explaining business cycles in small open economies abstract this paper analyzes the role of world price shocks fluctuations in the prices of capital intermediate and primary goods and in the world real interest rate in the generation and propagation of business cycles in small open developing countries i construct a stochastic dynamic multi sector small open economy model the model is a variant of the specific factors model and reflects the major structural characteristics of developing economies i utilize variance decomposition methods to quantitatively evaluate the impact of world price shocks the results indicate that world price shocks account for a significant fraction of business cycle variability in developing countries

fundamental analysis future earnings and stock prices in this paper we investigate how detailed financial statement data fundamental signals enter the decisions of market participants by examining whether current changes in the signals are informative about subsequent earnings changes our approach is consistent with the view expressed by penman 1992 and others that predicting accounting earnings as opposed to explaining security returns should be the central task of fundamental analysis studying the links between fundamental signals and future earnings changes allows us to test directly the validity of the economic intuition that underlies the original construction of the signals an alternative and less direct approach followed by lev and thiagarajan 1993 henceforth lt is based on an examination of the relations between the fundamental signals and contemporaneous returns

empirical evidence on inflation expectations in the new keynesian phillips curve abstract we review the main identification strategies and empirical evidence on the role of expectations in the new keynesian phillips curve paying particular attention to the issue of weak identi

a rudimentary random matching model with divisible money and prices abstract we consider a version of kiyotaki and wright s monetary search model in which agents can hold arbitrary amounts of divisible money a continuum of stationary equilibria indexed by the aggregate real money stock exists with all trading occurring at a single price there is always a maximum level of the real money stock consistent with existence of such an equilibrium in the limit as trading becomes faster relative to discounting any real money stock becomes feasible in such an equilibrium in contrast to the original kiyotaki wright model higher equilibrium real money stocks unambiguously correspond to higher welfare in this costless production environment journal of economic literature classification numbers d51 e40

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

forming priors for dsge models and how it affects the assessment of nominal rigidities abstract we discuss prior elicitation for the parameters of dynamic stochastic general equilibrium dsge models and provide a method for constructing prior distributions for a subset of these parameters from beliefs about steady state relationships and second moments of the endogenous variables the empirical application documents how the specification of the prior distribution affects our assessment of the relative importance of price and wage rigidities in a new keynesian dsge model

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

gmm estimation of the new phillips curve abstract this paper applies test statistics developed by stock and wright econometrica 68 2000 1055 to examine the two specifications of the new keynesian phillips curve in gali and gertler journal of monetary economics 44 1999 195 the new test statistics demonstrate the inadequacy of conventional gmm methodology by indicating two features that are neglected by gali and gertler observational equivalence in the baseline model and weak identification in the hybrid model

nonatomic economies and the boundaries of perfect competition this paper explores the distinction between nonatomicity and thick markets as the source of perfect competition the focus of the paper is the construction of a model of an imperfectly competitive economy with a nonatomic continuum of traders and a continuum of differentiated commodities for which walrasian equilibria exist the failure of perfect competition in this instance can be identified in two ways individuals can affect prices and the core is strictly larger than the set of walrasian allocations by contrast it is shown that when markets are physically or economically thick or both then individuals cannot typically affect prices and the core always coincides with the set of walrasian allocations

the role of the exchange rate in monetary policy rules for a country that chooses not to permanently fix its exchange rate through a currency board or a common currency or some kind of dollarization the only alternative monetary policy that can work well in the long run is one based on the trinity of i a flexible exchange rate ii an inflation target and iii a monetary policy rule while not often put into this threepart format the desirability of such a monetary policy in an open economy is in my view the clear implication of three corresponding strands of recent monetary research i research on fixed exchange rates regimes including the influential 1995 article the mirage of fixed exchange rates by maurice obstfeld and kenneth rogoff and the many analyses of the breakdown of fixed exchange rate regimes in the late 1990 s ii research on the practical success with inflation targeting by ben bernanke et al 1999 and iii research on the benefits of simple monetary policy rules see e g taylor 1999a this clear policy implication however does not end the debate about how exchange rates should be taken into account in formulating monetary policy even if one excludes capital controls and sterilized exchange market intervention from consideration because they are not effective or attractive ways to de link exchangerate movements from the domestic interest rate a crucial question remains how should the instruments of monetary policy the interest rate or a monetary aggregate react to the exchange rate should policymakers avoid any reaction and focus instead on domestic indicators such as inflation and real gdp or is the rule of thumb that a substantial appreciation of the real exchange rate furnishes a prima facie case for relaxing monetary policy as characterized by obstfeld and rogoff 1995 p 93 a better monetary policy rule or perhaps policymakers should heed the obstfeld rogoff warning that substantial departures from ppp purchasing power parity in the short run and even over decades make such a policy reaction to the exchange rate undesirable more generally if one accepts the trinity concept of monetary policy in an open economy then what is the role of the exchange rate in the monetarypolicy rule

