does exchange rate variability depress trade flows evidence from error correction models this paper examines the impact of exchange rate volatility on the trade flows of the g 7 countries in the context of a multivariate error correction model the error correction models do not show any sign of parameter instability the results indicate that the exchange rate volatility has a significant negative impact on the volume of exports in each of the g 7 countries assuming market participants are risk averse these results imply that exchange rate uncertainty causes them to reduce their activities change prices or shift sources of demand and supply in order to minimize their exposure to the effects of exchange rate volatility this in turn can change the distribution of output across many sectors in these countries it is quite possible that the surprisingly weak relationship between trade flows and exchange rate volatility reported in several previous studies are due to insufficient attention to the stochastic properties of the relevant time series copyright 1993 by mit press

can portmanteau nonlinearity tests serve as general mis specification tests a number of recent papers have employed the bds test as a general test for mis specification for linear and nonlinear models we show that for a particular class of conditionally heteroscedastic models the bds test is unable to detect a common mis specification our results also demonstrate that specific rather than portmanteau diagnostics are required to detect neglected asymmetry in volatility however for both classes of tests reasonable power is only obtained using very large sample sizes

hysteresis in international trade a general equilibrium analysis abstract this paper presents a simple general equilibrium model of hysteresis in international trade i e temporary exchange rate fluctuations can have persistent effects on trade flows besides supporting earlier partial equilibrium results the analysis bears out a conjecture by baldwin and krugman 1989 that a hysteretic shift in trade flows will cause a hysteretic shift in the equilibrium exchange rate a positive demand shock which leads to a temporary exchange rate appreciation is followed by a persistent depreciation another implication is that equity values in the country with a positive demand shock will ultimately fall below their pre shock level temporarily high profits reduce future profitability by attracting competitors who remain in the market after the shock has receded jel f10

short run exchange rate uncertainty in latin america this paper to obtain an ex ante measure of exchange rate uncertainty in 11 latin american countries as a preliminary issue the purchasing power parity ppp condition is tested using engle and granger two step procedure and johansen method the argument is that exchange rate uncertainty could be lower if ppp holds in the long run the expected exchange rate uncertainty is estimated according to an extended version of the autoregressive conditionally heteroscedastic arch model the results show that the arch adjusment produces more efficient estimates in seven countries and that the acceptance of ppp has little effect on exchange rate uncertainty

unobservable shocks as carriers of contagion we propose an identified structural garch model to disentangle the dynamics of financial market crises we distinguish between the hypersensitivity of a domestic market in crisis to news from foreign non crisis markets and the contagion imported to a tranquil domestic market from foreign crises the model also enables us to connect unobserved structural shocks with their source markets using variance decompositions and to compare the size and dynamics of impulses during crises periods with tranquil period impulses to illustrate we apply the method to data from the 1997 1998 asian financial crisis which consists of a complicated set of interacting crises we find significant hypersensitivity and contagion between these markets but also show that links may strengthen or weaken impulse response functions for an equally weighted equity portfolio show the increasing dominance of korean and hong kong shocks during the crises and covariance responses demonstrate multiple layers of contagion effects

u s bilateral trade flows and exchange risk during the floating period abstract this paper tests for real exchange rate risk effects on u s bilateral trade flows during the floating period using several new as well as previously used risk measures significant negative effects occur in five of six u s import flows and in two of six u s export flows with one export flow showing a significant positive effect these results are consistent with several previous findings for aggregate u s trade two risk measures using the forward exchange rate and assuming a time varying risk premium provide marginally more significant results than the others

has the european monetary system led to more exports evidence from four european union countries abstract we attempt to investigate whether the exchange rate mechanism erm period has coincided with an increase in intra eu exports we conclude that this has not been the case but it is likely that the elimination of nominal exchange rate variability arising from a single currency will boost intra european union trade

occupational hazards and social disability insurance abstract using retrospective data we introduce evidence that occupational exposure significantly affects disability risk incorporating this into a general equilibrium model social disability insurance sdi affects welfare through i the classic risk sharing channel and ii a new channel of occupational reallocation both channels can increase welfare but at the optimal sdi they are at odds welfare gains from additional risk sharing are reduced by overly incentivizing workers to choose risky occupations in a calibration optimal sdi increases welfare by 6 3 relative to actuarially fair insurance mostly due to risk sharing

exchange rate volatility and intervention implications of the theory of optimum currency areas we show that variables pointed to by the theory of optimum currency areas ocas help to explain patterns of exchange rate variability and intervention across countries but oca considerations affect exchange market pressures and intervention in different ways exchange market pressures mainly reflect asymmetric shocks while intervention largely reflects the variables that oca theory suggests cause countries to value stable exchange rates small size and the extent of trade links intervention and exchange market pressure also vary with the structure of the international monetary system

