DEMOCRACY AND DE FACTO EXCHANGE RATE REGIMES

This paper explores the relationship between a country's political regime type and its de facto exchange rate fixity. It argues that more democratic regimes should be associated with less de facto fixity because the median voter is likely to be a domestically oriented producer with a monetary preference for domestic policy autonomy, requiring more a more flexible exchange rate regime. Focusing on a broad sample of country–years in the post‐Bretton Woods era defined by international capital mobility, the statistical results show that not only are more democratic regimes negatively associated with de facto fixity using three different operational measures for this dependent variable, but that this negative relationship gets stronger as the median voter is more likely to be a domestically oriented producer and as societal groups are more able to influence public policy.     

The imposed gift of Versailles: the fiscal effects of restricting the size of Germany's armed forces, 1924–9

Weimar's politicians used to attribute the continuous budget crises after the currency stabilization of 1923–4 to the burden put on the German economy by the Treaty of Versailles, in particular the reparation payments. This argument, which is still popular, neglects the fact that the restriction of the German military to 115,000 men relieved the German central budget considerably. In a counterfactual analysis we assess the savings in additional military costs and compare them to the reparation payments. Depending on the character of the foreign policy pursued by an unrestricted Germany, we find that the net effect of the Treaty's stipulations on the German central budgets was either much lower than hitherto thought or even positive. This finding gives support to the argument that Germany suffered from home‐made political failure even in the relatively stable period from 1924 to 1929.     

Inventory Accounting Method and Earnings-Price Ratios*

Lee (1988) finds that LIFO firms have higher earnings-price (EP) ratios than non-LIFO firms despite the income-reducing effects of LIFO, a result contrary to economic intuition that Lee describes as a “puzzle.” This paper attempts to resolve this puzzle by introducing refined measures of variables that are related to both EP ratios and inventory costing method choices. The improved proxies are analysts' expectations of future growth rather than realized growth, beta computed using a procedure designed to reduce measurement error rather than the usual OLS beta, and leverage as a supplemental risk measure. Further, we control for expected earnings changes, since transitory earnings shocks that are not expected to persist in future earnings affect the numerator of the EP ratio. After controlling for these factors, we find that EP ratios for LIFO firms are actually lower than those of non-LIFO firms, a result consistent with economic intuition and the result expected by Lee.     

Changing Monetary Policy Rules, Learning, and Real Exchange Rate Dynamics

When the exchange rate is priced by uncovered interest parity and central banks set nominal interest rates according to a reaction function such as the Taylor rule, the real exchange rate will be determined by expected inflation and the output gap or the unemployment gap of the home and foreign countries. This paper examines the implications of these Taylor rule fundamentals for real exchange rate determination. Because the true parameters in central bank policy rules are unknown to the public and change over time, the model is presented in the context of a least squares learning environment. This simple learning model captures the volatility and the major swings in the real deutschemark/euro–dollar exchange rate from 1976 to 2007.     

Estimation of Implicit Bankruptcy Costs

This paper presents a new methodology, quasilinear estimation, for efficiently estimating economic variables reflected in the prices of corporate securities. For example, ex ante bankruptcy costs are not directly observable, however, if these costs are sufficiently large, then current security prices are affected and bankruptcy costs can be indirectly measured. When bankruptcy costs and other relevant parameters are known, there are many numerical solution techniques that can be used to determine security prices. One technique, the method of lines, is compatible with quasilinear estimation, which has been employed extensively in the physical sciences for the estimation of coefficients in differential equation models. We demonstrate that quasilinear estimation is a potentially reliable and efficient technique for the estimation of corporate bankruptcy costs and the asset variance from security prices.