or when adevaluation is triggered by the central bank s loss of foreign reserves as in obstfeld 1986 providedthat the domestic asset supply is sufficiently elastic in the interest rate and shocks to the domesticbond supply are sufficiently small christian helliwigdepartment of economicsuniversity of california los angelesbox 951477los angeles ca 90095 1477arijit mukherjiuniversity of minnesotaaleh tsyvinskidepartment of economicsharvard universitylittauer centercambridge ma 02138 3001

large versus small players a closer look at the dynamics of speculative attacks what is the role of large players e g hedge funds in speculative attacks recent work suggests that large players move early to induce smaller agents to attack however many observers argue that large players move late in order to benefit from interest rate differentials we propose a model in which large players can do both using data on currency trading by foreign large and local small players we find that foreign players moved last in three attacks on the norwegian krone during the 1990s during the attack on the swedish krona after the russian moratorium in 1998 foreign players moved early gains by delaying attack were small however because interest rates did not increase

sentiments and aggregate demand fluctuations we formalize the keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations when production decisions must be made under imperfect information about demand optimal decisions based on sentiments can generate stochastic self fulfilling rational expectations equilibria in standard economies without persistent informational frictions externalities nonconvexities or strategic complementarities in production the models we consider are deliberately simple but could serve as benchmarks for more complicated equilibrium models with additional features

defending against speculative attacks the policy maker s reputation abstract this paper studies how speculative attacks and regime change arise from the interaction between a policy maker s reputation for defending against speculative attacks and speculators learning of the policy maker s type if speculators receive conditionally independent and identically distributed private signals about the policy maker s type in every period then no matter how precise their per period private signals are there can be no equilibrium with attacks if the speculators receive private signals whose precision increases as a power function of the time with the power strictly greater than two there exist infinitely many equilibria with attacks but this equilibrium multiplicity arises from the timing of the attacks only in such a case the set of status quos surviving in any equilibrium is strictly larger than in the case of a short lived policy maker

coordinating regime switches the canonical model of strategic complementarities between individual actions which exhibits multiple equilibria under perfect information is extended with heterogeneous agents and imperfect information agents observe their own cost of action and the history of the levels of aggregate activity the distribution of individual characteristics evolves through a random process and individuals are rational bayesians under plausible conditions there is a unique equilibrium with phases of high and low activity and random switches applications may be found in macroeconomics and revolutions

noisy signals in target zone regimes theory and monte carlo experiments abstract previous empirical evidence indicates that uncovered interest parity uip does not hold for target zone exchange rates like those in the european monetary system and in the nordic countries we explore a target zone model where the market infers the probability of a realignment of the band on the basis of a noisy signal we show theoretically and through monte carlo simulations that if the market overrates the information content in the signal then this may explain the empirical results obtained from testing uip for target zone exchange rates

models of currency crises with self fulfilling features the discomfort a government suffers from speculation against its currency determines the strategic incentives of speculators and the scope for multiple currency market equilibria after describing an illustrative model in which high unemployment may cause an exchange rate crisis with self fulfilling features the paper reviews some other self reinforcing mechanisms recent econometric evidence seems consistent with the practical importance of these mechanisms

credibility of policies versus credibility of policymakers standard models of policy credibility defined as the expectation that an announced policy will be carried out emphasize the preferences of the policymaker and the role of tough policies in signaling toughness and raising credibility whether a policy is carried out however will also reflect the state of the economy we present a model in which a policymaker maintains a fixed parity in good times but devalues if the unemployment rate gets too high our main conclusion is that if there is persistence in unemployment observing a tough policy in a given period may lower rather than raise the credibility of a no devaluation pledge in subsequent periods we test this implication on ems interest rates and find support for our hypothesis

information acquisition in global games of regime change abstract we study costly information acquisition in global games of regime change that is coordination games where payoffs are discontinuous in the unobserved state and in the agents average action we show that only symmetric equilibria exist and provide sufficient conditions for uniqueness we then characterize the value of information in these games and link it to the underlying parameters of the model we investigate equilibrium efficiency complementarities in information choices and the trade offs between public and private information we show that information acquisition can be inefficient and that strategic complementarities in actions do not always translate into strategic complementarities in information acquisition finally we find that public and private information can be complements these results contrast findings in linear quadratic models where payoffs depend continuously on both the unobserved state and the agents average action

