business cycle analysis with a markov switching model this article explores the hamilton markov switching model through an analysis of the business cycles of eight developed market economies forecasting and specification tests suggest only marginal improvements over linear autoregressive models yet filtered and smoothed conditional probabilities indicate turning points in business cycles that closely correlate with turning points from traditional methods tests regarding the asymmetry of business cycles reject the null of symmetry for most countries

debt regimes and the effectiveness of monetary policy abstract this paper develops a medium scale non linear model of the us economy our proposed model a threshold vector autoregression with stochastic volatility assumes that changes in government debt to gdp ratios drive the transition between regimes capturing low and high debt regimes the introduction of hierarchical priors enables us to flexibly shrink the empirical model towards the moments implied by a dynamic stochastic general equilibrium model in the empirical application we analyze regime specific monetary policy shocks our findings indicate that the effect of monetary policy is less pronounced in high debt regimes pointing towards differences in the underlying monetary policy transmission mechanisms forecast error variance decompositions enable us to shed further light on the relative importance of monetary policy shocks within different debt regimes in terms of explaining the variance of forecast errors

tracking the market dynamic pricing and learning in a changing environment dynamic pricing of commodities without knowing the exact relation between price and demand is a much studied problem most existing studies assume that the parameters describing the market are constant during the selling period this severely reduces their practical applicability since in reality market characteristics may change all the time without the firm always being aware of it in the present paper we study dynamic pricing and learning in a changing market environment we introduce a methodology that enables the price manager to hedge against changes in the market and provide explicit upper bounds on the regret a measure of the performance of the firm s pricing decisions in addition this methodology guides the selection of the optimal way to estimate the market process we provide numerical examples from practically relevant situations to illustrate the methodology

optimal monopolist pricing under demand uncertainty in dynamic markets we examine pricing policy for a monopolist facing uncertain demand in a market characterized by dynamics on the demand side such as diffusion or saturation effects and or on the cost side experience curve effects our model explicitly incorporates the impact of demand uncertainty and thus allows us to analyze the implications of uncertainty on the optimal price path by contrasting the stochastic policy with the corresponding deterministic policy we begin with an analysis of the general model and then focus on several special cases based on well known demand specifications to gain more specific insights and to suggest directional guidelines for dynamic pricing decisions in an uncertain environment in general the interaction among uncertainty demand and or cost dynamics and firm s discount rate thus farsighted firms operating under dynamic market conditions with high demand uncertainty such as high tech companies with innovative products for consumer or industrial markets should attach partic

the brevity and violence of contractions and expansions abstract early studies of business cycles argued that contractions in economic activity were briefer shorter and more violent rapid than expansions this paper systematically investigates this claim and in the process discovers a robust new business cycle fact contractions in employment are briefer and more violent than expansions but we cannot reject the null of equal brevity and violence for expansions and contractions in output the difference arises because employment typically lags output around peaks but they coincide in their troughs we discuss the performance of existing business cycle models in accounting for this fact and conclude that none can fully account for it we then show that a business cycle model with asymmetric adjustment costs on employment and a choice of when to scrap old technologies can account for the business cycle fact both qualitatively and quantitatively

are business cycles asymmetric some european evidence economic thought has often regarded business cycles as asymmetric this study examines the existence of asymmetries over the business cycle in seven european countries france germany ireland italy luxembourg the netherlands and the united kingdom to analyse this issue industrial production in these countries from 1957 to 1998 is examined and quarterly contractions and expansions in this variable are compared the results obtained with both parametric and non parametric methods allow the existence of asymmetries in these countries to be questioned

analysis of the nonlinear response of electricity prices to fundamental and strategic factors this paper seeks to characterize the nonlinear effects of exogenous factors on wholesale electricity price formation using a special type of regime switching the logistic smooth transition regression model we capture the mean reverting and spiky characteristics of spot prices and at the same time estimate their rather complex relationships to fundamentals we show that for different trading periods within the day prices can be a function of fundamentally different drivers in addition to including the usual fuel price demand and reserve margin drivers this analysis tests whether a market concentration variable is as significant in the high frequency context as it is known to be over the longer term the analysis is also innovative in testing the nonlinear influence of carbon emission trading

optimal forecasts from markov switching models we derive forecasts for markov switching models that are optimal in the mean square forecast error msfe sense by means of weighting observations we provide analytic expressions of the weights conditional on the markov states and conditional on state probabilities this allows us to study the effect of uncertainty around states on forecasts it emerges that even in large samples forecasting performance increases substantially when the construction of optimal weights takes uncertainty around states into account performance of the optimal weights is shown through simulations and an application to u s gnp where using optimal weights leads to significant reductions in msfe supplementary materials for this article are available online

was the recent downturn in us real gdp predictable this article uses a small set of variables real gdp the inflation rate and the short term interest rate and a rich set of models atheoretical time series and theoretical structural linear and nonlinear as well as classical and bayesian models to consider whether we could have predicted the recent downturn of the us real gdp comparing the performance of the models to the benchmark random walk model by root mean square errors the two structural theoretical models especially the nonlinear model perform well on average across all forecast horizons in our ex post out of sample forecasts although at specific forecast horizons certain nonlinear atheoretical models perform the best the nonlinear theoretical model also dominates in our ex ante out of sample forecast of the great recession suggesting that developing forward looking microfounded nonlinear dynamic stochastic general equilibrium models of the economy may prove crucial in forecasting turning points

