intrinsic bubbles the case of stock prices several puzzling aspects of the behavior of united states stock prices may be explained by the presence of a specific type of rational bubble that depends exclusively on aggregate dividends the authors call bubbles of this type intrinsic bubbles because they derive all of their variability from exogenous economic fundamentals and none from extraneous factors intrinsic bubbles provide a more plausible empirical account of deviations from present value pricing than do the traditional examples of rational bubbles their explanatory potential comes partly from their ability to generate persistent deviations that appear to be relatively stable over long periods copyright 1991 by american economic association

exchange rate fundamentals forecasting and speculation bayesian models in black markets summary although speculative activity is central to black markets for currency the out of sample performance of structural models in those settings is unknown we substantially update the literature on empirical determinants of black market rates and evaluate the out of sample performance of linear models and non parametric bayesian treed gaussian process btgp models against the random walk benchmark fundamentals based models outperform the benchmark in out of sample prediction accuracy and trading rule profitability measures given future values of fundamentals in simulated real time trading exercises however the btgp achieves superior realized profitability accuracy and market timing while linear models do no better than a random walk copyright 2013 john wiley sons ltd

have trading rule profits in the currency markets declined over time abstract previous studies have reported mixed results regarding the success of technical trading rules in currency markets abnormal returns were observed in many studies using data up to the mid 1980s while more recent studies generally report less success for technical trading rules this paper tests whether moving average trading rule profits have declined over the period from 1971 to 2000 if so previous profits may represent a temporary inefficiency that has since been eliminated in the currency markets the hypothesis is tested using 18 exchange rate series over a longer time period than in previous studies rules are optimized for successive 5 year in sample periods from 1971 to 1995 and tested over subsequent 5 year out of sample periods results show that risk adjusted trading rule profits have declined over time from an average of over 3 in the late 1970s and early 1980s to about zero in the 1990s thus market inefficiencies reported in previous studies may have been only temporary inefficiencies

the out of sample success of term structure models as exchange rate predictors a step beyond abstract a large literature suggests that standard exchange rate models cannot outperform a random walk forecast and that the forward rate is not an optimal predictor of the spot rate however there is evidence that the term structure of forward premia contains valuable information for forecasting future spot exchange rates and that exchange rate dynamics display nonlinearities this paper proposes a term structure forecasting model of exchange rates based on a regime switching vector equilibrium correction model which is novel in this context our model significantly outperforms both a random walk and to a lesser extent a linear term structure vector equilibrium correction model for four major dollar rates across a range of horizons

forecasting foreign exchange rates with an intrinsically nonlinear dynamic speed of adjustment model forecasting foreign exchange rates is an important but difficult process therefore it is important to use a superior forecasting model the paper takes up this criterion and proposes to describe and forecast foreign exchange rates by developing an intrinsically nonlinear model with variable and dynamic speeds of adjustment it is found that the speed of adjusting the random or expected to the equilibrium rate is very slow implying that fiscal policy statistically insignificat and monetary policy statistically significant may be ineffective to induce changes in the adjustment speed we also find that the nonlinear dynamic model improves forecasting performance implying that nonlinearities in the sense of functional forms are exploitable for improved point forecasting of foreign exchange rates

exchange rate target zones a survey of the literature this work selectively reviews the literature on exchange rate target zones and their theoretical and empirical methodologies and examines whether they can be used to clarify to what extent this type of exchange rate regime could contribute to greater exchange rate stability we discuss the main contributions of the first and second generations of exchange rate target zone models in an attempt to reconcile the poor empirical performance of the krugman model with the reality of exchange rate target zone regimes this line of research integrates target zones with alternative underlying economic models such as imperfect credibility intra marginal interventions and sticky price models it was thus possible to understand the correlations observed between the exchange rate its fundamentals determinants and the interest rate differential and to explain the fact that the statistical distribution of the exchange rate is hump shaped rather than u shaped this implies that the initial emphasis of target zone models on nonlinearities honeymoon effect smooth pasting and marginal interventions has vanished exchange rate target zones are better described as similar to managed floating regimes with intra marginal interventions with some marginal interventions when the exchange rate reaches the edges of the floating band

