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

supply side and demand side cost sharing in deregulated social health insurance which is more effective abstract microeconomic theory predicts that if patients are fully insured and providers are paid fee for service utilization of medical services exceeds the efficient level moral hazard effect in switzerland both demand side and supply side cost sharing have been introduced to mitigate this problem analyzing a panel dataset of about 160 000 adults we find both types of cost sharing to be effective in curtailing the use of medical services however when moral hazard mitigation is traded off against risk selection the minimum deductible supply side cost sharing option ranks first followed by the medium deductible demand side alternative making the supply side option somewhat more effective

recent developments in international finance a guide to research abstract this is a critical evaluation of the state of the art in international finance several points of reference are selected the mundell fleming branson mfp paradigm the monetary model with purchasing power parity ppp as a long run anchor the representative agent approach and the natural real exchange rate natrex model their strengths and weaknesses are identified from both a theoretical and empirical point of view we conclude with a suggestion of what is a fruitful explanation of medium to longer run movements in the real exchange rate and the current account

exchange rate behaviour under the ems regime was there any systematic change abstract most empirical studies fail to detect any systematic effects of the ems regime on the economic performance of member countries this reveals the difficulty of constructing controlled experiments which can distinguish what is due to the ems from that due to common external pressures we argue that the crucial step is to examine the exchange rates distribution since no performance improvements will appear if exchange rate behaviour does not change within the ems we find that there are changes in the third and fourth moments which imply that ems currencies have become more fragile and susceptible to shocks particularly negative shocks relative to non ems currencies

target zones and exchange rate dynamics this paper develops a simple model of exchange rate behavior under a target zone regime it shows that the expectation that monetary policy will be adjusted to limit exchange rate variation affects exchange rate behavior even when the exchange rate lies inside the zone and is thus not being defended actively somewhat surprisingly the analysis of target zones turns out to have a strong formal similarity to problems in option pricing and investment under uncertainty

testing mean reversion in target zone exchange rates the aim of the paper is to assess to what extent european monetary system ems target zone exchange rates have been characterized by mean reverting behaviour to this purpose a new class of mean reversion tests is introduced with respect to standard approaches the proposed tests which are based on the sample excursion of the exchange rate within the band have a better ability to detect target zone mean reverting dynamics the empirical analysis of the exchange rates among the main ems currencies shows that the degree of mean reversion is much higher than what has been reported in the literature both before and after the target zone widening of 1993 finally the proposed tests have a wider range of applications since they originate a new approach to unit root testing

threshold cointegration between inflation and us capacity utilization abstractan analogue to the phillips curve shows a positive relationship between inflation and capacity utilization some recent empirical work has shown that this relationship has broken down when using data after the mid 1980s we empirically investigate this issue using several threshold error correction models we find in the long run a 1 increase in the rate of inflation leads to approximately a 0 0046 increase in capacity utilization the asymmetric error correction structure shows that changes in capacity utilization show significant corrective measures only during booms while changes in inflation correct during both phases of the business cycle with the corrections being stronger during recessions we also find that in the short run changes in the inflation rate do granger cause capacity utilization while changes in capacity utilization do not granger cause inflation the granger causality from inflation to capacity utilization can be interpreted as supporting recent calls made in the popular

determinants of the implied shadow exchange rates from a target zone abstract the paper provides a continuous time model of the dynamic behavior of exchange rates and interest rates when exchange rates are managed within a target zone with the possibility of realignments in the case of a realignment the exchange rate jumps to a shadow exchange rate the timing of realignments is modelled by a cox process with an intensity that depends on the location of the exchange rate in the target zone band as well as the distance to the shadow exchange rate we set up an approximate maximum likelihood estimation approach and provide parameter estimates for six erm target zones moreover in the empirical analysis we filter out the shadow exchange rates and investigate which fundamental macroeconomic factors are able to explain the short run and long run behavior of the filtered shadow exchange rates

assessing target zone credibility mean reversion and devaluation expectations in the erm 1979 1992 abstract the paper presents estimates of devaluation expectations for six erm currencies relative to the deutsche mark for the period march 1979 april 1992 both the simplest test and the drift adjustment method are used the simplest test adjusts interest rate differentials for the maximum and minimum expected rate of depreciation within the exchange rate band the drift adjustment method adjusts interest rate differentials by the estimated expected rate of depreciation within the band the latter method gives more precise estimates especially for short horizons and allows statistical inference and hypothesis testing expected rates of devaluation have generally fallen during the period still some devaluation expectations relative to the deutsche mark remain in 1992 except for the belgian luxembourg franc and the netherlands guilder expected rates of devaluation have fluctuated more than interest rate differentials

