the turning black tide energy prices and the canadian dollar the authors revisit the relationship between energy prices and the canadian dollar in the amano and van norden 1995 equation which shows a negative relationship such that higher real energy prices lead to a depreciation of the canadian dollar

defensive strategies in the quality ladders abstract this paper analyses the potentially defensive behaviour of patent race winners and the ensuing effect on aggregate r d effort we propose a quality ladder model where leaders strategically acquire a technology advantage and are able to innovate in this context product market regulation by affecting this strategic behaviour may have either a positive or negative effect on aggregate r d intensity the negative effect is likely to pertain in liberal markets whereas the positive influence arises in more regulated environments and can be stronger for larger jumps in innovation these steady state equilibrium outcomes are consistent with the puzzling patterns in data from manufacturing industries in 14 oecd countries over the 1987 2003 period

input demand elasticities for heterogeneous labor firm level estimates and an investigation into the effects of aggregation labor economists have paid increasing attention to the estimation of demand elasticities for heterogeneous labor the majority of these studies investigate the effect on wage rates resulting from exogenous changes in factor quantities i e the measurement of elasticities of complementarity examples of these studies abound borjas for example investigates the impact of differences in labor market representation on the earnings of racial groups 8 in another paper borjas defines immigrants as a separate labor group and is able to determine the impact of immigration on the wages earned by natives 9 berger defines labor inputs along education and gender lines thereby allowing for the investigation of changes in the age education composition of the work force on wage rates 5 and grant and hamermesh study the effect of increasing female labor force participation on the wages earned by youth and adults 17 less attention has been paid to the study of the responsiveness of employment to exogenous changes in wage rates i e the measurement of elasticities of substitution less attention has been focused on this issue because the data requirements are more stringent since in order to presume that wage rates are exogenously determined the unit of observation must be small ideally establishmentor firm level data would be used the relative inaccessibility of these type of data has led researchers to use more aggregated figures such as smsa level or industry level data to address microissues as long as wage rates are determined exogenously the unit of observation chosen is appropriate there are real concerns however about the adequacy of more aggregated units to describe the behavior of firms 2 this study addresses the issue of whether micro level data are in fact needed to accurately measure elasticities of substitution among labor groups a firm level data set that includes input

oil prices inflation and interest rates in a structural cointegrated var model for the g 7 countries sharp increases in the price of oil are generally seen as a major contributor to business cycle asymmetries moreover the very recent highs registered in the world oil market are causing concern about possible slowdowns in the economic performance of the most developed countries in this paper a structural cointegrated var model has been considered for the g 7 countries in order to study the direct effects of oil price shocks on output and prices and the reaction of monetary variables to external shocks our results can be summarized as follows i a stationary money demand as suggested by the classic theory of money can be identified for most countries ii according to the estimated coefficients of the structural part of the model for all countries except japan and u k the null hypothesis of an influence of oil prices on the inflation rate cannot be rejected inflation rate shocks are transmitted to the real economy by increasing interest rates iii impulse response analysis suggests for most countries the existence of an instantaneous temporary effect of oil price innovations on prices iv impulse response functions indicate different monetary policy reactions to inflationary and growth shocks v the simulation exercises directed to estimate the total impact of the 1990 oil price shock indicate that for some countries u s a significant part of the effects of the oil price shock is due to the monetary policy reaction function for other countries canada france and italy however the total impact is offset at least in part by an easing of monetary conditions

horizontal mergers with free entry abstract we consider the impact of horizontal mergers in the presence of free entry and exit in contrast to much of the previous literature on mergers our model yields predictions that seem intuitively reasonable with only moderate cost synergies mergers of a small number of industry participants are beneficial even under quantity competition there is no free rider problem in that insiders always benefit more than outsiders and quantity setting and price setting games yield similar predictions about profitability we also derive two welfare results that hold under quantity competition with homogeneous goods if the initial no merger equilibrium is symmetric then with free entry 1 a horizontal merger has no impact on the equilibrium price and 2 all privately beneficial mergers are socially beneficial

stackelberg versus cournot oligopoly equilibrium abstract we compare an m firm cournot model with a hierarchical stackelberg model where m firms choose outputs sequentially the stackelberg equilibrium price is lower so output and total surplus are higher total profits are lower while the first mover in a stackelberg duopoly earns more than a cournot duopolist this is not necessarily true for m 2 we find a surprisingly simple relation which determines whether cournot profit exceeds the stackelberg leader s finally we consider a game with firms choosing whether to reveal their outputs which includes stackelberg and cournot as possible outcomes the equilibrium is stackelberg

