the retirement behaviour of the self employed in britain we analyze the retirement behaviour of older self employed workers using a life cycle framework and a multinomial logit model of dynamic employment and retirement choices using data from the two wave retirement survey we find that greater actual or potential earnings decrease the probability of retirement among the self employed in contrast to employees none of gender health or family circumstances appear to affect self employed retirement decisions the dynamic analysis reveals that relatively few employees and virtually no retirees switch into self employment in later life the switches that do occur are motivated less by attempts to use self employment as a bridge job or stepping stone to full retirement than by self employment being a last resort for less affluent workers with job histories of weak attachment to the labour market we compare self employed and employee retirement behaviour and discuss the policy implications of our results

forecasting the exchange rate a monetary or random walk phenomenon abstract this paper evaluates the forecasting accuracy of monetary and random walk models of the exchange rate instrumental variable estimates of the simple monetary model are not supported by the data while the full information maximum liklihood estimates of its rational expectations counterpart are the rational expectations monetary model is operationalized using the results of hansen and sargent 1980 and flavin 1981 and box jenkins time series techniques monthly data on the us and uk economics over the recent flexible exchange rate period serve as the case study

short run forecasting of the euro dollar exchange rate with economic fundamentals abstract we propose a fundamentals based econometric model for the weekly changes in the euro dollar rate with the distinctive feature of mixing economic variables quoted at different frequencies the model obtains good in sample fit and more importantly encouraging out of sample forecasting results at horizons ranging from one week to one month specifically we obtain statistically significant improvements upon the hard to beat random walk model using traditional statistical measures of forecasting error at all horizons moreover our model obtains a great improvement when we use the direction of change metric which has more economic relevance than other loss measures with this measure our model performs much better at all forecasting horizons than a naive model that predicts the exchange rate as an equal chance to go up or down with statistically significant improvements

trader see trader do how do small fx traders react to large counterparties trades abstract we show that information about the counterparty of a trade affects the future trading decisions of individual traders the effect is such that traders tend to reverse their order flow in line with the better informed counterparties informed traders primarily incorporate their own private as well as publicly available information into prices whereas uninformed traders mainly magnify the effect of the informed this pattern of interaction among traders extends to different order types traders treat their own and others market orders as more informative than limit orders

deviations from purchasing power parity in the long run this paper demonstrates that deviations from purchasing power parity reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible rate periods for a wide variety of countries and in both monthly and annual data since this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper proposes an alternative explanation which instead relies on financial arbitrage in bonds as the underlying mechanism this paper will demonstrate that deviations from purchasing power parity ppp reveal a remarkable and possibly startling consistency with martingale behavior during both fixed and flexible exchange rate periods for a wide variety of countries and in both monthly and annual data this pattern appears to be much more general than one would expect on the basis of models founded on international commodity arbitrage the paper therefore proposes an alternative explanation which does not presuppose free trade in goods but which instead relies on financial arbitrage in bonds as the underlying mechanism the major implication of the theory and the results is that ppp is as likely to be violated in the long as in the short run as an empirical matter deviations from ppp can be observed for most currencies at any instant see kravis et al 21 stockman 37 and genberg 15 among others these deviations are typically both cumulative and persistent the real exchange rate can remain on either side of parity for lengthy but variable time intervals of a year or more as a consequence the current consensus shared

a two country natrex model for the euro dollar this paper develops a natrex natural real exchange rate model for two large economies the eurozone and the united states the natrex approach has already been adopted to explain the medium long term dynamics of the real exchange rate in a number of industrial countries so far however it has been applied to a one country framework where the rest of the world is treated as given in this paper we build a natrex model where the two economies are fully specified and allowed to interact our theoretical model offers the basis for empirical estimation of the euro dollar equilibrium exchange rate that will be carried out in future research jel classification f31 f36 f47

global microstructures the virtual societies of financial markets using participant observation data interviews and trading transcripts drawn from interbank currency trading in global investment banks this article examines regular patterns of integration that characterize the global social system embedded in economic transactions to interpret these patterns which are global in scope but microsocial in character this article uses the term global microstructures features of the interaction order loosely defined have become constitutive of and implanted in processes that have global breadth this study draws on schutz in the development of the concept of temporal coordination as the basis for the level of intersubjectivity discerned in global markets this article contributes to economic sociology through the analysis of cambist i e trading markets which are distinguished from producer markets and by positing a form of market coordination that supplements relational or network forms of coordination

