Currency mismatches and monetary policy: A tale of two equilibria

We develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency. The central bank, in turn, chooses fixed or flexible exchange rates, taking the currency denomination of debts as given. We characterize the simultaneous determination of portfolios and exchange rate regime. Both floating and fixed rates can occur as equilibrium outcomes. “Fear of floating” may emerge endogenously and in association with a currency mismatch in assets and liabilities. If equilibria with both fixed rates and floating rates coexist, the latter is Pareto superior. Lessons for current “de-dollarization” proposals are discussed.     

Exchange rate regimes and national price levels

This paper explores the role of exchange rate regimes in explaining deviations from the classic theory of purchasing power parity. Examining a broad panel of countries, I find that developing countries with fixed exchange rate regimes have national price levels that are 20 percent higher than those with flexible regimes. For industrial countries, the relation between regimes and price levels is qualitatively similar but weaker. I investigate several explanations for this pattern, and find that exchange-rate overshooting in floats, inflation inertia in pegs and expansionary policies can explain only 5 percentage points of the observed differences. I also show that even though the observed pattern could be the outcome of a class of open economy models pioneered by Obstfeld and Rogoff, the data provides limited empirical support for the predictions of this model.     

Fixed exchange rates and trade

A classic argument for a fixed exchange rate is its promotion of trade. Empirical support for this, however, is mixed. While one branch of research consistently shows a small negative effect of exchange rate volatility on trade, another, more recent, branch presents evidence of a large positive impact of currency unions on trade. This paper helps resolve this disconnect. Our results, which use a new data-based classification of fixed exchange rate regimes, show a large, significant effect of a fixed exchange rate on bilateral trade between a base country and a country that pegs to it. These results suggest an economically relevant role for exchange rate regimes in trade determination since a significant amount of world trade is conducted between countries with fixed exchange rates.     

Does self-employment reduce unemployment?

This paper investigates the dynamic relationship between self-employment and unemployment rates. On the one hand, high unemployment rates may lead to start-up activity of self-employed individuals (the “refugee” effect). On the other hand, higher rates of self-employment may indicate increased entrepreneurial activity reducing unemployment in subsequent periods (the “entrepreneurial” effect). This paper introduces a new two-equation vector autoregression model capable of reconciling these ambiguities and estimates it for data from 23 OECD countries between 1974 and 2002. The empirical results confirm the existence of two distinct relationships between unemployment and self-employment: the “refugee” and “entrepreneurial” effects. We also find that the “entrepreneurial” effects are considerably stronger than the “refugee” effects.     

On the efficiency of monetary policy rules with flexible prices and rational expectations

The classic Sargent–Wallace–Lucas (SWL) rational expectations-flexible price model is usually interpreted as implying “policy ineffectiveness”: systematic monetary rules cannot affect the distribution of real output. A contrary but not widely-appreciated result of Dotsey and King suggests that there exist “prospective feedback” rules (future money depending systematically on current but as yet unobserved information) which improve output distribution by means of improving agents’ ability to perceive relative prices.We show the Dotsey–King proposition in fact to be a colossal understatement: prospective feedback rules applied vigorously enough (and even “contemporaneous feedback” rules based on current interest rates, provided at least one prospective feedback is active) can in the limit drive price-perception errors to zero. This is not to say such a policy would be desirable. Feedback parameter combinations that reduce current price level misperception tend to produce high forecast error variances with respect to future prices, with attendant loss in capital market efficiency. Whatever the desirable frontier among these different social cost-producing variables, feedback parameters will in general be needed in order to get on the frontier as well as to move along it. Monetary policy clearly produces social gain even in a version of this model which contains no elements of price “friction,” inefficient use of available information, or asymmetry in information as between the government and the public.     

Choosing and upgrading financial services dealers in the US and UK

This paper addresses a gap in the international literature aimed at understanding the impact of the marketing mix on choosing and upgrading business-to-business financial services dealers. This study involves two important financial services markets (foreign exchange and bonds) in two leading countries in financial services (the United States and the United Kingdom). It provides a comparative analysis of the effectiveness of marketing mix variables (“price”, “product”, and “promotion” in this case) in determining (a) choice of dealers and (b) how a utilized dealer may achieve the sought-after status of being among the top three dealers of a customer. The impact of the marketing mix variables on the choice of dealer is significantly greater in the US relative to the UK. However, a two-stage analysis shows no significant country differences in the impact of the marketing mix on how a dealer is upgraded to a top three status with a customer. Further, the effects of the individual marketing mix variables are more nearly equal in the determination of whether a utilized dealer is among the top three dealers relative to the choice stage. Finally, consistent with our hypothesis, the bond market is more price sensitive relative to foreign exchange and the foreign exchange market is more product sensitive than the bond market.     

