the effect of sporting success and management failure on attendance demand in the bundesliga a revealed and stated preference travel cost approach abstractthis study examines the private consumption benefits of sports attendance using revealed and stated preference data from 28 football bundesliga teams across three divisions survey respondents were presented with positive sporting success and negative management failure scenarios and asked for the number of game trips if each scenario occurred the results of a pooled random effects poisson model show that travel costs and ticket price have a significant negative effect on the number of home game trips the weighted consumer surplus per game trip including travel costs and ticket prices is 345 consumer surplus per game trip was found to change by 41 first division and 98 second and third division if the positive scenario occurred and by 39 if the negative scenario occurred

a note on unionization and the elasticity of substitution if unions force employers off their demand curves the measured elasticity of substitutio n should be lower where unionization is stronger estimates based on pooled data for twenty two digit sic canadian manufacturing industrie s over the period 1971 81 support this proposition point estimates a re that the elasticity is 1 98 in the absence of unions 1 04 if empl oyees are fifty percent unionized and only 0 10 if employees are one hundred percent unionized however the results are not very robust to specification changes

a two country natrex model for the euro dollar this paper develops a natrex natural real exchange rate model for two large economies the eurozone and the united states the natrex approach has already been adopted to explain the medium long term dynamics of the real exchange rate in a number of industrial countries so far however it has been applied to a one country framework where the rest of the world is treated as given in this paper we build a natrex model where the two economies are fully specified and allowed to interact our theoretical model offers the basis for empirical estimation of the euro dollar equilibrium exchange rate that will be carried out in future research jel classification f31 f36 f47

quantifying the uncertainty about the half life of deviations from ppp we propose a bayesian framework in which the uncertainty about the half life of deviations from purchasing power parity can be quantified based on the responses to a survey study we propose a prior probability distribution for the half life under the recent float intended to capture widely held views among economists we derive the posterior probability distribution of the half life under this consensus prior and confirm the presence of substantial uncertainty about the half life we provide for the first time a comprehensive formal evaluation of several nonnested hypotheses of economic interest including rogoff s 1996 claim that the half life is contained in the range of 3 to 5 years we find that no hypothesis receives strong support from the data copyright 2002 john wiley sons ltd

skilled labor unskilled labor and economic growth abstract we study a growth model in which workers with different skill levels are imperfect substitutes we show that economies with high substitutability between skilled and unskilled workers have high levels of capital output and a high proportion of skilled workers

factor substitution average firm size and economic growth this paper extends the lucas 1978 the bell journal of economics 9 2 508 523 analysis of firm size by taking into account a normalised aggregate ces production function in a general equilibrium framework it is proved that there is an inverse relation between the elasticity of substitution and average firm size if interpreted together with the fact that richer countries are characterised by a higher elasticity of substitution this result can explain why the recent literature finds a positive association between the importance of smes in an economy and its stage of development but seems to fail in finding causality between the two both have a common origin a high value of the elasticity of substitution this paper also provides a first empirical test of the theory proposed using cross country data from both developed and developing countries

modelling and forecasting exchange rates with a bayesian time varying coefficient model this paper employs a multivariate bayesian time varying coefficients tvc approach to model and forecast exchange rate data it is shown that if used as a data generating mechanism a tvc model induces nonlinearities in the conditional moments and leptokurtosis in the unconditional distribution of the series it is also shown that leptokurtic behavior disappears under time aggregation as a forecasting device a bayesian tvc model improves over a random walk model the improvements are robust to several changes in the forecasting environment

taylor rules and the euro this paper uses real time data to analyze whether the variables that normally enter central banks interest ratesetting rules which we call taylor rule fundamentals can provide evidence of out of sample predictability for the united states dollar euro exchange rate from the inception of the euro in 1999 to the end of 2007 the major result of the paper is that the null hypothesis of no predictability can be rejected against an alternative hypothesis of predictability with taylor rule fundamentals for a wide variety of specifications that include inflation and a measure of real economic activity in the forecasting regression we also present less formal evidence that with real time data the taylor rule provides a better description of ecb than of fed policy during this period while the evidence of predictability is only found for specifications that do not include the real exchange rate in the forecasting regression the results are robust to whether or not the coefficients on inflation and the real economic activity measure are constrained to be the same for the u s and the euro area and to whether or not there is interest rate smoothing the evidence of predictability is stronger for realtime than for revised data about the same with inflation forecasts as with inflation rates and weakens if output gap growth is included in the forecasting regression bad news about inflation and good news about real economic activity both lead to out of sample predictability through forecasted exchange rate appreciation

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

ces production functions and economic growth we examine inconsistencies and controversies related to the use of ces production functions in growth models first we show that not all variants of ces functions commonly used are consistently specified second using a simple growth model we find that a higher elasticity of substitution leads to a higher steady state and makes the emergence of permanent growth more probable it is also pointed out that the effect of a higher elasticity of substitution on the speed of convergence depends on the relative scarcity of the factors of production finally we discuss possible explanations of variations in the elasticity of substitution jel classification o41 o11

oil prices and the rise and fall of the us real exchange rate abstract questions of the relative importance of real vs monetary shocks in explaining exchange rate movements still have no widely accepted answer despite their importance both for the research agenda and for policy questions we examine this issue using a variety of empirical techniques for the us effective exchange rate we find that a stable link exists between oil price shocks and the us real effective exchange rate over the post bretton woods period the results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks and that energy prices may have important implications for future work on exchange rate behavior