can we improve the perceived quality of economic forecasts a number of topics are discussed concerning how economic forecasts can be improved in quality or at least in presentation these include the following using 50 uncertainty intervals rather than 95 noting that even though forecasters use many different techniques they are all occasionally incorrect in the same direction that there is a tendency to underestimate changes that some expectations and recently available data are used insufficiently lagged forecasts errors can help compensate for structural breaks series that are more forecastable could be emphasized and that present methods of evaluating forecasts do not capture the useful properties of some methods compared to alternatives

coordination and delay in global games abstract what is the effect of offering agents an option to delay their choices in a global coordination game we address this question by considering a canonical binary action global game and allowing players to delay their irreversible decisions those that delay have access to accurate private information at the second stage but receive lower payoffs we show that as noise vanishes as long as the benefit to taking the risky action early is greater than the benefit of taking the risky action late the introduction of the option to delay reduces the incidence of coordination failure in equilibrium relative to the standard case where all agents must choose their actions at the same time we outline the welfare implications of this finding and probe the robustness of our results from a variety of angles

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

the credibility of a fixed exchange rate how reputation is gained or lost we examine the interest rate differential between each of the four largest nordic countries and the countries of their foreign currency baskets on monthly data for the period 1978 79 92 the interest rate differential is assumed to reflect devaluation expectations which partly depend on government reputation we investigate the formation of the reputation of the government assuming that reputation is updated using bayes s formula it is shown theoretically that when there is no devaluation the improvement in government reputation is larger the larger the prior devaluation expectations for norway the evidence gives support to this assertion

dynamic global games of regime change learning multiplicity and the timing of attacks global games of regime change coordination games of incomplete information in which a status quo is abandoned once a sufficiently large fraction of agents attack it have been used to study crises phenomena such as currency attacks bank runs debt crises and political change we extend the static benchmark examined in the literature by allowing agents to take actions in many periods and to learn about the underlying fundamentals over time we first provide a simple recursive algorithm for the characterization of monotone equilibria we then show how the interaction of the knowledge that the regime survived past attacks with the arrival of information over time or with changes in fundamentals leads to interesting equilibrium properties first multiplicity may obtain under the same conditions on exogenous information that guarantee uniqueness in the static benchmark second fundamentals may predict the eventual fate of the regime but not the timing or the number of attacks finally equilibrium dynamics can alternate between phases of tranquility where no attack is possible and phases of distress where a large attack can occur even without changes in fundamentals

combining forecasts encompassing and the properties of uk macroeconomic forecasts the idea of combining forecasts is of great interest to forecasters and a linear combination of different forecasts can be more accurate than any individual forecast for model builders forecast encompassing is a way of checking whether any extra important information is contained in forecasts from rival models efficient forecasts have errors which are unrelated to any information available when they are formed combinations of forecasts forecast encompassing and efficiency tests can all be achieved by a restricted or unrestricted regression of outcomes on the separate forecasts this paper links these three approaches and examines the implications for recent uk annual forecasts

the african growth and opportunity act and the global commodity chain for clothing abstract this paper examines responses to the african growth and opportunity act in sub saharan africa s clothing sector the paper reviews statistical evidence on supply response as well as presenting recent fieldwork findings from southern africa using a modified version of global commodity value chain analysis it argues that while there has been a significant level of response this has been largely confined to enterprises of a particular type the latter has evolved globally in relation to the specificities of the us clothing market this has consequences both for chain analysis and for broader debates concerning industrial upgrading and trade vs aid

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

big elephants in small ponds do large traders make financial markets more aggressive abstract market participants often suspect that large traders have a disproportionate effect on financial markets increasing the aggressiveness of market responses prior studies have shown that the impact of a large trader on a currency crisis depends positively on his size and informational position by contrast this article highlights the role that market sentiment has on the impact of a large trader if the market believes that fundamentals are weak then the probability of a crisis depends positively on the trader s size but negatively on the precision of his information with these effects reversed in a generally optimistic market a large player therefore need not make market responses more aggressive

do countries falsify economic data strategically some evidence that they might we find evidence supporting the hypothesis that countries at times misreport their economic data in a strategic manner among those suspected are countries with fixed exchange rate regimes high negative net foreign asset positions or negative current account balances which corroborates the intuition developed with a simple economic model we also find that countries with bad institutional quality rankings and those in africa middle east eastern europe and latin america release economic data of questionable veracity our evidence calls for models with public signals to consider strategic misinformation and for establishing independent statistical agencies to assure the delivery of high quality economic data