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

loss function assumptions in rational expectations tests on financial analysts earnings forecasts abstract prior research concludes that financial analysts do not process public information efficiently in generating their earnings forecasts the ordinary least squares ols regression based tests used in prior studies assume implicitly that analysts face a quadratic loss function in contrast we argue that analysts likely face a linear loss function and hence try to minimize their absolute forecast errors we conduct and compare rational expectations tests using these two alternative loss functions we reproduce most prior findings of forecast inefficiency with ols regressions but find virtually no evidence of forecast inefficiency with least absolute deviation regressions where we explicitly assume a linear loss function

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

conservatism and international ipo underpricing we study the impact of country level accounting conservatism on international ipo underpricing examining 13 285 ipos from 36 countries we find that ipos are underpriced less in countries in which existing public firms practice more accounting conservatism the link between conservatism and underpricing is robust to alternative measures of conservatism country mean regressions sample country exclusions and endogenous treatment models consistent with the hypothesis that conservatism reduces underpricing by mitigating the impact of information asymmetries we find that higher country level conservatism is associated with lower country level pin values and that the negative relation between conservatism and underpricing is strongest for ipos involving small firms in which information asymmetries are likely to be high lastly we find evidence that legal origin a factor linked to the practice of conservatism influences the relations between underpricing and conservatism

debt covenant violation and manipulation of accruals abstract this paper examines the abnormal accruals of a sample of 94 firms that reported debt covenant violations in annual reports we expect debt covenant restrictions to influence accounting choices in the year preceding and the year of violation time series and cross sectional models are used to estimate normal accruals in the year prior to violation both models indicate that abnormal total and working capital accruals are significantly positive in the year of violation there is evidence of positive abnormal working capital accruals after controlling for management changes and auditor going concern qualifications

dynamic monetary equilibrium in a random matching economy this article concerns an infinite horizon economy where trade must occur pairwise using a double auction mechanism and where fiat money overcomes lack of double coincidence of wants traders are anonymous and lack market power goods are divisible and perishable and are consumed at every date preferences are defined by utility stream overtaking money is divisible and not subject to inventory constraints the evolution of individual and economywide money holdings distributions is characterized there is a welfare ordered continuum of single price equilibria reflecting indeterminacy of the price level rather than of relative prices

toward a strategic foundation for rational expectations equilibrium a step toward a strategic foundation for rational expectations equilibrium is taken by considering a double auction with n buyers and m sellers with interdependent values and affiliated private information if there are sufficiently many buyers and sellers and their bids are restricted to a sufficiently fine discrete set of prices then generically there is an equilibrium in nondecreasing bidding functions that is arbitrarily close to the unique fully revealing rational expectations equilibrium of the limit market with unrestricted bids and a continuum of agents in particular the large double auction equilibrium is almost efficient and almost fully aggregates the agents information

unifying underreaction anomalies this paper asks whether momentum and postevent drift are manifestations of the same underlying mechanism or are separate phenomena we find that both effects can be attributed to persistence in returns following news that affects expected earnings or earnings growth holding these quantities fixed there is no momentum effect nor is there postevent drift for our sample of events which includes seasoned equity offerings repurchases equity financed mergers and dividend initiations and omissions the implication is that return continuation follows fundamental news in general and in aggregate this explains momentum

do security analysts speak in two tongues why do security analysts issue overly positive recommendations we propose a novel approach to distinguish strategic motives e g generating small investor purchases and pleasing management from nonstrategic motives genuine overoptimism we argue that nonstrategic distorters tend to issue both positive recommendations and optimistic forecasts while strategic distorters speak in two tongues issuing overly positive recommendations but less optimistic forecasts we show that the incidence of strategic distortion is large and systematically related to proxies for incentive misalignment our two tongues metric reveals strategic distortion beyond those indicators and provides a new tool for detecting incentives to distort that are hard to identify otherwise

within firm pay inequality financial regulators and investors have expressed concerns about high pay inequality within firms using a proprietary data set of public and private firms this paper shows that firms with higher pay inequality relative wage differentials between top and bottom level jobs are larger and have higher valuations and stronger operating performance moreover firms with higher pay inequality exhibit larger equity returns and greater earnings surprises suggesting that pay inequality is not fully priced by the market our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent received march 14 2016 editorial decision january 21 2017 by editor itay goldstein

