black market exchange rate and the productivity bias hypothesis abstract previous studies that tested the productivity bias hypothesis employed the official nominal exchange rate in constructing the real rate hence in testing the productivity bias hypothesis in this paper we show that if official real exchange rate does not support the productivity bias hypothesis the real black market rate does this conjecture is tested by using data from chile colombia and costa rica

how to beat the random walk an empirical model of real exchange rates abstract an econometric model is developed for all possible bilateral real exchange rates between the united states the united kingdom germany and japan for the period february 1977 to june 1987 we extend the standard dornbusch frankel type of models using an error correction approach with an observable macro economic determinant of the long run real exchange rate for the econometric analysis we develop an efficient estimator by pooling the data for all currencies contrary to previous empirical tests on the long run behaviour of real exchange rates we find a notable and significant mean reversion component

instability in short run adjustments to purchasing power parity results for selected latin american countries according to the theory of purchasing power parity ppp there is a tendency toward equalization of different countries price levels in common currency terms however even assuming that a long run ppp relationship exists its relevance for policy makers in less developed countries ldcs will depend not only on the average speed of adjustment toward this relationship but also on the variability of such short run adjustments we present evidence of extreme volatility in adjustments toward ppp for four latin american countries based on time varying parameter estimates of error correction models

determinants of the equilibrium real exchange rate n b professor neary was based at university college dublin and queen s university ontario canada when this article was first published the full text of this article is not available in ora at this time citation neary j p 1988 determinants of the equilibrium real exchange rate american economic review 78 1 210 215

the j curve in the emerging economies of eastern europe devaluation or depreciation of a currency worsens the trade balance before improving it resulting in a j curve pattern a new definition of the hypothesis implies a short run deterioration combined with the long run improvement by using monthly data over the january 1990 june 2005 period from 11 east european emerging economies most of which are the new european union eu members or the eu candidate countries this article uses the bounds testing approach to cointegration and error correction modelling and finds empirical support for the j curve hypothesis in three countries of bulgaria croatia and russia the results have important implications for policymakers involved in economics in terms of using exchange rate policy as a policy device to achieve real convergence toward eu standards

excess volatility of real exchange rates in the ems some evidence from structural vars this paper argues that the effectiveness of the exchange rate mechanism erm of the european monetary system ems should be gauged by its impact on the monetary component of real exchange rate variability nominal and real shocks are separated using a bivariate structural var applied to real exchange rate data of the six original member countries participating in the erm and a control group consisting of britain and the united states the findings suggest that monetary shocks have been an important source of real exchange rate variability and that the erm has been successful in reducing the incidence of monetary shocks across its member countries prior to the ems currency crises of 1992 93 while being less successful thereafter

a reexamination of balassa s productivity bias hypothesis rency by ri s the price level in country i by pi and the price level in the united states by pu s the ppp theory postulates that ri u s pi pu s many studies have tried to verify whether exchange rates follow the path outlined by the ppp equation the empirical results at best are inconclusive for example j a frenkel tested the ppp by drawing data from the 1970s and showed that the ppp failed on the other hand n davutyan and j pippenger criticized frenkel s work and reversed his conclusion 2 both studies used ordinary least squares and two stage least squares methods even recent studies that have used a relatively modern econometric technique cointegration analysis have mostly rejected the ppp 3 several reasons have been given in the literature for the failure of the ppp or deviation of the ppp based exchange rates from equilibrium exchange rates including lack of free trade existence of transaction costs existence of nontradables simultaneity problems different weights used in constructing different national price indexes money and asset prices and real factors or real variables among the real variables the productivity differential between two countries has received most of the attention in the literature if we denote the market determined equilibrium exchange rate by re and the ppp based rate by pi pu s following the literature we

the black market exchange rate vs the official rate in testing ppp which rate fosters the adjustment process abstract in testing the purchasing power parity theory ppp researchers hardly pay attention to the speed with which the exchange rate adjusts to a change in relative prices in this paper we show that the speed of adjustment is faster when the black market exchange rate is used in testing the ppp as compared to the official exchange rate this could be another reason as to why central banks should unify the two rates