exchange rate volatility and foreign trade evidence from thirteen ldc s this article investigates empirically the impact of real exchange rate volatility on the export flows of 13 less developed countries ldc s over the quarterly period 1973 1996 estimates of the cointegrating relations are obtained using johansen s multivariate procedure estimates of the short run dynamics are obtained for each country using the error correction technique the major results show that increases in the volatility of the real effective exchange rate approximating exchange rate uncertainty exert a significant negative effect on export demand in both the short run and the long run in each of the 13 ldc s these effects may result in significant reallocation of resources by market participants

conditional exchange rate volatility and the volume of foreign trade evidence from seven industrialized countries there has long been a concern over the volatility of exchange rates and their impact on the volume of foreign trade however very little attention has been paid to the choice of an appropriate volatility variable as well as the proper specification of the trade equation the sample standard deviation of the exchange rate has been used as a proxy for exchangerate uncertainty in empirical studies that examine the effects of exchange rate uncertainty on the volume of foreign trade see for example akhtar and hilton 1 and gotur 27 these studies have provided conflicting evidence on this issue it has been argued that use of the sample standard deviation is inappropriate because the empirical distribution of exchange rates is not normal 22 10 in this regard subsequent empirical research 12 36 40 41 11 has employed a moving standard deviation of the rate of change of the exchange rate as a proxy for exchange rate uncertainty chowdhury 11 obtained a clear pattern of results that support the hypothesis that the higher volatility of exchange rates led to a reduction in international trade transactions after the breakdown of the bretton woods system in march 1973 other studies have reported ambiguous results 2 the moving standard deviation used in these studies has been criticized in the literature for a ignoring relevant information on the random process generating exchange rates 18 b underestimating the effect of volatility on decisions 52 c distorting the measurement of the volatility variable by smoothing the series 9 and d injecting an element of arbitrariness into the calculation through decisions about the order m of the moving average 43 3

time irreversibility and egarch effects in us stock index returns in this paper we suggest using a modified version of the time reversibility tr test of chen chou and kuan 2000 as a complementary diagnostic test for time series models the modified cck test is easy to compute and requires weaker moment conditions than existing tests our simulations demonstrate that this test is powerful against asymmetry in volatility but the bds test is not in the empirical study of us stock index returns we first find that these returns are all time irreversible applying the garch and egarch models to these returns we also find that the q and bds tests always accept the null hypothesis and cannot distinguish between these models by contrast the modified cck test accepts only the egarch model with an order that can accommodate the underlying asymmetry in volatility our results suggest that the detected time irreversibility in these return series may be attributed to volatility asymmetry and that such asymmetry may be captured using a proper egarch model copyright 2002 john wiley sons ltd

asymmetric exchange rate exposure theory and evidence abstract this paper tests the hypothesis that exchange rate exposure is asymmetric over appreciation depreciation cycles more specifically it investigates whether returns on nine sector indexes across four major countries are asymmetrically affected by exchange rate movements the results show that in several instances exposure is asymmetric asymmetries are found to be more pronounced in the financial and non cyclical sectors possible theoretical explanations are provided regarding the particular type of exposure found across sectors and countries

search profiling with partial knowledge of deterrence consider the choice of a profiling policy where decisions to search for evidence of crime may vary with observable covariates of the persons at risk of search i pose a planning problem whose objective is to minimise the social cost of crime and search the consequences of a search rule depend on the extent to which search deters crime i study the planning problem when the planner has partial knowledge of deterrence i show how the planner can eliminate dominated search rules and how he can use the minimax or minimax regret criterion to choose an undominated rule

designing optimal disability insurance a case for asset testing we analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes an optimum is implemented by an asset tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum the logic behind this result is that an agent who plans to falsely claim disability a finds doing so unattractive if he does not adjust his savings and b cannot collect disability insurance if he does adjust his savings in the desired direction upward for a calibrated economy we find that welfare gains from asset testing are significant

international competition and exchange rate shocks a cross country industry analysis of stock returns this article systematically examines the importance of exchange rate movements and industry competition for stock returns common shocks to industries across countries are more important than competitive shocks due to changes in exchange rates weekly exchange rate shocks explain almost nothing of the relative performance of industries using returns measured over longer horizons the importance of exchange rate shocks increases slightly and the importance of industry common shocks increases more substantially both industry and exchange rate shocks are more important for industries that produce internationally traded goods but the importance of these shocks is economically small for these industries as well economists journalists and politicians around the world argue that some of the industries in their country compete vigorously with the same industries in other countries and that exchange rate shocks affect their competitiveness in the united states it is routinely stated that some u s industries compete with japanese industries and that a depreciation of the yen is bad for these u s industries and good for the rival japanese industries if the yen falls trade tensions could intensify between the u s and japan as autos and machinery from japan gain a competitive edge 1 further the exchange rate literature shows that exchange rate shocks lead to persistent deviations from purchasing power parity 2 froot and klemperer 1989 and knetter 1989 1993 among others demonstrate that deviations from purchasing power parity lead to sharp changes in price markups and profit margins for exporters

