Asset market approaches to exchange rate determination: A comparative analysis

Summary To this point, we have focused on the assumptions needed to derive the various theoretical models from our illustrative model. All the models, whether monetary or portfolio balance in nature, tend to use similar speed of adjustment and specialization assumptions to simplify the analysis. For instance, both approaches have models that assume that goods markets adjust slowly relative to asset markets, so that goods prices are fixed in the short run (i.e., Henderson, Isard, Branson, Dornbusch, Frankel), and both approaches also have models that assume that goods markets clear in the short run via flexible prices (i.e., Kouri, Bilson, Frenkel). As we have seen, the crucial assumptions separating the monetary and portfolio balance approaches concern the degree of substitutability between domestic and foreign bonds: the monetary approach assumes perfect substitutability, while the portfolio balance approach assumes imperfect substitutability. These substitutability assumptions specify whether or not more than money market equilibrium is necessary for determining the short-run exchange rate. In Sections III and IV, we assess the validity of the various assumptions by empirically evaluating two models representative of the two approaches.

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Zusammenfassung Verm?gensans?tze zur Erkl?rung der Wechselkurse: Eine vergleichende Analyse. — Diese Studie vergleicht die zwei wesentlichen Varianten des Verm?gensansatzes zur Erkl?rung der Wechselkurse: den monet?ren Ansatz und den Ansatz des Portfoliogleichgewichts. Die verschiedenen Finanzmarktmodelle in der Literatur enthalten Annahmen über die Substituierbarkeit unter den Aktiva, die Anpassungsgeschwindigkeit der M?rkte, die Spezialisierung bei finanziellen Transaktionen und die Gr?\e eines Landes und haben daher vieles gemeinsam. Wenn auch viele Annahmen beider Ans?tze gleich sind, so unterscheiden sie sich doch grundlegend in den Annahmen über die Substituierbarkeit von in- und ausl?ndischen festverzinslichen Wertpapieren und die Rolle des Verm?gens in den Nachfragefunktionen für Finanzanlagen. Aufgrund der empirischen Ergebnisse kann keinem der beiden Ans?tze eindeutig der Vorzug gegeben werden. Die Simulationen weisen darauf hin, da\ der Ansatz des Portfoliogleichgewichts eine genauere Vorhersage des Niveaus und der Ver?nderungsrate des Wechselkurses erlaubt, doch lassen die Ergebnisse des Monte-Carlo-Modells erkennen, da\ die Unterschiede statistisch nicht signifikant sind.

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Résumé La théorie des marchés d’actifs financiers à la détermination du taux de change: Une analyse comparative. — La présente étude compare les deux principales variantes de l’application de la théorie des marchés d’actifs financiers à la détermination du taux de change: l’approche monétaire et l’approche par l’équilibre du portefeuille. A partir d’hypothèses relatives aux possibilités de substitution entre actifs, à la rapidité de l’ajustement des marchés, à la spécialisation des transactions financières et aux dimensions de l’économie considérée, les divers modèles de marchés financiers présentés dans les ouvrages économiques procèdent tous du même cadre d’analyse des taux de change. Si les deux approches ont en commun de nombreuses hypothèses, leurs différences portent avant tout sur les hypothèses relatives aux possibilités de substitution entre obligations intérieures et obligations étrangères et au r?le de la richesse dans les fonctions de demande d’actifs. Les résultats empiriques obtenus par les auteurs ne confirment pas indiscutablement la validité de l’une ou de l’autre approche. Les simulations qu’ils ont effectuées montrent que l’approche par l’équilibre du portefeuille donne une prévision plus correcte du niveau et du rythme de variation du taux de change, mais les résultats obtenus au moyen de la méthode de Monte Carlo semblent indiquer que les différences entre les deux approches ne sont pas statistiquement significatives.

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Resumen Determinatión del tipo de cambio basada en el studio del mercado de activos: Un análisis comparativo. — En este trabajo se comparan las dos principales variantes del método basado en el mercado de activos que se aplica para determinar el tipo de cambio: el método monetario y el método del saldo de cartera. Adoptando supuestos respecto a la posibilidad de sustitución, velocidad del ajuste, especialización y dimensiónen del país, todos los modelos de mercado financiero que figuran en la literatura se derivan de un marco común para el análisis del tipo de cambio. Si bien muchos de los supuestos que se adoptan en los métodos monetario y del saldo de cartera son parecidos, las principales distinciones se refieren a los supuestos relativos a la posibilidad de sustitución entre los bonos internos y los bonos exteriores, así como al papel de la riqueza en las funciones de demanda de activos. Los resultados empíricos obtenidos no favorecen claramente a uno u otro método. Nuestras simulaciones indican que el método del saldo de cartera permite prever con mayor exactitud el nivel y la tasa de variación del tipo de cambio, pero nuestros resultados Monte Carlo parecen indicar que las diferencias no son significativas a efectos estadísticos.

