issue costs in the eurobond market the effects of market integration this study compares the issuance costs of eurobonds before and after the completion of the economic and monetary union emu in 2002 we find that the introduction of the euro has significantly reduced the issue cost of euro denominated bonds compared to bonds denominated in the legacy currencies the reduction in issue cost is not due to a decrease in underwriter compensation but rather to the elimination of underpricing the difference between the market price after trading commences and the offering price underwriter fee has declined substantially after the completion of the emu but this decline has been offset by an increase in underwriter spread the difference between the offering price and the guaranteed price to the issuer leaving total underwriter compensation unchanged the emu is also associated with significant reductions in bond maturity and syndicate size consistent with its expected effects on liquidity and issue costs in the eurobond market

correlation of business cycles in the euro zone in this short article we use a simple diferences in diferences technique to investigate whether bilateral correlation of business cycles increased more amongst members of the european monetary union emu after the implementation of the euro than amidst other oecd economies we present evidence suggesting this to be the case importantly this higher correlations appear to be the result of the common monetary policy per se and not of higher bilateral trade

stock market returns and annuitization abstract i investigate the strong negative relation between recent stock returns and the annuitization of retirement savings using a novel data set with over 100 000 actual payout decisions after controlling for several standard explanations e g wealth effects i present evidence supporting naive beliefs and extrapolation from past returns the effect of recent returns on annuitization dramatically increases with age confirming that the elderly rely most heavily on recent information my results provide insights into how beliefs are formed in old age and have implications for the design of public policies seeking to promote annuitization

pennies a day the effect of temporal reframing on transaction evaluation to increase transaction compliance marketers sometimes temporally reframe the cost of a product from an aggregate one time expense to a series of small ongoing expenses often in spite of the fact that the physical payments remain aggregated this temporal reframing is identified in this article as the pennies a day pad strategy a two step consumer decision making process of 1 comparison retrieval and 2 transaction evaluation is posited to explain the effectiveness of this strategy in a series of laboratory studies general support for pad effectiveness across a range of product categories and specific support for the proposed two step model was found the pad framing of a target transaction is shown to systematically foster the retrieval and consideration of small ongoing expenses as the standard of comparison whereas an aggregate framing of that same transaction is shown to foster the retrieval and consideration of large infrequent expenses this difference in retrieval is shown to significantly influence subsequent transaction evaluation and compliance

unemployment labor market reform and monetary union monetary union such as the economic and monetary union in europe emu may affect incentives for labor market reform and thus equilibrium unemployment through several mechanisms if an inflation bias exists there is usually a stronger incentive to reduce equilibrium unemployment through national reform outside rather than inside the emu absent such a bias emu membership could lead to more reform one reason is that reform may increase wage flexibility which can substitute for monetary policy in the emu another reason could be a precautionary motive for low equilibrium unemployment to reduce the utility cost of increased macroeconomic variability in the emu

theoretical relations between risk premiums and conditional variances many statistical models of time varying risk premiums including the autoregressive conditional heteroscedasticity arch in mean attempt to exploit a relation between risk premiums and conditional variances or covariances of asset returns we examine this relation in numerical versions of a dynamic asset pricing theory and show that it can be increasing decreasing flat or nonmonotonic its shape depends on both the preferences of the representative agent and the stochastic structure of the economy without additional structure the theory does not provide either a general foundation for arch in mean specifications or a simple interpretation of their parameters

currencies and the allocation of risk the welfare effects of a monetary union in a general equilibrium model with incomplete asset markets nominal securities and mean variance preferences a monetary union is desirable when the gain from eliminating excess volatility of nominal variables exceeds the cost of reducing the number of currencies with which to hedge risks copyright 1998 by american economic association

the new theory of optimum currency areas highbrow opinion is like a hunted hare if you stand long enough it will come back to the place it started from dennis robertson

