FINANCIAL FRICTIONS AND THE CHOICE OF EXCHANGE RATE REGIMES

This article provides a quantitative assessment of the role of financial frictions in the choice of exchange rate regimes. I use a two‐country model with sticky prices to compare different exchange rate arrangements. I simulate the model without and with borrowing constraints on investment, under monetary policy and technology shocks. I find that the stabilization properties of floating exchange rate regimes in face of foreign shocks are enhanced relative to fixed exchange rate in presence of credit frictions. In presence of symmetric and correlated shock, fixed exchange rates regimes can perform better than floating. This analysis can have important policy implications for accession countries joining the European Exchange Rate Mechanism II system and with high degrees of credit frictions. (JEL E3, E42, E44, E52, F41)     

EXCHANGE RATE REGIMES AND FISCAL DISCIPLINE: THE ROLE OF CAPITAL CONTROLS

How do exchange rate regimes influence fiscal discipline? This important question has typically been addressed exploiting the classic dichotomy of fixed versus flexible exchange rate regimes assuming perfect capital mobility. However, the role of capital controls cannot be neglected, particularly in developing countries. This paper analyzes the effects of capital controls on fiscal performance by focusing on dual exchange rate regimes. In a model in which the fiscal policy is endogenously determined by a nonbenevolent fiscal authority, dual regimes induce politicians to have higher fiscal deficits than under fixed and flexible regimes operating under perfect capital mobility. The model also shows this effect increases as fiscal authorities become more impatient. Dynamic panel regressions confirm that dual regimes lead to higher fiscal deficits than fixed and flexible regimes operating under unified rates. Using a dummy for pre‐electoral year as an indicator of fiscal authorities' shortsightedness, we also confirm that dual exchange rate has a more adverse effect on fiscal deficits as the authorities become more impatient. (JEL E50, E60, F31, F41)     

EXCHANGE RATE VOLATILITY: THE ROLE OF REAL SHOCKS AND THE VELOCITY OF MONEY

The effects of stochastic output shocks on the behavior of ex-change rates and nominal price levels is studied within the context of a two-country, cash-in-advance model. The analysis of this model, in contrast to the existing cash-in-advance literature, demonstrates that exchange rates can be more volatile than price levels even though agents' elasticity of substitution between foreign and domestic goods is greater than one-half. This possibility arises when output shocks are autocorrelated and are due to revisions in expectations that affect the terms of trade and/or the velocity of money.     

RIESMAN'S CHARACTER TYPOLOGY AND MUSICAL PREFERENCES

Researchers analyzed YUM(!) Brand/Kentucky Fried Chicken's (KFC's) response to the People for the Ethical Treatment of Animals' (PETA's) KFC cruelty campaign in order to add a new component to the current organizational deviance literature related to how corporations defend themselves against attacks. KFC's reaction to PETA's attempts to label it deviant is a unique pattern of response we dub strategic interaction, in which each tactic used by PETA is met with a new and adaptive response by KFC. After an extensive campaign, PETA was still unable to succeed at changing KFC's policies. We attempt to explain PETA's lack of success in terms of superficial appeasement and appropriation. Superficial appeasement is a newly identified stalling tactic, which may provide organizations with the time they need to create a history of corporate responsibility in response to accusations of deviance. Appropriation involved KFC's co-optation of a joint panel that was intended to facilitate dialogue between the two organizations, but instead became almost entirely filled with panelists sympathetic to KFC's existing corporate policies, a technique that may facilitate other corporations attempting to defend themselves.     

ACROSS TIME AND REGIMES: 212 YEARS OF THE US‐UK REAL EXCHANGE RATE

The behavior of the US‐UK real exchange rate over the period 1794–2005 is examined. This series includes five intervals of floating nominal exchange rates and four fixed exchange rate regime periods. A consistent pattern of higher real exchange rate volatility under floating nominal rates is shown. Over time, real exchange rate movements have increasingly been driven by movements in the nominal exchange rate rather than relative prices. The persistence of the real exchange rate has been considerably higher in the postwar period. (JEL F31, N20)     

