dynamic predictor selection in a new keynesian model with heterogeneous expectations abstract this paper introduces dynamic predictor selection into a new keynesian model with heterogeneous expectations and examines its implications for monetary policy we extend branch and mcgough 2009 by incorporating endogenous time varying predictor proportions along the lines of brock and hommes 1997 we find that periodic orbits and complex dynamics may arise even if the model under rational expectations has a unique stationary solution the qualitative nature of the non linear dynamics turns on the interaction between hawkishness of the government s policy and the extrapolative behavior of non rational agents

interpreting the macroeconomic time series facts the effects of monetary policy existing theory and evidence on the effects of monetary policy are reviewed substantial room for disagreement among economists remains new evidence based on multivariate time series studies of several countries is presented while certain patterns in the data consistent with effective monetary policy are strikingly similar across countries others particularly the tendency of interest rate increases to predict high inflation are harder to reconcile with effective monetary policy

expectation shocks and learning as drivers of the business cycle psychological factors market sentiments and less than fully rational shifts in beliefs are widely believed to play a role in the economy yet they are rarely considered in macroeconomic models this paper evaluates the empirical role of expectational shocks on business cycle fluctuations the paper relaxes the rational expectations assumption to exploit survey data on expectations in the estimation of a new keynesian model which allows for learning by economic agents expectation shocks affect the formation of expectations and capture waves of optimism and pessimism that lead agents to form forecasts that deviate from those implied by their learning model the empirical results uncover a crucial role for these novel expectations shocks as a major driving force of the u s business cycle expectation shocks regarding future real activity are the main source of economic fluctuations accounting for roughly half of business cycle fluctuations

experimental evidence on the persistence of output and inflation this article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock in the experimental sessions however output and inflation display considerable persistence and regular cyclical patterns

real time inflation forecasting in a changing world this article revisits the accuracy of inflation forecasting using activity and expectations variables we apply bayesian model averaging across different regression specifications selected from a set of potential predictors that includes lagged values of inflation a host of real activity data term structure data relative price data and surveys in this model average we can entertain different channels of structural instability by either incorporating stochastic breaks in the regression parameters of each individual specification within this average or allowing for breaks in the error variance of the overall model average or both thus our framework simultaneously addresses structural change and model uncertainty that would unavoidably affect any inflation forecast model the different versions of our framework are used to model u s personal consumption expenditures pce deflator and gross domestic product gdp deflator inflation rates for the 1960 2011 period a real time inflation forecast

predicting the next step of a random walk experimental evidence of regime shifting beliefs barberis et al j financial econ 49 1998 307 construct a model in which investors use the prevalence of past trend reversals as an indicator of the likelihood of future reversals while such regime shifting beliefs are consistent with a variety of psychological theories other contrary predictions are consistent with the same theories we report two experiments with mba student participants that strongly support the existence of regime shifting beliefs we conclude that regime shifting models can provide a useful framework for understanding market anomalies including underreactions to earnings changes and overreactions to longterm earnings trends r 2002 published by elsevier science b v

economies of scale in services a study of multinational insurers this study investigates whether multinational insurers achieve economies of scale using a time series cross sectional design it analyzes the relationship between expenses and output of multinational insurers the study finds that multinational insurers achieve economies of scale only up to a point and rather than benefitting from scale the most internationally diverse insurers suffer diseconomies the conclusion is that the benefits of extensive foreign acquisitions by insurers are questionable

the role of path dependency and managerial intentionality a perspective on international business research several decades of research in the field of international business have advanced various theories and studies on the internationalization of firms our assessment of the literature on internationalization shows that the focus has been primarily on path dependency and learning based aspects of internationalization while managerial intentionality and the possibility of managers making deliberate strategic choices towards further internationalization have not been very prominent in the ib literature we argue that internationalization paths and processes should be approached as a joint outcome of management intentionality and experience based learning in other words managers are assumed to have the ability and the intention to influence the evolutionary paths of the firm we derive a future research agenda that calls for the pursuit of this promising and emergent research stream moreover we develop a model integrating managerial intentionality knowledge experience and other factors institutional and selection forces to explain heterogeneous outcomes of internationalization positions paths and processes

inflation targeting and liquidity traps under endogenous credibility abstract policy implications are derived for an inflation targeting central bank whose credibility is endogenous and depends on its past ability to achieve its targets this is done in a new keynesian framework with heterogeneous and boundedly rational expectations we find that the region of allowed policy parameters is strictly larger than under rational expectations however when the zero lower bound on the nominal interest rate is accounted for self fulfilling deflationary spirals can occur depending on the credibility of the central bank deflationary spirals can be prevented with a high inflation target and aggressive monetary easing

the experience factor in foreign market entry behavior of service firms the paper examines the effect of international experience on service firms selection of foreign markets and entry modes the investigation utilizes survey date from 151 united states based service firms results on market selection suggest that as their experience increases and becomes geographically more diversified service firms tend to choose markets that are culturally less similar to their home country on entry mode choice the paper departs from traditional linear conceptualizations and hypothesizes a u shaped relationship between experience and propensity for integrated entry modes results generally support the hypothesis the paper explains these findings and describes how service firms resemble and differ from manufacturing firms in their foreign market entry behavior

what can survey forecasts tell us about information rigidities a lot we derive common and conflicting predictions from models in which agents face information constraints and then assess their validity using surveys of consumers firms central bankers and professional forecasters we document that mean forecasts fail to completely adjust on impact to shocks leading to statistically and economically significant deviations from the null of full information the dynamics of forecast errors after shocks are consistent with the predictions of models with information rigidities the conditional responses of forecast errors and disagreement among agents can also be used to differentiate between some of the most prominent models of information rigidities

