Showing papers in "The Economic Journal in 1999"

Beyond Becker: Training in Imperfect Labour Markets

Abstract: In this paper, the authors survey noncompetitive theories of training. With competitive labor markets, firms never pay for investments in general training, whereas when labor markets are imperfect, firm-sponsored training arises as an equilibrium phenomenon. The authors discuss a variety of evidence that supports the predictions of noncompetitive theories and they draw some tentative policy conclusions from these models.

Does Child Labour Displace Schooling? Evidence on Behavioral Responses to an Enrollment Subsidy

Abstract: This brief summarizes the results of a gender impact evaluation study, entitled Does child labour displace schooling? Evidence on behavioral responses to an enrollment subsidy, conducted between 1995 and 1996, in Bangladesh. The study observed that the subsidy increases schooling, but its effect on child labour is ambiguous. The subsidy increased schooling by far more than it reduced child labour. Substitution effects helped protect current incomes from the higher school attendance induced by the subsidy. Substitution effects helped protect current incomes from the higher school attendance induced by the subsidy. The reduction in the incidence of child labour by boys (girls) represents about one quarter (eighth) of the increase in their school enrollment rate.

Uses and Abuses of Estimates of the Underground Economy

Abstract: ered valuable by at least a part of society (narcotics production and distribution, prostitution, gambling). These activities can be large in some countries and should be counted in the national accounts of all countries although they rarely are. Their omission affects the comparability of data across countries. The incomes generated by illegal activities are rarely taxed.' Many other activities, such as those associated with the subsistence or informal sectors, are estimated, rather than measured, and are generally not taxed because of the low value they generate to those who engage in them. In conclusion there are many reasons, beside the ones discussed in this paper why the measurements of national output may not be complete. About two decades ago, a few economists became convinced that many normal economic activities, that should be measured and taxed, were taking place 'underground' or in the 'shadow' thus presumably escaping the attention of the statistical offices, of the tax authorities, and, more generally, of the government regulators. Some of these economists also claimed that, like Alice in Wonderland, these hidden activities were growing in a 'ridiculous fashion'. (See Gutmann, 1977; and Feige, 1979). By the late 1970s, the role of government had grown enormously, so that the level of taxation and the tax rates had risen sharply and regulations had proliferated in many countries. See Tanzi and Schuknecht (1997). These developments had created strong incentives for individuals and enterprises to go 'underground' to avoid taxes and regulatory restrictions. Thus, a good case could be made that what came to be called the underground economy was a phenomenon to worry about. Newspaper articles were ready to accept the

What explains the success or failure of structural adjustment programs

Abstract: In the 1980s development assistance shifted largely from financing investments (such as roads and dams) to promoting policy reform. This change came because of a growing awareness that developing countries were held back more by poor policies than by a lack of finance for investment. After nearly 20 years' experience with policy-based or conditional lending, there have now been many studies of adjustment lending, most of which take a case-study approach. Many conclude that policy-based lending works if countries have decided on their own to reform. The authors examine a database of 220 World Bank-supported reform programs to identify why adjustment programs succeed or fail. They find that a few political economy variables can successfully predict the outcome of an adjustment loan 75 percent of the time. Variables under the World Bank's control -- resources devoted to preparation and supervision or number of conditions -- have no relationship with an adjustment program's success or failure. What development agencies must do, then, is select promising candidates for adjustment support. When the candidates is a poor selection, devoting more administrative resources or imposing more conditions will not increase the likelihood of successful reform. To improve its success rate with adjustment lending, the World Bank must become more selective and do a better job of understanding which environments are promising for reform and which are not. That is likely to lead to fewer adjustment loans, unless there is a significant change in the number of promising reformers. To become more effective at supporting policy reform, the agency must be willing to accept that this may lead to smaller volumes of lending.

True world income distribution, 1988 and 1993: first calculation based on household surveys alone

Abstract: The paper derives world income or expenditure distribution of individuals for two years 1988 and 1993. It is the first paper to calculate world distribution for individuals based entirely on household survey data from 91 countries, and adjusted for differences in purchasing power parity between the countries. Measured by the Gini index, inequality increased from an already very high 63 in 1988 to 66 in 1993. The increase was driven more by rising differences in mean incomes between the countries than by rising inequalities within countries. The most important contributors were rising urban-rural differences in China, and slow growth of rural incomes in South Asia compared to several large developed market economies.