recent developments in international finance a guide to research abstract this is a critical evaluation of the state of the art in international finance several points of reference are selected the mundell fleming branson mfp paradigm the monetary model with purchasing power parity ppp as a long run anchor the representative agent approach and the natural real exchange rate natrex model their strengths and weaknesses are identified from both a theoretical and empirical point of view we conclude with a suggestion of what is a fruitful explanation of medium to longer run movements in the real exchange rate and the current account

the use of flow analysis in foreign exchange exploratory evidence abstract this paper provides questionnaire evidence on the role of flow analysis for professional traders and fund managers this evidence suggests that besides fundamental information and technical analysis the analysis of flows provides an independent third type of information for professionals the view that flows can be used to learn about fundamentals is not consistent with the data instead evidence indicates that flows more likely provide insight into semi fundamental private information

the influence of fundamentals on exchange rates findings from analyses of news effects as we survey the literature of macroeconomic news in the foreign exchange market we can by now look back on nearly 30 years of research the first studies which analysed news effects on exchange rates were established in the early 1990s see for example dornbusch almost at the same time meese and rogoff published their influential paper revealing the forecasting inferiority in exchange rates of structural models against the random walk this finding has shocked the pillars of exchange rate economics and thus cast general suspicion on research focusing on fundamentals in this field the eventual rising popularity of event studies can partly be attributed to the re establishment of the raison d etre of exchange rate economics this work focuses on systematically surveying this literature with particular respect to its primary goal i e shedding light on the analytical value of fundamental research thus its major findings are first fundamental news does matter whereas non fundamental news matters to a lesser degree second news influences exchange rates via two separated channels i e incorporating common information into prices directly or indirectly based upon order flow third with a few exceptions the impact of fundamental news on exchange rates is fairly stable over time

comparative exchange rate simulations the 1983 fall meeting of the project link was held at the time of the tenth anniversary of the commencement of the generalized floating rate regime it might be debatable whether one should celebrate the birth of this regime or mourn over the death of the bretton woods system but no one would disagree with the view that we shall have to live together with this ten year old neighbor for some years to come so that we should learn more about the temper of this temperamental system at the 1982 link meeting one special session was devoted to an investigation of alternative methods of modeling capital flows and exchange rates see klein and krelle 1983 during the meeting a plan evolved to organize a comparative study among multi country or world models that have incorporated exchange rate determination mechanisms originally the federal reserve board multi country model the world economic model of the economic planning agency japan and the link system itself had been planned to participate but in an early stage of preparation the oecd interlink also joined the group with its latest attempt to endogenize exchange rates among major currencies in what follows the first four papers report on the methods of endogenizing exchange rates in the framework of multilaterally linked models they also report on the simulation results designed to facilitate comparisons among alternative approaches the final paper discusses major similarities and differences of the simulation experiments each model of course has its own history of exchange rate modeling an early attempt in fed mcm can be found in bemer et al 1977 which was based on the structural balance of payments approach due to difficulties in obtaining stable equation estimates for international capital transactions among other reasons a shift has been made to a single equation method

currency boards and debt traps evidence from argentina and relevance for estonia this paper analyses the november 2000 liquidity crisis that brought argentina near default on its foreign debt the main purpose of this paper is to assess whether this crisis may be taken as a warning signal for estonia given the similar exchange rate system shared by the two countries it seems that with a low level of public debt and a balanced budget estonia will not face a similar liquidity crisis as its latin american counterpart which remained heavily reliant on foreign borrowings but the substantial real exchangerate appreciation of the kroon under the currency board arrangement has resulted into serious external imbalances which will need to be corrected to avoid balance of payments pressure and reduce estonia s high dependency on the level of foreign direct investments

testing for the fundamental determinants of the long run real exchange rate abstract the methods of cointegration and error correction are used to test three models of the long run real exchange rate between the us and other g 10 countries the models are as proposed by the theory of purchasing power parity by the hypothesis of fisher open rational expectations and by the analysis described in allen and stein 1989 the dynamics of the real exchange rate capital intensity and foreign debt brown university working paper the results show that none of the models satisfactorily explain the dynamics of the real exchange rate however there is some evidence that the fundamental determinants of the real exchange rate include variables such as productivity the terms of trade and real domestic and foreign interest rates

