ARCH modeling in finance: A review of the theory and empirical evidence

Empirical exchange rate models of the seventies: Do they fit out of sample?

This study explores the premise that knowledge in new product development proves both a barrier to and a source of innovation. To understand the problematic nature of knowledge and the boundaries that result, an ethnographic study was used to understand how knowledge is structured differently across the four primary functions that are dependent on each other in the creation and production of a high-volume product. A pragmatic view of 'knowledge in practice' is developed, describing knowledge as localized, embedded, and invested within a function and how, when working across functions, consequences often arise that generate problematic knowledge boundaries. The use of a boundary object is then described as a means of representing, learning about, and transforming knowledge to resolve the consequences that exist at a given boundary. Finally, this pragmatic view of knowledge and boundaries is proposed as a framework to revisit the differentiation and integration of knowledge.

A Pragmatic View of Knowledge and Boundaries: Boundary Objects in New Product Development

This paper presents a theoretical analysis of the 'Dutch Disease': the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors, both by directly bi ...

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Booming Sector and De-Industrialisation in a Small Open Economy

FIRST ARTICULATED by scholars of the ISalamanca school in sixteenth century Spain,1 purchasing power parity (PPP) is the disarmingly simple empirical proposition that, once converted to a common currency, national price levels should be equal. The basic idea is that if goods market arbitrage enforces broad parity in prices across a sufficient range of individual goods (the law of one price), then there should also be a high correlation in aggregate price levels. While few empirically literate economists take PPP seriously as a short-term proposition, most instinctively believe in some variant of purchasing power parity as an anchor for long-run real exchange rates. Warm, fuzzy feelings about PPP are not, of course, a substitute for hard evidence. There is today an enormous and evergrowing empirical literature on PPP, one that has arrived at a surprising degree of consensus on a couple of basic facts. First, at long last, a number of recent studies have weighed in with fairly persuasive evidence that real exchange rates (nominal exchange rates adjusted for differences in national price levels) tend toward purchasing power parity in the very long run. Consensus estimates suggest, however, that the speed of convergence to PPP is extremely slow; deviations appear to damp out at a rate of roughly 15 percent per year. Second, short-run deviations from PPP are large and volatile. Indeed, the one-month conditional volatility of real exchange rates (the volatility of deviations from PPP) is of the same order of magnitude as the conditional volatility of nominal exchange rates. Price differential volatility is surprisingly large even when one confines attention to relatively homogenous classes of highly traded goods. The purchasing power parity puzzle then is this: How can one reconcile the enormous short-term volatility of real exchange rates with the extremely slow rate at which shocks appear to damp out? Most explanations of short-term exchange rate volatility point to financial factors such as changes in portfolio preferences, short-term asset price bubbles, and monetary shocks (see, for example, Maurice Obstfeld and Rogoff forthcoming). Such shocks can have substantial effects on the real economy in the presence of sticky nominal wages and prices. I See Lawrence H. Officer (1982, ch. 3) for an extensive discussion of the origins of PPP theory; see also Dornbusch (1987).

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Michael Mussa

Papers

Monopoly and product quality

Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications

Empirical regularities in the behavior of exchange rates and theories of the foreign exchange market

The two-sector model in terms of its dual: A geometric exposition

Imperfect factor mobility and the distribution of income