uncertainty avoidance and the preference for innovation championing roles this paper examines the preferences of 4405 individuals in forty three organizations from sixty eight different countries for four innovation championing roles the organizational maverick the network facilitator the transformational leader and the organizational buffer the study shows that the cultural value of uncertainty acceptance is significantly associated with preferences for these four championing roles it suggests that uncertainty accepting societies may be more innovative than uncertainty avoiding societies because of the greater legitimacy of those roles

the big push natural resource booms and growth a simple application of big push reasoning suggests that natural resource booms can be important catalysts for development in poorer countries in this paper we present evidence from seven latin american countries that natural resource booms are sometimes accompa nied by declining per capita gdp we present a model with natural resources increasing returns in the spirit of big push models and expectations to clarify some of the reasons this may happen q 1999 elsevier science b v all rights reserved

testing price equations how inflation and unemployment are related in both the short run and long run is perhaps the key question in macroeconomics this paper tests various price equations using quarterly u s data from 1952 to the present issues treated are the following 1 estimating price and wage equations in which wages affect prices and vice versa versus estimating reducedform price equations with no wage explanatory variables 2 estimating price equations in log level terms first difference i e inflation terms and second difference i e change in inflation terms 3 the treatment of expectations 4 the choice and functional form of the demand variable 5 the choice of the cost shock variable the results suggest that the best specification is a price equation in level terms imbedded in a price wage model where the wage equation is also in level terms the best cost shock variable is the import price deflator and the best demand variable is the unemployment rate there is some evidence of a nonlinear effect of the unemployment rate on the price level at low values of the unemployment rate many of the results in this paper are contrary to common views in the literature but the empirical

increasing returns capital utilization and the effects of government spending abstract we show that a one sector real business cycle model with mild increasing returns to scale variable capital utilization and saddle path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases due to an endogenous increase in labor productivity a positive spending shock can lead to simultaneous increases in output consumption investment employment and real wage our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez faire in particular the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez faire one sector real business cycle model to exhibit local indeterminacy

forms of trust and conditions for their stability of the three principal approaches to trust we decided to investigate in greater detail the one in which trust is regarded as a belief that the individuals involved hold about a relationship trust was defined as a delegatory relationship based on anticipation of the delegatee s behaviour we reached four main conclusions first the solution to the problem posed by the indeterminacy of trust lies in the differentiation and hierarchisation of the various forms of trust contractual organisational and tacit on the basis of their degree of irreversibility and stability second contractual trust is unstable because it comes up against the problem of guarantees of individual intentions this leads to the third conclusion rational evaluation by individuals cannot by itself establish trust which is based on collective beliefs practices and rules fourth we identified two conditions for the stability of trust the creation of irreversibilities through adherence to a rule and the creation of a confidence interval within which different interpretations of contradictory individual strategies are tolerated thus the viability of the various forms of trust depends on the ability of institutions and organisations to create rules that are likely when applied to produce an interval in which tolerance of mutual intentions is the norm these analyses of trust hence highlight the role of time and period of time in the notion of trust

hedonic price indexes for spreadsheets and an empirical test for network externalities in this article i first estimate hedonic price equations for computer spreadsheet programs and then use the analysis to empirically test whether network externalities exist in this industry the study shows that consumers are willing to pay a significant premium for spreadsheets that are compatible with the lotus platform and for spreadsheets that offer links to external databases and a similar premium for spreadsheets that offer local area network externalities finally the quality adjusted real price of computer spreadsheets declined by approximately 15 per year from 1986 to 1991

differences in managerial values a study of u s hong kong and prc managers in this study of convergence divergence of managerial values four western developed measures machiavellianism locus of control intolerance of ambiguity and dogmatism and the four dimensions of the eastern developed chinese value survey confucian dynamism human heartedness integration and moral discipline were the measures used the findings indicate that often times both culture and the business environment interact to create a unique set of managerial values in a country