real exchange rates and macroeconomics a selective survey the paper discusses real exchange rate issues of industrial and of developing countries for real exchange rates among the key industrial countries we ask what is the best conceptual framework to shed light on this question we look at alternative theoretical approaches and at empirical evidence on the relation among interest rates expectations and depreciation the discussion of developing countries real exchange rates focuses on the link between real exchange rates real wages and the profitability of capital the model highlights the discrepancy between the mobility of capital including in the long run physical capital and

the foreign exchange market a random walk with a dragging anchor this paper explores some anomalies in the foreign exchange market it is hard to find evidence of either short term overshooting or of longer term reversion to an equilibrium the forward exchange rate contains virtually no information on future spot rates discussions with practitioners indicate that longer term speculation based on fundamentals is strictly limited and survey data and other evidence suggest that expectations and speculation are based on a variety of models the interplay between speculation based on fundamentals and on a random walk or chartist approach influences the outcome this endorses the prior model of j a frankel and k a froot copyright 1988 by the london school of economics and political science

exchange rates in the oecd interlink model specification and simulation properties international financial linkages with endogenised exchange rates were introduced into the interlink model to permit simulation analysis of the transmission of financial impulses from one country to another apart from simulation analysis the chief use of the model is in checking the international consistency of the oecd secretariat s twice yearly forecasts these proceed on the technical assumption of unchanged nominal exchange rates the model s role in this context is to help check the consistency of national forecasts with each other and with the exchange rate assumption the international financial linkages a subset of the model s equations were conceived as a complete and consistent world system international identities governing financial flows are binding and 16 exchange rates are determined simultaneously the interlink system itself consists of 23 country models with sub models of eight non oecd zones grouped around a trade model which has a five commodity breakdown the country models are generally income expenditure systems with some parameters estimated econometrically and others imposed to reproduce national model properties for six of the larger oecd countries the models are relatively more

systematic movements in real exchange rates in the g 5 evidence on theintegration of internal and external markets abstract many recent studies have documented the random behavior of real exchange rates this paper shows that real exchange rates defined for different sectors of an economy move closely together with one another even though each of the sectoral real exchange rates taken alone has a large random component the sectoral real exchange rates are tied together by internal price links due to factor mobility within each national economy any differences between real exchange rates which develop moreover can be explained almost entirely by productivity differentials at least in the long run this paper contrasts the strong ties which bind together prices from different sectors internally with ties that bind the prices of goods from the same sector internationally prices are shown to be much more highly correlated internally than externally because flexible exchange rates disrupt normal pricing relationships between goods from different countries

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

external debt and real exchange rates adjustment in the euro area new evidence from a non linear natrex model in this paper we revisit medium to long run real exchange rate determination within the euro area focusing on the role of external debt accordingly we rely on the natrex approach which provides an explicit framework of the external debt real exchange rates nexus in particular given the indebtedness levels reached by the euro area economies we investigate potential non linearity in real exchange rates dynamics according to the level of the external debt our results evidence that during the monetary union gross and net external debt positions of the euro area countries have exerted pressures on real exchange rate dynamics within the area moreover we find that beyond a threshold reached by the external debt euro area countries are found to be in a vulnerable position leading to an unavoidable adjustment process nevertheless the adjustment process while effective is found to be low and occurs slowly

the tobin tax in a continuous time non linear dynamic model of the exchange rate starting from a new continuous time non linear dynamic model of the exchange rate we formally show that the introduction of a tobin tax reduces speculators profit and influences the dynamics of the system making it more stable and less prone to chaotic motion

efficient exchange rate forecasts lagged models better than the random walk abstract the evidence of meese amd rogoff 1983 on the out of sample forecasting performance of structural exchange rate models in comparison to the random walk model portrays a disappointing picture of structural models this paper re considers the issue for the german mark for an updated period to include a larger set of structural models and lagged adjustment besides out of sample evidence in sample evidence is also examined we conclude that while some stuctural models dominate the random walk a lagged adjustment consideration can contribute towards better performance