price elasticity and adverse selection in the demand for supplementary health insurance probit regression estimates show the effects of the price of insurance anticipated medical expenditures and other factors on reported decisions about purchasing hypothetically offered supplementary insurance policies the demand estimates can characterize how much supplemental insurance would be purchased under different tax policies affecting health insurance purchases although eliminating the current tax subsidy to insurance is shown to decrease demand the results indicate a substantial demand for supplementary insurance even in the absence of present tax incentives however our results on adverse selection raise concerns about the potential stability of supplemental insurance markets

factor ownership taxes and specialization this paper examines the incentives of regions to levy source based capital taxes when the tax revenue is not needed to finance the regional public sector it is assumed that capital is completely mobile among regions but that labour is completely immobile since each region can produce the same two tradable goods using the same technology then differences in tax rates on capital will lead to some specialization if residents of one region own more of the nation s capital per person then these tax differences may be an equilibrium phenomenon regions with below average capital endowment per person will levy capital taxes to lower the cost of the capital they import even though these taxes lead to capital flight and specialization in the labour intensive good

a dynamic analysis of the demand for health insurance and health care we find that asymmetric information is important for the uptake of supplementary private health insurance and health care utilization we use dynamic panel data models to investigate the sources of asymmetric information and distinguish short run selection effects into insurance from long run selection effects short run selection effects i e responses to shocks are adverse but small in size also long run effects driven by differences in for example preferences and risk aversion are small but we find some evidence for multidimensional asymmetric information for example mental health causes advantageous selection estimates of health care utilization models suggest that moral hazard is not important

a note on estimating realignment probabilities a first passage time approach abstract this paper proposes a path dependent approach for estimating realignment probabilities of targeted exchange rates based on first passage time distributions instead of the commonly used path independent approach we consider that path dependency is an intrinsic characteristic of realignment risk because a realignment of an exchange rate can occur whenever a committed band by a central bank is breached a mean reverting lognormal process is considered in the first passage time approach based on market data of the british pound and mark during the erm crisis of 1992 the realignment probabilities of the pound estimated under the proposed approach show that path dependency is quantitatively significant compared with the path independent approach

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

a semi parametric model for asymmetric information in health plan markets i introduction there are two potential sources of asymmetric information that induce market failure in the health plan market the first adverse selection is analyzed by rothschild and stiglitz 1976 in their study individuals are exogenously assigned one of two possible illness probabilities only the individuals know their true illness probability under these conditions low risk consumers underinsure in environments where equilibrium exists adverse selection also occurs when plans can observe characteristics that affect risk but cannot adjust premiums to reflect these risks this type of adverse selection is discussed by cutler and reeber 1998 here plan premiums are constrained to be the same across all policyholders and therefore one cannot risk adjust on observable variables such as age or previous medical history similar to the first type of adverse selection the low and high risk policyholders sort themselves into different plans or plans attempt to cream skim by adjusting reimbursements that are more favorable to the profitable low risk policyholders death spirals can occur where the low risk consumers leave the more generous plans causing premiums of these plans to grow which in turn induces more members to leave these plans as the premiums grow more individuals leave the generous plan until it is no longer viable the second source of information asymmetry comes from the individual s choice of preventive effort much recent publicity has shown how individuals can reduce their probability of illnesses or accidents choices of eating drinking exercising smoking unprotected sexual activity driving behavior recreational drug use and sunscreen use are a few items from the long lists of decisions that affect the probability of illness health insurers cannot contract policyholders to exert a certain level of preventive effort because there is no mechanism to observe these efforts auto insurers can contract indirectly for effort by accessing public driving records and charging premium surcharges for traffic violations there are no counterpart records for health plans arnott and stiglitz 1988 and pauly 1974 discuss the welfare effects when preventive effort can reduce illness probabilities but the level of these efforts cannot be monitored and therefore cannot be written into a contract when this condition occurs full insurance is no longer feasible because no effort would be exerted under full insurance because health plans are not compensating individuals for the cost savings that come from preventive effort the individual s choice of effort is usually less than optimal therefore we call this information asymmetry moral hazard this moral hazard results in underinsurance for the entire population stewart 1994 looks at an economy where both adverse selection and moral hazard are present he finds that the welfare losses coming from both sources are subadditive i e the total welfare loss is less than the sum of the losses coming from both yet when both moral hazard and adverse selection are present the economy is still worse off by having both sources of asymmetric information instead of one of them in most of his simulations the low risk types substitute preventive effort for income protection although this is not a theoretically proven result his study shows that it is difficult to derive general results on the misallocation of effort and risk sharing when both sources are present because these misallocations depend on the individual s willingness to substitute the income savings from effort for the income protection that comes from insurance setting good health care policy requires knowing about the presence of these informational asymmetries unfortunately to date there is no consensus about the presence of informational asymmetries that come from either adverse selection or preventive effort most studies have attempted to determine only if adverse selection is present while ignoring the possible existence of preventive effort

