Government expenditures and equilibrium real exchange rates

Economists have long investigated theoretically and empirically the relationship between government spending and equilibrium real exchange rates. As Frenkel and Razin (1996) summarize for a small open economy, government expenditures (financed by lump-sum taxes) influence real exchange rates via a resource-withdrawal channel and a consumption-tilting channel. Recent theoretical and empirical studies, such as Froot and Rogoff (1991), Rogoff (1992), De Gregorio, Giovannini, and Krueger (1994), De Gregorio, Giovannini, and Wolf (1994), De Gregorio and Wolf (1994), and Chinn and Johnston (1996), have focused only upon the effects of government spending through the resource-withdrawal channel. Extending Frenkel and Razin (1996), this paper generates closed-form theoretical solutions for the relationships among the real exchange rate, relative per capita private consumption, relative per capita government consumption, and relative per capita tradables and nontradables production in a two-country general equilibrium model. Using relative price level, private and government per capita consumption, and relative productivity data from the Summers and Heston (1991) Penn World Tables and OECD (1 996) data for a sample of OECD countries relative to the United States, we estimate the model\u27 s structural equations. The results suggest that government expenditures influence equilibrium real exchange rates approximately equally via the resource-withdrawal and consumption-tilting channels. Moreover, the results imply that government spending and private consumption are complements in utility

What do financial markets reveal about global warming? Working paper series--09-13

Global warming and its importance are controversial. While a variety of estimates exists of the likelihood of global warming and its economic cost, financial market information can provide an objective assessment of expected losses due to global warming. We consider a Merton-type asset pricing model in which asset prices are affected by the changes in investment opportunities caused by global warming. In this setting, global warming would imply a negative risk premium, with most assets loading negatively on the global warming factor, and financial assets in sectors that are more sensitive to global warming exhibiting stronger negative loadings. Utilizing a variant of Campbell and Diebold's (2005) weather forecasting model in conjunction with Lamont's (2001) and Vassalou's (2003) approach for extracting financial market "news", we empirically uncover the global warming factor. We find that the risk premium is indeed significantly negative and becoming more so over time, that loadings for most assets are negative, and that asset portfolios in industries considered to be more vulnerable to global warming (see IPCC, 2007, and Quiggin and Horowitz, 2003) have significantly stronger negative loadings on the global warming factor. We estimate that required returns on average are 0.11 percentage points higher due to the global warming factor, translating to a present value loss of 4.18 percent of wealth. The industry loadings appear to be unrelated to potential vulnerability to emissions regulation. Rather, the loss in wealth represents a general cost from increased systematic risk due to uncertainty in the extent and impact of warming and the increased incidence of extreme weather events, thus complementing existing estimates of the cost of global warming

Variability and the Duration of Search.

In a sequential search model without learning, a proportionate mean-preserving spread of the offer distribution has two opposing effects on the expected duration of search: it raises the likelihood that any particular reservation value is exceeded, but also raises the reservation value itself. The net effect depends upon whether the sum of implicit and explicit search costs is positive, zero, or negative. Copyright 1990 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Optimal transaction filters under transitory trading opportunities: Theory and empirical illustration

If transitory profitable trading opportunities exist, transaction filters mitigate trading costs. We use a dynamic programming framework to design an optimal filter that maximizes after-cost expected returns. The filter size depends crucially on the degree of persistence of trading opportunities, transaction cost, and standard deviation of shocks. For daily dollar-yen exchange trading, the optimal filter can be economically significantly different from a naïve filter equal to the transaction cost. The candidate trading strategies generate positive returns that disappear after transaction costs. However, when the optimal filter is used, returns after costs remain positive and higher than for naïve filters.Transaction costs Transaction filters Trading strategies Foreign exchange

Optimal Transaction Filters under Transitory Trading Opportunities: Theory and Empirical Illustration

If transitory profitable trading opportunities exist, filter rules are used in practice to mitigate transaction costs. The filter size is difficult to determine a priori. Our paper uses a dynamic programming framework to design a filter that is optimal in the sense of maximizing expected returns after transaction costs. The optimal filter size depends crucially on the degree of persistence of the profitable trading opportunities, on transaction cost, and on the standard deviation of shocks. We apply our theoretical results to foreign exchange trading by parameterizing the moving average strategy often employed in foreign exchange markets. The parameterization implies the same decisions as the moving average rule, in the absence of transaction costs, but has the advantage of translating the buy/sell signal into the same units as the transaction costs so that the optimal filter can be calculated. Application to daily dollar-yen trading demonstrates that the optimal filter can differ dramatically from a naïve filter equal to the transaction cost. We confirm that daily moving average foreign exchange trading generates positive returns that disappear after accounting for transaction costs. However, when the optima

What Do Financial Markets Reveal about Global Warming? *

Financial market information can provide an objective assessment of expected losses due to global warming. In a Merton-type asset pricing model, with asset prices affected by changes in investment opportunities caused by global warming, the risk premium is significantly negative and growing over time, loadings for most assets are negative, and asset portfolios in more vulnerable industries have stronger negative loadings on the global warming factor. Required returns are 0.11 percent higher due to global warming, implying a present value loss of 4.18 percent of wealth. These costs complement and exceed previous estimates of the cost of global warming