the relationship between exchange rates and interest rate differentials a wavelet approach this paper uses wavelet analysis to investigate the relationship between the spot exchange rate and interest rate differential for seven pairs of countries with a small country sweden included

laboratory tests of equilibrium predictions with disequilibrium data we examine a common practice used within previous studies of laboratory markets testing equilibrium models using some data from markets that have not reached an equilibrium we examine the effect of this practice when it is applied to some laboratory markets where an appreciable number of them eventually satisfied an operational definition of an equilibrium our data suggest that for our markets significantly different equilibrium test results would be obtained when using all data available in market periods analysed in previous studies rather than using only equilibrium data for our markets choices made in disequilibrium are quite different from those in equilibrium this paper is primarily concerned with examining one common practice used in previous studies of laboratory markets this practice is testing equilibrium models using some data from markets that have not reached an equilibrium the data set used typically consists of all available laboratory data from the last period an average of the last few periods an average of all periods or from the nth period for some fixed n i know of no attempt at least formally to assure all data were from markets in equilibrium markets where market choices have stabilized recently some laboratory markets were run where an appreciable number of them eventually satisfied an operational definition of an equilibrium could the use of disequilibrium data significantly affect the results of tests we might make of some equilibrium models for these laboratory markets this practice would be desirable if the disequilibrium data provided a useful estimate of the behaviour that would have been observed if an equilibrium had been obtained on the other hand if some disequilibrium behaviour is qualitatively different from the behaviour that would be observed in an equilibrium this practice could produce misleading results within this paper we examine the effect of this practice when it is used on our laboratory data

forecasting the exchange rate a monetary or random walk phenomenon abstract this paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate instrumental variable estimates of the simple monetary model are not supported by the data while the full information maximum liklihood estimates of its rational expectations counterpart are the rational expectations monetary model is operationalized using the results of hansen and sargent 1980 and flavin 1981 and box jenkins time series techniques monthly data on the us and uk economics over the recent flexible exchange rate period serve as the case study

contestability in real time experimental flow markets this article reports the results from laboratory markets using a new trading institution in which sellers post offers to sell flows of output in real time we use the new institution to examine the outcomes in natural monopoly experimental markets no stable price outcomes were observed in markets contestable by two firms a finding that is consistent with the contestable markets hypothesis but in conflict with assertions commonly made by those advancing the theory s role in policy formation the average efficiency of markets contestable by two firms while greater than that of monopoly markets protected from entry was significantly less than that associated with the sustainable equilibrium

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

revisiting the exchange rate disconnect puzzle abstractone of the major anomalies in international macroeconomics is the persistent finding that the exchange rate has no empirical relationship with a variety of macroeconomic fundamentals dubbed the exchange rate disconnect puzzle this article examines this issue for five australian dollar bilateral exchange rates using quarterly data for the period 1984 1 2015 4 a novel feature of this article is that it departs from the extant literature by using a different approach to testing for cointegration the results show that the exchange rates and fundamentals move together in the long run furthermore the results show that fundamentals granger cause exchange rates both in the short run and the long run

the monetary approach to exchange rate determination under rational expectations the dollar deutschmark rate abstract this paper reformulates the monetary approach after ascertaining that a money demand function with a partial adjustment mechanism had more empirical support than a money demand function which assumed instantaneous stock adjustment the resulting exchange rate equation is estimated by two rational expectations techniques the parameter estimates are reasonable and are robust to the estimation technique used to different specifications of the driving processes and to changes in the estimation period the structural model outperforms the random walk model and its own unconstrained equivalent a pure time series equation in outof sample forecasts

experimental gasoline markets abstract zone pricing in wholesale gasoline markets is a contentious topic in the public policy debate with a controlled laboratory experiment we investigate the competitive effects of zone pricing on consumers retail stations and refiners vis a vis the proposed policy prescription of uniform wholesale pricing to retailers we also examine the issue of divorcement and the rockets and feathers phenomenon the former is the legal restriction that refiners and retailers cannot be vertically integrated and the latter is the perception that retail gasoline prices rise faster than they fall in response to random walk movements in the world price for oil

maximum likelihood estimation of cointegration in exchange rate models for seven inflationary oecd countries abstract we apply the johansen technique to estimate cointegration in a monetary exchange rate model modified for real exchange rate fluctuations and applied to seven inflationary oecd countries we generally find one or more cointegrating vectors and the signs of their coefficients are broadly consistent with the modified monetary model the adjustment coefficients are also examined our statistical testing is based on bootstrapping and generates much more conservative rejection criteria than the use of asymptotic critical values even after a substantial degree of freedom correction power estimates are also presented finally we conclude that the monetary model unmodified for real exchange rate fluctuations would be inadequate

third country effects on the exchange rate abstract predictive regressions for bilateral exchange rates are typically run on variables from the associated bilateral pairs of countries these regressions characteristically have low explanatory power which leaves room for an omitted variables interpretation we test whether these omitted variables are from third countries when third country macro factors are added to bilateral exchange rate regressions they enter significantly and increase the adjusted r 2 a three country exchange rate model illustrates potential channels for third country spillovers to affect the bilateral rate

