[Closed-end country funds can trade at large premiums and discounts from their foreign asset values (NAVs). Investigating this anomaly, we find that individual fund premiums move together, primarily because of the comovement of their stock prices with the U.S. market. Moreover, an index of country fund premiums differentiates size-ranked U.S. portfolio returns and forecasts country fund stock returns. These findings suggest that international equity prices are affected by local risk. In particular, we show that country fund premium movements reflect a U.S.-specific risk, which may be interpreted as U.S. market sentiment.]

Fully modified least squares (FM-OLS) regression was originally designed in work by Phillips and Hansen (1990) to provide optimal estimates of cointegrating regressions. The method modifies least squares to account for serial correlation effects and for the endogeneity in the regressors that results from the existence of a cointegrating relationship. This paper provides a general framework which makes it possible to study the asymptotic behavior of FM-OLS in models with full rank I(1) regressors, models with I(1) and I(0) regressors, models with unit roots, and models with only stationary regressors. This framework enables us to consider the use of FM regression in the context of vector autoregressions (VAR's) with some unit roots and some cointegrating relations. The resulting FM-VAR regressions are shown to have some interesting properties. For example, when there is some cointegration in the system, FM-VAR estimation has a limit theory that is normal for all of the stationary coefficients and mixed normal for all of the nonstationary coefficients. Thus, there are no unit root limit distributions even in the case of the unit root coefficient submatrix (i.e., I n-r , for an n-dimensional VAR with r cointegrating vectors). Moreover, optimal estimation of the cointegration space is attained in FM-VAR regression without prior knowledge of the number of unit roots in the system, without pretesting to determine the dimension of the cointegration space and without the use of restricted regression techniques like reduced rank regression. The paper also develops an asymptotic theory for inference based on FM-OLS and FM-VAR regression. The limit theory for Wald tests that rely on the FM estimator is shown to involve a linear combination of independent chi-squared variates. This limit distribution is bounded above by the conventional chi-squared distribution with degrees of freedom equal to the number of restrictions. Thus, conventional critical values can be used to construct valid (but conservative) asymptotic tests in quite general FM time series regressions. This theory applies to causality testing in VAR's and is therefore potentially useful in empirical applications.

At the beginning of this century the Dutch government controlled the opium market in the Dutch East Indies--nowadays Indonesia--for several decades. This state monopoly was called the opiumregie. Using information gathered during the opiumregie, this paper estimates price elasticities of opium consumption. It appears that short-term price elasticities of opium use are about -0.7. Long-term price elasticities are about -1.0.

At the beginning of this century the Dutch government controlled the opium market in the Dutch East Indies--nowadays Indonesia--for several decades. This state monopoly was called the opiumregie. Using information gathered during the opiumregie, this paper estimates price elasticities of opium consumption. It appears that short-term price elasticities of opium use are about -0.7. Long-term price elasticities are about -1.0.

Decisions under uncertainty depend not only on the degree of uncertainty but also on its source, as illustrated by Ellsberg's observation of ambiguity aversion. In this article we propose the comparative ignorance hypothesis, according to which ambiguity aversion is produced by a comparison with less ambiguous events or with more knowledgeable individuals. This hypothesis is supported in a series of studies showing that ambiguity aversion, present in a comparative context in which a person evaluates both clear and vague prospects, seems to disappear in a noncomparative context in which a person evaluates only one of these prospects in isolation.

This paper investigates the effects of shocks to U. S. monetary policy on exchange rates. We consider three measures of these shocks: orthogonalized shocks to the federal funds rate, orthogonalized shocks to the ratio of nonborrowed to total reserves and changes in the Romer and Romer index of monetary policy. In sharp contrast to the literature, we find substantial evidence of a link between monetary policy and exchange rates. Specifically, according to our results a contractionary shock to U. S. monetary policy leads to (i) persistent, significant appreciations in U. S. nominal and real exchange rates and (ii) significant, persistent deviations from uncovered interest rate parity in favor of U. S. interest rates.

Roger Kormendi (1983) presents apparently strong evidence that, in contrast to the standard view, consumption is not reduced by taxes but is reduced by government expenditure. He interprets his results as supporting a consolidated approach to private sector behavior in which consumers effectively internalize the government budget constraint. Specifically, he claims that consumers regard government spending as the true measure of the government's claim on private resources, and so do not respond to changes in taxes, given spending. This is basically the approach advocated by Robert Barro (1974) and known also as the Ricardian Equivalence Proposition (hereafter REP). Kormendi's results appears to contradict other empirical work based on the Life Cycle Hypothesis (for example, Martin Feldstein, 1982; Modigliani 1984a; Sterling, 1985) although results similar to his have been reported (see David Aschauer, 1985; John Seater and Roberto Mariano, 1985 and the references in Kormendi). In our view, Kormendi's analysis is seriously flawed. His heuristic derivation of the consumption function leads him to a specification of the aggregate consumption function, which is not consistent with the Life Cycle Hypothesis (LCH) or with REP, and to questionable methods of estimation. Once his conceptual and methodological errors are corrected, his formulation and, more generally, the REP hypothesis are found to receive little empirical support. In the next section we rely on the LCH to derive an aggregate consumption function which shows explicitly how government expenditure and taxes should effect private consumption. This derivation helps to bring out the observable implications of REP, which are shown to be equivalent to a limiting form of the LCH in which the planning horizon is infinite. It also serves to clarify the appropriate specification of the variables appearing in the consumption function. Next, Section II reports our empirical estimates and tests. Section III compares our results with Kormendi's. Finally, Section IV reports the results of endeavors to improve the specification of fiscal variables, notably by distinguishing between permanent and transitory tax changes.

We report the first results for Japanese firms on the effects of employee stock-ownership plans (ESOP's) and bonuses by estimating production functions using new panel data. We find that the introduction of an ESOP will lead to a 4-5-percent increase in productivity; this productivity payoff takes 3-4 years. There is a modest productivity gain from the bonus system. We also find evidence that the productivity effect of bonuses is enhanced by the existence of ESOP's, suggesting that ESOP's may create a climate conducive to profit-sharing by enhancing long-term commitment and peer monitoring.