stochastic diffusion models with advertising and word of mouth effects abstract this paper presents a stochastic diffusion model which incorporates advertising word of mouth effects the model defines a 3 variate stochastic process based on explicit assumptions regarding consumer behavior and consumers response to advertising the model generalizes a wide variety of advertising models and in addition includes several classes of consumers interaction effects between these consumers and of course a stochastic framework that may be used for assessing the risk implications of advertising policies and for empirical analyses purposes

the central banks ability to control variability of money market interest rates the case of inflation targeting countries abstract it is well known that variability of money market interest rates is time variant further the ability to control money market interest rates by central bank is also important for effectiveness of inflation targeting as a contribution to understanding the transmission between main monetary policy rate and money market interest rates an innovative formal framework of money market interest rate variability reflecting variety of macroeconomic shocks was developed subsequently a middle size macro financial model with exogenous variables is estimated by the bayesian method with sign restriction to identify main sources of macroeconomic shocks parameters of this model are estimated from a dataset of six countries with long lasting history of inflation targeting using the estimation results three measures of ability to control of money market interest rates are derived and they are used to compare time and country specific conditions of the effects of main policy rate on money market interest rates we consider these measures as an important contribution for evaluating suitability of var models as well as the one for measuring the ability of central bank to control money market rates our findings are interesting and the novel approach is applicable to solve similar problem

a floor and ceiling model of us output abstract building on previous nonlinear time series models we further examine the form of nonlinearity in us output we develop a model of us output that allows for floor and ceiling effects to alter the dynamics of output growth the model estimated on post korean war quarterly data displays features similar to nonlinear trade cycle models of the 1940s and 1950s thus as predicted by many of the earlier theoretical models our empirical results suggest that the turning points of the business cycle provide new initial conditions for the ensuing growth process we also find important asymmetries in the responses of output to positive and negative shocks this history and shock dependence property is not present in linear or approximately linear models of the type that arise in the standard implementations of real business cycle theory

can the markov switching model forecast exchange rates abstract a markov swirching model is fit for 18 exchange rates at quarterly frequencies the model fits well in sample for many exchange rates by the mean squared error criterion the markov model does not generate superior forecasts to a random walk or the forward rate there appears to ne some evidence that the forecasts of the markov model are superior at predicting the direction of change of the exchange rate

price dynamics in a vertical sector the case of butter we develop a reduced form model of price transmission in a vertical sector allowing for refined asymmetric contemporaneous and lagged own and cross price effects under time varying volatility the model is used to investigate the wholesale retail price dynamics in the u s butter market the analysis documents the nature of nonlinear price dynamics in a vertical sector it finds strong evidence of asymmetric retail price responses both in the short term and the longer term but only weak evidence of asymmetric wholesale price responses asymmetric retail responses play a major role in generating a skewed distribution of butter prices the empirical results indicate the presence of imperfect competition at the retail level

alternative supply chain production sales policies for new product diffusion an agent based modeling and simulation approach abstract applying agent based modeling and simulation abms methodology this paper analyzes the impact of alternative production sales policies on the diffusion of a new generic product and the generated npv of profit the key features of the abms model that captures the marketplace as a complex adaptive system are i supply chain capacity is constrained ii consumers new product adoption decisions are influenced by marketing activities as well as positive and negative word of mouth wom between consumers iii interactions among consumers taking place in the context of their social network are captured at the individual level and iv the new product adoption process is adaptive conducting over 1 million simulation experiments we determined the best production sales policies under various parameter combinations based on the npv of profit generated over the diffusion process the key findings are as follows 1 on average the build up policy with delayed marketing is the preferred policy in the case of only positive wom as well as the case of positive and negative wom this policy provides the highest expected npv of profit on average and it also performs very smoothly with respect to changes in build up periods 2 it is critical to consider the significant impact of negative word of mouth in choosing production sales policies neglecting the effect of negative word of mouth can lead to poor policy recommendations incorrect conclusions concerning the impact of operational parameters on the policy choice and suboptimal choice of build up periods

a nonlinear approach to us gnp a univariate nonlinear model is estimated for us gnp that on many criteria outperforms standard linear models the estimated model is of the threshold autoregressive type and contains evidence of asymmetric effects of shocks over the business cycle in particular the nonlinear model suggests that the post 1945 us economy is significantly more stable than the pre 1945 us economy

investment intensity of currencies and the random walk hypothesis cross currency evidence abstract this paper studies the cross currency and temporal variations in the random walk behavior in exchange rates we characterize currencies with relatively large investment flows as investment intensive and conjecture that the more investment intensive a currency is the closer its exchange rate adheres to random walk using 29 floating bilateral usd exchange rates we find that the higher the investment intensity the less likely it is to reject random walk and the smaller the deviation from random walk is however the effect of investment intensity is non monotonic application of threshold models shows that after investment intensity reaches the estimated thresholds the level of investment intensity has no further effect on the deviation from random walk these findings help reconcile the previous conflicting results on the random walk in exchange rates by focusing on the effect of cross currency and temporal variations in investment intensity