target zone models with stochastic realignments an econometric evaluation abstract this paper provides empirical support for the second generation of target zone models with stochastic devaluation risk i propose a simple non linear framework with a time varying probability of exchange rate realignment this model nests alternatives i with no devaluation risk ii with constant devaluation risk and iii the random walk i reject these three in favor of a stochastic realignment model where devaluation risk varies with economic fundamentals the model predicts 13 of 17 realignments for the franc and lira including an out of sample episode in august 1993

nonlinear nonparametric nonessential exchange rate estimation a wide variety of empirical exchange rate mo dels have been estimated over the years but despite the considerable energies that have been devoted to this work the economics profession has remarkably little to show for itself there is little evidence that conclusively links the bilateral exchange rates of typical oecd countries to fundamental macroeconomic determinants of exchange rates such as money output relative prices or interest differentials coefficient estimates are notoriously unstable and frequently mis signed compared with theoretical predictions exchange rate equations do not fit particularly well and forecast no better than the simplest naive alternatives recently a new class of exchange rate models was introduced by paul krugman 1988 these models provide a potential reason for the poor performance of traditional exchange rate models because they are nonlinear if the exchange rate actually depends in a nonlinear way on exogenous macroeconomic fundamentals linear exchange rate models may work poorly even though the exchange rate is closely linked to fundamentals in this paper we provide a brief sketch of some of this work as well as some preliminary evidence on the actual performance of these nonlinear models in our empirical analysis we use a nonparametric estimator that can handle a wide variety of nonlinear phenomena we examine fixed exchange rate regimes where nonlinearities should be quite easy to detect however we do not find strong empirical support for the hypothesis that the incorporation of nonlinear effects significantly improves models of exchange rate determination in section i we briefly review the theoretical literature on nonlinear target zone exchange rate models linking this work to the tests for intrinsic bubbles we draw heavily on recent papers by kenneth froot and maurice obstfeld 1989a b our methodology and data are discussed in section ii section iii contains new empirical tests for nonlinearities in exchange rate models

marginal pricing and supplement cost allocation in transmission open access the application of marginal costing to transmission pricing in open access schemes requires the collection of a supplement to finance the transmission systems the paper describes the application of marginal cost based pricing in the chilean power system and the difficulties faced in allocating the supplement among parties involved alternative methods for defining the allocation are formulated generalized generation and load distribution factors for cost allocation are formulated and implemented the methods are applied to allocate payments for transmission services provided by the transmission network and by a distribution company

understanding the macroeconomic impact of illiquidity shocks in the united states in this paper we empirically investigate the role of stock market illiquidity shocks stemming from amihud s illiquidity measure in explaining u s macroeconomic fluctuations from 1973 to 2018 we find that the impact of illiquidity shocks on economic activity is substantial and historical decomposition analysis shows that cumulative illiquidity shocks were an essential contributor to the prolonged economic slump of the great recession moreover our identified illiquidity shocks represent a distinct source of macroeconomic instability this suggests that illiquidity shocks measured by the stock price impacts may contain more information than other types of shocks in recent studies such as financial shocks and uncertainty shocks jel c32 e32

a more fair power flow based transmission cost allocation scheme considering maximum line loading for n 1 security this paper proposes an efficient approach to transmission fixed cost allocation in a pool based electricity market that takes into consideration n 1 secure annual system operation the optimal capacity of a transmission facility is defined as the maximum power flow the facility may face under a contingency situation for a certain system snapshot in this pricing approach for each time interval the largest optimal capacity of a transmission facility is calculated for all n 1 conditions considering a security constrained optimal power flow charges for each facility are based on the facility usage of the largest optimal capacity for all time intervals during one or more years network usage is determined by generalized distribution factors and three variations of the mw mile method for pricing counter flows are investigated for the proposed cost allocation method the three proposed pricing methods are applied to the ieee 24 bus reliability test system and compared with other pricing methods

