Export pricing and exchange rate expectations under uncertainty

This paper contributes to the literature on firms’ export pricing by assessing whether and to what extent firms take into account the expected future evolution of the exchange rates while setting their prices. Using French micro-level trade data, our empirical analysis reveals that by adjusting their export prices, firms partly absorb information about future exchange rate variations. The extent to which individual exporters absorb future exchange rate fluctuations is found to depend on their market power, in accordance with theoretical dynamic demand-side models encompassing mechanisms creating an inter-temporal relationship between current market shares and future profits. The analysis also shows that the strength of such expectation-related mechanism is considerably reduced with greater future exchange rate uncertainty, in line with an interpretation of pricing-to-market as an investment decision under uncertainty. In a comparative perspective our results are shown to drive asymmetric responses across destinations of aggregate bilateral export flows to expected exchange rate movements.     

Set them (almost) free: Discretion in electoral campaigns under incomplete information

The paper analyzes a model of electoral campaigning as a problem of competitive delegation. We consider an environment characterized by two sources of uncertainty: uncertainty on the nature of the optimal policy and uncertainty on the candidates’ biases. Although voters know whether the candidate is left‐ or right‐wing, they do not know the extent of the bias. In this environment, discretion may benefit voters as it allows the elected politician to adjust his policies to the state of the world. The paper shows that the optimal set of promises must be a closed interval, whose size is decreasing in the expected bias of the candidate. An example where the set of types is finite shows that an increase in the variability of candidates’ types may either increase or decrease the voters’ willingness to grant discretion to politicians.     

Global stability and the choice of policy targets under rational expectations

It is shown that if the supply of capital is properly incorporated in a macromodel with rational expectations, the government cannot peg its expenditures wholly in real terms since, otherwise, the economy will be globally unstable.     

Price level determinacy and the choice of policy targets under rational expectations

We show that in a conventional macro model with rational expectations, the government can use monetary policy to peg real interest rates, and still attain a determinate price level provided it also pegs some nominal policy variable, e.g., nominal expenditures.     

Public utility pricing and capacity choice under risk: A rational expectations approach

Over the last two decades there has developed an extensive literature on the theory of public enterprise pricing and capacity choice under uncertainty. A major concern has been the analysis of the rationing of consumers in states in which demand exceeds available system capacity. An issue that has been largely ignored however is the effect that consumers' probability of being rationed (system reliability) has on their demand for the service. In this paper we develop a model that reflects the intuitive notion that a more reliable service is a higher quality service, so that an increase in system reliability shifts consumers' demand curves outward. We then incorporate this effect into our analysis of the utility's optimal pricing and investment rules. Finally, we demonstrate how the value of reliability can, in principle, be estimated from generally available demand data.     

On the analogy between field experiments in economics and clinical trials in medicine

Randomized experiments, as developed by Esther Duflo and Abhijit Banerjee at the Abdul Latif Jameel Poverty Action Lab (J-PAL), offer a novel, evidence-based approach to fighting poverty. This approach is original, in that it imports the methodology of clinical trials for application in development economics. This paper examines the analogy between J-PAL’s field experiments in development economics and randomized controlled trials (RCTs) in medicine. RCTs and randomized field experiments are commonly treated as identical, but such treatment neglects some of the major distinguishing features that make each experiment specifically apt for use in its respective field. The central claim of this paper is that the analogy between medicine and development economics is incomplete because the central dimensions of RCTs are not simply different but altogether lacking in J-PAL’s approach. This weakens both the political and the theoretical power of such experiments in development economics.     

Economic impact of industry-sponsored clinical trials of pharmaceutical products in Austria

Abstract

Aims: Modern pharmaceutical product development is a long and complex process associated with significant investments by pharmaceutical companies. The innovative pharmaceutical industry accounts for the vast majority of expenditures in clinical trials of potential new pharmaceuticals and therefore generates economic activity within a country. The aim was to assess the far-reaching economic impact of industry-sponsored clinical-trials (ISCTs) of pharmaceutical products for the healthcare system and the national economy.