complicated dynamics in a flow model of the labor market abstract we develop a worker flow model with a nonlinear and endogenous outflow rate from unemployment inconsistent claims on the output lead to changing inflation rates which feedback on job offers through the real money supply via simulations one can show that the nonlinear outflow rate causes asymmetric adjustment of unemployment to the equilibrium rate of unemployment in addition and depending on the parameters the equilibrium rate of unemployment may also become locally unstable then there is a downward sloping phillips curve but no trade off between unemployment and inflation in the short run as there is none in the long run

introduction strategy for new products with positive and negative word of mouth existing innovation diffusion models assume that individual experience with the product is always communicated positively through word of mouth for certain innovations however this assumption is tenuous since communicators of the product experience may transfer favorable unfavorable or indifferent messages through word of mouth this paper examines a diffusion model for products in which negative information plays a dominant role discusses its implications for optimal advertising timing policy and presents an application to forecast attendance for the movie gandhi in the dallas area

bias in federal reserve inflation forecasts is the federal reserve irrational or just cautious abstract inflation forecasts of the federal reserve seem to have systematically under predicted inflation from the fourth quarter of 1968 until volcker s appointment as chairman and to systematically over predict it afterwards until the second quarter of 1998 furthermore under quadratic loss commercial forecasts seem to have information not contained in those forecasts to investigate the cause of this apparent irrationality this paper recovers the loss function implied by federal reserve s inflation forecasts the results suggest that the cost of having inflation above an implicit time varying target was larger than the cost of having inflation below it for the period since volcker and that the opposite was true for the pre volcker era once these asymmetries are taken into account the federal reserve s inflation forecasts are found to be rational

forecasting unemployment across countries the ins and outs abstract this paper evaluates the flow approach to unemployment forecasting proposed by barnichon and nekarda 2012 for a set of oecd countries characterized by very different labor markets we find that the flow approach yields substantial improvements in forecast accuracy over professional forecasts for all countries with especially large improvements at longer horizons one year ahead forecasts for european countries moreover the flow approach has the highest predictive ability during recessions and turning points when unemployment forecasts are most valuable

uncertainty shocks and asymmetric dynamics in korea a non linear approach this study investigates the impact of uncertainty shocks on macroeconomic activity in korea for this purpose a smooth transition var model is employed to document the state dependent dynamics of

time variation in the dynamics of worker flows evidence from north america and europe vector autoregressive methods have been used to model the interrelationships between job vacancy rates job separation rates and job finding rates using tools such as impulse response analysis we investigate whether such impulse responses change across the business cycle or over time by estimating time varying parameter vector autoregressions for data from north america the usa and canada and europe france spain and the uk while the adjustment process of the labour market to shocks in canada and the usa is similar we find the adjustment process differs much more across the european countries with greater persistence in shocks relative to the usa and canada

dynamic asymmetries in u s unemployment we examine dynamic asymmetries in u s unemployment using nonlinear time series models and bayesian methods we find strong statistical evidence in favor of a two regime threshold auto regressive model empirical results indicate that once we take into account both parameter and model uncertainty there are economically interesting asymmetries in the unemployment rate one finding of particular interest is that shocks that lower the unemployment rate tend to have a smaller effect than shocks that raise the unemployment rate this finding is consistent with unemployment rises being sudden and falls gradual

forecasting asymmetric unemployment rates asymmetric behavior has been documented in postwar quar terly u s unemployment rates this suggests that improvement over conventional linear forecasts may be possible through the use of nonlinear time series models in this note an out of sample forecasting competition is carried out for a set of leading nonlinear time series models it is shown that several nonlinear forecasts do indeed dominate the linear forecast the results are sensitive however to whether a stationarity inducing transfor mation is applied to the nonstationary unemployment rate series

is the business cycle characterized by deterministic chaos abstract tests are conducted on u s macroeconomic data for the presence of low dimensional deterministic chaos where deterministic chaos is defined as in grandmont s 1985 walras bowley lecture or in brock 1986 the idea is to test for evidence of endogenous instability causing the business cycle low order autoregressions are hard to reject with our methods evidence of chaos is weak but our tests may be too weak to detect it evidence of nonlinearity is present in employment 1950 i to 1983 iv unemployment 1949 i to 1982 iv monthly post war industrial production and pig iron production 1877 1937

the transmission of world maize price to south african maize market a threshold cointegration approach this article seeks to provide an explanation for the relationship between domestic maize price in south africa and world maize prices in order to evaluate comovement and transmission of world prices to domestic prices in sub sahara african countries this is done by comparing nested and nonnested models that capture different forms of nonlinearity in the price spread adopting a bayesian approach that allows for comparison of models using bayes factor we found that the relationship between south african price and world price for maize indicates the presence of nonlinearity in price transmission with three regimes that is triggered by the price spread in previous period