international pollution control cooperative versus noncooperative strategies abstract international pollution control involving two neighboring countries is modeled as a simple two player dynamic game each country produces a good that is consumed by domestic households production of each consumption good results in emissions of pollutants households in each country derive utility from the consumption of the domestically produced good but incur costs through the total stock of pollution stock externality in this setting we characterize cooperative as well as noncooperative pollution control strategies of the governments of the two countries that maximize the discounted stream of net benefits of a representative consumer it turns out that when the governments are restricted to use linear strategies noncooperative behavior results in overall losses for both countries if on the contrary governments use nonlinear markov perfect strategies and the discount rate is small enough a pareto efficient steady state pollution stock can be supported as a differentiable subgame perfect equilibrium thus the emergence of first best solutions cooperative outcomes does not require any institutional arrangements threats retaliation etc but can be brought about through the use of nonlinear markov perfect equilibrium strategies

pigouvian taxation of energy for flow and stock externalities and strategic noncompetitive energy pricing abstract the literature on energy and carbon taxes is by and large concerned about the derivation of globally efficient strategies in contrast this paper considers the dynamic interactions between cartelized energy suppliers and a consumers government that collectively taxes energy carriers for pigouvian motives two different kinds of external costs are associated with energy consumption flow e g acid rain and stock externalities e g global warming the dynamic interactions between a consumers government and a producers cartel are modeled as a differential game with a subgame perfect nash equilibrium in linear and nonlinear markov strategies the major implications are that the nonlinear solutions are pareto inferior to the linear strategies and energy suppliers may preempt energy taxation and thereby may raise the price at front however this effect diminishes over time because the producers price declines while taxes increase

the kinked demand curve revisited abstract in a stackelberg oligopoly with cost asymmetry and possibility of entry the stackelberg leader faces a kinked demand curve for a robust interval of cost of the leader the equilibrium price is rigid with respect to small changes in demand and costs of active firms

why real interest rates cost of capital and price earnings ratios vary across countries abstract this paper examines how productivity changes affect real rates of return and price earnings ratios in a small open economy the model provides conditions under which increased productivity in a country s traded goods sector causes prices of non traded goods to increase relative to the price of traded goods under these conditions real rates of interest decline and the production of certain non traded durable goods such as capital equipment and housing immediately increase this overconstruction has two effects first the increase in capital relative to labor in these sectors increases the marginal product of labor and hence immediately causes an increase in wages and the prices of non traded goods second an oversupply of capital goods and housing depresses their rental rates in the current period thereby increasing their price to rental ratios or equivalently their price earnings ratios

a quantitative reassessment of the purchasing power parity hypothesis evidence from norway and the united kingdom summary annual data from norway and the united kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity ppp doctrine the simple version of the ppp relationship is supported by the data only if different short run dynamics during a floating rate period 1914 1928 is allowed for two sets of factors were found to be important in amending the simple ppp model these were short run cyclical variables affecting the adjustment towards the ppp equilibrium relationship and long run structural factors such as productivity and terms of trade within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected

purchasing power parity in less developed and transition economies a review paper abstract the concept of purchasing power parity ppp has been the subject of numerous studies many of which have been unable to prove conclusively this core principle of international finance although industrialized countries have received most of the attention studies that focus on less developed and transition economies have also attained mixed results this study surveys trends in this branch of the literature highlighting the econometric advances that have sought to solve this puzzle while pointing out that more needs to be done to address the reasons that might cause ppp not to hold

a note on the determinants of unexpected exchange rate movements abstract in this paper we study the relative importance of surprises in fundamentals in explaining unexpected exchange rate movements employing a unique survey dataset that contains matched exchange rate and interest rate expectations we are able to derive a number of interesting conclusions a variance decomposition of unexpected exchange rate movements into various components reveals that interest rate news is relatively unimportant but that changes in perceptions about risk premia and more importantly revisions of expectations with regard to future exchange rate levels are crucial in explaining unexpected exchange rate movements