the impact of exchange rate volatility on international trade reduced form estimates using the garch in mean model abstract in this paper we use a multivariate garch in mean model of the reduced form of multilateral exports to examine the relationship between nominal exchange rate volatility and export flows and prices the model imposes rationality on perceived exchange rate volatility unlike conventional two step strategies tests are performed for five industrialized countries over the post bretton woods era we find that the garch conditional variance has a statistically significant impact on the reduced form equations for all countries for most of the countries the magnitude of the effect is stronger for export prices than quantities in addition the estimated magnitude of the impact of volatility on exports is not robust to using the conventional estimation strategy jel f41 f31

the effects of exchange rate volatility on exports some new estimates investigations of the impact of exchange rate volatility on exports have not allowed for the integrated non stationary of the variables employed in estimation the results reported in this note are suggestive that in the context of an error correction framework real exchange rate volatility has a significant impact on exports

persistent trade effects of large exchange rate shocks this paper presents a theoretical basis for the argument that large exchange rate shocks such as the 1980s dollar cycle may have persistent effects on trade flows and the equilibrium exchange rate itself we begin with a partial equilibrium model in which large exchange rate fluctuations lead to entry or exit decisions that are not reversed when the currency returns to its previous level then we develop a simple model of the feedback from hysteresis in trade to the exchange rate itself here we see that a large capital inflow which leads to an initial appreciation can result in a persistent reduction in the exchange rate consistent with trade balance

exchange rate depreciation and exports the case of singapore revisited this article revisits the weak relationship between exchange rate depreciation and exports for singapore using a bivariate generalized autoregressive conditional heteroscedasticity in mean model that simultaneously estimates time varying risk the evidence shows that depreciation does not significantly improve exports but that exchange rate risk significantly impedes exports in sum singaporean policy makers can better promote export growth by stabilizing the exchange rate rather than generating its depreciation

the determinants of asymmetric volatility volatility in equity markets is asymmetric contemporaneous return and conditional return volatility are negatively correlated in this article i develop an asymmetric volatility model where dividend growth and dividend volatility are the two state variables of the economy the model allows both the leverage effect and the volatility feedback effect the two popular explanations of asymmetry the model is estimated by the simulated method of moments i find that both the leverage effect and volatility feedback are important determinants of asymmetric volatility and volatility feedback is significant both statistically and economically the relationship between stock price and its volatility has long interested financial researchers empirically returns and conditional variance of next period s returns are negatively correlated that is negative positive returns are generally associated with upward downward revisions of the conditional volatility this empirical phenomenon is often referred to as asymmetric volatility in the literature see engle and ng 1993 zakoian 1994 and wu and xiao 1999 the presence of asymmetric volatility is most apparent during stock market crashes when a large decline in stock price is associated with a significant increase in market volatility formal econometric models have been developed by researchers to capture asymmetric volatility for example asymmetric arch models of nelson 1991 and glosten jagannathan and runkle 1993 have been found to significantly outperform their counterparts that do not accommodate the asymmetry moreover continuous time stochastic volatility models generally produce estimates of a negative correlation between return and return volatility bakshi cao and chen 1997 and bates 1997 for a review of the literature on asymmetric volatility see bekaert

exchange rate variation commodity price variation and the implications for international trade abstract a commonly cited disadvantage of floating exchange rates is that a fluctuating exchange rate reduces international trade when firm owners are risk averse risk averse firm owners are concerned with the variation in the real domestic currency price of the good they export or import this price variation depends on exchange rate variation but also on a good s foreign currency price variation domestic price level variation and the covariation between these three variables the empirical results presented here show that for many commodities floating exchange rates did not cause a significant increase in overall real domestic currency price variation

foreign exchange markets overview of the special issue introduction by way of abstract two decades ago exchange rate economics seemed to be in total shambles that however did not last long science proceeds by successive approximations and in the intervening years the foreign exchange market became one of the most heavily researched areas in economics the first wave of findings to come out of this new research concerned the centuries old theoretical construct of purchasing power parity and relatedly the behavior of real exchange rates here the consensus gradually shifted from the widespread view that ppp had collapsed to the view that it was in fact a useful empirical first empirical approximation in the long run as lothian and taylor 1996 put it in an introduction to the jimf conference issue on exchange rate modeling published in 1998 one of us wrote koedijk 1998 1 ten years of data and estimation techniques later the outlook is less bleak at least in the medium run a predictable relationship between exchange rates and economic fundamentals has re emerged and reintroduced tempered optimism in exchange rate economics

measuring the response of macroeconomic uncertainty to shocks recent research documents the importance of uncertainty in determining macroeconomic outcomes but little is known about the transmission of uncertainty across such outcomes this paper examines the response of uncertainty about inflation and output growth to shocks documenting statistically significant size and sign bias and spillover effects uncertainty about inflation is a determinant of output uncertainty whereas higher growth volatility tends to raise inflation volatility both inflation and growth volatility respond asymmetrically to positive and negative shocks negative growth and inflation shocks lead to higher and more persistent uncertainty than shocks of equal magnitude but opposite sign