testing the monetary model of exchange rate determination new evidence from a century of data abstract we test the long run monetary model of exchange rate determination for a collection of 14 industrialized countries using data spanning the late nineteenth or early twentieth century to the late twentieth century interestingly we find support for a simple form of the long run monetary model in over half of the countries we consider for these countries we estimate vector error correction models to investigate the adjustment process to the long run monetary equilibrium in the spirit of meese and rogoff journal of international economics 14 1983 3 24 we also compare nominal exchange rate forecasts based on monetary fundamentals to those based on a naive random walk model

confidence intervals for half life deviations from purchasing power parity existing point estimates of half life deviations from purchasing power parity ppp around 3 5 years suggest that the speed of convergence is extremely slow this article assesses the degree of uncertainty around these point estimates by using local to unity asymptotic theory to construct confidence intervals that are robust to high persistence in small samples the empirical evidence suggests that the lower bound of the confidence interval is between four and eight quarters for most currencies which is not inconsistent with traditional price stickiness explanations however the upper bounds are infinity for all currencies so we cannot provide conclusive evidence in favor of ppp either

ces technology and business cycle fluctuations we contribute to an emerging literature that brings the constant elasticity of substitution ces specification of the production function into the analysis of business cycle fluctuations using us data we estimate by bayesian maximum likelihood methods a standard medium sized dsge model with a ces rather than cobb douglas cd technology we estimate a elasticity of substitution between capital and labour well below unity at 0 15 0 18 in a marginal likelihood race ces decisively beats the cd production and this is matched by its ability to fit the data better in terms of second moments we show that this result is mainly driven by the implied fluctuations of factor shares under the ces specification the ces model performance is further improved when the estimation is carried out under an imperfect information assumption hence the main message for dsge models is that we should dismiss once and for all the use of cd for business cycle analysis

a dual elasticity of substitution production function with an application to cross country inequality abstract this note first develops a production function with two elasticities of substitution between two input factors second the note gives an application regarding the unequal development of relative capital intensities and productivities across countries and tries to quantify it empirically

new measures of factor productivity in australia a sato approach this article derives new results of the elasticity of substitution es between capital and labour and factor productivity for australia an economy which experienced major economic reform that substantially increased the flexibility of its labour product and capital markets throughout the 1980s and 1990s it employs a sato production function specification which has unique properties that enable the estimation of capital labour substitution elasticity and changing marginal productivities through time these estimates reveal that the substitution elasticity and labour productivity in australia rose significantly from the mid 1960s and remained elevated during the economic reform period a novel contribution of this article is the depiction of australia s production isoquants to convey how combining labour and capital to produce real gross domestic product gdp has changed over recent decades

the long term success of the neoclassical growth model in this paper we seek to re establish the link between the constant elasticity of substitution ces production function and neoclassical solow growth theory we do so in three dimensions first we review the increasing importance of the ces technology in modern dynamic macroeconomics in expanding not only theory but also in addressing important policy questions second we aue that the importance of the ces function in growth theory is intimately linked to normalization finally we examine the data congruence between ces functions and recent growth patterns in the usa and the euro area economies where we apply a supply side system incorporating a ces function with factor augmenting and time varying technical progress

capital labor substitution and equilibrium indeterminacy empirical evidence indicates that the elasticity of capital labor substitution for the aggregate u s economy is below unity in contrast the existing indeterminacy literature has mostly restricted attention to a cobb douglas production function which imposes a substitution elasticity exactly equal to unity this paper examines the quantitative relationship between capital labor substitution and the conditions needed for equilibrium indeterminacy and belief driven fluctuations in a one sector growth model with variable capital utilization the substitution elasticity has little quantitative impact on the minimum degree of increasing returns needed for indeterminacy however when capital utilization is constant a below unity substitution elasticity sharply raises the minimum degree of increasing returns in this version of the model lower substitution elasticities impose a higher adjustment cost on labor hours that cannot be mitigated by shifts in the capital utilization rate overall our results show that empirically plausible departures from the cobb douglas specification can make indeterminacy more difficult to achieve

the 1956 contribution to economic growth theory by robert solow a major landmark and some of its undiscovered riches the famous 1956 contribution by robert solow was always thought to be central to positive or descriptive economic growth theory we show that it is also at the core of optimal growth because the fisher equation of competitive equilibrium is nothing short of an euler equation it corresponds to the maximization of the sum of discounted consumption flows from this equation an optimal savings rate results with reasonable very reachable values we also show the importance of the elasticity of substitution there is a threshold value of this parameter leading to a permanent growth rate of income per person that is above the labour augmenting rate of technical progress and that rate does depend upon the investment saving ratio

shocking stuff technology hours and factor substitution the response of hours to technology shocks is a key controversy in macroeconomics we show that differences between rbc and nk models hinge on highly restrictive views of technology we introduce ces production technologies and demonstrate that the response of hours depends on the factor augmenting nature of shocks and the capital labor substitution elasticity in both models we develop analytical expressions to establish the thresholds determining its sign this opens new margins for shock identification combining theory and var evidence we discuss how our models provide new robust restrictions for empirical work especially using the labor income share

