Pricing Behavior and the Response of Hours to Productivity Shocks

Recent contributions have suggested that technology shocks have a negative impact on hours, contrary to the prediction of standard flexible-price models of the business cycle. Some authors have interpreted this finding as evidence in favor of sticky-price models, while others have either extended flexible-price models or disputed the empirical finding itself. In this paper, we estimate a variety of alternative total factor productivity measures for a representative sample of Italian manufacturing firms and on average find a negative effect of productivity shocks on hours growth. More interestingly, using the reported frequency of price reviews, we show that the contractionary effect is stronger for firms with stickier prices and weaker or not significant for firms with more flexible prices. Price stickiness remains a crucial factor in shaping the response of hours after controlling for product storability or market power.     

Inflation Targeting,Recursive Inattentiveness,and Heterogeneous Beliefs

We consider a monetary authority that provides an explicit inflation target in order to align expectations with the policy objective. However, biased perceptions of the target may arise due to imperfect information flows. We allow agents to revise expectations over time and we model their recursive choice among prediction strategies as an optimization problem under rational inattention. We then investigate whether a simple policy rule can steer the economy toward the targeted equilibrium. Our findings suggest that determinacy under rational expectations may not be sufficient to reach the target. Instead, monetary policy should be fine‐tuned to correct agents' biased beliefs.     

Nonlinear Transmission of Financial Shocks: Some New Evidence

Financial shocks generate a protracted and quantitatively important effect on real economic activity and financial markets only if the shocks are both negative and large. Otherwise, their role is quite modest. Financial shocks have become more important for economic fluctuations after 2000 and have contributed substantially to deepening the recessions of 2001 and 2008. The evidence is obtained using a new econometric procedure based on a Vector Moving Average representation that includes a nonlinear function of the financial shock. This method is a contribution of the present work.     

Devaluation,Inflation, and the Balance of Payments: A Short-Run Monetary Approach*

In this paper a model is presented to analyze, in a monetary setting, the effects of a once-and-for-all adjustment in the exchange rate in a small economy committed to a fixed exchange-rate system. The effects of such an adjustment are shown to be transitory. After a devaluation the domestic rate of inflation accelerates in relation to the rate of inflation in the rest of the world. The increase in prices reduces the real value of the nominal stock of money and, in order to restore real liquidity to its previous level, foreign-exchange reserves start to flow into the country. However, as monetary equlibrium is reached, the flow of reserves tends to stop and the domestic rate of inflation converges to the world rate.     

Similitudes and Discrepancies in Post‐Keynesian and Marxist Theories of Investment: A Theoretical and Empirical Investigation1

There has been a substantial amount of convergence between post‐Keynesian and Marxist economics, the writings of Kalecki being common ground for both traditions. Still, some differences remain. While authors in both traditions seem to agree to a large extent on short‐period issues, long‐period matters relating to the role of saving, the rate of profit, inflation, crowding out, excess money supply, are still contentious. All this seems to depend on the exact form taken by the investment function, more specifically the role of capacity utilization. Four different equations are set up to be tested, two of which correspond to two variants of the Marxist view, while the other two equations correspond to a naive and a sophisticated Kaleckian view, the latter being based on hysteresis. The equations are tested on three sets of annual Canadian data. Various statistical tests are applied to all four equations in an effort to rank them, notably information and encompassing tests. The Kaleckian equation with hysteresis generally comes out empirically with the preferred statistical properties, when manufacturing data on actual rates of capital accumulation are considered separately or when both realized and intended rates of investment for the total industrial sector are used.     

The Influence of Nonaudit Service Revenues and Client Pressure on External Auditors' Decisions to Rely on Internal Audit*

This paper investigates how external auditor provision of significant nonaudit services and client pressure to use the work of internal audit influence external auditors' use of internal auditors' work. More specifically, we study how external audit evidence gathering choices are influenced by nonaudit fees and client pressure. Our research is motivated by an observation that the magnitude of nonaudit services provided to audit clients introduces the risk that client management may leverage its position with the external auditor and potentially affect the audit process. We address this issue by extending prior research and focusing on the importance of various explanatory variables, including nonaudit service revenues, client pressure, internal audit quality, and coordination, to the external auditor's decision to rely on the work of internal audit. We use data primarily obtained through surveys completed by internal and external auditors. The survey responses represent 74 separate audit engagements. Our findings reveal that when significant nonaudit services are not provided to a client, internal audit quality and the level of internal‐external auditor coordination positively affect auditors' internal audit reliance decisions. However, when the auditor provides significant nonaudit services to the client, internal audit quality and the extent of internal ‐ external auditor coordination do not significantly affect auditors' reliance decisions. Furthermore, when significant nonaudit services are provided, client pressure significantly increases the extent of internal audit reliance. Thus, external auditors appear to be more affected by client pressure and less concerned about internal audit quality and coordination when making internal audit reliance decisions at clients for whom significant nonaudit services are also provided.     

Three‐Regime Asymmetric STAR Modeling and Exchange Rate Reversion

The breakdown of the Bretton Woods system and the adoption of generalized floating exchange rates ushered in a new era of exchange rate volatility and uncertainty. This increased volatility leads economists to search for economic models able to describe observed exchange rate behavior. In the present paper, we propose more general STAR transition functions that encompass both threshold nonlinearity and asymmetric effects. Our framework allows for a gradual adjustment from one regime to another and considers threshold effects by encompassing other existing models, such as TAR models. We apply our methodology to three different exchange rate data sets: one for developing countries and official nominal exchange rates, the second for emerging market economies using black market exchange rates, and the third for OECD economies.