can carbon tax eat opec s rents abstract we consider the optimal emission tax for a stock pollutant when the pollutant flow is also regulated by a resource exporting cartel we consolidate clarify and generalize a set of previous results to obtain clear isolation of the pigouvian and trade policy components of the tax because of the trade policy component the tax can shift more rents from the cartel than the pollution causes damage related costs this leads to the possibility that the pollution problem accompanied by the coordination of taxation can bring about net benefits at the expense of the cartel

productivity differentials the relative price of non tradables and real exchange rates abstract this paper reconciles the apparent contradiction between recent panel unit root tests of real exchange rates and the productivity differential model proposing an alternative view that explains the coexistence of such findings real exchange rates and the relative price of non tradables reflect the gradual adjustment of mean reverting and endogenously competing factors supply and demand shocks as well as traded goods arbitrage granger causality and variance decomposition results indicate substantial simultaneity and feedback effects between real exchange rates the relative price of non tradables and productivity differentials

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

productivity bias hypothesis and the purchasing power parity a review article abstract productivity differentials among countries are said to be one of the major sources that contribute to the deviation of the purchasing power parity based exchange rate from the equilibrium rate hence the productivity bias hypothesis prior to last review article on the productivity bias hypothesis in 1976 almost all studies relied upon cross sectional regression analysis since then two groups of empirical studies have emerged while one group has employed time series data the other one has used panel data these two later groups have provided more support to the hypothesis than the earlier cross sectional studies this paper reviews and criticizes each group separately and provides tables that summarize main features of each study

a theory of dynamic oligopoly ii price competition kinked demand curves and edgeworth cycles we provide game theoretic foundations for the classic kinked demand curve equilibrium and edgeworth cycle we analyze a model in which firms take turns choosing prices the model is intended to capture the idea of reactions based on short run commitment in a markov perfect equilibrium mpe a firm s move in any period depends only on the other firm s current price there are multiple mpe s consisting of both kinked demand curve equilibria and edgeworth cycles in any mpe profit is bounded away from the bertrand equilibrium level we show that a kinked demand curve at the monopoly price is the unique symmetric renegotiation proof equilibrium when there is little discounting we then endogenize the timing by allowing firms to move at any time subject to short run commitments we find that firms end up alternating thus vindicating the ad hoc timing assumption of our simpler model we also discuss how the model can be enriched to provide explanations for excess capacity and market sharing keiiwords tacit collusion markov perfect equilibrium kinked demand curve edgeworth cycle excess capacity market sharing endogenous timing

testing a model of the kinked demand curve this paper analyzes survey data on the responses firms expect from their competitors when they change prices there is evidence of an assymmetry in expected responses which provides some support for modified versions of the kinked demand curve the asymmetry in responses is found to be cyclically sensitive and to differ with certain firm characteristics copyright 1991 by blackwell publishing ltd

real exchange rates national price levels and the peace dividend the crumbling of the berlin wall in germany in 1989 the dismantling of communist party control of central and eastern european governments in 1990 and the dissolution of the soviet union in 1991 have created the opportunity for substantive reductions in military expenditures in the united states and europe this paper addresses conceptually and empirically some of the issues surrounding the potential structural impacts of disarmament upon an open economy s allocation of capital and labor between tradable and nontradable goods upon the relative price of tradables and nontradables and upon the nation s price level relative to a world average theoretically the effects of military spending reductions on these variables is ambiguous the effects depend upon the relative factor intensities in production of civilian versus military goods and those of civilian tradable versus nontradable goods as well as upon the relative importance in utility of civilian tradable versus nontradable goods empirically the model suggests that the effects of disarmament on the relative demand for and relative supply of nontradables to tradables are economically and statistically significant however because military spending reductions will tend to increase the relative supply only slightly more than the relative demand their relative price i e the real exchange rate is predicted to decline by only a small amount consequently lower military expenditures are predicted to result in a small real depreciation of a country s currency and thus only a minor fall in the national price level relative to the world average

