macroeconomic forecasting in the euro area country specific versus area wide information abstract this paper compares several time series methods for short run forecasting of euro wide inflation and real activity using data from 1982 to 1997 forecasts are constructed from univariate autoregressions vector autoregressions single equation models that include euro wide and us aggregates and large model methods in which forecasts are based on estimates of common dynamic factors aggregate euro wide forecasts are constructed from models that utilize only aggregate euro wide variables and by aggregating country specific models the results suggest that forecasts constructed by aggregating the country specific models are more accurate than forecasts constructed using the aggregate data

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shared atm networks and banking competition abstract in this paper we study the incentives of banks to share their automatic teller machines atms when they are competitors in the market for deposits we construct a stylized model of banking competition which emphasises the distinctive features of atm compatibility we find that in equilibrium either a strict subset of banks share their atms or total incompatibility prevails we also derive the implications for atm compatibility of withdrawal fees interchange bank fees entry and depositor switching costs finally we investigate the normative implications of our model and draw some policy conclusions

measuring business cycles a modern perspective in the first half of this century special attention was given to two features of the business cycle 1 the comovement of many individual economic series and 2 the different behavior of the economy during expansions and contractions both of these attributes were ignored in many subsequent business cycle models which were often linear representations of a single macroeconomic aggregate however recent theoretical and empirical research has revived interest in each attribute separately notably dynamic factor models have been used to obtain a single common factor from a set of macroeconomic variables and nonlinear models have been used to describe the regime switching nature of aggregate output we survey these two strands of research and then provide some suggestive empirical analysis in an effort to unite the two literatures and to assess their usefulness in a statistical characterization of business cycle dynamics

what s in a name tony lawson on neoclassical economics and heterodox economics in this article i respond to tony lawson s what is this school called neoclassical economics lawson s paper is provocative because it reformulates neoclassical economics based on veblen s original intent as a mismatch created by recognising the value of an evolutionary approach to the economy whilst remaining over reliant on elements of a taxonomic approach for lawson many heterodox economists may be neoclassical under this description i argue that there is clearly a case to be heard but that the reformulation of the neoclassical raises a number of issues there are issues concerning the specific critique of the current usage of the term neoclassical regarding genealogy and meaning there are specific issues regarding the further development of the new old veblen definition of the neoclassical how clear is the definition in a practical context as a way to identify a neoclassical group based on the commitments of the critique and the definition what does it mean to be more realistic and what is the strategic value of such a provocation for heterodoxy i argue that the combination of these are reasons for more consideration of issues of social ontology not less insofar as the terms of the argument are incomplete and this invites both lawson and those he is criticising to progress the argument particularly on method

the expected utility of the doubling strategy it has been noted that a certain continuous time trading strategy termed the doubling strategy generates a positive net return on borrowed funds with probability one and within a finite period of time since the doubling strategy seems to represent a free lunch or arbitrage opportunity a variety of constraints to render it infeasible have been proposed in this paper we show that the doubling strategy generates infinite disutility for a large class of utility functions and we can think of no utility function for a risk averse agent which is a counterexample harrison and kreps 5 pointed out that a certain continuous time trading strategy in frictionless markets since termed the doubling strategy generates a positive net return on borrowed funds with probability one and within a finite period of time moreover the returns can be made arbitrarily large by increasing the initial amount borrowed thus the doubling strategy seems to represent a free lunch or arbitrage opportunity the theory of valuation of derivative assets also assumes continuous time trading in frictionless markets an assumption necessary to argue that the derivative asset can be perfectly hedged by the underlying asset and the risk free asset as in black and scholes 2 or equivalently that the returns on the derivative asset can be replicated by a self financing trading strategy see harrison and kreps 5 or harrision and pliska 6 in addition it must be assumed that the economy is free of arbitrage opportunities so that the continuously revised hedge portfolio earns the risk free rate or again equivalently that the value of the derivative asset is equal to the replicating strategy s initial portfolio consequently harrison kreps and others have viewed the existence of the doubling strategy and its apparent violation of the arbitrage free economy condition as a serious problem in contingent claims theory more generally the doubling strategy seems to suggest an inconsistency in standard sets of assumptions e g diffusion type asset prices frictionless continuous time markets and market efficiency when sufficiently complex trading strategies are permitted since the doubling strategy was introduced by harrison and kreps a number of constraints have been proposed to eliminate the doubling strategy without at the same time ruling out the other continuous time trading strategies essential to derivative asset pricing and continuous time portfolio theory bounds on portfolio positions kreps 9 a positive constraint on wealth dybvig 3 and margin requirements heath and jarrow 7 more generally dybvig and huang 4 show that a lower bound on wealth precludes other complex trading strategies

