We show analytically that in a rational expectations present-value model, an asset price manifests near-random walk behavior if fundamentals are I(1) and the factor for discounting future fundamentals is near one. We argue that this result helps explain the well-known puzzle that fundamental...

Standard economic models hold that exchange rates are influenced by fundamental variables such as relative money supplies, outputs, inflation rates and interest rates. Nonetheless, it has been well documented that such variables little help predict changes in floating exchange rates - that is,...

Nominal exchange rates in low-inflation advanced countries are nearly random walks. Engel and West (2003a) offer an explanation for this in the context of models in which the exchange rate is determined as the discounted sum of current and expected future fundamentals. Engel and West show that...

This paper establishes an inequality that may be used to test the null hypothesis that a stock price equals the expected present discounted value of its dividend stream, with a constant discount rate. The inequality states that if this hypothesis is true, the variance of the innovation in the...

It is shown that GNP will have an autoregressive root very close to unity in a variant of Taylor's (1980a,b) overlapping wage contracts model, for stylized versions of simple money supply rules and plausible values for the model's parameters. In this variant, monetary policy is the only reason...

Empirical examination of some aggregate manufacturing data suggests that order backlogs may help explain two puzzling facts: (1) the variability of production appears to be greater than that of demand, and (2) inventories appear to be drawn down when demand is low, built up when demand is high

This paper considers tests of the parameter on endogenous variables in an instrumental variables regression model. The focus is on determining tests that have some optimal power properties. We start by considering a model with normally distributed errors and known error covariance matrix. We...

The ongoing analysis of the effects of pension plan provisions on retirement is pursued in this paper. A primary objective of this paper is to test the validity of models previously developed and estimated with data from a Fortune 500 company, here using data from a second large company. The...

The option value model developed in an earlier paper is used to simulate the effect on retirement of changes in a firm's pension plan compared to the effect of changes in Social Security provisions. The provisions of the firm's pension plan have a much greater effect than Social Security...

The possibility of mean reversion in stock prices recently has been examined using statistics based on multi-year returns. Previous researchers have noted difficulties in drawing inferences about these statistics because of poor performance of the usual approximating asymptotic distributions. We...