multinational corporation internationalization in the service sector a study of japanese trading companies this paper extends chang s 1995 sequential investment theory to include multinational corporations mncs in service industries given this sector s large and growing impact on the global economy to facilitate an examination of service mnc internationalization patterns we develop a new typology of service investment i e core global related local unrelated global and unrelated local based on business relatedness and location specificity we test this typology on a sample of large japanese trading companies our results suggest that the initial investments of service mncs are closely related to their core businesses and are less location specific but that subsequent investments are less related to firms core services and are more location specific a pattern similar to the traditional view on manufacturing mncs we extend our analysis to examine several case studies to provide a richer context for these findings in addition we examine the performance implications of internationalization our findings suggest that firms that internationalize through early investments that are closely related to their core activities outperform those in unrelated businesses over time but that this performance gap between related and unrelated foreign investments diminishes in more advanced stages of internationalization

factors affecting export intermediaries service offerings the british example this study attempts to determine and explain the service offering behavior of british export intermediaries eis it was empirically confirmed that eis offer two categories of services transaction creating and physical fulfillment services it was postulated that the extent to which an ei offers these types of services is influenced by a set of factors that are internally product market supplier and buyer related empirical tests on a sample of 135 british eis established that an ei s exporting role number of employees amount of undifferentiated products carried number of suppliers and number of countries served all have a direct impact on an ei s service offering behavior

inflation targeting recursive inattentiveness and heterogeneous beliefs in this paper we consider a scenario in which the monetary authority provides an explicit in ation target in order to anchor private sector expectations and align them with policy objectives in this context a biased perception of the target may arise due to imperfect information ows and idiosyncrasies in information processing lead to heterogenous beliefs about the target we allow private sector expectations to be revised over time as new information becomes available and the direction of change is determined by the distance between agents beliefs and actual realizations of macro variables the recursive choice between alternative predictors is modeled as an optimization problem under rational inattention within this framework we investigate whether a simple interest rate rule can steer the economy toward the targeted equilibrium our ndings suggest that standard policy advices i e ensure determinacy under rational expectations may not be sucient to reach the target instead a sound monetary policy should be ne tuned to ensure that the signal sent by realizations of macro variables can correct biased agents beliefs

trend inflation indexation and inflation persistence in the new keynesian phillips curve purely forward looking versions of the new keynesian phillips curve nkpc generate too little inflation persistence some authors add ad hoc backward looking terms to address this shortcoming we hypothesize that inflation per sistence results mainly from variation in the long run trend component of inflation which we attribute to shifts in monetary policy we derive a version of the nkpc that incorporates a time varying inflation trend and examine whether it explains the dynamics of inflation when drift in trend inflation is taken into account a purely forward looking version of the model fits the data well and there is no need for backward looking components jel e12 e31 e52 in this paper we consider the extent to which guillermo calvo s 1983 model of nominal price rigidities can explain inflation dynamics without relying on arbitrary backward looking terms in its baseline formulation the calvo model leads to a purely forward looking new keynesian

the behavioral economics of currency unions economic integration and monetary policy we analyze different behavioral models of expectation formation in a multi country new keynesian currency union model our analyses yield the following robust results first economic integration is of crucial importance for the stability of the economic dynamics in a currency union second when the economic dynamics are unstable more activist monetary policy does not lead to stable economic dynamics these findings have natural counterparts in the rational expectations version of the model there economic integration is crucial for the determinacy of the equilibrium and when the equilibrium is indeterminate more activist monetary policy does not lead to a determinate equilibrium in an application to euro area data we find that the behavioral macroeconomic model outperforms its rational counterpart in terms of prediction performance

a review of research on the growth of multinational enterprises a penrosean lens abstract we provide a comprehensive review of the growth of multinational enterprises mnes based on a quarter century 25 years of scholarly international business publications we synthesize research insights on the determinants of the growth of mnes through the lens of penrose s theory of firm growth which is the most influential theoretical perspective on firm growth the review takes stock of the research findings on the facilitators constraints and the trajectory of growth of mnes and elaborates on the commonalities and differences between research on the growth of mnes that draws on penrose s theory and research that does not this comparison highlights the opportunity to build an internally coherent theory of the growth of mnes that is a theory that connects what an mne is to what determines an mne s growth it also indicates that past research placed a strong emphasis on exogenous factors e g cross country distances as key constraints on growth even though the penrosean lens suggests a close consideration of endogenous factors that drive international growth as well as endogenizing the ostensibly exogenous growth determinants the review highlights the importance of firm specific managerial knowledge and learning which shapes the direction of the growth of mnes and ensures its administrative coherence

taking stock a rigorous modelling of animal spirits in macroeconomics modelling animal spirits this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

legitimacy and multi level institutional environments implications for foreign subsidiary ownership structure in this study we examine from an institutional perspective the legitimacy rationale behind the choice of subsidiary ownership structure among multinational corporations mncs we suggest that when under a strong pressure to conform at the host country and local industry levels of their institutional environment mncs are likely to take a lower ownership stake in exchange for external legitimacy in the host country or local industry that their foreign subsidiaries are entering we also suggest that mncs are likely to take a higher ownership stake in response to strong internal pressure to sustain their internal legitimacy at the corporate level of their institutional environment we also propose that mncs are more likely to exchange ownership for legitimacy in local industries than in host countries and in local markets with a high level of political instability than in those with a low level of political instability these propositions are generally supported by our analysis of 4451 subsidiaries established by 898 japanese mncs that operated in 39 countries across 52 industries two digit sic between 1988 and 1999

