Jon Vilasuso

Forecasting exchange rate volatility

Abstract Exchange rate volatility forecasts are obtained using a fractionally integrated GARCH model. Gains in forecast accuracy associated with a fractionally integrated model compared to a GARCH or IGARCH model are shown to be substantial in many cases.

Agency Costs, Asset Specificity, and the Capital Structure of the Firm

We develop a dynamic model that incorporates the insights of both the agency cost and asset specificity literature about corporate finance. In general, we find that neither can be ignored, and that the optimal capital structure minimizes agency cost and asset specificity considerations. A key finding is that the conditions most favorable for reducing transaction costs due to asset specificity are the same as those for reducing the agency costs of debt. Empirically, we find that agency costs and asset specificity are significant determinants of a firms capital structure in the transportation equipment and the printing and publishing industries.

Causality tests and conditional heteroskedasticity:: Monte Carlo evidence

Abstract This paper investigates the reliability of causality tests based on least squares when conditional heteroskedasticity exists. Monte Carlo evidence documents considerable size distortion if the conditional variances are correlated. Inference based on a heteroskedasticity and autocorrelation consistent covariance matrix offers little improvement. This size distortion traces to an inability to discriminate between causality in mean and causality in variance. As a result, this paper endorses conducting causality tests based on an empirical specification that explicitly models the conditional means and conditional variances. The relationship between money and prices serves as an illustrative example.

Public policy and R&D when research joint ventures are costly

In this paper we examine the role of policy when forming a R&D joint venture is costly. Contrary to previous studies, we document an active role for public policy, since the interests of firms are not necessarily aligned with societal interests. The nature of policy, however, depends on the joint venture cost. If it is relatively low, then policy may call for subsidizing the joint venture to encourage collaboration. If forming a joint venture is very costly, however, then there are cases where social welfare is improved if policy encourages R&D competition with no joint venture.

Is Keynesian Demand Management Policy Still Viable

Keynesian policy in the United States, and to call for a defense. The debate no longer revolves solely around obscure theoretical issues. The arguments supporting policy ineffectiveness inthe current economy exceed differences between schools of economic thought and political ideologies, and need not challenge the wisdom or effectiveness of the policies of past decades. As a result of earlier policy choices, changing technologies, and special innovations in the financial industry, the structure of the economy has changed. In the present U.S. economic setting, demand management policies may be largely ineffective, and in some cases, contribute more to the problems than to the solutions. The postwar era through the 1970s was dominated by economic policies that focused on adjustments to aggregate demand. The dominant policy approach involved attempting to overpower apparent failures at the level of individual markets by gross changes to spending at the aggregate level. This approach is consistent with Keynesian theory, and some argue that it may even have been effective. There was no evidence of significant crowding effects, exchange rates were fixed under the Bretton Woods agreement, and the rapid growth in real output exceeded the growth of monetary aggregates that were required to continue the domestic interest

A Time Series Analysis of the Relationship between Inflation Uncertainty and Unemployment

Abstract This paper examines the empirical relationship between inflation uncertainty and unemployment rates. We find supportive evidence of a significant positive association between inflation uncertainty and unemployment, but this relationship depends critically on three factors. First, the inflation uncertainty-unemployment relationship is not significant before the mid-1970s. Second, the inflation uncertainty-unemployment relationship does not hold across all single digit SIC industries. And third, the inflation uncertainty-unemployment relationship is concentrated at business cycle and long-run components of the data, rather than high-frequency components.

Time aggregation and causality tests: results from a monte carlo experiment

This paper examines the importance of time aggregation in causality testing. We find that temporal aggregates are between two and ten times more unlikely to detect a true causal relationship than are systematic sampled aggregates over short aggregation spans.

A Band Spectral Analysis of Exports and Economic Growth in the United States

This paper examines the role of exports in aggregate economic growth in the United States using band spectral regression. The findings reveal a predictable relationship between long-run frequency components of real export growth and real GDP growth over the post-Bretton Woods period of flexible exchange rates. The study fails to uncover a significant relationship between long-run frequency components of the terms of trade and real output. Overall, the findings support the export-led growth hypothesis, and dismiss long-run movements in the terms of trade as an important determinant of real output growth. Copyright 1999 by Blackwell Publishing Ltd.

Domestic Price, (Expected) Foreign Price, and Travel Spending by Canadians in the United States

In this paper, the authors develop and test a model to explain travel expenditures in the United States by Canadians. The model examines a consumers choice problem where income is allocated between domestic and foreign consumption. Consumers do not know the foreign price level and base their spending in part on expected foreign price. In addition to expected foreign price, domestic price, exchange rates, income, and foreign price uncertainty influence travel spending. Empirically, each determinant is statistically significant. The contribution of each determinant, however, is not the same: Canadian prices and the exchange rate are the primary factors influencing Canadian travel spending.

Tests for Nonlinearity in EMS Exchange Rates

This paper tests for nonlinearity in EMS exchange rates using the bispectrum. The early experience of the ERM witnessed numerous realignments. We find that exchange rates follow a linear process over the period 1979-1987, consistent with the predictions of the realignment target zone model, where a stabilizing nonlinearity is absent. But from 1987-1992, no realignments occurred, and many currencies conformed to a nonlinear process, consistent with the credible target zone model where an inherent nonlinearity stabilizes exchange rates. However, the Italian lira and the Irish pound follow a linear process, which suggests that a target zone has not proven effective in stabilizing exchange rates.