Peter Pauly

The determinants of atmospheric SO2 concentrations: reconsidering the environmental Kuznets curve

This analysis explores the effects of income and the spatial intensity of economic activity on the atmospheric concentration of sulfur dioxide. The results indicate that there is a U-shaped relation between income and atmospheric concentration of SO2 and an inverted U-shaped relation between the spatial intensity of economic activity and SO2 concentrations. These results suggest that the spatial intensity of economic activity, rather than income, provides the impetus for policies and technologies that reduce SO2 emissions. Based on this result, the atmospheric concentration of SO2 in developing nations may decline faster than indicated by previous analyses. The potential for this decline depends on the rate at which income grows relative to population. The trade-off between the effects of income gains and the spatial intensity of economic activity on the atmospheric concentration of SO2 is consistent with the notion that some environmental problems can be ameliorated by slowing population growth and increasing income levels.

Endogenous risk in a portfolio-balance rational-expectations model of the Deutschemark-Dollar rate

Abstract A portfolio-balance model of the DM/S rate under rational expectations is specified, in which systematic risk-induced deviations from uncovered interest parity are allowed. This leads to a reduced from containing a potentially time-varying risk premium, which we approximate and estimate using an ARCH-in-mean approach. The maximum likelihood estimator and a Lagrande multiplier test for ARCH-in-mean are developed. The estimation results indicate a small, but non-negligible, time-varying risk premium.

Has the EMS Reduced Member-Country Exchange Rate Volatility?

ConclusionsUsing tests for unit roots, serial correlation, and conditional heteroskedasticity, we find that the stochastic structure of the percentage changes in both the Franc/DM and Lira/DM rates is well described by a low order autoregression with ARCH disturbances. While this assertion is not rejected in either the Pre-EMS or the EMS period, we present evidence indicating a structural shift between sub-periods. In particular, while ARCH is present in each sub-period, its explicit parameterization changes dramatically.Likelihood-ratio tests indicate the desirability of a bivariate analysis, and significant ARCH effects are found in the conditional variances and covariances over both subperiods. Likelihood ratio tests also indicate substantial structural change between the subperiods. The conditional variances of exchange rate innovations are used as natural measures of exchange rate volatility; it is found that volatility decreases substantially for both rates in the EMS period. Furthermore, the Franc shows a relatively greater volatility decrease with the move to the EMS, a result consistent with the narrower parity bands established for the Franc. Finally, the covariation of shocks to the two intra-EMS rates is shown to decrease between the Pre-EMS and EMS periods.

Small sample properties of asymptotically equivalent tests for autoregressive conditional heteroskedasticity

Models that allow for autoregressive conditional heteroskedasticity (ARCH) in the error process have recently found widespread application. The purpose of this paper is to evaluate, through Monte Carlo analysis, the small sample properties of an exact Lagrange multiplier test for the presence of ARCH, and to compare the power of this test with that of an asymptotically equivalent TR2 version. The comparison involves first-and higher-order variants of these processes. The results indicate substantial power differentials in favor of the exact LM test, by up to 15% for sample sizes smaller than 100.

Comparative exchange rate simulations

The 1983 Fall Meeting of the Project LINK was held at the time of the tenth anniversary of the commencement of the generalized floating rate regime. It might be debatable whether one should celebrate the birth of this regime or mourn over the death of the Bretton Woods system, but no one would disagree with the view that we shall have to live together with this ten-year old neighbor for some years to come so that we should learn more about the temper of this temperamental system. At the 1982 LINK meeting, one special session was devoted to an investigation of alternative methods of modeling capital flows and exchange rates [see Klein and Krelle (1983)]. During the meeting a plan evolved to organize a comparative study among multi-country or world models that have incorporated exchange rate determination mechanisms. Originally, the Federal Reserve Board Multi-Country Model, the World Economic Model of the Economic Planning Agency (Japan) and the LINK system itself had been planned to participate, but in an early stage of preparation the OECD INTERLINK also joined the group with its latest attempt to endogenize exchange rates among major currencies. In what follows the first four papers report on the methods of endogenizing exchange rates in the framework of multilaterally linked models. They also report on the simulation results designed to facilitate comparisons among alternative approaches. The final paper discusses major similarities and differences of the simulation experiments. Each model. of course has its own history of exchange-rate modeling. An early attempt in FED-MCM can be found in Bemer et al. (1977), which was based on the structural balance of payments approach. Due to difficulties in obtaining stable equation estimates for international capital transactions, among other reasons, a shift has been made to a single-equation method

Random Walk or Bandwagon: Some Evidence From Foreign Exchanges in the 1980s

The predicitive performance of the bandwagon expectations model foe weekly spot exchange rates over the 1980–6 period is evaluated. Empirical results generally indicate the presence of significant bandwagon effects in the exchange rate dynamics, as found in survey expectations data. Specifically, we find the the bandwagon forecasting scheme can improve the forecasting accuracy in terms of both mean squared errors and market timing upon the random walk and vector autoregressive models. The results illustrate that bandwagon expectations can be rational, and the exchange rate appears to follow a more general integrated process than a random walk.

OPEC's pricing policy and the international transmission of oil price effects

Abstract We endogenize OPECs pricing policy recognizing that oil price changes affect the real income of oil importers, and that changes in the real income of oil importers affect oil price changes. We determine real income, international trade flows, and prices in a three-region (DCs, OPEC, non-OPEC LDCs) econometric world model. Applying optimal control theory, we derive optimal oil pricing strategies. We find that not allowing for income feedback effects results in an upward bias in the total price elasticity of oil demand and in the optimal oil price path, neither of which is in OPECs best interests.

Production Lags and Price Behaviour

This paper explores the implications of the production lag for the firms decisions. The authors establish a significant relationship between price behavior and the length of the production lag. They show that specific results in the literature are crucially dependent upon the assumption about the production lag. By allowing the production time to exceed the decision period, the basic framework of the earlier price-inventory models is significantly extended. The model, thus, incorporates finished-goods inventories as well as goods-in-process inventories. Copyright 1992 by The London School of Economics and Political Science.

International policy coordination and growth prospects of developing countries: An optimal control application

Abstract This paper estimates the gains from implementing cooperative policies among the North, the South, and OPEC. This is accomplished by applying optimal control to an econometric model of a three-region world economy. The results suggest that while a worldwide recovery is feasible, not all regions benefit equally from it. Motivated by these findings, the paper also examines how a shift in the regional balance of power in favor of the South improves their growth prospects.

Reflections on global modeling: The state of the art

From their early beginnings in the 1970s, global econometric models have developed in very diverse directions. From the early demand-driven model structures in the Cowles Commission tradition to today’s highly sophisticated Dynamic Structural General Equilibrium (DSGE) models, they have become the primary tool for forecasting and policy analysis at most national and international agencies. Both economic theory and econometric techniques have advanced considerably since the early days of econometric modeling, and a critical examination of the decades-long development of multi-country econometric modeling appears in order. This paper seeks to provide a selective review of both achievements and shortcomings in the field of international econometric modeling, and to suggest possible areas of future research.