market microstructure information aggregation and equilibrium uniqueness in a global game abstract speculators contemplating an attack e g on a currency peg must guess the beliefs of other speculators which they can do by looking at the stock market as shown in earlier work this information gathering process may be destabilising by creating multiple equilibria this paper studies the role played by the microstructure of the asset market in the emergence of multiple equilibria driven by information aggregation to do so we study the outcome of a two stage global game wherein an asset price determined at the trading stage of the game provides an endogenous public signal about the fundamental that affects traders decision to attack in the coordination stage of the game in the trading stage placing a full demand schedule i e a continuum of limit orders is costly but traders may use riskier and cheaper market orders i e order to sell or buy a fixed quantity of assets unconditional on the execution price price execution risk reduces traders aggressiveness and hence slows down information aggregation which ultimately makes multiple equilibria in the coordination stage less likely in this sense microstructure frictions that lead to greater individual exposure to price execution risk may reduce aggregate uncertainty by pinning down a unique equilibrium outcome

breaking the law when others do a model of law enforcement with neighborhood externalities abstract a standard assumption in the economics of law enforcement is that the probability of a violator being punished depends only on the resources devoted to enforcement however it is often true that the productivity of enforcement resources decreases with the number of violators in this paper an individual who violates the law provides a positive externality for other offenders because the probability of being punished decreases with the number of individuals violating the law this externality explains the existence of correlation between individuals decisions to break a law the model evaluates the implications when determining the socially optimal enforcement expenditure focusing specifically on the case of neighborhood crime in particular using a parametrized functional form i show that neighborhood externalities will enhance or impede enforcement depending on the crime rate

information manipulation coordination and regime change this article presents a model of information manipulation and political regime change there is a regime that can be overthrown but only if enough citizens participate in an uprising citizens are imperfectly informed about the regime s ability to resist an uprising and the regime can engage in propaganda that taken at face value makes the regime seem stronger than it truly is this coordination game with endogenous information manipulation has a unique equilibrium and the article gives a complete analytic characterization of the equilibrium s comparative statics holding fixed the number of signals available to citizens if the per unit signal precision is sufficiently high then the regime is harder to overthrow in contrast if the number of signals increases so that both total signal precision and the regime s costs of manipulation rise together then the regime is easier to overthrow unless there are strong economies of scale in information control

dueling policies why systemic risk taxation can fail abstract two policy instruments for the banking sector are investigated namely systemic risk taxation and constructive ambiguity about bailout policy bailout expectations can induce moral hazard in the form of excessive risk taking by banks systemic risk taxation induces banks to prefer uncorrelated investments leading to lower systemic risk formation constructive ambiguity generates uncertainty about bailout prospects however systemic risk taxation also may inform banks about the regulator s concern for financial stability and thereby its bailout policy this result leads to a trade off between systemic risk taxation and constructive ambiguity and highlights the need to consider interdependence across policies when evaluating their effectiveness

experimental analysis on the role of a large speculator in currency crises abstract corsetti et al 2004 demonstrate that the presence of a large speculator in the foreign exchange market makes the remaining traders more aggressive in their speculative attacks we conduct an experiment designed to test their theoretical predictions and also use the experiment to analyze an additional aspect that has not been previously covered in the literature namely whether the entry of a large speculator and the exit of the same speculator have the same effect in magnitude on the probability of a successful speculative attack we obtain two main findings first the results support the main conclusion of corsetti et al 2004 that the presence of a large speculator makes other small speculators more aggressive second the results suggest that the effect of the entry of a large speculator on the probability of successful speculative attacks is larger than that of the exit of the same speculator

runs versus lemons information disclosure and fiscal capacity we study the optimal use of disclosure and fiscal backstops during financial crises providing information can reduce adverse selection in credit markets but negative disclosures can also trigger inefficient bank runs in our model governments are thus forced to choose between runs and lemons a fiscal backstop mitigates the cost of runs and allows a government to pursue a high disclosure strategy our model explains why governments with strong fiscal positions are more likely to run informative stress tests and paradoxically how they can end up spending less than governments that are more fiscally constrained

