Sources of Fluctuations in the Real Exchange Rates and Trade Balances of the G‐7: A Sign Restriction VAR Approach

This paper estimates structural vector autoregression models of output, the real exchange rate and trade balance for the group of seven leading advanced economies (G‐7). Unlike previous studies, we do not impose long‐run purchasing power parity as an identifying assumption; instead, the shocks underlying the model are structurally identified using a set of theory‐consistent sign restrictions. Empirical results show that nominal shocks account for most of the long‐run variability in trade balances across the G‐7 countries. We are able to attribute this finding to long‐run movements in the real exchange rate, as the real exchange rate is significantly affected by nominal shocks in the long run.     

Plea bargaining: on the selection of jury trials

We consider a model of the criminal court process, focusing on plea bargaining. A plea bargain provides unequal incentives to go to trial because innocent defendants are more willing to plead not guilty. We show that the court process implements the preferences of the person or group who is most concerned about wrongful conviction. If a prosecutor is more concerned about wrongful conviction than the jury, the prosecutor can shape the defendant pool at trial so that jurors act according to prosecutor’s preferences against judicial mistakes. Our model also connects insights from strategic jury models that usually omit plea bargaining with the actual criminal court process where most cases are resolved through plea bargaining. As an example, we show that the inferiority of the unanimity rule established in Feddersen and Pesendorfer (Am Polit Sci Rev 92(1):23–35, 1998) persists in spite of the addition of plea bargaining.     

CAN SECRET INTERVENTION BE COMPATIBLE WITH A NON‐PROFITMAKING CENTRAL BANK AND A FUNDAMENTAL‐CONSISTENT TARGET?

The coexistence of secret intervention operations and “the signaling channel” (Mussa. The Role of Official Intervention, 1981) seems confusing. Vitale ( Journal of International Economics, 49, 1999, 245–267) resolves this puzzle by employing an asymmetric information framework and an assumption of a fundamental‐inconsistent target for the exchange rate. Ferré and Manzano ( International Journal of Finance and Economics, 14, 2009, 378–393) follow Vitale's microstructure framework and argue that the central banks' profitability motivation offers a rationale for their secret intervention even under a target consistent with the fundamentals. However, that the authority uses its superior information to obtain speculative profits through secret intervention in the market is not a typical goal for central banks. To theoretically explain the opaqueness in non‐profitmaking central banks' exchange rate policies, we employ a model of a central bank's optimization by considering that no bank really knows the exact fundamental rate and they take into account the possible bad consequences of announcing the intervention. We also show that, in passing the bank's private information to market participants, a bank's announcement of the intervention size is equivalent to revealing its target rate. (JEL E58, F39)     

The Finance-growth Relationship and the Level of Country Development

We examine whether dynamic impacts of banks and stock markets on economic growth are related to the level of country development. Using annual data from 15 industrial and 15 emerging countries over the period from 1976 to 2005, we find that banking development and stock market development may have distinct short-and long-run impacts on economic growth at various stages of country development. Financial development is not always a panacea for economic growth. Most importantly, our findings suggest that the fully functional tools to render stable growth for a country may depend on the level of the country’s development.     

Fractional Integration of Nominal Exchange Rates: Evidence from CEECs in the Light of EMU Enlargement

This paper uses fractional integration models to describe the long‐run dependence of nominal exchange rates in Central and Eastern European countries (CEECs). The analysis is validated using nonparametric, semiparametric and parametric techniques. From comparing the results across the three approaches, it was clear that mean reversion takes places only for the euro exchange rates in Bulgaria, Estonia, and Slovenia. Other exchange rates based on the euro also display mean reversion with the parametric methods. For the US dollar rates, the unit‐root null hypothesis cannot be rejected in any single country, indicating that shocks affecting the exchange rates against the US dollar are of a permanent nature, while those directed against the euro are less persistent, and tend sometimes to disappear in the long run. Policy implications are derived.     

On a family of data-based transformed models useful in forecasting technological substitutions

This paper examines, via real data, some well known models for technology substitution analysis. We propose a family of data-based transformed models that will include the models under examination as special cases. The basic thrust of the paper is the recognition that for technology substitution analysis, the observations are time series data and hence are not independent. Also, the functional form of the model should be determined by both theoretical considerations as well as the data on hand. This suggests that the traditional ordinary least squares procedure used in estimating the parameters and the resulting forecasting procedures are not adequate. The existing models examined here are Fisher–Pry, Gompertz, Weibull, and Normal. We stress the statistical aspects of the models and their relative merits in terms of predictive power. The criteria used for the purpose of comparison are the mean squared deviation and the mean absolute deviation of the predicted values compared with the actual observations.     

EFFECTS OF A CHILD'S DISABILITY ON AFFECTED FEMALE'S LABOUR SUPPLY IN AUSTRALIA

Australia has experienced a growing rate of child disability, with the rate of 3.7 per cent in 1998 increasing to 4.3 per cent in 2003 for children aged under four years and from 9.5 per cent to 10 per cent for children aged five to 14 years in the same period. However, surprisingly no study has examined the economic effects of child disability in the Australian context. This paper attempts to quantify the link between a child's disability and the work behaviour of the female in the affected family. Our findings provide empirical justifications for the current policy linking the severity level of child disability to the assessment of eligibility for Carer Payment (Child). We also found that child disability has different impacts on the labour market activities of married women and non‐married women. It appears that child disability imposes a greater hardship on non‐married women than on married women in terms of work choice decision. Once non‐married women manage to enter the labour force, they may have to stay on to work as usual even if they have a disabled child, because they may not have other family members to turn to for help as married women do.     

An alternative approach for portfolio performance evaluation: enabling fund evaluation relative to peer group via Malkiel’s monkey

We propose an implementable portfolio performance evaluation procedure that compares a portfolio with respect to the portfolios constructed by an infinite number of Malkiel’s blindfolded monkeys, or equivalently the whole enumeration of all possible portfolios. We argue that this approach exhibits two main advantages. First, it does not require any benchmark portfolios because a portfolio is being compared to an infinite number of portfolios. Second, it is market condition invariant. Since the market conditions are already reflected in the portfolio performances of an infinite blindfolded monkeys, our measure of portfolio performances is invariant to volatile market conditions.     

Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence

When producing International Financial Reporting Standards (IFRS), one of the main goals of the International Accounting Standards Board (IASB) was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in achieving this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK generally accepted accounting practices (GAAP) and IFRS. Results indicate that the value relevance of forecasted earnings is significantly lower under IFRS while the value relevance of reported earnings is significantly larger. These findings suggest that IFRS substitutes price‐relevant information previously provided to the market in the form of analyst forecasts with information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal and points towards IFRS forecasts being more accurate and less dispersed than UK GAAP forecasts. This, in turn, implies that analysts are able to provide more informative forecasts under IFRS than under pre‐IFRS regimes and that the aforementioned substitution effect is not a consequence of any decrease in the quality of forecasts under the new regime.