seasonal flutuations and equilibrium models of exchange rate most of the evidence on dynamic equilibrium exchange rate models is based on seasonally adjusted consumption data equilibrium models have not worked well in explaining the actual exchange rate however the use of seasonally adjusted data might be responsible for the spurious rejection of the model this article presents a new equilibrium model for the exchange rates that incorporates seasonal preferences the fit of the model to the data is evaluated for five industrialized countries using seasonally unadjusted data our findings indicate that a model with seasonal preferences can generate monthly time series of the exchange rate without seasonality even when the variables that theoretically determine the exchange rate show clear seasonal behaviours further the model can generate theoretical exchange rates with the same order of integration than actual exchange rates and in some cases with the same stochastic trend

the effects of nonstationarities on performance in call markets abstract this experiment investigates the responsiveness of laboratory call markets to repetitive systematic shocks in underlying demand or supply conditions results of nine call markets conducted under three treatment conditions are compared with nine previously reported double auctions the informationally sparse call auctions perform no worse than the double auctions allocative efficiency is similar across institutions and call markets appear to track underlying equilibrium price movements more accurately than double auctions

evaluating the predictability of exchange rates using long horizon regressions mind your p s and q s since the breakdown of the bretton woods agreement researchers have used a wide variety of structural models to try to predict exchange rate movements unfortunately finding consistent evidence that these models outperform a random walk has proven elusive in this paper we investigate the impact different methods of inference may have had on these conclusions using p values based on recently developed tests of forecast accuracy and encompassing as well as q values designed to mitigate multiple testing problems we provide stronger evidence consistent with these models having superior predictive ability our results suggest that previous studies inability to detect predictive ability may have been influenced by the statistics used and the manner in which they were employed

exchange rates financial innovation and divisia money the sterling dollar rate 1972 1990 in this paper we examine the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using as a convenient framework the monetary model of the exchange rate we demonstrate inter alia that for the sterling us dollar exchange rate over the period 1972 q1 to 1990 q2 that the use of divisia money makes a significant difference to both the long and short run modelling of the exchange rate

tests for parameter instability in regressions with i 1 processes this article derives the large sample distributions of lagrange multiplier lm tests for parameter instability against several alternatives of interest in the context of cointegrated regression models the fully modified estimator of phillips and hansen is extended to cover general models with stochastic and deterministic trends the test statistics considered include the supf test of quandt as well as the lm tests of nyblom and of nabeya and tanaka it is found that the asymptotic distributions depend on the nature of the regressor processes that is if the regressors are stochastic or deterministic trends the distributions are noticeably different from the distributions when the data are weakly dependent it is also found that the lack of cointegration is a special case of the alternative hypothesis considered an unstable intercept so the tests proposed here may also be viewed as a test of the null of cointegration against the alternative of no cointegration the tests are applied to three data se

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

potential pitfalls for the purchasing power parity puzzle sampling and specification biases in mean reversion tests of the law of one price the ppp puzzle is based on empirical evidence that international price differences for individual goods loop or baskets of goods ppp appear highly persistent or even nonstationary the present consensus is these price differences have a half life that is of the order of five years at best and infinity at worst this seems unreasonable in a world where transportation and transaction costs appear so low as to encourage arbitrage and the convergence of price gaps over much shorter horizons typically days or weeks however current empirics rely on a particular choice of methodology involving i relatively low frequency monthly quarterly or annual data and ii a linear model specification in fact these methodological choices are not innocent and they can be shown to bias analysis towards findings of slow convergence and a random walk intuitively if we suspect that the actual adjustment horizon is of the order of days then monthly and annual data cannot be expected to reveal it if we suspect arbitrage costs are high enough to produce a substantial band of inaction then a linear model will fail to support convergence if the process spends considerable time random walking in that band thus when testing for ppp or loop model specification and data sampling should not proceed without consideration of the actual institutional context and logistical framework of markets

monetary fundamentals and exchange rate dynamics under different nominal regimes we investigate the dynamic relationship between the us dollar exchange rate and its fundamentals across different exchange rate regimes using data going back to the late 1800s or early 1900s for six industrialized countries for these countries there is evidence of a long run relation between the nominal exchange rate and monetary fundamentals consistent with conventional theories of exchange rate determination we employ a markov switching vector equilibrium correction model that allows for regime shifts in the entire set of parameters and the variance covariance matrix our results suggest that the relative importance of exchange rates and fundamentals in restoring the long run equilibrium level implied by the exchange rate monetary fundamentals model varies significantly over time and is affected by the nominal exchange rate regime in operation

purchasing power parity and unit root tests using panel data abstract this paper reports the results of unit root tests for real exchange rates using a panel framework this panel approach provides greatly improved power compared to conventional univariate time series unit root tests we obtain evidence supporting ppp over the recent flexible exchange rate period for g 6 and oecd countries we show explicitly that failure to find such evidence in previous research was due to the low power of the tests

