economic determinants of free trade agreements abstract the purpose of this study is to provide the first systematic empirical analysis of the economic determinants of the formation of free trade agreements ftas and of the likelihood of ftas between pairs of countries using a qualitative choice model we develop this econometric model based upon a general equilibrium model of world trade with two factors of production two monopolistically competitive product markets and explicit intercontinental and intracontinental transportation costs among multiple countries on multiple continents the empirical model correctly predicts based solely upon economic characteristics 85 of the 286 ftas existing in 1996 among 1431 pairs of countries and 97 of the remaining 1145 pairs with no ftas

armington models and terms of trade effects some econometric evidence for north america elasticities of substitution among u s imports from mexico canada the rest of the world and competing domestic production are estimated for twenty two mining and manufacturing sectors based on quarterly data for 1980 88 these elasticities will provide a benchmark for computable general equilibrium models of north american trade liberalization the authors also find that estimated armington elasticities are low and therefore researchers may want to reconsider the device of using high values of armington elasticities in multicountry computable general equilibrium models to avoid large terms of trade losses associated with preferential trade liberalization

the silent success of customs unions an earlier version of this paper is part of arevik gnutzmann mkrtchyan s thesis essays on the economics of trade agreements 2014 http hdl handle net 1814 34561

can learning affect exchange rate behavior the case of the dollar in the early 1980 s this paper demonstrates that a change in parameters of the money market that is not immediately understood will affect the behavior of exchange rate forecast errors while the market is learning the analysis is applied to the behavior of u s dollar german mark forecast errors during the early 1980 s when the market appeared to systematically underpredict the strength of the dollar consistent with this observation empirical estimates of implied forecast errors based upon bayesian learning suggest that forecast errors would have been on average negative during the period as the market came to realize the increase in u s money demand

forward exchange bias hedging and the gains from international diversification of investment portfolios abstract the gains to the us investor from international diversification of investment portfolios are examined for portfolio strategies that hedge and strategies that do not hedge exchange rate risk via the interbank forward market using the sharpe performance index and stochastic dominance as performance measures almost all the unhedged strategies outperformed the hedged strategies for 1985 1988 the opposite held for 1981 1984 the results are explained by the biasedness of forward rates in predicting future spot rates jel f30

heterogeneity and volatility puzzles in international finance we develop an equilibrium model in a 2 country 2 good pure exchange economy in which investors with logarithmic utility functions have heterogeneous beliefs about exogenously given output or endowment processes we obtain closed form representations of real ex change rates and of stock prices we show that heterogeneous beliefs together with hetero geneous preferences make the volatility of real exchange rates and of stocks exhibit some properties that have been well documented in the empirical literature these properties include the high volatility of both real exchange rates and stocks compared with that of economic fundamentals the high correlation of stocks during periods of volatile markets the model can also generate the clustering of the volatility of foreign exchange rates and stocks if the differences of beliefs are clustering

warranty and price optimization in a competitive duopoly supply chain with parallel importation abstract gray market has always been an opposing challenge for manufacturers parallel markets tend to purchase the manufacturer s product at a lower price and resell it in another market with a higher price in order to ameliorate the effects of parallel importation the offering of a warranty for authorized channels is suggested as a competitive strategy this paper considers two markets with different levels of willingness to pay a manufacturer is present at both of these markets and offers the same product with different prices according to each market s willingness to pay in the market with a lower willingness to pay the manufacturer s product is not only purchased by a group of customers but also by the parallel importer who later attempts to sell this product in the market with a higher willingness to pay moreover in the market with lower willingness to pay the manufacturer competes with another manufacturer that offers a similar product a model for this problem is proposed when the manufacturer offers warranty as a competitive strategy against the parallel importer at the market with higher willingness to pay furthermore a numerical example and a sensitivity analysis for the model are presented additionally due to the practicality of this problem managerial insights are included at the end of this research work

do big countries win tariff wars yes it is widely believed that tariffs invite retaliation and that the postretaliation equilibrium l eaves all countries worse off than they would be at free trade the a uthors present a simple pure exchange model with two countries and t wo goods and show which endowment patterns are consistent with this belief they find that if one country is substantially bigger than th e other it can expect to gain from a tariff war despite retaliation the model can be extended to show that the advantage obtained by bei ng part of a large trading unit can help explain the formation of cus toms unions copyright 1988 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

