Monetary Policy and the Illusionary Exchange Rate Puzzle

Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts†to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification.

VAR Modelling Approach and Cowles Commission Heritage

This paper examines the rise of the VAR approach from a historical perspective. It shows that the VAR approach arises as a systematic solution to the issue of 'model choice' bypassed by Cowles Commission (CC) researchers, and that the approach essentially inherits and enhances the CC legacy rather than abandons or opposes it. It argues that the approach is not so atheoretical as widely believed and that it helps reform econometrics by shifting research focus from measurement of given theories to identification/verification of data-coherent theories, and hence from confirmatory analysis to a mixture of confirmatory and exploratory analysis.VAR, Macroeconometrics, Methodology, Rational expectations, Structural model

Monetary policy and the illusionary exchange rate puzzle

Dornbusch’s exchange rate overshooting hypothesis is a central building block in international macroeconomics. Yet, empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting. This puzzling result has developed into a “styled facts” to be reckoned with in policy modelling. However, many of these studies, in particular those using VARs, have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restriction on them. By instead imposing a long-run neutrality restriction on the real exchange, thereby allowing the interest rate and the exchange rate to react simultaneously to any news, I find that the puzzles disappear. In particular, a contractionary monetary policy shock has a strong effect on the exchange rate that appreciates on impact. The maximum effect occurs immediately, and the exchange rate thereafter gradually depreciates to baseline, consistent with the Dornbusch overshooting hypothesis and with few exceptions consistent with UIP.Dornbusch overshooting, VAR, monetary policy, exchange rate puzzle, identification

Neighborhood Dynamics and the Housing Price Effects of Spatially Targeted Economic Development Policy

Neighborhoods are the result of a complicated interplay between residential choice, housing supply and the influences of the larger metropolitan system on its constituent parts. We model this interplay as a system of reduced-form equations in order to examine the effects of a generous spatially targeted economic development program (the federal Empowerment Zone program) on neighborhood characteristics, especially housing values. This system of equations approach allows us to compute direct effects of the policy intervention as well as the effects mediated through non-price channels such as changes in the housing stock or neighborhood demographics. In the process, we are able to shed light on the rich simultaneity among neighborhood characteristics, including housing prices.economic development, simultaneity

The diffusion of externalities from foreign direct investment: theory ahead of measurement

In this paper a structural estimation framework is developed to assess whether inward foreign direct investment (FDI) generates technological externalities. The econometric model is implemented in an empirical investigation with data from Colombia’s Manufacturing Census. So far, evidence of new technological opportunities for host-country firms arising from the operations of multinational corporations (MNCs) has been rather scarce. This is due to serious limitations in the way in which spillovers have been measured. In particular, empirical research has focused almost exclusively on intra-industry externalities while no allowance has been made for inter-industry technological externalities. But, in theory, the optimal location and organizational strategies by a MNC are chosen to minimize the risk of losing profits due to the leakage of technical information to potential competitors. Therefore, the host-country firms within the MNC subsidiary’s sector will tend to experience limited technological gains ensuing FDI, whereas producers in other sectors may benefit, especially if the MNC outsources to local upstream suppliers. While FDI may substitute investment by domestic plants within the MNC subsidiary’s sector, it can complement investment in other sectors. Hence, spillovers from FDI should be primarily inter-industry and not intra-industry. This conjecture is corroborated by testing of the mutisectoral model of FDI spillover diffusion on Colombian manufacturing data. Furthermore, both generic knowhow spillovers and linkage externalities are sizable Keywords; generic technology, inter-industry spillovers, absorptive capacity JEL codes: F21, F23, F43, O41, O34

An Empirical Analysis Of Debt-equity Choice In Indonesian Companies.

