Eric O'n. Fisher

Testing Purchasing Power Parity under the Null Hypothesis of Co-integration

This paper analyzes monthly data on the exchange rates and price indices of the eleven major industrial countries over the modern period of floating exchange rates. It presents tests that are based upon the null hypothesis of cointegration. The paper finds evidence that most country pairs not involving North American currencies have exchange rates and price indices that are cointegrated. It estimates the error correction representation for the series that are cointegrated and it shows that the dynamic adjustment of the relationship between exchange rates and prices is accomplished almost entirely in the market for foreign exchange. Copyright 1991 by Royal Economic Society.

Experimental Foreign Exchange Markets

The paper analyzes experimental markets where subjects buy and sell two different assets. The assets’ properties vary across treatments, and their relative price is the exchange rate. Although both assets uniformly exhibit bubbles, the exchange rate satisfies cross-currency arbitrage. There is no evidence of a positive risk premium in these markets, and almost all subjects’ forecasts of the exchange rate are rational.

Economic Geography, Trade, and War

An agent-based model in which economic exchange and military conflict are emergent processes is used to explore the relationship between trade and war. The model of exchange is an applied analysis of the economics of trading networks. The model of conflict treats war as a breakdown in interstate bargaining due to incomplete information. The simulations explore how initial economic geography, state revisionism, defensive advantage, and technological advancement akin to globalization affect both trade and war. The results show that the relationship between trade and war depends on third factors, and an inverse relationship between trade and war emerges from compact geographies with revisionist states.

Funded Pensions, Labor Market Participation, and Economic Growth

This paper analyses a model of overlapping generations in which agents who are not in the labor market are unable to borrow. An increase in a fully funded pension raises aggregate savings since private savings are not crowded out one-for-one. Labor force participation is determined endogenously, and a rise in the level of fully funded pensions increases aggregate employment. This increase in employment augments growth, directly by raising per capita savings and indirectly by affecting tax and interest rates.

A New Way of Thinking about the Current Account

Extending the theory of generational accounts, the author shows that the conventional current account is not related to the real effects of a countrys fiscal policy. For any international array of fiscal policies, a country can implement its own policy so that the conventional government and current account deficits are zero in every period. The author argues that economists should develop a new measure of the current account. This measure is forward looking and keeps track of expected transfers between countries. Copyright 1995 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Sustainable balance of trade deficits

Abstract This paper analyzes a model of overlapping generations in which there are two currencies. There are two agents born in each period, and these agents have completely heterogeneous preferences and endowments. The paper shows that there are monetary equilibria in which one country can sustain a trade deficit whose present value is arbitrarily close to that of its trading partners entire stream of resources. Hence, there may be no limit to the present value of a countrys trade deficit, even if the equilibrium for the world economy satisfies an intertemporal efficiency criterion.

Sustained growth in the model of overlapping generations

Abstract This paper analyzes endogenous economic growth in the model of overlapping generations. There is no bequest motive, nor are there any externalities. If the technology is convex, per capita growth can occur only if the economy has at least two sectors. This paper shows that the limiting marginal efficiency of investment determines the potential for growth and that the rate of growth depends upon the share of the capital stock devoted to investment. Sustained consumption growth can occur only under a fairly restrictive set of assumptions. There is an equilibrium with growth only if the marginal propensity to save is sufficiently high.

Price Competition Between Two International Firms Facing Tariffs

Abstract This paper examines the effects of tariffs on price-setting duopolists selling a homogeneous product. The producers cannot segment geographically distinct markets. It provides a complete characterization of the equilibrium (mixed) strategies and analyzes the pattern of competition for different tariffs. If a country raises its tariff, the profits of both producers increase, although the protected firm typically benefits more than its foreign counterpart. Growth in one market may reduce the profits of the firm located in the other market.

Dollarization and the Mexican Labor Market

This paper examines how dollarization affects wages and employment in the Mexican labor market. Dollarization is modeled as a fixed real exchange rate and also as a potentially increased inflow of capital from abroad. The effects of dollarization depend upon whether adopting a fixed exchange reduces the rate of return on emigration and helps to attract foreign capital. The paper investigates how Mexican emigration to the United States responds to changes in bilateral economic conditions. The evidence indicates that the flow of illegal immigrants from Mexico into the United States is sensitive to economic conditions and is more volatile when the Mexican monetary authorities have fixed the exchange rate in the past. In contrast, the legal immigrant flow is not sensitive to changes in relative economic conditions.

Purchasing Power Parity and Interest Parity in the Laboratory

This paper analyzes purchasing power parity and uncovered interest parity in the laboratory. It finds strong evidence that purchasing power parity, covered interest parity, and uncovered interest parity hold. Subjects are endowed with an intrinsically useless (green) currency that can be used to purchase another useless (red) currency. Green goods can be bought only with green currency, and red goods can be bought only with red currency. The foreign exchange markets are organized as call markets. In the treatment analyzing purchasing power parity, the price of the red good varies. In a second treatment, the interest rate on red currency varies. In a third treatment, the interest rate on red currency varies, and the price of the red good is random.