sources procedures and microeconomic effects of innovation fabio arcangeli paul david frank engelman christopher freeman massimo moggi richard nelson luigi orsenigo nathan rosenberg michele salvati g n von tunzelman two anonymous referees and the participants at the meeting of the committee on distribution growth and technical progress of the italian national research council cnr rome november 16 1985 have helped with various redraftings a particularly grateful acknowledgment is for the insightful and patient help of moses abramovitz this work has been undertaken at the science policy research unit spru university of sussex as part of the research program of the designated research centre sponsored by the economic and social research council esrc earlier support to the research that led to this paper by the italian national research council cnr is also gratefully acknowledged the statistical research has been undertaken with the assistance of stephano brioschi ilaria fornari and giovannu prennushi

dynamic competition with network externalities why history matters we consider dynamic competition among platforms in a market with network exter nalities a platform that dominated the market in the previous period becomes focal in the current period in that agents play the equilibrium in which they adopt the focal platform whenever such equilibrium exists yet when faced with higher quality competition can a low quality platform remain focal in the finite horizon case the unique equilibrium is efficient for patient platforms with an infinite time horizon however there are multiple equilibria where either the lowor high quality platform dominates if qualities are stochastic the platform with a better average quality wins with a higher probability even when its realized quality is lower and this probability increases as platforms become more patient hence social welfare may decline as platforms become more forward looking

the benefits and costs of strong patent protection a contribution to the current debate abstract today s conventional wisdom is that strong patent rights are conducive to economic progress yet not long ago students of the patent system took a more nuanced position arguing that often strong patents were not necessary to induce invention and entailed significant economic costs several empirical studies have supported this position however the current advocacy invokes theories of the positive benefits of patents that were repressed in the earlier more negative analyses this essay reviews these theories and the empirical evidence that might bear on them the authors conclude that there is reason for concern that the present movement towards stronger patent protection may hinder rather than stimulate technological and economic progress

privatization in eastern europe irreversibility and critical mass effects abstract this paper proposes a model to shed light on two important policy features of privatization in central and eastern europe the idea of a necessary critical mass of privatization on one hand and the great difficulties encountered in the actual privatization process on the other the model incorporates a positive externality related to the size of the private sector multiple equilibria may arise for political and economic reasons policies of free distribution are analysed with the model they may eliminate the danger of policy reversals due to excess unemployment but may at the same time increase the relative cost of restructuring leading in some cases to pareto inferior outcomes

fishing upstream firm innovation strategy and university research alliances this paper examines how innovation strategy influences firms level of involvement with university based research our results suggest that firms with internal r d strategies more heavily weighted toward exploratory activities allocate a greater share of their r d resources to exploratory university research and develop deeper multifaceted relationships with their university research partners in addition firms with more centralized internal r d organizations spend a greater share of their r d dollars on exploratory research conducted at universities in contrast to other external partners we find evidence suggesting that universities are preferred when the firm perceives potential conflicts over intellectual property 2007 elsevier b v all rights reserved

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

estimating new keynesian phillips curves a full information maximum likelihood approach abstract the new keynesian phillips curve has recently become an important ingredient in monetary policy models however using limited information methods the empirical support for the new keynesian phillips curve appear to be mixed this paper argues by means of monte carlo simulations with a simple new keynesian sticky price model that single equations methods e g gmm are likely to produce imprecise and biased estimates then it is argued that estimating the model with full information maximum likelihood fiml is a useful way of obtaining better estimates finally a version of the model used in the monte carlo simulations is estimated on u s data with fiml and although the pure forward looking new keynesian phillips curve is rejected a version with both forward and backward looking components provides a reasonable approximation of u s inflation dynamics

competing technologies the learning curve and rational expectations abstract the problem of choice between several variants of a technology subject to dynamic learning economies is examined in a rational expectations model with overlapping adopters it is shown that even with rational expectations the long term market outcome depends sensitively on the pattern of early chance events and that only one variant of the technology will come to dominate the market in the long run this variant need not be the one which is socially optimal or most promising technically

