International Capital Mobility and Tax Evasion

This paper studies the welfare effects of international investment to evade domestic taxes on domestic investment income. Capital mobility for tax evasion eliminates distortions in the intertemporal allocation of consumption, but introduces distortions in domestic production. Conversely, a regime where residents pay taxes on all investment income, domestic and foreign, introduces distortions in intertemporal consumption allocation, but leaves domestic production distortion-free. The relative magnitude of the interest elasticity of savings and the interest elasticity of domestic investment determines the welfare effects of capital movements for the purpose tax evasion.

The Macroeconomics of Exchange-rate and Price-level Interactions: Empirical Evidence for West Germany

This paper studies the evidence on the conditional covariances between the German wholesale price level and the Deutsche mark exchange rate in the short run and in the long run. I rely both on an unrestricted time-series model, and on a structural Mussa-Dornbusch model. The results from unrestricted estimates indicate that the volatility of change. in the nominal exchange rate much exceed the volatility of the inflation rate both in the short run and in the long run. This implies a very high correlation between changes in the nominal and real exchange rate, and a correlation between the inflation rate and changes in the exchange rate that never exceeds .4--with 959 probability. The results from the structural estimates and sensitivity analysis indicate that perfect price flexibility is strongly rejected, and chat the model tends to make sticky prices play a crucial role in explaining the evidence. Since the overidentifying restrictions implied by the structural model are rejected, I conclude that we still do not have a fully satisfactory explanation of observed extreme sluggishness of aggregate price levels.

Can The European Monetary System Be Copied Outside Europe? Lessons From Ten Years of Monetary Policy Coordination In Europe

This paper addresses the question of whether the European Monetary System can be copied outside Europe. Our answer is negative. The EMS is just one element of a more comprehensive design of institutional integration within Europe: the presence of the European Economic Community, and the dependence of EEC institutions upon exchange rate stability lend credibility to EMS exchange rate targets in a way that would not be present. say, among the United States, Europe and Japan. The EMS has also reproduced previous experiences of fixed exchange rates by not imposing the exchange rate constraint symmetrically upon all member countries: the system has de facto worked as a DM-zone, thus confirming that the institution of fixed rates pg cannot induce international monetary cooperation. Finally, the differences in the use of the inflation tax among European countries and the divergent behavior of government debt after 1979 indicate that the pursuit of monetary convergence among countries with different fiscal structures might entail substantial fiscal reforms.

The Time-Variation of Risk and Return in the Foreign Exchange and Stock Markets

Recent empirical work indicates that, in a variety of financial markets, both conditional expectations and conditional variances of returns are time- varying. The purpose of this paper is to determine whether these joint fluctuations of conditional first and second moments are consistent with the Sharpe-Lintner-Mossin capital-asset-pricing model. We test the mean-variance model under several different assumptions about the time-variation of conditional second moments of returns, using weekly data from July 1974 to December 1986, that include returns on a portfolio composed of dollar, Deutsche mark, Sterling, and Swiss franc assets, together with the US stock market. The model is estimated constraining risk premia to depend on the time-varying conditional covariance matrix of the residuals of the expected returns equations. The results indicate that estimated conditional variances cannot explain the observed time-variation of risk premia. Furthermore, the constraints imposed by the static CAPH are always rejected.

Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model

When tastes are represented by a class of generalized preferences which -- unlike traditional Von-Neumann preferences -- do not confuse behavior towards risk with attitudes towards intertemporal substitution, the true beta of an asset is, in general, an average of its consumption and market betas. We show that the two parameters measuring risk aversion and intertemporal substitution affect consumption and portfolio allocation decisions in symmetrical ways. A unit elasticity of intertemporal substitution gives rise to myopia in consumption-savings decisions (the future does not affect the optimal consumption plan), while a unit coefficient of relative risk aversion gives rise to myopia in portfolio allocation (the future does not affect optimal portfolio allocation). The empirical evidence is consistent with the behavior of intertemporal maximizers who have a unit coefficient of relative risk aversion and an elasticity of intertemporal substitution different from 1.

Time-Series Tests of a Non-Expected-Utility Model of Asset Pricing

This paper provides two alternative estimation and testing procedures of a representative-agent model of asset pricing which relies on a particular parametrization of non-expected-utility preferences. The first is based on maximum-likelihood estimates, supplemented with an explicit model of time varying first and second moments (where the time-variation of second moments in modelled with an ARCH-Autoregressive Conditionally Heteroskedastic-process); the second is based on generalized-method-of moments estimates. We perform our tests on a data set that includes monthly observations of rates of return on US stock prices and US consumption of nondurables and services. Our results are directly comparable to a test of the dynamic capital asset pricing model performed by Hansen and Singleton (1983), and to a recent test of the model studied here performed by Epstein and Zin (1989).