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

the euro dollar exchange rate chaotic or non chaotic a continuous time model with heterogeneous beliefs abstract the aim of this paper is to develop a continuous time exchange rate model that allows for heterogeneity of the agents beliefs in order to explore non linearities and possible chaotic behaviour the theoretical model contains an intrinsic non linearity that gives rise to a jerk differential equation which is in principle capable of generating chaos the model is econometrically estimated in continuous time with euro dollar data and examined for the possible presence of chaotic motion our results indicate that the possibility of chaotic dynamics in our model is rejected

does the exchange rate follow a random walk a monte carlo study of four tests for a random walk abstract several authors have urged that real and nominal exchange rates follow a random walk conditions under which the exchange rate follows a random walk are reviewed in this paper many of these do not appear to hold therefore the empirical evidence presents a puzzle some evidence suggets the exchange rate follows a random walk while other evidence suggests the opposite should be true this paper attempts to reconcile the evidence it is argued that the tests for a random walk have low power monte carlo evidence on four tests for a random walk is presented that suppors this claim

exchange rate forecasts with the michigan quarterly econometric model of the us economy abstract gandolfo et al journal of banking and finance 14 1990 965 992 have shown that their continuous time model of the italian economy produces better ex post out of sample forecasts of the lira exchange rate than either existing structural or random walk models when the michigan quarterly econometric model is used it is found that ex post out of sample forecasts of the trade weighted value of the us dollar produced by the model are also superior to forecasts of a random walk model however ex ante forecasts in which all the exogenous as well as the endogenous variables are forecast are less accurate than those produced by the random walk the price of imported goods in foreign currency an exogenous variable in both the michigan and italian econometric models is the key variable in the michigan model which explains the divergence of the ex ante and ex post forecasting results

majority rule and election models abstract this paper surveys the theoretical work that has been done on majority rule and economic models of elections section i provides an overview of the topic section 2 reviews the most important results that have been obtained about majority rule as an abstract collective choice rule section 3 identifies some alternative inferences that can be made from those results section 4 covers some models that include additional features that are present in political institutions where majority rule is used section 5 concentrates on some alternative election models and equilibrium concepts section 6 focuses on election models with abstentions and or candidate uncertainty about voter behaviour section 7 compares and contrasts models where candidates are certain about what the voters choices will be contingent upon about the choices made by the candidates and models where they are uncertain about those choices section 8 closes the survey by identifying some emerging areas of research

the real exchange rate abstract this essay concerns the real value of the u s relative to the g 10 i what are the dynamics of the fundamental determinants of the real exchange rate and its steady state value ii to what extent are the observed movements in the exchange rate from 1973 to 1988 due to the fundamentals iii how integrated are international capital markets iv how does the real exchange rate respond to a changes in the cyclically adjusted government budget deficit and to b changes in the marginal efficiency of investment

exchange rate determination single equation or economy wide models a test against the random walk abstract we first give a brief presentation of the existing single equation structural models of exchange rate determination and a survey of how the exchange rate is modelled in the main economy wide macroeconometric models we then show with respect to the lira exchange rate that the out of sample predictive performance of the single equation models is inferior to that of the simple random walk model this confirms the thesis that only by moving away from these single equation semi reduced form models towards suitable economy wide macroeconometric models can one hope to beat the random walk following this course we finally show that the mark v version of our continuous time macroeconometric model of the italian economy outperforms both the existing structural models and the random walk process in out of sample forecasting tests concerning the lira exchange rate

exchange rate simulation properties of the mcm this paper describes the simulation properties of the federal reserve board staffs multicountry model mcm with emphasis on the movement of exchange rates in response to various policy shocks the particular simulations described were run in conjunction with a project to compare the simulation properties of four major multicountry models under the auspices of project link they also cover a number of multiplier simulations presented in a volume documenting the mcm as it existed at the time of the tokyo link meeting in the fall of 1983 2 the purpose of this paper and the broader project is both to contribute to the literature on comparative model properties and to examine more closely the processes of exchange rate determination in large scale linked macro models the mcm like other linked models affords the opportunity to treat as endogenous variables the structural determinants of exchange rates such as incomes prices real interest rates and current accounts such variables are frequently treated as exogenous or partially exogenous in small models of exchange rate determination in the larger model framework exchange rate movements ultimately can be traced back to shifts in monetary and fiscal policies oil prices or other relatively exogenous factors moreover the multiple country framework allows for richer analysis of the effects of either differences in or coordination of policies across countries than is possible ib the two country framework of most small models the simulations reported below were selected in part to assess these features of the mcm after providing a brief overview of the mcm and a