an empirical inquiry into the nature of the forward exchange rate bias abstract this paper tests whether anticipated real exchange rate movements fully account for the systematic time varying discrepancies between forward and future spot exchange rates the data do not reject this hypothesis the results demonstrate that 1 real exchange rate changes are predictable 2 anticipated real exchange rate changes are reflected in the forward bias and 3 information available at the signing of the forward contract is useless in forecasting differences between forward and future spot prices beyond the information s ability to predict real exchange rate changes the results emphasize the importance of real exchange rates in international asset pricing

structural determinants of real exchange rates and national price levels some empirical evidence contrary to the long held notion of purchasing power parity ppp economists have found systematic evidence that the general level of prices across countries at a point in time varies dramatically irving b kravis alan w heston and robert summers 1982 for example report that some countries national price levels are no more than one third the u s price level extensions of this work show that such departures from ppp have persisted for decades recently efforts have been made to explain systematically these persistent or structural departures from ppp pioneering work by kravis and robert e lipsey 1983 1987 1988 has demonstrated that a positive correlation between the price level and real per capita gross domestic product is robust across numerous cross sectional specifications for instance using data from kravis et al 1982 table 6 12 87 percent of the variation in national price levels pl of 21 countries in 1975 is explained by per capita gdp y and a constant

how sensitive is commodity trade flows between us and india to currency depreciation previous studies that investigated the impact of real depreciation of the rupee on indian trade balance used aggregate trade data and provided no support for real depreciation to be effective in improving india s trade balance in this article we disaggregate the indian trade data by commodity and consider the sensitivity of each industry s inpayments export value and outpayments import value to real rupee dollar exchange rate annual data over the period of 1962 to 2004 from 40 industries that trade between the two countries as well as bounds testing approach are used to show that while in half of the industries real depreciation of rupee has short run effects on inpayments and outpayments the short run effects do not last into the long run in majority of the cases

real exchange rates ppp and the relative price of nontraded goods the purchasing power parity hypothesis ppp states that nominal exchange rates move with differences in relative prices between economies the theory has received considerable attention in the economic literature since cassell 6 and is the foundation of many long run theoretical hypotheses in international finance yet its empirical validity remains in question many tests of ppp focus on the stationarity of the real exchange rate the nominal exchange rate adjusted for changes in price levels between economies if domestic and foreign price levels and the nominal exchange rate are integrated then cointegration between these variables implies the existence of both a long run equilibrium relationship and ppp the residual the real exchange rate then follows a stationary process the paper uses the multivariate cointegration methodology of johansen 16 and johansen and juselius 17 18 to examine the source of real exchange rate nonstationarity is the nonstationarity due to shifts in the domestic and foreign price of nontradeables or productivity differentials between traded and nontraded sectors or is the nonstationarity a possible outcome of difficulties in intercountry comparisons of prices movements associated with construction of these price indices most research finds the real exchange rate follows a nonstationary process due to the presence of a unit root 8 12 1 9 19 27 however the existence of a variable trend in the real exchange rate does not imply the absence of a long run relationship between relative prices levels and nominal exchange rates for two reasons first a long run relationship between price levels and nominal exchange rates may exist but not the one for one relationship implicit in the calculation of real exchange rates due to measurement differences in the construction of price indices between economies second ppp violations may occur due to the presence of permanent productivity innovations which affect the relative price of nontradeables if these shocks are not represented by measurable variables a cointegrating relationship will not exist the paper constructs traded and nontraded gdp price indices and productivity rates for 14 oecd economies and tests 1 if the variable trend the nonstationary process in the real exchange rate is due to permanent innovations in relative price of domestic and foreign nontradeables 2 if long run ppp violations are due to permanent movements in the relative price of nontradeables 3 if the nonstationarity in the real exchange rate is due to permanent innovations in domestic and foreign productivity differentials between the traded and nontraded sectors 4 if the variable trend in the relative price of nontradeables is due to permanent innovations in productivity between sectors lastly the paper constructs a cointegrating error correction model