exchange rate effects on the volume and variability of trade flows abstract this paper investigates the effects of exchange rate uncertainty on the volume and variability of trade flows employing a signal extraction framework we show that the direction and magnitude of importers and exporters optimal trading activities depend upon the source of the uncertainty general microstructure shocks fundamental factors driving the exchange rate process or a noisy signal of policy innovations providing a rationale for the contradictory empirical evidence in the literature we also show that exchange rate uncertainty emanating from general microstructure shocks and the fundamental factors reduces the variability of trade flows while that related to a noisy signal of policy innovations increases variability

is price adjustment asymmetric evaluating the market share and marketing bottlenecks hypothesis abstract export price adjustment is asymmetric with respect to currency fluctuations in at least two circumstances if firms face capacity constraints in distribution networks or quantitative trade restrictions then pricing to market may be greater during depreciations of the exporter s currency if firms attempt to build market share subject to the threat of trade restrictions then pricing to market may be greater during appreciations of the exporter s currency this paper tests for asymmetries using panel data on german and japanese 7 digit industry exports the data seldom reject the hypothesis of a symmetric response of prices to exchange rates

on the long term effectiveness of exchange rate communication and interventions abstract exchange rate communication has come to play an increasingly important role as a policy tool for monetary authorities over the past decade the paper assesses the strategies and the long term effectiveness of communication as well as actual interventions the empirical results for the g3 economies indicate that communication has not only exhibited a significant contemporaneous effect on exchange rates but also has moved forward exchange rates up to a horizon of 6 months in the desired direction moreover communication is found to reduce exchange rate volatility and uncertainty whereas actual interventions tend to raise it overall this underlines a key difference between these two policy tools and suggests that communication tends to be a fairly effective policy tool over the medium term

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

the long run volatility puzzle of the real exchange rate abstract this paper documents large cross country differences in the long run volatility of the real exchange rate it shows that the real exchange rate of developing countries is approximately three times more volatile than the real exchange rate in industrial countries the paper shows that this difference in volatility cannot be explained by the fact that developing countries face larger shocks both real and nominal recurrent currency crises or by different elasticities to these shocks arch estimations find a much higher persistence of deviations of the variance of the rer from its long run value when the economy suffers shocks of various kinds

hyteresis in import prices the beachhead effect this paper shows that temporary real exchange rate fluctuations can have persistent hysteretic effects on trade specifically when market entry costs are sunk sufficiently large exchange rate shocks alter domestic market structure and thereby induce hysteresis this simple result has strong implications for exchange rate theory t rade policy and estimation of trade equations empirical evidence su ggests that the recent dollar overvaluation induced hysteresis in u s import prices namely the aggregate pass through equation of exchange rates to import prices shifted in the 1980s the shift s nature and timing is broadly consistent with the hysteresis hypothesis copyright 1988 by american economic association

the effects of real exchange rate risk on international trade abstract by assuming real profit maximization and uncertain prices as well as exchange rates we conclude that it is uncertain percentage changes in the real exchange rate that are risky in international trade empirical estimation of fourteen bilateral trade flows among industrialized countries finds a significant negative effect on trade quantity from such risk in a number of these cases the expectation variable has a positive effect in a larger number of cases significant price effects from the expectation variable are fewer and from risk are negligible

heterogeneity and tests of risk sharing how well do people share risk standard risk sharing regressions assume that any variation in households risk preferences is uncorrelated with variation in the cyclicality of income i combine administrative and survey data to show that this assumption is questionable risk tolerant workers hold jobs in which earnings carry more aggregate risk the correlation makes risk sharing regressions in the previous literature too pessimistic i derive techniques that eliminate the bias apply them to u s data and find that the effect of idiosyncratic income shocks on consumption is practically small and statistically difficult to distinguish from zero

real exchange rate volatility and international trade a reexamination of the theory one of the issues that have received considerable attention in the comparison of the properties of alternative exchange rate regimes is the effect of exchange rate risk on the volume of trade it has been argued that the higher volatility of exchange rates witnessed since the adoption of the floating regime in 1973 has led to a decrease in international trade transactions this is because most trade contracts are not for immediate delivery of goods and since they are denominated in terms of the currency of either the importer or the exporter unanticipated fluctuations in the exchange rate affect realized profits and hence the volume of trade it is implicitly assumed that forward exchange markets that can help traders eliminate this type of variations in profits either are not available as it is true for the majority of currencies because most are not fully convertible thereby impairing forward markets or for some reason they are not utilized to fully hedge exchange risk present in trade transactions the empirical evidence regarding the effect of exchange rate risk on trade has at best been inconclusive the large majority of the empirical studies are unable to establish a systematically significant link between exchange rate variability and the volume of international trade whether on an aggregate or on a bilateral basis abrams 1 akhtar and hilton 2 cushman 4 5 6 and kenan and rodrik 12 find some significant negative effects of exchange volatility on exports however bailey tavlas and uhlan 3 hooper and kohlhagen 10 and an international monetary fund study 11 do not find any supporting evidence for the depressing effect of exchange rate volatility on international trade it is also interesting to note that in many of these studies a significant positive effect of exchange rate volatility on the volume of trade is found for some cases however the positive effect believed to be at odds with the theory was either ignored or dismissed as a perverse result since as far as volumes are concerned theoretical considerations