sand in the wheels or spanner in the works the tobin tax and global finance this paper presents a radical critique of the tobin tax a tax on currency transactions by undercutting certain assumptions about the size and character of the world s foreign exchange markets which furnish the tax with its basic rationale while it is acknowledged that only a fraction of the massive volumes of fx transactions relate directly to trade in goods and services or to cross border investments it is denied that all the residual transactions are motivated purely by exchange rate considerations speculative or hedging activities rather the argument is that a significant proportion of fx trades have money market characteristics and that these trades together with domestic money market transactions play an important role in the day to day operation of the global financial system this perspective is used to show that the imposition of a tobin tax would cause extensive material damage to the system with consequences that may run counter to the expectations of supporters of the tax

expectations driven distortions in the foreign exchange market this paper explores the phenomenon of lasting deviations of the exchange rate from its fundamental value in the foreign exchange market motivated by empirical observations a chartists fundamentalists model is developed in which boundedly rational agents repeatedly choose between technical and fundamental trading rules to determine their speculative investment positions crucial for the dynamics is how the traders perceive the fundamental exchange rate this perception process is based on psychological evidence simulations give rise to bubbles but simultaneously display quite realistic exchange rate dynamics unit roots in the exchange rates fat tails for returns and volatility clustering

risk aversion foreign exchange speculation and gambler s ruin the apparent persistence of unexploited opportunities for expected profits in foreign exchange markets suggests highly risk averse market participants financial institutions put tight limits on the foreign exchange positions they may have at risk at any time despite beliefs that the odds are favourable that the positions will be profitable this safety first practice is consistent with keeping the probability of ruin low enough to be of no practical concern the setting of a very low probability of ruin for prudential reasons provides a rationale for traders behaving as if they have a degree of risk aversion that might otherwise seem implausibly high

modelling the floating australian dollar can the random walk be encompassed by a model using a permanent decomposition of money and output abstract this paper tests whether the australian dollar has at least followed a random walk with drift in the first two years of its float having established this benchmark structural monetary models are constructed to see whether one can obtain better within sample and or out of sample results rational forecasts of exogenous variables are obtained using muth s 1960 decomposition interpolation is used to obtain weekly forecasts when the observation period is greater it appears that the random walk can be beaten

efficient windows and labor force reduction recently many u s firms have offered window plans that provide bonuses to a group of workers if the worker retires within a specified short time span this paper examines a window plan at a fortune 500 firm and addresses two main issues first what was the effect of the window plan on departures second assuming a variety of possible firm objectives what would be the design of an efficient window plan these questions are addressed using the retirement model in stock and wise 1988a 1988b the model estimated using data for an earlier year predicts well out of sample the subsequent large increase in retirements under the window plan we find that while the firm successfully maximized departures if its goal was to minimize either expected future wage payments or the current cost per induced retirement the firm could have saved more with efficient plans constructed using the model one interpretation is that the firm was primarily interested in reducing the overall size of the labor force or in retiring older employees to allow promotion of younger employees this abstract was borrowed from another version of this item

the response of employees to severance incentives the university of california s faculty 1991 94 in response to huge budgetary shortfalls in the early 1990s the university of california offered its older and longer service employees financial inducements to leave this paper analyzes the responses of uc s faculty to three waves of buyout incentives it is estimated that an individual presented with 10 percent higher severance benefits has a 7 8 percent higher probability of quitting however quit probabilities are very difficult to forecast with accuracy this casts doubt on arguments that maintain that buyouts are superior to employer initiated layoffs as a mechanism to effect large employment changes

learning to forecast the exchange rate two competing approaches this paper compares two competing approaches to model foreign exchange market participants behavior statistical learning and fitness learning these learning mechanisms are applied to a set of predictors chartist and fundamentalist rules we examine which of the learning approaches is best in terms of replicating the exchange rate dynamics within the framework of a standard asset pricing model we find that both learning methods reveal the fundamental value of the exchange rate in the equilibrium but only fitness learning creates the disconnection phenomenon and only statistical learning replicates volatility clustering none of the mechanisms is able to produce a unit root process but both of them generate non normally distributed returns

capital flow management there is a wide variety in the capital account policies of emerging markets and developing economies some countries such as brazil have recently experimented with prudential controls on capital inflows whereas others such as china have continued to maintain tight controls this paper reviews the recent theoretical literature explaining the motivations behind capital account policies and whether there is a case for international coordination in this area