ex ante transmission service pricing based on load flow patterns in this paper a new pattern based transmission service pricing technique is reported it is based on power flow tracing techniques that determine the power contributions of participants in line power flows throughout the whole network since producers supply a consumer through the transmission paths considering kirchoff s laws it is obvious that the actual paths are not strongly correlated with the contractual paths this means that instead of financial paths only the actual power flow paths should be considered when calculating the transmission service price power flow data from previous years can be utilized for this purpose several power systems and different operating states that realistically represent actual system operating conditions were statistically analyzed the analysis showed a constant pattern of power flow shares in lines to consumers which can be utilized in ex ante transmission pricing for a network since the new approach reflects the characteristics of transaction and nontransaction based methods it combines their benefits too

forecasting and combining competing models of exchange rate determination this article investigates the out of sample forecast performance of a set of competing models of exchange rate determination we compare standard linear models with models that characterize the relationship between exchange rate and the underlying fundamentals by nonlinear dynamics linear models tend to outperform at short forecast horizons especially when deviations from long term equilibrium are small in contrast nonlinear models with more elaborate mean reverting components dominate at longer horizons especially when deviations from long term equilibrium are large the results also suggest that combining different forecasting procedures generally produces more accurate forecasts than can be attained from a single model

the impact of exchange rate volatility on international trade reduced form estimates using the garch in mean model abstract in this paper we use a multivariate garch in mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices the model imposes rationality on perceived exchange rate volatility unlike conventional two step strategies tests are performed for five industrialized countries over the post bretton woods era we find that the garch conditional variance has a statistically significant impact on the reduced form equations for all countries for most of the countries the magnitude of the effect is stronger for export prices than quantities in addition the estimated magnitude of the impact of volatility on exports is not robust to using the conventional estimation strategy jel f41 f31

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

the uncertainty multiplier and business cycles abstract i study a business cycle model where agents learn about the fundamentals by accumulating capital during recessions agents invest less and this generates noisier estimates of macroeconomic conditions and an increase in uncertainty the endogenous increase in aggregate uncertainty further reduces economic activity and thus gives rise to a multiplier effect that amplifies aggregate fluctuations to discipline learning dynamics i parametrize the model so that it matches not only standard business cycle moments but also survey data on macroeconomic forecasts i find that the uncertainty multiplier amplifies output standard deviation by 16

modelling the ff mm rate by threshold cointegration analysis this paper investigates a sticky price model of exchange rate determination extension of krugman s target zone model with price inertia applied to the french franc a novel theoretical argument is considered threshold cointegration such that the long run relationship between the parity and its fundamentals is dormant within a certain range of disequilibria but is restored when the system crosses the boundaries over the period 1987 1993 nonlinearities in the ff dm rate consistent with the credibility of this target zone were detected by pointing out a band reversion mechanism a shock persistence analysis which highlights a nonlinear reversion of the exchange rate deviation is also implemented

macroeconomic fluctuations and the allocation of time what are the fundamental driving forces of macroeconomic fluctuations in particular why do people spend more time working in booms and less in recessions these are basic questions of macroeconomics recent thinking has emphasized technology shifts preference shifts and changes in government purchases as likely driving forces it is useful to distinguish atemporal and intertemporal effects of the driving forces under standard assumptions the technology shift has no effect through atemporal channels because income and substitution effects exactly offset a straightforward decomposition of movements of employment attributes most of them to the atemporal effects of preference shifts

an interpretation of recent research on exchange rate target zones how do exchange rate bands work compared to completely fixed rates between realignments or more precisely what are the dynamics of exchange rates interest rates and central bank interventions within exchange rate bands does the difference between bands and completely fixed exchange rates matter and if so which of the two arrangements is best or more precisely what are the tradeoffs that determine the optimal bandwidth this article will present an interpretation of some selected recent theoretical and empirical research on exchange rate target zones with emphasis on main ideas and results and without technical detail