irving fisher and the fisher relation setting the record straight william j crowder 1997 1124 1127 states that the fisher hypothesis represents one of the oldest and most basic equilibrium relationships in financial economics the fisher equation encapsulates the simple relationship hypothesized to exist between nominal interest rates and expected inflation first delineated by irving fisher 1930 whose name has been associated with the equation ever since crowder s first sentence is indisputable the other sentence quoted presents a belief that seems almost universal in the literature on the fisher relation as distinct from the history of economic thought literature about irving fisher it credits fisher with one of the few innovations in the area for which he does not deserve and did not claim credit neglects what he did contribute on related topics and views the theory of interest 1930 as his first presentation of the relationship a third of a century later than his classic reformulation of the relation the celebrated equation which appears in fisher s american economic association monograph appreciation and interest 1896 and in an appendix to his the rate of interest 1907 does not appear in the theory of interest where the treatment of the relation in chapters 2 and 19 is verbal supplemented with diagrams but no equation in appreciation and interest 1896 fisher drew attention to statements by william douglass john stuart mill alfred marshall jacob de haas and john bates clark of how expected inflation or deflation affects nominal interest and he made no claim to originality on the point writing at the end of a thirty year period of declining prices fisher referred in his title to appreciation of the purchasing power of money rather than to depreciation fisher was the first to write down the relation as an equation but not the first to articulate the relation while endorsing

substitution between clean and dirty energy inputs a macroeconomic perspective in macroeconomic models the elasticity of substitution between clean and dirty energy inputs within the energy aggregate is a central parameter in assessing the necessary conditions for long run green growth using new sectoral data in a panel of 26 countries we formulate specifications of nested constant elasticity of substitution production functions that allow estimating this parameter for the first time we present evidence that it significantly exceeds unity a favorable condition for promoting green growth

monitoring and forecasting currency crises can we improve forecasts of currency crises by using a large number of predictors which economic variables are most important to predict currency crises this paper evaluates the performance of traditional leading indicators and a new diffusion index di method as early warning systems to monitor the risk and forecast the likelihood of the recent currency crises in east asia we find that relative to traditional leading indicators such as money multipliers terms of trade etc the diffusion index performs quite well in real time with a higher probability of providing correct signals we also find that the economic variables that help in forecasting future crises are output growth the balance of payments interest rates and money growth and that their relative importance changes dramatically around the time of the crises

multivariate density forecast evaluation and calibration in financial risk management high frequency returns on foreign exchange we provide a framework for evaluating and improving multivariate density forecasts among other things the multivariate framework lets us evaluate the adequacy of density forecasts involving cross variable interactions such as time varying conditional correlations we also provide conditions under which a technique of density forecast calibration can be used to improve deficient density forecasts and we show how the calibration method can be used to generate good density forecasts from econometric models even when the conditional density is unknown finally motivated by recent advances in financial risk management we provide a detailed application to multivariate high frequency exchange rate density forecasts

the purchasing power parity persistence paradigm abstract rogoff journal of economic literature 1996 34 647 668 describes the remarkable consensus of 3 5 year half lives of purchasing power parity deviations among studies using long horizon data these studies however focus on rejections of unit roots in real exchange rates and do not use appropriate techniques to measure persistence our half life estimates explicitly account for serial correlation sampling uncertainty and most importantly small sample bias calculating confidence intervals as well as point estimates for long horizon and post 1973 data we find that even though most of the point estimates lie within the 3 5 year range univariate methods provide virtually no information regarding the size of the half lives

two level ces production technology in the solow and diamond growth models the two level ces aggregate production function that nests a ces into another ces function has recently been used extensively in theoretical and empirical applications of macroeconomics this paper examines its theoretical properties and establishes existence and stability conditions of equilibria under the solow and diamond growth models in addition it examines the efiect of changes in substitution parameters on transitional growth and steady states it is shown that in the solow model the su cient condition for a steady state is fulfllled for a larger range of substitution parameter values than with the basic ces function in the diamond model an increase in substitution parameters results in higher transitional growth under weaker conditions than with the basic ces function

forecast comparisons in unstable environments we propose new methods for comparing the out of sample forecasting performance of two competing models in the presence of possible instabilities the main idea is to develop a measure of the relative local forecasting performance for the two models and to investigate its stability over time by means of statistical tests we propose two tests the fluctuation test and the one time reversal test that analyze the evolution of the models relative performance over historical samples in contrast to previous approaches to forecast comparison which are based on measures of global performance we focus on the entire time path of the models relative performance which may contain useful information that is lost when looking for the model that forecasts best on average we apply our tests to the analysis of the time variation in the out of sample forecasting performance of monetary models of exchange rate determination relative to the random walk copyright 2010 john wiley sons ltd

testing long horizon predictive ability with high persistence and the meese rogoff puzzle a well known puzzle in the international finance literature is that a random walk predicts exchange rates better than economic models meese and rogoff 1983a b and 1988 this paper offers a potential explanation for this finding when exchange rates and fundamentals are highly persistent long horizon forecasts of economic models are asymptotically biased by the estimation error in the parameter that measures the persistence when this bias outweighs the benefits from exploiting economic information the random walk model will forecast better this happens even if the economic model is the true data generating process the reason is that a random walk model imposes a unit root rather than estimates it the paper thus proposes a test for equal predictive ability in the presence of highly persistent variables when applied to the meese rogoff exercise this test shows that the poor forecasting ability of economic models does not imply that the models are not a good description of the data