     

Characterization of optima in smooth Pareto economic systems

Simple techniques of calculus and geometry are used to study and characterize the optima of pure exchange economies in which the utility functions are smooth but not necessarily convex. It is also shown how one can reduce the problem of optimizing p functions on the manifold of states to that of maximizing a single function on a submanifold of this space. Two models are described: one in which a person cannot trade to an optimum unless he starts at one; and one in which a person cannot even get near a local Pareto optimum along continuous ‘trade curves’ from most initial distributions. Finally, the set of optima is described for a generic set of utility mappings.     

An exploratory study examining information technology adoption and implementation in full-service restaurant firms

The purpose of the paper is to explore and compare the current use of information technology-related advances in chain and independent full-service restaurants, the factors that motivate managers of these types of restaurants to decide whether or not to implement such technology, and how these managers perceive the impact of technology on the firm. A case study analysis involving four San Francisco Bay Area full-service restaurants was conducted to examine the framework of full-service restaurants to implement new technology. Propositions are developed that purport the information technology adoption and implementation characteristics of full-service restaurant firms while elucidating the distinctiveness between chain and independent firms.     

Labor market search, sticky prices, and interest rate policies

What accounts for the significant real effects of monetary policy shocks? And what accounts for the persistent and hump shaped responses of output and inflation in response to such shocks? These questions are investigated in a model that incorporates labor market search, habit persistence, sticky prices, and policy inertia. While habit persistence and price stickiness are important for the hump shaped output response and the long, drawn out inflation response, respectively, labor market frictions increase the output response and reduce the inflation response relative to an otherwise similar model based on a Walrasian labor market. Significantly, policy inertia itself is found to be the most important factor in accounting for the magnitude of the output effects of policy shocks in the model.     

Counting Groves-Ledyard equilibria via degree theory

We study the Groves-Ledyard mechanism for determining optimal amounts of public goods in economies whose agents have the most general class of preferences for which a Pareto amount of public goods can be computed independently of income distribution. We use degree theory on affine spaces to show that the number of equilibria in such economies grows exponentially as the number of agents in the economy increases. The large number of equilibria in such simple economic models raises doubts as to whether the Groves-Ledyard mechanism is a workable solution to the Free Rider Problem since individuals may have incentives to falsify their preferences in order to drive the adjustment process to a preferred Nash equilibrium.     

Perfect foresight models and the dynamic instability problem from a higher viewpoint

Dynamic macroeconomic models incorporating perfect foresight expectations can display a dynamic instability of the saddle point type. So that unless the initial values happen to place the system on the stable arm of the saddle point, the economic variables will diverge ever more from the equilibrium. We consider the dynamic instability problem in a simple model of monetary dynamics which is non-linear and assumes adaptive expectations which are characterized by an expectations time lag. This model is shown to have a stable limit cycle. By considering perfect foresight as the limit as the expectations time lag tends to zero we are able to view the perfect foresight model from a dimension higher than that from which is it is normally viewed. We are thus able to see that the stable limit cycle continues to exist for the perfect foresight model as well. In this framework there is no longer a dynamic instability problem since whatever the intial values time paths are tending to the stable limit cycle.     

A preference free partial differential equation for the term structure of interest rates

The objectives of this paper are two-fold: the first is the reconciliation of the differences between the Vasicek and the Heath-Jarrow-Morton approaches to the modelling of term structure of interest rates. We demonstrate that under certain (not empirically unreasonable) assumptions prices of interest-rate sensitive claims within the Heath-Jarrow-Morton framework can be expressed as a partial differential equation which both is preference-free and matches the currently observed yield curve. This partial differential equation is shown to be equivalent to the extended Vasicek model of Hull and White. The second is the pricing of interest rate claims in this framework. The preference free partial differential equation that we obtain has the added advantage that it allows us to bring to bear on the problem of evaluating American style contingent claims in a stochastic interest rate environment the various numerical techniques for solving free boundary value problems which have been developed in recent years such as the method of lines.