learning to deal with repeated shocks under strategic complementarity an experiment experimental evidence shows that the rational expectations hypothesis fails to characterize the path to equilibrium after an exogenous shock when actions are strategic complements under identical shocks however repetition allows adaptive learning so that inertia in adjustment should fade away with experience if this finding proves to be robust inertia in adjustment may be irrelevant among experienced agents the conjecture in the literature is that inertia would still persist perhaps indefinitely in the presence of real world complications such as nonidentical shocks herein we empirically test the conjecture that the inertia in adjustment is more persistent if the shocks are nonidentical for both identical and nonidentical shocks we find persistent inertia and similar patterns of adjustment that can be explained by backward looking expectation rules a reformulation of naive expectations with similarity based learning approach is found to have a higher predictive power than rational and trend following rules

monetary policy trend inflation and the great moderation an alternative interpretation with positive trend inflation the taylor principle does not guarantee a determinate equilibrium we provide new theoretical results on determinacy in new keynesian models with positive trend inflation and new empirical findings on the federal reserve s reaction function before and after the volcker disinflation to find that i while the fed likely satisfied the taylor principle before volcker the us economy was still subject to self fulfilling fluctuations in the 1970s ii the us economy switched to determinacy during the volcker disinflation and iii the switch reflected changes in the fed s response to macroeconomic variables and the decline in trend inflation jel e12 e23 e31 e32 e52

does labor s share drive inflation a number of researchers have recently argued that the new keynesian phillips curve matches the empirical behavior of inflation well when the labor income share is used as a driving variable but fits poorly when deterministically detrended output is used the theoretical motivation for these results rests on the idea that the output gap the deviation between actual and potential output is better captured by the labor income share in turn implying that central banks should raise interest rates in response to increases in this variable we show that the empirical evidence generally suggests that the labor share version of the new keynesian phillips curve is a very poor model of price inflation we conclude that there is little reason to view the labor income share as a good measure of the output gap or as an appropriate variable for incorporation in a monetary policy rule

the new keynesian phillips curve from sticky inflation to sticky prices the new keynesian phillips curve nkpc model of inflation dynamics based on forward looking expectations is of great theoretical significance in monetary policy analysis empirical studies however often find that backward looking inflation inertia dominates the dynamics of the short run aggregate supply curve this inconsistency is examined by investigating multiple structural changes in the nkpc for the u s between 1960 and 2005 employing both inflation expectations survey data and a rational expectations approximation we find that forward looking behavior plays a smaller role during the high and volatile inflation regime to 1981 than in the subsequent period of moderate inflation providing empirical support for sticky price models over the last two decades a break in the intercept of the nkpc is also identified around 2001 and this may be associated with u s monetary policy in that period

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

unstable inflation targets this paper studies long run inflation targets and stability in an imperfect information environment when central banks set an inflation target that is not fully communicated agents draw inferences about inflation from recent data and remain alert to structural change by forming expectations from a forecasting model that is estimated via discounted least squares inflation targets can lead agents beliefs to depart from rational expectations through two channels first implementing a higher inflation target can lead to overshooting second there can be nearly self fulfilling inflation disinflation or deflation that arises as an endogenous response to shocks policy implications for implementing a higher target without deanchoring expectations are discussed

an organizational model for understanding internationalization processes we propose an organizational model for understanding internationalization processes we argue that these processes differ with the type of organization we compare the internationalization processes of three organization types the mass production organization the disaggregated production organization and the project based organization each organization type responds differently to critical elements of the internationalization process namely the focus of entry the degree of presence and physical presence requirements in the foreign market which in turn influence what modal forms are adopted as the process progresses consequently we observe different approaches to resource commitment in the foreign market over time

behavioral heterogeneity in u s inflation dynamics in this article we develop and estimate a behavioral model of inflation dynamics with heterogeneous firms in our stylized framework there are two groups of price setters fundamentalists and rando

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

weak instrument robust tests in gmm and the new keynesian phillips curve we discuss weak instrument robust statistics in gmm for testing hypotheses on the full parameter vector or on subsets of the parameters we use these test procedures to reexamine the evidence on the new keynesian phillips curve model we find that u s postwar data are consistent with the view that inflation dynamics are predominantly forward looking but we cannot rule out the presence of considerable backward looking dynamics moreover the phillips curve has become flatter recently and this is an important factor contributing to its weak identification

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

do expected future marginal costs drive inflation dynamics abstract this article discusses a more general interpretation of the two step minimum distance estimation procedure proposed in sbordone 2002 the estimator is again applied to a version of the new keynesian phillips curve where inflation dynamics are driven by the expected evolution of marginal costs the article clarifies econometric issues addresses concerns about uncertainty and model misspecification raised in recent studies and assesses the robustness of previous results while confirming the importance of forward looking terms in accounting for inflation dynamics it suggests how the methodology can be applied to extend the analysis of inflation to a multivariate setting

charts noise and fundamentals in the london foreign exchange market this paper presents some empirical evidence on the prevalence perceived importance and nature of chartist or technical analysis in the london foreign exchange market if noise traders see e g de long et al i987 are defined as those speculators who do not base their trading strategies on a consideration of market fundamentals then it clearly encompasses those traders who employ chart analysis i e those who base their strategies on the analysis and extrapolation of past price movements alone