strategic investment and timing of entry the authors introduce competition over entry time into a sequential output choice model to show how profit differences will be dissipated this resolves a problem in the standard stackelberg model that the order of moves is exogenously specified yet an earlier position in the order is usually preferred to a later one if capacity costs are not too low the authors solution applies even if firms cannot commit to sell their entire output introducing positive capacity costs slightly modifies the static stackelberg results since endogenous cost asymmetries arise the framework therefore partially rehabilitates the stackelberg model copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

high yield bond and energy markets abstract high yield bonds hold a particularly unique space in the debt market from many aspects literature suggests these assets to behave more like stocks than bonds given the significant similarities between the high yield bond and stock markets it is expected for these markets to be similarly affected by certain outside factors some shocks including the ones from energy markets are known to impact the entire stock market and not just related company shares since high yield bond portfolios include some amount of energy company debt the recent volatility in energy prices has been particularly concerning to market participants however the question of whether price and volatility shocks only impact energy company bonds or the entire high yield bond market as they do with the stock market still remains unanswered this study attempts to address that question by exploring the dynamic relationships between the high yield bond and energy markets price transmission tests which account for gradual structural shifts suggest oil and ethanol markets significantly impacting the high yield bond market furthermore volatility tests find uni directional volatility transmitting from energy markets to the high yield bond market

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

imperfect competition and the effects of energy price increases on economic activity the authors show that modifying the standard neoclassical growth model by assuming that competition is imperfect makes it easier to explain the size of the declines in output and real wages that follow increases in the price of oil plausibly parameterized models of this type are able to mimic the response of output and real wages in the united states the responses are particularly consistent with a model of implicit collusion where markups depend positively on the ratio of the expected present value of future profits to the current level of output copyright 1996 by ohio state university press

entry deterrence and the free rider problem the public good aspect of entry prevention is examined in an industry characterized by an established oligopoly facing a potential entrant although incumbent firms act noncooperatively underinvestment in entry deterrence does not occur and in fact incumbents may find themselves in a pareto dominated arrangement in terms of profits by preventing entry

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

market competition r d and firm profits in asymmetric oligopoly we investigate a cournot model with strategic r d investments wherein efficient low cost firms compete against less efficient high cost firms we findthat an increase in the number of high cost firms can stimulate r d by the low cost firms while it always reduces r d by the high cost firms more importantly this force can be strong enough to compensate for the loss that arises from more intense market competition the low cost firms profits may indeed increase with the number of high cost firms an implication of this result is far reaching as it gives low cost firms an incentive to help rather than harm high cost competitors we relate this implication to a practice known as open knowledge disclosure especially ford s strategy of disclosing its know how publicly and extensively at the beginning of the 20th century

endogenous market structures and innovation by leaders an empirical test models of competition for the market with endogenous market structures show that contrary to the arrow view an endogenous entry threat induces the average firm to invest less in r d and the incumbent leader to invest more we test these predictions using a unique dataset for the german manufacturing sector the mannheim innovation panel in line with our predictions endogenous entry threats as perceived by the firms in survey data reduce r d intensity for an average firm but they increase it for an incumbent leader these results hold after a number of robustness tests with instrumental variable regressions

endogenous market structures and the business cycle we propose a flexible prices model where endogenous market structures and search and matching frictions in the labor market interact endogenously the interplay between firms endogenous entry strategic interactions among producers and labor market frictions represents a strong amplification channel of technology shocks on labor market variables and helps addressing the unemployment volatility puzzle consistently with u s evidence new firms create a large fraction of new jobs and grow faster than more mature firms net firms entry is procyclical and the price mark up is countercyclical

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

sequential entry industry structure and welfare in this paper we reexamine the relationship between potential competition industry structure and welfare in a market subject to a sequential entry threat where firms can make quantity commitments and have access to a constant returns technology it is shown that provided entry is not blockaded the incumbent s will either prevent entry or allow all the potential entrants in furthermore actual entry may decrease but social welfare never goes down with more potential entrants nevertheless with a finite number of potential entrants policies which lower the cost of entry need not be beneficial in welfare terms

terms of trade and real exchange rates the canadian evidence abstract this paper presents empirical evidence linking the canada us real exchange rate with the terms of trade using recently developed econometric methods for nondashstationary data we find that the real exchange rate is cointegrated with terms of trade variables and that causality runs from the terms of trade to the exchange rate we then construct a simple exchange rate equation that satisfies several specification tests and performs better than a random walk in post sample forecasting experiments the results suggest that much of the variation in the real exchange rate is attributable to movements in the terms of trade and that the influence of monetary factors is secondary

the international transmission of economic fluctuations abstract this paper suggests that for a wide class of international real business cycle models including models with imperfect competition the traditional channels of international transmission of business cycles through world interest rate and terms of trade variations cannot explain the cyclical response of the canadian economy to innovations in u s output empirically testable quantitative models of the effects on canadian economic activity of shocks to the u s economy are developed and their empirical relevance is tested by comparing impulse responses estimated from vector autoregressions to the quantitative predictions of the theoretical models