tests of asset pricing with time varying expected risk premiums and market betas tests of asset pricing models are developed that allow expected risk premiums and market betas to vary over time these tests exploit the relation between expected excess returns and current market values using weekly data for 1963 through 1982 on ten common stock portfolios formed according to equity capitalization a single risk premium model is not rejected if the expected premium is time varying and is not constrained to correspond to a market factor conditional mean variance efficiency of a value weighted stock index is rejected and the rejection is insensitive to how much variability of expected risk premiums is assumed financial economists have studied valuation models in which securities expected returns are related to the covariances of unanticipated returns with the return on the market portfolio or with other risk factors empirical tests of such models typically have employed unconditional sample moments of returns recent studies provide mounting evidence that expected returns change over time with information such evidence presents an opportunity to develop new approaches for evaluating and implementing asset pricing models that exploit this time variation this paper presents new tests of financial valuation models in which expected returns are allowed to vary over time time series of relative

the use of technical analysis in the foreign exchange market abstract technica or chartist analysis of financial markets involves providing forecasts or trading advice on the basis of largely visual inspection of past prices without regard to any underlying economic or fundamental analysis this paper reports the results of a questionnaire survey conducted on behalf of the bank of england among chief foreign exchange dealers based in london in november 1988 amongst other findings it is revealed that at least 90 per cent of respondents place some weight on this form of non fundamental analysis when forming views at one or more time horizons there is also a skew towards reliance on technical as opposed to fundamentalist analysis at shorter horizons which becomes steadily reversed as the length of horizon considered is increased a very high proportion of chief dealers view technical and fundamental analysis as complementary forms of analysis and a substantial proportion suggest that technical advice may be self fulfilling jel f31

economic determinants of the optimal retirement age an empirical investigation in this paper we examine how the structures of earnings social security and pension benefits affect retirement behavior we use an intertemporal model of labor supply paying special attention to the institutional features of private pensions and social security benefits this theoretical formulation produces comparative dynamic predictions and guides empirical modeling data from a new survey of workers and their income opportunities are used to implement the empirical model on the basis of empirical retirement estimates we conclude that 1 people with higher base wealth retire earlier and 2 those who expect to gain more by postponing retirement retire later

exchange rates and fundamental variables a semi parametric analysis of binary choice this study is motivated by the dearth of models that provide good out of sample fit for exchange rates that is current models of exchange rate behaviour are poor predictors of subsequent currency movements an attempt is made to determine if the relationship between exchange rates and fundamental variables can help explain the more extreme exchange rate movements distributional switches models are developed that relate fundamental economic variables to the resulting estimates based on the mixture of normal probability distributions parametric estimation procedures logit and probit are compared with a semi parametric technique maximum score estimation mscore which is relatively untested in the field of finance the fundamental variables of these models include information on trade balances money supply changes interest rate changes real economic growth relative inflation rates and changes in stock market indexes classification results favour mscore implications of results and improvements

exchange rate management under floating exchange rates abstract the purpose of this paper is to analyze the swiss approach to exchange rate management a number of difficulties are identified that have plagued the swiss national bank s efforts to reconcile its ultimate objective of a stable price level with its desire to moderate extreme exchange rate swings these difficulties are in turn analyzed within a rational expectations model of exchange rate determination although the model does not account for all these difficulties it does throw light on two important issues 1 the impact of a given change in the monetary base on the exchange rate is highly sensitive to the type of money supply strategy pursued by the bank 2 the objective of price stability is bound to conflict with the desire to stabilize the exchange rate the stronger the bank s commitment to price stability the weaker is the impact of temporary changes in the monetary base on the exchange rate

the effect of separation bonuses on voluntary quits evidence from the military s downsizing this paper analyzes the decision of mid career personnel to voluntarily leave the u s military in response to a financial incentive program a model of the separation decision is tested using data on navy and air force enlisted personnel who were targeted for the buyout in 1992 two alternative estimates are provided one from a fixed effects model and one from a structural annualized cost of leaving model our basic results indicate the financial incentive had a modest effect in inducing additional quits the impact of the separation bonus however was much larger for occupations facing a threat of involuntary layoff

job search requirements for unemployed at the end of working life effects on unemployment dynamics and self employment probabilities this paper investigates the extent to which job search requirements in unemployment insurance u i increase the probability of self employment as a retirement route for causal identification we apply a difference in differences approach using a dutch 2004 policy reform that introduced job search requirements in u i for persons aged 57 5 and older unemployment dynamics and self employment probabilities are studied using a dynamic multinomial logit model with unobserved heterogeneity the results suggest that job search requirements stimulated people to exit unemployment and discouraged older workers to enter unemployment the probability of self employment as an exit route to retirement increased relative to u i but not relative to paid employment