Doha Development Round Perspectives

The Doha round got back on track in the summer of 2004. Where does it stand today? Has market access policy gained predominance over market regulation policy? Is the promotion of economic and social development becoming the “mainstream” of negotiations? What role does trade facilitation in developing countries play in this context? Is multilateral liberalisation compatible with the regional and bilateral opening of markets? Is further institutional reform of the WTO beyond the Doha agenda necessary? If so, what form could this take?*This article is based on a contribution made by the author to the International Policy Dialogue “Doha Development Round: Status and Prospects for Success” organised by the InWEnt gGmbH’s Development Policy Forum (Entwicklungspolitisches Forum, EF) in Berlin on 7/8 June 2005.     

Varying monetary policy regimes: A vector autoregressive investigation

Recently, two stylized facts about the behavior of the U.S. economy have emerged: first, macroeconomic aggregates appear to be less volatile post-1984 than in the preceding 2 decades; second, monetary policy appears more responsive to inflationary pressures – and thereby more “stabilizing” – during the Volcker/Greenspan chairmanships relative to earlier regimes. Does a causal relationship exist between these two observations? In particular, has “better” policy by the Federal Reserve Board contributed significantly to the lessened volatility of the U.S. economy? This paper uses a structural vector autoregressive (VAR) specification to address these questions, examining the advantages and limitations of such an approach. In contrast with much of the existing research on these topics, I find that most of the quantitatively significant changes in volatility are attributed to breaks in the non-policy portion of the structural VAR, and not to the identified policy equation.     

A note on closet-indexing

Actively managed equity mutual funds with returns that are highly correlated with popular stock market indices like the S&P 500 often are accused of “closet-indexing”. We ask whether a trading strategy that shorts these funds and buys “true” index funds makes money for investors. Using a sample of high-R² growth-and-income funds from the CRSP survivor bias free mutual fund file, we document that the Sharpe ratio of this trading strategy and the market Sharpe ratio are statistically indistinguishable in the 1991–2000 sample period. The result is consistent with the view that widespread closet-indexing does not exist in the mutual fund industry.     

Corruption and Companies: The Use of Facilitating Payments

Making use of facilitating payments is a very widespread form of corruption. These consist of small payments or gifts made to a person – generally a public official or an employee of a private company – to obtain a favour, such as expediting an administrative process; obtaining a permit, licence or service; or avoiding an abuse of power. Unlike the worst forms of corruption, facilitating payments do not usually involve an outright injustice on the part of the payer as they are entitled to what they request. This may be why public opinion tends to condone such payments; often they are assumed to be unavoidable and are excused on the grounds of low wages and lack of professionalism among public officials and disorganisation in government offices. Many companies that take the fight against “grand” corruption very seriously are inclined to overlook these “petty” transgressions, which are seen as the grease that makes the wheels of the bureaucratic machine turn more smoothly. Despite this, facilitating payments have a pernicious effect on the working of public and private administrations: all too often they are the slippery slope to more serious forms of corruption; they impose additional costs on companies and citizens; and in the long run they sap the ethical foundations of organisations. Although many articles on corruption mention facilitating payments, there have been no systematic studies from a company’s point of view. This article thus focuses on facilitating payments from the point of view of the company that makes the payment, either as the active partner (when it is the company that takes the initiative) or as the passive partner (when the official or employee is the instigator).     

Building industrial cooperation through Japanese strategies

Joint industrial policies undergird Japanese international growth. That policy of “unite and conquer” already has caught on in other Asian countries and in Europe. American companies, although hamstrung by laws that equate “big” with “bad,” are doing their utmost to remain competitive by pursuing Japan's cooperative strategies.     