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

the normalized ces production function theory and empirics abstract the elasticity of substitution between capital and labor and in turn the direction of technical change are critical parameters in many fields of economics until recently though the application of production functions with specifically non unitary substitution elasticities i e non cobb douglas was hampered by empirical and theoretical uncertainties as recently revealed normalization of production technology systems holds out the promise of resolving many of those uncertainties we survey and assess the intrinsic links between production as conceptualized in a production function factor substitution as made most explicit in constant elasticity of substitution functions and normalization defined by the fixing of baseline values for relevant variables first we recall how the normalized constant elasticity of substitution function came into existence and what normalization implies for its formal properties then we deal with the key role of normalization in recent advances in the theory of business cycles and of economic growth next we discuss the benefits normalization brings for empirical estimation and empirical growth research finally we identify promising areas of future research

testing the monetary model of exchange rate determination a closer look at panels abstract in this paper we undertake an extensive evaluation of panel tests of the long run monetary model of exchange rate determination we first show how poorly the monetary model performs on a country by country basis for us dollar exchange rates over the post bretton woods period for a large number of industrialized countries in sharp contrast we find considerable support for the monetary model using panel procedures as in groen 2000 and mark and sul 2001 given the disparity in the country by country and panel approaches we carefully analyze the homogeneity restrictions inherent in the panel procedures the evidence on the appropriateness of the homogeneity restrictions is mixed in the end whether the monetary model conforms to post bretton woods data largely depends on one s prior beliefs

economic growth and the elasticity of substitution two theorems and some suggestions at the beginning of the twentieth century the work of the swedish economist knut wicksell 1901 marked an important advance in our understanding of the relationship between the structure of production functions and income distribution wicksell had asked the following question among many others suppose that the marginal productivities are equal to the remuneration rates of each factor what then should be the form of the corresponding production function he pointed out p 125 that the general integral of the partial differential equation implied by this relationship was of the form y lf kil which meant in turn that the product y was necessarily a homogeneous of degree one function of capital k and labor l as an example he gave a function where the shares of k and l in y were constant and wrote down the function which would be rediscovered decades later by charles w cobb and paul h douglas 1928 however it is only half a century later in robert m solow s nobel prize winning 1956 essay that implications between the structure of the production function and long run equilibrium or disequilibrium of the economy were drawn in his classic article a contribution to the theory of economic growth solow had considered three cases analytically other cases were also discussed geometrically using a phase diagram he had labeled the two first cases 1hlarrod domar and cobb douglas respectively and he referred to the third type of production function as offering a bit of variety it was y ak 2 l 2 2 a particular case of y akp lp 1p in those early days solow had not pointed out to the reader that his cases could have been numbered 0 1 and 2 following the elasticity of substitution of the corresponding production function it would be only five years later in 1961 that with his coauthors kenneth j arrow et al he would find the general form of the two factor constant elasticity of substitution ces production function by integrating the differential equation corresponding to the observed relationship between output per capita and the wage rate solow s third case was indeed highly interesting since it allowed the possibility of everincreasing income per head even without any technical progress indeed solow showed that due to the efficiency of the system entailed by the particular production function he had chosen there existed a threshold for the savings rates s to generate investment per head large enough for income per head to grow forever that threshold was s nla2 where n is the growth rate of the population it was then natural to ask whether one could express that threshold in terms of the elasticity of substitution a the value of that threshold was determined by de la grandville 1989 to be equal to s no3 or where a is k s coefficient in a normalized ces function equal to a in solow s third case where u 2 for any s and n values this relationship gives also the threshold value in implicit form by the solution of ao1 1 log 3q or ilog nls by totally differentiating the last relationship one could observe that the threshold for the elasticity of substitution to entail ever sustained growth was an in klump faculty of mathematics and economics university of ulm helmholtzstrasse 20 d 89081 ulm germany de la grandville department of economics university of geneva 102 boulevard carl vogt ch 1211 geneva 4 switzerland we gratefully acknowledge the comments of seminar participants at stanford university and at the universities of stuttgart hohenheim and munich where parts of the paper were presented also we would like to thank without implicating in any way robert solow for his insightful remarks and an anonymous referee for very helnfuil supgestions wicksell cobb and douglas would no doubt burst with pride if they knew that one of our first year students wrote in a paper of his of course we recognize here a kirk douglas production function

state of the art unit root tests and purchasing power parity although the question of whether purchasing power parity ppp holds in the long run has been extensively studied the answer is still controversial some of the strongest evidence is provided by taylor the review of economics and statistics 84 2002 139 150 who concludes that long run ppp held over the 20th century we argue that this conclusion is quite sensitive to the use of sub optimal lag selection in unit root tests using superior lag selection methods we find that long run ppp held for the real exchange rates of only 9 out of the 16 industrialized countries in taylor s sample with the u s dollar as the base currency

time varying parameters and the out of sample forecasting performance of structural exchange rate models varying parameter estimation techniques based on recursive application of the kalman filter are used to improve the predictive performance of a class of monetary exchange rate models i find that allowing estimated parameters to vary over time enhances the models forecasting performance for the dollar pound dollar mark and dollar yen exchange rates contrary to earlier results in the literature ex post forecasts for the dollar mark rate compare favorably with those obtained from the naive random walk forecasting rule

exchange rate forecasts and expected fundamentals using a large panel of individual professionals forecasts this paper demonstrates that good exchange rate forecasts are related to a proper understanding of fundamentals specifically good interest rate forecasts this relationship is robust to individual fixed effects and further controls reassuringly the relationship is stronger during phases when the impact from fundamentals is more obvious e g when exchange rates substantially deviate from their ppp values finally forecasters largely agree that an interest rate increase relates to a currency appreciation but only good forecasters get expected interest rates right