monetary and fiscal policy switching a growing body of evidence finds that policy reaction functions vary substantially over different periods in the united states this paper explores how moving to an environment in which monetary and fiscal regimes evolve according to a markov process can change the impacts of policy shocks in one regime monetary policy follows the taylor principle and taxes rise strongly with debt in another regime the taylor principle fails to hold and taxes are exogenous an example shows that a unique bounded non ricardian equilibrium exists in this environment a computational model illustrates that because agents decision rules embed the probability that policies will change in the future monetary and tax shocks always produce wealth effects when it is possible that fiscal policy will be unresponsive to debt at times active monetary policy like a taylor rule in one regime is not sufficient to insulate the economy against tax shocks in that regime and it can have the unintended consequence of amplifying and propagating the aggregate demand effects of tax shocks the paper also considers the implications of policy switching for two empirical issues

herding a synchronous updating and heterogeneity in memory in a cbs abstract this paper considers a simple continuous beliefs system cbs to investigate the effects on price dynamics of several behavioural assumptions i herd behaviour ii a synchronous updating of beliefs and iii heterogeneity in time horizons memory among agents the recently introduced concept of a cbs allows one to model the co evolution of prices and the beliefs distribution explicitly while keeping track of the unpredictable nature of individual preferences technical report cendef working paper 03 05 university of amsterdam tinbergen institute discussion paper 2003 073 1 as a benchmark model we take a simple cbs which in a market with many traders exhibits a random walk driven by news using the explicit nature of the dynamics of the cbs we show that the introduction of herding modifies the random walk to an arima 0 1 1 process which is observationally equivalent to a reduction of the number of market participants in terms of returns the model predicts ma 1 structure with a negative coefficient a synchronous updating leads to an ma 1 model for returns with garch 1 1 innovations and predicts a relation between the arch and garch coefficients heterogeneity in memory leads to long range dependence in returns in the empirical section we perform a modest reality check concerning the predicted sign of the ma coefficient and the relation between the arch and garch coefficients for exchange rate data

interdependent behavior in foreign direct investment the multi level effects of prior entry and prior exit on foreign market entry this paper examines the interdependent foreign market entry decisions of multinational corporations mncs based on the argument that legitimacy and competition are two important forces in foreign market entry decisions we hypothesize that an mnc s market entry decisions are influenced by its own prior entry and prior exit decisions and those of other mncs we examine this general proposition at four levels of analysis the host country global industry an industry that spans host countries local industry an industry that is separately defined within each host country and parent firm level our analysis of a panel data of over 4000 market entry decisions that were made by japanese mncs shows that an mnc s market entry decision has a stronger inverted u shaped relationship with the prior entry and exit decisions of other mncs at the local industry level than the prior entry and exit decisions of other mncs at the host country and global industry levels we also find that both the prior entry and prior exit decisions of an mnc have a marginal influence on its own subsequent market entry decisions at the parent firm level

taking stock a rigorous modelling of animal spirits in macroeconomics this paper is a survey of the burgeoning literature that seeks to take the enigmatic concept of the animal spirits more seriously by building heterodox macro dynamic models that can capture some of its crucial aspects in a rigorous way two approaches are considered the discrete choice and the transition probability approach where individual agents face a binary decision and choose one of them with a certain probability these assessments are adjusted upward or downward in response to what the agents observe which leads to changes in the aggregate sentiment and the macroeconomic variables resulting from the corresponding decisions typical applications of the two approaches alternatively give rise to what will be called a weak and a strong form of animal spirits on the whole the literature included in this survey provides examples of applications of a modelling tool that demonstrates a considerable flexibility within a canonical framework

macroeconomic expectations of households and professional forecasters economists have long emphasized the importance of expectations in determining macroeconomic outcomes yet there has been almost no recent effort to model actual empirical expectations data instead m acroeconomists usually simply assume that expectations are rational this paper shows that while empirical household expectations are not rational in the usual sense expectational dynamics are well captured by a model in which households views derive from news reports of the views of professional forecasters which in turn may be rational the model s estimates imply that people only occasionally pay attention to news reports this inattention generates stickyness in aggregate expectations with important macroeconomic consequences

policy regimes policy shifts and u s business cycles abstract using an estimated dsge model with monetary and fiscal policy interactions and allowing for equilibrium indeterminacy we find that a passive monetary and passive fiscal policy regime prevailed in the pre volcker period this gave rise to self fulfilling beliefs and unconventional transmission mechanisms of policy shifts unanticipated increases in interest rates increased inflation and output while unanticipated increases in lump sum taxes decreased inflation and output we show that had the monetary policy regime of the post volcker era been in place pre volcker inflation volatility would have been lower by 25 and the rise of inflation in the 1970s would not have occurred

japanese trading companies can they be copied analysis of japanese trading companies suggests that would be u s trading companies could be emulate japan s special rather than general trading companies factors likely to lead to success are offering narrow high margin product lines in geographically diversified markets integration with manufacturing operations having strong domestic markets well capitalized finances with access to ample credit perhaps achieved through partnership with large international banks efficient working capital management consisting of liberal but controlled trade credit and tight inventories management experienced in international markets and capable of heeding national interest considerations in many countries and patience and a long term outlook since during client relationships are necessary to achieve profitability

experimental evidence on inflation expectation formation using laboratory experiments within a new keynesian sticky price framework we study the process of inflation expectation formation we focus on adaptive learning and rational expectations contrary to the previous literature that mostly studied simple heuristics using a test for rational expectations that allows heterogeneity of expectations we find that we cannot reject rationality for about 40 of subjects more than 20 of subjects are also best described by adaptive learning models where they behave like econometricians and update their model estimates every period however rather than using a single forecasting model switching between models describes their behavior better switching is more likely to occur when experimental economy is in a recession