health insurance and the demand for medical care evidence from a randomized experiment we estimate how cost sharing the portion of the bill the patient pays affects the demand for medical services the data come from a randomized experiment a catastrophic insurance plan reduces expenditures 31 percent relative to zero out of pocket price the price elasticity is approximately 0 2 we reject the hypothesis that less favorable coverage of outpatient services increases total expenditure for example by deterring preventive care or inducing hospitalization

adverse selection moral hazard and wealth effects in the medigap insurance market using data from a longitudinal study of the recently retired we attempt to separate the moral hazard effect of medicare supplementary medigap insurance on health care expenditures from the adverse selection effect of poor health on medigap coverage we find evidence of adverse selection but its magnitude is unlikely to create serious efficiency problems taking adverse selection into account reduces the estimate of the moral hazard effect in addition we find a strong positive wealth effect on the demand for supplementary insurance

international trade and capital mobility between diversified economies abstract this paper reconsiders and simplifies the theory of international trade with foreign investment while concentrating on significant gaps in the analysis of the globally diversified case where both countries of the two commodity two factor model remain incompletely specialized the analysis goes beyond previous literature by 1 deriving an important condition for stability of equilibrium 2 investigating the effects of import tariffs and foreign investment taxes on the international allocation of capital 3 examining the actual signs of optimal first best and other tariffs and taxes and 4 developing new and plausible conditions for existence of global diversification

the width of the band and exchange rate mean reversion some further erm based results one key prediction of the target zone model is that the exchange rate should be mean reverting within the band in this paper we investigate this prediction by examining the time series characteristics of seven currencies participating in the exchange rate mechanism erm of the european monetary system both immediately before and after the introduction of wide exchange rate bands in 1993 using standard univariate unit root tests we find some evidence of mean reversion and this is much more pronounced using variance ratio test statistics it turns out that such mean reversion is as strong for the wide band erm as for the narrow band erm

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

the rational nonpurchase of long term care insurance only a tiny fraction of the nonpoor population currently purchases private insurance coverage against long term care ltc costs studies generally attribute the failure to purchase private coverage to unawareness by potential purchasers of the benefits of coverage and a misperception that medicare currently covers long term care i explore alternative reasons for failure to purchase coverage by well informed expected utility maximizing risk averse individuals for whom ltc is associated with a large increase in mortality and for whom family members represent an alternative source of care there may be no demand for ltc insurance even if it is made available at actuarially fair premiums because the main consequence of coverage is to enhance the expected value of one s estate

more on the economic efficiency of mixed public private insurance abstract blomqvist and johansson 1996 criticize my results regarding besley s besley 1989 analysis of public catastrophic coverage they concede that my analysis was correct under the assumptions i made but they argue that a more general model than besley or i used might yield different results unfortunately blomqvist and johansson s analysis of the more general case is flawed whereas they claim to have provided a more general argument against the sort of public intervention besley proposed they have unwittingly discovered an example in which his original conjecture holds

pigou tiebout property taxation and the underprovision of local public goods abstract pigou s proposition that the use of distorting taxes rather than neutral head taxes reduces public service levels is examined in this paper a simple model with a national system of competing local governments is utilized to demonstrate that the use of a distorting property tax on mobile capital decreases the level of residential public services the case where public services are an intermediate producer good is also considered

the effects of rate regulation on demand for supplemental health insurance many developed countries have a market for private health insurance that supplements publicly funded universal coverage government regulation of the supplemental market including the extent to which insurers are permitted to adjust premiums based on individual characteristics such as age sex and health status varies across countries oecd 2004 proponents of rate regulation argue that the resulting crosssubsidization from low to high risks is necessary to maintain the affordability of coverage for high risks economic theory however raises the concern that the inability to adjust premiums to reflect individual risk could create adverse selection by driving low risks from the market michael rothschild and joseph stiglitz 1976 little empirical evidence exists to determine the optimal role of rate regulation in private supplemental insurance markets existing studies of the consequences of rating restrictions focus on markets for primary health insurance and find that these laws have had surprisingly little effect on overall rates of coverage simon 2004 in this paper we study the effects of rate regulation in supplemental health insurance markets by examining the market for individually purchased coverage that supplements medicare among the elderly in the united states while the publicly financed medicare program provides nearly universal coverage of a standard set of benefits for those 65 and over beneficiaries are exposed to significant financial risk due to the cost sharing associated with covered services and a lack of coverage for some important services the vast majority of medicare beneficiaries obtain supplemental coverage through a complex system of publicly and privately funded sources state medicaid programs provide publicly financed supplemental coverage for low income and disabled beneficiaries and employers provide highly subsidized retiree supplemental health insurance for other beneficiaries but the remainder rely on highly regulated private insurance markets medicare s part c managed care plans are a voluntary private replacement for traditional medicare while medigap coverage is a private policy bought by about 30 percent of medicare beneficiaries that provides only supplemental benefits franklin j eppig and george s chulis 1997 our study examines the effects of regulations limiting the information on individual characteristics insurers can use in setting premiums for medigap coverage