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

can exchange rates forecast commodity prices we show that commodity currency exchange rates have surprisingly robust power in predicting global commodity prices both in sample and out of sample and against a variety of alternative benchmarks this result is of particular interest to policy makers given the lack of deep forward markets in many individual commodities and broad aggregate commodity indices in particular we also explore the reverse relationship commodity prices forecasting exchange rates but find it to be notably less robust we offer a theoretical resolution based on the fact that exchange rates are strongly forward looking whereas commodity price fluctuations are typically more sensitive to short term demand imbalances

steady state growth and the elasticity of substitution in a neoclassical economy with endogenous capital and labor augmenting technical change the steady state growth rate of output per worker is shown to increase in the elasticity of substitution between capital and labor this confirms the assessment of klump and de la grandville 2000 that the elasticity of substitution is a powerful engine of economic growth however unlike their findings my result applies to the steady state growth rate moreover it does not hinge on particular assumptions on how aggregate savings come about it holds for any household sector allowing savings to grow at the same rate as aggregate output

the monetary exchange rate model as a long run phenomenon abstract pure time series based tests fail to find empirical support for monetary exchange rate models in this paper we apply pooled time series estimation on a forward looking monetary model resulting in parameter estimates which are in compliance with the underlying theory based on a panel version of the engle and granger engle r f granger c w j 1987 co integration and error correction representation estimation and testing econometrica 55 251 276 two step procedure we find that the residuals of the panel based estimated monetary model are stationary this indicates that on a pooled time series level there is cointegration between the exchange rate and the macroeconomic fundamentals of this monetary model

exchange rate predictability the main goal of this article is to provide an answer to the question does anything forecast exchange rates and if so which variables it is well known that exchange rate fluctuations are very difficult to predict using economic models and that a random walk forecasts exchange rates better than any economic model the meese and rogoff puzzle however the recent literature has identified a series of fundamentals methodologies that claim to have resolved the puzzle this article provides a critical review of the recent literature on exchange rate forecasting and illustrates the new methodologies and fundamentals that have been recently proposed in an up to date thorough empirical analysis overall our analysis of the literature and the data suggests that the answer to the question are exchange rates predictable is it depends on the choice of predictor forecast horizon sample period model and forecast evaluation method predictability is most apparent when one or more of the following hold the predictors are taylor rule or net foreign assets the model is linear and a small number of parameters are estimated the toughest benchmark is the random walk without drift

accounting for exchange rate variability in present value models when the discount factor is near 1 a well known stylized fact about nominal exchange rates among low inflation advanced countries particularly u s exchange rates is that their logs are approximately random walks michael i mussa 1979 is most frequently cited for observing this regularity in a famous pair of papers richard a meese and kenneth rogoff 1983a b found that the structural models of the 1970 s could not beat a random walk in explaining exchange rate movements recently some authors menzie chinn and meese 1995 nelson mark 1995 mark and donggyu sul 2001 have argued that the models can outforecast the random walk at long horizons but a comprehensive recent study by yin wong cheung et al 2003 documents that no model consistently outperforms a random walk why one obvious explanation is that the macroeconomic variables that determine the exchange rate themselves follow random walks if the log of the nominal exchange rate is a linear function of forcing variables that are random walks then it will inherit the random walk property the problem with this explanation is that the economic fundamentals proposed in the most popular models of exchange rates do not in fact follow simple random walks one resolution to this problem is that there may be some other fundamentals ones that have been proposed in some models but are not easily measurable or ones that have not yet been proposed at all that are important in determining exchange rates if these unobserved fundamentals follow random walks and dominate the variation in exchange rate changes then exchange rates will nearly be random walks even if the standard observed fundamentals are not in engel and west 2003a hereinafter ew we propose an alternative explanation we consider linear models of the exchange rate that are in the asset market approach to exchange rates these models emphasize the role of expectations of future economic fundamentals in determining the current exchange rate the exchange rate expressed as the home currency price of foreign currency in this paper can be written as a discounted sum of the current and expected future fundamentals

order flow and the monetary model of exchange rates evidence from a novel data set we propose an exchange rate model that is a hybrid of the conventional specification with monetary fundamentals and the evans lyons microstructure approach we estimate a model augmented with order flow variables using a unique data set almost 100 monthly observations on interdealer order flow on dollar euro and dollar yen the augmented macroeconomic or hybrid model exhibits greater in sample stability and out of sample forecasting improvement vis a vis the basic macroeconomic and random walk specifications

a microfoundation for normalized ces production functions with factor augmenting technical change based on a tractable endogeneous technology choice framework we provide a microfoundation for aggregate normalized constant elasticity of substitution ces production functions with non neutral factor augmenting technical change in this framework firms are allowed to choose unit productivities of capital and labor optimally from a technology menu constructed under the assumption that unit factor productivities ufps are independently weibull distributed the weibull distribution itself is also microfounded here based on extreme value theory it is found to be an accurate and robust approximation of the true ufp distribution if technologies consist of a large number of complementary components