Materials and methods: The study approach was based on three analytical steps. First, a survey among 15 pharmaceutical companies in Austria was conducted to evaluate the annual number of ISCTs subdivided according to trial phase, therapeutic areas and associated employees. Second, the monetary value of treatments performed in ISCTs was calculated based on a sample of clinical-trial protocols. Finally, the macroeconomic impact, measured in terms of value-added and jobs created by the conducted ISCTs, was calculated using Input–Output analysis by applying an extended Leontief-model.

Results: The study demonstrated that €116.22 million spent in ISCTs generated a total value added of €144 million, €74 million direct, in 2018. Each year a medical treatment value of €100 million was financed through 463 ISCTs, with an average value of medical treatment of €37,068 per recruited patient. This represents a significant 0.3% of annual current health-expenditures. In summary, each Euro invested by the pharmaceutical industry in ISCTs generates €1.95 for the Austrian economy. ISCTs also created and secured employment in the extent of 2,021 full-time-equivalents, thus resulting in an employment multiplier of 1.66.

Conclusions: In conclusion, conducting clinical-trials by pharmaceutical industry—beside its importance in its own domain—results in tangible benefits and a positive macroeconomic impact that contribute to the sustainability of the Austrian healthcare system by complementing its limited resources. Furthermore, it is a non-negligible factor in locational and industrial policy.     

Dynamic asset allocation and consumption under inflation inequality: The impacts of inflation experiences and expectations

Differences in spending patterns and in price increases across goods and services lead to the unequal inflation experiences of households (called inflation inequality). These differences then cause disagreements in inflation expectations and eventually have a significant effect on households’ asset allocation and consumption decisions. The asset allocation model in this paper explains how inflation experiences affect household investment and consumption through corresponding inflation expectations, which are characterized by long-term expected inflation, the impact coefficient of the expected inflation and the correlation between expected inflation and the risky return. Using China's economic data, the empirical results show that significant differences in inflation expectation arise from income gap, regional inequality, different inflation measures and economic sector spending differences. Using the estimated coefficients, the calibration results have policy implications that households need more financing channels to resist inflation, especially in rural areas and in the raw material sector.     

Inflation targeting and inflation expectations in Mexico

In this article we analyse inflation expectations in Mexico. After a review of the theoretical and empirical literature, we apply unit root, normality and cointegration tests to the data provided by Banco de México (Banxico) in the Survey on the Expectations of the Private Sector Economics Specialists. Our results reject the null hypothesis of normality for inflation expectations over the period 2004:01–2011:12. The exchange rate has become one of the most relevant variables in the transmission mechanism of monetary policy in a small open economy. In this regard, we show the existence of a long-run relationship between nominal exchange rate and interest rate where inflation expectations matter for long-term dynamics.     

Optimistic income expectations and meeting those expectations: What matters for well-being in a developing country?

This paper examines the impact of income expectations and the extent to which these expectations are met, on subjective well-being. For the Indonesian sample, expectations had asymmetric effects on well-being, with pessimistic expectations having a strong adverse effect compared with a weak positive effect of optimism. Optimism improves only females' and not males' well-being while pessimism has the reverse effect on both genders' well-being. Although unmet expectations reduced well-being for all subgroups, the mediating role of social capital to negate this was limited to some subgroups. Results point toward a gendered policy agenda and the rural–urban divide to improve well-being.     

Dynamic factor demands and market structure under rational expectations: some estimates for the Italian manufacturing system

This paper deals with a dynamic model of the behaviour of firms under rational expectations. The adjustment cost framework is followed to describe production technologies. The objective of firms is to maximize the stream of future profits under rational expectation. First-order conditions for the optimum are derived with respect to input demands and one output supply. The output market structure is modelled in order to test price taking behaviour. The adjustment costs of quasi-fixed inputs are internal and interrelated. The model is estimated for the Italian manufacturing system with encouraging results.     