fitting observed inflation expectations abstract the paper provides evidence on the extent to which inflation expectations generated by a standard christiano et al 2005 smets and wouters 2003 type dsge model are in line with what observed in the data we consider three variants of this model that differ in terms of the behavior of and the public s information on the central banks inflation target allegedly a key determinant of inflation expectations we find that i time variation in the inflation target is needed to capture the evolution of expectations during the post volcker period ii the variant where agents have imperfect information is strongly rejected by the data iii inflation expectations appear to contain information that is not present in the other series used in estimation and iv none of the models fully capture the dynamics of this variable

heterogeneity learning and information stickiness in inflation expectations in this paper we propose novel techniques for the empirical analysis of adaptive learning and sticky information in inflation expectations these methodologies are applied to the distribution of households inflation expectations collected by the university of michigan survey research center to account for the evolution of the cross section of inflation forecasts over time and measure the degree of heterogeneity in private agents forecasts we explore time series of percentiles from the empirical distribution our results show that heterogeneity is pervasive in the process of inflation expectation formation we identify three regions of the distribution that correspond to different underlying mechanisms of expectation formation a static or highly autoregressive region on the left hand side of the median a nearly rational region around the median and a fraction of forecasts on the right hand side of the median formed in accordance with adaptive learning and sticky information

the globalization of service multinationals in the triad regions japan western europe and north america in this study we empirically investigate the determinants of foreign direct investment of service multinationals based in the triad regions japan western europe and north america foreign investment decisions of 168 of the largest service firms in nine service industries over the period 1976 1986 are analyzed and hypotheses that are developed based on findings of manufacturing fdi and studies of single service industries are tested using a logistic regression model the applicability of the mne fdi theories to service mnes is tested empirically over a broad range of mne home countries and service industries differences in the international behavior of service mnes based in different countries are uncovered and analyzed

expectational diversity in monetary economies abstract we investigate an overlapping generations monetary economy in which expectations depend upon backward looking predictors of the future price level we use discrete choice theory to model how agents select a predictor based on its past forecast error letting the number of available predictors tend to infinity we obtain the large type limit of the system taking the large type limit dramatically reduces the number of free parameters while maintaining the expectational diversity which we argue is necessary for constructing plausible learning based models the model s dynamics are strongly influenced by the intensity of choice which measures how sensitive an agent s predictor choice is to differences in forecast errors across predictors when the intensity of choice is low the monetary steady state is stable as the intensity of choice increases and if certain parametric restrictions are met the system undergoes a hopf bifurcation in which case we document the existence of highly irregular equilibrium price paths

decomposing the declining volatility of long term inflation expectations abstract the level and volatility of survey based measures of long term inflation expectations have come down dramatically over the past several decades to capture these changes in inflation dynamics we embed both short and long term expectations into a medium scale var model with stochastic volatility the model estimates attribute most of the marked decline in the volatility of expectations to smaller shocks to long run inflation expectations according to our estimates the volatility of shocks plummeted in the early to mid 1980s moved to a somewhat higher level that prevailed for much of the 1990s and then declined to and remained at very low levels

inflation announcements and social dynamics this paper investigates the eectiveness of central bank communication when rms have heterogeneous ination expectations that are updated through social dynamics the bank s credibility evolves with these dynamics and determines how well its announcements anchor expectations we show that trying to eliminate high ination by abruptly introducing a low ination target can lead to short term overshooting

testing for indeterminacy an application to u s monetary policy reply this paper considers a prototypical new keynesian model in which the equilibrium is undetermined if monetary policy is passive the likelihood based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations we construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks according to the estimated model u s monetary policy post 1982 is consistent with determinacy whereas the pre volcker policy is not we find that before 1979 indeterminacy substantially altered the propagation of shocks

managing unanchored heterogeneous expectations and liquidity traps abstract we study the possibility of almost self fulfilling waves of optimism and pessimism and self fulfilling liquidity traps in a new keynesian model with a continuum of heterogeneous expectations in particular all agents choose based on past forecasting performance expectation values out of a distribution around the targets of the central bank this framework allows us to explicitly model the anchoring of expectations as the variance of this distribution of possible expectation values we find that when the zero lower bound on the nominal interest rate is not binding adequate monetary policy can prevent waves of optimism and pessimism and exclude near unit root dynamics even when expectations are unanchored however as shocks bring the economy to a situation with a binding zero lower bound there is a danger of a long lasting self fulfilling liquidity trap that can take the form of a deflationary spiral this can be prevented if expectations are strongly enough anchored to the targets or if the inflation target is high enough

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

firm specific capital inflation persistence and the sources of business cycles this paper estimates a firm specific capital dsge model firm specific capital improves the fit of dsge models to the data as shown by a large increase in the value of the log marginal likelihood this results from a lower implied estimate of the nkpc slope for a given degree of price stickiness firm specific capital leads to a better fit to the volatilities of macro variables and a greater persistence of inflation it is also shown that firm specific capital reduces the dependence of new keynesian models on price markup shocks and that it increases the persistence of output to monetary shocks

stepping on a rake the role of fiscal policy in the inflation of the 1970s abstract the inflation of the 1970s in the us is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors yet fiscal policy underwent dramatic shifts in the 1970s and economic theory makes clear that in an environment of uncertainty about future fiscal policy monetary policy instruments may lose potency or have perverse effects this paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy s future course it also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models even if traditional monetary policy indicators are included in the system

high trend inflation and passive monetary detours abstract does the long run taylor principle davig and leeper 2007 hold when both monetary and fiscal policies can switch and there is positive trend inflation we find that with high trend inflation passive monetary detours are no longer possible whatever fiscal policy is in place this has important policy implications in terms of flexibility and monetary fiscal authorities coordination