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

real exchange rates in the short medium and long run abstract this paper uses long horizon autocorrelations and variance ratio statistics to test for long term mean reversion in real exchange rates unlike most previous tests of this hypothesis the tests do reject a random walk for monthly data in the post bretton woods era however the statistics indicate that positively correlated innovations rather than mean reversion are the source of the rejection tests using annual data for the twentieth century also reject the random walk in this case however the rejection can be attributed to mean reversion and confirms that ppp is a long term phenomenon

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

money stock versus monetary base in time frequency exchange rate determination abstract this study uses a time frequency analysis to provide empirical evidence of the changing role of the money supply in the determination of the japanese yen u s dollar exchange rate we demonstrate that in the short run money supply has a stable significant effect on the exchange rate only after the introduction of quantitative easing policies together with a remarkable difference between the money stock and the monetary base under quantitative easing policies while money stock has a limited role at best in short run exchange rate dynamics increases in the monetary base cause the currency to depreciate in the short run the notable role of the monetary base remains exceptionally stable over time only in quantitative easing regimes while the exchange rate is unstably connected to other fundamentals moreover in the long run the monetary base outperforms the money stock in explaining the exchange rate in general lastly the growing role of the monetary base is shown to be robust to several checks

gains and losses of sugar program policy options high domestic sugar prices supported by u s sugar policy have induced a significant substitution of corn sweeteners for sugar recognizing the close relationship between sugar and corn sweeteners this study applies a general equilibrium approach to evaluate the distributional effects of three different policy options i e quota tariff and deficiency payment on sugar related interest groups the results show that the current quota policy intended ostensibly to protect domestic sugar producers have hurt foreign exporters it will harm domestic sugar producers if the trend continues additionally the quota program is the most expensive of the options considered

on the predictive power of monetary exchange rate model the case of the malaysian ringgit us dollar rate the predictive power of the monetary model for the malaysian ringgit us dollar rm usd rate is analysed using quarterly data ending in 2006 q3 we find compelling evidence of a long run relationship between exchange rates and the economic fundamental determinant macroeconomic factors systematically affect the long run movement of the rm usd rate additionally the rm usd rate was overvalued by about 10 several quarters before the 1997 crisis after the crisis rates fluctuated close to the equilibrium value the out of sample forecasts demonstrate that the monetary model outperforms the naive random walk model the monetary and purchasing power parity ppp models do well at the four to eight quarters horizon

are real exchange rates nonstationary evidence from a panel data test it is well documented that real exchange rates between the united states and many industrialized countries in the post bretton woods period are integrated this result implies that purchasing power parity ppp does not hold even as a long run relationship this paper demonstrates that the failure to reject the unit root hypothesis may result from the low power of existing univariate test procedures i test for unit roots in real exchange rates by employing a more powerful panel based procedure using both cpi and wpi real dollar exchange rate data i strongly reject the null hypothesis of a unit root my results provide overwhelming support for the long run ppp under the current float copyright 1996 by ohio state university press

the impact of technical change on the aggregate production function this study endeavours to look at both disembodied technical progress and embodied technical progress in the capital stock and in the labour force in the united states over the period 1947 80 the results suggest that disembodied technical progress has been about 3 per year embodied technical progress in the capital stock is approximately 3 4 per year and educational attainment significantly enhances labour productivity finally when the issue of structural stability of the underlying production relationship is addressed the period 1971 80 gives rise to some inconsistency

efficient exchange rate forecasts lagged models better than the random walk abstract the evidence of meese amd rogoff 1983 on the out of sample forecasting performance of structural exchange rate models in comparison to the random walk model portrays a disappointing picture of structural models this paper re considers the issue for the german mark for an updated period to include a larger set of structural models and lagged adjustment besides out of sample evidence in sample evidence is also examined we conclude that while some stuctural models dominate the random walk a lagged adjustment consideration can contribute towards better performance

market power and the institutional asymmetry of the posted offer trading institution abstract this paper reports a series of market experiments examining the conjecture that the institutional asymmetry inherent in posted offer pricing can suppress the exercise of market power by the non posting side of the market the data clearly support this conjecture if market power is defined as a unilateral incentive to manipulate the market price via strategic quantity withholding

measuring the dollar euro permanent equilibrium exchange rate using the unobserved components model this paper employs an unobserved component model that incorporates a set of economic fundamentals to obtain the euro dollar permanent equilibrium exchange rates peer for the period 1975q1 to 2008q4 the results show that for most of the sample period the euro dollar exchange rate closely followed the values implied by the peer the only significant deviations from the peer occurred in the years immediately before and after the introduction of the single european currency the forecasting exercise shows that incorporating economic fundamentals provides a better long run exchange rate forecasting performance than a random walk process

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

real exchange rate behavior the recent float from the perspective of the past two centuries using annual data spanning two centuries for dollar sterling and franc sterling real exchange rates we find strong evidence of mean reverting real exchange rate behavior using simple stationary autoregressive models estimated on prefloat data we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float such stationary univariate equations explain 60 80 percent of the in sample variation in real exchange rates although the degree of short run persistence may be high the econometric estimates imply a half life of shocks to the real exchange rate of about 6 years for dollar sterling and a little under 3 years for franc sterling