Rationalizable expectations and sunspot equilibria in an overlapping-generations economy

There are two theories for the treatment of market uncertainty: rationalizable expectations and sunspot equilibria. This paper shows how the game-theoretic solution concept of rationalizable expectations can be applied to an overlapping-generations exchange economy. Some general properties of these equilibria are discussed. It is shown that rationalizable-expectations equilibria are the predictions yielded by considering sunspot equilibria in which probability beliefs may differ across individuals. This result allows for a new interpretation of sunspot equilibria and helps to understand their relevance.     

Quantification and characteristics of household inflation expectations in Switzerland

Inflation expectations are a key variable in conducting monetary policy. However, these expectations are generally unobservable and only certain proxy variables exist, such as surveys on inflation expectations. This article offers guidance on the appropriate quantification of household inflation expectations in the Swiss Consumer Survey, where answers are qualitative in nature. We apply and evaluate different variants of the probability approach and the regression approach; we demonstrate that models that include answers on perceived inflation and allow for time-varying response thresholds yield the best results; and we show why the originally proposed approach of Fluri and Spörndli (1987) has resulted in heavily biased inflation expectations since the mid-1990s. Furthermore, we discuss some of the key features of Swiss household inflation expectations, i.e. the fact that there has been a shift in expectation formation since 2000 (expectations are better anchored and less adaptive, and there is lower disagreement of expectations). We suggest that this may be linked to the Swiss National Bank’s adjustment of its monetary policy framework around this time. In addition, we outline how expectation formation in Switzerland is in line with the sticky information model, where information disseminates slowly from professional forecasters to households.     

A model of inflation and expectations in Latin America

This paper attempts to overcome certain shortcomings in the existing tests of various theories of inflation and cyclical income growth. It does so by appending a simple model of expectations formation to a simple macroeconomic simultaneous equation model of aggregate supply and demand. Some of the theoretical building blocs are reformulated so as to be more realistic for developing countries. Simultaneous equation estimation techniques are applied to a pooled sample of time series data for 16 Latin American countries. The authors provide empirical evidence supporting the revised hypotheses and offering new insights into the relationships among the actual and expected rates of inflation, the rate of income growth, and the growth rate of the money supply.     

Imperfect competition and the modelling of expectations in macroeconomics

We show that when a model of the macroeconomy is based on imperfect, rather than perfect, competition, this may increase the problem of how to model agents’ expectations. We provide a simple example using an overlapping-generations economy with the potential for unemployment. Under certain assumptions about how consumers migrate between locations between the first and second periods of their lives, this extra issue regarding expectations arises. Imperfect competition may increase agents’ forecasting difficulties because they have to forecast not only future equilibrium prices, but also future out-of-equilibrium prices, and by definition the latter are never actually observed.

Inflation surprises and inflation expectations in the Euro area

In the second half of 2012, euro area inflation started declining and reached historical lows at the end of 2014. Market-based measures of inflation expectations also declined to unprecedented levels. During this disinflationary period, inflation releases have often surprised analysts on the downside. We provide evidence that inflation ‘surprises’ have significant effects on inflation expectations. The sensitivity of inflation expectations to the surprises, which has varied over time, disappeared after the introduction of the Asset Purchase Programme by the European Central Bank.     

Heterogeneous expectations and capital intensity in an overlapping-generations model

In this paper we examine the macroeconomic effects of heterogeneous probability beliefs in the context of a modified Diamond-type overlapping-generations model. We derive the effect of an increase in the degree of heterogeneity on the steady-state savings rate, the capital intensity, and welfare.     

Inflation and output growth uncertainty in individual survey expectations

This paper studies uncertainty using the ECB Survey of Professional Forecasters’ data. Both inflation and real GDP growth forecasts at the micro level are considered. Our analysis indicates that individual inflation uncertainty is closely related to output growth uncertainty. Individual forecasters seem to behave according to an uncertainty-augmented hybrid specification of the New Keynesian Phillips curve. We also find evidence that inflation uncertainty has a negative impact on economic activity by lowering output growth, boosting inflation and reducing the price-sensitiveness of aggregate supply.