customer involvement and service firm internationalization performance an integrative framework to overcome the costs of doing business abroad researchers have suggested either legitimacy or efficiency based solutions however both types of solutions still treat host country customers as external to the theory we highlight the role of customers in the international professional business service setting and argue that customer involvement is positively related to the perceived internationalization performance of multinational corporations mncs mncs with managers who perceive higher legitimacy pressures and greater needs for local knowledge tend to undertake greater efforts to build customer involvement furthermore we develop a configuration framework between perceived strategic needs and mncs capabilities specifically mncs that match relational capability with legitimacy needs and absorptive capacity with knowledge needs are more likely to engage in customer involvement our survey of 175 chinese mncs provides evidence that customer involvement is positively related to perceived internationalization performance when mncs relational capabilities are stronger the positive relationship between legitimacy pressure and customer involvement increases by contrast mncs with greater perceived market ambiguity improve customer involvement only when they have stronger absorptive capacity we conclude that mncs may simultaneously reduce legitimacy and efficiency costs through customer involvement after considering the fit between perceived environmental pressures and firm capabilities

the taylor rule and optimal monetary policy where it denotes the fed s operating target for the federal funds rate pt is the inflation rate measured by the gdp deflator yt is the log of real gdp and y t is the log of potential output identified empirically with a linear trend the rule has since been subject to considerable attention both as an account of actual policy in the united states and elsewhere and as a prescription for desirable policy taylor argues for the rule s normative significance both on the basis of simulations and on the ground that it describes u s policy in a period in which monetary policy is widely judged to have been unusually successful taylor 1999 suggesting that the rule is worth adopting as a principle of behavior here i wish to consider to what extent this prescription resembles the sort of policy that economic theory would recommend i consider the question in the context of a simple but widely used optimizing model of the monetary transmission mechanism which allows one to reach clear conclusions about economic welfare the model is highly stylized but incorporates important features of more realistic models and allows me to make several points that are of more general validity out of concern for the robustness of the conclusions reached the analysis here addresses only broad qualitative features of the taylor rule and attempts to identify features of a desirable policy rule that are likely to hold under a variety of model specifications

heterogeneous inflation expectations and learning using the panel component of the michigan survey of consumers we estimate a learning model of inflation expectations allowing for heterogeneous use of private information and lifetime inflation experience life experience inflation has a significant impact on individual expectations but only for 1 year ahead inflation public information is substantially more relevant for longer horizon expectations even controlling for life experience inflation and public information idiosyncratic information explains a nontrivial proportion of the inflation forecasts of agents women ethnic minorities and less educated agents have a higher degree of heterogeneity in their idiosyncratic information and give less importance to recent movements in inflation

indeterminacy change points and the price puzzle in an estimated dsge model abstract we extend lubik and schorfheide s 2004 testing for indeterminacy an application to u s monetary policy american economic review 94 190 217 likelihood based estimation of dynamic stochastic general equilibrium dsge models under indeterminacy to encompass a sample period the includes both determinacy and indeterminacy by implementing a change point methodology chib s 1998 estimation and comparison of multiple change point models journal of econometrics 86 221 241 by letting the data provide estimates of the dates of the determinacy regimes and allowing the estimates of structural parameters to be the same across regimes we obtain more precise estimates of the differences in characteristics such as the impulse responses across the regimes the most striking finding about the indeterminacy regime which is estimated to coincide with the great inflation of the 1970s is that it exhibits the price puzzle in that the inflation rate rises immediately and in a sustained manner following a positive interest rate shock thus the price puzzle might have been a genuine phenomenon under indeterminacy rather than a false finding to be excised through specification search and parameter restrictions

social learning and monetary policy rules we analyse the effects of social learning in a monetary policy context social learning might be viewed as more descriptive of actual learning behaviour in complex market economies in our model taylor principle governs uniqueness and expectational stability of rational expectations equilibrium ree under homogeneous recursive algorithms we find that the taylor principle is not necessary for convergence to ree minimum state variable msv equilibrium under social learning sunspot equilibria exist in the indeterminate region our agents cannot co ordinate on a sunspot equilibrium in general form specification however they can co ordinate on common factor specification we contribute to the use of genetic algorithm learning in stochastic environments

on the internationalization process of firms a critical analysis even though international marketing has been challenged because of theoretical and methodological shortcomings very few researchers have actually attempted to analyze the weaknesses based on principles of theory evaluation in this article the author examines two types of models addressing the individual firm s internationalization process a theory evaluation is performed based on the explanation and the falsification criteria in order to improve the internationalization models some measures are proposed

inflation dynamics the role of public debt and policy regimes abstract in a passive monetary and active fiscal policy regime changes in the value of public debt generate wealth effects on households then in contrast to the active monetary and passive fiscal policy regime inflation moves oppositely from the inflation target and a stronger reaction of interest rates to inflation increases the response of inflation to shocks moreover a higher level of public debt increases the response of inflation while a weaker reaction of taxes to debt decreases the response of inflation to shocks in a passive monetary and passive fiscal policy regime both monetary and fiscal policy parameters affect inflation

new tests of the new keynesian phillips curve abstract lagged dependent variables typically play an important role in empirical models of inflation do these lags reflect backward looking inflation expectations or do they proxy for rational forward looking expectations as in the new keynesian phillips curve gali and gertler 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 attempt to answer this question using gmm to estimate specifications incorporating both lagged and future inflation they report small coefficients on lagged inflation and conclude that the new keynesian model provides a good first approximation to inflation dynamics we show that these tests have low power against alternative backward looking specifications and demonstrate that their results are also consistent with a backward looking phillips curve using an alternative approach we find that the new keynesian pricing model cannot explain the importance of lagged inflation in standard inflation regressions and find that forward looking terms play a very limited role in explaining inflation dynamics