export promotion through exchange rate policy exchange rate depreciation or stabilization exchange rate movements affect exports in two ways rate depreciation and rate variability risk a depreciation raises exports but the associated exchange rate risk could offset that positive effect the present paper investigates the net effect for eight asian countries using a dynamic conditional correlation bivariate garch m model that simultaneously estimates time varying correlation and exchange rate risk depreciation encourages exports as expected for most countries but its contribution to export growth is weak exchange rate risk contributes to export growth in malaysia and the philippines leading to positive net effects exchange rate risk generates a negative effect for six of the countries resulting in a negative net effect in indonesia japan singapore and taiwan and a zero net effect in korea and thailand exchange rate movements affect exports in two ways rate depreciation and rate volatility risk the two effects have received considerable attention since the collapse of fixed exchange rates in the early 1970s but no research considers the net total effect on exports of the two potentially offsetting effects this paper investigates the net effect for eight asian countries with engle s 2002 dynamic conditional correlation dcc bivariate garch m model that simultaneously estimates time varying correlation and exchange rate risk the net effect relates to the goal of a foreign exchange intervention depreciation lowers the foreign currency price of exports and probably increases the quantity of exports and export revenue in domestic currency conditions may exist however where export revenue falls highly inelastic foreign import demand leads to falling export revenue ambiguity also arises if export production incorporates high import content since the domestic cost or price of exports rises with depreciation during periods of appreciation exporters might price to market lowering their domestic currency price to maintain export market share theory and empirical evidence exhibits ambiguity as to the effect of the exchange rate on exports and export revenue junz and rhomberg 1973 and wilson and takacs 1979 find that devaluation

why is it so difficult to find an effect of exchange rate risk on trade abstract it is commonly argued that exchange rate risk hampers international trade however the large literature on this subject has not yet provided conclusive evidence this paper analyzes why it is so difficult to obtain a clear answer from time series analyses we use data on bilateral aggregate u s exports to the other g7 countries the results show that as far as the exchange rate is concerned export decisions are mostly affected by the probability distribution of the about one year ahead rate the riskiness of the exchange rate at such a long horizon appears fairly constant over time with only short term fluctuations this makes it difficult to discover the true effect of exchange rate risk on trade from the time series data that are typically available

exchange rate volatility and international trade the purpose of this note is to show that a positive effect of exchange rate volatility on export production has a theoretical basis the key to this claim is that as the exchange rate volatility increases so does the value of the real option to export to the world market higher volatility increases the potential gains from trade this may explain part of the mixed empirical findings regarding the effects of exchange rate risk on international trade

measuring and analysing the effects of short term volatility in real exchange rates this paper examines short term volatility in the real effective exchange rates of industrial countries and its impact on their imports it yields three conclusions first volatility has not diminished as markets have gained experience with floating exchange rates the trend appears to be in the opposite direction for some countries second exposure to short term volatility has differed among countries japan and sweden have experienced much more than most other industrial countries third volatility appears to depress the volume of international trade this third finding is consistent with results reported by cushman and by akhtar and hilton and challenges earlier findings by hooper and kohlhagen

real exchange rate volatility and the us bilateral trade a var approach this paper uses var models to investigate the impact of real exchange rate volatility on u s bilateral imports from the united kingdom france germany japan and canada the var systems include u s and foreign macro variables and are estimated separately for each country the major results suggest that the effect of volatility on imports is weak although permanent shocks to volatility do have a negative impact on this measure of trade and those effects are relatively more important over the flexible rate period copyright 1989 by mit press

exchange rate volatility and international trading strategy abstract it is usually argued that an increase in exchange rate volatility reduces the volume of international trade as trading firms are risk averse this paper shows that exporting firms benefit under fairly general conditions from an increase in exchange rate volatility firms optimally adjust their export volumes to the level of the exchange rate exporting is an option which is exercised if profitable in addition the paper presents conditions under which the volume of international trade grows with exchange rate volatility

output growth and its volatility the gold standard through the great moderation this study examines the relationship between u s output growth and its volatility over the period 1876 i to 2012 ii we adjust the data for outliers and structural breaks we employ generalized autoregressive conditional heteroskedasticity garch and exponential garch egarch specifications normality and homoskedasticity appear only in the garch or egarch model that corrects for the outliers when including the break in the mean equation high volatility persistence remains after also accommodating the breaks in the variance equation the integrated garch effect proves spurious either for the symmetric or the asymmetric model finally our empirical results suggest that the finding of higher output growth volatility stimulating output growth and higher output growth reducing its volatility obtained from the symmetric garch in mean garch m model also proves spurious as a result of the emergence of an asymmetric effect our more appropriately specified asymmetric egarch m model suggests positive volatility in mean and level effects in the long period real gross national product series