monetary policy rules based on real time data this paper examines the magnitude of informational problems associated with the implementation and interpretation of simple monetary policy rules using taylor s rule as an example i demonstrate that real time policy recommendations differ considerably from those obtained with ex post revised data further estimated policy reaction functions based on ex post revised data provide misleading descriptions of historical policy and obscure the behavior suggested by information available to the federal reserve in real time these results indicate that reliance on the information actually available to policy makers in real time is essential for the analysis of monetary policy rules

dynamic optimal control models in advertising recent developments this paper presents a review of recent developments that have taken place in the area of dynamic optimal control models in advertising subsequent to the comprehensive survey of the literature by sethi in 1977 the basic problem underlying these models is that of determining optimal advertising expenditures and possibly other variables of interest over time for a firm or a group of competing firms under consideration this optimization is done subject to some dynamics that define how these variables translate into sales and in turn into profits the purpose of this update is twofold on the one hand new contributions in the areas already treated in the earlier survey are reviewed on the other hand new trends in the advertising literature since 1977 such as quality as an additional marketing instrument cumulative sales models pulsing advertising and advertising as a part of corporate models of the firm are discussed the models covered in this update are organized under six headings models with ca

comparing smooth transition and markov switching autoregressive models of us unemployment logistic smooth transition and markov switching autoregressive models of a logistic transform of the monthly us unemployment rate are estimated by markov chain monte carlo methods the markov switching model is identified by constraining the first autoregression coefficient to differ across regimes the transition variable in the lstar model is the lagged seasonal difference of the unemployment rate out of sample forecasts are obtained from bayesian predictive densities although both models provide very similar descriptions bayes factors and predictive efficiency tests both bayesian and classical favor the smooth transition model copyright 2008 john wiley sons ltd

does purchasing power parity hold sometimes regime switching in real exchange rates standard unit root tests are not very powerful in drawing conclusions regarding the validity of purchasing power parity ppp rather than asking whether ppp holds throughout the whole sample period we examine in this study if ppp holds sometimes by employing hamilton type 1989 markov regime switching models when at least one of multiple regimes is stationary ppp holds locally within the regime there are indeed various reasons that we should expect that the persistence of real exchange rates changes over time employing five real exchange rates spanning more than 100 years we find herein strong evidence that the strength of ppp varies during the sample periods and that there exist stationary regimes in which ppp holds throughout the article we also make comparisons to previous markov regime switching estimation results by kanas 2006 on the same data series the new markov switching model selection criterion of smith et al 2006 which is devised especially for discriminating markov regime s

nonlinear time series modelling an introduction recent developments in nonlinear time series modelling are reviewed three main types of nonlinear model are discussed markov switching threshold autoregression and smooth transition autoregression classical and bayesian estimation techniques are described for each model parametric tests for nonlinearity are reviewed with examples from the three types of model finally forecasting and impulse response analysis is developed

innovation diffusion uncertainty advertising and pricing policies we develop and analyze a normative and structurally stochastic model of innovation diffusion by depicting the market at an aggregate level model dynamics are defined through the flow pattern of individuals that move from the innovation unaware stage to the innovation aware and ultimately to the adopter stages the stochastic evolution of this stage wise transition unfolds according to tractable stochastic processes and is influenced by such factors as price word of mouth and advertisement efforts in this environment techniques of contingent claims analysis and stochastic control theory are employed to obtain optimal pricing or advertising policies that maximize the value of the innovation to account for their optimal adjustment over time these policies are modeled as positive real valued adapted processes given this setting policy adjustments over time i e advertising or pricing are viewed as a value additive sequence of nested real options we present closed form analytic results regarding the optimal policies simulations provide a numeric insight to the models behavior

macro factors and the term structure of interest rates this paper presents an essentially affine model of the term structure of interest rates making use of macroeconomic factors and their long run expectations the model extends the approach pioneered by kozicki and tinsley 2001 by modeling consistently long run inflation expectations simultaneously with the term structure application to the u s economy shows the importance of long run inflation expectations in the modeling of long term bond yields the paper also provides a macroeconomic interpretation for the latent factors found in standard finance models of the yield curve the level factor represents the long run inflation expectation of agents the slope factor captures business cycle conditions and the curvature factor expresses a clear independent monetary policy factor

excess comovements between the euro us dollar and pound sterling us dollar exchange rates abstractthe aim of this article is to discuss excess comovements of the euro us dollar and pound sterling us dollar exchange rates i e we look for comovements of exchange rates which are stronger

innovation diffusion in the presence of supply restrictions innovation diffusion models are developed to represent the spread of a new product from its manufacturers to its ultimate users in the marketplace however the growth of a new product can be retarded by supply restrictions such as the unavailability of the product due to limitations on the production capacity or difficulties encountered in setting up distribution systems in the presence of supply restrictions diffusion models must be developed to capture the dynamics of supply restrictions and to allow management to evaluate the impact of such supply restrictions on the growth of a new product in the market place based on the bass innovation diffusion model the objective of this paper is to suggest a parsimonious diffusion model that integrates the demand side dynamics with the supply side restrictions the sensitivity of innovation diffusion patterns in the presence of supply restrictions is examined an application examining the diffusion of new telephones in israel is documented to illustrate the usefulness of the proposed model