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

the hayek hypothesis in experimental auctions institutional effects and market power the hayek hypothesis in experimental auctions institutional effects and market power we report twelve market experiments utilizing a seller market power supply and demand structure where two of five sellers can unilaterally increase their profit by withholding supply the data indicate that both the double auction and posted offer institutions result in traders extracting the bulk of the potential gains from exchange in the market however prices generally occur above the competitive equilibrium prediction market power in the form of strategic supply withholding does not appear to be responsible for the supra competitive prices i introduction one important result arising from experimental market research is that the information flows and contracting rules which define the institutional structure of a market can exert a pronounced influence on market performance such institutional features may be more important than some traditional structural characteristics in determining whether market outcomes will correspond to the predictions of the competitive model in particular a large and growing body of experimental data suggests that markets can generate efficient outcomes even when there are a relatively small number of buyers and sellers with incomplete information on the underlying structure of the market based on evidence from a wide variety of experimental double auction markets vernon smith 1982 167 has expressed this more formally as the hayek hypothesis markets economize on information in the sense that strict privacy together with the public messages of the market are sufficient to produce efficient ce competitive equilibrium outcomes in this statement however the notion of an efficient ce outcome could be interpreted as 1 a simple efficiency claim that all exchange surplus will be extracted or 2 a price claim that all exchange surplus will be extracted via trades at the competitive equilibrium price a recent study by holt langan and villamil 1986 hereafter hlv examines the validity of the hayek hypothesis using the double auction institution and a market structure designed to provide a rather difficult test for the competitive model hlv s market power design provides a subset of sellers with an incentive to unilaterally generate a price increase via the strategic withholding of supply the resulting price deviation from the competitive equilibrium is substantial but results in a relatively small loss of market efficiency thus the price interpretation of the hayek hypothesis is violated in this design if holders of market power recognize their position and successfully affect prices to their advantage the efficiency interpretation however will still hold approximately even with the successful exercise of market power in fact the price interpretation of the hayek hypothesis tends to break down in hlv s markets but the efficiency interpretation tends to hold hlv report deviations from the competitive equilibrium price consistent with the exercise of market power in three of five seller market power experiments they also conjecture that deviations from the competitive equilibrium may increase as participants become more experienced with the trading institution this paper reports the results of twelve experiments that build on hlv s research our experiments compare market performance in hlv s seller market power smp design using both the double auction and posted offer trading institutions our purpose in conducting these experiments is twofold first we are interested in examining the effects of changes in trading institutions on deviations from the competitive equilibrium price in the smp design second to the extent that competitive equilibrium price deviations are observed we are interested in assessing whether the exercise of market power in the form of strategic withholding is the source of these deviations

testing the validity of the monetary model for asean with structural break this study examines the validity of the long run structural relations underlying the monetary exchange rate model for malaysia singapore the philippines and thailand take into consideration the possibility of structural change we examined the models using recent developed techniques of testing unit root and cointegration with a structural break our findings of three cointegrating relations among the variables in the system were further identified by testing theoretical restrictions on the cointegrating equations the long run relationships were able to be interpreted according to the theory hence support the long run validity of the monetary exchange rate model

oil price fluctuations and u s dollar exchange rates adding oil prices to the monetary model of exchange rates we find that oil prices significantly explain movements in the value of the u s dollar usd against major currencies from the 1970s to 2008 our long run and forecasting results are remarkably consistent with an oil exchange rate relationship increases in real oil prices lead to a significant depreciation of the usd against net oil exporter currencies such as canada mexico and russia on the other hand the currencies of oil importers such as japan depreciate relative to the usd when the real oil price goes up

changing monetary policy rules learning and real exchange rate dynamics when the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the taylor rule the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries this paper examines the implications of these taylor rule fundamentals for real exchange rate determination because the true parameters in central bank policy rules are unknown to the public and change over time the model is presented in the context of a least squares learning environment this simple learning model captures the volatility and the major swings in the real deutschemark euro dollar exchange rate from 1976 to 2007

price level co movements within currency unions an alternative integration metric this paper analyses currency union integration by testing whether price levels in member countries possess a common stochastic trend the trace statistic test for cointegration proposed by johansen 1995 demonstrates the presence of such a trend for most unions a disaggregated analysis identifies a common stochastic trend for several though fewer than half of country pairs within a union some unions such as the eurozone have small shares of cointegrated country pairs yet the share of cointegrated country pairs is large relative to countries outside currency unions comparison to a control group country pairs where one country belongs to a given union and the other country does not indicates that the cointegration found within a currency union is a union specific trait and not a feature of the individual countries within the union these results provide an alternative metric to intraunion trade for gauging the extent of currency union integration