note comment and letter to the editorsustainable oligopolies in this paper we show that an oligopoly market where both increasing returns to scale and competition are present can nevertheless satisfy stability conditions in a sustainable oligopoly 1 each consumer chooses the firm which proposes the price quality schedule he prefers 2 firms earn non negative profits 3 no new firm could attract consumers and make profits we prove that such a sustainable oligopoly exists under rather weak assumptions the results apply to most models of vertical or horizontal product differentiation or to models of quality differentiation due to congestion effects

some welfare effects of sequential customs union formation this paper deals with the effects on world welfare of sequential customs union formation a computational model of customs union formation is developed and simulated under a variety of assumptions these assumptions concern various characteristics of the world the pattern of customs union formation and gatt restrictions on common external tariffs the results show that unrestricted customs union formation is likely to result in successive deterioration of world welfare despite gains for the member countries collectively an examination of the current gatt guidelines however suggests that if they were vigorously enforced world welfare would rise with customs union formation

empirical tests of the monetary approach to exchange rate determination there has been much discussion as to whether or not the turbulence in foreign exchange rates that has existed since 1973 is consistent with an efficient foreign exchange market this empirical question can only be tested relative to an equilibrium exchange rate model in this paper we conduct variance tests and efficient markets tests of three different models of exchange rate determination the equilibrium rational expectations model ere the currency substitution model cs and dornbusch s exchange rate dynamics model erd we find that the uncertainty in realised exchange rate movements can only be explained by the erd model and that actual exchange rates could have been predicted in a manner that is inconsistent with the efficient markets hypothesis

joint determination of optimal inventory and quality control policy typically the operating policy for the inventory control system for a commodity is developed independent of the operating policy for the quality control system for that commodity and vice versa in many circumstances these systems are dependent on one another a cost model that combines a fixed order quantity inventory control system with a bayesian quality control system for a lot by lot attribute acceptance sampling plan is presented along with an algorithm to obtain the operating parameters for the combined systems behavior of the combined systems is investigated and the costs and operating policy determined using this model are compared with the costs and operating policy determined when there is no integration of the two systems and when there is partial integration of the two systems there are significant cost savings obtained by using the operating policy developed under the combined systems over the operating policy derived from the separate systems

optimal tariff equilibria with customs unions the authors construct a model of customs unions in which countries charge optimal tariffs customs unions internalize the externality that exists whenever two countries import the same good also customs unions make several countries into one large unit with more market power big customs unions can improve their members welfare relative to the free trade the authors model of customs unions separates the effects of tariff reduction from the effects of policy coordination the movement from nash equilibrium to a free trade association improves global resource allocations moving from a free trade association to a full customs union has ambiguous resource allocation effects

forming coalitions and the shapley ntu value a simple protocol for coalition formation is presented first an order of the players is randomly chosen then a coalition grows by sequentially incorporating new members in this order the protocol is studied in the context of non transferable utility ntu games in characteristic function form if weighted utility transfers are feasible when everybody cooperates then the expected subgame perfect equilibrium payoff allocation anticipated before any implemented game is the shapley ntu value

a note on exchange rate expectations and nominal interest differentials a test of the fisher hypothesis this note tests the hypothesis that nominal interest differentials between similar assets denominated in different currencies can be explained entirely by the expected change in the exchange rate over the holding period this proposition often called the fisher open hypothesis or the hypothesis of perfect asset substitutability has been a major component of recent theories of exchange rate determination and has important implications for monetary policy 1 the fisher hypothesis differs from the covered interest parity theorem enunciated by keynes 11 while covered interest parity equates the nominal interest differential between financial centers to a known premium or discount on forward foreign exchange and is thus in principle riskless fisher parity involves risk in an essential way the two conditions are equivalent only when forward exchange rates equal expected future spot rates recent theoretical work for example that of grauer litzenberger and stehle 8 kouri 12 and frankel 6 shows that this need not be the case when market participants are risk averse thus while covered interest parity must always hold exactly in an informationally efficient asset market with no transactions costs fisher parity need not nominal interest differentials may reflect risk premia in addition to expected exchange rate movements 2 it should be emphasized at the outset that the tests conducted in this paper are really joint tests of the fisher hypothesis and a weak form of foreign exchange market informational efficiency levich 14 has argued that tests of market efficiency are always joint tests involving some hypothesized structure of normal equilibrium returns below we assume informational efficiency and instead test fisher s hypothesized arbitrage condition that nominal interest differentials equal expected percentage changes in exchange rates