are economic time series asymmetric over the business cycle it has long been argued that major cyclical variables such as the unemployment rate display an asymmetric behavior over various phases of the business cycle the paper provides a statistical test for this hypothesis using the framework of finite state markov processes i implement a test to see if the behavior of the unemployment rate is characterized by sudden jumps and slower drops it is argued that the framework provided in the paper can also be used to test other sample path properties of economic time series

stochastic competitive entries and dynamic pricing abstract how should firms price new products when they do not know the timing nor the nature of the next competitive entry to guide managers pricing decisions in such contexts we propose a dynamic pricing model with two types of randomly timed entry i e imitative and innovative the characterization of the equilibrium strategies reveals how optimal prices vary with the manager s knowledge about the timing of future competitive entries we show that price skimming is not always optimal when entry dates are unknown to managers everything else equal we demonstrate that the randomness of competitive entries make forward looking managers to choose constant prices even though the characteristics of the market would have justified skimming the demand in the normal course moreover we show that the constant pricing policy remains optimal even when the incumbent s optimal pricing strategy influences the probability of facing a competitive entry finally we find that uncertainty does not necessarily hurt firms profits

technical note a pure birth model of optimal advertising with word of mouth a stochastic dynamic model of advertising which incorporates both advertising and word of mouth effects is formulated the time between the acquisition of new customers is assumed to be random the distribution of the time until the firm obtains a new customer depends upon the rate of advertising expenditures and upon a word of mouth parameter the problem of choosing the rate of advertising expenditures so as to maximize long run expected profit is formulated as a continuous time markov decision chain the impact of changes in various parameters of the model on optimal advertising decisions is studied

testing nonlinearities in economic growth in the oecd countries an evidence from setar and star models this study estimates the self exciting threshold autoregressive setar and smooth transition autoregressive star models and examines the nonlinear and regime switching dynamics of economic growth for a set of 10 oecd countries the null of linearity in setar model is tested using the recursive polynomial f test of tsay and the bootstrap based supremum average and exponential average lagrange multiplier lm tests of hansen the f test of tsay rejects the null of linearity for all the countries except spain and switzerland the setar model of hansen reinforces the evidence and suggests the rejection of linear model the star model rejects the null of linearity against star nonlinearity for all the countries except denmark and switzerland the sequential f tests for the conditional nulls suggest the lstar nonlinearity for australia belgium france sweden and uk and the estar nonlinearity for canada spain and the usa

do recessions permanently change output abstract this paper examines whether negative innovations to gnp are more or less persistent than positive innovations we find that once we allow for the impulse response of gnp to be asymmetric negative innovations to gnp are observed to be much less persistent than positive ones in particular the effect of a recession on the forecast of output is found to be negligible after only eight to twelve quarters while the effect of a positive shock is estimated to be persistent and amplified over time our results may therefore help reconcile two antagonistic views about the nature of business cycle fluctuations

presidential approval and macroeconomic conditions evidence from a nonlinear model abstractcontrary to previous empirical studies that find a linear link between economic conditions and presidential approval this study argues for and finds a nonlinear relationship a threshold regression is used to assess potential nonlinear relationships between macroeconomic variables and presidential popularity a quarterly data analysis for the 1960q1 2012q2 time period reveals that domestic factors prevail in shaping presidential approval most compelling is evidence of a threshold relationship involving economic conditions when unemployment is slightly over 7 its decline impacts significantly and favourably on presidential approval an effect that virtually disappears below the threshold value change in consumer sentiment affects presidential approval in a limited way while inflation shows no association at all these results combine to encourage further investigation of nonlinear processes in the nexus of economics and politics

evaluating density forecasts with applications to financial risk management density forecasting is increasingly more important and commonplace for example in financial risk management yet little attention has been given to the evaluation of density forecasts the authors develop a simple and operational framework for density forecast evaluation they illustrate the framework with a detailed application to density forecasting of asset returns in environments with time varying volatility finally the authors discuss several extensions copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

unemployment persistence does the size of the shock matter one of the stylized facts of unemployment is that shifts in its mean rate between decades and half decades account for most of its variance in this paper we use a statistical analysis based on markov switching regression models to identify the dates of infrequent changes in the mean of the unemployment rate series of fifteen countries we find that in most countries unemployment persistence is much reduced once the infrequently changing mean rate induced by large shocks to unemployment has been removed we conclude that the observed persistence in unemployment appears to be consistent with multiple equilibria models and models with an endogeneous natural rate 1998 john wiley sons ltd

