retail bank deposits as quasi fixed factors of production neoclassical models of the banking firm for example michael klein 1971 treat all deposit liabilities as fully variable factors of production banks then maximize profits minimize liability costs by equating the marginal costs of all liability types during each period the empirical relevance of these models is difficult to establish because binding deposit rate ceilings regulation q force bank competition for many retail deposits into implicit interest channels that are not readily measured it is therefore noteworthy that during two recent periods when deposit rate ceilings were not binding banks paid retail deposit rates considerably in excess of the rate at which they could borrow via large unregulated certificates of deposit such behavior seems inconsistent with the cost minimization prescribed by neoclassical bank models however if retail deposit accounts are interpreted as quasi fixed gary becker 1962 walter oi 1962 donald parsons 1972 sherwin rosen 1968 inputs to the banking firm these important historical observations can be reconciled with bank profit maximization this paper first describes two historical episodes during which the bank retail deposit rate exceeded the negotiable certificate of deposit rate for substantial periods of time while no profit maximizing cost minimizing bank would pay such a rate differential if retail deposit quantities are costlessly variable interpreting retail deposit accounts as quasi fixed inputs to the bank explains the peculiar rate structures a simple two period model of bank liability selection formalizes the analysis i two puzzling historical episodes

the effect of political risk on the forward exchange bias the case of elections abstract the unsuccesful search for explanations of the forward bias has concentrated on variables suggested by traditional models of risk political news although important to foreign exchange traders has not been considered as a determinant of the forward bias i present a model in which the forward bias changes when the governing party changes elections in major industrial countries provide a natural test of the model the forward bias changed as predicted after half of the 13 elections in canada france the united kingdom and the united states between 1973 and 1985 politics provides useful information for foreign exchange traders which economists should not ignore

strikes and political activism of trade unions theory and application to bangladesh the behavior of bangladeshi trade unions is characterized bypolitical activism and momentous strikes called hartalsthere have played a crucial part in most political changes inthis country we offer a theoretical framework for discussingthis fact and we test empirically its main prediction bybringing out the political cycle that characterizes theoccurrence of strikes in bangladesh

the economics of worldwide stagflation the last fifteen years have witnessed dramatic changes in economics not only in the manner in which the economics profession views economics but also in the manner in which the general public views economics and economists by the late 1960 s there had emerged more or less a consensus macroeconomic framework that is an agreed upon structure to be used to study economic problems at the aggregate level robert solow stated as quoted in leijonhufvud 1968

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

exchange rate policy and wage formation in an economy with many trade unions abstract exchange rate policy may confront governments with an important credibility problem while there is usually a long run gain from abstaining from devaluations there may also be a short run benefit from a devaluation this short run benefit may cause expectations of future devaluations resulting in wage and price rises that make the expectations self fulfilling this issue is analysed within a model with many trade unions if the government pursues a non devaluation policy the trade unions gain from voluntary wage restraint however if the non devaluation policy isn t credible the cooperation on wage restraint may break down

organized labor and the political economy of product market distortions why are economic reforms reversed through strikes and demonstrations in some countries but backed by the labor movement in other countries why do product and labor market distortions differ so much across countries this article addresses these questions by means of a simple heuristic model of the economy that replicates in an integrated manner several independent results from the recent political economy literature unlike most of this literature however the model focuses on the role played by organized labor rather than by rent seeking firms and guilds a two stage game between the government and organized labor determines the level of product market distortions for example import tariffs in the first stage the players may undertake costly actions such as redistributing income or striking in order to increase their bargaining power in the second stage they negotiate over product market distortions and wages under very general assumptions several policy regimes exist changes in the key parameters of the economy may trigger a switch in the strategy of trade unions from confrontation to cooperation and hence change the policy regime cross country data highlight that in spite of its simplicity the model reproduces some observed empirical regularities

exchange rate policy wage formation and credibility abstract since the collapse of the bretton woods system some european countries have pursued discretionary exchange rate policies in order to maintain or enhance the international competitiveness of the traded goods sector these countries which typically feature centralized wage setting have also tended to experience high nominal wage increases the overall outcome may be described as a devaluation wage spiral this paper applies two models of repeated games to analyze the strategic interaction between an exchange rate setting policy maker and a wage setting trade union it is shown how a devaluation wage spiral may result from a conflict of interest over the real wage it is also shown how reputational forces may provide a way out of the devaluation wage spiral