capital market imperfections and the theory of optimum currency areas this paper studies how within and cross country capital market imperfections affect the welfare effects of forming a currency union the analysis considers a bank only world where intermediaries compete in cournot fashion and monitoring and state verification are costly the first part determines the credit market equilibrium and the optimal number of banks prior to joining the union the second part discusses the benefits from joining a currency union a competition effect is identified and related to the added monitoring costs that banks may incur when operating outside their home country through an argument akin to the brander krugman reciprocal dumping model of bilateral trade however in our framework whether joining a union raises welfare of the home country is ambiguous it depends on the relative strength of investment creation and intermediation diversion effects

penny wise dollar foolish buy sell imbalances on and around round numbers this paper provides evidence that stock traders focus on round numbers as cognitive reference points for value using a random sample of more than 100 million stock transactions we find excess buying selling by liquidity demanders at all price points one penny below above round numbers further the size of the buy sell imbalance is monotonic in the roundness of the adjacent round number i e largest adjacent to integers second largest adjacent to half dollars etc conditioning on the price path we find much stronger excess buying selling by liquidity demanders when the ask falls bid rises to reach the integer than when it crosses the integer we discuss and test three explanations for these results finally 24 hour returns also vary by price point and buy sell imbalances are a major determinant of that variation across price points buying selling by liquidity demanders below above round numbers yield losses approaching 1 billion per year this paper was accepted by brad barber teck ho and terrance odean special issue editors

monetary union a welfare based approach abstract this article attempts to shed light on the consequences of the transition to emu for individual welfare following specific shocks to this end we develop a two country intertemporal general equilibrium model that extends the obstfeld and rogoff journal of political economy 103 3 1995 624 specification to nominal rigidities through price adjustment costs and pricing to market behavior we show that when facing a positive asymmetric permanent shock to either technology or government expenditures occurring in one country implementing a monetary union is beneficial to the households living in this economy conversely it is detrimental to foreigners further a sensitivity analysis shows that if the gains losses to implementing monetary union are qualitatively robust when facing changes in the degree of nominal rigidities and the elasticity of substitution between foreign and domestic goods they are quite sensitive to the degree of pricing to market in the economy

the euro and inflation uncertainty in the european monetary union in this paper we investigate empirically the relationship between inflation and inflation uncertainty in twelve emu countries we estimate a time varying parameter model with a garch specification for the conditional volatility of inflation in order to distinguish between short run structural and impulse and steady state uncertainty we then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the euro and its effects on the links between inflation and inflation uncertainty we find that steady state inflation has generally remained stable with the important exception of germany where the trend has become positive steady state inflation uncertainty and inflation persistence have both increased and the relationship between inflation and inflation uncertainty has broken down in many countries these findings cast doubt on the optimistic view taken by the ecb concerning its success in controlling inflation and suggest the need for improvements in its analytical framework

modeling loss aversion and reference dependence effects on brand choice based upon a recently developed multiattribute generalization of prospect theory s value function tversky and kahneman 1991 we argue that consumer choice is influenced by the position of brands relative to multiattribute reference points and that consumers weigh losses from a reference point more than equivalent sized gains loss aversion we sketch implications of this model for understanding brand choice we develop a multinomial logit formulation of a reference dependent choice model calibrating it using scanner data in addition to providing better fit in both estimation and forecast periods than a standard multinomial logit model the model s coefficients demonstrate significant loss aversion as hypothesized we also discuss the implications of a reference dependent view of consumer choice for modeling brand choice demonstrate that loss aversion can account for asymmetric responses to changes in product characteristics and examine other implications for competitive strategy

a new approach to risk return trade off dynamics via decomposition this paper revisits the puzzling time series relation between risk premium and conditional volatility by proposing a flexible risk return trade off that allows for a variety of possible shapes and incorporates potential nonlinearities inherent in excess return dynamics we derive this flexible risk return relation using the decomposition approach of anatolyev and gospodinov 2010 which splits excess returns into the product of absolute returns and signs using this decomposition strategy we study four major international financial markets the empirical results support a significant and positive risk return trade off that is driven by conditional volatility market timing and the interdependence between the two components which is generically related to return skewness