incomplete pass through and the welfare effects of exchange rate variability abstract this paper considers the implications of incomplete exchange rate pass through for optimal monetary and exchange rate policy a two country model is presented which allows an explicit derivation of welfare functions in terms of a weighted sum of the second moments of producer prices and the nominal exchange rate from a single country perspective the optimal exchange rate variance depends on the degree of pass through the size and openness of the economy the elasticity of labour supply and the volatility of foreign producer prices welfare may be decreasing or increasing in the volatility of the exchange rate

recent estimates of time variation in the conditional variance and in the exchange risk premium abstract the optimal diversification model of investors portfolio behavior can give a linear relationship between the exchange risk premium and the conditional exchange rate variance this note surveys recent empirical work that allows the conditional variance itself and therefore the risk premium to vary over time in particular it examines the implications of recent empirical estimates for earlier arguments based on the assumption that the conditional variance was constant over time that the exchange risk premium had to be small in magnitude and variability

quantitative easing is not as unconventional as it seems policy interest rates do not have to be short the means by which monetary authorities influence prices and quantities can differ but the obstacles to altering one rather than the other are not insuperable inflation is sluggish and expectations of future interest rates long and short nominal and real are diverse and uncertain these factors determine the limited power that monetary authorities enjoy when they conduct quantitative easing but this policy is not as unconventional as some have claimed and indeed can be viewed as broadly similar to conventional monetary measures the impact of quantitative easing however could be very different depending on the underlying structure of the economy and the fiscal authorities responses finally we note some important caveats that must be borne in mind when trying to evaluate the impact of quantitative easing particularly given the fact that the world s main financial markets are closely linked copyright 2012 oxford university press

the advantage of hiding both hands foreign exchange intervention ambiguity and private information this paper analyzes a dynamic exchange rate policy game in which the central bank has private information about its short term exchange rate target on the one hand and in which the market is faced with a certain degree of ambiguity concerning the actual intervention volume on the other sterilized interventions are shown to derive their effectiveness from the fact that they transmit information about the short term exchange rate target to the market in this respect we provide an explanation for the presumed inconsistency between intervention secrecy and the effectiveness of the signalling channel since our model predicts that interventions will be more effective on average if the central bank retains some degree of ambiguity moreover it is also shown that sterilized interventions will not exert a lasting effect on the exchange rate finally we have also investigated the extent to which some political and economic parameters determine the size of the intervention bias

accepting an early retirement bonus an empirical study the presence of special early retirement bonuses can change the work incentives of older workers this study applies a pension acceptance model to acceptance of an early retirement pension bonus probabilities of acceptance range from 18 to 33 it also simulates acceptance behavior without the bonus with probabilities of acceptance ranging from 11 to 30

purchasing power parity price indices and exchange rate forcasts abstract this paper addresses the issue of using aggregate price indices for purchasing power parity ppp tests and the fitness of ppp as a model for exchange rate forecasting compared with consumer price index cpi and wholesale price index wpi the price index of traded goods tpi appears to be a more appropriate price index for both ppp tests and exchange rate forecasting it performs better in the tests and provides superior exchange rate forecasts both within and out of sample while the half life of the estimated deviations from ppp is about two years for the cpi and wpi based real exchange rates it is only one year for the tpi based real exchange rates

the road less travelled institutional aspects of data and their influence on empirical estimates with an application to tests of forward rate unbiasedness the difference between data used in empirical studies and that envisioned in the theory can influence empirical estimates sometimes by enough that the direction of future research is altered this paper illustrates how in the context of tests of forward rate unbiasedness a lack of articulation about the mechanics underlying foreign exchange market speculation and about the institutional aspects governing spot and forward rate contracts leads to sampling of the data in a way that is not consistent with the theory the authors find that the sampling problems account for some but not all of the bias in the coefficient on the forward premium copyright 1996 by royal economic society

communicating policy options at the zero bound abstract this paper examines a special episode in communication practices of the swiss national bank snb when short term interest rates reached the zero bound non sterilized foreign exchange interventions were frequently mentioned as a potential instrument we ask how the financial markets responded to the snb s repeated references of non sterilized interventions the empirical results with high frequency data provide strong evidence that snb intervention references depreciated the domestic currency for several hours the case study supports the view that communication is an effective tool for monetary policy in unusual situations as well