nonlinear forecasting analysis using diffusion indexes an application to japan this paper extends the diffusion index di forecast approach of stock and watson 1998 2002 to the case of possibly nonlinear dynamic factor models when the number of series is large a two step procedure based onthe method of principal components is useful since it allows wide variety of nonlinearity in the factors the factors extracted from a large japanese data suggest some evidence of nonlinear structure furthermore both the linear and nonlinear di forecasts in japan outperform traditional time series forecasts while the linear di forecast in most cases performs as well as the nonlinear di forecast

asset prices and consumption in a model of perpetual youth i construct a general equilibrium overlapping generations model with heterogeneous agents and obtain analytical solutions to asset prices consumption and asset demands individuals have constant absolute risk aversion and a constant probability of dying agents have three stages in their lives in the first stage agents are young and constrained from investing in stocks in the second stage they work and in the third they retire i analyze asset prices numerically and with comparative statics changing any exogenous parameter has large effects on asset prices when there are large demographic changes to the population constrained from investing in stocks

bibliography of robert m solow s publications 1950 1987 1952 6 an econometric model of interindustry flows with k j arrow and r shephard abstract econometrica july 1952 7 on the structure of linear models econometrica january 1952 8 review of w e deming some theory of sampling review of econometrics and statistics may 1952 9 review of r dorfman application of linear programming to the theory of the firm journal of american statistical association june 1952 10 review of t c koopmans ed activity analysis of production and allocation journal of american statistical association june 1952 11 review of r roy ed cahiers dii seminaire deconometrie no 1 journal of american statisticalassociation december 1952

trading volume and serial correlation in stock returns this paper investigates the relationship between aggregate stock market trading volume and the serial correlation of daily stock returns for both stock indexes and individual large stocks the first order daily return autocorrelation tends to decline with volume the paper explains this phenomenon using a model in which risk averse market makers accommodate buying or selling pressure from liquidity or noninformational traders changing expected stock returns reward market makers for playing this role the model implies that a stock price decline on a high volume day is more likely than a stock price decline on a low volume day to be associated with an increase in the expected stock return

business cycle turning points a new coincident index and tests of duration dependence based on a dynamic factor model with regime switching the synthesis of the dynamic factor model of stock and watson 1989 and the regime switching model of hamilton 1989 proposed by diebold and rudebusch 1996 potentially encompasses both features of the business cycle identified by burns and mitchell 1946 1 comovement among economic variables through the cycle and 2 nonlinearity in its evolution however maximum likelihood estimation has required approximation recent advances in multimove gibbs sampling methodology open the way to approximation free inference in such non gaussian nonlinear models this paper estimates the model for u s data and attempts to address three questions are both features of the business cycle empirically relevant might the implied new index of coincident indicators be a useful one in practice do the resulting estimates of regime switches show evidence of duration dependence the answers to all three would appear to be yes

applying methodological pluralism to wildlife and the economy abstract methodological pluralism is important when we study complex systems we aim to show that methodological pluralism yields additional insight by applying it to a specific question how are the economy and wildlife related in developed and developing countries we identify three possible ingredients of methodological pluralism 1 using both qualitative and quantitative information 2 tapping the potential of history to illuminate slow moving variables and 3 explicitly synthesizing either individually or in groups by thinking about the corresponding system we illustrate with examples

transformative technology and institutional transformation coevolution of biotechnology venture firms and the institutional framework in japan abstract japan is developing a national strategy for biotechnology which it sees as a transformative technology of strategic importance significant institutional transformation has occurred including changes to the legal structure of universities partly in an effort to enhance technology transfer these and other institutional changes are proving conducive to entrepreneurship and have developed alongside an increase in the number of biotechnology venture firms this paper presents an overview of these institutional transformations in the light of recent deregulation and legislative changes it posits that the emergence of bioventure firms the increase in their number and arguably their changing nature are manifestations of the coevolution of organizations with changes to the institutional framework finally it gives examples of several bioventures based on interviews conducted with the founders and chief scientists in japan and reveals some of the salient characteristics of these firms