congestion driven transmission expansion in competitive power markets a framework for transmission planning in a deregulated power market environment is discussed the level of congestion in the network is utilized as the driving signal for the need of network expansion a compromise between the congestion cost and the investment cost is used to determine the optimal expansion scheme the long term network expansion problem is formed as the decoupled combination of 1 the master problem minimization of investment costs subject to investment constraints and the benders cuts generated by the operational problem power pool and 2 the operational problem whose solution provides congestion details and associated multipliers a proper power pool model is developed and solved for congestion cost congestion revenue and transmission shadow prices linear programming is utilized to solve the investment subproblem while the quadratic programming technique has been used to solve the operational problem the algorithm has been developed for the complete planning process which provides the expansion schemes for the planning horizon the technique has been applied to illustrate the network planning study for a modified ieee 24 bus test system

balanced growth despite uzawa i use an event study approach to present novel evidence on the impact of trade liberalization on firm level profits using the uncertainty surrounding the negotiation and ratification process of the canada united states free trade agreement of 1989 cusfta i estimate the impact of different types of tariff reductions on the abnormal returns of canadian manufacturing firms i find that canadian import tariff reductions lead to lower and reductions in canadian intermediate input tariffs to higher abnormal returns the impact of u s tariff reductions is less clear and depends on the size of the affected firms i also calculate the total profit increase implied by my estimates overall cusfta increased per period profits by around 1 2 this was mainly driven by intermediate input tariff reductions which more than offset the negative effect of canadian import tariff reductions

do euro exchange rates follow a martingale some out of sample evidence abstract traditional autocorrelation and variance ratio tests are based on serial uncorrelatedness rather than martingale difference as such they do not capture potential nonlinearity in mean which could lead to misleading inferences in favor of the martingale hypothesis this paper employs various parametric and nonparametric nonlinear models as well as several model comparison criteria to examine the potential martingale behavior of euro exchange rates in the context of out of sample forecasts the overall evidence indicates that while martingale behavior cannot be rejected for euro exchange rates with major currencies such as the japanese yen british pound and us dollar there is nonlinear predictability in terms of economic criteria with respect to several smaller currencies

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

testing for bubbles in exchange markets a case of sparkling rates this paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles when a new econometric methodology for detecting asset market bubbles is used the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar deutsche mark and dollar pound ratesusing monthly data over the period 1973 82 additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care

multivariate nearest neighbour forecasts of ems exchange rates exchange rate modelling has been a persistent puzzle for international economists forecasts from popular models for the exchange rate generally fail to improve upon the random walk out of sample while a multivariate nonparametric approach provides useful information about exchange rates the model produces forecasts superior to the random walk for only one of the three ems currencies examined using a statistic developed in mizrach 1991 i find that the forecast improvement a 4 5 percent reduction in mean squared error for the lira in daily returns is not statistically significant a cross validation exercise suggests that the improvement is also not robust

sticky wages and sectoral labor comovement abstract a defining feature of business cycles is the comovement of inputs at the sectoral level with aggregate activity standard models cannot account for this phenomenon this paper develops and estimates a two sector dynamic general equilibrium model that can account for this key regularity my model incorporates three shocks to the economy monetary policy shocks neutral technology shocks and embodied technology shocks in the capital producing sector the estimated model is able to account for the response of the u s economy to all three shocks using this model i argue that the key friction underlying sectoral comovement is rigidity in nominal wages

an empirical reassessment of target zone nonlinearities abstract in this paper we investigate the presence of target zone nonlinearities in the pound sterling german mark exchange rate for the period of the uk european exchange rate mechanism erm membership using data with frequency of every 2 days tests against general nonlinear specifications as well as specifications consistent with a stochastic devaluation risk model of exchange rate target zones are carried out using recursive techniques in addition the significance of nonlinear effects is analysed within a recursive bayesian framework we find evidence of target zone nonlinearities in the whole sample but the recursive analysis yields support for the presence of such nonlinearities only in specific subsamples our results imply that the reduction in the uk inflation rate was most likely a consequence of contractionary policies rather than of the expectational effects associated with the target zone