the kinked demand curve a game theoretic approach in a simple model of duopoly firms price moves are modelled as an extensive form game where firms can respond to undercutting without delay when firms are not too dissimilar kinked demand strategies enforcing an arbitrary price may be nash equilibria however these strategies are dominated and perfect equilibrium is unique at the minimum optimal common price rather than implying price rigidity kinked demand strategies are a device for ensuring compliance with a collusive price leadership

non linear strategies in a linear quadratic differential game abstract we study non linear markov perfect equilibria in a two agent linear quadratic differential game in contrast to the literature owing to tsutsui and mino 1990 nonlinear strategies in dynamic duopolistic competition with sticky prices journal of economic theory 52 136 161 we do not associate endogenous subsets of the state space with candidate solutions instead we use the catching up optimality criterion to address the possibility of infinitely valued value functions applying sufficiency conditions for existence based on those in dockner et al 2000 differential games in economics and management science cambridge university press cambridge yields the familiar linear mpe and a condition under which a continuum of non linear mpes exists these include as their limit a previously unreported piecewise linear mpe the condition relaxes with increasing patience allowing more efficient steady states thus suggesting a folk theorem for differential games as the lower state and control bounds go to the non linear strategies are eliminated

purchasing power parities and exchange rates in latin america purchasing power parity ppp studies in recent years have revealed clearly that international comparisons of real income based on exchange rate conversions are very misleading indicators of standards of living there is no question that ppps provide the conceptually appropriate conversions of national accounts statistics from one currency to another and recent studies have shown that ppps deviate substantially from exchange rates 1 stimulated in part by the appearance of new bodies of data economists have recently renewed their interest in theoretical explanations of the long term or structural deviations of ppps from exchange rates the empirical tests of these models have been conducted almost entirely with data from the international comparisons project icp the purpose of the present paper is to test some of these models with a body of data collected by eciel for some latin american countries in 1970 2 this sample can also be combined with the phase 1 1970 sample of the icp to put this empirical study in context i shall first review briefly the theoretical and empirical literature on deviations of exchange rates from absolute ppps then i shall proceed to the empirical procedures and findings

the overvaluation of renminbi undervaluation we evaluate whether the renminbi rmb is misaligned relying upon conventional statistical methods of inference a framework built around the relationship between relative price and relative output levels is used we find that once sampling uncertainty and serial correlation are accounted for there is little statistical evidence that the rmb is undervalued even though the point estimates usually indicate economically significant misalignment the result is robust to various choices of country samples and sample periods as well as to the inclusion of control variables

can prices be insensitive to unit cost variations a game theoretic alternative to the kinked demand curve explanation abstract we provide a game theoretic alternative of the kinked demand curve explanation of rigid prices we analyze a duopoly where firms choose quantities and objectives we identify cases under which firms choose to maximize their revenue under these cases prices are insensitive to unit costs

real and nominal effective exchange rates in mena countries 1970 2004 the main purposes of this article are 3 fold first we construct measures of real and nominal effective exchange rates for 14 middle east and north african countries over the 1970 2004 period second we test the validity of the purchasing power parity ppp by applying the adf and kpss tests to the real effective exchange rates finally we employ the bounds testing approach to cointegration and error correction modelling to show that nominal devaluation leads to real devaluation in the short run as well as in the long run in many of the countries

are devaluations contractionary in mena countries currency depreciation reduces aggregate supply by raising cost of imported inputs and increases aggregate demand by increasing its net export component depending on the relative strength of the two effects depreciation could be expansionary or contractionary we employ the bounds testing approach to cointegration and error correction modelling to evaluate the effects of exchange rate depreciation on output growth both in the short and in the long run across a sample of mena countries exchange rate fluctuations are found to be important to fluctuations in real output growth in the short run anticipated exchange rate depreciation may induce long run expansionary or contractionary effects on output supply consistent with theory s predictions the expansionary effect of unanticipated depreciation is only transitory on output growth nonetheless unanticipated depreciation is found to have a contractionary effect on output growth in the long run via an increase in the cost of imported inputs