the persistence of the peso problem when policy is noisy abstract the peso problem the market s belief that a discrete event may occur has frequently been blamed for the persistence of on average mistaken forecasts of macroeconomic variables this paper demonstrates how beliefs that a policy process may have switched can induce apparent ex post biased forecasts of exchange rates even after the switch has occurred furthermore during this peso problem period exchange rates may appear to contain a speculative bubble component since they will systematically deviate from the levels implied by observing fundamentals ex post and the conditional variance of exchange rates will exceed the variance implied by observing fundamentals

optimal production run length and warranty period for an imperfect production system under selling price dependent on warranty period abstract this paper extends the extant literature to consider that the selling price of the product sold with warranty policy is a function of the length of the warranty period for an imperfect production system a product under a free replacement repair warranty policy is considered and the lifetime distribution of the product is assumed to be exponentially distributed we seek to maximize the total profit per item through optimal determinations of the production run length and the warranty period based on the proposed mathematical model we will derive some lemmas and the propositions to carry out an efficient solution procedure to determine the optimal warranty period and production run length the numerical examples are given to illustrate the features of the proposed maximizing profit model and to show all of the possible cases of the solution procedure

discounted and per unit costs of product warranty this paper proposes a detailed model of the costs and benefits to producers and consumers of product warranty three common types of product warranty contract are considered in addition we explicitly allow for randomness in consumer repurchase behavior and for the possibility of an independent damage process acting on products sold under warranty the cost criteria considered are discounted costs profits and per unit costs and profits the model is used to analyze the trade off between warranty and quality control and to illustrate the sensitivity of warranty costs to environmental variables

trade creation and diversion revisited accounting for model uncertainty and natural trading partner effects summary the effect of preferential trade agreements ptas on trade flows is subject to model uncertainty stemming from the diverse and even contradictory effects suggested by the theoretical pta literature the existing empirical literature has produced remarkably disparate results and the wide variety of empirical approaches reflects the uncertainty about the correct set of explanatory variables that ought to be included in the analysis to account for the model uncertainty that surrounds the validity of the competing pta theories we introduce bayesian model averaging bma to the pta literature statistical theory shows that bma successfully incorporates model uncertainty in linear regression analysis by minimizing the mean squared error and by generating predictive distributions with optimal predictive performance once model uncertainty is addressed as part of the empirical strategy we find strong evidence of trade creation trade diversion and open bloc effects our results are robust to a range of alternative empirical specifications proposed by the recent pta literature copyright 2010 john wiley sons ltd

learning and the volatility of exchange rates abstract this paper investigates the implications for the volatility of exchange rates of specifying market uncertainty as parameter uncertainty private agents learn by means of bayes rule about a parameter of the stochastic process generating the exogenous variables learning is shown to magnify the reaction of exchange rates to random shocks to the market fundamentals this magnification effect of learning can explain the rejections of the econometric tests on the variance bounds and on the absence of bubbles that have been reported in the literature

exchange rate and relative monetary expansions the case of simultaneous hyperinflation and rational expectations abstract the relationship between the exchange rate and relative monetary expansions of poland and germany in the 1920s when the countries are under simultaneous hyperinflation is studied the results show that for this period of predominantly monetary shocks the conventional specifications of the monetary model of exchange rate determination with rational expectations cannot be rejected the results therefore support the monetary approach in its most conducive environment

customs unions and the core abstract customs union formation is modeled as a two stage game in the first stage countries make coalitional choices according to core theory in the second stage optimal tariffs are determined this yields a theory that predicts which customs unions form an example shows that a customs union can be an equilibrium even when both member countries do better at free trade