automated pricing rules in electronic posted offer markets i introduction electronic commerce affords the opportunity to automate the process by which buyers and sellers engage in an exchange at a mutually agreeable price for example buyers on the internet can use software agents to automate the gathering of information on price and other product attributes in online retail markets that are traditionally organized as posted offer markets 1 this technology obviously reduces the consumer transaction costs of comparing prices which presumably would induce stronger competition among sellers however as hal varian remarked in the e commerce magazine wired everybody thinks more information is better for consumers that s not necessarily true bayers 2000 215 the same technology that reduces consumer transaction costs can be employed by sellers to automate the monitoring of rivals prices which might mitigate or even overwhelm the procompetitive effect of reduced consumer search costs in addition electronic markets grant more than just ideal information on competitors pr ices with electronic commerce a seller can commit to implementing an automated algorithm that could possibly sustain tacitly collusive prices in this article we study the supply side effects of three automated pricing algorithms that use price information as an input that could be retrieved from consumer price gathering technology in an electronic market two of the three algorithms that we study have the theoretical potential to facilitate collusion low price matching and a trigger strategy the third and presumably more competitive algorithm which we refer to as undercutting is drawn from the common retail practice of beating competitors prices using the experimental method this article explores how sellers deploy these three automated pricing algorithms in electronic markets more specifically we ask 1 do sellers prefer to set their price manually or to adopt automated algorithms that adjust price more frequently 2 are markets with automated pricing algorithms more competitive or less competitive than markets with manually posted prices 3 does increased commitment to an automated pricing mechanism facilitate tacit collusion to study the impact of automated pricing on seller behavior we base our work on the model of price dispersion in retail markets by varian 1980 thus our article also explores how well a theory of mixed strategy pricing organizes the behavior of sellers in a market with a nearly continuous stream of differentially informed fully revealing customers 2 as a preview of the results we find that 1 sellers employ automated pricing algorithms more often than they manually set their own price 2a automated undercutting leads to prices similar to the game theoretic prediction 2b automated low price matching generates prices significantly higher than the game theoretic prediction 2c automated trigger pricing results in market prices below the game theoretic prediction and 3 greater commitment to automated low price matching shifts prices closer to the joint profit maximizing outcome the structure of the article is as follows section ii presents the three automated pricing algorithms we consider the experimental design and procedures are in section iii section iv presents and discusses our results and section v briefly concludes ii automated pricing algorithms the market environment is motivated by the model of sales in varian 1980 3 in this model there are n sellers that supply buyers who each desire to purchase at most one unit of a homogeneous product each seller has a commonly known constant marginal cost c of supplying a unit to a buyer and posts a price p which the buyer can accept or reject the private value v for each nonstrategic buyer is assumed to be a random variable drawn independently from a known uniform distribution with a support v v buyers differ based on the number of firms from which price quotes are received prior to making a purchasing decision

foreign exchange market interventions and the exchange rate in the long run this article examines whether foreign exchange market interventions conducted by the bank of japan are important for the dollar yen exchange rate in the long run we rely on a re examination of the empirical performance of a monetary exchange rate model this is basically not a new topic however we focus on two new questions first does the consideration of periods of massive interventions in the foreign exchange market uncover a potential long run relationship between the exchange rate and its fundamentals second do forex interventions support the adjustment towards a long run equilibrium value our results suggest that taking periods of interventions into account within a monetary model does improve the goodness of fit of an identified long run relationship to a significant degree furthermore forex interventions increase the speed of adjustment towards long run equilibrium in some periods particularly in periods of coordinated forex interventions our results indicate that only coordinated inter

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

tax policy and u s agriculture a general equilibrium analysis this article emloys a computable general equilibrium model to analyze the effects of eliminating farm and food tax preferences in 1977 tax differentials on capital income labor payments and production and sales taxes are each examined results indicate that these combined preferences lowered food costs by about 4 5 billion while enhancing after tax returns to farm land labor and capital the associated general equilibrium tax expenditure is estimated to have been between 5 5 and 6 6 billion

tests of different monetary aggregates for the monetary models of the exchange rate in five asean countries this study examines the usefulness of divisia money relative to simple sum money for exchange rate modelling in a period of rapid financial deregulation this comparison is conducted using the monetary model of the exchange rate in the long run modelling the divisia money is significantly superior to simple sum money in the case of malaysia and the philippines while indifferent for indonesia singapore and thailand

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

cointegration how short is the long run abstract when testing for cointegration and faced with short sample periods it is common for researchers to turn to more frequently sampled observations that is to move from annual to quarterly or monthly data in order to increase the number of observations we argue that such a gain in the degrees of freedom is more apparent than real essentially cointegration is a long run concept and hence requires long spans of data to give tests for cointegration much power rather than merely large numbers of observations using monte carlo simulations we demonstrate this for four popular tests for cointegration

a stable us money demand function 1874 1975 we apply recent econometric techniques to the demand for money in the united states over a period of some hundred years using data previously analyzed by friedman and schwartz 1982 our results parallel those of hendry and ericsson s 1991 uk study we find evidence of a unique long run money demand function and of a stable short run demand function which passes a range of diagnostic tests and exhibits parameter constancy also parameter non constancy in an inverted equation where prices appear as the dependent variable is inconsistent with the hypothesis of exogenous money determining prices through the money demand function

long run purchasing power parity is it for real in this paper we re examine the purchasing power parity concept using data from the recent experience with floating exchange rates in particular we utilise the recently developed multivariate cointegration methodology to test for a long run relationship between exchange rates and relative prices and also to test for the proportionality of the exchange rate with respect to relative prices in contrast to much other research we demonstrate that there is a long run relationship between a number of bilateral u s dollar exchange rates and their corresponding relative prices the proportionality of the exchange rate to relative prices does not however receive support from the data this finding may be attributable to the use of measured price series rather than the true series

