EXCHANGE RATE POLICY AND ENDOGENOUS PRICE FLEXIBILITY

Most theoretical analysis of flexible versus fixed exchange rates takes the degree of nominal rigidity to be independent of the exchange rate regime choice itself; however, informal policy discussion often suggests that a credible exchange rate peg may increase internal price flexi‐bility. This paper explores the relationship between exchange rate policy and price flexibility, in a model where price flexibility itself is an endogenous choice of profit‐maximizing firms. A fixed exchange rate can affect the optimal degree of price flexibility by altering the volatility of nominal demand facing price‐setting firms. We find that a unilateral peg, such as a currency board, adopted by a single country, will increase internal price flexibility, perhaps by a large amount. On the other hand, when an exchange rate peg is supported by bilateral participation of all monetary authorities such as in a monetary union, price flexibility may actually be less than under freely floating exchange rates. Quantitatively, we find that the endogenous increase in price flexibility following a unilateral peg might be large enough that output volatility is no greater than it would be under a floating exchange rate regime. (JEL: F0, F4)     

A NOTE ON RENEGING DECISIONS

This note is an extension of the approach to the problem of reneging introduced in Parkan and Warren [1]. It is assumed customers consider joining an M/M/1 queuing system with a prior gamma distribution over the values of the mean service time. Thus, each customer has an initial estimate of his total waiting time in the system. The customers associate the same sunk value with the waiting time and obtain the same reward at service completion. Having joined a system each customer may consider reneging in view of his revision of his initial service time estimate based on service observations. The bounds on the stationary state probabilities for such a system are obtained and examples are provided to compare the cases with and without reneging.     

CHOOSING BETWEEN AN ADDITIVE AND A MULTIPLICATIVE MODEL OF EXPERIMENTAL EFFECTS*

An experiment is carried out, and the question is whether the experimental effect is additive or multiplicative. This paper suggests a decision-theoretic approach to this problem of model choice when the underlying population distribution is normal.     

GIFT EXCHANGE AND WORKERS' FAIRNESS CONCERNS: WHEN EQUALITY IS UNFAIR5

We study how different payment modes influence the effectiveness of gift exchange as a contract enforcement device. In particular, we analyze how horizontal fairness concerns affect performance and efficiency in an environment characterized by contractual incompleteness. In our experiment, one principal is matched with two agents. The principal pays equal wages in one treatment and can set individual wages in the other. We find that the use of equal wages elicits substantially lower efforts. This is not caused by monetary incentives per se because under both wage schemes it is profit‐maximizing for agents to exert high efforts. The treatment difference instead seems to be driven by the fact that the norm of equity is violated far more frequently in the equal wage treatment. After having suffered from violations of the equity principle, agents withdraw effort. These findings hold even after controlling for the role of intentions, as we show in a third treatment. Our results suggest that adherence to the norm of equity is a necessary prerequisite for successful establishment of gift‐exchange relations. (JEL: J33, D63, M52, C92, J41)     

SPECULATIVE ATTACKS AND THE INFORMATION ROLE OF THE INTEREST RATE

This paper models currency attacks as carried out by speculators who condition their actions on private signals about the state and on the market‐clearing interest rate. Besides affecting speculators' payoffs, this interest rate also provides an endogenous public signal. For a plausible type of investment strategies, the dual role of the interest rate allows the model to explain abrupt and intense speculative attacks solely via economic fundamentals, without resorting to sunspot variables. This result underlies a novel policy implication: An official intervention in the foreign exchange market may reinforce a currency peg by influencing the precision of public information. (JEL: D82, D84, F31)     

THE CHOICE OF EXCHANGE‐RATE REGIME AND SPECULATIVE ATTACKS

We develop a framework that makes it possible to study, for the first time, the strategic interaction between the ex ante choice of exchange‐rate regime and the likelihood of ex post currency attacks. The optimal regime is determined by a policymaker who trades off the loss from nominal exchange‐rate uncertainty against the cost of adopting a given regime. This cost increases, in turn, with the fraction of speculators who attack the local currency. Searching for the optimal regime within the class of exchange‐rate bands, we show that the optimal regime can be either a peg (a zero‐width band), a free float (an infinite‐width band), or a nondegenerate band of finite width. We study the effect of several factors on the optimal regime and on the probability of currency attacks. In particular, we show that a Tobin tax induces policymakers to set less flexible regimes. In our model, this generates an increase in the probability of currency attacks. (JEL: F31, D84)     