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

overtime labor employment frictions and the new keynesian phillips curve abstract this paper presents a new keynesian nk model that is extended to differentiate between straight time and overtime work the model proposes that the new keynesian phillips curve nkpc should be estimated with marginal cost measured in terms of overtime labor the resulting coefficient estimates are in accordance with theory and statistically significant for the hybrid nkpc which allows for backward looking price setters but not for the purely forward looking nkpc in the hybrid model backward looking behavior is found to be predominant the paper also shows that the incorporation of employment frictions predetermined employment and convex adjustment costs in nk models helps reconcile the frequent price changes found in the microdata with the degree of sluggishness in inflation adjustment to output changes at the macro level

a laboratory experiment on the heuristic switching model abstract we present results from the first laboratory experiment on the seminal heuristic switching model introduced by brock and hommes 1997 1998 subjects choose between two alternatives a sophisticated and stabilizing but costly heuristic and a destabilizing but cheap heuristic and are paid according to the performance of the chosen heuristic aggregate choices determine the evolution of a state variable and consequently the performance of both heuristics theoretically an increase in the costs for the stabilizing heuristic generates instability and leads to endogenous fluctuations in both the state variable and the fraction of agents using that heuristic we vary the costs of the stabilizing heuristic in the experiment and find that the predictions of the heuristic switching model are partially confirmed for low costs the dynamics are stable for high costs the dynamics initially are unstable and exhibit the type of bubbles and crashes emblematic for the heuristic switching model however over time the pattern of bubbles and crashes disappears and the dynamics become more stable we estimate a standard discrete choice model on aggregate choice data and observe that subjects have a tendency to become less sensitive to payoff differences when the environment is less stable which has important implications for the application of heuristic switching models

trend inflation taylor principle and indeterminacy positive trend inflation shrinks the determinacy region of a basic new keynesian dynamic stochastic general equilibrium model when monetary policy is conducted by a contemporaneous interest rate rule neither the taylor principle which requires the inflation coefficient to be greater than one nor the generalized taylor principle which requires that the nominal interest rate to be raised by more than the increase in inflation in the long run is a sufficient condition for local determinacy of equilibrium this finding holds for different types of taylor rules inertial policy rules and price indexation schemes therefore regardless of the theoretical setup the monetary literature on interest rate rules cannot disregard average inflation in both theoretical and empirical analyses

performance and survival of joint ventures with non conventional ownership structures the international joint venture jv literature has focused on two parent jvs formed between one foreign and one local firm yet other types of jvs exist this paper identifies four distinct forms of jvs based on the jv partners nationality and equity affiliation these are i jvs that are formed between affiliated home country based firms ii jvs that are formed between unaffiliated home country based firmsl iii jvs that are formed between home country based and local firms and iv jvs that are formed between home country and third country based firms our analysis of 737 japanese jvs in asia demonstrates that the conventionally assumed form of jv represented only 30 percent of the total further each of the four jv forms significantly differed in terms of incidence performance and survival likelihood

structural reforms animal spirits and monetary policies abstract we use a new keynesian behavioral macroeconomic model to analyze how structural reforms affect the economy there are two types of structural reforms the first one increases price flexibility the second one increases competition in the labor market and raises potential output we find that in a rigid economy business cycle movements are dominated by movements of animal spirits increasing price flexibility reduces the power of animal spirits and the boom bust nature of the business cycle we study the trade offs between output and inflation volatility faced by the central bank we find that flexibility improves these trade offs making it easier for the central bank to stabilize output and inflation

a new keynesian model with heterogeneous expectations abstract within a new keynesian model we incorporate bounded rationality at the individual agent level and we determine restrictions on expectations operators sufficient to imply aggregate is and as relations of the same functional form as those under rationality this result provides dual implications the strong nature of the restrictions required to achieve aggregation serve as a caution to researchers imposing heterogeneous expectations at an aggregate level may be ill advised on the other hand accepting the necessary restrictions provides for tractable analysis of expectations heterogeneity as an example we consider a case where a fraction of agents are rational and the remainder are adaptive and find specifications that are determinate under rationality may possess multiple equilibria in case of expectations heterogeneity

new keynesian economics and the phillips curve models with sticky prices are an important part of new keynesian economics the author shows that several of the new keynesian models imply a formulation that is similar to the expectations augmented phillips curve of milton friedman and edmund phelps he then presents new estimates of the new keynesian phillips curve the author uses two proxies for price expectations survey based measures and an econometric based measure originally developed by bennett mccallum 1976 overall the results are consistent with the model but the survey based results are more precise suggesting that the surveys may be better measures of actual expectations copyright 1995 by ohio state university press

modeling diverse expectations in an aggregated new keynesian model abstract we explore a new keynesian model with diverse beliefs and study the aggregation problems in the log linearized economy we show the solution of these problems depend upon the belief structure agents beliefs are described by individual state variables and satisfy three rationality axioms leading to the emergence of an aggregate state variable named mean market state of belief in equilibrium endogenous variables are functions of mean market belief and this state variable is the tool used to solve the aggregation problems diverse beliefs alter the problem faced by a central bank since the source of fluctuations is not only exogenous shocks but also market expectations due to diverse beliefs the effects of policy instruments are not monotonic and the trade off between inflation and output volatilities is complex also monetary policy can counter the effects of market belief by aggressive anti inflation policy but at the cost of increased volatility of financial markets and individual consumption

foreign exchange rate expectations micro survey data this paper analyzes the panel data of biweekly surveys on the yen dollar exchange rate expectations of forty four institutions for two years and contains four major findings first market participants are heterogeneous that is significant individual effects exist in their expectation formation second the individual effects have a characteristic of wishful expectations exporters expect yen depreciation and importers expect yen appreciation relative to others third many violate the rational expectations hypothesis fourth forecasts with long horizons show less yen appreciation than those with short horizons cross equation constraints implied by the consistency of the forecast term structure are strongly rejected in the data copyright 1990 by american economic association