using non linear methods to search for risk premia in currency futures abstract this paper uses currency futures prices to test the joint null hypotheses of rational expectations and absence of a time varying risk premium in the foreign exchange market we find no linear predictability in the logarithm of futures price changes either using its own past or past interest differentials also we establish that there is no non linear predictability in log price changes conditioning on its own past or past interest rate differentials thus if a time varying risk premium exists in currency futures market it is not related to its own past or past interest rate differentials

identifying the role of risk shocks in the business cycle using stock price data i introduction the finance literature on the forecastibility of stock returns has concluded that stock market movements are by and large not because of changes in the expected future cash flow of firms but are primarily because of changes in the risk premium that is how the expected cash flows are discounted by stock market participants cochrane 2011 1 these changes in risk premia also have important implications for real variables in the economy especially for consumption and investment an increase in the risk premium prompts households to reduce current consumption as they start to discount expected future income more heavily more importantly changes in the required return on equity alter the cost of capital of corporations when they finance new investment for firms that rely on external debt to finance marginal investment a lower stock price translates into lower net worth and therefore a higher cost of borrowing bernanke gertler and gilchrist 1999 similarly firms that rely on new equity issues are able to raise less funds from each new share when their stock price is lower even for firms that finance investment exclusively through internal funds i e retained earnings plus depreciation allowance the required return on existing shares reveals the opportunity cost of internally financed investment tobin 1969 tobin and brainard 1977 this is because at least in principle these funds can be returned to existing shareholders as dividends and new funds can then be raised from the markets through new equity shares for which investors would demand a risk premium figure 1 omitted in the aggregate u s corporations are predominantly financed through equity the dotted line in figure 1 plots the credit market liabilities of u s non financial corporations as a percent of the sum of equity and credit market liabilities in their balance sheets 2 by this measure debt financing accounts for about a third of total financing averaged over the whole sample and equity financing accounts for about two thirds the solid line in figure 1 provides an alternative measure which takes into account all financial liabilities including items such as trade payables but nets out financial assets to obtain a measure of net debt mcgrattan and prescott 2005 now debt financing accounts for only 15 of total financing in the post war period and its importance has declined in the last two decades note that both of these series are stock measures as opposed to flow measures that is they refer to financing of all past investments and do not necessarily reflect how corporations are financing investment at the margin these measures can also be biased against debt financing because most debt items are recorded on a book value basis in the flow of funds but equity is recorded on a market value basis to overcome these caveats i consider the flow components of sources of funds i e internal funds net new equity and net new debt as a share of corporate tangible investment in figure 2 several patterns emerge first the ratio of internal funds to gross capital expenditures has been close to 1 throughout the post war period in other words at least in the aggregate u s corporate investment has been by and large financed internally second new equity issuance has not been an important source of financing in fact net new stock issues have been mostly negative in the latter part of the sample this mainly reflects the preference of corporations to distribute resources to shareholders through stock buybacks rather than ordinary dividend payments because of the preferential tax treatment of long term capital gains third net new debt has contributed to about a third of aggregate financing assuming that the discrepancy in the flow account is distributed proportionally to each financing component as internal funds and net new stock issues are fairly reliable data series we can reasonably lump the rather large discrepancy item in the ffa data with net debt

imperfect credibility and risk premia in the european monetary system the paper deals with the estiamation of models for the expected rate of depreciation within the currency bands of the french franc and the italian lira against the deutshmark both unconditional and conditional upon no realignment as well as the estimastion of models for risk premia using these estimates estimates are constructed for the expected rate of depreciation the expected rate of realignment and the expected rate of devaluation of these exchange rates during their ems period by appropriate adjustment of interest rate differentials it is found that these adjustments are of non trivial magnitude

a univariate analysis of ems exchange rates using a target zone model summary the models in the literature on exchange rate target zones imply a non linear time series model for the exchange rate we show how the parameters of such models can be estimated and develop maximum likelihood and method of simulated moments estimators for the target zone model of krugman 1991 the maximum likelihood estimator is based on a computationally attractive approximation to the exact predictive density of the continuous time model monte carlo experiments are used to assess the properties of this estimator in the empirical part we estimate the model with data on recent ems exchange rates we find that the krugman 1991 target zone model is not able to explain the full observed kurtosis and conditional heteroscedasticity of the exchange rate returns