comments on arrow and on lucas such a number of interesting and provocative things are put forward in lucas and in arrow in this issue that i would like to be able to dissect them in detail for example lucas states that the problem of controlling inflation has been successfully solved in a scientific sense p s405 i am tempted to explore the limits of the set of problems that might be said to be scientifically solved in the lucas sense but i fear that this would take up a good deal of space arrow deplores the use of homogeneity assumptions as a device for adding content to otherwise inconclusive economic theories but presumably he does not believe that the sonnenschien mantel debreu theorem is the ultimate conclusion regarding the useful content of the propositions of general equilibrium theory some restrictions of intermediate strength are presumably called for and i would like to make the case that strong empirical generalizations about the nature of human actors such as those describing the biological requirements for survival are available and relevant in this connection this too would take some space to develop in detail though not as much as the first subject given the constraints i must choose a focus i will focus on what i take to be the main message that lucas has put forward regarding the relationship between adaptive behavior and the rationality assumptions employed in standard economic theory this message is recognizable as the intellectual descendant of similar discussions by friedman and machlup in the 1940s and 1950s and the ideas involved remain extremely influential in the discipline today i will present and comment on my own statement of this position which i following blaug 1980 will call the classic defense of the rationality as

infinite horizon incomplete markets the model of general equilibrium with incomplete markets is a generalization of the arrow debreu model which provides a rich framework for studying problems of macroeconomics this paper shows how the model which has so far been restricted to economies with a finite horizon can be extended to the more natural setting of an open ended future thereby providing an extension of the finite horizon representative agent models of modern macroeconomics to economies with heterogeneous agents and incomplete markets there are two natural concepts of equilibrium over an infinite horizon which prevent agents from entering into ponzi schemes that is from indefinitely postponing the repayment of their debts the first is based on debt constraints which place bounds on debt at each date event the second is based on transversality conditions which limit the asymptotic rate of growth of debt the concept of an equilibrium with debt constraint is a natural concept of equilibrium for macroeconomic analysis however the concept of an equilibrium with transversality condition is more amenable to theoretical analysis since it permits the powerful techniques of arrow debreu theory to be carried over to the setting of incomplete markets in an economy in which agents are impatient expressed by the mackey continuity of their preference orderings and have a degree of impatience at each date event which is bounded below a concept defined in the paper we show that the equilibria of an economy with transversality condition coincide with the equilibria with debt constraints an equilibrium with transversality condition is shown to exist it follows that for each economy there is an explicit bound m such that an equilibrium with explicit debt constraint m exists in which the constraint is never binding this latter property ensuring that the debt constraint whose objective is to prevent ponzi schemes does not in itself introduce a new imperfection into the model over and above the incompleteness of the markets

land tenure and property rights theory and implications for development policy this article explores the nature of property rights systems their evolution and their effect on resource allocation it is argued that certain institutional arrangements for land rights have evolved in order to reduce uncertainty and increase efficiency in credit as well as in land markets of particular relevance to developing countries the article emphasizes the contribution of public sector infrastructure to effective land rights systems an appendix to the article presents a formal model analyzing the effects of security of land rights on land prices the intensity of cultivation and the use of credit empirical evidence from thailand supports several of the propositions derived from the model

a behavioral explanation for nominal wage rigidity during the great depression nominal wages in manufacturing were left unchanged by the large decline in nominal demand that marked the first two years of the great depression this rigidity in nominal wages is explained using the tools of the behavioral theory of the firm the emphasis is on the reasons firms changed their decision rules linking fluctuations in final sales to changes in nominal wages

asset returns with transactions costs and uninsured individual risk abstract we explore whether incorporating an explicit motive for holding liquid assets within an equilibrium asset pricing model helps explain the following features of asset returns and turnover in the post war u s economy i the low risk free real interest rate ii the large spread between returns on liquid assets and stocks and iii the greater transaction velocity of liquid assets relative to stocks we introduce a demand for liquid assets by adding uninsured individual risk together with differential costs of trading securities numerical simulations attempting to match the return data generate a ratio of liquid assets to income considerably below observed levels

solving asset pricing models with gaussian shocks this paper provides a closed form solution for the price dividend ratio in a standard asset pricing model when the growth rate of the endowment is a first order gaussian autoregression it determines the conditions under which this solution is bounded the findings are useful in allowing comparisons among numerical methods used to approximate the nontrivial closed form the solution method is extended to accommodate multivariate and higher ordered autoregressive processes

world income components measuring and exploiting risk sharing opportunities a method is constructedfor decomposing the variance of changes in incomes in the world into components to indicate the most important risk sharing opportunities among people of the world a constant absolute risk premium carp model an intertemporal general equilibrium model of the world is presented to permit optimal contract design for a contract designer maximizing a social welfare function the optimal contracts maximize the equilibrium world real interest rate securities are defined in terms of eigenvectors of a transformed variance matrix the method is applied using penn world table data on the g 7 countries 1950