Using the ARD Establishment Level Data to Look at Foreign Ownership and Productivity in the United Kingdom

Abstract: Recently the data underlying the Annual Census of Production has been made available to academic economists in the United Kingdom. The data provide information on production activity in the United Kingdom at the plant level. This paper provides some preliminary description of the data and discusses a few of its advantages and some of the problems associated with using it. A brief review of current empirical work using the ARD data is given. A particular application, looking at differences between foreign and domestic-owned establishments, is described in more detail.

Experimental Economics From the Vantage‐point of Behavioural Economics

Abstract: As a behavioural economist (an economist who brings psychological insights to bear on economic phenomena), preparing a controversy corner piece criticising experimental economics (the use of experimentation to address economic questions) is like working yourself up to enter the boxing ring against a friend. Experimental economics and behavioural economics have much in common. Both groups can trace their origins to psychology psychological theory in one case and experimentation in the other. Both subfields came of age in the last quarter of this century, and have gained growing acceptance within the discipline of economics as measured by almost any criterion: publications in mainstream journals, academic positions in top departments, prominence at meetings, etc.. In the current climate it is easy to forget that only 20 years ago the simple fact that an article reported experiments or discussed psychology was regarded by many editors as grounds for summary rejection. Perhaps more importantly, many behavioural economists (BEs) use economics-style experiments, and some experimental economists (EEs) embrace psychology. Indeed, some researchers would find it difficult to classify themselves into one group or the other, and would be embraced by both groups as one of their own. There is, therefore no inherent conflict between the two approaches; indeed, there is good cause for synergistic coexistence. Nevertheless, there is often value in obtaining another field's perspective on what one does. Some EEs have not been particularly reticent about providing BEs with such input (see, e.g., Smith, 199 1). In this essay I attempt to return the favour in a small way. There are, in fact, many differences between the two subfields, the most important of which is one of basic orientation. BEs are methodological eclectics. They define themselves, not on the basis of the research methods that they employ, but rather their application of psychological insights to economics. In recent published research, BEs are as likely to use field research as experimentation (see, e.g., Camerer et al., 1997; Babcock et al., 1996). EEs on the other hand, define themselves on the basis of their endorsement and use of experimentation as a research tool. Consistent with this orientation, EEs have made a major investment in developing novel experimental methods that are suitable for addressing economic issues, and have achieving a virtual consensus among themselves on a number of important methodological

Survival of the fittest? an analysis of self- employment duration in britain*

Abstract: This paper uses data from the British Household Panel Survey to investigate the duration of self-employment spells in Britain. The results suggest that 40% of self-employment ventures started since 1991 have not survived their first year in business. Evidence is produced showing that a substantial proportion of self-employment spells are not terminated through bankruptcy, but through moves to alternative employment. The fittest, in terms of self-employment survival, are those with no previous unemployment experience but with some work experience, who quit their previous job, and who entered self-employment with some initial capital. Policy makers have implemented initiatives designed to encourage and facilitate the growth of small businesses and self-employment in Britain. Such enterprises are regarded as an important source of job creation and innovation. Despite this, little attention has focused on their success. This paper investigates issues concerning the success of the self-employed by examining the length of self-employment spells using life tables and Cox proportional hazard models, and the reasons given for leaving self-employment. Unlike most previous studies, it is concerned with the individual running the firm, allowing personal characteristics to influence the probability of survival. Uniquely, the data allow the separate analysis of voluntary and involuntary selfemployment terminations. All analyses are carried out separately for men and women using micro-level data from the British Household Panel Survey. Previous work analysing self-employment survival rates has mainly focused on personal asset and wealth holdings. Most is consistent with the hypothesis that entrepreneurial activity is restricted by liquidity constraints, either by preventing firm entry (Evans and Leighton, 1989; Evans and Jovanovic, 1989;

The Pre‐programme Earnings Dip and the Determinants of Participation in a Social Programme. Implications for Simple Programme Evaluation Strategies

Abstract: The key to estimating the impact of a programme is constructing the counterfactual outcome representing what would have happened in its absence. This problem becomes more complicated when agents, such as individuals, firms or local governments, self-select into the programme rather than being exogenously assigned to it. This paper uses data from a major social experiment to identify what would have happened to the earnings of self-selected participants in a job training programme had they not participated in it. We investigate the implications of these earnings patterns for the validity of widely-used before-after and difference-in-differences estimators.