stochastic trends and jumps in ems exchange rates abstract in this paper we study the statistical properties of ems exchange rate returns our findings show that jumps time varying parameters and conditional leptokurtosis are pertinent features in the empirical distributions of ems exchange rate returns allowance for fat tails however tends to reduce the measured frequency of jumps in the distributions to more realistic proportions most successful in capturing the relevant features of ems exchange rate returns is a combined jump garch model with conditionally t distributed innovations jel f31

increasing returns and unsynchronized wage adjustment in sunspot models of the business cycle a challenge to models of equilibrium indeterminacy based on increasing returns is that required increasing returns for generating indeterminacy can be implausibly large and rise quickly with the relative risk aversion in labor we show that unsynchronized wage adjustment via a relative wage effect can both lower the required degree of increasing returns for indeterminacy to a plausible level and make it invariant to the relative risk aversion in labor consequently indeterminacy and sunspot driven fluctuations can emerge for plausible increasing returns regardless of the relative risk aversion in labor our model generates reasonable dynamics in terms of matching the business cycle and sunspot shocks become more important with labor market friction

exchange rates and fundamental variables a semi parametric analysis of binary choice this study is motivated by the dearth of models that provide good out of sample fit for exchange rates that is current models of exchange rate behaviour are poor predictors of subsequent currency movements an attempt is made to determine if the relationship between exchange rates and fundamental variables can help explain the more extreme exchange rate movements distributional switches models are developed that relate fundamental economic variables to the resulting estimates based on the mixture of normal probability distributions parametric estimation procedures logit and probit are compared with a semi parametric technique maximum score estimation mscore which is relatively untested in the field of finance the fundamental variables of these models include information on trade balances money supply changes interest rate changes real economic growth relative inflation rates and changes in stock market indexes classification results favour mscore implications of results and improvements

stochastic devaluation risk and the empirical fit of target zone models in the model of this paper an exchange rate fluctuates between given boundaries for random lengths of time and jumps discretely when devaluation occur we provide explicit solutions for the stochastic processes followed by the exchange rate and by the expected rate of depreciation when the likelihood and the size of devaluations vary stochastically over time the model produces realistic patterns of covariation between exchange rates and interest rate differentials and provides interesting interpretations of available empirical evidence we also specify how to infer devaluation risk from target zone data

marginal pricing of transmission services a comparative analysis of network cost allocation methods a strict marginal network pricing policy is not able to generate enough revenues to recover the cost of the primary transmission service other related network services are ignored here this cost recovery problem requires the stipulation of a complementary charge which completes the network marginal revenues this paper evaluates numerically and qualitatively three different allocation methods of the complementary charge marginal participation factors mean participation factors and benefit factors the evaluation has been applied to the spanish electrical system model

testing target zone models using efficient method of moments the objectives of this article are threefold 1 to test target zone models using more efficient and direct econometric methodology than previous research 2 to identify an implicit band if it exists from observed data and to test target zone models based on the estimated implicit band rather than the stated official band and 3 to examine whether the exchange rate can be modeled as a managed float system with a central parity that lacks a band we find strong evidence that a model with intramarginal intervention and a narrower implicit unofficial band can describe the dynamics of the french franc deutsche mark exchange rate from january 1 1987 july 30 1993

linear non linear and essential foreign exchange rate prediction with simple technical trading rules abstract this paper investigates the predictability of spot foreign exchange rate returns from past buy sell signals of the simple technical trading rules by using the nearest neighbors and the feedforward network regressions the optimal choices for nearest neighbors hidden units in a feedforward network and the training set are determined by the cross validation method which minimizes the mean square error although this method is computationally expensive the results indicate that it has the advantage of avoiding overfitting in noisy environments and indicate that simple technical rules provide significant forecast improvements for the current returns over the random walk model

