Where’s the Money? An Investigation into the Whereabouts and Uses of Australian Banknotes

The Reserve Bank of Australia is the sole issuer and redeemer of Australian banknotes, but between issuance and destruction there is little information about where banknotes go or what they are used for. We estimate the whereabouts and uses of Australian banknotes, and find that 15–35 per cent are used to facilitate legitimate transactions, 4–7 per cent are used for transactions in the shadow economy, while the remainder are non-transactional. The vast majority of non-transactional banknotes are likely to be hoarded, and we estimate that 5–10 per cent of outstanding banknotes are lost or collected.     

Consumer expectations: a new paradigm

Business Economics - Most scholars view the expectations held by consumers to be little more than uninformed guesses. Nonetheless, research has repeatedly found a close correspondence between...     

Nonlinear models for strongly dependent processes with financial applications

This paper is motivated by recent evidence that many univariate economic and financial time series have both nonlinear and long memory characteristics. Hence, this paper considers a general nonlinear, smooth transition regime autoregression which is embedded within a strongly dependent, long memory process. A time domain MLE$MLE$ with simultaneous estimation of the long memory, linear AR$AR$ and nonlinear parameters is shown to have desirable asymptotic properties. The Bayesian and Hannan–Quinn information criteria are shown to provide consistent model selection procedures. The paper also considers an alternative two step estimator where the original time series is fractionally filtered from an initial semi-parametric estimate of the long memory parameter. Simulation evidence indicates that the time domain MLE$MLE$ is generally superior to the two step estimator. The paper also includes some applications of the methodology and estimation of a fractionally integrated, nonlinear autoregressive-ESTAR$ESTAR$ model to forward premium and real exchange rates.     

WILL BUSINESS CYCLES IN THE EURO AREA CONVERGE? A CRITICAL SURVEY OF EMPIRICAL RESEARCH

Abstract.  This survey of business cycle synchronization in the European monetary union focuses on two issues: have business cycles become more similar, and which factors drive business cycle synchronization. We conclude that business cycles in the euro area have gone through periods of both convergence and divergence. Still, there is quite some evidence that during the 1990s business cycle synchronization in the euro area has increased. Higher trade intensity is found to lead to more synchronization, but the point estimates vary widely. The evidence for other factors affecting business cycle synchronization is very mixed.     

Investor recognition and stock returns

It is well established that investment fundamentals, such as earnings and cash flows, can explain only a small proportion of the variation in stock returns. We find that investor recognition of a firm’s stock can explain relatively more of the variation in stock returns. Consistent with Merton’s (J Finance 42(3):483–510, 1987) theoretical analysis, we show that (i) contemporaneous stock returns are positively related to changes in investor recognition, (ii) future stock returns are negatively related to changes in investor recognition, (iii) the above relations are stronger for stocks with greater idiosyncratic risk and (iv) corporate investment and financing activities are both positively related to changes in investor recognition. Our research suggests that investors and managers who are concerned with firm valuation should consider investor recognition in addition to accounting information and related investment fundamentals.     

Evidence on Simulation Inference for Near Unit-Root Processes with Implications for Term Structure Estimation

The high persistence of interest rates has important implicationsfor the preferred method used to estimate term structure models.We study the finite-sample properties of two standard dynamicsimulation methods—efficient method of moments (EMM) andindirect inference—when they are applied to an first orderautoregressive (AR[1]) process with Gaussian innovations. Whensimulated data are as persistent as interest rates, the finite-sampleproperties of EMM differ both from their asymptotic propertiesand from the finite-sample properties of indirect inferenceand maximum likelihood. EMM produces larger confidence boundsthan indirect inference and maximum likelihood, yet is muchless likely to contain the true parameter value. This is primarilybecause the population variance of the data plays a much largerrole in the EMM conditions than in the moment conditions foreither indirect inference or maximum likelihood. These resultssuggest that, under Gaussian assumptions, indirect inference(if practical) is preferable to EMM when working with persistentdata such as interest rates. EMM's emphasis on the populationvariance strongly enforces stationarity on the underlying process,so this same reasoning suggests that EMM may be preferable insettings where stability and stationarity are important anddifficult to impose.     

The Euro and International Equity Flows

We use a new panel data set on bilateral gross cross-border equity flows between 14 countries. We fit a “gravity model” to these data and a strictly comparable set of data for manufactures trade between these countries. The results are strikingly similar, although the coefficient on the distance variable is lower for equity than for trade flows (but still highly significant). We use the results to throw some light on the likely consequences of unifying the European equity markets.J. Japan. Int. Econ.December 1998,12(4), pp. 406–423. London Business School and CEPR, Sussex Place, Regent's Park, London NW1 4SA, United Kingdom and London School of Economics, London WC2 2AE, United Kingdom.Copyright 1998 Academic Press.Journal of Economic LiteratureClassification Numbers F21, F3.