Monetary policy and U.S. long-term interest rates: How close are the linkages?

The effect of monetary policy on long-term interest rates has been a question of interest in recent years. A number of papers, relying on single-equation estimation techniques, have presented evidence that long-term interest rates exhibit sizable and significant responses to unanticipated changes in the Federal Reserve's target federal funds rate. This paper examines these findings in light of conflicting findings from VAR studies, which indicate negligible effects of innovations in the federal funds rate on long-term rates. To address the issue we use a single-equation approach where unanticipated changes in the federal funds rate are measured as residuals from policy reaction functions. We also estimate VAR specifications, which incorporate information about the timing of changes in the Federal Reserve's target federal funds rate. Our single-equation estimates provide evidence of strong responses of long rates to unanticipated changes in the federal funds rate both for the Greenspan period and for a longer period back to the mid-1960s. It seems likely that estimated VARs for the post-1987 years are less successful in isolating monetary policy surprises than was the case for earlier years.     

Bond Rate,Loan Rate and Tobin's q in a Temporary Equilibrium Model of the Financial Sector

The paper sets up a portfolio model of the financial sector with markets for equity, government bonds, money and debt. The comparative statics of the temporary equilibrium are studied analytically and numerically. Subsequent simulations explore the reactions of financial markets in response to stylized oscillations of some of the exogenous variables. These include economic activity, income distribution, inflation, investors' sentiment, and banks' perceived bankruptcy risk of firms. Special emphasis is put on the resulting cyclical pattern of Tobin's q and the interest spread between loan rate and bond rate.     

Immigration,uncertainty and macroeconomic dynamics

This paper examines the macroeconomic effects of rising migration uncertainty in four advanced economies (i.e. US, UK, Germany and France). Migration uncertainty is first captured by the Migration Policy Uncertainty (MPUI) and the Migration Fear (MFI) news-based indexes developed by Baker et al. (Immigration fears and policy uncertainty, 2015), and then by a novel Google Trend Migration Uncertainty Index (GTMU) based on the frequency of Internet searches for the term ‘immigration’. VAR investigations suggest that the macroeconomic implications of rising migration uncertainty differ across countries. Moreover, news-based and Google search-based migration fear shocks generate different macroeconomic effects. For instance, in the US (France), MPUI, MFI and GTMU shocks all improve (undermine) production and labour market conditions in the medium run. For Germany and the UK, mixed evidence is found, suggesting that increasing media attention on migration phenomena and rising population's interest in migration-related issues influence people's mood differently. The observed heterogeneity in the macroeconomic effects of rising migration uncertainty can be explained by cross-country gaps in (a) the level of labour market rigidity, (b) the degree of people's happiness and life satisfaction and (c) the percentage of graduates.     

Comment on “Speculations on the Future of Advertising Research”

Abstract

David Stewart's “Speculations…” are based on the existence of a crisis in advertising. This comment takes a contrary position, premised on the derived and cyclical nature of advertising demand.     

The Role of Simulations in International Management Education

Abstract

Following a brief discussion of the “invention” of simulation games 5,000 years ago, this article discusses developments in the field of management simulations during the past forty years, with particular emphasis on international management simulations.

The author believes that the recent history of management games can be sub-divided into three periods. During the first period (dubbed the “Pioneering Period”) from 1955 to 1969, North American schools were the most active users of simulations. During the second period, (termed the “Development Period”), from 1970 to 1984 management simulations became much more international in both their authorship and use. Mainframe computers began to be used in North America simulations during this period. During the most recent period, from 1985 to the present, (and titled “The Hi-Tech Period”), a significant number of international management simulations have appeared, and microcomputers are now widely used in management games.

Following a discussion of various predictions regarding of management simulations in general, the author makes a number of additional observations with respect to their future use in international education and training.     