formation of rationally heterogeneous expectations this paper models expectation formation by taking into account that agents may produce heterogeneous expectations because of informational frictions and differing levels of a capacity to process information we show that there are two general classes of steady states within this framework those where strictly dominated forecasting rules vanish and those heterogeneous states where a positive proportion of agents uses a more costly perfect foresight we demonstrate that intrinsic heterogeneity can also arise in a model where the forecasting rules are not equally costly and do not exhibit identical performance in the long run

monetary policy regime switches and macroeconomic dynamics this article considers the determinacy and distributional consequences of regime switching in monetary policy although switching in the inflation target does not affect determinacy switches in the inflation response can cause indeterminacy satisfying the taylor principle period by period is neither necessary nor sufficient for determinacy when inflation responses switch indeterminacy can arise if monetary policy responds too aggressively to inflation in the active regime inflation target switches primarily impact the level of inflation whereas inflation response switches primarily impact the volatility expecting an inflation target switch has minor effects on volatility whereas expecting an inflation response switch raises volatility more substantially

service multinationals conceptualization measurement and theory the application of mne definitions measurements and theories to international services is still in its infancy despite the considerable size and growth of this sector there are problems in defining classifying measuring comparing and explaining service mnes but they do not require special definitions and theories still research to date suggests 1 delinking the concepts of multinational enterprise and foreign direct investment under certain conditions and 2 qualifying the nature of ownership internalization and location advantages in fdi theory as far as service mnes are concerned

inflation dynamics and subjective expectations in the united states i introduction this paper analyzes the ability of sticky price models to explain the dynamics of u s inflation when using survey data as proxies for inflation expectations testing sticky price models with survey expectations is attractive since to the extent that survey data correctly capture agents expectations they allow to disregard issues related to the specification of agents expectations functions one neither has to impose untested orthogonality restrictions as required when estimating under the assumption of rational expectations nor has to make restrictive assumptions about the precise form of nonrationality present in agents forecast functions this allows to focus on the question whether the economic models under consideration are correctly specified previous tests of sticky price models performed under the assumption that agents hold rational expectations have generated mixed results prominently fuhrer and moore 1995 have reported that sticky price models do not generate sufficient stickiness for inflation when the output gap is used as a measure of real marginal costs recent evidence however has shown that the empirical performance depends crucially on how one measures real marginal costs the main determinant of inflation according to sticky price models for instance gall and gertler 1999 and sbordone 2002 show that sticky price models perform well once marginal costs are approximated by average unit labor costs 1 it makes an important difference whether sticky price models successfully explain inflation dynamics as a function of output behavior or they relate inflation dynamics to the behavior of unit labor costs given that the ultimate objective is a model explaining the joint behavior of output and inflation the latter case would require an additional empirically plausible theory linking the dynamics of unit labor costs to the behavior of output this paper studies whether the currently popular new keynesian phillips curve nkpc which can be derived from calvo 1983 style sticky price models is able to explain a relationship between inflation on the one hand and output or unit labor costs on the other hand thus we let the data speak whether a theory linking output to costs is warranted once expectations are approximated by data reported in the survey of professional forecasters our main finding is that the nkpc performs equally well with both measures of marginal costs output and unit labor costs whatever measure is used the estimate of the quarterly discount factor is close to one and the point estimate of the degree of price stickiness implies that firms reset their prices roughly every five quarters on average these results suggest that potential nonrationalities in expectations as they show up in surveys have biased previous estimates using output as a measure for marginal costs quite surprisingly the same nonrationalities do not seem to play a role when using unit labor costs here our estimates confirm the results obtained by gall and gertler 1999 and sbordone 2002 who assumed rational expectations we show that the reason for this finding is that approximating the agents information set using the unit labor cost variable rests on more solid grounds than approximating it using the output variable in particular the survey data suggest that the hypothesis of rational expectations implies a too high correlation between lagged output and future inflation expectations we show that this causes the coefficient estimate for output to become negative contrary to what is implied by theory these results suggest that once one takes account of potentially nonrational expectations via survey expectations sticky price models are able to establish a close link between output dynamics and the behavior of inflation to assess the robustness of this finding we include into the price equation lags of various variables and test for their significance

the relationship between international diversification and performance in service firms international diversification is a growth strategy that has a major potential impact on firm performance the relationship between international diversification and firm performance has been extensively studied in the international strategy literature a major gap in the literature has been the non existence of studies that have examined the effect of international diversification on performance in service firms previous studies that have tested the international diversification performance relationship were based on samples of manufacturing firms we argue that the form of the relationship between multinationality and performance is different in service firms we provide a theoretical argument for this claim and hypothesize that there is a u shaped curvilinear relationship between multinationality and performance in service firms our sample consists of 81 major german service firms spanning across four industries results show that there is support for a u shaped curvilinear relationship based on the findings implications and directions for future research are provided

a simple test of the new keynesian phillips curve we propose a way to test the new keynesian phillips curve nkpc without estimating the structural parameters governing the curve i e price stickiness and firms backwardness using this strategy we can test the nkpc avoiding the identification problems related to the gmm approach we find that it does not exist a combination of the structural parameters which is consistent with us data this result does not necessarily imply that the idea of a forward looking price setting behaviour should be entirely disregarded as the rejection might be due to the failure of the joint hypothesis of rational expectations thus further research should be aimed at providing alternative models for agents expectations