the potential impacts of climate change on capital in the 21st century abstract an endogenous growth model with a simple climate system is used to examine the potential impacts of climate change on the capital to net income ratio and the net of depreciation share of income to capital a measure of wealth concentration and income distribution between capital and labour respectively over the next two centuries if climate change only directly affects production as usually assumed the capital to net income ratio will increase as compared to what it would be in the absence of climate change the capital to income ratio will increase even further if climate change affects labour productivity in both cases the increase in the ratio after 2100 is due to the stock of capital being depleted at a lower rate than net income is falling however the capital to net income ratio will be lower and eventually fall if damage from climate change increases the depreciation rate of capital this decline is marginally reduced if climate change impacts both capital and labour productivity in the case where climate change impacts the depreciation of capital the ratio after 2100 is falling because the stock of capital is destroyed faster than net income is falling furthermore climate change reduces the net share of income accruing to capital in all scenarios with dramatic changes in the case of climate change affecting the depreciation of capital emissions abatement almost completely mitigates these impacts on the capital to net income ratio and the net share of income to capital

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

avoiding mis estimation of the ces function unit matters abstractwe demonstrate that unit errors of measurement will lead to significant biases in estimating the constant elasticity of substitution ces function monte carlo simulations show that estima

taylor rules and the deutschmark dollar real exchange rate we explore the link between an interest rate rule for monetary policy and the behavior of the real exchange rate the interest rate rule in conjunction with some standard assumptions implies that the deviation of the real exchange rate from its steady state depends on the present value of a weighted sum of inflation and output gap differentials the weights are functions of the parameters of the interest rate rule an initial look at german data yields some support for the model

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

economic growth technical change biases and the elasticity of substitution a test of the de la grandville hypothesis a recent development in microeconomic theory suggests that the size of the elasticity of substitution between factors is relevant to economic growth this study undertakes an empirical investigation of this proposition comparing two economies the united states and south korea the authors test results support the de la grandville hypothesis that the elasticity of substitution is a potent explanatory variable of economic growth this inquiry also provides a clue to the puzzle that the u s elasticity of substitution between labor and capital is well below unity whereas that of south korea is close to unity nonetheless the u s factor shares have tended to remain fairly stable whereas the distributive shares of south korea seem to have changed in favor of capital their findings indicate that a high elasticity of substitution is a bad signal for the distribution of income under the paradigm of modern technology copyright 1991 by mit press

central bank independence revisited the case for central bank independence cbi while not a new one has been strengthened by a growing body of empirical evidence by recent developments in economic theory and by the temper of the times the case is a strong one 1 which is becoming part of the washington orthodoxy the purposes of this paper are both to make more precise the type of cbi that is likely to enhance economic performance and to point to some remaining open issues and anomalies i start with the two theoretical approaches to cbi

endogenous aggregate elasticity of substitution abstract in the literature studying aggregate economies the aggregate elasticity of substitution aes between capital and labor is often treated as a constant or deep parameter this view contrasts with the conjecture put forward by arrow et al 1961 capital labor substitution and economic efficiency review of economics and statistics 43 225 250 that aes evolves over time and changes with the process of economic development this paper evaluates this conjecture in a simple dynamic multi sector growth model in which aes is endogenously determined our findings support the conjecture and in particular demonstrate that aes tends to be positively related to the state of economic development a result consistent with recent empirical findings

factor substitution and labor market friction in the united states 1948 2010 we re estimate the capital labor elasticity of substitution and the biased factor augmenting technological progress using a system approach for the aggregate u s economy from 1948 to 2010 due to

a comparison of forecast performance between federal reserve staff forecasts simple reduced form models and a dsge model this paper considers the forecast performance of the federal reserve staff five atheoretical reduced form models and an estimated dynamic stochastic general equilibrium dsge model focusing on the late 1990s through 2001 our analysis finds that the dsge model and atheoretical models forecast real gdp growth better than the federal reserve staff during this period by an economically significant margin we find smaller differences across each method in the quality of inflation forecasts over this period these results provide some support to the notion that richly specified dsge models such the one used in this paper belong in the forecasting toolbox of a central bank rochelle m edge rochelle m edge frb gov michael t kiley michael t kiley frb gov and jeanphilippe laforte jean philippe laforte frb gov are affiliated with the macroeconomic and quantitative studies section at the board of governors of the federal reserve system this paper represents ongoing work in the section on developing dge models that can be useful for policy analysis nevertheless any views expressed in this paper remain solely those of the authors and do not necessarily reflect those of the board of governors of the federal reserve system or it staff all errors are our own

the mystery of the multiplying marks a modification of the monetary model fair ray and dwight jaffee methods of estimation for markets in disequilibrium econometrica 40 may 1972 497 514 fair ray and harry kelejian methods of estimation for markets in disequilibrium further study econometrica 42 jan 1974 177 190 goldfeld stephen and richard quandt estimation in a disequilibrium model and the value of information journal of econometrics 3 nov 1975 325 348 hausman jerry the effects of wages taxes and fixed costs on women s labor force participation journal of public economics 14 oct 1980 161 194 mcdonald john and robert moffitt the uses of tobit analysis this review 62 may 1980 318 321 maddala g s and forrest nelson maximum likelihood methods for models of markets in disequilibrium econometrica 42 nov 1974 1013 1030 moffit robert and kenneth kehrer the effect of tax and transfer programs on labor supply the evidence from the income maintenance experiments in ronald ehrenberg ed research in labor economics vol 4 greenwich conn jai press 1981 nelson forrest censored regression models with unobserved stochastic censoring thresholds journal of econometrics 6 nov 1977 309 327 oi walter labor as a quasi fixed factor journal of political economy 70 dec 1962 538 555 rosen harvey and richard quandt estimation of a disequilibrium aggregate labor market this review 60 aug 1978 371 379 tobin james estimation of relationships for limited dependent variables econometrica 26 jan 1958 24 36