oil prices monetary policy and counterfactual experiments recessions are associated with both rising oil prices and increases in the federal funds rate are recessions caused by the spikes in oil prices or by the sharp tightening of monetary policy this paper discusses the difficulties in disentangling these two effects

identifying monetary policy in a small open economy under flexible exchange rates abstract previous empirical study on the effects of monetary policy shocks in small open economies has generated puzzling dynamic responses in various macroeconomic variables this paper argues that these puzzles derive from an identification of monetary policy that is inappropriate for such economies to remedy this it is proposed that a structural model be estimated to explicitly account for the features of the small open economy such a model is applied to canada with tightly estimated results overall the dynamic responses to the identified monetary policy shock are consistent with standard theory and highlight the exchange rate as a transmission mechanism

oil price shocks and their transmission mechanism in an oil exporting economy a var analysis informed by a dsge model abstract this paper examines the macroeconomic effects of oil price shocks and the oil shock transmission mechanism in an oil exporting country canada we use a structural var with sign restrictions that comes from a two country dynamic stochastic general equilibrium dsge model to jointly identify oil price domestic supply and u s and domestic monetary policy shocks this identification strategy not only controls for reverse causality from the canadian and u s macroeconomic conditions to the real oil prices but more importantly it also allows for contemporaneous interactions between the canadian and u s variables we find that oil shocks have a stimulative effect on canadian aggregate demand appreciate the canadian dollar improve the terms of trade and reduce real wages foreign disturbances including innovations in oil prices and the u s interest rate have a significant influence on canadian economic activities our counterfactual analysis indicates that the reaction of the u s interest rate as an indirect transmission channel for oil price shocks plays a moderate role in explaining the real exchange rate and inflation but has negligible impacts on the canadian output and interest rate

endogenous market structures and contract theory delegation principal agent contracts screening franchising and tying abstract i study the role of unilateral strategic contracts for firms active in markets with price competition and endogenous entry traditional results change substantially when the market structure is endogenous rather than exogenous they concern 1 contracts of managerial delegation to non profit maximizers 2 incentive principal agent contracts in the presence of moral hazard on cost reducing activities 3 screening contracts in case of asymmetric information on the productivity of the managers 4 vertical contracts of franchising in case of hold up problems and 5 tying contracts by monopolists competing also in secondary markets firms use always these contracts to strengthen price competition and manage to obtain positive profits in spite of free entry

the economic effects of energy price shocks large fluctuations in energy prices have been a distinguishing characteristic of the u s economy since the 1970s turmoil in the middle east rising energy prices in the u s and evidence of global warming recently have reignited interest in the link between energy prices and economic performance this paper addresses a number of the key issues in this debate what are energy price shocks and where do they come from how responsive is energy demand to changes in energy prices how do consumers expenditure patterns evolve in response to energy price shocks how do energy price shocks affect u s real output inflation and stock prices why do energy price increases seem to cause recessions but energy price decreases do not seem to cause expansions why has there been a surge in the price of oil in recent years why has this new energy price shock not caused a recession so far have the effects of energy price shocks waned since the 1980s and if so why as the paper demonstrates it is critical to account for the endogeneity of energy prices and to differentiate between the effects of demand and supply shocks in energy markets when answering these questions

the structural dynamics of output growth and inflation some international evidence we examine the dynamics of output growth and inflation in the us euro area and uk using a structural time varying coefficient var there are important similarities in structural inflation dynamics across countries output growth dynamics differ swings in the magnitude of inflation and output growth volatilities and persistences are accounted for by a combination of three structural shocks changes over time in the structure of the economy are limited and permanent variations largely absent changes in the volatilities of structural shocks matter

oil shocks and aggregate macroeconomic behavior the role of monetary policy hamilton and herrera hh have provided an interesting comment on our 1997 paper bernanke gertler and watson 1997 bgw we take the opportunity offered to us by the editors to respond briefly the goal of bgw was to show that the magnitude and shape of the economy s response to a particular exogenous shock will typically depend critically on how monetary policy makers choose to react to the shock as a consequence we argued that assessments of the importance of monetary policy for real activity should take into account the systematic portion of policy i e the policy rule as well as the unsystematic component i e monetary policy shocks the specific type of exogenous shock that we considered in bgw was a sharp increase in the price of oil of the magnitude observed during several episodes in the 1970s using a modified var framework we considered counterfactual scenarios in which monetary policy represented by the level of the federal funds rate does not respond to an oil price shock we found that the adverse effects of an oil price shock on output are reduced considerably when the endogenous response of the funds rate is shut off indeed our point estimates suggested that the endogenous response of monetary policy accounted for virtually all the negative impact of the oil shock on this research was funded in part by nsf grants to each of the authors we thank michele cavallo for research assistance