a utility based comparison of some models of exchange rate volatility abstract when estimates of variances are used to make asset allocation decisions underestimates of population variances lead to lower expected utility than equivalent overestimates a utility based criterion is asymmetric unlike standard criteria such as mean squared error to illustrate how to estimate a utility based criterion we use five bilateral weekly dollar exchange rates 1973 1989 and the corresponding pair of eurodeposit rates of homoskedastic garch autoregressive and non parametric models for the conditional variance of each exchange rate garch models tend to produce the highest utility on average a mean squared error criterion also favors garch but not as sharply

economic history and economics i have in the back of my mind a picture of the sort of discipline economics ought to be or at least the sort of discipline i wish it were if economics were practiced in that way there would be nothing problematical about its reciprocal relationship with economic history it would be pretty clear what it is that economic theory offers to economic history and what economic history offers to economic theory i will try to describe what i mean below for better or worse however economics has gone down a different path not the one i have in mind one consequence not the most important one but the one that matters for this discussion is that economic theory learns nothing from economic history and economic history is as much corrupted as enriched by economic theory i will come to that too later on you will notice that i am using strong language i am prepared to admit right away that i may be dead wrong in my judgements but there is no point in pussyfooting bluntness may lead to an interesting discussion after all no one would remember the old german historical school if it were not for the famous methodenstreit actually no one remembers them anyway there must be a lesson in that to get right down to it i suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail there are many partially overlapping reasons for believing this but since that is not the topic under discussion today i do not have to lay them out in an orderly way i hope the following hodgepodge will convey what i mean a modern economy is a very complicated system since we cannot conduct controlled experiments on its smaller parts or even observe them in isolation the classical hardscience devices for discriminating between competing hypotheses are closed to us the main alternative device is the statistical analysis of historical time series but then another difficulty arises the competing hypotheses are themselves complex and subtle we know before we start that all of them or at least many of them are capable of fitting the data in a gross sort of way then in order to make more refined distinctions we need long time series observed under stationary conditions unfortunately however economics is a social science it is subject to damon runyon s law that nothing between human beings is more than three to one to express the point more formally much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity moreover all narrowly economic activity is embedded in a web of social institutions customs beliefs and attitudes concrete outcomes are indubitably affected by these background factors some of which change slowly and gradually others erratically as soon as time series get long enough to offer hope of discriminating among complex hypotheses the likelihood that they remain stationary dwindles away and the noise level gets correspondingly high under these circumstances a little cleverness and persistence can get you almost any result you want i think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief indeed some of fortune s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices if i am anywhere near right about this the interests of scientific economics would be better served by a more modest approach there is enough for us to do without pretending to a degree of completeness and department of economics massachusetts institute of technology cambridge ma 02139

how to be an ecological economist abstract to answer the question how to be an ecological economist we must start by defining the field of ecological economics mainstream economics altogether lacks the concepts required to deal adequately with nature justice and time it was the absence of these three concepts in this otherwise great social science that led to the establishment of ecological economics the interest in nature justice and time is its defining characteristic the main thesis of this paper is that our field is a fragile institution and that the professional existence of an ecological economist is no less fragile however this very fragility also represents freedom scope for free thinking conceptualising and research nevertheless to be able to really use and in turn enjoy the full scope of this freedom an ecological economist needs certain specific characteristics in particular what is termed in the german philosophical tradition urteilskraft and in english power of judgement a description of these characteristics is developed in this paper providing an answer to the question how to be an ecological economist

exact solution of asset pricing models with arbitrary shock distributions abstract the paper provides an exact solution to standard asset pricing models for any distribution of shocks to endowment s growth rate it determines the conditions that guarantee the existence of a stationary bounded equilibrium and examines these conditions for an edgeworth expansion distribution of the shocks the results are extended to the case of multivariate asset pricing models