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

profits risk and uncertainty in foreign exchange markets this paper examines the properties of nominal profits from speculation in dollar dominated forward contracts using a representative agent cash in advance model modified to allow for heteroscedasticity in the exogenous processes the model is simulated by estimating exogenous processes from the data and the remaining free parameters with a simulated method of moments technique simulated expected profits are variable heteroskedastic and serially correlated but the magnitude of these second moments fall short of those of the predictable component of observed profits on the u s dollar as in the actual data simulated forward rates display biasedness in predicting simulated future spot rates

labour market institutions and economic performance labour markets richard freeman do particular types of labour market institution hold the key to economic success should other countries try to emulate the flexibility of the american labour market or the centralization of swedish style corporatism since 1970 within the oecd there has been a sharp divergence both of economic performance and of indicators of labour market structure the paper uses union density and the degree of wage dispersion across industries to proxy a country s underlying labour market institutions in assessing economic performance it is argued that cross country differences in output growth were much smaller than differences in employment growth for given output growth there is a clear negative relationship between employment growth and real wage growth across countries why do different countries find themselves at different points on this trade off the final part of the paper examines the correlation between indicators of labour market structure and the position on the wage employment trade off it concludes that the degree of wage dispersion across industries is the most important indicator of market structure and that countries with very high or very low dispersion typically the countries with highly centralized or highly decentralized bargaining in the labour market have better employment performance than countries with intermediate degrees of centralization and wage dispersion

risk uncertainty and exchange rates this paper is motivated by two facts failure of log linear empirical exchange rate models of the 1970 s and the observed variability of risk premiums in the forward market rational maximizing models predict that changes in conditional variances of monetary policies government spendings and income growths affect risk premiums and induce conditional volatility of exchange rates i examine theoretically how changes in these exogenous conditional variances affect the level of the current exchange rate and attempt to quantify the extent that this channel explains exchange rate volatility using autoregressive conditional heteroscedastic models

why are stabilizations delayed when a stabilization has significant distributional implications e g tax increases to eliminate a large budget deficit socioeconomic groups may attempt to shift the burden of stabilization onto other groups the process leading to stabilization becomes a war of attrition each group attempting to wait the others out and stabilization occurring only when one group concedes and bears a disproportionate share of the burden the authors solve for the expected time of stabilization in a model of rational delay and relate it to several political and economic variables they motivate this approach and its results by comparison to historical and current episodes copyright 1991 by american economic association

bargaining structure and economic performance in the open economy abstract it seems nowadays accepted that both centralized wage bargaining and negotiation at the firm level perform better than sectoral wage bargaining this is because sectoral unions have enough market power to raise wages but do not internalize all the effects of their actions however the ranking may be different in an open economy facing a less than infinitely elastic foreign demand because raising wages improves the country s terms of trade as in the optimal tariff argument as a result welfare is higher in the centralized setting while sectoral bargaining is better than full decentralization when imported goods represent a large share of total consumption

exchange rate theory and practice this volume grew out of a national bureau of economic research conference on exchange rates held in bellagio italy in 1982 in it the world s most respected international monetary economists discuss three significant new views on the economics of exchange rates rudiger dornbusch s overshooting model jacob frenkel s and michael mussa s asset market variants and pentti kouri s current account portfolio approach their papers test these views with evidence from empirical studies and analyze a number of exchange rate policies in use today including those of the european monetary system

a computational approach to the optimal structure of bank input prices abstract most bank deposits contain an embedded option which permits the depositor to withdraw funds at will demand deposits generally allow costless withdrawal while time deposits often require payment of an early withdrawal penalty managing the risk that depositors will exercise their withdrawal option is an important aspect of input pricing this paper acknowledges the threat of deposit withdrawal and then solves for the optimal structure of bank deposit rates

on biases in the measurement of foreign exchange risk premiums abstract the hypothesis that the forward rate is an unbiased predictor of the future spot rate has been consistently rejected in recent empirical studies this paper examines several sources of measurement error and misspecification that might induce biases in such studies although previous inferences are shown to be robust to a failure to construct true returns and to omitted variable bias arising from conditional heteroskedasticity in spot rates we show that the parameters were not stable over the 1975 89 sample period estimation that allows for endogenous regime shifts in the parameters demonstrates that deviations from unbiasedness were more severe in the 1980s jel f31

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

the forward premium puzzle in a model of imperfect information abstract this paper studies the forward premium puzzle in a model with imperfect information the model predicts fixed effects and conditional heteroskedasticity in the forward premium regression and provides a rationale for the evidence in mayfield and murphy mayfield e s murphy r g 1992 interest rate parity and the exchange risk premium economics letters 40 319 324

interest rate parity and the exchange risk premium evidence from panel data abstract this paper provides evidence that a time varying risk premium is responsible for the rejection of the interest rate parity theory we use a panel data set of returns on eurocurrency deposits and employ cross section time series methods to account for common movements in risk premia across deposits denominated in different currencies

conditional variance and the risk premium in the foreign exchange market abstract we investigate the existence of a risk premium in the foreign exchange market based on the conditional variance of market forecast errors the forecast errors are assumed to follow the arch process introduced by engle 1982 estimation and diagnostic testing of the model are discussed and results are presented for the currencies of the united kingdom france germany japan and switzerland