Adaptive expectations, underparameterization and the Lucas critique

A striking implication of the replacement of adaptive expectations by rational expectations was the “Lucas critique,” which showed that expectation parameters, and endogenous variable dynamics, depend on policy parameters. We consider this issue from the vantage point of bounded rationality, where for transparency we model bounded rationality by means of simple adaptive expectations. We show that for a range of processes, monetary policy remains subject to the Lucas critique. However, there are also regimes in which the expectation parameter is locally invariant and the Lucas critique does not apply.     

Factor substitution,employment density and suburbanization

A model of an urban area producing one good for export is presented and solved to yield the employment density function. The production technology is a constant elasticity of substitution (σ) production function, unlike other models which use a Cobb-Douglas function. The shape of the employment density function proves to be sensitive to the elasticity of substitution and can diverge markedly from the usually assumed negative exponential form. The employment density function is a constant when σ = 0; always declines for positive σ but at an increasing rate if $\text{σ ≤}\text{1}\text{2}$; at either an increasing rate near the city center and decreasing thereafter or always at a decreasing rate if $\text{1}\text{2}\text{< σ < 1}$; and at a decreasing rate if σ ≥ 1. When the employment density function is differentiated with respect to σ, the sign of the derivative is positive near the city center and generally negative in the outer regions; the city seems to centralize. A decline in transport costs does not always suburbanize employment; it is contingent on the nature of the production technology.     

Intra-industry information transfers associated with earnings releases

The impact that a firm's earnings releases have on the stock prices of other firms in its industry is examined. For an identifiable sub-set of firms, the results are consistent with a significant information transfer occurring between the earnings release firm and the other firms in its industry. This subset is identified by examining the impact of the release on the stock price of the announcing firm. The magnitude of this impact is more significant for a sample of firms which have a larger percentage of their revenues in the same line of business as the earnings release firm vis-á-vis a sample with a lower percentage of their revenues from the same line of business. Alternative interpretations of the empirical results are also discussed. The research findings have implications for information content and market efficiency research and for research on policy issues associated with disclosure regulation.     

CAUSALITY TESTS OF SHORT SALES ON THE NEW YORK STOCK EXCHANGE

Published statistics on short sales of stock are used by investors as a technical indicator of market timing. Research on this topic is mixed. Findings in this article rely on causality tests that use white noise residuals generated from time-series analysis of short sales. Results indicate that specialists' short sales lead short sales of other investors, but these other investors are unable to take advantage of the information because a time lag exists in the published data.