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

constant absolute risk aversion preferences and constant equilibrium interest rates this paper constructs a general equilibrium model with endogenous stochastic production and establishes that the equilibrium interest rate can be constant in a closed production economy when the preferences are represented by constant absolute risk aversion utility functions the results in this paper and their limitations are compared and contrasted with related contributions in the financial economics literature in this paper an intertemporal allocation problem with endogenous stochastic production is solved for consumption function and the interest rate preferences are assumed to be of constant absolute risk aversion type there are a number of stochastic constant returns to scale production techniques with independently and identically distributed shocks it is shown that the wealth dynamics of agent can be then approximated by a square root diffusion process which is a special case of constant elasticity of variance diffusion with this as the starting point the consumption function and interest rates are derived and discussed at equilibrium the interest rate is shown to be a constant and consumption is shown to be drawn from a distribution which belongs to the constant elasticity of variance diffusion class restrictions are placed on the form of the problem so that results make economic sense the assumption of a constant interest rate has been made frequently in the asset pricing literature we provide a plausible equilibrium model in which this assumption is valid the findings are compared with those of bhattacharya 1 constantinides 2 rubinstein 8 and stapleton and subrahmanyam 10 in subsequent sections this paper is organized as follows in the next section the characteristics of the economy are described section ii develops the dynamic optimization problem facing the consumer in the economy in section iii the optimal consumption function is derived and discussed section iv contains a result on the equilibrium interest rate in this section it is shown that the equilibrium interest rate is a constant and its properties are analyzed in section v a discussion of the results is provided

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

intergenerational risksharing and equilibrium asset prices in the presence of overlapping generations a social security system with contingent taxes and benefits can affect both asset prices and intergenerational risksharing in a simple model with two risky factors of production human capital owned by the young and physical capital owned by all older generations a social security system that optimally shares risks exposes future generations to a share of the risk in physical capital such a system reduces precautionary saving and increases the riskbearing capacity of the economy under plausible conditions it increases the riskless interest rate and lowers the price and risk premium of physical capital

an econometric characterization of business cycle dynamics with factor structure and regime switching a dynamic factor model with regime switching is proposed as an empirical characterization of business cycles the approach integrates the idea of comovements among macroeconomic variables and asymmetries of business cycle expansions and contractions the first is captured with an unobservable dynamic factor and the second by allowing the factor to switch regimes the model is estimated by maximizing its likelihood function and the empirical results indicate that the combination of these two features leads to a successful representation of the data relative to extant literature this holds for within and out of sample and for both revised and real time data copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

a technical definition of uncertainty and the long run non neutrality of money ever since knight s 1921 seminal work some economists have drawn a distinction between uncertainty and risk in order to demonstrate that this difference has important implications for understanding the operations of an entrepreneurial economy lawson 1985 is the latest to discuss the need for the analysis of societal interaction 1 in an economic world where uncertainty as opposed to mathematical risk is a pervasive fact of life p 909 lawson correctly associates the concept of uncertainty with the situation where there is no basis whatever upon which to form any calculable probability uncertainty in this account arises when the probability relation is numerically indeterminate and non comparable to other probability relations 1985 p 914

do financial variables help forecasting inflation and real activity in the euro area abstract this paper uses a large data set consisting of 447 monthly macroeconomic time series concerning the main countries of the euro area to simulate out of sample predictions of the euro area industrial production and the harmonized inflation index and to evaluate the role of financial variables in forecasting we considered two models which allow forecasting based on large panels of time series forni et al rev econom statist 82 2000 540 mimeo 2001b and stock and watson mimeo 1999 performance of both models were compared to that of a simple univariate ar model results show that multivariate methods outperform univariate methods for forecasting inflation at one three six and twelve months and industrial production at one and three months we find that financial variables do help forecasting inflation but do not help forecasting industrial production

new index of coincident indicators a multivariate markov switching factor model approach abstract this paper extends the univariate markov switching unobserved component model to the multivariate markov switching factor model of coincident economic indicators an approximate ml method is developed to estimate the model the extracted markov switching factor may be interpreted as the coincident index and is comparable to the stock watson index which differs only by the markov switching component using four constituent series of the doc coincident index for the period january 1960 to june 1992 the proposed model generates recessionary and expansionary periods which are remarkably consistent with the nber chronology of the business cycles from the noisy monthly data this paper also finds that duration dependence does matter

macroeconomic forecasting using diffusion indexes this article studies forecasting a macroeconomic time series variable using a large number of predictors the predictors are summarized using a small number of indexes constructed by principal component analysis an approximate dynamic factor model serves as the statistical framework for the estimation of the indexes and construction of the forecasts the method is used to construct 6 12 and 24 monthahead forecasts for eight monthly u s macroeconomic time series using 215 predictors in simulated real time from 1970 through 1998 during this sample period these new forecasts outperformed univariate autoregressions small vector autoregressions and leading indicator models