Can Economists Forecast Exchange Rates? The Debate Re‐Visited: The Case of the USD/GBP Market

In the debate on forecasting exchange rates, critics claimed that traditional macroeconomic models could not outperform a random walk in post‐sample forecasts. Perceived deficiencies include inadequate allowance for simultaneity, and expectations hypotheses inconsistent with the structure of models employed. This paper re‐visits the debate, first to address critics' major concerns, and second because in the view of the present authors, the debate closed on an unduly pessimistic note. This paper develops a simultaneous, rational expectations model of the USD/GBP market, with functional relationships for hedgers, speculators and a spot rate equation. The model is estimated with data contemporaneous to the debate, including a period during which the US Commodity Futures Trading Commission did not collect data on traders' open positions. Using the results of post‐debate research on tests for stationarity with missing observations, the model, using only public information, outperforms a random walk in post‐sample forecasts of the spot rate. Recent microstructure models of the exchange rate based on order flow have re‐kindled the forecasting debate. The model developed here, however, is differentiated from these microstructure models, first because order flow utilises both public and private information, and second because the microstructure models do not directly address critics' concerns.     

A Critique of ‘Neoliberal Autonomy’: The Rhetoric of Ownership Society

The rhetoric of the Ownership Society defined by the Cato Institute has been integral to framing the motivation behind the Social Security reform introduced by George W. Bush. This motivational frame involves a fierce advocacy of what we will call ‘neoliberal autonomy’ in a Hayekian and Friedmanite sense. For Hayek and Friedman, the social adequacy component of Social Security is problematized in the name of self-reliance and individual choice, which rejects any authoritative standards as morally indefensible. Nevertheless, the rhetoric of the Ownership Society, though it glorifies the neoliberal notion of autonomy, does not explicitly question the moral basis of Social Security. Rather, by defining the terms of debate, it frames the meaning of Social Security along neoliberal lines in an attempt to make a supposedly detached economic case for private retirement accounts. In this ‘pro-privatization’ framework, the social adequacy component of the Social Security system fades away as individual equity, or actuarial fairness, comes to the fore as the chief theme. We suggest a ‘pro-social’ rhetoric that recognizes the pursuit of social standards as providing the element of autonomy.

Simultaneity, Rationality and Price Determination in US Live Cattle

The results of recent research on the informational efficiency of the US live cattle futures market are ambiguous. Moreover, simultaneous, rational expectations models of spot and futures markets for non-storables are lacking in the literature. This paper addresses both issues: by developing a simultaneous rational expectations model of the US live cattle market, with functional relationships for short hedgers, long hedgers, net short speculators and consumers, the paper employs a wider information set than in previous research and it thus provides a more powerful test of the efficient market hypothesis (EMH). Tests indicate the possible presence of non-linearities in the long hedging and net short speculation equations.
The results suggest first, that there is support for Working's hypotheses of selective and operational hedging, for short and long hedgers respectively, second that speculators may be noise traders or risk-loving (although the non-linear version of the speculation function partially corrects this anomaly), and third that beef is a normal good while corn is a complementary input. Time-varying volatility is represented as an EGARCH ( p , q ) process. Post-sample, this model does not significantly outperform the futures price in spot price forecasting, implying non-rejection of the EMH.     

Concentration and Liquidity in Mature Markets: Evidence from the US Dollar/Yen Futures Market

The cost of liquidity is the major cost of transacting on organised futures exchanges. Liquidity has value both to traders and to exchanges. This paper argues that liquidity varies directly with market development, and that this relationship provides a major incentive for mergers among exchanges. While previous research on liquidity has focused on spot markets for a range of securities, this paper employs data from the US dollar/Yen futures contract to investigate the relationship between liquidity and volume, between liquidity, volume and volatility, and between liquidity and the speculation ratio. The paper tests for non–linearity in these relationships, and explores the presence of Granger causality between pairs of key variables.
The results include inter alia the presence of a significant negative relationship between the cost of liquidity and volume, and evidence of a significant non–linear relationship in which the cost of liquidity varies directly with volatility and negatively with the conditional fourth moment about the mean of daily prices (a measure of kurtosis). Moreover, there is evidence that liquidity Granger causes volume, that volatility Granger causes volume, and that liquidity Granger causes the speculation ratio.     

State‐owned Enterprises,Inequality, and Political Ideology

State‐owned enterprises continue to play a considerable role in many economies. In this study we empirically investigate the connections between these enterprises and inequality as mediated through political ideology. Using cross‐country data on the relative size of the state‐owned enterprise sector, we find strong empirical support for an inverted U‐shaped relationship between its size and income inequality. We also find strong evidence that left‐wing (vis‐a‐vis right‐wing) governments are associated with a larger state‐owned enterprise sector in countries with higher inequality. This result is robust to using cross‐sectional vs. panel data, different identification strategies, and various controls.     

