conditions that cause risk pooling to increase inventory abstract we say product a is a partial substitute for product b if a fraction of the customers who prefer b are willing to accept a when b is out of stock when demand is uncertain it is intuitive and true that a larger willing to substitute fraction implies larger expected profits a higher willing to substitute fraction allows one to pool the risk of individual products it may also be intuitive that a larger willing to substitute fraction might result in lower optimal total inventory for the full substitution structure several researchers have shown that for certain distributions such as the exponential this latter intuition is not true we show that this full substitution anomaly can occur with any right skewed demand distribution we assume i i d demand distributions unless we indicate otherwise we also show that the anomaly can occur for a number of realistic situations of partial substitution with commonly used demand distributions such as normal exponential poisson and uniform we also demonstrate the anomaly for more than one period with backlogging lost sales more than two products and with setup costs

investment and financing activity following calls of convertible bonds abstract the staged financing hypothesis of mayers mayers d 1998 why firms issue convertible bonds the matching of financial and real investment options journal of financial economics 47 83 102 predicts that investment and financing activity will increase following in the money convertible bond calls the prediction for out of the money convertible calls is different no increase is expected we study the rate of both corporate investment and external financing around forced conversions using benchmarks that are analogous to those recommended by barber and lyon barber b lyon j 1996 detecting abnormal operating performance the empirical power and specification of test statistics journal of financial economics 41 359 400 we also examine the cross section of changes in investment and financing activity conversion forcing firms exhibit an increase in both capital expenditures and debt financing around the year of the convertible bond call however the same result holds for the sample firms that conducted out of the money convertible calls further there is no relation between changes in investment activity and changes in debt issuance at the firm level the evidence is inconsistent with the notion that forced conversions serve as a catalyst for staged financing and investment

budget deficits money growth and inflation the turkish evidence the paper investigates the long run relationships between budget deficits inflation and monetary growth in turkey considering two alternative trivariate systems corresponding to the narrowest and the broadest monetary aggregates while the joint endogeneity of money and inflation rejects the validity of the monetarist view lack of a direct relationship between inflation and budget deficits makes the pure fiscal theory explanations illegitimate for the turkish case consistent with the policy regime of financing domestic debt through the commercial banking system budget deficits lead to a growth not of currency seigniorage but of broad money in turkey this mode of deficit financing leading to the creation of near money and restricting the scope for an effective monetary policy may not be sustainable as the government securities broad money ratio cannot grow without limit

commonality in product design cost saving valuation change and cannibalization abstract offering a variety of products is important for a firm to attract different consumer segments however high product variety increases production and distribution costs modular product design and parts commonality are approaches used to counter this trend in cost and still offer a variety of products this paper develops a model to examine when modular products should be introduced and how much modularity to offer the model looks at a market consisting of a high segment and a low segment customers choose the product that maximizes their surplus which is defined as the product s utility minus its price presence of commonality affects the utility of a product greater commonality decreases production cost but makes the products more indistinguishable from one another this makes the product more desirable for the low segment but less desirable for the high segment the firm s objective is to design the products and set the prices so as to maximize its profit

analysis of an industrial component commonality problem we discuss a case study of an industrial production marketing coordination problem involving component commonality for the product line considered the strategic goal of the company is to move from the current low volume market to a high volume market the marketing department believes that this can be achieved by substantially lowering the end products prices however this requires a product redesign to lower production costs in order to maintain profit margins the redesign decision involves grouping end products into families all products within one family use the same version of some components this paper fits in the stream of recent literature on component commonality where the focus has shifted from inventory cost savings to production and development cost savings further we consider both costs and revenues leading to a profit maximization approach the price elasticity of demand determines the relationship between the price level and number of units sold consequently we integrate information from different functional areas such as production marketing and accounting we formulate the problem as a net present value investment decision we propose a mixed integer nonlinear optimization model to find the optimal commonality decision the recommendation based on our analysis has been implemented in the company in addition the application allows us to experimentally validate some claims made in the literature and obtain managerial insights into the trade offs

what drives inflation expectations in brazil an empirical analysis this study examines the macro economic determinants of survey inflation expectations in brazil since the adoption of inflation targeting in 1999 the results suggest that the inflation targeting framework has helped anchor expectations with the dispersion of inflation expectations declining considerably particularly during periods of high uncertainty we also find that apart from the inflation target the stance of fiscal policy as proxied by the ratio of the consolidated primary surplus to gdp has been instrumental in shaping expectations the importance of past inflation in determining expectations appears to be relatively low and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process