banking on currency forecasts how predictable is change in money abstract the paper examines the predictive performance of four structural exchange rate models using both parametric and nonparametric techniques error correction versions of the models are fit so that plausible long run elasticities can be imposed on the fundamental variables of each model a variety of model evaluation statistics are reported our findings confirm that fundamental exchange rate models forecast no better than a random walk model for short term prediction horizons for longer horizons error correction terms can explain exchange rate movements significantly better than a no change forecast for a subset of the models and currencies we consider

some linear and nonlinear thoughts on exchange rates abstract after discussing the inconclusive results of linear structural models as applied to exchange rates this paper assesses the possibilities of using a particular form of nonlinear estimation called alternating conditional expectations as i a diagnostic tool and ii a forecasting method it contrasts the forecast performance of various linear in levels in differences error correction and nonlinear in levels in differences specifications of a sticky price monetary model augmented by a relative wealth variable the diagnostic results are as follows the optimal transformations are almost always nonlinear and often nonmonotonic forecasting results in sample and out of sample nonlinear forecasts yield substantial improvements over a random walk however in exercises with forecasts from rolling regressions the random walk specification still dominates over one quarter forecast horizons albeit only marginally and insignificantly so nonlinear specifications do slightly better than linear competitors at four quarter horizons

cointegration fractional cointegration and exchange rate dynamics multivariate tests due to johansen 1988 1991 as implemented by baillie and bollerslev 1989a and diebold gardeazabal and yilmaz 1994 reveal mixed evidence on whether a group of exchange rates are cointegrated further analysis of the deviations from the cointegrating relationship suggests that it possesses long memory and may possibly be well described as a fractionally integrated process hence the influence of shocks to the equilibrium exchange rates may only vanish at very long horizons in the article by baillie and bollerslev 1989a it is argued that seven different nominal spot and forward exchange rates all contain unit roots in their univariate time series representations at the same time however the spot exchange rates appear to be tied together in the long run through a cointegration type relationship the latter finding of baillie and bollerslev has attracted particular interest and several studies such as those by hakkio and rush 1991 and sephton and larsen 1991 have already addressed this issue using the same data as the baillie and bollerslev article sephton and larsen 1991 describe the evidence for the presence of cointegration as being fragile and note that mixed conclusions are reached by truncating the baillie and bollerslev sample at different points in time diebold gardeazabal and yilmaz 1994 henceforth diebold et al provide interesting evidence that application of the johansen 1988 1991 tests with and without an intercept will result in different inferences on the baillie and bollerslev data set furthermore diebold et al carry out an ex ante forecasting experiment and find that the addition of an error correction term to the martingale model as implied by the standard cointegration paradigm fails to reduce the prediction mean square error when compared to a simple martingale model this therefore leads diebold et al to conclude that there exists substantial uncertainty regarding the existence of cointegration relationships among nominal dollar exchange rates this article provides some additional evidence on the existence of such a long run relationship among the same seven nominal spot exchange rates after further analysis it appears that a form of cointegration does exist between the exchange rates so that they do not drift apart in the long run we argue that this form of cointegration is

exchange rate predictability and monetary fundamentals in a small multi country panel in this paper a panel of vector error correction models based on a common long run relationship is utilized to test whether the euro exchange rates of canada japan and the united states have a long run link with monetary fundamentals we use both exchange relationships relative to the full emu area with synthetic aggregates for the pre emu period and relative to germany solely compared to existing cointegration frameworks our approach provides more evidence that the aforementioned exchange rates are consistent with a rational expectations based monetary exchange rate model based on a common long run relationship albeit with a long run impact of relative income that is higher than predicted by the theory as a next step we analyze the out of sample fit of this common long run exchange rate model relative to naive random walk based forecasts these forecasting evaluations indicate that the monetary fundamentals based common longrun model is superior to both random walk based forecasts and standard cointegrated var model based forecasts especially at horizons of 2 to 4 years

what determines the elasticity of substitution between capital and labor a literature review this paper provides the first comprehensive review of the empirical and theoretical literature on the determinants of the elasticity of substitution between capital and labor our focus is on the two input constant elasticity of substitution ces production function we start by presenting four concise observations that summarize the empirical literature on the estimation of motivated by these observations the main part of this survey then focuses on potential determinants of capital labor substitution we first review several approaches to the microfoundation of production functions where the elasticity of substitution eos is treated as a purely technological parameter second we outline the construction of an aggregate elasticity of substitution aes in a multi sectoral framework and investigate its dependence on underlying intra and inter sectoral substitution third we discuss the influence of the institutional framework on the extent of factor substitution overall this survey highlights that the effective elasticity of substitution ees which is typically estimated in empirical studies is generally not an immutable deep parameter but depends on a multitude of technological non technological and institutional determinants based on these insights the final section identifies a number of potential empirical and theoretical avenues for future research