The Depoliticization of Monetary Policy

In the past thirty years, it has been claimed that Republicans tend to favor relatively restrictive monetary policy while Democrats favor relatively accommodative monetary policy. Another claim is that, regardless of which political party is in power, monetary policy tends to be relatively restrictive during the first two years of an administration and relatively accommodative during its final two years. The present paper finds an absence of empirical evidence supporting either claim by restricting the sample period to the past quarter century (1982–2006). The depoliticization of monetary policy decisions probably reflects, among other factors, both the post-1970s new-Keynesian consensus in macroeconomic theory and the realization of political independence of the Federal Reserve System during the Volcker-Greenspan years. Editor’s note: After this article was submitted and accepted for publication by Business Economics, Mr. Tempelman took a position with the Federal Reserve Bank of New York. The views expressed are strictly those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System.     

The Perceived Value of Value Meals

Abstract

This study provides a new explanation as to why restaurants frequently sell value meals along with the meals' components separately. We argue that beyond the traditional economic model of extracting the surplus from customers with extreme valuation for particular dishes, mixed bundling unintentionally creates a decoy price effect. With mixed bundling, the value meal might seem more attractive than with pure bundling, generating more profits for the restaurant. The combination of extracting additional consumer surplus and the increased demand due to decoy pricing makes the mixed bundling strategy a highly valuable marketing tool for restaurants. We test the theory by measuring subjects' willingness to pay for value meals while varying the prices of the meal's components that appear separately on the menu. The results strongly support our prediction that customers' willingness to pay for a value meal can be manipulated by controlling the price of the components.     

Measuring customer orientation of a salesperson: Modifications of the soco scale

This article addresses modifications made to the Michaels and Day (1985) version of the SOCO (selling orientation customer orientation) scale. Two modifications were made on the basis of pilot interviews conducted with industrial buyers. First, the scale items were changed to refer to a particular salesperson rather than salespeople. Second, the 9-point scale was changed to a more conventional 7-point scale. Further, in order to provide all respondents with the same frame of reference, scale instructions were modified to refer to the respondent's most recent buying situation. Scale properties were evaluated using the updated paradigm suggested by Gerbing and Anderson (1988). Unidimensionality of the scale was insured through the use of a confirmatory factor analysis program. The reliability of the scale is higher than that reported by Saxe and Weitz (1982), and Michaels and Day (1985). Convergent and discriminant validity were also assessed. The scale as modified in this article can be used to assess buyers' perceptions of salespeople and could provide sales managers with a means of assessing long-term aspects of a salesperson's performance. © 1995 John Wiley & Sons, Inc.     

The volatility effect of diaspora's location

Remittances can transmit volatility from host to home countries for some common patterns of diaspora's geographical distribution. In a migration portfolio model, the overall risk of volatility of any set of diaspora location is decomposed into a contagion and a concentration risks: a diaspora located in more volatile destinations induces a higher contagion risk, while a diaspora located in few destination countries increases the concentration risk. A series of estimations on a large panel of developing countries over 1995–2015 provide evidence for these two risks. Estimation of a structural model confirms that the geography of diaspora has an indirect impact on the origin country's aggregate instability through remittances.     

Structural change and cumulative causation: A Kaldorian approach

This paper presents a multisectoral model based on Kaldor's approach to explain the importance of structural change and cumulative causation. Divergence in countries' growth rates in Kaldorian models are explained either by different degrees of increasing returns among sectors on the supply side or by different income elasticities of exports and imports on the demand-side, but it is not explained by both factors together. In this vein, a multisector growth model that combines different sectoral income elasticities and different sectoral increasing returns is built to explain how structural changes toward high-tech industries can trigger a process of cumulative causation and ensure higher growth rates in the long run.     

Why Have U.S. Prices Become Independent of Business Cycles?