portfolio preferences of foreign institutional investors the authors examine the relationship between foreign investment and the attributes of emerging market countries and firms in which investment is made their findings indicate that countries with higher levels of economic development and floating exchange rate regimes tend to have greater ability to obtain foreign capital after controlling for the country s level of economic development they find that firms in countries with stronger shareholder rights and legal framework attract more foreign capital the authors also find that foreign institutions allocate more of their assets to firms with better corporate governance after controlling for other country and firm attributes the main firm level measures of corporate governance are derived from accounting quality variables their results imply that steps can be taken both at the country and the firm level to create an environment conducive to foreign portfolio investment the analysis is based on a unique dataset consisting of equity positions of u s mutual funds in emerging markets

vrp revisited the impact of behavioural costs in balancing standardisation and variety abstract the objective of this paper is to bring a new element to the academic and industrial debate concerning the optimum level of variety in component design in mass production companies many authors have explored the trade off between functional and variety costs and this could be considered as a well acknowledged management issue at least from an engineering perspective nevertheless while defining the theoretically optimal level of component variety there are other elements more related to operators attitude or to operative conditions which may intervene and prevent effective exploitation of the existing variety these elements have been given scant attention in literature while they may play a relevant role in real organisations in this paper we will present a case study and an analytic model for these behavioural costs in manufacturing environments so as to show how the theoretically optimal amount of variety changes if one takes into account these aspects researchers and practitioners might leverage on this contribution in order to rejuvenate the variety reduction paradigm and to increase their awareness in designing and managing mass production manufacturing processes

optimal safety stock levels of subassemblies and manufacturing components abstract in order to control the time to market and manufacturing costs companies produce and purchase many parts and components before receiving customer orders consequently demand forecasting is a critical decision process using modular product design and super bills of materials are two effective strategies for developing a reliable demand forecasting process they reduce the probability of stockouts in diversified production contexts furthermore managing and controlling safety stocks for pre assembled modules provide an effective solution to the problem of minimizing the effects of forecast errors this paper develops evaluates and applies innovative cost based analytical models so that the optimal safety stock of modular subassemblies and components in assembly to order and manufacturing to order systems respectively can be rapidly quantified the implementation of the proposed models in two industrial case applications demonstrates that they significantly reduce the safety stock inventory levels and the global logistical cost

safety stock optimization in multi stage inventory systems abstract determining appropriate safety stocks in stochastic multi state production distribution systems is a very difficult task approaches for optimal determination of safety stocks regarding cost objectives and service level restrictions which are suitable for practical applications can only be found for a very limited class of multi stage inventory problems like problems of strictly serial structure or special two stage production distribution systems in this paper a procedure for determining the optimal size and distribution of safety stocks in a general serial or divergent production distribution process ruled by a base stock control policy is presented this approach especially allows for taking into account the impact of end item demand correlation on distribution and size of safety stocks by using risk pooling effects in divergent systems a powerful dynamic programming algorithm for solving the safety stock optimization problem is developed and impacts of problem parameter variations on the optimal solution are discussed

macroeconomic effects of budget deficits further international evidence abstract this paper investigates the effects of budget deficits on money growth inflation investment and real output growth using annual data from a sample of 32 countries the findings can be summarized as follows i deficits are generally not monetized and therefore they do not produce inflation via monetary expansions ii deficits are not inflationary even through their alleged aggregate demand effects iii deficits are negatively correlated with the rate of growth of real output but this may just reflect their countercyclical nature and iv increased deficits do appear to retard investment usually after one or two years jel e63 h62

application of the scenario aggregation approach to a two stage stochastic common component inventory problem with a budget constraint abstract the purpose of this paper is to study from a new perspective the problem of allocating a given budget among product components that are required for manufacturing the end items in an assemble to order environment since some of the components are common to a number of different end items this constitutes a commonality inventory problem that in fact can be described as a two stage stochastic programming problem we explore the new possibilities made available by the scenario aggregation technique recently proposed by rockafeller and wets in work at the international institute of applied systems analysis iiasa their method was subsequently extended to deal with discrete problems this extension is utilized in the current study