intervention policy and mean reversion in exchange rate target zones the swedish the intervention policy of the swedish central bank is studied using daily intervention data for the late 1 980s in contrast to the first generation of target zone models we find that the interventions occur all over the exchange rate band and almost every day based on this evidence we estimate an exchange rate target zone model with intra marginal interventions the results go a long way towards explaining the well established hump shaped exchange rate distribution and lack of non linearities

a structural transmission cost allocation scheme based on capacity usage identification in liberalized electricity markets it is essential and of great importance to develop a fair transmission cost allocation scheme that is able to reflect the extent of use of the transmission facilities as much as possible in this paper the transmission capacity is divided into four components capacity used in normal conditions cn capacity reserved for contingencies cc capacity reserved for future use cf and invalid capacity ic cn and cc are determined by the power flow in the normal and contingency conditions of the system operation snapshot respectively the cf is determined by the maximum power flow in contingency conditions over a certain period say yearly the cost corresponding to ic would not be allocated to network users based on capacity usage identification differential cost allocation methods are designed according to the functions of the transmission capacity the cost corresponding to the capacity usage of the transmission asset under normal and contingency conditions is allocated separately case studies in a 3 bus system and the ieee 30 bus system validate the good performance of the proposed structural transmission cost allocation scheme

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

quantitative modelling of the eur chf exchange rate during the target zone regime of september 2011 to january 2015 krugman 1991 s target zone model for exchange rate dynamics has become the reference of a large part of this literature despite its simplicity and elegance empirical evidence has been lacking not least because it is difficult to capture the predicted non linear relationship between the observable exchange rate and the non observable fundamental value this is why we propose a different approach by inverting locally the relation between exchange rate and fundamental value we derive analytical expressions for the conditional volatility and the probability density as a function of the exchange rate this allows us to examine krugman s prediction directly from historical data and furthermore enables us to test the smooth pasting condition which is intimately related to the no arbitrage condition concretely we study the performance of the euro swiss franc exchange rate in the extraordinary period from september 6 2011 to january 15 2015 when the swiss national bank enforced a minimum exchange rate of 1 20 swiss francs per euro we show that the data are well explained by the theory and conclude that krugman s target zone model holds after all but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone

learning and shifts in long run productivity growth abstract an extensive literature has analyzed the macroeconomic effects of shocks to the level of aggregate productivity however there has been little corresponding research on sustained shifts in the growth rate of productivity in this paper we examine the effects of shocks to productivity growth in a dynamic general equilibrium model where agents do not directly observe whether shocks are transitory or persistent we show that an estimated kalman filter model using real time data describes economists long run productivity growth forecasts in the united states extremely well and that filtering has profound implications for the macroeconomic effects of shifts in productivity growth

comparing shocks and frictions in us and euro area business cycles a bayesian dsge approach this paper estimates a dsge model with many types of shocks and frictions for both the us and the euro area economy over a common sample period 1974 2002 the structural estimation methodology allows us to investigate whether differences in business cycle behaviour are due to differences in the type of shocks that affect the two economies differences in the propagation mechanism of those shocks or differences in the way the central bank responds to those economic developments our main conclusion is that each of these characteristics is remarkably similar across both currency areas copyright 2005 john wiley sons ltd

news and financial intermediation in aggregate fluctuations an important disconnect in the news view of fluctuations is the lack of consistent evidence suggestive of significant macroeconomic effects of news shocks findings from estimated dsge models that in theory allow news shocks to matter quantitatively suggest that they do not this disconnect can be resolved once we augment a dsge model with a financial channel that provides amplification to news shocks our results suggest that news shocks to the future growth prospects of the economy are significant drivers of u s fluctuations explaining as much as 50 and 37 of the variance in hours worked and output respectively in cyclical frequencies