error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting the proposition that dynamic exchange rate models can outperform the random walk in out of sample forecasting in the sense that they produce lower mean square errors is examined and disputed by using several dynamic versions of three macroeconomic exchange rate models it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk the results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable which in effect is a random walk component the analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component

competitive equilibrium convergence in a posted offer market with extreme earnings inequities abstract we present the results of five laboratory posted offer experiments in which the competitive equilibrium model predicts that all exchange profits are received by one side of the market thus defining a boundary condition price converges to the prediction more slowly when buyers rather than sellers receive the exchange surplus apparently due to the increased market power of sellers in this trading mechanism a model of the seller s decision in this market is developed to explain this result we also observe costly signalling and tacit collusion in our experiments

nominal shocks in monopolistically competitive markets an experiment abstract a market experiment examines the capacity of price and information frictions to explain real responses to nominal price shocks results indicate that both price and information frictions impede the response to a nominal shock as predicted by the standard dynamic adjustment models observed adjustment delays however far exceed predicted levels results of a pair of subsequent treatments indicate that a combination of announcing the shock privately to all sellers rather than publicly and a failure of many sellers to best respond to their expectations explains the observed adjustment inertia

the monetary model strikes back evidence from the world abstract we revisit the dramatic failure of monetary models in explaining exchange rate movements using the information content from 98 countries we find strong evidence for cointegration between nominal exchange rates and monetary fundamentals we also find fundamentals based models very successful in beating a random walk in out of sample prediction

assessing the impact of the sugar programme on the us economy abstract this study examines the effect of the sugar tariff rate import quota program on the united states economy based on a computable general equilibrium model the analysis suggests that a complete elimination of the sugar program would reduce output for all producing sectors by about 2 85 billion for producing sectors besides the agriculture programme crops crude oil and petroleum refining sectors output would increase by about 2 98 billion additionally there would be an increase of about 197 million and 121 million in the consumption of goods and services and in welfare respectively the government sector would realize a reduction in revenue of about 15 million

does the euro follow the german mark evidence from the monetary model of the exchange rate abstract this paper investigates whether german or synthetic european pre emu data provides the appropriate empirical basis for evaluating euro dollar exchange rate behavior monetary exchange rate equations are estimated for both data sets over the pre emu period and out of sample forecasts are evaluated to assess their ability to explain the euro dollar exchange rate from 1999 to 2004 while forecast accuracy tests confirm the usefulness of synthetic european data for euro exchange rate analysis forecasts based on the german pre emu experience cannot even beat a random walk our results indicate that the euro does not simply follow the german mark but that it has its origins in the other pre emu currencies as well

cointegration tests of purchasing power parity the case of swiss exchange rates abstract this paper tests purchasing power parity ppp as a long run equilibrium condition by examining the long run relationshiop between exchange rates and wholesale price indices using cointegration tests this paper avoids some of the problems of previous cointegration tests of ppp by using more precise data pretests and by not imposing a priori restrictions upon the cointegrating vector of the nine combinations of swiss exchange rates and price indices examined cointegration is detected in seven cases thus supporting ppp as a long run equilibrium jel f31 c32

exchange rate economics is always and everywhere controversial abstractthis article reviews the major developments in the recent literature on exchange rate economics it is argued that the link between the exchange rate and economic fundamentals is breaking new ground evidence indicates that alternative analytical frameworks such as the new open economy macroeconomics and exchange rate arrangements such as the euro have their theoretical and analytical elegance but are proving empirically very difficult to implement the role of methodological advances and alternative fundamental instruments such as world commodity prices is also highlighted

co integration tests for long run equilibrium in the monetary exchange rate model abstract the monetary model of exchange rate determination is tested as a long run equilibrium relation tests of co integration among the variables in this model over a wide range of specifications are generally unfavorable to the monetary approach