a threshold inventory rationing policy for service differentiated demand classes motivated by a study of the logistics systems used to manage consumable service parts for the u s military we consider a static threshold based rationing policy that is useful when pooling inventory across two demand classes characterized by different arrival rates and shortage stockout and delay costs the scheme operates as a q r policy with the following feature demands from both classes are filled on a first come first serve basis as long as on hand inventory lies above a threshold levelk once on hand inventory falls below this level low priority i e low shortage cost demand is backordered while high priority demand continues to be filled we analyze this static policy first under the assumption that backorders are filled according to a special threshold clearing mechanism structural results for the key performance measures are established to enable an efficient solution algorithm for computing stock control and rationing parameters i e q r andk numerical results confirm that the solution under this special threshold clearing mechanism closely approximates that of the priority clearing policy we next highlight conditions where our policy offers significant savings over traditional round up and separate stock policies encountered in the military and elsewhere finally we develop a lower bound on the cost of the optimal rationing policy numerical results show that the performance gap between our static threshold policy and the optimal policy is small in environments typical of the military and high technology industries

the effect of commonality on safety stock in a simple inventory model we examine the effects of component commonality on optimal safety stock levels in a two product two level inventory model the criterion is to minimize system safety stock subject to a service level constraint although our model is specialized its analysis provides insights not available in other multilevel inventory models

explaining fiscal policies and inflation in developing countries abstract in this paper we investigate empirically the determinants of inflation seigniorage and fiscal deficits in developing countries we first test the optimal taxation theory of inflation for a group of 21 lcds we find that the implications of this theory are rejected for all these countries we then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies we deal with some of the implications of a credibility and reputation model and of a strategic government behavior model we find that the data support the most important predictions of the political economy view of fiscal policy our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage inflation government borrowing and fiscal deficits we end by discussing directions for future research

the costs and benefits of commonality in assemble to order systems with a q r policy for component replenishment abstract in assemble to order systems it has been shown that replacing a number of specific components by a smaller number of general purpose common components can reduce required safety stock levels due to the benefits of risk pooling previous research using single period models has shown that even if the common components are somewhat more expensive than the unique components they replace the benefits of risk pooling often outweigh the added purchasing costs however this has been shown often not to be the case with multiple period models in the long run the added purchasing costs dominate the benefits of risk pooling however both single and multiple period models ignore one of the benefits of commonality order pooling with commonality demand is pooled into a smaller number of components reducing the required number of orders or setups after re optimizing the order quantities and order intervals both the ordering costs and cyclic carrying costs are reduced this paper develops a model to consider the assemble to order environment where components are replenished according to a q r policy results show that order pooling is a significant benefit in many cases it is much more important than the risk pooling benefit in contrast to multiple period models there is often a total cost benefit with commonality even when the common component is several percent more expensive than the unique components it replaces

just in time component replenishment decisions for assemble to order manufacturing under capital constraint and stochastic demand abstract while just in time ideas have been enthusiastically embraced by manufacturing practitioners the small replenishment batch sizes advocated are difficult to reconcile with the standard management science cost trade off approach in a previous paper by the authors which analysed a multi product manufacturing scenario under deterministic demand this difficulty was diagnosed as being due to the standard assumption that capital for inventory is borrowed and hence boundless when inventory is financed by investors and is thus finite the investment level must be treated as an additional variable in the decision to adopt inventory reduction policies for lean investments which might be chosen to maximise return on investment roi rather than absolute profit or for reasons of flexibility jit replenishment becomes more attractive for certain components than the standard analysis would suggest because the capital formerly invested in these components can be reinvested in the inventory of the remaining batch components to improve efficiencies this paper treats the stochastic version of the same problem develops a tractable solution method for the decision problem and in addition to reinforcing the findings of the previous study reveals several other ways in which jit replenishment and component substitution can improve performance by limiting the cost of dealing with uncertainty the analysis is illustrated using an actual case study of a small manufacturing enterprise seeking to reduce inventory and increase roi

