Further Evidence on PPP Adjustment Speeds: the Case of Effective Real Exchange Rates and the EMS*

Two different approaches intend to resolve the ‘puzzling’ slow convergence to purchasing power parity (PPP) reported in the literature [see Rogoff (1996) , Journal of Economic Literature, Vol. 34.] On the one hand, there are models that consider a non‐linear adjustment of real exchange rate to PPP induced by transaction costs. Such costs imply the presence of a certain transaction band where adjustment is too costly to be undertaken. On the other hand, there are models that relax the ‘classical’ PPP assumption of constant equilibrium real exchange rates. A prominent theory put together by Balassa (1964, Journal of Political Economy, Vol. 72) and Samuelson (1964 Review of Economics and Statistics, Vol. 46) , the BS effect, suggests that a non‐constant real exchange rate equilibrium is induced by different productivity growth rates between countries. This paper reconciles those two approaches by considering an exponential smooth transition‐in‐deviation non‐linear adjustment mechanism towards non‐constant equilibrium real exchange rates within the EMS (European Monetary System) and effective rates. The equilibrium is proxied, in a theoretically appealing manner, using deterministic trends and the relative price of non‐tradables to proxy for BS effects. The empirical results provide further support for the hypothesis that real exchange rates are well described by symmetric, nonlinear processes. Furthermore, the half‐life of shocks in such models is found to be dramatically shorter than that obtained in linear models.     

Productivity Growth and Some of Its Determinants in the Deregulated U.S. Railroad Industry

This study analyzes the effects of an important postderegulation innovation on rail freight productivity: the elimination of cabooses and related crew members. It also analyzes the overall growth of productivity in rail freight between 1983 and 1997 (using a translog rail cost function estimated over a sample of Class I railroads between 1983 and 1997). The results indicate that elimination of cabooses and associated crew members from freight trains reduced costs by 5-8% on the typical Class I railroad in 1997, equivalent to an annual cost saving of $2 billion to $3.3 billion for all Class I railroads. Moreover, if Class I railroads had no other technological advances since 1983, their 1997 costs (with 1997 factor prices) would have been 36-43% higher than they in fact were. Finally, the results show that overall productivity growth in rail freight did not decelerate between 1983 and 1997; if anything, it accelerated slightly.     

Non‐linear Predictability of UK Stock Market Returns*

Linear predictability of stock market returns has been widely reported. However, recently developed theoretical research has suggested that due to the interaction of noise and arbitrage traders, stock returns are inherently non‐linear, whereby market dynamics differ between small and large returns. This paper examines whether an exponential smooth transition threshold model, which is capable of capturing this non‐linear behaviour, can provide a better characterization of UK stock market returns than either a linear model or an alternate non‐linear model. The results of both in‐sample and out‐of‐sample specification tests support the exponential smooth transition threshold model and hence the belief that investor behaviour does differ between large and small returns.     

Buildings for the Japanese information economy : Neighbourhood and resort offices

A new physical infrastructure to support activities based on communications and the transmission of information is being developed. Part of this infrastructure includes the construction of ‘intelligent’ buildings which are seen to play as important a role in improving efficiency of office workers as automation has played on the shopfloor of manufacturing industry. The location of these buildings is important. This article focuses on two types of experimental office development—neighbourhood offices and resort offices.     

Service Competitiveness – An Anglo-US Study

This article reports on the latest in a series of international comparisons of management practices and performance outcomes of industries in various countries. Here, it is the service industries in the UK and the US which come under the microscope. Among the companies surveyed, there were more world-class performers in the US than the UK, but also more low performers. The concluding part of the article is diagnostic – the authors also suggest measures which could improve performance.     

A note on incentive incompatibility under franchising

This note provides a formal demonstration of the incentive incompatibility problem that exists in franchisor — franchisee relationships. It is shown that incentive incompatibility exists with respect to both price and quality. Several contractual mechanisms designed to mitigate the incompatibility problem are examined.