reinterpreting the kernel the reduced game relevant for the consistency of the prekernel is used to reinterpret this solution concept in a way that makes it independent of interpersonal utility comparisons based on this reinterpretation a non cooperative model is presented that yields in stationary equilibria the prekernel kernel for the class of monotonic transferable utility games next we apply the same non cooperative model to more general coalitional games for pure bargaining problems the model yields the nash solution for general non transferable utility games a natural extension of the prekernel arises thus the prekernel is obtained as the set of payoffs where the relevant bargaining range between every pair of players is split in half journal of economic literatureclassification numbers c71 c72 c78

optimal replenishment and rework with multiple unreliable supply sources we study a production inventory system with multiple unreliable supply sources through inspection and rework the system can improve the quality of the units received from the supply sources there are two interleaved decisions the replenishment quantities from the sources and the inspection rework quantities among the units received we show the optimal solution to the replenishment decision can be efficiently derived from a greedy algorithm and inspection rework is optimally applied to a single source identified by the algorithm furthermore in the case of linear cost functions it is optimal to place orders from two supply sources i e dual sourcing the results extend to the infinite horizon case where an order up to policy is optimal the model also readily adapts to situations in which the supply imperfection takes the form of a reduced delivery quantity yield loss

accounting for exchange rate variability in present value models when the discount factor is near 1 a well known stylized fact about nominal exchange rates among low inflation advanced countries particularly u s exchange rates is that their logs are approximately random walks michael i mussa 1979 is most frequently cited for observing this regularity in a famous pair of papers richard a meese and kenneth rogoff 1983a b found that the structural models of the 1970 s could not beat a random walk in explaining exchange rate movements recently some authors menzie chinn and meese 1995 nelson mark 1995 mark and donggyu sul 2001 have argued that the models can outforecast the random walk at long horizons but a comprehensive recent study by yin wong cheung et al 2003 documents that no model consistently outperforms a random walk why one obvious explanation is that the macroeconomic variables that determine the exchange rate themselves follow random walks if the log of the nominal exchange rate is a linear function of forcing variables that are random walks then it will inherit the random walk property the problem with this explanation is that the economic fundamentals proposed in the most popular models of exchange rates do not in fact follow simple random walks one resolution to this problem is that there may be some other fundamentals ones that have been proposed in some models but are not easily measurable or ones that have not yet been proposed at all that are important in determining exchange rates if these unobserved fundamentals follow random walks and dominate the variation in exchange rate changes then exchange rates will nearly be random walks even if the standard observed fundamentals are not in engel and west 2003a hereinafter ew we propose an alternative explanation we consider linear models of the exchange rate that are in the asset market approach to exchange rates these models emphasize the role of expectations of future economic fundamentals in determining the current exchange rate the exchange rate expressed as the home currency price of foreign currency in this paper can be written as a discounted sum of the current and expected future fundamentals

on tariff preferences and delegation decisions in customs unions a heckscher ohlin approach this paper studies preferences of customs union cu members over common external tariff cet levels and extends the literature on delegation decisions over trade policy in models with production in a model with similar cu members we prove that most preferred cets can be ranked with the help of compensated price elasticities of import demand functions in the heckscher ohlin trade model we show these elasticities depend on inter country differences in relative factor endowments and inter sectoral differences in technology this helps identify the optimal policy maker in a cu and demonstrates delegation decisions over trade policy can be integrated into mainstream trade theory the proliferation of preferential trade agreements ptas in the 1990s has presented policy analysts with a dual challenge to identify how these arrangements affect policy makers incentives to intervene in trade and to predict their implications for welfare economists responded to this challenge vigorously thanks to their research efforts a substantial body of work is now available addressing these issues under alternative assumptions regarding the theoretical environment considered including the objectives of policy makers the nature of their interactions the gatt rules that might constrain these interactions market structure the process of coalition formation etc 1 still while undeniably valuable the recent literature on regionalism has shed limited light on an important issue how heterogeneity among partners in a pta shapes their national preferences over external tariff levels and how these preferences in turn manifest themselves in the formation of actual trade