This article analyzes the issue of price cyclicality from a Post Keynesian perspective. It shows that there are two key factors at the center of the mechanism for the sudden U.S. transition from counter‐cyclical to a‐cyclical price movement in the early 1980s. First, the cost pass‐through policy has been changed to ensure that the cyclical changes of input prices and/or labor productivity are absorbed more thoroughly and are thus reflected more frequently in profit markups than occurred prior to 1984. This relatively increased adaptability of the profit markups in the aggregate sense between the pricing periods cushions the direct effect of cyclical changes in the cost base on price cyclicality. Second, a structural change in the U.S. labor productivity's cyclical property has generated cost‐base stability during the post‐1984 period. Declines in hiring and firing costs and cutbacks in social security benefits have led the labor discipline effect to dominate the labor hoarding effect. This has allowed labor productivity to increase as the unemployment rate rises; thus, the cost base cyclicality has weakened, and prices have become less cyclical since 1984.     

An Econometric Model of the Circuit of Capital

The circuit of value outlined in the second volume of Marx's Capital provides a coherent framework for the characterization of macroeconomic phenomena from a classical perspective. This paper builds on Foley's (Journal of Economic Theory, 28 (1982), pp. 300–319) formal reconstruction of the circuit to derive estimable forms for its three critical mechanisms: the production, realization and recommittal lags. The entire model is then estimated for the United States over the period 1948–89 on the basis of the Shaikh and Tonak (Measuring the Wealth of Nations: The Political Economy of National Accounts, Cambridge University Press, New York, 1995) data set, and the results are used to explore a number of current controversies, including (on the basis of simulation exercises) the consequence of various deficit reduction proposals.     

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.     

Indeterminacy and fundamental reduced form representations of DSGE models

Dynamic stochastic general equilibrium (DSGE) models are known to exhibit indeterminacy—that is, equilibrium nonuniqueness—under realistic parameterizations. This paper studies how the potential for indeterminacy impacts on the possibility of recovering a DSGE model's structural shocks via empirical vector autoregressions (VARs), which in turn requires the model's reduced form representation to be fundamental. By means of a simple example, we first establish that indeterminacy is neither necessary nor sufficient for (non)fundamental representations to arise. We then investigate the relationship between indeterminacy and nonfundamentalness in the context of a general class of linearized DSGE models, which nests the New Keynesian framework as a special case. It is shown that an indeterminate equilibrium model may generically admit a fundamental moving average representation, even when its determinate counterpart always involves nonfundamentalness. As a main implication, checking for existence of a VAR representation of a DSGE model's equilibria cannot be regarded as an indirect test for the indeterminacy hypothesis.     

Green intentions under the blue flag: Exploring differences in EU consumers’ willingness to pay more for environmentally‐friendly products

Recent research on consumer social responsibility highlights the need to examine psychological drivers of environmentally‐friendly consumption choices in a global context. This article investigates consumers’ willingness to pay (WTP) more for environmentally‐friendly products across 28 European Union (EU) countries, using a sample of 21,514 consumers. A multigroup structural equation modeling analysis reveals significantly different patterns and relationships, in how (a) subjective knowledge about the product's environmental impact, (b) environmental product attitudes, and (c) the perceived importance of the products’ environmental impact influence consumers’ WTP more for environmentally‐friendly products across countries. The hypothesized model predicts WTP for 20 out of 28 countries and the findings show that a “one‐size‐fits‐all” approach is inadequate in capturing the heterogeneity of EU consumers. Hosfstede's cultural dimensions of uncertainty tolerance and individualism explain differences in WTP for environmentally‐friendly products across EU countries. Business, marketing communications, and policy making implications are discussed.     

Is the US fiscal deficit sustainable?: A fractionally integrated approach

In this paper, we examine if sustainability of the US fiscal deficit holds by means of studying the univariate properties of the difference between expenditures and public revenues using a methodology based on fractional processes. Furthermore, we incorporate the possibility of structural breaks in the deficit process. The results show that when allowing for a break in the mid-1970s, the public deficit in the US is an I(d) process with the fractional integration parameter d being slightly less than unity, implying that the fiscal deficit is mean reverting, and thus, sustainable, though the adjustment process towards equilibrium will take a very long time.     

Structural change and environmental impact

Although structural change in many industrialized countries has increased since the early 1970s, the environmental policy aspects of this change have hardly been investigated. Using a set of four indicators, this study examines the correlation between structural changes and environmental pollution in thirty-one Eastern and Western industrialized countries from 1970 to 1985.     