nash equilibrium and buyer rationing rules experimental evidence i introduction this paper presents the results of laboratory experiments comparing the effect of two buyer rationing rules on capacity constrained duopoly markets bertrand edgeworth games this setting offers an excellent opportunity to compare the stage game nash prediction with other equilibria of a repeated game under otherwise identical conditions the rationing rule generates either a unique pure strategy equilibrium or a unique mixed strategy equilibrium of the stage game further collusive outcomes of the repeated game are supported by a wider range of discount factors for one rationing rule than the other this study presents evidence that the single stage nash equilibrium has predictive power for both rationing rules even in repeated settings this result appears to be robust whether the nash equilibrium is in pure strategies or exists only in mixed strategies in modeling capacity constrained price games the choice of rationing rule is possibly the most arbitrary decision a theorist makes in the literature of single shot bertrand edgeworth games we can find examples of nearly identical models which yield substantively different results due to differences in the rationing rule assumed examples are beckmann s 1965 model and levitan and shubik 1972 allen and hellwig 1986 and vives 1986 and kreps and scheinkman 1983 and davidson and deneckere 1986 laboratory experiments provide an interesting opportunity to examine the empirical consequences of alternative buyer rationing rules knowledge of the type of buyer rationing scheme involved with field data is usually unavailable to a researcher in laboratory experiments the researcher can control the type of buyer rationing rule to be used and compare the effects of alternative rules this study provides a first step toward an empirical understanding of the effects of rationing rules one of the rationing rules that i study the value queue 1 is mathematically more tractable than an alternative the random queue 2 hence the authors are able to generalize the value queue models in other dimensions however the value queue assumption reservation values that comprise demand are ordered from highest to lowest should be viewed as a serious restriction on the applicability of these models section ii relates laboratory and field experiments to single shot bertrand edgeworth nash equilibria section iii describes the development and recent contributions to bertrand edgeworth oligopoly theory and demonstrates the effect of rationing rule assumptions on theoretical predictions i describe the experimental design in section iv and identify the competitive monopoly joint profit maximum and single shot nash predictions additionally qualitative differences predicted by single shot and repeated game nash equilibria are discussed experimental results follow in section v with concluding remarks in section vi ii laboratory and field experiments and the nash equilibrium existing laboratory evidence for capacity constrained price games has been compared to the single shot nash equilibrium only ketchum smith and williams 1984 and kruse rassenti reynolds and smith 1993 provide initial results as to the predictive strength of the single stage nash equilibrium in a laboratory environment ketchum smith and williams compare the prices resulting from four seller plato computer assisted posted offer markets the comparison is between one treatment group in which the competitive equilibrium is also the single stage nash equilibrium and another treatment group in which the competitive equilibrium is not a nash equilibrium they find significantly different market outcomes between the two groups kruse rassenti reynolds and smith 1987 test a four seller constant marginal cost bertrand edgeworth model using a komogorov smirnoff test they reject the hypothesis that the actual price distribution matches the mixed strategy price distribution predicted by the theory

oligopoly competition in fixed cost environments abstract many industries with avoidable fixed costs face competitive price instability problems in an attempt to maintain profitability we designed an experimental environment where profitability is eroded by the addition of sunk and avoidable fixed costs while we cannot reject the hypothesis that sunk fixed costs have no effect on prices we observe a pattern of price signaling and responses which maintain above normal profits this success implies that a firm does not have to exit such an industry in order to avoid loses and may help to explain why some competitive industries appear to maintain an inefficient number of firms

tests of the different variants of the monetary model in a developing economy malaysian experience in the pre and post crisis periods this study examines the validity of four different variants of the monetary model of exchange rate determination for malaysia covering both the pre and post crisis periods using the vector error correction models the findings demonstrate that for both periods the variables used are cointegrated tests tend to suggest that of the four variants of monetary model the sticky price model holds in both periods and the flexible price model holds only in the post crisis period the proportionality between the exchange rate and relative money does not hold in any period the plotted actual and fitted exchange rates for both sub samples show that the models are able to track the actual exchange rate trend quiet well

purchasing power parity over two centuries strengthening the case for real exchange rate stability a reply to cuddington and liang cuddington and liang 2000 purchasing power parity over two centuries journal of international money and finance 19 751 755 examine the long span of sterling dollar real exchange rate data of lothian and taylor 1996 real exchange rate behavior the recent float from the perspective of the past two centuries journal of political economy 104 488 509 and claim to reject long run purchasing power parity by fitting time trends or by considering very high order autoregresssive representations this reply demonstrates however that the central claims of lothian and taylor are in fact strengthened by the implications of cuddington and liang s analysis in that while the economic importance of introducing trend terms is slight this leads to a faster estimated speed of mean reversion c 2000 elsevier science ltd all rights reserved jel classification f31 f41 c22

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

an economic evaluation of empirical exchange rate models this paper provides a comprehensive evaluation of the short horizon predictive ability of economic fundamentals and forward premiums on monthly exchange rate returns in a framework that allows for volatility timing we implement bayesian methods for estimation and ranking of a set of empirical exchange rate models and construct combined forecasts based on bayesian model averaging more importantly we assess the economic value of the in sample and out of sample forecasting power of the empirical models and find two key results 1 a risk averse investor will pay a high performance fee to switch from a dynamic portfolio strategy based on the random walk model to one that conditions on the forward premium with stochastic volatility innovations and 2 strategies based on combined forecasts yield large economic gains over the random walk benchmark these two results are robust to reasonably high transaction costs

the failure of the monetary exchange rate model for the canadian u s dollar in this paper the validity of the monetary exchange rate model in the long run for the canadian u s dollar exchange rate is examined the primary test employed is the johansen 1991 and johansen and juselius 1990 cointegration technique the effects of dummy variables and lag specification on the statistical inference are considered and monte carlo simulations based on the estimated parameters are employed despite the use of the longest data set yet for the canadian case no evidence is found in favour of the monetary exchange rate model using the johansen procedures this result is confirmed by several other cointegration procedures jel classification f31 f41 la faillite du modele monetaire du taux de change pour les dollars canadien et americain ce memoire examine le modele monetaire du taux de change pour savoir s il est valide par l experience canado americaine en longue periode le test principal utilise est la technique de cointegration de johansen 1991 et johansen et juselius 1990 les effets des variables fictives et de la specification de la structure de delais sur l inference statistique sont consideres et on utilise des simulations de monte carlo fondees sur les parametres calibres malgre le fait qu on fait appel a la plus longue serie chronologique utilisee dans ce type d analyse a ce jour on ne trouve aucun support du modele monetaire du taux de change en utilisant les procedures de johansen ce resultat est confirme par l utilisation de plusieurs autres procedures de cointegration