unit root tests persistence and the unemployment rate of the u s states author affiliation diego romero avila department of economics carretera de utrera km 1 pablo de olavide university 41013 seville spain dromtor upo escarlos usabiaga professor department of economics carretera de utrera km 1 pablo de olavide university 41013 seville spain cusaiba upo es corresponding author acknowledgment the authors would like to thank seminar participants at the pablo de olavide university and dg economics at the european central bank carlos usabiaga acknowledges the financial support from centro de estudios andaluces ecod1 05 033 special thanks go to junsoo lee and nikolay gospodinov for making available to us the codes to implement some of the techniques used in the paper and to two anonymous referees for suggestions that substantially improved the paper the usual disclaimer applies 1 introductionthe high persistence in unemployment rates observed in the developed world since the first oil shock has led to a vivid debate over which paradigm can better explain the behavior of unemployment rates the traditional strand of the literature that forms the basis of the natural rate theory phelps 1967 1968 friedman 1968 assumes that the unemployment rate evolves around an equilibrium level describing stationary fluctuations this equilibrium level or natural rate is set depending on fundamentals of the economy while initially the absence of theories explaining the determination of the natural rate meant that in practice it was taken to be constant and exogenous subsequent developments have attempted to identify the structural factors behind differences across economies and over time including labor productivity technological change real interest rates real exchange rates and energy prices to name a few see phelps 1994 phelps and zoega 1998 according to the structuralist view phelps 1994 most shocks to unemployment are temporary but occasionally the natural rate permanently changes and is affected by variations in the aforementioned structural factors as a consequence the unemployment rate may be characterized as a process that is stationary once a small number of structural breaks are allowed for in contrast to the natural rate and structuralist approaches the hysteresis hypothesis see blanchard and summers 1986 1987 implies that the unemployment rate is path dependent and temporary shocks can affect unemployment permanently 1 while hysteresis is thought to imply that the natural rate is conditioned by the level of unemployment recorded in the past persistence in unemployment which is a special case of the natural rate hypothesis entails a slow adjustment process of reversion toward the mean thus hysteresis implies that unemployment is characterized by a unit root while persistence is characterized by a near unit root in the latter case shocks to unemployment though long lasting would not have a permanent effect to discriminate among theories explaining the behavior of unemployment rates unit root tests have been widely applied the hysteresis hypothesis has been formulated as a unit root process and its rejection lends support to the natural rate hypothesis if no breaks are included in the specification and the structuralist hypothesis if breaks are allowed for the purpose of this article is to investigate which theoretical paradigm most closely represents the behavior of unemployment rates in the states of the united states over the period 1976 2004 we first apply the individual lagrange multiplier lm t statistic proposed by schmidt and phillips 1992 to monthly data and we fail to reject the null hypothesis of a unit root in unemployment for forty states perron 1989 pointed out that the presence of structural changes could favor the nonrejection of the unit root null if they are not properly accounted for therefore we employ the minimum lm t statistic allowing for up to two endogenous changes in level proposed by lee and strazicich 2003

is there a peso problem evidence from the dollar pound exchange rate 1976 1987 one of the most puzzling aspects of the floating exchange rate regime since 1973 has been the apparent irrationality embedded in investors exchange rate expectations this paper investigates whether exchange rate forecasts although biased are still rational the idea is that investors can be rational and yet make repeated mistakes if the true model of the exchange rate is evolving over time the author s results support the hypothesis that the exchange rate has followed a switching regime process moreover the switching regime model estimated can explain about 75 percent of the bias implied by the forward market and the survey data copyright 1993 by american economic association

a macro finance model of the term structure monetary policy and the economy this paper develops and estimates a macro finance model that combines a canonical affine no arbitrage finance specification of the term structure with standard macroeconomic aggregate relationships for output and inflation from this new empirical formulation we obtain several interesting results 1 the latent term structure factors from finance no arbitrage models appear to have important macroeconomic and monetary policy underpinnings 2 there is no evidence of monetary policy inertia or a slow partial adjustment of the policy interest rate by the federal reserve and 3 both forward looking and backward looking elements play important roles in macroeconomic dynamics

trial awareness advertising decisions a control problem with phase diagrams with non stationary boundaries abstract the paper presents a solution to a diffusion process in which advertising has two goals awareness creation and trial inducement it is shown that the advertising time paths can be either monotonic or single peaked the solution technique involves phase diagrams where the boundaries are non stationary general discussion of such techniques is provided the paper proves the existence of a stationary equilibrium to which the paths converge furthermore this two state variables two control variables equilibrium point is conditionally stable

monetary policy and market interest rates this thesis contains four chapters each of which examines different aspects of the uncertainty facing monetary policymakers monetary policy and market interest rates investigates how interest rates set on financial markets respond to policy actions taken by the monetary authorities the reaction of market rates is shown to depend crucially on market participants interpretation of the factors underlying the policy move these theoretical predictions find support in an empirical analysis of the u s financial markets predicting monetary policy using federal funds futures prices examines how prices of federal funds futures contracts can be used to predict policy moves by the federal reserve although the futures prices exhibit systematic variation across trading days and calendar months they are shown to be fairly successful in predicting the federal funds rate target that will prevailafter the next meeting of the federal open market committee from 1994 to 1998 monetary policy with uncertain parameters examines the effects of parameter uncertainty on the optimal monetary policy strategy under certain parameter configurations increasing uncertainty is shown to lead to more aggressive policy in contrast to the accepted wisdom should central banks be more aggressive examines why a certain class of monetary policy models leads to more aggressive policy prescriptions than what is observed in reality these counterfactual results are shown to be due to model restrictions rather than central banks being too cautious in their policy behavior an unrestricted model taking the dynamics of the economy and multiplicative parameter uncertainty into account leads to optimal policy prescriptions which are very close to observed federal reserve behavior

