Recently the two dominant models of foreign direct investment (FDI), the horizontal and vertical models, have been synthesized into the knowledge capital (KK) model. Empirical tests, however, have found that the horizontal model cannot be rejected in favor of the KK model. This paper suggests...

The most distinctive prediction of prospect theory is the fourfold pattern (FFP) of risk attitudes. People are said to be (1) risk-seeking over low-probability gains, (2) risk-averse over low-probability losses, (3) risk-averse over high-probability gains, and (4) risk-seeking over...

Conventional wisdom attributes the severity of mortality in poorer countries to widespread poverty and inadequate living conditions. This paper considers the possibility that persistent poverty may arise, in turn, from a high incidence of mortality. Endogenous mortality risk is introduced in a...

In the presence of informational frictions and uncertainty, an investment model is developed to capture the asymmetric dynamics of business cycles. When affected by a negative shock, the economy responds differently than when hit by a positive shock, both in terms of size and recovery length. In...

We examine the nonlinear model x_t = E_t F(x_(t+1)). Markov SSEs exist near an indeterminate steady state, hat(x)=F(hat(x)), provided |F'(hat(x)| 1. Despite the importance of indeterminancy in macroeconomics, earlier results have not provided conditions for the existance of adaptively stable...

We review the recent work on interest rate setting, which emphasizes the desireability of designing policy to ensure stability under private agent learning. Appropriately designed expectations based rules can yield optimal rational expectations equilibria that are both determinate and stable...

In choosing an exchange rate regime for a small open economy, the common wisdom (Friedman (1953), Meade (1950)) calls for a °oating regime to outperform a peg because of the ability of the former to cope with relative price changes without major output effects. With balance sheet effects in...

We extend common factor analysis to a multi-dimensional setting by considering a bivariate reduced form consistent with many Real Business Cycle type models. We show how to obtain new representations of sunspots and find that there are parameter regions in which these sunspots are stable under...

We develop a monetary model with flexible supply of labor, cash in advance constraints and government spending financed by seignorage. This model has two regimes. One regime is conventional with two steady states. The other regime has a unique steady state which can be determinate or...

This is a revised and shortened version of Working Paper 2002-11. Commitment in monetary policy leads to equilibria that are superior to those from optimal discretionary policies. A number of interest rate reaction functions and instrument rules have been proposed to implement or approximate...