This study offers new insights by employing Indonesian data. The uniqueness of Indonesian companies is reflected by the common occurrence of ownership concentration among a few large families and affiliation with a corporate group in which seems nonexistent in many developed countries. With regard to the methodology problem, this study uses simultaneous equations model to overcome the endogeneity problem in debt-equity study. It is reported that the external block ownership has dominant position by having majority control and impact on powerless Indonesian managers. The inadequate legal framework for investors' protection, insufficient internal financing and improper development of the capital market occur. With regard to this situation, debt-equity choice was widely practiced. There is evidence that Indonesian companies relied heavily on loans to finance unrealistic rapid corporate expansion. The insignificant relationship between the level of debt and tangibility of assets and profitability indicate the appearance of moral hazard problem before the crisi

Quantum and Classical Message Identification via Quantum Channels

We discuss concepts of message identification in the sense of Ahlswede and Dueck via general quantum channels, extending investigations for classical channels, initial work for classical-quantum (cq) channels and "quantum fingerprinting". We show that the identification capacity of a discrete memoryless quantum channel for classical information can be larger than that for transmission; this is in contrast to all previously considered models, where it turns out to equal the common randomness capacity (equals transmission capacity in our case): in particular, for a noiseless qubit, we show the identification capacity to be 2, while transmission and common randomness capacity are 1. Then we turn to a natural concept of identification of quantum messages (i.e. a notion of "fingerprint" for quantum states). This is much closer to quantum information transmission than its classical counterpart (for one thing, the code length grows only exponentially, compared to double exponentially for classical identification). Indeed, we show how the problem exhibits a nice connection to visible quantum coding. Astonishingly, for the noiseless qubit channel this capacity turns out to be 2: in other words, one can compress two qubits into one and this is optimal. In general however, we conjecture quantum identification capacity to be different from classical identification capacity.Comment: 18 pages, requires Rinton-P9x6.cls. On the occasion of Alexander Holevo's 60th birthday. Version 2 has a few theorems knocked off: Y Steinberg has pointed out a crucial error in my statements on simultaneous ID codes. They are all gone and replaced by a speculative remark. The central results of the paper are all unharmed. In v3: proof of Proposition 17 corrected, without change of its statemen

Estimating Production Functions Using Inputs to Control for Unobservables

We introduce a new method for conditioning out serially correlated unobserved shocks to the production technology by building ideas first developed in Olley and Pakes (1996). Olley and Pakes show how to use investment to control for correlation between input levels and the unobserved firm-specific productivity process. We prove that like investment, intermediate inputs (those inputs which are typically subtracted out in a value-added production function) can also solve this simultaneity problem. We highlight three potential advantages to using an intermediate inputs approach relative to investment. Our results indicate that these advantages are empirically important.

Measuring monetary policy in open economies

The paper extends Bernanke and Mihov's [6] closed-economy strategy for identification of monetary policy shocks to open-economy settings, accounting for the simultaneity between interest-rate and exchange-rate innovations. The methodology allows a separate treatment of two distinct monetary policy shocks, one that operates through open market operations, and another one that takes place through interventions in the foreign exchange market. Implementation of this strategy to the case of Argentina provides the stylized facts necessary to choose among competing theoretical models of this economy. In addition to studying the effects of monetary policy innovations, the present study sheds light on the endogenous component of monetary policy. In this regard, the paper finds that, notwithstanding the relative stability of the exchange rate and the accumulation of large amounts of international reserves, the central bank in Argentina has been far from absorbing balance of payments shocks in a currency-board fashion. The growing level of international reserves can be rationalized, instead, as the monetary authority's response to terms of trade, supply and domestic currency demand shocks.Currencies and Exchange Rates,Debt Markets,Economic Stabilization,Emerging Markets,Economic Theory&Research

A Combinatorial Bit Bang Leading to Quaternions

This paper describes in detail how (discrete) quaternions - ie. the abstract structure of 3-D space - emerge from, first, the Void, and thence from primitive combinatorial structures, using only the exclusion and co-occurrence of otherwise unspecified events. We show how this computational view supplements and provides an interpretation for the mathematical structures, and derive quark structure. The build-up is emergently hierarchical, compatible with both quantum mechanics and relativity, and can be extended upwards to the macroscopic. The mathematics is that of Clifford algebras emplaced in the homology-cohomology structure pioneered by Kron. Interestingly, the ideas presented here were originally developed by the author to resolve fundamental limitations of existing AI paradigms. As such, the approach can be used for learning, planning, vision, NLP, pattern recognition; and as well, for modelling, simulation, and implementation of complex systems, eg. biological.Comment: 23 pages, 4 figure