risk preferences and demand drivers of extended warranties we disentangle and study the relative importance of different risk preferences in explaining extended warranty purchases and the high premia paid for them empirical and behavioral research on insurance is at odds with whether diminishing returns curvature of the utility function or loss aversion and nonlinear probability weighting lead to observed consumer behavior this lack of consensus is primarily due to the inability of standard choice data to separate different risk preferences and the consequent need to rely on strong parametric assumptions we design two conjoint studies consistent with simultaneous and sequential decision making with choices about washing machines and extended warranties where subjects are given failure probabilities and repair costs using stated choice data from the surveys we can nonparametrically identify product and risk preferences we find that loss aversion is significantly more important than curvature and probability weights in explaining extended warranty choices importantly failure to decompose risk averse behavior into that arising from curvature loss aversion and probability weighting leads to lower washer prices and profits these findings are robust to alternate reference point assumptions we rationalize the premia paid for warranties by exploring retailer incentives to price discriminate and test the theory on complementary goods pricing finally based on counterfactual analysis forcing separate retailers to sell washers and extended warranties is not necessarily welfare enhancing as cited in the media and previous literature

effect of risk aversion on single sample attribute inspection plans the impact of a decision maker s risk aversion on the choice of an optimal sampling plan is empirically examined for various batch sizes and prior distributions of the process quality level these plans are compared to those of the classical linear cost model the comparisons show that substantial differences in the characteristics of an optimal sampling plan i e probability of acceptance optimal sample size and expected total cost occur when risk aversion is considered a discussion of the optimization characteristics involved in the selection of a sampling plan is also presented an optimization algorithm which obtains an optimal sampling plan based on the criterion of maximizing expected utility is proposed and evaluated

endogenous trade bloc formation in an asymmetric world this paper investigates how variations in endowments and the structure of preferences impact on the coalition formation decisions of asymmetric countries there exist relatively few general results on the relationship between country characteristics and trade bloc formation here new light is shed on this issue by systematically simulating bloc formation and by explicitly analysing the blocking behaviour of coalitions a general equilibrium model of world trade is implemented with equilibrium coalition formation being modelled using the equilibrium concept of the core it is found that global free trade is observed when all countries are similar customs unions tend to form between countries with adjacent consumer preferences or with adjacent endowments of their export commodity finally in contrast to the existing literature but consistent with observed behaviour it is found that free trade areas often pareto dominate customs unions provided consumer preferences differ sufficiently

explaining armington what determines substitutability between home and foreign goods for decades trade economists have modeled imperfect substitution between home and foreign goods in consumption often called the armington assumption with little analysis of what explains the wide variation in these substitution elasticities across sectors using a varying coefficients model the authors estimate armington elasticities between u s domestic and foreign goods across over one hundred industrial sectors from 1980 to 1988 and examine the role of product industry political and home bias factors as determinants they find strong support that the presence of foreign owned affiliates affects armington elasticities in important ways and some support that entry barriers and union presence have an effect

determining the optimal warranty price based on the producer s and customers risk preferences we propose a warranty model for the free replacement fixed period warranty policy that determines the optimal warranty price for a given warranty period we assume a constant failure rate for the product constant repair costs throughout the warranty period and a producer s and customers risk aversion for future repair costs using the exponential utility function and the gamma failure rate distribution we derive the decision model that maximizes the producer s certainty profit equivalent furthermore the sensitivity of the optimal warranty price is analyzed with a numerical example with respect to such factors as 1 the producer s and customers risk preferences 2 their perceptions about the product failure rate 3 the customers loyalty to the original producer in repairing failed products and 4 the customers repair price

can bilateral trade agreements help induce free trade there has been growing debate about whether bilateral trade agreements are damaging multilateral efforts to eliminate barriers to international trade this paper develops a model in which trading blocs always charge optimal tariffs and make trade agreements based on strategic considerations we ask a very simple question does the fact that trading blocs can form bilateral trade agreements make free trade less likely to occur the answer is that it depends on the size distribution of the trading blocs if there is one large trading bloc along with some smaller ones then bilateral trade agreements allow the smaller trading blocs to coalesce and block the monopoly power of large trading blocs in this case bilateral trade agreements facilitate the attainment of free trade not allowing customs unions leads to more not less protection if trading blocs are of roughly equivalent size then bilateral trade agreements allow groups of trading blocs to more effectively monopolize world trade in which case they may make free trade less likely these results suggest that a policy that inhibits the formation of trading blocs may be harmful we also compute the welfare effects of trade agreements to get some idea of how empirically important these issues are