There is No Housing Bubble in the USA

There is no evidence of a housing “bubble” in the United States and housing demand should stay strong for years to come. Three major factors lead to this conclusion. First, the 77 million baby boomers are approaching the peak home ownership ages of 65-75 (over 83.0 percent versus a national average in 2004 of 69.0 percent). Second, immigrants, a growing share of the U.S. population, tend to buy houses ten years later than people born in the United States of the same income group and family size. Third, mortgage rates are not likely to go high enough (8.0 percent or more for 30-year fixed rate mortgages) to put a crimp in demand. Despite some areas of concern, overall homeowners’ equity is at record levels above $9 trillion. Delinquencies are still less than one percent of mortgages outstanding.JEL Classification L850,R210     

Exit, stage left why entrepreneurs end their entrepreneurial careers before retirement

This article examines the process of entrepreneurship from a different perspective. It considers evidence not only about practicing entrepreneurs but also about ex-entrepreneurs: individuals who have ended their entrepreneurial pursuits to work for someone else.Why entrepreneurs ended their entrepreneurial careers is understood by examining not only their expressed reasons for leaving, but also by observing how they exited, when they exited, and who exited compared to who remained.The study's findings are tentative. They are published now because they have important implications for potential entrepreneurs, for practicing entrepreneurs, and for those working with entrepreneurs either directly or indirectly (e.g., policymakers) who must make important decisions before more evidence is available .Overall, the findings indicate that a high-risk profile exists that distinguishes ex-entrepreneurs, particularly those with brief careers, from “more seasoned” entrepreneurs who have experienced longer lives as entrepreneurs.Perhaps the most important implication is that early-career start-ups may be better than previously thought. Preexisting profiles of the “ideal entrepreneurs” place them in their mid- to late thirties at the time of venture start up. But this start-up age (and older ages) were highly correlated in this study with very short, aborted careers compared to practicing entrepreneurs and ex-entrepreneurs who started earlier.A second implication is related to the first: those who started earlier were able to do a better job of anticipating their future entrepreneurial pursuits than were those who started later, mainly because they were sensitized to entrepreneurship as a career possibility at a much earlier age. Early planning for an entrepreneurial career is correlated with longer careers not just because they start earlier but because they last longer.A third implication is the need to scale down the scope (and risk) of the first venture. Such venture “downsizing” can lessen financial requirements while also giving new entrepreneurs the flexibility to start another, often better, venture after they get into business and learn about new opportunities, contacts, and skills that they could not foresee or develop before starting their first ventures.A fourth implication reinforces existing notions about the relative perils of the first few years of an entrepreneurial career. Survival rates increase considerably after the completion of the second year and the probability of a long career rises substantially after the sixth year of entrepreneurial life.A final implication is that the overall costs, risks, and dangers of entrepreneuring have been overstated. Career exit rates are much lower than venture exit rates. Relatively few ex-entrepreneurs apparently suffered truly catastrophic career exits, at least to the extent that they felt that their careers had been very unrewarding and that they had ruled out ever entrepreneuring again.     

On the Link Between Exchange‐rate Regimes,Capital Controls and Monetary Policy Autonomy in Small European Countries, 1979–2000

We investigate international monetary‐policy transmission under different exchange‐rate and capital‐account regimes in eleven small, open economies during the 1980s and 1990s. We find no systematic link between ex‐post monetary‐policy autonomy and exchange‐rate regimes. Capital controls appear to have provided a degree of temporal insulation from foreign monetary policy shocks, though not strict autonomy. The results are consistent both with short‐term autonomy for small countries even under fixed exchange rates and an open capital account, and with long‐term dependence under flexible exchange rates and an independent stability target. Results also indicate that euro‐area market interest rates are significantly more responsive to the development of the corresponding US rate than were the previous national rates.     

Banking crises and exchange rate regimes: is there a link?

This paper investigates the linkages between banking crises and exchange rate regimes, using a comprehensive cross-country dataset for the last two decades. The paper examines whether the choice of exchange rate regime affects the likelihood, cost, and duration of banking crises. Empirical results seem to indicate that adopting a fixed exchange rate diminishes the likelihood of banking crises among developing countries. However, once crises occur, the real costs associated with them appear to be larger in countries with fixed exchange rates. The duration of crises does not seem to be robustly affected by the exchange rate policy.     