currency unions and the real exchange rate abstract when the transmission mechanisms are different across member states real exchange rate shocks affect currency unions aggregate inflation output and welfare at the regional level the impact of real exchange rate movements is larger in smaller countries

an investigation of time preferences life expectancy and annuity versus lump sum choices can smoking harm long term saving decisions abstract we exploit the fact that israeli pension insurance policies do not take health conditions or smoking status into account in annuity pricing to investigate the potential effect of being a smoker on retirement payout choices contrary to the idea that smokers have higher discount rates and thus should prefer the lump sum option and even though the insurance pricing mechanism means that smokers would be offered the same annuity as nonsmokers all else equal we find that smokers do not prefer the lump sum option we offer and test several potential explanations for our findings illusions regarding life expectancy self control and advantageous selection

the risk return relationship evidence from index returns and realised variances abstract this paper provides new evidence on the risk return relationship by jointly analysing index return and realised variance rv series it is argued that the contemporaneous correlation cc between the return and rv which has been largely overlooked in the literature is a crucial component in the empirical risk return relationship based on daily and weekly time series from 21 international market indices the findings support the predictions of the risk premium volatility feedback and statistical balance however little support is found for the short memory volatility component risk premium it is argued that the empirical risk return relationship is primarily shaped by the cc and the vastly different autocorrelation structures of the return and rv

labour markets and monetary union a strategic analysis this paper shows that the effects of a monetary union depend on several labour market features in particular the switch from national monetary policies to a common monetary policy usually affects both inflation and unemployment even when all structural parameters of the economy and of unions and policymakers preferences remain the same the benchmark case of a monetary union between identical countries suggests that the switch to a monetary union is likely to make labour unions more aggressive increasing unemployment qualifications to this result are provided under alternative institutional scenarios like cross country asymmetries pre union erm membership and wage leadership

currency areas international monetary regimes and the employment inflation tradeoff we show that the employment inflation tradeoff facing a central bank depends on the size of the economy for which it sets monetary policy for inflation averse central banks the tradeoff improves the smaller the relevant economy the tradeoff facing the region whose central bank controls the exchange rate in a managed exchange rate regime does not change moving to a symmetric flexible exchange rate regime instead the core region in an asymmetric regime faces a worse tradeoff than under flexible exchange rates equipped with these results we explore the issue of the optimal size of a currency area both in a two and in a three region world 1998 elsevier science b v

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

the shape of the risk premium we examine the relationship between the risk premium on the center for research on security prices crsp value weighted index total return and its conditional variance we propose a new semiparametric model in which the conditional variance process is parametric and the conditional mean is an arbitrary function of the conditional variance for monthly crsp value weighted excess returns the relationship between the two moments that we uncover is nonlinear and nonmonotonic

risk and return abstract this paper examines the seasonality in the basic relationship between expected return and risk during 1935 82 the results reveal that the positive relationship between return and risk is unique to january the risk premiums during the remaining eleven months are not significantly different from zero

risk and return long run relations fractional cointegration and return predictability univariate dependencies in market volatility both objective and risk neutral are best described by long memory fractionally integrated processes meanwhile the ex post difference or the variance swap payoff reflecting the reward for bearing volatility risk displays far less persistent dynamics using intraday data for the standard poor s 500 and the volatility index vix coupled with frequency domain methods we separate the series into various components we find that the coherence between volatility and the volatilityrisk reward is the strongest at long run frequencies our results are consistent with generalized long run risk models and help explain why classical efforts of establishing a