IDENTIFYING THE EFFECTS OF MONETARY POLICY SHOCKS ON EXCHANGE RATES USING HIGH FREQUENCY DATA

This paper proposes a new approach to identifying the effects of monetary policy shocks in an international vector autoregression. Using high‐frequency data on the prices of Fed Funds futures contracts, we measure the impact of the surprise component of the FOMC‐day Federal Reserve policy decision on financial variables, such as the exchange rate and the foreign interest rate. We show how this information can be used to achieve identification without having to make the usual strong assumption of a recursive ordering. (JEL: C32, E52, F30)     

MANAGERS AND (SECRET) SOCIAL NETWORKS: THE INFLUENCE OF THE FREEMASONRY ON FIRM PERFORMANCE

In this paper, I study the impact of managers’ affiliations with the Freemasonry on the performances of companies. Using a unique data set of 412 companies quoted on the London Stock Exchange between 1895 and 1902, I find that young and small firms run by Masonic managers exhibited larger leverage ratios. These companies earned higher profits, although the effect is not statistically significant. Large publicly quoted corporations managed by Freemasons instead had lower profits and lower Tobin’s Q. I discuss the issue of the endogeneity of Freemasonry membership, and I use four different approaches to partially address this.     

UNCERTAIN DEMAND,CONSUMER LOSS AVERSION,AND FLAT‐RATE TARIFFS

We consider a model of firm pricing and consumer choice, where consumers are loss averse and uncertain about their future demand. Possibly, consumers in our model prefer a flat rate to a measured tariff, even though this choice does not minimize their expected billing amount—a behavior in line with ample empirical evidence. We solve for the profit‐maximizing two‐part tariff, which is a flat rate if (a) marginal costs are not too high, (b) loss aversion is intense, and (c) there are strong variations in demand. Moreover, we analyze the optimal nonlinear tariff. This tariff has a large flat part when a flat rate is optimal among the class of two‐part tariffs.     

ON PERSONNEL BUDGETING FOR CONTINUOUS OPERATIONS (WITH EMPHASIS ON HOSPITALS)

This paper develops an approach for determining staff size when N_j personnel are needed on weekday j, j= 1, 2,…,7. The method explicitly incorporates the fact that staff size will vary with both regular rest policy and fringe-benefit days. The typical hospital case where N employees are needed weekdays and n on weekends is developed in detail.     

CHILDREN OF A (POLICY) REVOLUTION: THE INTRODUCTION OF UNIVERSAL CHILD CARE AND ITS EFFECT ON FERTILITY

What role does affordable and widely available public child care play for fertility? We exploit a major German reform generating large temporal and spatial variation in child care coverage for children under the age of three. Our precise and robust estimates on birth register data reveal that increases in public child care have significant positive effects on fertility. The fertility effects are more pronounced at the intensive than at the extensive margin, and are not driven by changes in the timing of births or selective migration. Our findings inform policy makers concerned about low fertility by suggesting that universal early child care holds the promise of being an effective means of increasing birth rates.     

ON THE (RE)DISCOVERY OF FUZZY GOAL PROGRAMMING

An earlier paper and subsequent commentaries in Decision Sciences described purportedly new methods for formulating and solving goal programming problems with fuzzy goals. This note suggests that much of what these articles propose is but a rediscovery of well-known results.     

CURRICULUM DESIGN AND EVALUATION: INCORPORATING STUDENT PERSPECTIVES ON MAJORS AND CAREERS

In this paper the authors discuss the curriculum evaluation process. The use of student inputs to this process is supported. A demonstration is given of a methodology for analyzing student attitudes towards areas of study in the curriculum, and their perceptions of the relations between those areas of study and the job market.     

A NOTE ON HOLDING COSTS AND LOT-SIZE ERRORS

This note examines the sensitivity of the basic economic-order-quantity inventory model to lot-size errors when holding costs are assumed to be a strictly increasing (though not necessarily linear) function of average inventory. In particular, we show that the penalty associated with ordering either too much or too little is a function not only of the size of the error but of the shape of the holding-cost curve as well. We demonstrate that, under certain conditions, even relatively small lot-size errors can be extremely costly.     

EQUIVALENCE RESULTS FOR OPTIMAL PASS‐THROUGH,OPTIMAL INDEXING TO EXCHANGE RATES,AND OPTIMAL CHOICE OF CURRENCY FOR EXPORT PRICING

Firms sometimes write price lists or catalogs for their exports, so they set prices for a period of time and do not adjust prices during that interval in response to changes in their environment. The firm sets the price either in its own currency or the importer's currency. This paper draws a simple link between the choice of currency and the pricing decision of a firm that changes prices in response to all shocks. Specifically, if the latter firm's price has a lower variance in terms of its own currency than the importer's currency, then the firm with a price list will set the price in its own currency (and otherwise it will set price in the foreign currency). This relationship is established by consideration of the firm with a price list as a special case of a firm that indexes its export price to the exchange rate. (JEL: F4, F1)