the size of trading blocs market power and world welfare effects abstract we construct an n country n commodity trade model to analyze the implications of bloc size for nash equilibrium tariffs and welfare the relationship between the absolute size of symmetric trading blocs and their market power is ambiguous and we illustrate how this relationship varies with model parameters in contrast sufficiently large increases in the relative size of a bloc enhance its relative market power and cause the welfare of its country members to rise above the free trade level we establish the existence of an optimal bloc size and study the dependence of optimal size on the parameters of the model

on the different geographic characteristics of free trade agreements and customs unions abstract casual observation reveals a striking phenomenon of preferential trade agreements ptas while customs unions cus are only intra regional free trade agreements ftas are inter and intra regional using a farsighted dynamic model we endogenize the equilibrium path of ptas among two close countries and one far country rising transport costs mitigate the cost of discrimination faced by the far country as a cu non member and diminish the value of preferential access as a cu member thus sufficiently large transport costs imply that an fta is the only type of pta that can induce the far country s participation in pta formation unlike cu formation fta formation can induce participation because ftas provide a flexibility benefit an fta member can form further ptas with non members but a cu member must do so jointly with all existing members hence in equilibrium cus are intra regional while ftas are intra and inter regional

replacement costs under warranty cost moments and time variability we consider a product that is sold under one of the two common warranty policies under the pro rata warranty policy a failed item is replaced by a new one or is repaired at a cost prorated to the age of the failed item under the free replacement warranty policy replacements or repairs during the warranty period are provided by the supplier free of charge to the buyer assuming that successive failure times form a renewal process we derive moments of the total replacement cost for both policies during the product life cycle 0 t we also provide an extension to time varying failure time distributions in the case of the pro rata warranty policy

the monetary approach to the exchange rate revisited 1984 the monetary approach to the exchange rate revisited applied economics vol 16 no 5 pp 771 782

multilateral tariff cooperation during the formation of customs unions abstract we study the implications of customs union formation for multilateral tariff cooperation we model cooperation in multilateral trade policy as self enforcing in that it involves balancing the current gains from deviating unilaterally from an agreed upon trade policy against the future losses from forfeiting the benefits of multilateral cooperation that such a unilateral defection would imply the early stages of the process of customs union formation are shown to alter this dynamic incentive constraint in a way that leads to a temporary honeymoon for liberal multilateral trade policies we find however that the harmony between customs unions and multilateral liberalization is temporary eventually as the full impact of the emerging customs union becomes felt a less favorable balance between current and future conditions re emerges and the liberal multilateral policies of the honeymoon phase cannot be sustained

sequencing regional trade integration and cooperation agreements trade integration agreements and other international cooperation agreements have proliferated in recent years around the world rather than being spurred by exogenous forces alone the two phenomena are likely to be both path dependent and endogenous to one another however the theoretical and empirical understanding of the relationships between agreements forged in different domains of cooperation remains nascent the purpose of this paper is to describe a new extensive dataset on international agreements that can be employed to start mending the gaps in the literature and to develop best practices of sequencing international agreements to obtain higher pay offs from cooperation of particular interest here is the relationship between trade integration and other cooperation agreements the data provide preliminary grounds for hypothesising that trade integration agreements can be a particularly likely catalyst for further cooperation between states

tariff bindings and the dynamic formation of preferential trade agreements abstract we show that multilateral tariff binding liberalization substantially impacts the nature and extent of preferential trade agreement pta formation first it shapes the nature of forces constraining expansion of free trade agreements ftas the constraining force is a free riding incentive of fta non members under relatively high bindings but an exclusion incentive of fta members under relatively low bindings second multilateral tariff binding liberalization shapes the role played by ptas in the attainment of global free trade initially tariff binding liberalization leads to custom union cu formation in equilibrium but in a way that undermines the pursuit of global free trade however further tariff binding liberalization leads to fta formation in equilibrium and in a way that facilitates the attainment of global free trade our theoretical analysis also has implications regarding recent empirical discussions over the relative merits of ftas versus cus