ems exchange rate bands a monte carlo investigation of three target zone models abstract a monte carlo analysis is used to compare three target zone models in reproducing some stylized facts of weekly deutsche mark exchange rates in the european monetary system for the period january 1987 august 1992 the models are the standard target zone model a model of infracum intramarginal interventions and a model of unfulfilled realignment expectations compared with the corresponding dollar rates returns on deutsche mark rates exhibit much more non normality which can be generated endogenously by the latter two models and more conditional heteroskedasticity which can be produced simultaneously by the infra cum intramarginal interventions model

commodity price shocks and the business cycle structural evidence for the u s this paper evaluates the relative importance of commodity price shocks in the u s business cycle therefore we extend the standard set of business cycle shocks to include unexpected changes in commodity prices the resulting svar shows that commodity price shocks are a very important driving force of macroeconomic fluctuations second only to investment specific technology shocks particularly with respect to inflation neutral technology shocks and monetary policy shocks on the other hand seem less relevant at business cycle frequencies neutral technology shocks rather play an important role at low frequencies

chaotic behaviour in exchange rate series first results for the peseta u s dollar case abstract we test for the presence of deterministic chaos on daily data for the spot and forward spanish peseta u s dollar exchange rates the finding of a chaotic behaviour in the series allows us to make short run predictions which in general outperform those from the random walk model

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

aggregate fluctuations and the industry structure of the us economy abstract in a two sector economy changes in intermediate input trade as reflected in cost share fluctuations are key to determining the amplification properties of investment specific and neutral shocks i document that the cost shares of intermediate inputs produced by the investment sector correlate positively with gdp whereas those of inputs produced by the consumption sector correlate negatively with gdp the two sector model of greenwood et al 1988 is extended to allow for trade of intermediate goods and to show that the documented correlations discipline heterogeneous elasticities of substitution in intermediate inputs across sectors shock amplification that is the effect of a sectorial shock on aggregate value added depends on the degree of heterogeneity in these elasticities of substitution for a calibrated economy to that of the united states i find that shock amplification is stronger than in a unitary elasticity economy it is also stronger than in an economy with a common non unitary elasticity that is either inferred from data via reduced form estimates or calibrated to match the same targets as our benchmark economy

exchange rate discounting abstract economists often describe nominal exchange rates as forward looking so that they reflect discounted expected future fundamentals this study applies a method for identifying the discount rate involved without knowing or measuring fundamentals identification arises from assumptions on the stochastic process followed by fundamentals combined with non linearity arising from expected future regime changes two applications yield evidence against the present value model in the form of discount rates which are negative and statistically significant

the dynamic effects of neutral and investment specific technology shocks the neoclassical growth model is used to identify the short run effects of neutral technology shocks which affect the production of all goods homogeneously and investment specific shocks which affect only investment goods the real equipment price crucial for identifying the investment shocks experiences an abrupt increase in its average rate of decline in 1982 so the analysis is based on a split sample on the basis of the preferred specification the two technology shocks account for 73 percent of hours and 44 percent of output s business cycle variation before 1982 and 38 percent and 80 percent afterward the shocks also account for more than 40 percent of hours and 58 percent of output s forecast errors over a three to eight year horizon in both samples the majority of these effects are driven by the investment shocks

skill biased technological change and the business cycle over the past two decades technological progress in the united states has been biased towards skilled labor what does this imply for business cycles we construct a quarterly skill premium from the cps and use it to identify skill biased technology shocks in a var with long run restrictions hours fall in response to skill biased technology shocks indicating that at least part of the technology induced fall in total hours is due to a compositional shift in labor demand investment specific technology shocks reduce the skill premium indicating that capital and skill are not complementary in aggregate production

target zones and forward rates in a model with repeated realignments abstract this paper studies the term structure of forward premia in a target zone with imperfect credibility the relationship between spot and forward exchange rates which reflects the possibility of realignments of the band is studied for various intervention policies with different degrees of credibility forward market data is used to estimate the implied credibility of the french german target zone during the ems parameter estimates accord with the experience of the ff dm exchange rate during the 1980s although spot exchange rates display little sensitivity to anticipated intervention forward data can be used to detect the effects of intervention on exchange rate dynamics