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

self selection and analyst coverage this paper examines the relation between analysts information about a stock s future prospects and their decisions to issue investment recommendations and earnings forecasts for that stock and the implications of this relation for the observed distribution of recommendations and earnings forecast errors articles in the financial press have long argued that analysts are reluctant to issue unfavorable investment information perhaps because they fear jeopardizing potential investment banking

vested interest and biased price estimates evidence from an auction market this study employs a new data set from art auctions to examine the relationship between auctioneer presale price estimates and the long term performance of artworks we find that the price estimates for expensive paintings have a consistent upward bias over a long period of 30 years high estimates at the time of purchase are associated with adverse subsequent abnormal returns moreover the estimation error for individual paintings tends to persist over time these results are consistent with the view that auction house price estimates are affected by agency problems and that

targeting the real exchange rate theory and evidence abstract this paper presents a theoretical and empirical analysis of policies aimed at setting a more depreciated level of the real exchange rate an intertemporal optimizing model suggests that in the absence of changes in fiscal policy a more depreciated level of the real exchange rate can only be attained temporarily this can be achieved by means of higher inflation and or higher real interest rates depending on the degree of capital mobility evidence for brazil chile and colombia supports the model s prediction that undervalued real exchange rates are associated with higher inflation

why new issues and high accrual firms underperform the role of analysts credulity we find that analysts forecast errors are predicted by past accounting accruals adjustments to cash flows to obtain reported earnings among both equity issuers and nonissuers analysts are more optimistic for the subsequent four years for issuers reporting higher issue year accruals the predictive power is greater for discretionary accruals than nondiscretionary accruals and is independent of the presence of an underwriting affiliation predicted forecast errors from accruals significantly explain the long term underperformance of new issuers the predictability of forecast errors among nonissuers suggests that analysts credulity about accruals management more generally contributes to market inefficiency copyright 2002 oxford university press

identification issues in forward looking models estimated by gmm with an application to the phillips curve limited information methods are commonly used to estimate forward looking models with rational expectations such as the new keynesian phillips curve of gal and gertler 1999 in this paper we address issues of identiflcation that have been overlooked due to the incompleteness of the single equation formulation we show that problems of weak instruments may arise depending on the properties of the exogenous variables and that they are empirically relevant we also uncover a link between identiflcation and dynamic mis speciflcation and examine the lack of power of hansen s 1982 j test to detect invalid over identifying restrictions with regards to the new phillips curve we flnd that problems of identiflcation cannot be ruled out and they deserve further attention

identification issues in limited information bayesian analysis of structural macroeconomic models the likelihood of the parameters in structural macroeconomic models typically has non identification regions over which it is constant when sufficiently diffuse priors are used the posterior piles up in such non identification regions use of informative priors can lead to the opposite so both can generate spurious inference we propose priors posteriors on the structural parameters that are implied by priors posteriors on the parameters of an embedding reduced form model an example of such a prior is the jeffreys prior we use it to conduct bayesian limited information inference on the new keynesian phillips curve with a var reduced form for us data

the new open economy macroeconomics a survey since the 1995 publication of obsteld and rogoff s redux model there has been an outpouring of research on open economy dynamic general equilibrium models that incorporate imperfect competition and nominal rigidities this paper offers an interim survey of this recent literature 2001 elsevier science b v all rights reserved

perfectly competitive bilateral exchange without discounting in a random matching economy of traders who maximize cumulative consumption overtaking criterion the stationary markov bayesian perfect equilibrium is studied at such equilibrium two results hold 1 perfect substitutability between current and future consumption implies a no surplus condition and 2 by the no surplus condition there is a nominal price at which all trades must occur these results strengthen the seminal results of ostroy 1973 regarding monetary bilateral exchange in two ways the incentive compatibility of the equilibrium trading pattern is established and a less roundabout trading pattern enhances welfare by enabling consumption to occur more frequently

conflict of interest and the credibility of underwriter analyst recommendations brokerage analysts frequently comment on and sometimes recommend companies that their firms have recently taken public we show that stocks that underwriter analysts recommend perform more poorly than buy recommendations by unaffiliated brokers prior to at the time of and subsequent to the recommendation date we conclude that the recommendations by underwriter analysts show significant evidence of bias we show also that the market does not recognize the full extent of this bias the results suggest a potential conflict of interest inherent in the different functions that investment bankers perform