racial profiling fairness and effectiveness of policing citizens of two groups may engage in crime depending on their legal earning opportunities and on the probability of being audited police audit citizens police behavior is fair if both groups are policed with the same intensity we provide exact conditions under which forcing the police to behave more fairly reduces the total amount of crime these conditions are expressed as constraints on the quantile quantile plot of the distributions of legal earning opportunities in the two groups we also investigate the definition of fairness when the cost of being searched reflects the stigma of being singled out by police

exchange rate shocks and trade a multivariate garch m approach abstract we build on the recent literature studying the effects of uncertainty on trade by introducing a model that combines a reduced form vector autoregression for the growth rates of exports foreign income and the real exchange rate rer with a multivariate garch model up to 12 lags of several conditional standard deviations are added to relevant mean equations and all parameters are estimated simultaneously using maximum likelihood thus allowing us to avoid two step procedures that are common in the literature using a large data set of both developed and emerging countries we find evidence that rer uncertainty negatively impacts trade for several less developed countries we also find that rer uncertainty tends to be associated with a real currency appreciation when we compute generalized impulse response functions to study the impacts of unexpected shocks to rer growth on export growth the results are typically asymmetric positive shocks generate substantial negative responses while unexpected depreciations produce relatively smaller positive responses especially in our developing country sample

disability insurance and the dynamics of the incentive insurance trade off we provide a life cycle framework for comparing insurance and disincentive effects of disability benefits the risks that individuals face and the parameters of the disability insurance di program are estimated from consumption health disability insurance and wage data we characterize the effects of disability insurance and study how policy reforms impact behavior and welfare di features high rejection rates of disabled applicants and some acceptance of healthy applicants despite worse incentives welfare increases as programs become less strict or generosity increases disability insurance interacts with welfare programs making unconditional means tested programs more generous improves disability insurance targeting and increases welfare

exchange rate pass through when market share matters the authors investigate the pass through from exchange rates to import prices when firms future demands depend on their current market shares they show that profit maximizing foreign firms may either raise or lower their dollar export prices when the dollar appreciates temporarily i e the pass through may be perverse and that current import prices may be more sensitive to expected future exchange rates than to current exchange rates they present evidence that suggests the behavior of expected future exchange rates may provide a clue to the puzzling recent behavior of u s import prices copyright 1989 by american economic association

modeling heteroscedasticity in daily foreign exchange rates this article estimates autoregressive conditionally heteroscedastic arch and generalized arch garch models for five foreign currencies using 10 years of daily data a variety of arch and garch specifications a number of nonnormal error densities and a comprehensive set of diagnostic checks it finds that arch and garch models can usually remove all heteroscedasticity in price changes in all five currencies goodness of fit diagnostics indicate that exponential garch with certain nonnormal distributions fits the canadian dollar extremely well and the swiss franc and the deutsche mark reasonably well only one nonnormal distribution fits the japanese yen reasonably well none fit the british pound

bilateral trade flows the linder hypothesis and exchange risk bilateral trade flows are used to examine the linder hypothesis and the effect of exchange rate variability in a gra vity type trade model derived from an underlying demand and supply mo del a behavioral model is used to justify examining these issues joi ntly the model performs well empirically using a sample of seventeen countries for the period 1974 82 the authors find overwhelming supp ort for the linder hypothesis and this version of the gravity model moreover they find strong support for the hypothesis that increased exchange rate variability affects bilateral trade flows copyright 1987 by mit press

implications of nonlinear dynamics for financial risk management this paper demonstrates that when log price changes are not iid their conditional density may be more accurate than their unconditional density for describing short term behavior using the bds test of independence and identical distribution daily log price changes in four currency futures contracts are found to be not iid while there appear to be no predictable conditional mean changes conditional variances are predictable and can be described by an autoregressive volatility model that seems to capture all the departures from independence and identical distribution based on this model daily log price changes are decomposed into a predictable part which is described parametrically by the autoregressive volatility model and an unpredictable part which can be modeled by an empirical density either parametrically or nonparametrically this two step seminonparametric method yields a conditional density for daily log price changes which has a number of uses in financial risk management

does exchange rate risk affect exports asymmetrically asian evidence abstract this paper tests the hypothesis of asymmetric effects of exchange rate risk with a dynamic conditional correlation bivariate garch 1 1 m model the asymmetry means that exchange rate risk volatility affects exports differently during appreciations and depreciations which may reflect exporter s asymmetric risk perception and hedging behavior using bilateral exports from eight asian countries to the us the real exchange rate risk significantly affects exports for all countries negative or positive in periods of depreciation or appreciation thus policy makers can consider the stability of the exchange rate in addition to its depreciation as a method of controlling export growth

exchange rate volatility and pakistan s exports to the developed world 1974 85 abstract the paper attempts to estimate the impact of exchange rate uncertainty on pakistan s exports to the developed world for 1974 85 discovering strong evidence to suggest that exports were adversely affected by the increased variability of its bilateral exchange rates unlike much of the recent evidence on developed countries however it is the variability in nominal rather than real exchange rates that is significant the computations also suggest the presence of strong third country effects

monetary and real shocks productive capacity and exchange rate regimes where producers may diversify internationally international diversification is shown to inuuce a positive correlation between the volatility of productivity shocks and investment in the presence of a phillips curve the expected gnp is lower under a floating exchange rate regime than under a fixed exchange rate regime this result applies both for real and monetary shocks attempts to reduce foreign direct investment by capital controls will tend to reduce welfare without affecting our results regarding the ranking of exchange rate regimes implies that in the presence of market power uncertainty tends to reduce investment in the first part of the paper i demonstrate the international diversi fication of production modifies this result foreign direct investment tends to offset the impact of market power on the concavity of the profit function by weakening the relative price effect associated with output changes and by increasing the flexibility of adjusting the variable input hence international diversification of production is shown to induce a positive correlation between the volatility of productivity shocks and investment the second part of the paper utilizes the framework presented in section i to re examine the welfare ranking of exchange rate regimes in the presence of capital mobility as is well appreciated a one dimensional answer regarding the merits of a fixed exchange rate regime will not do justice to the host of issues relevant for making the choice between exchange rate regimes the second part of the paper focuses on one aspect of the debate the linkages between volatility domestic and foreign direct investment and productive capacity a frequent argument in favour of exchange rate stability relates to the potential cost of exchange rate volatility which may work to increase the cost of international trade and to reduce its volume yet efforts to detect the adverse effects of exchange rate volatility on trade volumes in the last two decades have not delivered clear cut results in fact the experience of international trade among the united states canada europe and japan suggests that there is no natural

conditional exchange rate volatility and the volume of international trade evidence from the early 1900s exports from britain to the united states from 1900 to 1940 are examined to ascertain the effect of exchange rate volatility on the volume of trade in addition to using a rolling standard deviation measure of exchange rate uncertainty the conditional variance of the exchange rate series modeled as a generalized autoregressive conditional heteroskedastic process is used to generate an alternative measure of exchange rate uncertainty the results of estimation using the two measures of exchange rate volatility suggest that increases in the volatility of the real exchange rate reduce the volume of trade copyright 1992 by mit press

optimal search profiling with linear deterrence i examine here an aspect of law enforcement that has recently been the subject of debate this is the choice of a profiling policy wherein decisions to search for evidence of crime may vary with observable covariates of the persons at risk of being searched policies that make search rates vary with personal attributes are variously defended as essential to effective law enforcement and denounced as unfair to classes of persons subjected to relatively high search rates variation of search rates by race has been particularly controversial see e g john knowles et al 2001 nicola persico 2002 jeff dominitz 2003 whereas recent research on profiling has sought to define and detect racial discrimination my concern is to understand how a social planner might choose a profiling policy this paper studies optimal profiling in a simple illustrative setting in related work manski 2004 i consider how a planner might reasonably behave when he does not possess all of the information needed to determine an optimal policy section i poses a utilitarian planning problem whose objective is to minimize the social cost of crime and search search is costly per se and search that reveals a crime entails costs for punishment of offenders search is beneficial to the extent that it deters or prevents crime deterrence is expressed through the offense function which describes how the offense rate of persons with given covariates varies with the search rate applied to these persons prevention occurs when search prevents an offense from causing social harm section ii derives the optimal profiling policy in the tractable case where search deters crime linearly one might think that search should focus on the most crime prone segments of the population however this is not necessarily the case if persons differ in the extent to which search deters crime it may be optimal to search a less crime prone group and not to search a more crime prone group if members of the former group are deterrable and those in the latter group are not sections i and ii consider ex ante search which apprehends offenders before their offenses cause social harm section iii performs parallel analysis for ex post search which apprehends offenders after completion of their offenses whereas ex ante search both deters and prevents crime ex post search only deters the two types of search have different implications for profiling policy although detection of discrimination is not my direct concern the findings reported here do have implications for that inferential problem the models studied in knowles et al 2001 and persico 2002 imply that in the absence of discrimination optimal profiling must equalize the offense rates of persons with different covariates provided that such persons are searched at all the present model differs from theirs and it does not produce their conclusion perhaps the most important difference is in the objective functions assumed for the agencies that make profiling policy they assume that police on the street aim to maximize the probability of successful searches minus the cost of performing searches i assume that a planner wants to minimize a social cost function with three components a the harm caused by completed offenses b the cost of punishing offenders who are apprehended and c the cost of performing searches

the impact of exchange rate volatility on international trade flows despite the best efforts of economists a basic paradox as to the impact of exchange rate volatility on trade flows remains unresolved at both the theoretical and empirical level this paper surveys the vast literature in the area in an attempt to identify major issues which have contributed to the development of the debate and examine whether any general direction for consensus may be found

exchange rate appreciation and export competitiveness the case of singapore policy prescriptions have generally assumed that exchange rate depreciation would stimulate exports and curtail imports while exchange rate appreciation would be detrimental to exports and encourage imports this prediction has however often neglected to consider the existence of the import content of exports as well as the dynamic effects of productivity improvements our paper seeks to show empirically the significance of these two factors in affecting the competitiveness of singapore s exports specifically the paper shows that in the presence of high import content exports are not adversely affected by currency appreciation because the lower import prices due to appreciation reduce the cost of export production in the case of singapore this cushioning effect outweighs that of the effect of productivity gains on export competitiveness the service exports however with a very low import content tend to suffer from currency appreciation

efficient unemployment insurance this paper constructs a tractable general equilibrium model of search with risk aversion an increase in risk aversion reduces wages unemployment and investment unemployment insurance has the opposite effect insured workers seek high wage jobs with high unemployment risk an economy with risk neutral workers achieves maximal output without any unemployment insurance but an economy with risk averse workers requires a positive level of unemployment insurance to maximize output therefore moderate unemployment insurance not only improves risk sharing but also increases output

human capital in multinational enterprises does strategic alignment matter this research proposes a strategic human capital alignment framework to examine whether the alignment between subsidiary strategy i e export oriented vs local market oriented strategy and human capital i e parent firm vs local specific human capital is positively related to subsidiary performance in multinational enterprises mnes we further explore two important exogenous i e foreign exchange rate change and endogenous i e mne international experience boundary conditions since they may adjust the positive effect of strategic human capital alignment on performance the analysis based on 5604 subsidiary observations of 423 mnes from 1990 to 2012 confirms the positive synergic effect of aligning subsidiary strategy and human capital and shows the moderating effects of foreign exchange rate change and mne international experience by presenting the importance of subsidiary strategy global staffing alignment and the roles of external economic environments and internal organizational capabilities as boundary conditions the strategic human capital alignment framework suggests that what makes human capital valuable for the firm is its alignment with strategic orientation thus managers should carefully deploy the appropriate type of human capital to fulfill the requisite organizational strategy and take into account changing external and internal contextual conditions in applying the framework

has exchange risk depressed international trade the impact of third country exchange risk abstract this paper argues that the effect of exchange risk on bilateral and aggregate trade flows should be analyzed by including the impact of third country exchange risk factors in addition to direct bilateral or multilateral risk after a theoretical examination of these effects us bilateral export flow to its six largest trading partners are analyzed empirically i find individuality and jointly significant third country risk effects in most cases in contrast to some recent bilateral efforts i find a steadily growing negative impact on trade flows from exchange risk during floating and in contrast to recent aggregate trade flow studies i conclude that there was no temporary decline in exchange risk during the late 1970s

nonlinear dynamics in real time equity market indices evidence from the united kingdom this paper tests for the presence of nonlinear dependence and chaos in real time returns on the u k ftse 100 index using a six month sample of about 60 000 observations since there is clear evidence of nonlinearity the authors follow other researchers in this field by applying the same tests to the residuals from a garch process fitted to the data in order to find out whether or not the nonlinearity can be explained by this type of model in the event their results suggest that garch can explain some but not all of the observed nonlinear dependence copyright 1995 by royal economic society

product differentiation and oligopoly in international markets the case of the u s automobile industry this paper develops and estimates a model of the u s automobile industry on the demand side a discrete choice model is adopted that is estimated using micro data from the consumer expenditure survey the estimation results are used in conjunction with population weights to derive aggregate demand on the supply side the automobile industry is modelled as an oligopoly with product differentiation equilibrium is characterized by the first order conditions of the profit maximizing firms the estimation results are used in counterfactual simulations to investigate two trade policy issues the effects of the ver and exchange rate pass through

exchange rates and the trade balance abstract the impact of the exchange rate on the trade balance is examined for a number of developing countries non structural techniques indicate that a depreciation of the real exchange rate is not strongly associated with a significant improvement in the trade balance

exchange risk exposure and the option to trade rather than impeding trade increased exchange rate uncertainty may on average create trade as it implies a higher probability that ex post deviations from commodity price parity will exceed tariffs and transportation costs we demonstrate such an effect in a small country short term model under the alternative assumptions of perfect competition and of a monopolist trader producer the proofs rely on the fact that such firms exposures can be replicated and hedged by standard options under partial monopoly scenarios the effect of volatility is ex ante unclear though jel f31

the effects of exchange rate variability on international trade a meta regression analysis the trade effects of exchange rate variability have been an issue in international economics for the past 30 years the contribution of this article is to apply meta regression analysis mra to the empirical literature on average exchange rate variability exerts a negative effect on international trade yet mra confirms the view that this result is highly conditional by identifying factors that help to explain why estimated trade effects vary from significantly negative to significantly positive mra evidence on the pronounced heterogeneity of the empirical findings may be instructive for policy first by establishing that average trade effects are not sufficiently robust to generalize across countries and second by suggesting the importance of hedging opportunities hence of financial development for trade promotion for the practice of mra we make a case for checking the robustness of results with respect to estimation technique model specification and sample

exchange rate variability and the flow of international trade abstract this study uses a garch generalized autoregressive conditional heteroskedasticity model to test if real exchange rate volatility has an adverse effect on the value of u s imports from canada we find that exchange rate uncertainty has a negative and statistically significant affect on trade flows