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

exchange rates and fundamentals co movement long run relationships and short run dynamics abstract the present study builds upon the seminal work of engel and west 2005 and in particular on the relationship between exchange rates and fundamentals the paper discusses the well known puzzle that fundamental variables such as money supply and interest rate provide help in predicting changes in floating rates it also tests the theoretical result of engel and west 2005 that in a rational expectations present value model the asset price manifests near random walk behaviour if the fundamentals are i 1 and the factor for discounting future fundamentals is near one the study explores the direction and nature of causal interdependencies among the most widely traded currencies in the world their country specific fundamentals and their us differentials a new var vecm garch multivariate filtering approach is implemented whilst linear and nonlinear non causality is tested and validated on simulated and empirical data the evidence implies that there is no indication of a prevailing causal behaviour and when nonlinear effects are accounted for the pattern of leads and lags changes over time the variations in this linkage can be attributed to parameter instability in structural models which may have little effect on fx forecastability over short horizons yet it is significant for long run cointegrating relationships while it is difficult to reconcile these findings with the rational expectations hypothesis the theory of consistent expectations or bounded rationality matches simulation and empirical findings more efficiently overall fundamentals may be important determinants of fx rates however there may be some other unobservable variables driving the currency rates that current asset pricing models have not yet captured

fiscal deficits and mean reversion in real exchange rates the mean reversion of real exchange rates in g5 countries depends on both countries fiscal deficits surplus in a nonlinear way when the fiscal policy pushes the real exchange rate to be deviated further away from the equilibrium level the mean reversion process is faster

persistence in foreign exchange rates abstract this study examines the long run behavior of seven daily nominal exchange rates using univariate and multivariate persistence measures our results indicate that for some currencies the long run behavior deviates from that of a pure random walk in certain periods the multivariate estimates reflect the effect of both the ems exchange rate mechanism and increased post louvre accord coordinated intervention a large portion of the effect of a shock in one currency on another currency s long run value can be attributed to contemporaneous effects on the other currencies

the contribution of economic fundamentals to movements in exchange rates starting from the asset pricing approach of engel and west we examine the degree to which fundamentals can explain exchange rate fluctuations we show that it is not possible to obtain sharp inferences about the relative contribution of fundamentals using only data on observed monetary fundamentals money minus output differentials across countries and exchange rates we use additional data on interest rate and price differentials along with the implications of the monetary model of exchange rates to decompose exchange rate fluctuations in general we find that money demand shifts along with observed monetary fundamentals are an important contributor to exchange rate fluctuations

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

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

real exchange rates and structural breaks cointegration tests often fail to detect the existence of long term relationships such as purchasing power parity for two reasons i these tests have low power and ii structural shocks can alter the long run real exchange rate in this paper the long run movements of five exchange rates relative to the us dollar and five european exchange rates relative to the deutsche mark are investigated in particular corrected cointegration tests are applied which take into account the possibility of a structural break at an unknown date empirical evidence is found that structural changes can be responsible for most exchange rate deviations from their equilibrium defined by purchasing power parity or a generic monetary model

searching for stationarity purchasing power parity under the current float abstract using panel data methods we investigate long run purchasing power parity by testing for unit roots in real exchange rates of industrial countries under the current float the evidence against the unit root hypothesis is stronger for larger than for smaller panels for monthly than for quarterly data and when the german mark rather than the united states dollar is used as the base currency while we find that accounting for serial correlation considerably weakens the evidence against the unit root null the results as a whole are consistent with long run purchasing power parity

exchange rates and fundamentals under adaptive learning abstract this paper studies a monetary model that is standard in all respects except that market participants have incomplete knowledge about the economic structure and employ adaptive learning rules to learn about the economic environment market participants also must contend with unannounced regime shifts simulation results suggest that the models under adaptive learning especially constant gain learning combined with a structural change dominate the alternative specifications of expectations in their ability to account for why fundamentals predict exchange rate returns over long horizons but not over short horizons and for generating excessively volatile returns and persistent deviations of the exchange rate from the monetary fundamentals

posted offer markets in near continuous time an experimental investigation this paper reports an experiment conducted to evaluate a near continuous variant of the posted offer trading institution where the number of periods in a market session is increased by reducing sharply each period s maximum length experimental results suggest that although decisions in time truncated periods are not equivalent to periods of longer duration extensive repetition improves considerably the drawing power of equilibrium predictions in some challenging environments nevertheless significant deviations remain in the near continuous framework we also observe that the extra data collected in the near continuous framework allows new insights into price convergence and price signaling