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

priors from general equilibrium models for vars abstract this paper uses a simple new keynesian dynamic stochastic general equilibrium model as a prior for a vector autoregression shows that the resulting model is competitive with standard benchmarks in terms of forecasting and can be used for policy analysis jel classification c11 c32 c53 key words bayesian analysis dsge models forecasting vector autoregressions 1 introduction dynamic stochastic general equilibrium dsge models are popular nowadays in macroeconomics they are taught in virtually every economics ph d program and represent a predominant share of publications in the field yet when it comes to policy making these models are scarcely used at least from a quantitative point of view the main quantitative workhorse for policy making at the federal reserve system is frb us a macro econometric model built in the cowles foundation tradition a style of macroeconomics that is no longer taught in many ph d programs 1 in their decision process fed policy makers rely heavily on forecasting they want to know the expected path of inflation in the next few quarters and by how much a 50 basis point increase in the federal funds rate would affect that path frb us offers answers to these questions answers that many macroeconomists would regard with suspicion given both the lucas 1976 critique and the fact that in general the restrictions imposed by cowles foundation models are at odds with dynamic general equilibrium macroeconomics sims 1980 general equilibrium models on the other hand have a hard time providing alternative answers the fact that these models are perceived to do badly in terms of forecasting as they are scarcely parameterized is perhaps one of the reasons why they are not at the forefront of policy making while progress is being made in the development of dsge models that deliver acceptable forecasts e g smets and wouters 2003 this paper proposes an approach that combines a stylized general equilibrium model with a vector autoregression var to obtain a specification that both forecasts well and is usable for policy analysis specifically the approach involves using prior information coming from a dsge model in the estimation of a vector autoregression loosely speaking this prior can be thought of as the result of the following exercise i simulate time series data from the dsge model ii fit a var to these data in practice we replace the sample moments of the simulated data by population moments computed from the dsge model solution since the dsge model depends on unknown structural parameters we use a hierarchical prior in our analysis by placing a distribution on the dsge model parameters a tightness parameter controls the weight of the dsge model prior relative to the weight of the actual sample markov chain monte carlo methods are used to generate draws from the joint posterior distribution of the var and dsge model parameters the paper shows that the approach makes even a fairly stylized new keynesian dsge model competitive with standard benchmarks in terms of forecasting real output growth inflation and the nominal interest rate the three variables that are of most interest to policy makers 2 up to this point our procedure borrows from the work of dejong ingram and whiteman 1993 and ingram and whiteman 1994 who are the first to use priors from dsge models for vars ingram and whiteman showed that prior information from the bare bones stochastic growth model of king plosser and rebelo 1988 is helpful in forecasting real economic activity such as output consumption investment and hours worked in addition to documenting the forecasting performance of a trivariate var with a prior derived from a monetary dsge model this paper makes two contributions that significantly extend the earlier work first we show formally how posterior inference for the var parameters can be translated into posterior inference for dsge model parameters

posterior predictive evidence on us inflation using extended new keynesian phillips curve models with non filtered data changing time series properties of us inflation and economic activity measured as marginal costs are modeled within a set of extended new keynesian phillips curve nkpc models it is shown that mechanical removal or modeling of simple low frequency movements in the data may yield poor predictive results which depend on the model specification used basic nkpc models are extended to include structural time series models that describe typical time varying patterns in levels and volatilities forward and backward looking expectation components for inflation are incorporated and their relative importance is evaluated survey data on expected inflation are introduced to strengthen the information in the likelihood use is made of simulation based bayesian techniques for the empirical analysis no credible evidence is found on endogeneity and long run stability between inflation and marginal costs backward looking inflation appears stronger than forward looking inflation levels and volatilities of inflation are estimated more precisely using rich nkpc models the extended nkpc structures compare favorably with existing basic bayesian vector autoregressive and stochastic volatility models in terms of fit and prediction tails of the complete predictive distributions indicate an increase in the probability of deflation in recent years

on the fit of new keynesian models this article provides new tools for the evaluation of dynamic stochastic general equilibrium dsge models and applies them to a large scale new keynesian model we approximate the dsge model by a vector autoregression and then systematically relax the implied cross equation restrictions and document how the model fit changes we also compare the dsge model s impulse responses to structural shocks with those obtained after relaxing its restrictions we find that the degree of misspecification in this large scale dsge model is no longer so large as to prevent its use in day to day policy analysis yet is not small enough to be ignored

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve