Knowledge that Transforms

Macroeconomics has always rested on the fiction that the behavior of aggregates was stable and, therefore, individual market phenomena could be safely ignored. In an important recent contribution, David M. Lilien challenged this fiction and argued that a large component of fluctuations in unemployment could be explained by the dispersion of employment growth across industries. This paper develops models of consumption and investment paper in which the dispersion of economic activity can play a role. The econometric evidence suggests an important role for the dispersion of economic activity in explaining aggregate consumption and investment.

Following the method of Hansen and Hodrick (1980) we test the efficiency of the Canada-U.S.A. foreign exchange market by pooling information from contracts of five lengths. The test is based on daily data from the period 1971 to 1980 inclusive. We show that these data reject the joint hypothesis of exchange market informational efficiency and no risk premlum. The degree to which foreign exchange markets are inefficient is of obvious importance. McKinnon (1976) has argued that a lack of speculative activity has led to excessive exchange rate turbulence and associated economic cost; this would be manifest in exchange inefficiency. Additionally, tests of the efficiency of the well organized foreign exchanges are of obvious value in the ongoing debate concerning the validity of the Rational Expectations Hypothesis. In this note we report the results of a test of the joint hypothesis of exchange market informational efficiency and no risk premium. The test is based on a generalized concept of the foreign exchange market. The study uses daily data on the Canada-U.S.A. market for the period 1971 to 1980 inclusive. In its most general form, Fama's condition for market efficiency is f(i,t) = E(f(i -j,t + j)14(t)) (1) where f (i, t) is the forward exchange rate prevailing at time t for a contract of i months; s1(t) is the information set available to market participints at time t; and E(-) is a conditional expectations operator. If condition (1) did not hold and transactions were Received for publication August 3, 1982. Revision accepted for publication February 10, 1984. *Nuffield College, Oxford, and Bank of Canada, respectively. The views expressed in this paper are those of the authors and no responsibility for them should be attributed to the Bank of Canada. We appreciate the comments and assistance of David Burton, Kevin Lynch, Donn Maccara, Barbara Macpherson, George Pickering, Heather Robertson, and two anonymous referees. This content downloaded from 157.55.39.163 on Wed, 21 Sep 2016 05:12:50 UTC All use subject to http://about.jstor.org/terms 670 THE REVIEW OF ECONOMICS AND STATISTICS costless, speculators could make risky profits by taking the appropriate long or short position. Thus the hypothesis of efficient markets which we test consists of two parts: the assertion that expectations are rational; and the postulation that speculators swiftly arbitrage away economic profits by exploiting valuable information. Equation (1) recognizes the fact that a speculator in the foreign exchange market has many trading strategies open to him (Caller, 1980). For instance, a speculator can buy a two month forward contract and hold it until it matures, in which case the corresponding speculative rate is the spot rate two months hence: alternatively one can buy a three month contract and match it with a one month contract which starts two months hence. If the foreign exchange market is efficient, the speculator should be indifferent between these two, and all other possible strategies, and no strategy should yield extraordinary profit. This formulation is in contrast to the more commonly used formulation of informational efficiency, f(i,t) = E(s(t + i) l4(t)), where s(t + i) is the spot exchange rate observed at time t + i. Clearly, this condition reflects merely a single instance of the general formulation (1). By examining the complete set of strategies implied by (1) we are better able to address the question of foreign exchange market efficiency. Consistent with the view that there exists a wide array of speculative strategies open to a speculator within the Canada-U.S.A. market, we model the speculator as basing decisions on prediction errors recently realized from various maturities of the same market. In previous studies of this nature, tests have often been based upon an information set involving a single and a single (Cornell and Dietrich, 1977; Levich, 1978; Blejer and Khan, 1980; and Longworth, 1981). Usually this has been done to avoid the problem of overlapping observations, which will be further discussed below. However, the choice of a relatively coarse data frequency makes these tests less powerful, if the phenomena of interest are of extremely short duration, as was proved by Hansen and Hodrick (1980). Alternatively, economists have modelled speculators as basing their decisions on the information from multiple markets, all of the same (Geweke and Feige, 1979; Hansen and Hodrick, 1980). This is the normal method of transforming a weakform test (a test which uses only lagged regressands as explanatory variables) into a semi-strong test (which in addition to lagged regressands incorporates into the test other publicly available information). Our test is composed by pooling information from varying maturities for the same currency, instead of pooling information from different currencies of identical maturities. Our procedure seems to be an interesting alternative, primarily because of the information costs associated with speculating with many currencies. Speculation may be pictured as being a currency activity (with arbitrage occurring readily between lengths of a given ratio), as well as a maturity length specific activity. I.e., speculators may concentrate their attention on the dollar-yen rate, rather than the three-month market. Thus, we would expect information to be disseminated quickly across lengths; finding that information from one is not quickly disseminated to other maturities would be strong evidence against market

A device is presented that allows the user of any input-output price model to induce modifications in some selected coefficients in response to changes in prices. These modifications are induced by specifying the values of some elasticities, whenever they are defined. These values may come from other studies, from the user's own knowledge or beliefs about the situation, or from those of experts. If subjective elasticities are used, a simple rationality rule greatly reduces the task of determining their values when the substitution between two inputs or two groups of inputs is assumed to be a function of their prices only. This assumption does not prevent there being, in a second stage, substitution between these two inputs treated as a group and other inputs or groups of inputs.