Growth pattern of academic entrepreneurial firms

Academic entrepreneurship, the creation of new business ventures by university professors, technicians, or students, is increasingly being promoted by university-based innovation centers and university business offices. It is seen as an efficient university-industry technology transfer mechanism, and, in some cases may contribute to university revenue. Whereas most entrepreneurs leave the university at time of start-up, others keep their academic postings as full-time or part-time professors. “Part time” entrepreneurship may be interesting from a university point of view, because (i) it keeps in the laboratory a creative individual, (ii) it may provide through part-time academic positions for a more efficient use of university resources, and (iii) it encourages more contacts between faculty, students, and the business world. However, manufacturing firms led by part-time entrepreneurs do not seem to be as aggressive and growth-oriented as “independent” firms. The university professor interested in the successful transposition of an idea, an invention, to the commercial sector, may therefore have to do it through licensing, or resign from the university to devote all his time and energy to the development, manufacturing, and commercialization process. And the university interested in investing in a new “academic firm” created to exploit commercially an invention made in its own laboratories should beware of keeping the academic entrepreneur on staff, or, if he stays on staff, of involving him with the management of the new company.These are the main conclusions of a study of the evolution from 1980–1981 to 1984–1985 of 38 young firms originally created by entrepreneurs while at various universities in several Canadian provinces. The results, supported by the observation of a small control group of 8 Canadian hightechnology companies, bring out a dichotomy: for firms offering technical services, the continued this project were made by Colleen Bigelow and Branko Peterman. Their help was greatly appreciated. academic posting of the firm's creator does not appear to overly affect its operations and growth; however, manufacturing firms completely independent from the university tend to g row faster. Other results support the negative correlation that seems to exist between the growth rate of sales and closeness to academic life, as measured, for example, by the use of university laboratories and equipment. Whether they are still closely connected to a university or not, the entrepreneurs in our sample do note many potential positive benefits from continuing contacts with the academic world. It is possible that the negative correlation between growth and university links observed in the sample results more from the individual characteristics of the entrepreneurs than from a negative influence by the university. As venture capitalists have long noticed, one of the main determinants of growth and success is the entrepreneur himself. The entrepreneurs staying close to the university and using university services may be less aggressive and less risk-oriented than the others.     

Linking multi-channel customer behavior with shopping motives: An empirical investigation of a German retailer

Operating multiple channels, in store as well as non-store, allows a retailer to cater to the different shopping motives of its customers. This research into the buying behavior of 525 customers of a multi-channel retailer that operates five channels in Germany shows that most customers use only one channel within a buying process, selecting the channel that best satisfies their shopping motives in each situation. Based on exploratory qualitative and quantitative research, this study identifies five shopping motives: “recreational orientation”, “convenience orientation”, “independence orientation”, “delivery-related risk aversion” and “product- and payment-related risk aversion”. In the majority of the store channels examined in this study (chain stores and bakeries), single-channel users primarily look to satisfy emotional and social needs. Single-channel users of non-store channels (catalogue and online-shop) look for convenience and strive for independence. Multi-channel users, who obtain their information from the online-shop and then make their purchase in the chain store, are combining the independence of online-shop information with the reduction of risks associated with buying products in the chain store. These findings can be used to develop recommendations for managing the individual channels.     

Ethics and Marketing Management:: A Retrospective and Prospective Commentary

The Authors thank the Journal of Business Research for awarding its Quality and Impact in Marketing Scholarship Award to our 1985 article, “Ethics and Marketing Management.” In this article, provide a retrospective that examines how subsequent research has extended our findings and provide a prospective that suggests directions for future research.     

Of bears, bumble-bees, and spiders: the role of expatriates in controlling foreign subsidiaries

This article investigates the role of expatriate managers in multinational companies. We discuss three key organizational functions of expatriation: position filling, management development, and organization development. In the last function, organization development, international transfers are used as an informal coordination and control strategy through socialization and the building of informal communication networks. The article explores this role of international transfers in greater detail, but also discusses a more formal way in which expatriates can control subsidiaries. The following metaphors for these different control functions of expatriation are introduced: “bear” (formal direct control), “bumble-bee” (socialization), and “spider” (informal communication). A large-scale mail survey offers empirical evidence for the bear, bumble-bee and spider roles and shows under which circumstances they are most effective. Being aware of the different control functions of expatriation and the circumstances under which they are most effective can help managers to use expatriate assignments as a more strategic tool.     

Market share as a source of market power: Implications and some evidence

This paper investigates the proposition that firms with a high market share enjoy a unique form of market power—“inherent product differentiation.” The analysis is based on a sample of 6492 banks, during the 1970s. Tests tend to control for market concentration, scale economies, and explicit product differentiation as factors influencing rates of return. Test results indicate that market share per se is a source of high profits, regardless of the level of concentration and after controlling for firm size. These findings question the Demsetz (1973) view that high profits of market leaders are due to efficiency rather than to some form of market power.These findings suggest that traditional market models that account only for a single price may be incomplete. The paper suggests a kind of simple model that would account for the existence of multiple prices in a market.