quantitative modelling of the eur chf exchange rate during the target zone regime of september 2011 to january 2015 krugman 1991 s target zone model for exchange rate dynamics has become the reference of a large part of this literature despite its simplicity and elegance empirical evidence has been lacking not least because it is difficult to capture the predicted non linear relationship between the observable exchange rate and the non observable fundamental value this is why we propose a different approach by inverting locally the relation between exchange rate and fundamental value we derive analytical expressions for the conditional volatility and the probability density as a function of the exchange rate this allows us to examine krugman s prediction directly from historical data and furthermore enables us to test the smooth pasting condition which is intimately related to the no arbitrage condition concretely we study the performance of the euro swiss franc exchange rate in the extraordinary period from september 6 2011 to january 15 2015 when the swiss national bank enforced a minimum exchange rate of 1 20 swiss francs per euro we show that the data are well explained by the theory and conclude that krugman s target zone model holds after all but apparently only under extreme and sustained pressure that pushes continuously the exchange rate very close to the boundary of the target zone

the effect of the euro on foreign direct investment abstract in this paper the recent effect of the european monetary union on inward fdi flows is examined using a difference in differences approach the estimated results show that the introduction of the euro raised inward fdi flows by approximately 16 within the euro area by approximately 11 to non members and weakly by around 8 from non member countries into the euro area moreover the geographical effects of the euro are explored the results show partial agglomeration tendencies for the euro area there are also some indications of increased importance of vertical specialization in the sample

monetary policy interactions under managed exchange rates this paper studies a two country monetary system where one country sets its money stock but gives up control of the exchange rate and the other country gives up control of its own money stock but can set the exchange rate independently cournot nash equilibria under managed rates differ significantly from those under fixed or floating rates the country that controls the exchange rate can effectively offset inflationary shocks by changing the exchange rate at the expense of the foreign country and as a result can be better off than the foreign country this result provides an example of a successful disinflation through an exchange rate appreciation in a two country world and it indicates that managed exchange rate regimes tend to be unstable since both countries find it desirable to affect the exchange rate managed exchange rates however are a stable outcome when the center country is so much larger than its partner that changes in the real exchange rate do not affect its output and real income copyright 1989 by the london school of economics and political science

mobile capital domestic institutions and electorally induced monetary and fiscal policy the literature on global integration and national policy autonomy often ignores a central result from open economy macroeconomics capital mobility constrains monetary policy when the exchange rate is fixed and fiscal policy when the exchange rate is flexible similarly examinations of the electoral determinants of monetary and fiscal policy typically ignore international pressures altogether we develop a formal model to analyze the interaction between fiscal and monetary policymakers under various exchange rate regimes and the degrees of central bank independence we test the model using data from oecd countries we find evidence that preelectoral monetary expansions occur only when the exchange rate is flexible and central bank independence is low preelectoral fiscal expansions occur when the exchange rate is fixed we then explore the implications of our model for arguments that emphasize the partisan sources of macroeconomic policy and for the conduct of fiscal policy after economic and monetary union in europe

the costs of losing monetary independence the case of mexico this paper develops a two country monetary model calibrated to data from the united states and mexico to address the question of whether dollarization is welfare improving for the two countries our findings suggest that dollarization is not necessarily pareto superior to monetary independence for mexico there are two persuasive arguments that are often put foleth in support of the idea that many countries would benefit from the adoption of the u s dollar as their national cultency one is the standard argument often made in favor of a common currency that it promotes economic and financial integration and reduces tleansaction costs the other argument is that dollarization would solve the credibility and commitment problem and impose monetary discipline the idea is that many countries particularly in latin america have long histories of high inflation and a record of breaking promises to pursue monetary policies that lead to low inflation taking monetary policy out of the hands of domestic central banks is one way to addleess this issue thus one of the conjectured benefits of adopting the u s dollar hinges on the prospect that this would eliminate an inflationary bias among the participating countries these benefits have to be balanced against the costs associated with the loss of monetary independence that eithele dollarization or a cultency area necessarily implies this loss of monetary independence means that the country can no longer use the instruments of monetary policy to adjust to internal or external shocks these considerations suggest two main questions that should be addressed in thinking about the proposal to adopt the u s dollar in mexico first is the higher inflation rate in mexico necessarily the result of the lack of monetaley discipline ole it can be justified by some principle of optimality in the conduct of monetary policy second is the welfare loss from not being able to use monetary policy to react optimally to shocks quantitatively important