government spending and welfare with returns to specialization we explore a novel channel through which government spending can stimulate consumption and welfare through its effects on aggregate productivity without directly affecting either utility or production possibilities in the presence of monopolistic competition and increasing returns to specialization it is shown that government spending can partly alleviate the inefficiencies of monopolistic competition this is because government spending generates an endogenous increase in total factor productivity by increasing the variety of intermediate goods if the degree of increasing returns to variety is large enough a rise in such wasteful government spending may increase consumption levels enough to increase welfare

identification robust analysis of dsge and structural macroeconomic models abstract full and limited information identification robust methods are proposed for structural systems notably dsge models which are valid whether identification is weak or strong theory intrinsic or data specific the proposed methods are applied to a standard new keynesian system for the u s single and multi equation estimation and fit are also compared when a unique rational expectation stable equilibrium is imposed the model is rejected in contrast limited information inference produces informative results regarding forward looking behavior in the nkpc and precise conclusions on feedback coefficients in the reaction function which cannot be reached via single equation methods

the un importance of forward looking behavior in price specifications the seminal work of edmund s phelps 1978 john b taylor 1980 and guillermo a calvo 1983 developed forward looking models of price determination that imparted inertia to the price level these models incorporate expectations of future prices and excess demand by imposing constraints typically lag lead symmetry constraints that force future variables to enter the specification in this paper the author tests the empirical significance of future prices in specifications like those of taylor he finds that expectations of future prices are empirically unimportant in explaining price and inflation behavior however the dynamics of a model that includes a purely backward looking inflation specification differ substantially and not altogether pleasingly from those with a forward looking specification copyright 1997 by ohio state university press

platform selection in the lab abstract emerging literature explores experimental platform selection games these games converge rapidly on the superior platform under a wide range of conditions we replicate the remarkable results of hossain and morgan 2009 in which such a game tips almost perfectly to the superior platform next we show that platform coordination fails when seemingly innocent increases in out of equilibrium payoffs are introduced the inflated payoffs keep the best reply structure unchanged and do not influence players security levels our design allows control for the explanatory force of risk dominance we find that equilibrium selection theory is unable to account for coordination failure while observed behavior is consistent with non rational learning furthermore and contrary to the literature we find that efficiency suffers when an inferior platform is granted initial monopoly

modeling inflation dynamics a critical review of recent research in recent years a broad academic consensus has arisen around the use of rational expectations sticky price models to capture inflation dynamics these models are seen as providing an empirically reasonable characterization of observed inflation behavior once suitable measures of the output gap are chosen and moreover are perceived to be robust to the lucas critique in a way that earlier econometric models of inflation are not we review the principal conclusions of this literature concerning 1 the ability of these models to fit the data 2 the importance of rational forward looking expectations in price setting and 3 the appropriate measure of inflationary pressures we argue that existing rational expectations sticky price models fail to provide a useful empirical description of the inflation process especially relative to traditional econometric phillips curves of the sort commonly employed for policy analysis

the output employment and interest rate effects of government consumption abstract we study the impact on aggregate variables of changes in government consumption using the neoclassical stochastic growth model we show theoretically that the impact on output and employment of a persistent change in government consumption exceeds that of a temporary change we also show that in principle there can be an analog to the keynesian multiplier in the neoclassical growth model finally in an empirically plausible version of the model we show that the interest rate impact of a persistent government consumption shock exceeds that of a temporary one our results provide counterexamples to existing claims in the literature

economic creativity and innovation implementation the entrepreneurial drivers of growth evidence from 63 countries this paper examines the effect of culture on national innovation and prosperity because culture shapes the way people think about and behave in regard to risk opportunities and rewards it should influence the nature of entrepreneurial activity and by extension economic outcomes using structural equation modeling on a sample of 63 countries we propose and test a comprehensive explanation of how culture as an umbrella construct as opposed to an analysis of its constituent parts affects innovation and national prosperity we propose a two stage model of innovation and find support for our hypothesized relationship that economic creativity influences innovation implementation at the national level we find that culture does indeed influence economic creativity we also find that innovation implementation explained some of the variation in prosperity across countries by establishing that big picture culture matters to innovation the door has opened for researchers to evaluate this relationship using data from any one of a number of rival culture frameworks moreover these empirical finding buttress the theoretical arguments that culture powerfully shapes the character of national innovation