Globalisation and the Market for Team‐Mates

Abstract: The globalisation of firms is explored at theoretical and empirical levels. The idea is that a global firm is a multi-cultural team. The existence of a global firm is somewhat puzzling. Combining workers who have different cultures, legal systems, and languages imposes costs on the firm that would not be present were all workers to conform to one standard. In order to offset the costs of cross-cultural dealing, there must be complementarities between the workers that are sufficiently important to overcome the costs. The search for the ‘best practice’ is analysed and empirical support from an examination of trading patterns is provided.

On the Benefits From Rigid Labour Markets: Norms, Market Failures, and Social Insurance

Abstract: The common view that far-reaching labour market deregulation is the only remedy for high European unemployment is too simplistic. First, the evidence suggests that deeply rooted social customs are ...

An analysis of the Stability and Growth Pact.

Abstract: We use a stylised model to analyse the Stability and Growth Pact for countries that have formed the European Monetary Union (EMU). In our model, shortsighted governments fail to internalise the consequences of their debt policies for the common inflation rate fully. Therefore, while governments have no incentive to sign a stability pact in the absence of a monetary union, they do so with monetary union to restrain this externality. With uncertainty, a monetary union combined with an appropriately designed pact will be strictly preferred to autonomy. With differences in initial conditions, conflicts of interest arise. We study the Nash bargaining solution.

Access to Markets and the Benefits of Rural Roads

Abstract: Transport infrastructure plays a central role in rural development, yet little is known about the size - or, especially, the distribution - of benefits from road investments. Among other benefits, rural roads provide cheaper access to both markets for agricultural output and for modern inputs. The author develops and implements a method for nonparametrically estimating the benefits from road projects at the household level. The idea is that since these benefits get capitalized in land values, they can be estimated by examining how the value of farmland falls with distance from agricultural markets. Household-level benefits from hypothetical road projects are calculated from the predicted appreciation in value of the household's farmland. These predicted benefits are then related to household per-capita expenditures to assess their distributional consequences. The empirical analysis, using data from Nepal, shows large benefits from extending roads into remote rural areas, much of these gains going to poorer households. But rural road construction is not the magic bullet for poverty alleviation. The benefits are neither large enough nor targeted well enough to reduce income inequality appreciably.

Unemployment responses to ''skill-biased'' technology shocks: the role of labour market policy

Abstract: Do skill-biased shocks that increase the spread of labour productivities, interacting with different policy regimes, explain the rise in unemployment in Europe relative to the United States in the 1980s and 1990s? The hypothesis is an implication of a version of the Mortensen and Pissarides (1994) model of equilibrium unemployment which allows for worker heterogeneity. A calibrated version of the model implies that a similar unemployment increase would have occurred in the United States over this period, given changes in relative productivity by education implied by observed wage changes, had unemployment compensation and employment protection policies been at European levels.

Modelling the Impact of Demographic Change Upon the Economy

Abstract: Over the next few decades there will be significant changes in the demographic structure of nearly all developed countries. Such dramatic demographic change could have a powerful impact upon saving behaviour but estimates of how great the effects will be differ depending on what evidence is used. This paper argues that simulations based on calibrated general equilibrium models are likely to provide the most reliable evidence. A model is developed and is used to assess the impact of reforms to pension systems. (EXCERPT)

Measuring the Hidden Economy: Implications for Econometric Modelling

Abstract: In this paper I support using econometric techniques to measure the size of the hidden (underground) economy, because such information is important for the construction of certain economic models, and for empirical policy analysis. Generally, detailed information on the output of the hidden economy is unavailable. Even where careful measures of the underground economy have been constructed, usually these data are available only periodically. Important exceptions are the classic results of Tanzi (1983) for the United States, and Bhattacharyya's (1990) series for the United Kingdom. In the case of the New Zealand economy, a time-series of data on the hidden economy has been generated recently (Giles, 1997a). This provides the unusual opportunity to undertake econometric modelling in a way which takes account of such activity formally. Moreover, we can examine the policy implications arising from the linkages between hidden output and various measured economic aggregates. (This abstract was borrowed from another version of this item.)

