Knowledge that Transforms

A wide variety of empirical exchange rate mo.dels have been estimated over the years. But, despite the considerable energies that have been devoted to this work, the economics profession has remarkably little to show for itself. There is little evidence that conclusively links the bilateral exchange rates of typical OECD countries to fundamental macroeconomic determinants of exchange rates, such as money, output, relative prices, or interest differentials. Coefficient estimates are notoriously unstable and frequently mis-signed (compared with theoretical predictions); exchange rate equations do not fit particularly well, and forecast no better than the simplest naive alternatives. Recently, a new class of exchange rate models was introduced by Paul Krugman (1988). These models provide a potential reason for the poor performance of traditional exchange rate models, because they are nonlinear. If the exchange rate actually depends in a nonlinear way on exogenous macroeconomic fundamentals, linear exchange rate models may work poorly, even though the exchange rate is closely linked to fundamentals. In this paper we provide a brief sketch of some of this work, as well as some preliminary evidence on the actual performance of these nonlinear models. In our empirical analysis, we use a nonparametric estimator that can handle a wide variety of nonlinear phenomena. We examine fixed exchange rate regimes, where nonlinearities should be quite easy to detect. However, we do not find strong empirical support for the hypothesis that the incorporation of nonlinear effects significantly improves models of exchange rate determination. In Section I, we briefly review the theoretical literature on nonlinear target zone exchange rate models, linking this work to the tests for intrinsic bubbles (we draw heavily on recent papers by Kenneth Froot and Maurice Obstfeld, 1989a,b). Our methodology and data are discussed in Section II; Section III contains new empirical tests for nonlinearities in exchange rate models.

Claude d'Aspremont and Alexis Jacquemin (1988) employ a simple yet elegant symmetric duopoly model of R&D and spillovers to compare several equilibrium concepts. These concepts include (1) the two-stage noncooperative solution, (2) the two-stage mixed game,' (3) the two-stage fully cooperative solution,2 and (4) the social planner's optimum.3 For each of the cases stated above, they computed the equilibrium levels of output (Q=q1+q2) and R&D (xl=x2=x) and the required second-order conditions. They report (i) for large spillovers (i.e., /B > 0.5) x** > > x' > x* and Q**> Q> Q*> Q and (ii) for small spillovers (i.e., /3 x 2x*>x and Q**>Q*>Q>Q, where x denotes a firm's R&D level, Q denotes total industry output, ** denotes the social optimum, denotes the fully cooperative model, * the noncooperative two-stage case, and the mixed game. /3 is the spillover parameter. Here we show that comparing the pure cooperative and the pure noncooperative solutions as defined by d'Aspremont and Jacquemin is only meaningful when the noncooperative solution is stable, that is, when spillovers are not too small. We find that, for very small spillovers (in our example this occurs when 3 < 0.17), the d'Aspremont-Jacquemin observation holds because the noncooperative model is unstable. The importance of this result rests on the fact that even though the output reaction functions cross correctly when /3 < 0.17, the R&D reaction functions do not. When 0.17 < / < 0.41, stability obtains but R&D levels are higher in the noncooperative case than the fully cooperative one. For large spillovers the d'Aspremont-Jacquemin result is confirmed. Moreover, we find that the introduction of spillovers in the case of the noncooperative model tends to promote stability. In the case of the cooperative model, however, as the level of spillovers is increased, an equilibrium ceases to exist.

This paper compares real and monetary business cycle models with and without endogenous technical change. If technology is endogenous, the properties of these models change significantly. In particular, both real and monetary models yield very similar output processes if growth is endogenous, and changes in aggregate demand can result in permanent changes in productivity, employment, and output. The effect of depreciation of technology is examined, and the pattern of real wage movements over the cycle when money wages are fixed, but technology is changing, is briefly considered.

There is now widespread recognition that an airline's operation at a given airport greatly affects its competitive position on routes flown out of that airport (see M. Levine, 1987; S. Borenstein, 1989; S. Morrison and C. Winston, 1989; and myself, 1989, among many others.) Airlines typically defend any competitive advantage as stemming from the lower costs and better service that are said to be generated by hub-and-spoke route systems. Airline critics typically respond that airlines gain by dominating individual airports. Both views are at least plausible. Huband-spoke transportation networks reduce the number of round-trips necessary to carry a given number of passengers on a given set of itineraries, while increasing the number of passenger miles flown. If there are sufficient economies of scale in plane size, then the advantages of hubbing can overcome the disadvantage in passenger miles, resulting in lower total costs. By pooling passengers with different ultimate destinations, a hubbed system can also offer more frequent flights than would be economically feasible under a nonstop system. It also appears, however, that airlines gain other advantages from a large presence at an airport. Incumbent airlines are the major source of financing for many airports and therefore gain a large degree of bureaucratic control over airport operations. This control may enable them to block the entry or expansion of rivals. Airlines with a large presence in a given city also gain advantages from frequent flyer plans and nonlinear travel agent commission schedules (see, again, Levine and others). If the bureaucratic and marketing advantages of airport presence are sufficient to prevent most attempts at entry, then incumbents may gain the ability to exercise traditional market power by restricting output and driving up prices. This paper argues that both simple costreducing and naive stories are inappropriate for the airline industry. I present a model in which consumers are willing to pay a premium for the services of the dominant airline; this premium may be related to a number of factors, including flight frequency, frequent flier miles, and travel agent commission overrides. This model has the advantage of treating oligopoly product differentiation in an explicit way, of treating price as an endogenous variable, and of allowing for airport presence to affect both costs and demand.

evaluation ; econometric models ; labour supply

Recent contribution emphasize that the presence of exchange rate target zones has important effects on the within-band behaviour of exchange rates. We show that the implications of available models are strikingly inconsistent with European Monetary System data, and we propose a model of recurring realignments the predictions of which are consistent with the evidence.

The authors study natural selection of preferences using a golden-age model with endogenous population. In equilibrium, all agents have preferences with maximum biological fitness, given resource constraints, and total population is the maximum the environment can sustain. Naturally selected agents follow the golden rule, acting as if they maximize the undiscounted sum of per-capita felicities of current and future generations. Selected preferences and, hence, work, saving, consumption, and population density vary predictably with environmental differences.