Non-storables, Simultaneity and Price Determination: The Australian (Finished) Live Cattle Market

Empirical studies of simultaneous rational expectations (RE) models of spot and futures markets for non-storable commodities, such as finished live cattle, are rare. Indeed, only two countries, the US and Australia, have produced data sets for the study of such markets. This paper develops, and presents estimates of a simultaneous RE model of the live cattle market in Australia, the world's leading beef exporting country. The model contains functional relationships for short hedgers and short speculators, long hedgers and long speculators, and consumers, and is completed with a spot price equation and market clearing identity. Augmented Dickey-Fuller and Phillips-Perron tests for unit roots are executed, and Johansen cointegration tests are employed to investigate whether the I(1) variables are cointegrated. Structural equations are estimated by maximum likelihood when ARCH effects are present, by instrumental variables in the absence of serial correlation, and by non-linear least squares when a correction for autocorrelation is required. The estimates of all structural parameters are significant at the five per cent level. Post-sample, the model forecasts spot and futures prices with per cent RMSE's of 4.4 per cent and 2.5 per cent, respectively. In forecasting the spot price, the model outperforms but not significantly, a random walk, an ARIMA model, and a lagged futures price as a predictor of the spot price. The outcome of this last comparison implies that the efficient markets hypothesis cannot be rejected.     

Simultaneity,Forecasting and Profits in London Copper Futures

Previous research on price determination for non‐ferrous metals at the London Metal Exchange (LME) suffers from three limitations: first it has employed single equation methods only, which cannot explain the simultaneous determination of spot and futures prices; second, by focusing on current and lagged prices, previous research does not analyse the effect on price determination of critical variables such as expectations, consumption and inventories; third, the outcome of prior research regarding market efficiency is ambiguous. This paper, which addresses these issues, develops a simultaneous model of the copper market at the LME, with representation of the activities of hedgers, speculators and consumers. This model produces post‐sample forecasts of the spot price which outperform conventional benchmarks, thus providing evidence against the efficient market hypothesis. Model‐derived forecasts are employed as the foundation of a trading program which produces risk‐adjusted profits (net of commission costs) for holding periods of one week and one month, thus fulfilling the ‘sufficient condition’ for market inefficiency. This study, therefore, provides new insights into price determination on the LME copper market, and resolves the ambiguity of previous research regarding the efficiency of that market. This is the first application of the model forecasting approach to the question of performance of the market for copper.     

Does antidumping cause investment and R&D?: Evidence from Turkey

This article employs Turkish firm-level data and analyses the effect of antidumping protection on capital spending and Research and Development (R&D). Using matching techniques and alternative control groups and applying difference-in-difference methodology, we find that antidumping duties imposed by the Turkish government significantly increase fixed investment and R&D expenditures. We also show that antidumping duties are effective in terms of increasing the domestic sales. To our knowledge, our article represents the first attempt to analyse the effect of antidumping policy in Turkey, a very active user of temporary trade barriers, using firm-level data.     

On the Pro-Social Security Rhetoric

We propose to reframe Social Security to offer a coherent anti-privatization rhetoric that has not been fully provided in the contemporary literature. The dissatisfaction that motivated this study centers on the observation that the prevalent anti-privatization rhetoric exposes the drawbacks of Private Retirement Accounts (PRAs), but this rhetoric itself doesn't satisfactorily explain why the current Social Security system is more desirable. In reframing Social Security, we will follow a two-stage strategy. First, we will articulate the desirability of Social Security grounded in the function it serves in a way PRAs are not suited for serving: being a social income insurance scheme whose provision inherently favors the least fortunate in a Rawlsian fashion. Second, we will concentrate how Social Security provides this non-market choice by drawing on the unique resources not entirely available to the market.     

A Critique of ‘Neoliberal Autonomy’: The Rhetoric of Ownership Society

The rhetoric of the Ownership Society defined by the Cato Institute has been integral to framing the motivation behind the Social Security reform introduced by George W. Bush. This motivational frame involves a fierce advocacy of what we will call ‘neoliberal autonomy’ in a Hayekian and Friedmanite sense. For Hayek and Friedman, the social adequacy component of Social Security is problematized in the name of self-reliance and individual choice, which rejects any authoritative standards as morally indefensible. Nevertheless, the rhetoric of the Ownership Society, though it glorifies the neoliberal notion of autonomy, does not explicitly question the moral basis of Social Security. Rather, by defining the terms of debate, it frames the meaning of Social Security along neoliberal lines in an attempt to make a supposedly detached economic case for private retirement accounts. In this ‘pro-privatization’ framework, the social adequacy component of the Social Security system fades away as individual equity, or actuarial fairness, comes to the fore as the chief theme. We suggest a ‘pro-social’ rhetoric that recognizes the pursuit of social standards as providing the element of autonomy.