Can Social Cohesion be Harnessed to Repair Market Failures? Evidence from Group Lending in Guatemala

Abstract: The success of group lending in developing countries has been attributed to the ability of the institution to mitigate asymmetric information problems in credit markets. Previous research has offered a number of explanations for this phenomenon: social ties between borrowing group members, internal group pressure to repay loans, and peer monitoring. This research presents empirical tests on borrowing group data from Guatemala which indicate that peer monitoring significantly effects borrowing group performance through stimulating intra-group insurance. Group pressure is found to have a small effect in deterring moral hazard, while the effect of social ties among members is statistically insignificant.

Quantifying the Black Economy: ‘measurement Without Theory’ Yet Again?

Abstract: I shall argue that 'measurement without theory' is a fair description of the published empirical work aimed at guestimating the size of the 'hidden' or 'black economy'.' I shall also argue that a mere guestimate of the overall size of the black economy is of limited value for the policy maker; it is also important to know who is doing what, where, how and why. Then we can see what should and/or can be done about legislating for or against the black economy. In assessing the various attempts to measure the size of the black economy, one should also be aware of a political dimension to some of this work. Perhaps a large and growing black economy is an indication that the economy is overtaxed and over-regulated and a neo-liberal adjustment is needed to free it up? If a large part of the black economy is social security fraud, then maybe unemployment is not really as bad as it looks? Clearly such political conclusions depended on having good theoretical as well as sound quantitative foundations and both these components were generally missing.

The Impact of Exchange Rate Uncertainty on the Level of Investment

Abstract: Conventional wisdom has it that increasing price or exchange rate uncertainty will depress investment. Using the Dixit-Pindyck model, we find that there are situations where this will happen; and situations where it does not. There are threshold effects which allows us to identify when rising volatility would increase or decrease investment; and also to identify which types of industries would gain, and which would suffer, from a move to fixed exchange rates. This is important for monetary union in Europe since it is likely that, even if trade is insensitive to exchange rate volatility, investment with its longer horizon will be affected. Textbook theories of investment under uncertainty present a rather oversimplified rule for a firm deciding whether to invest or not. If the project's expected net present value (NPV) is positive, the firm invests; otherwise it does not. This implies that if the investment is reversible, the firm will simply disinvest if the NPV turns negative. But if investment is irreversible, then if a firm decides not to invest, it will never invest. This is not a realistic approach. Given uncertainty, firms often find it convenient to wait rather than to commit themselves one way or another. Waiting is therefore a proper alternative to investing or not investing; and firms will be confronted with an 'invest-wait-do not invest' decision, rather than an 'invest-do not invest' one. Dixit and Pindyck (1994) have developed a model in which the option value of an investment project is evaluated to represent the value of waiting. That option value then becomes part of the investment costs because, once an irreversible investment is made, the possibility of exercising this option to invest later on, when better information is available, has been lost. Thus the decision rule is still 'invest if NPV> 0, otherwise do not invest', but the NPV now represents the present value of the expected revenues, less the value of the option to invest later, less the present value of any other investment costs. In this paper we extend the Dixit-Pindyck model for varying degrees of uncertainty and price drift, and specifically for the case where that uncertainty is caused by exchange rate volatility. Such an extension is important, not only because it is a new development, but also because we need to understand how monetary union will affect investment expenditures in Europe. For simplicity we assume the domestic prices are fixed, and that the only uncertainty is in the exchange rate and hence the domestic value of foreign currency revenues. That leaves us with various problems. The first is to determine the threshold at which exchange rate/price uncertainty is sufficient to affect investment adversely. Second, under what conditions does that uncertainty actually reduce investment? Third, do exchange rate misalignments or exchange rate volatility damage investment more? We show that answers to such questions can be [C55]

Computerisation and Wage Dispersion: An Analytical Reinterpretation

Abstract: The rich countries have recently seen a dramatic rise in income inequality, all the more surprising because the long-term trend had been toward equality. This paper examines one of the leading explanations; computerisation in the workplace. I offer a theory of computers’ impact on white-collar work which goes far toward explaining the timing, form, and locus of recent labour market changes. The theory looks at the bureaucratic and organisational applications of computers that have been first, largest, and most influential. They have two effects on firms’ demand for labour at different skill levels.

Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits

Abstract: We develop an equilibrium search-matching model with risk-neutral agents and two-sided ex-ante heterogeneity. Unemployment insurance has the standard effect of reducing employment, but also helps workers to get a suitable job. We show, through calibrations, how the mere difference on unemployment insurance, when countries experience a common skilled-biased technological shock, may result in differences in unemployment, productivity growth and wage inequality. These results are consistent with the contrasting performance of the labour market in Europe and the United States in the last twenty-five years. The model is used to address some political economy issues.