optimal fiscal policies congestion and over entry by shedding light on market imperfections and the congestion of public goods we show that free entry in a market equilibrium will lead to excessive entry relative to the social optimum moreover by specifying a generalized congestion function it is also shown that different fiscal policies including labor income tax capital income tax and government expenditure play a distinct role in terms of remedying market distortions specifically optimal income taxes decrease with the degree of market imperfections in order to remove the monopoly inefficiency while they increase with the degree of congestion in order to remedy the adverse externality caused by congestion distortion since a higher degree of increasing returns to an expansion in the variety of intermediate goods is found to intensify the congestion effect of government infrastructure expenditure the optimal rule of government expenditure proposed by barro 1990 should be modified

culture and congruence the fit between management practices and national culture the financial performance of european and asian work units of one multinational company is examined as a function of the congruence between management practices and national culture using hofstede s five national culture dimensions and analogous management practices we find that work unit financial performance is higher when management practices in the work unit are congruent with the national culture

what did globe really measure researchers minds versus respondents minds the globe research program expanded the hofstede model of five dimensions of national cultures to 18 a re analysis based on globe s 2004 summary book produced five meta factors one was significantly correlated with gnp capita and from the hofstede dimensions primarily with power distance three more correlated significantly with hofstede s individualism uncertainty avoidance and long term orientation the fifth included the few globe questions that related to hofstede s dimension of masculinity versus femininity globe s respondents minds classified the questions in a way that the researchers minds did not account for and which closely resembles the original hofstede model

r d spillovers patents and the incentives to innovate in japan and the united states national surveys of r d labs across the manufacturing sectors in the us and japan show that intraindustry r d knowledge flows and spillovers are greater in japan than in the us and the appropriability of rents due to innovation less patents in particular are observed to play a more central role in diffusing information across rivals in japan and appear to be a key reason for greater intraindustry r d spillovers there suggesting that patent policy can importantly affect information flows uses of patents differ between the two nations with strategic uses of patents particularly for negotiations being more common in japan

inefficient standard adoption inertia and momentum revisited i introduction since the establishment of the theory of network effects economists have been concerned with the question of whether a market with network effects will tend to settle on the socially optimal standard it has been postulated that markets may exhibit excess inertia once a technological standard is in place a new superior standard may not displace it because of installed base effects alternatively markets may exhibit excess momentum consumers may adopt a new standard too quickly ignoring the stranding effect they are having on previous users similar issues arise in the adoption of language and social norms the literature has investigated various conditions under which one of these inefficiencies arises such inefficiencies are of particular concern for open technologies such as the qwerty and dvorak keyboards 1 the situation is somewhat different when individual firms own standards in that case a simple argument seems to indicate that there is no possibility that an inefficient standard will persist if a new standard is superior in any objective sense there are gains to be made from switching to it once the standard has been adopted the firm can appropriate these gains therefore the firm has incentive to lower the initial price enough to induce adoption of the standard the preceding argument is made in liebowitz and margolis 1999 and repeated in spulber 2002 spulber expresses a general skepticism about the likelihood of inefficiencies when property rights are defined and markets exist critics might claim that previous models that imply inefficient standard adoption are unrealistic in some way and that if such models were modified slightly the inefficiency would disappear i reconsider the issue of inefficient standard adoption using a parsimonious yet compelling model assuming only that there are successive generations of finitely lived consumers that preferences are heterogeneous and that there are network effects among users adoption decisions can be inefficient this is true even if consumers can coordinate efficiently within a generation and a firm can act as a coordinating device across generations the model presented here generates some of the same results found in other papers collectively but in a more general setting and with more robust results if there is an established standard and a superior alternative emerges no single generation of consumers will be willing to switch to the new standard if the switching cost the loss of network benefit from breaking with past users is too high it may be that the benefits to future generations of consumers are large enough that from a social standpoint it would be efficient for one generation to adopt the new standard even if it is privately optimal for that generation to retain the old standard on the other hand the current generation considers only its own switching cost and not the cost it imposes on the previous generation leading to potential overadoption of new technology even for proprietary standards it is not clear that the incentive of the firm to induce adoption matches the social incentive in particular if consumer preferences are heterogeneous the firm will not be able to price in such a way to extract all of the additional surplus gained from the new standard on the other hand the firm will be able to appropriate some of the surplus generated by the network effect itself which is present for any standard and thus does not affect the social incentive to change standards it is not possible to address this issue with a two period model as in some of the previous literature see for example choi 1994 choi and thum 1998 katz and shapiro 1986 if a new technology is introduced in the second period but then the game ends the welfare of future generations of consumers is neglected 2 this article also differs from previous infinite horizon models of technology adoption