Fama, Eugene, and Richard Roll, Some Properties of Symmetric Stable Distributions, Journal of the American Statistical Association 63 (Sept. 1968), 817-838. ______ Parameter Estimates for Symmetric Stable Distributions, Journal of the American Statistical Association 66 (June 1971), 331-338. Friedman, Daniel, and Stoddard Vandersteel, Short-run Fluctuations in Foreign Exchange Rates: Evidence from the Data 1973-79, Journal of International Economics 13 (Aug. 1982), 171-186. Gnedenko, B. V., and A. N. Kolmogorov, Limit Distributions for Sums of Independent Random Variables (Reading, MA: Addison-Wesley, 1968). International Monetary Fund, International Monetary Fund Survev, various issues. Judge, George G., William E. Griffiths, R. Carter Hill, and Tsoung-Chao Lee, Theory and Practice of Econometrics (New York: John Wiley and Sons, 1980). Kendall, Maurice G., and Alan Stuart, Advanced Theory of Statistics, 2nd Edition, Vol. I (London: Charles Griffin and Co., 1963). Kindleberger, C. P., The Benefits of International Money, Journal of International Economics 2 (Sept. 1972), 425-442. Mandelbrot, Benoit, Variation of Certain Speculative Prices, Journal of Business 36 (Oct. 1963), 394-419. McFarland, James W., R. Richardson Pettit, and Sam K. Sung, The Distribution of Foreign Exchange Price Changes: Trading Day Effects and Risk Measurement, Journal of Finance 37 (June 1982), 693-715. Moulton (Westerfield), Janice, An Estimation of Foreign Exchange Risk Under Fixed and Floating Rate Regimes, Journal of International Economics 7 (June 1977), 181-200. Rogalski, Richard J., and Joseph D. Vinso, Empirical Properties of Foreign Exchange Rates, Journal of International Business Studies 9 (Fall 1978), 69-79. Roll, Richard, Behavior of Interest Rates (New York: Basic Books, Inc., 1970). Schmidt, Peter, Econometrics (New York: Marcell Dekker, Inc., 1976).

Recent theoretical developments on multiproduct firm costs have increased our understanding of these firms. Yet, to date, empirical analysis of the relationship between multiproduct firm costs and industry structure has been limited. In this paper, the multiproduct nature of US energy producers is explicitly recognized, and a multiproduct cost function estimated for the industry. The empirical results indicate that the multiproduct structure of large energy firms has, at least in part, been motivated by economies of scope between petroleum and coal operations. 27 references, 19 footnotes, 3 figures, 1 table.

This paper takes a fresh look at discrete choice theory by observing that decision makers can deliberately blend discrete alternatives within an extended planning honrzon. Multinomial logit and generalized probit models are developed and their properties examined. These are then estimated and compared to the traditional myopic model using the travel diaries of a sample of commuters from Seoul, Korea. The new models yield travel cost elasticities which are substantially lower than those of the traditional approach.

We hypothesize that the substitution mechanism tends to break down in low income countries. As a result the input-output relationship in low income countries is largely explained by their X-inefficiency, while the same relationship in high income countries generally reflects their factor prices. This hypothesis is consistent with the empirical results calculated from Census data for eighteen countries at various stages of development.

This paper seeks to determine whether the underlying assumption of utility maximization can be empirically validated for the local public sector. In addition, three alternative functional forms of a system of demands are compared on the basis of their theoretical restrictions as well as their predictive performance. Based upon a likelihood ratio test we find that the restrictions implied by utility maximization are too restrictive to be consistent with the unrestricted estimates. Once integrability restrictions are imposed, however, both CES and Cobb-Douglas utility functions are consistent with the data. The unrestricted estimates had the best predictive performance based on information inaccuracy.

It is argued that the estimation techniques used by previous researchers to study rivalry in financial markets are inappropriate. The assumptions of both ordinary least-squares and Tobi analysis are violated when these techniques are used to analyze mobility and turnover data. To overcome the difficulties in the previous studies, we suggest a non-linear model (which is closely related to the Poisson model). This model is designed for describing frequency data and is not subject to the criticisms to which ordinary least-square and Tobut are subject.

Ahstrrct-The distribution of wealth in real estate am?ong people in the United States at the end of the eighteenth centuLry has hcen estimated frornt a samplc of rolls of the censuLs of real estatc in 1798. Mean real wcalth was $1,433 and the (lini coeficieint of incqualitv was 0588 with half the aduLlt male population owning property. A comparison with the distribultion for rcal estate in 1860 shows that wealth grew 1.9% a year pcr person. Relative inequality was a little larger than in 1798 buLt the diflcrcnce can be explained by crrors in mncasurcmcnt.