Learning in Cournot Oligopoly – an Experiment

Abstract: This experiment was designed to test various learning theories in the context of a Cournot oligopoly. We derive theoretical predictions for the learning theories and test these predictions by varying the information given to subjects. The results show that some subjects imitate successful behaviour if they have the necessary information, and if they imitate, markets are more competitive. Other subjects follow a best reply process. On the aggregate level we find that more information about demand and cost conditions yields less competitive behaviour, while more information about the quantities and profits of other firms yields more competitive behaviour.

Orchestrating Rent Seeking Contests

Abstract: Contests have different, sometimes quite complex, organisational structures In particular, while most of the existing literature focusses on simultaneous contests, multistage contests are also quite frequently encountered This paper seeks to provide a rationale for the latter by endogenising the choice of a contest structure, which is made by an organiser of a contest interested in maximising the efforts expended by the contenders

Long-term partnership formation: marriage and employment*

Abstract: Of course, marriage and employment are different. Nevertheless, a worker looking for a job, a ®rm looking for worker, or a single person looking for a marriage partner face similar problems as all are seeking a long-term partner. Indeed, forming long-term partnerships is a common occurrence in life. There are many other examples ± business people search for other business people to form a pro®table relationship, bridge players seek to ®nd a suitable partners, students search for a good university, we would all like to ®nd a good friend, etc. The problem becomes signi®cant if there are substantial differences in the return obtained from forming a partnership with different partners. For example, employers differ in the wages they offer, or in the work environment they provide. In such a situation a worker may reject some job offers. Similarly, as many have learned to their cost, some make better marriage partners than others. The problem is two-sided. While a worker is evaluating a potential employer, the employer is also evaluating the worker. It is this two-sided aspect of the problem that generates a signi®cant interest. A worker's willingness to accept employment at a ®rm depends not only on the characteristics of the ®rm but also the other possible options open to the worker. The better an individual's opportunities elsewhere, the more selective he or she will be in evaluating a potential partnership. An academic who believes Harvard may make an offer in the near future, will be more selective in evaluating offers from lesser universities. In this way expectations play a role. If a single man believes that few, if any, women will ®nd him an acceptable marriage partner, then he may accept the ®rst opportunity that presents itself. Partnership formation, typically, does not comply with a classic market situation, where all participants know everything and all trades take place at zero cost. Finding a job, ®nding a husband or wife, or ®nding a business partner is a time consuming activity where opportunities typically arrive over time at uncertain intervals of time. Of course, we can act in ways that in uence the arrival rate of potential partner. Workers go to employment agencies, or read help wanted advertisements in newspapers, singles of a certain age go to discos, or join tennis clubs. The literature on search and matching (SM) (see Mortensen (1982), and Pissarides (1990) for early examples)1 provides an excellent framework for The Economic Journal, 109 ( June), F307±F334. # Royal Economic Society 1999. Published by Blackwell Publishers, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street, Malden, MA 02148, USA.

Minimum Wages for Ronald McDonald Monopsonies: a Theory of Monopsonistic Competition

Abstract: Recent empirical work on the effects of minimum wages has called into question the conventional wisdom that minimum wages invariably reduce employment. We develop a model of monopsonistic competition with free entry to analyse the effects of minimum wages, and our predictions fit the empirical results closely. Under monopsonistic competition, we find that a rise in the minimum wage raises employment per firm, causes firm exit and may increase or reduce industry employment. Minimum wages increase welfare if they raise industry employment but welfare effects are ambiguous if employment falls.

The Editors and Authors of Economics Journals: a Case of Institutional Oligopoly?

