Are Housing Price Cycles Driven by Irrational Expectations?

This paper investigates the extent to which condominium apartment prices are set in an efficient asset market. Unlike previous work that focuses on the time-series properties of measures of excess returns, the analysis is framed in terms of the changes in observable house prices over time. More precisely, the paper develops and applies a test of the joint null hypothesis of rational expectations, perfect markets, and no risk premium in the Vancouver condominium apartment market. The empirical results provide significant evidence against the joint null hypothesis. On average, ex post house price changes move in a direction opposite to their rational expectation. This approach offers a methodological advantage over the standard efficiency literature and is shown to provide a more powerful test of market efficiency than conventional return regressions. Another contribution of the paper is to characterize the time-series properties of deviations of condominium prices from those predicted by the risk-neutral rational expectations model, using cointegration and random coefficients techniques. Deviations in house price changes from their (risk-neutral) rational expectations are time varying, stationary, and related to the stage of the real estate price cycle.     

A Study of Accountants' Judgments With Respect to the Provision of Consolidated Financial Statements

The release of the Australian Accounting Standards Board AASB 1024. Consolidated Accounts. in September 1991 represents a fundamental shift in concept, criteria and approach. The Standard is based on the entity concept and adopts 'capacity to control' as the sole criterion for identifying related entities for the purpose of preparing consolidated financial statements. A conceptual (substance-over-form) approach is used to implement the control criterion. In essence, this approach requires accountants to make professional judgments about the existence of control based on the substance of group structures and arrangements rather than their legal form. Concerns about the subjectivity and possible variability of accountants' judgments cast some doubt on the operational effectiveness of the conceptual approach. In response to these concerns, this paper reports the results of an experiment that examines the consolidation judgments accountants make in response to a number of hypothetical scenarios. The purpose of this paper, therefore, is to provide some insights into the likely quality and reliability of consolidation judgments under the conceptual approach adopted by AASB 1024. The results indicate that accountants can be expected to exhibit broad consensus in their consolidation judgments. In addition, an analysis of the variables suggests that the degree of share ownership is the most significant factor in making such judgments. Nevertheless, other factors including the composition of the board of directors, the existence of a special arrangement, and interactions with the other variables also proved to be significant. Overall, the study provides tentative support for the conceptual approach adopted in AASB 1024.     

Insights into Franchising: A Review of Empirical and Theoretical Perspectives

Business format franchising has expanded rapidly, over the past 40 years as an alternative method of distribution and business development. This literature review analyses the major issues which have been the subject of in-depth research and/or significant debate. These include: the determinants of franchising in theory and practice; why franchisors normally operate both franchised and company-owned outlets, and the factors which influence the balance between them; the role and position of franchisees within the franchisor/franchisee relationship and, finally, the continuing debate surrounding the kind of regulatory framework in which it should operate. These findings are evaluated and aspects of franchising which warrant further investigation are outlined.     

INFLATION TARGETING IN PRACTICE: FURTHER EVIDENCE

This paper empirically investigates the plausibility, which has been argued but not fully established, that the efficacy of the inflation-targeting strategy recently implemented by New Zealand, Canada, and the U.K. has been an artifact of a global disinflationary environment. A data decomposition procedure, which involves cointegration and canonical correlation analysis, is used to remove common trend and cyclical components from historical data that these three countries share with their nontargeting neighboring countries, namely, Australia, the U.S., and Germany, respectively. Simulations based on resulting country-specific data for inflation and other economic aggregates reveal scant evidence of regime-shift effects as exhibited in observed data. This contrast in findings highlights the extent to which cross-country synchronization in economic activity has on the performance of small open economies. (JEL C32, E52, E58)     

Fashion: a new paradigm of consumer behaviour

In clothing markets, ‘fashion’ has traditionally been defined as something that is accepted by a sizeable proportion of a market. This paper is based on empirical research amongst over 500 students investigating a variety of dimensions of ‘fashionability’. The findings support the ‘outer-directedness’ of ‘prevailing styles’ but also identify a potentially important set of ‘individualistic’ influences. It is suggested that this indicates the necessity for a redefinition of what is fashionable, and an explanation is offered for the apparent contradictions in current thinking about fashionability.     

Europe - Crisis or opportunity?*

This Economic Viewpoint is based on the report “Towards European Economic Recovery in the 1980s” which was written by Sir James Ball and M. Michel Albert (former head of the French Commissariat au Plan). The report was commissioned by the European Parliament.