the aggregate production function of the finnish economy in the twentieth century this article uses the bayesian approach to estimate the parameters of the normalized constant elasticity of substitution ces function with factor augmenting technical progress directly rather than using derived first order conditions of profit maximizing behavior bayesian estimation is applied because maximum likelihood estimation is sensitive to the starting values of maximization and the parameters typically fail to converge to the global optimum because of a multimodal likelihood thanks to a convenient prior distribution the posterior simulation of parameters works fairly well the results indicate that in the long run over 100 years the parameters for the elasticity of substitution and capital income share are intimately linked to the shape of capital augmenting technological progress in particular the linear restriction excludes the possibility that the speed of capital augmenting technological progress converges to zero which seems to lead to upwardly biased estimates of the elasticity of substitution and income share parameters

factor substitution and convergence speed in the neoclassical model with elastic labor supply abstract we study the link between factor substitutability and the speed of convergence in the ramsey cass koopmans model with elastic labor supply and normalized ces production if the baseline value of capital per unit of effective labor is below its steady state value an increase in the elasticity of substitution reduces the convergence speed

a model of exchange rate dynamics this model treats the exchange rate as an asset price that depends on expectations concerning exogenous real and monetary factors that will affect relative prices and absolute price levels in future periods changes in exchange rates reflect both expected changes in these exogenous factors and changes in expectations occasioned by new information the model explains the random component in exchange rate behavior the source of divergences from purchasing power parity the anticipatory response of exchange rates to future expected disturbances and the causes of exchange rate overshooting

factor substitution and factor augmenting technical progress in the united states a normalized supply side system approach abstract using a normalized ces function with factor augmenting technical progress we estimate a supply side system of the u s economy from 1953 to 1998 avoiding potential estimation biases that

the monetary model of the exchange rate long run relationships short run dynamics and how to beat a random walk abstract the monetary model is re examined for the sterling dollar exchange rate first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analyzing the long run exchange rate second we find once proper account has been taken of the short run data dynamics that an unrestricted monetary model outperforms the random walk and other models in an out of sample forecasting contest jel f31

on cointegration and exchange rate dynamics baillie and bollerslev 1989 have recently argued that nominal dollar spot exchange rates are cointegrated here we examine an immediate implication of their finding namely that cointegration implies an error correction representation yielding forecasts superior to those from a martingale benchmark in light of a large earlier literature highlighting the predictive superiority of the martingale in an out of sample forecasting exercise we find the martingale model to be superior we then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought a result consistent with the outcome of the forecasting exercise

determinants of income growth in metropolitan and nonmetropolitan labor markets this article analyzes determinants of growth across labor markets in the united states using a production function approach based on four inputs labor manufacturing investment human capital investment and public capital investment we find little role for public capital investment in growth but that manufacturing investment spurred growth in nonmetropolitan areas in contrast to metropolitan areas we also find that human capital investment mattered more for metropolitan areas than for nonmetropolitan areas further the presence of more colleges and universities more household amenities and lower tax rates are all found to have encouraged human capital accumulation in u s labor markets copyright 2008 oxford university press

productivity versus elasticity a normalized constant elasticity of substitution production function applied to historical soviet data this study tests the extensive growth hypothesis which would attribute the soviet economic slowdown to low elasticity of substitution and over investment rather than deteriorating productivity growth to circumvent the low availability of data widely applicable new methods for estimating productivity and elasticity of substitution were developed based on the normalized constant elasticity of substitution ces production function one is an extended version of the solow residual calculation and the other is a direct estimation of the time varying parameter normalized ces production function the application of the methods to the soviet data showed a decreasing trend in productivity growth and a low elasticity of substitution of approximately 0 25 the results neither reject nor support the extensive growth hypothesis because of uncertainty in the interpretation of the low elasticity of substitution the results suggest that it is reasonable to assert that both deteriorating productivity growth and low

common stochastic trends in a system of exchange rates univariate tests reveal strong evidence for the presence of a unit root in the univariate time series representation for seven daily spot and forward exchange rate series furthermore all seven spot and forward rates appear to be cointegrated that is the forward premiums are stationary and one common unit root or stochastic trend is detectable in the multivariate time series models for the seven spot and forward rates respectively this is consistent with the hypothesis that the seven exchange rates possess one longrun relationship and that the disequilibrium error around that relationship partly accounts for subsequent movements in the exchange rates a general consensus has emerged in recent years that many macroeconomic time series such as gnp consumption expenditures disposable income etc can be characterized by a stochastic trend model in particular nelson and plosser 22 described this property as one of being difference stationary so that the first difference of a time series is stationary an alternative trend stationary model where a stationary component is added to a deterministic trend term has generally been found to be less appropriate 1 similarly it has long been recognized that many financial time series such as foreign exchange rates are nonstationary e g in meese and singleton 21 the issue of nonstationary is not merely a statistical curiosity but has several important implications for the modeling of exchange rates for instance many models of exchange rate determination under rational expectations require stationarity assumptions when solving out the expected future values of the fundamentals further there has been some controversy over the appropriate transformations to use when conducting tests of whether the forward rate is an unbiased and efficient predictor of the future spot exchange rate 2 some authors e g frenkel 11 12 have conducted tests in levels while geweke and feige 14

the term structure of forward exchange premiums and the forecastability of spot exchange rates correcting the errors we develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and