We show that it is possible to adapt to nonparametric disturbance autocorrelation in time series regression in the presence of long memory in both regressors and disturbances by using a smoothed nonparametric spectrum estimate in frequency–domain generalized least squares. When the collective memory in regressors and disturbances is sufficiently strong, ordinary least squares is not only asymptotically inefficient but asymptotically non–normal and has a slow rate of convergence, whereas generalized least squares is asymptotically normal and Gauss–Markov efficient with standard convergence rate. Despite the anomalous behavior of nonparametric spectrum estimates near a spectral pole, we are able to justify a standard construction of frequency–domain generalized least squares, earlier considered in case of short memory disturbances. A small Monte Carlo study of finite sample performance is included.

Many emerging market countries have suffered financial crises. One view blames soft pegs for these crises. Adherents of this view suggest that countries move to corner solutions—hard pegs or floating exchange rates. We analyze the behavior of exchange rates, reserves, and interest rates to assess whether there is evidence that country practice is moving toward corner solutions. We focus on whether countries that claim they are floating are indeed doing so. We find that countries that say they allow their exchange rate to float mostly do not—there seems to be an epidemic case of “fear of floating.”

We consider the estimation of credit rating transitions based on continuous-time observations. Through simple examples and using a large data set from Standard and Poor's, we illustrate the difference between estimators based on discrete-time cohort methods and estimators based on continuous observations. We apply semi-parametric regression techniques to test for two types of non-Markov effects in rating transitions: Duration dependence and dependence on previous rating. We find significant non-Markov effects, especially for the downgrade movements.

This paper investigates nonlinear features of FX volatility dynamics using estimates of daily volatility based on the sum of intraday squared returns. Measurement errors associated with using realized volatility to estimate ex post latent volatility imply that standard time series models of the conditional variance become variants of an ARMAX model. We explore nonlinear departures from these linear specifications using a doubly stochastic process under duration-dependent mixing. This process can capture large abrupt changes in the level of volatility, time-varying persistence, and time-varying variance of volatility. The results have implications for forecast precision, hedging, and pricing of derivatives.

We revisit Reinhardt's (1972) commonly used production function for physician services. This production function, although appropriate in some settings, is not adequate for more detailed studies. The generalized linear production function (Diewart, 1971) is an attractive alternative for this application: it admits zero values for inputs and allows the estimation of complex technical relationships. We find that, from 1965-1988, the technical relationships that describe the production process for physician services are remarkably stable. By empirically estimating the parameters of this more general production function, we provide crucial evidence about the q-complementarity of health worker inputs, the first of its kind in the literature on health labor markets.

We use data from a sample of child care centers to estimate the relationships between cost and child care quality, and between revenue and quality. We use a measure of child care quality, designed by developmental psychologists, that is positively associated with child development. Taking the estimated cost-quality and revenue-quality relationships as given, we estimate the objective functions of firms and compute the quality supply function. The results indicate that the supply of quality is moderately elastic with respect to price and the wages of child care center workers. Implications of the results for child care policy are discussed.

It is well-known that if international linkages are relatively small, the potential gains to international monetary policy coordination are typically quite limited. But when goods and financial markets are tightly linked, is it problematic if countries unilaterally design their monetary policy rules? Are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination? We argue that under plausible assumptions the answer is no. Unless risk aversion is very high, lack of coordination in rule setting is a second-order problem compared with the overall gains from macroeconomic stabilization.

Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.

The liquidity of the market for corporate assets plays an important role in explaining whether a firm divests a business segment, which segment the firm divests, and whether it divests a core segment or an unrelated segment. Firms are more likely to divest segments from industries with a more liquid market for corporate assets, unrelated segments, poorly performing segments, and small segments. Strikingly, the segment with the least liquid market is less likely to be divested than the best-performing segment, while the worst-performing segment is less likely to be divested than the segment with the most liquid market.

This paper investigates individual motives to participate in rotating savings and credit associations (roscas). Detailed evidence from roscas in a Kenyan slum (Nairobi) suggests that most roscas are predominantly composed of women, particularly those living in a couple and earning an independent income. We propose an explanation of this based on conflictual interactions within the household. Participation in a rosea is a strategy a wife employs to protect her savings against claims by her husband for immediate consumption. The empirical implications of the model are then tested using the data collected in Kenya.