monetary policy in a low pass through environment in a dynamic new keynesian optimizing model we introduce incomplete exchange rate pass through on import prices three results stand out first unlike canonical models with perfect pass through which emphasize a type of isomorphism incomplete pass through renders the analysis of monetary policy of an open economy fundamentally different from the one of a closed economy second productivity driven deviations from the law of one price assume the interpretation of endogenous cost push shocks third the optimal commitment policy relative to discretion entails a smoothing of the deviations from the law of one price and requires more stable nominal and real exchange rates

using return policies to elicit retailer information we show that a manufacturer may prefer to offer a return policy when dealing with a retailer who holds advance knowledge about market conditions roughly stated the manufacturer offers a liberal return allowance in lieu of a lower price to satisfy a retailer facing unfavorable market conditions a retailer facing favorable conditions finds this tradeoff unattractive because he is likely to sell the merchandise anyway and thus not make as much use of the generous return terms as a consequence a retailer is less inclined to misstate market conditions by serving as an additional control instrument a returns policy reduces the manufacturer s need to ration cut production

forecasting the real prices of crude oil using forecast combinations over time varying parameter models abstract in this paper we forecast real prices of crude oil using real time forecast combinations over time varying parameter tvp models with single predictor we reveal the significant predictability at all horizons up to 24 months the mean squared predictive error reduction over the benchmark of no change forecast is as high as 17 and the directional accuracy as high as 0 645 a combination with tvp models is found to generate more accurate forecasts than the same combination with constant coefficient models because the forecast errors of individual tvp models are correlated at a lower degree we also evaluate the forecasting performance in the framework of density forecasting our results indicate that the benchmark model can be significantly outperformed by forecast combination at the horizons longer than 3 months

on the effects of entry in cournot markets in the framework of symmetric cournot oligopoly this paper provides two minimal sets of assumptions on the demand and cost functions that imply respectively that as the number of firms increases the minimal and maximal equilibria lead to i decreasing industry price and increasing or decreasing per firm output and ii increasing industry price and decreasing per firm output in both cases per firm profits are decreasing the analysis relies crucially on lattice theoretic methods and yields general unambiguous and easily interpretable conclusions of a global nature as a byproduct of independent interest new insight into existence of cournot equilibrium is developed

stackelberg competition with endogenous entry i characterise endogenous market structures where leaders have a first mover advantage and entry is endogenous leaders are always more aggressive than the followers independently from strategic substitutability or complementarity under quantity competition leaders produce more than any follower and i determine the conditions for entry deterrence high substitutability and non increasing marginal costs under price competition leaders set lower prices than the followers the opposite than with an exogenous number of firms in contests leaders invest more than each follower in all these cases a leadership improves the allocation of resources compared to the nash equilibrium with endogenous entry this article studies endogenous market structures where a firm has a first mover advantage in the sense of stackelberg 1934 on the other firms and entry in the market is endogenous the article characterises the equilibrium of these endo genous market structures and provides welfare analysis for some of the applications these market structures emerge in many sectors which are substantially competitive a fringe of firms is ready to enter whenever there is a profitable opportunity but where some incumbent firms have a competitive advantage over the followers because of technological historical or legal reasons or just because entry was not possible at an earlier stage and choose their strategies before them 1 while symmetric models of strategic interactions have been widely studied in the presence of endogenous entry in a marshallian tradition 2 traditional models with incumbent firms facing a competitive fringe of entrants have been mostly limited to the analysis of markets with homogeneous goods and entry deterrence for instance in the theories of limit pricing and of contestable markets baumol et al 1982 more recently vives 1988 has analysed games with sequential entry of multiple firms but without endogenising the entry process see also anderson and engers 1992 1994

how many firms should be leaders beneficial concentration revisited we investigate how the number of stackelberg leaders and followers aects economic welfare first we discuss the model with m leaders and n m followers compete in a homogeneous good market daughety 1990 nds that under constant marginal costs the stackelberg model m2 0 n yield a higher welfare than the cournot model m 0 or

oil shocks and aggregate macroeconomic behavior the role of monetary policy a recent paper by bernanke gertler and watson 1997 suggests that monetary policy could be used to eliminate any recessionary consequences of an oil price shock this paper challenges this conclusion on two grounds first we question whether the federal reserve actually has the power to implement such a policy for example we consider it unlikely that additional money creation would have succeeded in reducing the fed funds rate by 900 basis points relative to the values seen in 1974 second we point out that the size of the effect that bernanke gertler and watson attribute to oil shocks is substantially smaller than that reported by other researchers primarily due to their choice of a shorter lag length than that used by other researchers we offer evidence in favor of the longer lag length employed by previous research and show that under this specification even the aggressive federal reserve policies proposed would not have succeeded in averting a downturn