the value allocation of an economy with differential information we analyze the shapley value allocation of an economy with differential information since the intent of the shapley value is to measure the sum of the expected marginal contributions made by an agent to any coalition that he she belongs to the value allocation of an economy with differential information provides an interesting way to measure the information advantage of an agent this feature of the shapley value allocation is not necessarily shared by the rational expectation equilibrium thus we analyze the informational structure of an economy with differential information from a different and new viewpoint

the dollar pound exchange rate in the 1920s an empirical investigation much of the empirical support for the monetary approach to exchange rate determination has been obtained with data from the 1920s for example clements and frenkel 4 frenkel 8 9 frenkel and clements 11 and huang 18 all obtained favorable empirical evidence estimating different versions of the monetary model the empirical results with data from the 1970s however are mixed bilson 1 2 3 edwards 7 hoffman and schlagenhauf 16 and woo 25 obtained favorable empirical evidence while dornbusch 6 hartley 14 huang 17 meese and rogoff 20 and shafer and loopesko 24 obtained contrary empirical evidence this mixed performance of the monetary exchange rate model in the 1970s has been attributed by dornbusch 6 and frenkel 10 to the failure of purchasing power parity ppp to hold in the short run and by meese and rogoff 21 to the instability of the u s money demand function we re examine the empirical evidence on the dollar pound exchange rate in the 1920s using the simple monetary exchange rate model popularized by bilson 1 2 and frenkel 8 9 thus it is not the purpose of this paper to suggest new empirical monetary exchange rate models nevertheless there are several important reasons why we re examine the simple monetary exchange rate model first several important implications of the monetary exchange rate model in our opinion are not adequately tested in existing work second there is a presumption that the failure of the monetary exchange rate model in the 1970s and the 1980s is due to special events such as real shocks that affected ppp and the instability of the u s money demand function by using the data from the 1920s we hope to avoid the problem of the instability of the u s money demand equation in the 1970s moreover frenkel 10 found that ppp held up reasonably well in this period thus the period of the 1920s provides a favorable setting to test the monetary approach finally we choose the dollar pound exchange rate based on data availability our empirical methodology differs from most previous empirical studies in that we estimate the reduced form equation of the exchange rate within a system of three equations in addition to the reduced form equation of the exchange rate there are also two equations describing monetary equilibrium one for the domestic economy and one for the foreign economy the estimation

how often are propositions on the effects of regional trade agreements theoretical curiosa this paper uses computational techniques to assess whether or not various propositions that have been advanced as plausible in the literature on regional trade agreements may actually hold the idea is to make probabilistic statements as to whether propositions of interest might hold rather than to restrict assumptions so they unambiguously hold our aim is to blend theory and numerical simulation and go beyond the ambiguous analytically derived propositions that dominate the theoretical literature so as to assess the likelihood of propositions holding for particular model specifications

dynamic formation of preferential trade agreements the role of flexibility in practice free trade agreements ftas vastly outnumber customs unions cus nevertheless the literature traditionally views cus as optimal for members because cu members coordinate external tariffs i show that a dynamic fta flexibility benefit can help explain the prevalence of ftas individual fta members have the flexibility to form their own future ftas whereas cu members must jointly engage in future cu formation i show how the relative prevalence of ftas versus cus depends on the structure of market size asymmetry across countries and use these predictions to shed some light on fta versus cu formation in europe and south america formation dynamique d accords commerciaux preferentiels le role de la flexibilite en pratique les accords de libre echange ale sont plus nombreux que les unions douanieres ud neanmoins la litterature specialisee percoit traditionnellement que les ud sont optimales pour les membres parce qu ils peuvent coordonner leurs tarifs externes on montre qu une flexibilite dynamique de l ale peut aider a expliquer la prevalence des ale les membres des ale ont la flexibilite de former leurs propres ale dans l avenir alors que les membres des ud s engagent conjointement pour la formation des ud futures on montre comment la prevalence des ale versus les ud depend de la structure de l asymetrie de la taille entre les pays et on utilise ces previsions pour eclairer les choix entre la formation de ale et de ud en europe et en amerique du sud