long swings in exchange rates are they really in the data several authors have reported evidence of long swings in u s dollar exchange rates by rejecting the random walk in favor of a markov regime switching model we show that this evidence is not robust to an extension of the sample period one should however not conclude that long swings are thus absent because the tests may have insufficient power a possible reason for this is the low data frequency because existing tests are based on quarterly data and we find that the power can be increased substantially by raising the data frequency indeed weekly data reject the random walk so we conclude that long swings are in the data this conclusion is supported by significant superiority of regime switching over random walk out of sample forecasts of the direction of change

advertising budget allocation under uncertainty this article presents a model for the allocation of an advertising budget to geographic market segments or territories when the sales response to advertising in each segment is characterized by a probability distribution it is shown that allocation decisions that are based on the expected sales response may be associated with a relatively large degree of risk and therefore non optimal to a risk averse manager the model derives an efficient frontier in terms of the expected profit and its variance resulting from alternative budget allocations the manager then chooses the optimal allocation based on his her preference function

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

on the periodic structure of the business cycle this article tests whether an economic recovery is equally likely to occur in any month of the year i test this hypothesis with a homogeneous markov switching regime model and use the turning point dates for business cycles marked by the national bureau of economic research and romer i tend to find unequal probabilities to switch from recession to expansions in particular the spring and the month of december appear to have higher incidence of economic recovery my results also imply that recessions and expansions are on average longer or shorter depending on what time of the year they start this suggests the presence of a seasonal pattern in business cycle durations though such a notion of seasonality is quite different from the common one based on unobserved component linear time series models i investigate issues that go beyond linear dependence between seasonality and business cycles

stochastic optimal budget decision for advertising considering uncertain sales responses abstract firms are faced with uncertain sales responses even though they advertise appropriately to help marketing managers make optimal budget decisions in this situation we develop a stochastic model depicting the problem of advertising budget decision as a special markov decision process where a new objective maximizing expected market utility is proposed in the model we introduce a two dimension state variable including accumulative sales which vary randomly with advertising budget and the predicted probability that an advertising campaign obtains a full sales response we make an analysis of the model on the premise of growing infinite market potential deriving the property of optimal policies and that of optimal value function these results are successfully used to make advertising budget decisions for a private university in xi an china

does the fed act gradually a var analysis abstract the tendency for changes in the federal funds rate to be implemented gradually has been considered evidence of an interest rate smoothing objective for the federal reserve this paper investigates whether gradual funds rate movements can be explained by the dynamic structure of the economy and the uncertainty surrounding that structure without recourse to including an ad hoc interest rate smoothing argument in the fed s objective function in the absence of parameter uncertainty the optimal policy involves more aggressive movements in the funds rate than observed parameter uncertainty however limits the responsiveness of the interest rate as a result the optimal policy under parameter uncertainty can account for a considerable portion of the gradualism observed

meteor showers or heat waves heteroskedastic intra daily volatility in the foreign exchange market this paper seeks to explain the causes of volatility clustering in exchange rates careful examination of intra daily exchange rates provides a test of two hypotheses heat waves and meteor showers the heat wave hypothesis is that the volatility has only country specific autocorrelation alternatively the meteor shower is a phenomenon of intra daily volatility spillovers from one market to the next using the garch model to specify the heteroskedasticity across intra daily market segments we find that the empirical evidence is generally against the null hypothesis of the heat wave using a volatility type of vector autoregression we examine the impact of news in one market on the time path of per hour volatility in other markets

forecasting substantial data revisions in the presence of model uncertainty a recent revision to the preliminary measurement of gdp e growth for 2003q2 caused considerable press attention provoked a public enquiry and prompted a number of reforms to uk statistical reporting procedures in this article we compute the probability of substantial revisions that are greater in absolute value than the controversial 2003 revision the predictive densities are derived from bayesian model averaging over a wide set of forecasting models including linear structural break and regime switching models with and without heteroscedasticity ignoring the nonlinearities and model uncertainty yields misleading predictives and obscures recent improvements in the quality of preliminary uk macroeconomic measurements

is the fed too timid monetary policy in an uncertain world estimates of the taylor rule using historical data from the past decade or two suggest that monetary policy in the u s can be characterized as having reacted in a moderate fashion to output and in

uncertainty shocks and unemployment dynamics in u s recessions abstract what are the effects of uncertainty shocks on unemployment dynamics we answer this question by estimating non linear smooth transition vars with post wwii u s data the relevance of uncertainty shocks is found to be much larger than that predicted by standard linear vars in terms of i magnitude of the reaction of the unemployment rate to such shocks and ii contribution to the variance of the prediction errors of unemployment at business cycle frequencies the ability of different classes of dsge models to replicate our results is discussed

the effectiveness of alternative monetary policy tools in a zero lower bound environment this paper reviews alternative options for monetary policy when the shortterm interest rate is at the zero lower bound and develops new empirical estimates of the effects of the maturity structure of publicly held debt on the term structure of interest rates we use a model of risk averse arbitrageurs to develop measures of how the maturity structure of debt held by the public might affect the pricing of level slope and curvature term structure risk we find that these treasury factors historically were quite helpful for predicting both yields and excess returns over 1990 2007 the historical correlations are consistent with the claim that if in december 2006 the fed were to have sold off all its treasury holdings of less than 1 year maturity about 400 billion and use the proceeds to retire treasury debt from the long end this might have resulted in a 14 basis point drop in the 10 year rate and an 11 basis point increase in the 6 month rate we also develop a description of how the dynamic behavior of the term structure of interest rates changed after hitting the zero lower bound in 2009 our estimates imply that at the zero lower bound such a maturity swap would have the same effects as buying 400 billion in long term maturities outright with newly created reserves and could reduce the 10 year rate by 13 basis points without raising short term yields