collective action and constraints on repression at the endgame how can human rights abuses be prevented or reduced using a simple game theoretic model we demonstrate that repression can become a coordination game when the potential for abuses is greatest when dissent against a regime has grown sufficiently powerful in such scenarios repression depends on how the leader s agents coordinate on implementing a repression order if and to the extent agents believe other agents will not comply with an order to repress leaders can expect agents to disobey orders and will be less likely to order repression this logic of expectations constitutes a third mechanism for constraining repression in addition to sanctioning i e the logic of consequences and normative mechanisms i e the logic of appropriateness we formally explore how the logic of expectations can constrain the implementation of repression and also show that the logic of expectations has the greatest potential to constrain repression in middle regimes or anocracies in turn this has broader implic

the relationship between interest rate differentials and macroeconomic variables a panel data study for european countries abstract based on panel data regressions the relationship between 12 month interest rate differentials and macroeconomic variables is analyzed for nine european countries relative to germany stationarity properties of the variables are examined by tests developed for panel data models the distribution of the test statistic is not normal and is bootstrapped from the sample at hand all significant regression coefficients are estimated with the predicted sign in particular the inflation differential the real income growth differential relative labor costs and the current account have a strong effect on the interest rate differential hence the results indicate that governments have some scope for influencing the interest rate differential by conducting the appropriate macroeconomic policy these results are considerably more optimistic compared to earlier studies where interest rate differentials are frequently measured at 1 month and 3 months maturity included also is an analysis of whether the erm countries have gained more credibility in exchange rate policy through the exchange rate system

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

an analysis of a panel of spanish gdp forecasts this article undertakes an analysis of the forecasts included in the panel of spanish forecasts in order to highlight the fact that the predictions made and the errors committed by the entities participating on this panel contain information that is particularly useful in analysing the evolution of the spanish economy here a study is undertaken of the gdp growth forecasts for the spanish economy for the period 2000 to 2002 made in distinct forecast time horizons specifically it analyses whether the forecasts are optimistic or pessimistic and whether new information concerning the variable being predicted is used efficiently in revising earlier forecasts

once in a generation yen volatility in 1998 fundamentals intervention and order flow abstract the dramatic yen dollar volatility of 1998 has been popularly ascribed to order flow driven by changing tastes for risk and hedge fund herding on unwinding yen carry trade positions rather than fundamentals high frequency evidence of shifting fundamentals is provided by a comprehensive list of macroeconomic announcements news is found to have significant effects on volatility but order flow may play a more important role since portfolio shifts are revealed to the market through trading the results are consistent with order flow playing a significant role in the revelation of private information and associated exchange rate shifts

information choice and amplification of financial crises we propose an amplification mechanism of financial crises based on the information choices of investors information acquisition makes investors more likely to act against their prior deteriorating public news under an initially strong weak prior increases reduces the value of private information and induces more less information acquisition deteriorating public news increases the probability of a crisis since the initially strong weak prior induces no attacks attacks this effect is amplified with endogenous information choices to enhance financial stability a policy maker affects information acquisition via taxes and subsidies we derive and discuss testable implications for the magnitude of amplification

regime switching and interest rates in the european monetary system this paper examines the impact that a currency target zone has on short term interest rates for a number of countries in the european monetary system we characterize the short rate using a regime switching model that allows fbr a differently parameterized mean reverting square root process in each regime we find that the volatility the level and the speed of adjustment are all higher in the regime that is operative during speculative attacks and currency crises moreover we allow the conditional probability of being in each regime to be state dependent so the model can be used to examine questions relating to the likelihood of realignments and the stability of the target zone system c 1999 elsevier science bn all rights reserved jel classification e43 g12

exchange rate manipulation and constructive ambiguity i consider dynamic models in which investors are heterogeneously informed about both foreign exchange interventions and exchange rate fundamentals and show that transparency sometimes exacerbates misalignment between the exchange rate and fundamentals although transparency reveals information about fundamentals it also increases the precision of the exchange rate as a signal of those fundamentals that remain unknown the signal precision effect of transparency if a central bank announcement reveals little information about fundamentals then this effect dominates and transparency magnifies misalignment one implication is that ambiguity can increase the effectiveness of intervention to support a declining currency during times of crisis