the monetary approach to exchange rate in an efficient foreign exchange market tests based on volatility the variance bounds on exchange rate movements implied by the monetary approach to exchange rate in an efficient foreign exchange market is shown to be violated by sample data the paper also presents evidence showing that the forecast errors implied by the monetary model can be forecasted using historical data the results are interpreted to suggest either the incompatibility of the monetary approach with sample data or an inefficient foreign exchange market or both models of exchange rate determination based on the monetary approach to the balance of payments imply when coupled with an interest rate parity relation and the assumption of an efficient foreign exchange market that exchange rates are related to a long average of money stocks differentials 1 2 the long average is analogous to the difference across countries of the long average of expected future money stocks which was supposed to characterize the price level of a single country see e g sargent and wallace 20 since long averages are known to have certain smoothing properties it appears that the observed volatility of exchange rates may be inconsistent with these models thus alternative tests of the models may be produced which rely on those properties the aim of this paper is to determine if the observed volatility is consistent with those properties the paper is the first to use tests based on the volatility of the exchange rate in an efficient market model of the monetary approach the first set of tests is based on the property of implied variance bounds for exchange rate movements and the second set consists of the more familiar efficient market tests of forecastability the empirical results violate these two sets of tests of the model thus casting doubt on the model even though the claim that exchange rates are too volatile has been commonly made few direct attempts have been made in the past to determine the validity of the claim some studies have presented estimates of variances of spot and forward rates but lacking an objective criterion to determine what constitutes

fundamentals uncertainty bubbles and exchange rate dynamics abstract using a monetary model of exchange rate determination we study exchange rate dynamics with bubbles which depend on stochastic market fundamentals these dynamics can be either stochastically stable or unstable and either monotonic or non monotonic including cyclic in an extreme case they converge with probability one and exhibit cyclic movements implications for the analysis of time dependent regime shifts are also explored exchange rates with bubbles are likely to appear less volatile than the fundamentals in finite samples both the variance bounds and cointegration tests might thus be ineffective in testing the absence of bubbles under fundamentals uncertainty

simulated likelihood estimation of diffusions with an application to exchange rate dynamics in incomplete markets abstract we present an econometric method for estimating the parameters of a diffusion model from discretely sampled data the estimator is transparent adaptive and inherits the asymptotic properties of the generally unattainable maximum likelihood estimator we use this method to estimate a new continuous time model of the joint dynamics of interest rates in two countries and the exchange rate between the two currencies the model allows financial markets to be incomplete and specifies the degree of incompleteness as a stochastic process our empirical results offer several new insights into the dynamics of exchange rates

dynamic pricing and warranty policies for products with fixed lifetime abstract we consider a repairable product with known market entry and departure times a warranty policy is offered with product purchase under which a customer can have a failed item repaired free of charge in the warranty period it is assumed that customers are heterogeneous in their risk attitudes toward uncertain repair costs incurred after the warranty expires the objective is to determine a joint dynamic pricing and warranty policy for the lifetime of the product which maximizes the manufacturer s expected profit in the first part of the analysis we consider a linearly decreasing price function and a constant warranty length we first study customers purchase patterns under several different pricing strategies by the manufacturer and then discuss the optimal pricing and warranty strategy in the second part we assume that the warranty length can be altered once during the product lifetime in developing a joint pricing and warranty policy numerical studies show that a dynamic warranty policy can significantly outperform a fixed length warranty policy

testing the canonical model of exchange rates with unobservable fundamentals in this paper the authors test the asset market approach or canonical model of exchange rates they treat exchange rate fundamentals as unobservable the empirical results do not reject the canonical model and therefore the embedded rational expectations assumption in sharp contrast with previous empirical evidence the authors also find evidence of feedback from the exchange rate to fundamentals which is normally omitted in the theoretical literature copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the customs union issue why do we observe so few of them the number of preferential trade agreements has greatly increased over the past two decades yet most existing bilateral arrangements take the form of free trade areas and less than ten percent can be considered to be fully edged customs unions this paper develops a political economy model of trade policy under imperfect competition to provide a positive explanation for the prevalence of free trade areas in a three country setting a representative from each prospective member is elected to determine the tarifis to be applied on imported goods under a customs union the necessity to coordinate tarifis leads voters to strategically delegate power to more protectionist representatives contrary to most of the existing literature we show that strategic delegation may imply that free trade areas increase welfare compared to customs unions moreover the model also indicates that free trade areas are more likely to be politically viable than customs unions