the fiscal theory of the price level a critique abstract this paper argues that the fiscal theory of the price level ftpl has feet of clay the source of the problem is a fundamental economic misspecification the ftplconfuses two key building blocks of a model of a market economy budgetconstraints which must be satisfied identically and market clearing or equilibriumconditions the ftpl asssumes that the government s intertemporal budgetconstraint needs to be satisfied only in equilibrium this economic misspecification has far reaching implications for the mathematicalproperties of the equilibria supported by models that impose the structure of theftpl it produces a rash of contradictions and anomalies jel classifications e31 e41 e51 e52 e62 e63 key words fiscal theory of the price level ricardian fiscal financial monetaryprogrammes government budget constraint price level indeterminacy author willem h buiter european bank for reconstruction and development oneexchange square london ec2a 2jn uktel 44 20 73386805fax 44 20 73386110 6111e mail buiterw ebrd comweb page http www nber org wbuiter index htm

investor protection and convertible debt design abstract an important issue that firms consider when designing convertible debt is to specify security features such as conversion ratio maturity date and call period following lewis et al lewis m rogalski r seward j 2003 industry conditions growth opportunities and market reactions to convertible debt financing decisions journal of banking and finance 27 153 181 we employ a single measure that simultaneously considers all of these features the expected probability measured at issue date that the convertible will be converted to equity at maturity we find that firms in countries with stronger shareholder rights issue convertible debt with a higher expected probability of converting to equity the positive association between the expected probability of conversion and shareholder rights is less pronounced in firms for which ownership structures create potentially high managerial agency costs specifically in countries with stronger shareholder rights firms with higher separation of control rights and cash flow rights tend to issue convertibles with lower probability of conversion furthermore we find that large non management block ownership strengthens the likelihood of issuing convertible debt with higher probability of conversion in countries with stronger shareholder rights in contrast firms in countries with stronger creditor rights issue convertibles with lower probability of conversion we also document that the negative association between creditor rights and probability of conversion is more pronounced in firms with higher separation of control rights and cash flow rights

determining near optimal base stock levels in two stage general inventory systems abstract this paper proposes an easily implementable scalable decomposition heuristic for determining near optimal base stocks in two level general inventory systems in this heuristic the general system is decomposed into assembly systems one for each end product for these assembly systems the base stock levels are calculated separately taking into account risk pooling effects for the common components our numerical analyses yield two main insights first the base stock levels determined by the heuristic are close to optimal second considerable improvements can be obtained compared to common sense heuristics

incentives and commonality in a decentralized multiproduct assembly system in this paper we explore the impact of decentralized decision making on the behavior of multiproduct assembly systems specifically we consider a system where three components two product specific and one common are used to produce two end products to satisfy stochastic customer demands we study the system under both centralized and decentralized decision making in the decentralized system we prove that for any set of wholesale prices there exists a unique pareto optimal equilibrium in the suppliers capacity game we show that the assembler s optimal wholesale prices lie in one of two regions one leads to capacity imbalance and one does not we use these results to derive insights regarding the inefficiencies that decentralization can cause in such systems in particular several of our findings indicate that outsourcing the management of component supplies may inhibit the use of operational hedging approaches for managing uncertainty

the relationship between inflation and the budget deficit in turkey this article analyzes the empirical relationship between inflation and the budget deficit for the turkish economy by a multivariate cointegration analysis a single equation model shows that the scaled budget deficit as well as income growth and debt monetization significantly affects inflation in turkey the conditional model of inflation is constant and it encompasses a previously estimated model

deficits and money growth in the united states 1872 1983 abstract this paper reports empirical evidence on the relation between government budget deficits and the growth of high powered money in the united states high powered money growth appears to be positively related to war spending during periods when such spending is a substantial fraction of gnp there is little evidence that the growth of high powered money is related to the non war government deficit measured either in cash or in real terms after controlling for the level of overall economic activity

investment incentives debt and warrants abstract this paper models and characterizes investment incentive problems associated with debt financing the decision problem of residual claimants is explicity formulated and their investment policies are characterized the paper also analyzes the use of conversion features and warrants to control distortionary incentives these claims reverse the convex shape of levered equity over the upper range of the firm s earnings and this mitigates the incentive to take risk it is shown that under certain conditions such claims can be constructed to restore net present value maximizing incentives and simultaneously meet the financing requirements of the firm

