HOW RELIABLE ARE CYCLICALLY ADJUSTED BUDGET BALANCES IN REAL TIME?

Cyclically adjusted budget balances (CABs) are often used to provide an indication of the structural state of public finances. This paper analyzes the reliability of these figures in real time. In a test of the ability to forecast the “final data,” we find that real‐time CABs are outperformed by a simpler methodology. Furthermore, we find that real‐time CABs have low power in detecting fiscal slippages and in correctly identifying fiscal improvements. Finally, we find that CABs are systematically less reliable under conditions of poor or deteriorating public finances, which means they are at their most unreliable precisely when they are needed most. (JEL H62, H87)     

The Use of Trade Association Disclosures by Investors and Analysts: Evidence from the Semiconductor Industry*

This paper investigates the relation between industry-wide information disclosures by the trade association for the semiconductor industry and both share prices and analyst forecasts. Such disclosures may have little impact on investors and analysts, since prior theoretical research suggests that trade associations may be unable to secure reliable data from firms in an industry. At the same time, such disclosures may be important, since prior empirical research suggests that share prices and analyst forecasts reflect industry-wide earnings effects earlier than firm-specific effects. We document significant stock price movements on release dates of industry Flash Reports by the Semiconductor Industry Association (SIA) each month that contain aggregate industry data on new orders and shipments. The magnitude of the price revisions on Flash Report disclosure dates is positively associated with changes in the numbers disclosed and varies across sample firms in a manner associated with identifiable characteristics of the firms. Further tests indicate that the Flash Report provides mainly forward-looking information on new orders that is linked to firm-specific sales changes and has explanatory power for quarterly stock prices beyond firm-specific earnings. This information is used by security analysts mainly in assessing the persistence of firm-specific quarterly sales changes. Our findings support the hypothesis that the SIA is able to obtain data from firms, compile it into reliable aggregate statistics, and then distribute these statistics in a timely fashion.     

TRANSACTION COST IMPAIRMENTS TO INTERNATIONAL TRADE: LESSONS FROM EGYPT

Increasing evidence indicates the relative importance of transaction costs in international market penetration by LDC manufactured goods exporters. This paper identifies the sources and nature of these costs and recommends policies capable of helping LDC exporters overcome transaction cost-based obstacles to such exports. Data for the analysis are from questionnaires addressed to samples of manufactures exporters and trading intermediaries in Egypt.     

Hayek Too Lenient on Socialist Calculation

Professor Hayek( JEA 2.3) allowed that collectivist planning, although practically impossible, could conceivable work in theory . Andrew Melnyk shows that Ludwig von Mises had demonstrated in 1949 that it is just as impossible in theory as in practice.     

Index Options: The Early Evidence

Index options became the most important traded contracts during their first year of existence. Two contracts, namely those on the S&P100 and the Major Markets Index, have a trading volume which typically surpasses the trading volume in all individual stock option contracts. In this paper, we examine the pricing of the options on the S&P100 and the Major Markets Index. Using intra-day prices, we find the options frequently violate the arbitrage boundary, put/call parity, and are substantially mispriced relative to theoretical values. Our results suggest that tests of option pricing models may be more difficult than previously realized due to nonsynchronous prices, even using “real-time” data from the exchanges.     

Comment:The Statistical Relationship between the Money Supply and the Public Sector Borrowing Requirement

A controversy has recently broken out as to whether the PSBR influences the money supply in the UK. Clearly if this relationship does not exist much of the basis of the government's macroeconomic strategy falls away since the government is acting on the assumption that by controlling the PSBR it will be able to control money supply growth and hence inflation in the medium term. This argument has been forcibly stated in the recent Green Paper on Monetary Control (Cmnd 7858) and is enshrined in the Medium-term Financial Strategy that was announced in the March Budget.     

Briefing Paper: Public expenditure control in the 1980s

The past few months have seen well-leaked ministerial bids for additional resources as the government prepares to consider allocations for the 1987-8 financial year. There has also been an increasing number of calls from within the Conservative party for more public expenditure as a response to poor performance in the polls. The first part of this Briefing Paper provides a new dimension to the discussion of future spending plans by analysing the record of controlling public expenditure in the past. It outlines the reasons for uncertainty and the various ways by which the government has sought to keep expenditure under control and the limitations of the available information. On the basis of this analysis we look at the future and conclude that the government is unlikely to be able to keep expenditure within the plan for the coming year, or indeed for the rest of the decade. There has been a regular pattern of overspending in the past and this cannot be entirely explained by such factors as the miners' strike and the Falklands. Another conclusion is that the government has so far chosen to be seen to be keeping plans for expenditure growth down rather than providing realistic plans which allow for overspending, and is likely to continue to do so in the future. At a disaggregated level, analysis of the pressures on three major spending departments – Defence, the DHSS and Education and Science – suggests that these are unlikely to be completely offset by efficiency savings. Indeed it may be more difficult to make savings in the future because of past success in eliminating inefficiencies and slack in the system. The freedom of manoeuvre available to the government, including the use of the reserve, adjusting proceeds from the privatisation programme and the possibility of adjusting the figures themselves, is less than in the recent past. And the greatest potential scope for manoeuvre – policy changes to cut spending in areas that have a significant impact on the totals – is effectively denied a government wishing to present a caring image in the run-up to a general election.     

Implementing Option Pricing Models When Asset Returns Are Predictable

The predictability of an asset's returns will affect the prices of options on that asset, even though predictability is typically induced by the drift, which does not enter the option pricing formula. For discretely-sampled data, predictability is linked to the parameters that do enter the option pricing formula. We construct an adjustment for predictability to the Black-Scholes formula and show that this adjustment can be important even for small levels of predictability, especially for longer maturity options. We propose several continuous-time linear diffusion processes that can capture broader forms of predictability, and provide numerical examples that illustrate their importance for pricing options.