technology adoption in the presence of network externalities we analyze technology adoption in industries where network externalities are significant the pattern of adoption depends on whether technologies are sponsored a sponsor is an entity that has property rights to the technology and hence is willing to make investments to promote it key findings include the following 1 compatibility tends to be undersupplied by the market but excessive standardization can occur 2 in the absence of sponsors the technology superior today has a strategic advantage and is likely to dominate the market 3 when one of two rival technologies is sponsored that technology has a strategic advantage and may be adopted even if it is inferior 4 when two competing technologies both are sponsored the technology that will be superior tomorrow has a strategic advantage

a basic new keynesian dsge model with dispersed information an agent based approach abstract the aim of this paper is to bridge macro agent based models with mainstream macroeconomic models by agentifying the baseline new keynesian dsge model the model features multiple boundedly rational optimizing agents and is analyzed through numerical simulations we exploit the flexibility of agent based modeling to explore the effect of dispersed information on the learning process and on macroeconomic outcomes we find that with dispersed information monetary and fiscal policy acquire the role of public signals

strategic merger waves a theory of musical chairs this paper proposes an explanation of merger waves based on the interaction between competitive pressure and irreversibility of mergers in an uncertain environment a set of acquirers compete over time for scarce targets at each point in time an acquirer can either postpone a takeover attempt or raid immediately by postponing the takeover attempt an acquirer may gain from more favorable future market conditions but runs the risk of being preempted by rivals first a complete information model is considered and it is shown that the above tradeoff leads to a continuum of subgame perfect equilibria in monotone strategies that are strictly pareto ranked all these equilibria share the feature that all acquirers rush simultaneously in merger waves the model is then extended to a dynamic global game by introducing slightly noisy private information about merger profitability this game is shown to have a unique markov perfect bayesian equilibrium in monotone strategies and the timing of the merger wave can thus be predicted last the comparative dynamics predictions of the model are related to stylized facts

public information private information and the multiplicity of equilibria in coordination games abstract i study coordination games with incomplete public and private information and relate equilibrium convergence to convergence of higher order beliefs as the players signals become more and more precise the equilibrium manifold converges to the correspondence of common knowledge equilibria whenever the variance of the public signal converges to 0 at a rate faster than one half the rate of convergence of the variance of private signals the same condition also determines the convergence of common p belief to common knowledge which leads to a simple intuition for its origin and an immediate generalization of the former results about equilibrium convergence journal of economic literature classification numbers c72 d82

uncertainty and currency crises evidence from survey data this paper studies empirically how uncertainty aects speculation in the foreign ex change markets we use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals we nd that uncertainty has a non monotone eect on exchange rate pressures namely uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad we prove that this prediction arises from a broad class of currency crisis theories ranging from rst generation to global game models we also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias

unemployment and the formation of duty free zones abstract a number of authors have suggested that the formation of a duty free zone may reduce the welfare of the host country their analyses assumed full employment for a country suffering unwemployment of the harris todaro type we show that the value of national output at world prices increases with the formation of a duty free zone which involves the reduction of tariffs on intermediate imports into the zone

a reconsideration of the welfare economics of a free trade zone abstract this paper presents a model of a free trade zone which incorporates the fact that such zones are often established by government subsidies designed to promote non traditional exports in our model the condition is derived under which the establishment of a free trade zone can increase welfare regardless of the relative factor intensity of a zone based industry however the relative factor intensity of a free trade zone plays a crucial role in determining the change in welfare following economic growth and foreign investment

dynamic interventions and informational linkages abstract we model a dynamic economy with strategic complementarity among investors and study how endogenous government interventions mitigate coordination failures we establish equilibrium existence and uniqueness and we show that one intervention can affect another through altering the public information structure a stronger initial intervention helps subsequent interventions through increasing the likelihood of positive news but also leads to negative conditional updates our results suggest optimal policy should emphasize initial interventions when coordination outcomes tend to correlate neglecting informational externalities of initial interventions results in over or under interventions moreover saving smaller funds disproportionally more can generate greater informational benefits at smaller costs

uncertainty co ordination and path dependence abstract our objective is to assess whether dynamics hinder or assist co ordination in a game with strategic complementarities we study two dynamic aspects different agents make decisions at different points in time and extra information about a payoff relevant state of nature becomes available over time we find that the dynamic resolution of information matters most for uniqueness of equilibrium this is demonstrated by showing that the condition for uniqueness is weaker when learning occurs we also analyse how successfully agents co ordinate when there is a unique equilibrium finally we show that path dependence occurs the order in which signals arrive matters as well as the total amount of information received