foreign exchange market efficiency tests implications of recent empirical findings abstract the recent empirical literature on the efficiency of the foreign exchange market has been characterized by strikingly contradictory conclusions drawn from similar empirical evidence these contradictions result because 1 different maintained hypotheses are held and 2 different criteria e g micro versus macroeconomic are used to judge the evidence in this survey we organize the empirical literature under several headings the presence of risk premiums empirical regularities in regression tests profitable trading rules and advanced econometric techniques in integrating this material we consider the implications of the current evidence for investors forecasters policy makers and theorists

order flows news and exchange rate volatility abstract this paper examines the roles of order flow reflecting private information and news reflecting public information in explaining exchange rate volatility analyzing four months of a bank s high frequency dollar euro trading three different kinds of order flow are used in addition to seasonal patterns in explaining volatility we find that only larger sized order flows from financial customers and banks indicating informed trading contribute to explaining volatility whereas flows from commercial customers do not the result is robust when we control for news and other measures of market activity this strengthens the view that exchange rate volatility reflects information processing

interest rates and exchange rates under money supply targets the swiss evidence abstract short term effects of monetary policy on interest rates and exchange rates are evaluated with monthly and daily data for switzerland from 1974 to 1991 during this period the swiss national bank generally pursued a policy of targeting the money supply some evidence in favor of liquidity effects on interest rates is found the influence of changes in monetary aggregates is however not very strong both in terms of magnitude and explanatory power and depends on the time period investigated exchange rates do not react systematically to monetary policy actions

real exchange rates and structural breaks cointegration tests often fail to detect the existence of long term relationships such as purchasing power parity for two reasons i these tests have low power and ii structural shocks can alter the long run real exchange rate in this paper the long run movements of five exchange rates relative to the us dollar and five european exchange rates relative to the deutsche mark are investigated in particular corrected cointegration tests are applied which take into account the possibility of a structural break at an unknown date empirical evidence is found that structural changes can be responsible for most exchange rate deviations from their equilibrium defined by purchasing power parity or a generic monetary model

measuring exchange rate misalignment inflation differentials and domestic relative prices abstract empirical studies of exchange rate misalignment generally use crosscountry differences in overall inflation as proxy measures for a country s real exchange rate rer this paper shows that using such differential inflation proxies introduces two systematic biases in model results understatement of rer movements and a spurious trend towards depreciation these biases can be corrected only with disaggregated data on domestic relative prices of tradable and nontradable products using a standard model with disaggregated data for zimbabwe it is found that proxy based results understate misalignment by almost 25 and exaggerate depreciation by 4 per year

empirical evidence on the properties of exchange rate forecasts and the risk premium abstract the purpose in this note is to examine the properties of the risk premium obtained from a new source of market expectations derived from survey data

an empirical examination of long run purchasing power parity using cointegration techniques this paper presents an empirical analysis of long run purchasing power parity ppp for five major exchange rates using recently developed econometric techniques on the cointegration of economic time series our empirical results are extremely unfavourable to the ppp hypothesis as a long run equilibrium condition even with an allowance made for measurement error and or tranportation costs in particular we are unable to reject the hypothesis of non cointegration of the exchange rate and relative prices for any of the countries concerned far from finding a stable long run proportionality between exchange rates and relative prices our results therefore suggest that they tend to drift apart without bound

covered interest parity a high frequency high quality data study profitable deviations from covered interest parity cip represent riskless arbitrage opportunities and so indicate market ineffic iency previous empirical work on cip uses noncontemporaneously sampl ed data and reports mixed results this paper uses high frequency te n minute high quality data gathered personally by the author in th e london foreign exchange market to test the cip condition the resu lts overwhelmingly support the market efficiency hypothesis copyright 1987 by the review of economic studies limited

adjustment policies and the real exchange rate in kenya since 1975 abstract we show using several proxies that the real exchange rate in kenya has moved in accordance with the dependent economy model since 1975 the adjustment policy supported by the international monetary fund imf in the first half of the 1980s led to a rise in the kenyan real exchange rate and an improvement of its external position macroeconomic policy since 1986 however has resulted in a deterioration of the external position and is likely to result in a reduction in the real exchange rate in the near future

the term structure of forward exchange premiums and the forecastability of spot exchange rates correcting the errors we develop a framework to extract information regarding subsequent spot rate movements from the term structure of forward exchange premiums while admitting possible deviations from rationality and