the impact of demand aggregation through delayed component allocation in an assemble to order system we consider an assemble to order system in which multiple products are assembled from a common component and a set of product dedicated components component capacities are chosen prior to a finite horizon selling season and the common component is allocated to the products based on observed demands we propose a collection of allocation mechanisms involving varying degrees of demand aggregation ranging from a scheme under which all demands are observed prior to making the allocation decision to allocations made for each arriving demand in this context we explore the impact of the allocation scheme on sales profits and capacity decisions including the degree of capacity imbalance we find that the benefit from increased demand aggregation is closely linked to the degree of capacity imbalance profit gains from delayed allocation tend to be higher in systems in which the optimal capacity portfolio is highly unbalanced when the allocation decision is made after observing all demands we develop insights into what detailed system parameters lead to the largest gains from demand aggregation and also explore the trade offs associated with the choice of an allocation scheme when customers exhibit impatience if the allocation scheme forces them to wait to be served this paper was accepted by ananth iyer operations and supply chain management

capturing the risk pooling effect through demand reshape the risk pooling effect has been documented to benefit inventory systems by reducing the need for safety stock and consequently lowering costs such as inventory holding and shortage penalty in this paper we propose a new approach called demand reshape to take advantage of the risk pooling effect it is demonstrated that a company can improve its profit by encouraging some of its customers who intended to purchase one product to switch to another the effectiveness of this approach is evaluated in various scenarios and found to be very promising

the value of flexibility in make to order systems the effect of demand correlation we consider a manufacturer of mass customized modular products who orders components under demand uncertainty and sets prices produces to order and trades excess components in a secondary market after this uncertainty is resolved the sequence of events reflects in a parsimonious fashion the considerable reduction in demand uncertainty between the procurement stage and the selling season typical of industries with long supply lead times and short product life cycles we prove that in contrast to conventional wisdom the value of production flexibility and expected profit increase with demand correlation if and only if commonality between the corresponding products does not exceed a threshold we also prove that the value of flexibility and expected profit may each increase or decrease with demand variability depending on demand correlations and component commonalities across the entire product line finally we prove that when demand shocks are independent the optimal product prices are positively correlated if and only if the degree of commonality between the corresponding products exceeds a threshold

component commonality with service level requirements this paper extends recent results of baker et al baker k r m j magazine h l w nuttle 1986 the effect of commonality on safety stocks in a simple inventory model management sci 32 982 988 in understanding the impact of component commonality on stocking levels under service level constraints a model is formulated for an arbitrary number of products with general joint demand distribution the results obtained are not all intuitive while utilizing commonality is beneficial nothing general can be said about the resulting change in the components stock levels when the cost structure is of a particular simple form though some interesting general patterns do emerge we also discuss the case of using a service level measure where rationing of common components might be required and characterize the implied rationing rule

co production processes with random yields in the semiconductor industry a wide variety of manufacturing operations can be characterized as co production with substitutable demand that is there are many situations in which the availability of two or more items are related and because of randomness in either supply or demand it can be advantageous to substitute one of these items for another our research was motivated by the semiconductor industry where chips are produced in large batches because of the presence of randomness in the process individual chips in a given batch can perform differently because some customers have stricter specifications than others chips within the same batch can be classified and sold as different products according to their measurable performance we model the production and inventory problem as a stochastic dynamic program in which the objective is to minimize the costs of meeting contractual obligations after developing heuristic methods of solving the problem in practice we validate them against a lower bound on the cost of an optim

turkish budget deficit sustainability and the revenue expenditure nexus the sustainability of the turkish budget deficits as well as the dynamics of government revenues and expenditures in controlling the size of the deficit is examined using annual data from 1968 to 2004 the findings support the existence of a long run relation between government revenues and expenditures once allowance is made for an unknown structural break however the size of the slope parameter is significantly less than one suggesting that the government might face difficulties in financing its future debt with respect to the revenue expenditure nexus the empirical evidence is favourable to the tax spend hypothesis through the error correction term in the expenditures equation finally there is no evidence of asymmetries in the adjustment process in either the threshhold autoregressive or momentum threshold autoregressive specifications of the budgetary adjustment process

is currency seigniorage exogenous for inflation tax in turkey this paper discusses the implications of the validity of the conditioning hypothesis for the maintained money demand equation for an inflation tax analysis we also test the validity of the quantity theoretical inflation tax model for the post 1980 quarterly turkish data by using johansen cointegration techniques the results suggest that the tax rate inflation is weakly exogenous for the parameters of the long run money demand tax base equation this result consistent with a keynesian endogenous seigniorage exogenous inflation tax rate theory prior does not support the hypothesis that the turkish inflation can be explained by the conventional inflation tax revenue maximizing motive alone