signaling in a global game coordination and policy traps this paper introduces signaling in a global game so as to examine the informational role of policy in coordination environments such as currency crises and bank runs while exogenous asymmetric information has been shown to select a unique equilibrium we show that the endogenous information generated by policy interventions leads to multiple equilibria the policy maker is thus trapped into a position in which self fulfilling expectations dictate not only the coordination outcome but also the optimal policy this result does not rely on the freedom to choose out of equilibrium beliefs nor on the policy being a public signal it may obtain even if the policy is observed with idiosyncratic noise

signalling effects of monetary policy we develop a dynamic general equilibrium model in which the policy rate signals the central bank s view about macroeconomic developments to price setters the model is estimated with likelihood methods on a u s data set that includes the survey of professional forecasters as a measure of price setters inflation expectations this model improves upon existing perfect information models in explaining why in the data inflation expectations respond with delays to monetary impulses and remain disanchored for years in the 1970s u s monetary policy is found to signal persistent inflationary shocks explaining why inflation and inflation expectations were so persistently heightened the signalling effects of monetary policy also explain why inflation expectations adjusted more sluggishly than inflation after the robust monetary tightening of the 1980s

efficient ex ante stabilization of firms abstract distressed firms are vulnerable to inefficient panic based runs of their workers suppliers and customers a policymaker may try to prevent such a run by pledging to protect the interests of these stakeholders should a firm cease to do business however this promise also enables the firm to demand better terms of trade from its stakeholders which blunts the policy s effectiveness we show how to avoid such an adverse response by the use of partial countercyclical insurance under certain conditions such a scheme costlessly implements the first best outcome in the limit as the stakeholders information becomes precise we also identify least cost efficient schemes in the cases of large noise learning and duopoly

the signaling role of policy actions abstract in an economy affected by shocks that are imperfectly known the monetary instrument takes on a dual stabilizing role as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank s assessment to firms because mark up shocks cannot be neutralized by monetary policy providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion recognizing the signaling role of its instrument the central bank distorts its policy response in order to optimally shape firms beliefs while providing firms with more information is always detrimental to the output gap it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel although more transparency is always detrimental to welfare the information that is conveyed by the monetary instrument improves welfare when firms coordination is highly valuable

central bank intervention and exchange rate volatility abstract this paper explores the effects of foreign exchange intervention by central banks on the behavior of exchange rates the g 3 central banks have undertaken an unprecedented number of both coordinated and unilateral intervention operations in the last 10 years existing empirical evidence on the effectiveness of intervention is mixed studies using data from the 1970s suggest that intervention operations that do not affect the monetary base have at most a short lived influence on exchange rates but more recent studies indicate that the intervention operations that followed the plaza agreement influenced both the level and variance of exchange rates this paper examines the effects of us german and japanese monetary and intervention policies on dollar mark and dollar yen exchange rate volatility over the 1977 1994 period the results indicate that intervention operations generally increase exchange rate volatility this is particularly true of secret interventions which are those undertaken by central banks without notification of the public overt interventions in the mid 1980s appear to have reduced exchange rate volatility but in other periods and for the 1977 1994 period as a whole central bank intervention is associated with greater exchange rate volatility

rational and self fulfilling balance of payments crises speculative attacks on a pegged exchange rate must sometimes occur ifasset price paths are to be free of abnormal profit opportunities suchattacks are fully rational as they reflect the market s response to aregime breakdown that is inevitable the authors shows that under someexpectations about policy balance of payments crises can also be purely self fulfilling events in such cases even a permanently viableregime may collapse and the economy will possess multiple equilibriacorresponding to different subjective assessments of the probability ofa crisis the behavior of the domestic interest rate will naturally reflect the possibility of a speculative attack copyright 1986 by american economic association