the determination of the real exchange rate the productivity approach abstract this paper explains deviations of exchange rates from purchasing power parity with the differences between countries of the relative growth rates of labor productivity between traded and nontraded sectors two cases are considered germany and japan versus their respective major trading partners the results show that the time series methodology yields a more favorable confirmation of the productivity differential model than the cross section regressions in the literature

strategic pigouvian taxation stock externalities and polluting non renewable resources este trabajo propone una extension del modelo de wirl y dockner 1995 disenado para analizar la interdependencia bilateral a largo plazo entre un cartel exportador de un recurso y una coalicion de paises importadores en primer lugar se incorporan los efectos agotamiento al analisis de las propiedades intertemporales de un impuesto pigouviano en segundo lugar se calculan los equilibrios feedback de stackelberg los resultados muestran que la dinamica del impuesto depende criticamente del nivel del dano medioambiental marginal ademas tambien demuestran que el impuesto definido por el equilibrio de nash perfecto de markov es un impuesto pigouviano neutral en el sentido que solo corrige la ineficiencia causada por la externalidad del stock sin embargo para el equilibrio feedback de stackelberg el impuesto es ventajoso para los paises importadores ya que la imposicion pigouviana estrategica reduce el poder de mercado del cartel

two cheers and a qualm for behavioral environmental economics behavioral economics can gain more in roads into environmental economics if we better understand why exchange institutions fail more effectively reduce health risks and environmental conflicts encourage more coordination and cooperation design better incentive systems more accurately estimate economic measures of value and promote more protection at less cost behavioral economics deserves two cheers for advancing ideas of context dependence and social preferences which we illustrate with two examples of recent research

do multiple nash equilibria in markov strategies mitigate the tragedy of the commons abstract in a seminal paper dockner and van long 1993 international pollution control cooperative versus non cooperative strategies journal of environmental economics and management 25 13 29 argue that nonlinear strategies allow to protect the commons compared with the linear and singular strategy this paper shows that the existence of multiple equilibria depends on preference characteristics and that multiple equilibria need not foster conservation in particular if the absolute elasticity of marginal utility is decreasing then multiple equilibria aggravate the tragedy of the commons compared with the singular or saddlepoint strategy

nontradable goods prices and per caita income an application to regional korean data pooled time series cross sectional regional data for korea over the period 1985 1991 are used to investigate points which emerged from the united nations international comparison project the results based on a regional analysis are opposite to those of the icp the prices of services do not increase more rapidly in fast growing than in slow growing regions this regional analysis provides constradictory evidence to the widely recognized stylized fact that the prices of nontradables increase with real per capital income by a larger margin than the prices of tradables increase

global warming with green and brown consumers in this paper i investigate how much green polluters mitigate the familiar dynamic tragedy of the commons global warming green consumers feel penalized pain for any consumption in excess of the social optimum this can arise for example from kant s categorical moral imperative interplays among and between green and brown consumers are investigated as differential games green preferences the heterogeneity of consumers and the irreversibility of emissions lead to discontinuous strategies associated with these are a number of non trivial and even puzzling features e g the possibility of another green paradox

trade with polluting nonrenewable resources abstract the paper considers nonrenewable resource extraction in a situation where the resource buyers have formed a government which applies emission taxation for slowing pollution accumulation and the sellers are competitive or a resource cartel the noncompetitive situation is studied as a stackelberg differential game which the cartel leads it is first assumed that extraction costs do not depend on the resource stock level and that the pollution stock does not decay in the time consistent and markov perfect equilibrium the sellers monopoly power vanishes asymptotically the sellers market power reduces the buyers emission tax at each point in time in the stackelberg equilibrium the emission tax is below the marginal present value of pollution damage if pollution decays and extraction costs depend on the resource stock level buyers have monopsony power and the ability of sellers to receive emission tax revenues is weakened when the rate of pollution decay is high the producer price falls below the pareto optimal level

incorporating daily market uncertainty data into a conventional short run dynamic model the case of the black market exchange rate in iran the effect of market uncertainty on a country s currency while widely recognized is either omitted from mainstream models or addressed using low frequency series which are typically subject to a