FISCAL STABILIZATION WITH PARTIAL EXCHANGE RATE PASS‐THROUGH

This article examines the role of fiscal stabilization policy in a two‐country framework that allows for partial exchange rate pass‐through. Analytical solutions for optimal monetary and fiscal policy rules depend on the degree of pass‐through. Each country unilaterally uses its fiscal instrument to stabilize the costs facing exporters. The welfare effects differ strongly depending on the degree of pass‐through. For high levels, both countries are better off with the fiscal instrument and welfare is closer to the benchmark flex‐price level. For low levels, however, the unilateral equilibrium policy rules lead to high volatility in taxes, and fiscal policy ends up being destabilizing by transmitting exchange rate fluctuations. Because these results stem from strategic considerations by the two countries, the fiscal instrument is not used under policy coordination. In addition, imposing a monetary union increases welfare when pass‐through is low, including the case of local currency pricing. (JEL E52, E63, F41, F42)     

ON THE PREFERENCES OF PRINCIPALS AND AGENTS

One of the reasons why market economies are able to thrive is that they exploit the willingness of entrepreneurs to take risks that laborers might prefer to avoid. Markets work because they remunerate good judgment and punish mistakes. Indeed, modern contract theory is based on the assumption that principals are less risk averse than agents. We investigate if the risk preferences of entrepreneurs are different from those of laborers by implementing experiments with a random sample of the population in a fast‐growing, small‐manufacturing, economic cluster. As assumed by theory, we find that entrepreneurs are more likely to take risks than hired managers. These results are robust to the inclusion of a series of controls. This lends support to the idea that risk preferences is an important determinant of selection into occupations. Finally, our lotteries are good predictors of financial decisions, thus giving support to the external validity of our risk measures and experimental methods (JEL C93, D81, D86).     

A NOTE ON RISK AVERSION AND PREFERENCES

The relationship between Arrow-Pratt measures of risk aversion and the standard income and substitution effects in certainty problems is presented. Particular emphasis is placed on the relationship between curvature properties of indifference maps and properties of relative risk aversion. The results are applied to the demand for insurance and in models with asymmetric information.     

THE REAL EXCHANGE RATE AND REAL INTEREST DIFFERENTIALS: THE ROLE OF THE TREND‐CYCLE DECOMPOSITION

We propose an alternative model and method to reconcile the puzzling feature in the relationship between the real exchange rate and real interest rate differentials. Our simple two‐country model with preset prices, along with firms' misperception about the future exchange rate, implies that the real exchange rate follows an ARIMA(0,1,p) process. This allows us to compute the exact Beveridge‐Nelson decomposition, which is a model‐consistent decomposition. In accordance with our model, unit roots in the real exchange rates are found; and statistical inference is partially found to be affirmative regarding the link between the real exchange rate detrended by the Beveridge‐Nelson decomposition and corresponding real interest differentials. (JEL F31, F41)     

THE IMAGE AND THE VOTE MANIPULATING VOTERS' PREFERENCES

Concern is often expressed regarding the ability of campaignconsultants to shape candidates' images and, thereby, influenceelectoral outcomes. Despite this concern, little attempt hasbeen made to investigate whether candidates' images can be shapedin a way that affects the vote. Here, we examine the role ofnonverbal aspects of candidate presentation on image makingand voters' preferences. In a series of three related studiesconducted at the time of the 1984 national election, the impactof different photographs of the same candidate is assessed.The results suggest that a candidate's image can be shaped insuch a way as to manipulate voters' preferences.     

EXCHANGE RATE RISK and THE BID-ASK SPREAD: A SEVEN COUNTRY COMPARISON

This paper studies the determination of exchange market transaction costs. Using a large data set including seven currencies, it provides empirical support for the theoretical prediction of a positive relationship between the level of uncertainty regarding future prices and current transaction costs. In contrast to most previous work, it considers explicitly the problem of omitted transactions volume, showing that while estimators are less efficient and potentially inconsistent in the absence of the unavailable variable, the direction of potential coefficient bias is such that hypothesis tests regarding the importance of uncertainty are rendered more conservative.     

DIRECT TESTS OF INDIVIDUAL PREFERENCES FOR EFFICIENCY AND EQUITY

Departures from “economic man” behavior in many games in which fairness is a salient characteristic are now well documented in the experimental economics literature. These data have inspired the development of models of social preferences that assume agents have preferences for equity and efficiency as well as their own material payoffs. Empirical failure of the economic man model comes from experiments that provide direct tests of its distinguishing characteristic: indifference to the payoffs of others. This paper reports an experiment that subjects popular social preferences models to the same type of empirical challenge. We report direct tests of the distinguishing characteristics of these models: preference for allocations that have higher efficiency and greater equity. (JEL A12, A13, B49, C70, C91, D63)     

COMMITTEE ASSIGNMENTS, CONSTITUENT PREFERENCES, AND CAMPAIGN CONTRIBUTIONS

We model the behavior of a vote-maximizing legislator in order to predict interest group campaign contributions to incumbent politicians. We show that committee assignments and voter preferences affect the price a legislator requires to produce policies for any interest group. An econometric analysis of actual interest group contributions shows that these groups make significantly larger contributions to legislators on committees with jurisdiction over especially relevant policy issues and to incumbents with non-hostile constituencies. These results support our theory; interest groups act as if committees matter in the determination of policy and voters' interests constrain interest group behavior.     

CURRENT ACCOUNT ADJUSTMENT IN DEVELOPING COUNTRIES: THE ROLE OF EXCHANGE RATE REGIMES

This article employs hazard models to investigate the role of exchange rate regimes in the timing of current account adjustment in developing countries. We identify high current account deficit spells and find that fixed exchange rate regimes increase the duration of high deficit spells and thus delay current account adjustment. The result is robust to a variety of model specifications and alternative classifications of exchange rate regimes. When distinguishing between hard pegs and soft pegs, we notice that the delay in the current account adjustment is primarily driven by hard pegs rather than soft pegs. (JEL F3, F4)     

REAL EXCHANGE RATE,MONETARY POLICY,AND THE U.S. ECONOMY: EVIDENCE FROM A FAVAR MODEL

This paper examines the effects of exchange rate depreciation to the U.S. economy in a factor‐augmented vector autoregression model using monthly data of 148 variables for the post–Bretton Woods period of 1973–2017. Exchange rate shock is identified to reflect exogenous disturbances to the foreign exchange market, and movements in exchange rate that are not accounted for by changes in the U.S. monetary policy. We find that depreciation is expansionary and inflationary to the broad U.S. economy, the current account improves over time conforming to the J‐curve theory, and monetary policy is leaning against the wind. (JEL E3, E5, F31, F32, F41)     

THE COMPOSITION OF GOVERNMENT EXPENDITURE: ECONOMIC CONDITIONS AND PREFERENCES

This paper examines the question of why the composition of government expenditure differs among democratic countries and to what extent it may be explained by differences in economic conditions or preferences. A simple overlapping generations model, which allows for a range of relevant factors, is constructed to examine the division of expenditure on public goods and a transfer payment under majority voting. The model yields a closed‐form solution for the majority choice of the expenditure ratio. An empirical examination suggests that income inequalities play a minor role while different preferences for public goods reflecting cultural differences across countries may play an important role in accounting for the substantial variations in expenditure patterns. (JEL D72, H41, H53, H11)     

AFFIRMATIVE ACTION AND DYNAMICS OF WORK‐ETHIC PREFERENCES

This study examines the cultural‐transmission effects of compensatory‐discrimination affirmative action policies on work‐ethic preference dynamics for a population in a caste‐based segregated economy in which some high‐paid jobs are reserved for historically disadvantaged lower‐caste individuals. Cultural attitudes toward preferences for work‐loving and leisure‐loving traits evolve endogenously. The compensatory‐discrimination policies affect differently the preference dynamics for insiders (entitled to employment quota) and outsiders (not entitled to employment quota). Efficient and inefficient equilibria are possible, with larger or smaller proportions of individuals with a work ethic among the insider and outsider populations. The model shows that the commonly conceived conclusion that a job reservation policy benefits a disadvantaged group at the cost of efficiency and economic growth is not a necessary outcome. (JEL A12, C62, J71)