the africa growth and opportunity act and its rules of origin generosity undermined the african growth and opportunity act agoa signed into american law on may 18 2000 is a major plank of u s initiatives toward the african continent the act aims broadly at improving economic policymaking in africa enabling countries to embrace globalization and securing durable political and economic stability as an incentive for africa to adopt the necessary policy reform agoa offers increased preferential access for african exports to the united states this paper describes the provisions of agoa and assesses its quantitative impact on african exports particularly in the apparel sector its main conclusions are 1 agoa will provide real opportunities to africa even on conservative estimates about africa s supply response africa s non oil exports could be increased by about 8 11 percent 2 however the medium term gains could have been much greater if agoa had not imposed certain conditions and not excluded certain items from its coverage the most important condition is the stringent rule of origin that is the requirement that exporters source certain inputs from within africa or the united states estimates suggest that the absence of these conditions would have magnified the impact nearly five fold resulting in an overall increase in non oil exports of us 0 54 billion compared with the us 100 us 140 million increase that is expected in the presence of these restrictions these restrictions particularly on apparel will come at a particularly inopportune time as africa will be exposed to competition from other developing countries when the quotas maintained on the latters exports under the multi fiber arrangement mfa are eliminated africa s apparel exports will be lower by over 30 percent with the dismantling of the mfa if on the other hand agoa had provided unrestricted access the negative impact of the dismantling could be nearly fully offset

export processing zones in madagascar a success story under threat summary the success of export processing zones or the zone franche in madagascar since 1990 is with the exception of mauritius an isolated and unknown case in africa this paper based on first hand data explains that the zone franche has had a highly significant macroeconomic impact in terms of exports and jobs we show that average wages in the zone franche are equivalent to the other formal activity sectors other things being equal and that labor standards there are higher than average the zone franche quickly recovered from the 2002 crisis and has benefited a great deal from agoa the final phase out of the multi fibre arrangement in 2005 is expected to have a negative impact on the zone franche

foreign direct investment education and wages in indonesian manufacturing this paper examines whether the higher wages paid by foreign owned manufacturing plants than by domestically owned plants typical of most countries represents a higher price for labor that is does it reflect a higher price for workers of a given quality as represented by the level of education we then ask whether foreign owned plants pay a higher price for labor given the characteristics of the plants foreign owned firms are found to pay a higher price for labor of a given educational level than domestically owned ones only a part of the difference is associated with plant characteristics rather than ownership

currency crises with the threat of an interest rate defence while virtually all currency crisis models recognise that the decision to abandon a peg depends on how tenaciously policy makers defend it this is seldom modelled explicitly we add the threat of an interest rate defence to the global game model of morris and shin american economic review 88 1998 with an endogenous defence actions of speculators may become strategic substitutes instead of the usual complements nevertheless our generalised model remains tractable and has a unique threshold equilibrium it provides additional insights for instance the threat of an interest rate defence makes speculation riskier and this may be sufficient to keep speculators out when fundamentals are still relatively strong

devaluation risk in target zones evidence from the nordic countries in this paper the authors estimate devaluation risk in denmark finland norway and sweden the target exchange ra te is modeled as a censored variable a shadow peg that is only observed when the equilibrium floating rate is too far from the prevailing peg using a two step procedure the authors are able to calculate time series of the probability and expected size of devaluations th e probability as well as the size of devaluations seem to be systematically related to a relation between the money stock industrial production foreign exchange reserves and the prevailing central parity copyright 1993 by royal economic society

coordination failures and the lender of last resort was bagehot right after all the classical doctrine of the lender of last resort lolr elaborated by bagehot 1873 asserts that the central bank should lend to illiquid but solvent banks under certain conditions several authors have argued that this view is now obsolete in modern interbank markets a solvent bank cannot be illiquid this paper provides a possible theoretical foundation for rescuing bagehot s view our theory does not rely on the multiplicity of equilibria that arises in classical models of bank runs we built a model of banks liquidity crises that possesses a unique bayesian equilibrium in this equilibrium there is a positive probability that a solvent bank cannot find liquidity assistance in the market we derive policy implications about banking regulation solvency and liquidity ratios and interventions of the lender of last resort furthermore we find that public bailout and private bail in involvement are complementary in implementing the incentive efficient solution and that bagehot s lender of last resort facility must work together with institutions providing prompt corrective action and orderly failure resolution finally we derive similar implications for an international lender of last resort ilolr jel g21 g28

interest rates in the nordic countries evidence based on devaluation expectations over the period 1979 92 investments in danish and norwegian kroner in the euromarket have had an annual excess return of about 2 and 1 1 per cent compared to investments in the euromarket in foreign currencies assuming risk neutrality the subjective probability of a devaluation within the next month is derived from the excess returns on the euromarket these derived probabilities are found to be inconsistent with the actual number of devaluations that have taken place over this period so that the probability of devaluation has been significantly overrated for denmark and norway