the introduction of the euro and its effects on portfolio decisions abstract examining investment behavior related to the euro introduction we address the relevance of different investment determinants with the advent of the currency union two potential sources of portfolio reallocation can be distinguished first the diminishment of exchange rate risk and transaction costs within the emu second the increase of correlation of emu returns so that diversification benefits decreased we test for structural breaks in the holdings of german investors and estimate a market model to account for the two effects a significant decrease in national and an increase in emu and rest of the world investments can be observed comparing the observed holdings with benchmark portfolios we find that investment home bias has diminished since the euro introduction

currency unions and international integration this paper characterizes the integration patterns of international currency unions such as the cfa franc zone we empirically explore different features of currency unions and compare them to countries with sovereign monies by examining the criteria for mundellos concept of an optimum currency area we find that members of currency unions are more integrated than countries with their own currencies for instance we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies business cycles are more highly synchronized across currency union countries than across countries with sovereign monies

an optimum currency area odyssey abstract the theory of optimum currency areas was conceived and developed in three highly influential papers written by mundell 1961 mckinnon 1963 and kenen 1969 those authors identified characteristics that potential members of a monetary union should ideally possess in order to make it feasible to surrender a nationally tailored monetary policy and the adjustment of an exchange rate of a national currency we trace the development of optimum currency area theory which after a flurry of research into the subject in the 1960s was relegated to intellectual purgatory for about 20 years we then discuss factors that led to a renewed interest into the subject beginning in the early 1990s milton friedman plays a pivotal role in our narrative friedman s work on monetary integration in the early 1950s presaged subsequent optimum currency area contributions mundell s classic formulation of an optimal currency area was aimed in part at refuting friedman s strong case for floating exchange rates and friedman s work on the role of monetary policy had the effect of helping to revive interest in optimum currency area analysis the paper concludes with a discussion of recent analytical work using new keynesian models which has the promise of fulfilling the unfinished agenda set out by the original contributors to the optimum currency area literature that is providing a consistent framework in which a country s characteristics can be used to determine its optimal exchange rate regime

the southern african development community suitable for a monetary union abstract this paper investigates whether a monetary union is desirable among the countries of the southern african development community sadc we employ a generalised auto regressive conditional heteroscedasticity garch model to consider the share of the variation in real exchange rates rers vis a vis south africa that can be explained by the divergence in monetary and fiscal policies the results show that monetary integration would substantially eliminate real exchange rate variation due to different monetary policies for some members the study concludes that a monetary union that embraces all sadc members would amass large costs relative to the benefits and hence would not be desirable

the us and the european montary system ems a stylised asymmetrical two country model numerical simulation methods were used to explore the consequences of asymmetrical behaviour in a two countary model the asymmetries are located in the asset and goods demand functions and in the parameters governing fosreign exchange market intervention in a stylized fashion these asymmetries reflect differences that might be characteriestic of differences between the usa and the european countries the ems the model is in continuous time with an overlapping wage contact set up underlying the domestic inflation process good demand functions which incorporate dependence on wealth and rational expectations shocks to the model reveal the effect of the asymmetries when compared to a fully symmetrical bases case

the illusion of wealth and its reversal abstractresearch on choice architecture is shaping policy around the world touching on areas ranging from retirement economics to environmental issues recently researchers and policy makers have begun paying more attention not just to choice architecture but also to information architecture or the format in which information is presented to people in this article the authors investigate information architecture as it applies to consumption in retirement specifically in three experiments they examine how people react to lump sums versus equivalent streams of monthly income their primary question of interest is whether people exhibit more or less sensitivity to changes in retirement wealth expressed as lump sums e g 100 000 or monthly equivalents e g 500 per month for life they also test whether people exhibit an illusion of wealth by which lump sums seem more adequate than monthly amounts in certain conditions as well as the opposite effect in which lump sums seem less adequate t