The interaction between foreigners' trading and emerging stock returns: Evidence from Turkey

Using monthly foreign flows data on Istanbul Stock Exchange (ISE) and employing a structural VAR model, we analyze the interaction between foreigners' trading and emerging stock returns. In contrast to most of the available theory and repeated previous findings on other markets, foreign investors negative-feedback-trade with respect to past local returns in ISE, however only in rising markets and especially under macroeconomic instability. Net foreign flows forecast future market returns, but not individual stock returns. Price impacts are permanent, suggesting that foreigners' trading incorporates information. Overall, results reject previous conclusions that foreigners are uninformed positive feedback traders: rather, they are a heterogeneous group dominated by sophisticated investors able to rationally adjust their trading style in line with the market's prevailing characteristics.     

Alliance-Based New Product Development Success: The Role of Formalization in Exploration and Exploitation Contexts

Purpose: Although alliances offer tremendous strategic potential, firms still struggle to successfully manage new product development alliances (NPD alliances). A prominent explanation for this is the institutional economics' view (see Williamson 1985 Williamson, O. E. 1985. The economic institutions of capitalism: Firms, markets, relational contracting, New York: The Free Press.  [Google Scholar]) that, in general, a key disadvantage of alliances versus vertical integration is that administrative control mechanisms are weaker. Here, a key control mechanism is formalization (the use of explicit rules to govern business activities).

However, regarding formalization's influence on both NPD and alliance performance, conceptual views and empirical findings are mixed, which suggest that unexamined variables moderate formalization's influence on NPD performance.

Therefore, it is surprising that there is no research on whether formalization's influence differs in alliances pursuing an NPD exploration strategy versus an NPD exploitation strategy because both (1) require varying levels of freedom of action and adherence to procedural rules to achieve success, and (2) are extensively employed in NPD.

Further, there is also surprisingly little intrafirm NPD and non-NPD alliance research on formalization in exploration and exploitation contexts because here as well formalization's influence on performance (1) is central, and (2) differs based on the project's innovative and learning intent.

The purpose of this research is to begin to close important literature and industry practice knowledge gaps about formalization's influence on NPD alliance performance in exploitation versus exploration strategic contexts.

Originality, value, and contribution: This research is the first examination ever of two key NPD strategies—exploration and exploitation—in an NPD alliance context. The research sheds light on conflicting views about formalization's NPD performance-enhancing and inhibiting aspects, and offers implications for industry best practices.

Methodology/approach: Empirical examination of survey data from 151 NPD alliances via hierarchical regression and tests of group moderation.

Findings: Results shed light on when and why formalization moderates the influence of key fundamental alliance success mechanisms on NPD alliance performance based on strategic context.     

Understanding the Development of IOS-Based Trading Partner Relationships: A Structural Model with Empirical Validation

This study develops a research model that explains the interorganizational system (IOS) network development process in the buyer-supplier relationship. Particular attention is paid to the antecedents and consequences of two types of influence strategies— exercising power and offering IOS support—that a buyer firm often uses in increasing IOS usage with its suppliers. The research model is empirically tested with data obtained through a field survey from a sample of 233 suppliers, each exchanging electronic data interchange (EDI) documents with a nationally known retailing buyer in the United States. We find that the buyer's decision to offer EDI-related support to a supplier is negatively associated with the transaction volume with the supplier but positively with the supplier's IT capabilities as well as the supplier's transaction-specific investments made toward the relationship with the buyer. On the other hand, the buyer's decision to exercise power to a supplier is found to be negatively associated with the transaction volume between the trading partners. Our findings also indicate that offering EDI support, rather than exercising power, is more effectual in inducing greater EDI usage between the trading partners. Finally, the buyer's EDI support is found to be positively associated with suppliers' perceived benefits of using EDI in the relationship that, in turn contributes to more voluntary use of EDI with the buyer.