the marketing mix decision under uncertainty this paper develops a marketing mix model under uncertainty using the capital asset pricing model capm valuation framework the model is general because it treats price advertising and personal selling simultaneously and allows for general patterns of uncertainty because the manager often lacks precise quantitative information about the sales response function the analysis focuses on the qualitative properties of the model the methodology of comparative statics is used to determine how the marketing mix should be modified when market conditions change specifically the comparative statics are shown to depend on how advertising and personal selling influence price sensitivity the interaction between advertising and personal selling and the relationship between sales and the return earned in the capital markets the comparative statics for risk depend in addition on the precise mathematical form with which uncertainty enters the random demand function i e additive multiplicative or generalize

bond yields and the federal reserve bond yields respond to policy decisions by the federal reserve and vice versa to learn about these responses i model a high frequency policy rule based on yield curve information and an arbitrage free bond market in continuous time the fed s target is a pure jump process jump intensities depend on the state of the economy and the meeting calendar of the federal open market committee the model has closed form solutions for yields as functions of a few state variables introducing monetary policy helps to match the whole yield curve because the target is an observable state variable that pins down its short end and introduces important seasonalities around fomc meetings the volatility of yields is snake shaped which the model explains with policy inertia the policy rule crucially depends on the two year yield and describes fed policy better than taylor rules

conventional monetary policy transmission during financial crises an empirical analysis summary this paper studies the effects of a conventional monetary policy shock in the usa during times of high financial stress the analysis is carried out by introducing a smooth transition factor model where the transition between states normal and high financial stress depends on a financial conditions index employing a quarterly dataset over the period 1970 q1 to 2008 q4 containing 108 us macroeconomic and financial time series i find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output consumption and investment than it has during normal times differences in effects among the regimes seem to originate from nonlinearities in both components of the credit channel i e the balance sheet channel and the bank lending channel copyright 2016 john wiley sons ltd

asymmetric labour force participation decisions this article finds compelling evidence of asymmetric labour force participation decisions across demographic groups in response to changes in labour market conditions this behaviour is consistent with predictions from the standard labour leisure choice model and suggests that asymmetry in individual behaviour plays some role in the observed asymmetry of the aggregate unemployment rate it is estimated that the weighted average difference in response to a one percentage point change in unemployment rates is sizeable when compared to the average monthly change in the aggregate labour force

recent developments in dynamic advertising research a variety of continuous time differential functions have been developed to investigate dynamic advertising problems in business and economics fields since major dynamic models appearing before 1995 have been reviewed by a few survey papers we provide a comprehensive review of the dynamic advertising models published after 1995 which are classified into six categories i nerlove arrow model and its extensions ii vidale wolfe model and its extensions iii lanchester model and its extensions iv the diffusion models v dynamic advertising competition models with other attributes and vi empirical studies for dynamic advertising problems for each category we first briefly summarize major relevant before 1995 models and then discuss major after 1995 models in details we find that the dynamic models reviewed in this paper have been extensively used to analyze various advertising problems in the monopoly duopoly oligopoly and supply chain systems our review reveals that the diffusion models have not been used to analyze advertising problems in supply chain operations which may be a research direction in the future moreover we learn from our review that very few publications regarding dynamic advertising problems have considered the supply chain competition we also find that very few researchers have used the diffusion model to investigate the dynamic advertising problems with product quality as a decision variable and the pricing decision has not been incorporated into any extant lanchester model the paper ends with a summary of our review and suggestions on possible research directions in the future

unemployment dynamics and labour market tightness an empirical evaluation of matching function models the implications of matching function models for the relationship between labour market tightness and the transition probability into employment are summarized these implications are then tested using monthly data for three canadian provinces british columbia ontario and quebec testing methods use flexible regression techniques so as to reduce the effect of any extraneous restrictions the results show rough concordance between theoretical assumptions and empirical facts evidence of non linearity in the estimated relationships favours a search theoretic model of labour markets over one based on queues and some quantitative results offer guidance to those using calibrated search models in theoretical analysis

monopolist pricing with dynamic demand and production cost this paper deals with pricing of a new product over time by a monopolist who maximizes the discounted profit stream the interdependency of cost and demand on cumulative production makes the problem inherently dynamic cost is assumed to be declining with cumulative production learning curve effect while demand is a function of price and cumulative sales representing word of mouth and saturation effects the paper addresses this problem in a general framework that includes several previous results as special cases and provides new insights in other situations while the learning curve and word of mouth effect cause prices to be lower than the price that maximizes immediate revenues the saturation factor has the opposite effect the price path over time is affected by these factors and the interest rate we characterize the price path under several different situations and interpret the results for policy guidelines