exchange market mayhem the antecedents and aftermath of speculative attacks exchange market mayhem the antecedents and aftermath of speculative attacks this paper evaluates the causes and consequences of episodes of turbulence in foreign exchange markets using data from 1959 through 1993 for twenty oecd countries we consider the antecedents and aftermath of devaluations and revaluations flotations fixings and speculative attacks which may not be successful we find that realignments of fixed exchange rates are alike devaluations are preceded by political instability budget and current account deficits and fast growth of money and prices revaluations are mirror images of devaluations speculative attacks resemble devaluations but money growth and inflation are more endemic and there is no last minute attempt to tighten monetary policy in contrast few consistent correlations link regime transitions like flotations or fixings to macroeconomic or political variables transitions between exchange rate regimes are largely idiosyncratic and are neither consistently provoked ex ante by systematic imbalances nor typically justified ex post by subsequent changes in policy we conclude that there are no clear early warning signals of many speculative attacks and no easy solutions for policy makers barry eichengreen andrew k rose and charles wyplosz

what do economists know an empirical study of experts expectations for more than three decades economic columnist joseph a livingston has canvassed a panel of economists twice a year eliciting their six month and twelve month forecasts for more than a dozen key variables this study analyzes whether the experts predictions are unbiased and whether complete use was made of all relevant known information unbiasedness and completeness being necessary conditions for fully rational expectations little bias was found in either the half year or full year predictions but extensive underutilization of information particularly data on monetary growth occurred to prophecy is extremely difficult especially with respect to the future chinese proverb do economists expectations regarding key price and nonprice variables utilize all known relevant information in an unbiased efficient manner this is a worthy subject for research for several reasons properties of experts predictions likely form an upper bound for those of laymen further as john muth 14 has noted the character of dynamic processes is typically very sensitive to the way expectations are influenced by the actual course of events p 316 hence we need to know precisely how events do affect expectations finally the common practice of replacing a variable s generally unobserved expectation with a proxy based on its past values will be unbiased and will not cause bias in other

risk and wealth in a model of self fulfilling currency attacks market participants risk attitudes wealth and portfolio composition in uence their positions in a pegged foreign currency and therefore may have important efiects on the sustainability of currency pegs we analyze such efiects in a global game model of currency crises with continuous action choices generating a rich set of theoretical comparative static predictions related to often discussed but rarely modelled accounts of the onset and timing of currency crises the model can be solved in closed form and the methods could be used to study other economic issues in which coordination and risk aversion play important roles

the foreign exchange risk premium in a target zone with devaluation risk abstract the foreign exchange risk premium in an exchange rate target zone is derived when the exchange rate is heteroskedastic within the band and there is a separate devaluation risk the risk premium is then the sum of two separate risk premia arising from uncertainty about exchange rate movements within the band and from uncertainty about devaluations both real and nominal risk premia are considered real and nominal risk premia from movements within the band are very small real and nominal risk premia from devaluations are larger but still relatively small proportions of the interest rate differential

crises and prices information aggregation multiplicity and volatility crises are volatile times when endogenous sources of information are closely monitored we study the role of information in crises by introducing a financial market in a coordination game with imperfect information the asset price aggregates dispersed private information acting as a public noisy signal in contrast to the case with exogenous information our main result is that uniqueness may not obtain as a perturbation from perfect information multiplicity is ensured with small noise in addition we show that a multiplicity may emerge in the financial price itself b less noise may contribute toward nonfundamental volatility even when the equilibrium is unique and c similar results obtain for a model where individuals observe one another s actions highlighting the importance of endogenous information more generally

do the oecd 24 month horizon growth forecasts for the g7 countries contain information the oecd produces two year ahead growth forecasts for the g7 countries since 1987 these forecasts have never been evaluated a regression is developed that tests for the information content of the forecasts the idea is that this content is the added value forecasters incorporate in their forecasts the information content is defined relative to the forecast for the previous year in the end the added value contained in the current year forecast is calculated relative to the last observation the test consists in checking whether the information content reduces the forecasts error 1 the authors of the present study refer to mincer and zarnowitz 1969 mcnees 1988 stekler 1991 and fildes and stekler 2002 for a discussion of the evaluation techniques of forecasts the study begins with a calculation of the usual accuracy statistics these indicate an extreme low quality for the forecasts the regression tests support this conclusion although the forecasts for japan do possess some information al