mean reversion in target zones a re examination of some erm exchange rates the theoretical literature on exchange rate behaviour in target zones predicts that the exchange rate would be mean reverting this article empirically investigates this theoretical prediction in the case of the german mark bilateral exchange rates using a recently developed unit root test this article provides evidence that is generally negative to the idea of mean reversion it shows that all bilateral exchange rates under investigation appear to be unit root processes with the exception of the dutch guilder german mark rate

private insurance subsidies and public health care markets evidence from canada in this study i examine the effects of government subsidies to employer provided health insurance on the decision to purchase insurance and on utilization of publicly funded health services using unique variation in tax subsidies across canadian provinces as an instrument i estimate the effects of these subsidies on the demand for supplemental health insurance and their extended effects on the decision to use publicly funded health services my results show that government subsidies through tax exemptions have significant effects on the decision to purchase insurance furthermore additional insurance policies lead to moral hazard in the use of publicly funded health services jel classification h2 h4 11

patient cost sharing and hospitalization offsets in the elderly in the medicare program increases in cost sharing by a supplemental insurer can exert financial externalities we study a policy change that raised patient cost sharing for the supplemental insurer for retired public employees in california we find that physician visits and prescription drug usage have elasticities that are similar to those of the rand health insurance experiment hie unlike the hie however we find substantial offset effects in terms of increased hospital utilization the savings from increased cost sharing accrue mostly to the supplemental insurer while the costs of increased hospitalization accrue mostly to medicare

trade capital mobility and tax competition this paper examines a system of governments national state or local that finance public expenditures with taxes on mobile capital e g a property tax unlike previous research on tax competition explicit consideration is given to the general equilibrium determination of the prices at which goods are traded between regions the analysis identifies inefficiencies in government behavior that are not apparent in models in which the terms of trade are exogenously given capital taxation is shown to create an inefficient distribution of public good outputs across regions accompanied by an inefficient pattern of trade a model is presented in which the chosen levels of public good outputs differ across regions containing identical residents and production possibilities there is a wasteful diversity of public good supplies

on the mean reverting properties of target zone exchange rates one key prediction of the target zone model is that the exchange rate should be mean reverting within the band although this property is widely referred to in the target zone literature little work has been done to test it in this paper we seek to remedy this important lacuna in the literature by examining the time series properties of the seven currencies participating in the exchange rate mechanism erm of the european monetary system for the period 13 march 1979 to 9 april 1992 using standard univariate unit root tests we find little evidence of mean reversion however using variance ratio test statistics which control for heterogeneity in the distribution of exchange rate behaviour we find much more evidence of mean reversion another part of our work includes implementing a panel unit root test

model free evaluation of directional predictability in foreign exchange markets we examine directional predictability in foreign exchange markets using a model free statistical evaluation procedure based on a sample of foreign exchange spot rates and futures prices in six major currencies we document strong evidence that the directions of foreign exchange returns are predictable not only by the past history of foreign exchange returns but also the past history of interest rate differentials suggesting that the latter can be a useful predictor of the directions of future foreign exchange rates this evidence becomes stronger when the direction of larger changes is considered we further document that despite the weak conditional mean dynamics of foreign exchange returns directional predictability can be explained by strong dependence derived from higher order conditional moments such as the volatility skewness and kurtosis of past foreign exchange returns moreover the conditional mean dynamics of interest rate differentials contributes significantly to directional predictability we also examine the co movements between two foreign exchange rates particularly the co movements of joint large changes there exists strong evidence that the directions of joint changes are predictable using past foreign exchange returns and interest rate differentials furthermore both individual currency returns and interest rate differentials are also useful in predicting the directions of joint changes several sources can explain this directional predictability of joint changes including the level and volatility of underlying currency returns copyright 2007 john wiley sons ltd