cultural influences on national rates of innovation abstract the purpose of this research was to examine the effect of the cultural values of individualism power distance uncertainty avoidance and masculinity on national rates of innovation in 33 countries in 1975 and 1980 the study found that rates of innovation are most closely associated with the cultural value of uncertainty acceptance but that lack of power distance and individualism also are related to high rates of innovation this research suggests that nations may differ in their rates of innovation because of the cultural values of their citizens these findings have important implications for managers and policy makers first culture matters countries may not be able to increase their rates of innovation simply by increasing the amount of money spent on research and development or industrial infrastructure they also may need to change the values of their citizens to those that encourage innovative activity this concept in turn suggests that national rates of innovation are driven by more fundamental forces than economic conditions and that societal change may be necessary to make less innovative societies more innovative second the values associated with high national rates of innovation are those that many scholars have long argued are important at the firm level an acceptance of uncertainty appears to be necessary probably because innovation requires a tolerance for risk and change individualism seems to be important perhaps because of its association with autonomy independence and freedom lack of power distance appears important perhaps reflecting the role that tolerance of change in the social order and distribution of power play in the innovation process third the study indicates that the strength of the relationship between innovation and two cultural values individualism and lack of power distance were stronger in 1975 than in 1980 suggesting perhaps that these values are becoming less important in spurring the innovation process this finding supports the anecdotal evidence that many collectivist and hierarchical asian nations are becoming more innovative fourth this study shows that per capita income is a more important economic variable than industrial structure in determining national rates of innovation this finding confirms previous work that has shown that as nations become wealthier they become more innovative the reason may be that wealthier countries have more demand for innovations both because innovations are often laborsaving and because wealthier nations have greater demand for new and differentiated consumer goods

what differences in the cultural backgrounds of partners are detrimental for international joint ventures an international joint venture implies that a firm has to cooperate with a partner with a different cultural background in this study hypotheses about which differences in national culture are most disruptive for international joint ventures were developed and tested using hofstede s five dimensions the study focused on how these dimensions affect the survival of international joint ventures as well as their incidence relative to wholly owned subsidiaries the hypotheses were tested on longitudinal data about 828 foreign entries of twenty five dutch multinational in seventy two countries between 1966 and 1994 the database which spans almost three decades was also used to provide new evidence on a key assumption of hofstede s work that cultural values are stable over time

demand dynamics with socially evolving preferences in this work we first identify a few stylized facts concerning microconsumption acts second building on them we develop a simple model of boundedly rational consumers who endogenously evolve their preferences via both innovation and social imitation third we explore some statistical properties of the demand patterns generated by the model which despite its simplicity are surprisingly in line with the empirical evidence these results we suggest bring encouraging support to microfoundations of demand theory based on cognitive and behavioral foundations more in tune with the psychological and sociological evidence based on heterogeneous agents who are much less rational and much more social than in standard theory and who collectively discover along the way what they like within a growing universe of available commodities