Abstract: This paper examines data on the institutional backgrounds of editors and authors of the top 30 economics journals, identified by their 1995 citation impact. It is revealed, for example, that 70.8% of the journal editors were located in the United States, and twelve U.S. universities accounted for the location of more than 38.9%. Concerning journal article authors, 65.7% were located in U.S. institutions and twelve U.S. universities accounted for 21.8%. Arguably, the degree of institutional and geographical concentration of editors and authors may be unhealthy for innovative research in economics. The number of academic journals in economics is large and increasing rapidly. The Judge Institute (1994) compiled a list of no less than 1,431 journals in management and social science, a large proportion of which were devoted to economic issues.2 Given this rapidly growing abundance of titles, more and more attention is being devoted to the identification of, and greater relative status bestowed upon, the top 30 or 'core' journals in the subject. It is likely that the explosion in the number ofjournals will lead to much higher relative prestige being bestowed on work published in the perceive 'core'. Accordingly, questions of institutional affiliation and control relating to these 'core' journals are of major and increasing importance. A list of the 30 most visible and well-known economics journals is compiled here. It is shown that a large number of the editors and authors related to these journals come from a few, predominantly U.S.-based, academic institutions. Although the degree of institutional concentration revealed here may be surprising, some might wish to attempt to explain this phenomenon by supposing that

Investment with Uncertain Tax Policy: Does Random Tax Policy Discourage Investment

Abstract: We consider the impact of tax policy uncertainty on firm level and aggregate investment, comparing investment behaviour when uncertainty is due to a shock following Geometric Brownian Motion (GBM) versus when random discrete jumps in tax policy occur. Expectations of the likelihood of a tax policy switch have an important negative impact on the gain to delaying investment in the latter model and time to investment can fall with increasing tax policy uncertainty. Aggregate investment simulations indicate that capital formation is adversely affected by increases in uncertainty in the traditional GBM model but can be enhanced in the jump process model.

Why experiment in economics

Abstract: Experimental economics is now so popular that a Nobel prize is doubtless imminent for those who pioneered the subject. But one may ask what economists are doing in the laboratory at all. Would it not be better to leave laboratory experiments to psychologists who are trained to run them properly? The answer to this question requires making the same distinction in social science that hard scientists make between physics and engineering. Physicists try to find out how the world works and engineers use whatever happens to be known at present to make things. A similar unacknowledged division exists in economics between what one might call scientific economists and policy advisers. It seems to me uncontroversial that laboratory experimentations for policy purposes-as in Plott's recent testing of the rules of the big American spectrum auction for the Federal Communications Commission-is not only firmly established as a tool for widening debate, but that it is an activity that can only sensibly be undertaken by economists who understand the institutions that are to be reformed. My concern is therefore with whether scientific economists are wasting their time in the laboratory. I think the answer would be yes if economics were really as disastrous at predicting in the laboratory as the school of Kahneman and Tversky (1988) would have us believe. Indeed, I think there would be a good case for abandoning economics altogether if their wider claims were valid, since the rejoinder that economics somehow only works in the field seems pretty feeble to me. However, we should not be so easily led by the nose. In the first place, economists should be aware how Kahneman and Tversky have been criticised in the experimental psychology literature for the failure of their results to withstand simple robustness tests (Gigerenzer, 1996). Within our own literature, we have Bohm (1993, 1994) reporting that preference reversals disappear when subjects have strong enough incentives, Loomes (1993) reporting no endowment effect under some conditions, and Cubitt et al. (1996) finding no common-ratio effect under others. But there is a much more important point, which militates in favour of economists running their own experiments. Under the circumstances in which the school of Kahneman and Tversky run experiments, we should not expect to find economic theory predicting well anyway! I suppose that there are still economic theorists who believe that an invisible

Export Market Performance of OECD countries: an empirical examination of the role of cost competitiveness

Abstract: We investigate the relationship between export market shares and relative unit labour costs using a long panel of 12 manufacturing industries across 14 OECD countries. We ask how sensitive are export market shares to changes in relative costs and what determines this sensitivity? Both costs and embodied technology are important, but neither can fully explain changing export positions. We explore whether residual country-specific trends might be linked to ‘deep’ structural features of economies. Sensitivity to labour costs is lower in high tech industries and core ERM countries. Industry elasticities have increased, especially in industries subject to increasing product market competition.

Understanding exchange rate volatility without the contrivance of macroeconomics

Abstract: Exchange rate regimes differ primarily by the activity of the exchange rate, not observable macroeconomic ‘fundamentals’. Fixed exchange rates are typically stable and floating exchange rates are volatile, but macro phenomena are regime-independent. Fundamentals only seem to be relevant for exchange rates at low frequencies or when inflation is high. A basic task of international finance is explaining these cross-regime differences in exchange rate volatility. The evidence suggests that a switch in exchange rate policy is accompanied by a change in market structure; macroeconomic considerations are superfluous. We formalize this observation in a non-linear model with multiple equilibria. (This abstract was borrowed from another version of this item.)