the salience of culture s consequences the effects of cultural values on top executive commitment to the status quo while top executives are argued to play a central role in strategic adaptation evidence suggests that they are not equally open to organizational change this study extends earlier investigation of the determinants of top executive commitment to the status quo csq to the international arena examining the influence of cultural values on executive open mindedness toward change using data from a survey of top managers in 20 countries analyses reveal that values of individualism uncertainty avoidance power distance and long term orientation are significantly related to executives adherence to existing strategy and leadership profiles further while confirming earlier findings that industry tenure is positively related to strategy csq results show that tenure does not significantly affect leadership csq once cultural values are controlled in summary the findings reveal that culture has an important impact on executive mindsets as demonstrated by the fact that executives of differing cultural background are not equally open to change in organizational strategy and leadership profiles second the findings suggest that executives views of appropriate leadership profiles reflect the imprint of cultural socialization moreso than professional experience finally and more broadly the study offers empirical support for the view that values figure prominently in shaping executives strategic and leadership orientations 1997 by john wiley sons ltd

what determines aggregate returns to scale abstract this paper develops a unified framework that incorporates four features important in existing models with increasing returns fixed costs decreasing marginal costs product variety and market power when fixed costs are not allowed to vary and profits are imposed to be zero in every period only the degree of returns to variety determines the degree of aggregate increasing returns to scale when fixed costs respond to changes in aggregate activity or the zero profit condition does not hold in the short run aggregate returns depend not only on product variety but also on diminishing marginal costs or market power the degree of market power however does not affect input prices which are critical to determine the uniqueness of equilibrium

leading cultural research in the future a matter of paradigms and taste the styles and approaches used in cross cultural organizational research are nearly as varied as the cultures under study we see two variations of one dominant style in the work of hofstede and the globe research consortium in this commentary i shall place these approaches in context and discuss alternatives that seem to be highly promising but largely overlooked based on this analysis i conclude that it may well be time that this form of large scale multi country survey be set aside for the development of alternative mid range theories having a more direct application and explanation for organizational phenomena in a cultural and national context

the economics of convention c onventions regulate much of economic and social life yet they have received surprisingly little attention from economists by a convention we mean a pattern of behavior that is customary expected and self enforcing everyone conforms everyone expects others to conform and everyone has good reason to conform because conforming is in each person s best interest when everyone else plans to conform lewis 1969 familiar examples include following rules of the road adhering to conventional codes of dress and using words with their conventional meanings conventions with direct economic implications include species of money and credit industrial and technological standards accounting rules and forms of economic contracts indeed it would scarcely be an exaggeration to say that almost all economic and social institutions are governed to some extent by convention the main feature of a convention is that out of a host of conceivable choices only one is actually used this fact also explains why conventions are needed they resolve problems of indeterminacy in interactions that have multiple equilibria indeed from a formal point of view we may define a convention as an equilibrium that everyone expects in interactions that have more than one equilibrium the economic significance of conventions is that they reduce transaction costs imagine the inconvenience if whenever two vehicles approached one another the important exceptions are sugden 1986 and ullman margalit 1977 the interested reader might also refer to the symposium on social norms that appeared in the fall 1989 issue of this journal with articles by sugden 1989 and elster 1989

national culture and financial systems countries differ in the way their financial activities are organized in anglo saxon countries such as the us and the uk financial systems are dominated by stock markets whereas in continental europe and japan banks play a predominant role why do countries differ in the configuration of their financial systems we argue that national culture plays a significant role we find that countries characterized by higher uncertainty avoidance are more likely to have a bank based system

new tests of the new keynesian phillips curve abstract lagged dependent variables typically play an important role in empirical models of inflation do these lags reflect backward looking inflation expectations or do they proxy for rational forward looking expectations as in the new keynesian phillips curve gali and gertler 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 attempt to answer this question using gmm to estimate specifications incorporating both lagged and future inflation they report small coefficients on lagged inflation and conclude that the new keynesian model provides a good first approximation to inflation dynamics we show that these tests have low power against alternative backward looking specifications and demonstrate that their results are also consistent with a backward looking phillips curve using an alternative approach we find that the new keynesian pricing model cannot explain the importance of lagged inflation in standard inflation regressions and find that forward looking terms play a very limited role in explaining inflation dynamics

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve