This paper develops and tests implications of an oligopoly-pricing model. The model predicts that during a demand expansion the short run competitive price is a pure strategy Nash equilibrium, but in a recession firms set prices above the competitive price. Thus, price markups over the competitive price are countercyclical. Prices set during a recession are more variable than prices set in expansions, because firms employ mixed strategy pricing in recessions. The empirical analysis utilizes Hamilton's time series switching regime filter to test the unique predictions of the model. Fourteen out of fifteen industries have fluctuations consistent with this oligopoly-pricing model. * Wilson acknowledges research support from the John M. Olin Foundation and the National Science Foundation. Doc Ghose, Joe Harrington, Mark Walker, and John Wooders provided helpful suggestions. This paper has also benefited from comments by seminar participants at the University of Arizona, the University of Houston, Johns Hopkins University, the University of Kansas, the University of Toronto, and Virginia Polytechnic Institute and State University. 1 Recent research has focused on firms' market power and how this power may be exercised differentially over the business cycle. For example, studies by Greenwald et al. (1984), Gottfries (1991), Klemperer (1995), and Chevalier and Scharfstein (1996) have emphasized the role of capital-market imperfections. When capital-market imperfections exist, the incentives for firms to make investments may be reduced because firms may not reap the profits associated with the investment. One form of investment is a low price that builds a firm's market share by attracting more customers in the future. During a recession, firms may raise prices, forgoing a...

This paper shows how a well known class of rational expectations hypotheses using linear vector autoregressions (VAR:s) can be extended to allow for unobservable Markov switching. The regime shift model used falls into the general framework of Hamilton (1990), but differs to the centered model actually implemented by Hamilton and others. The model here has the advantage that it is easier to estimate, and the intuitive appeal that the state dependence is symmetric. The contribution of the paper is to derive testable restrictions implied by rational expectations, which are linear when the forecast horizon is infinite. The restrictions on the autoregressive parameters are the same as those that appear in the centered model. As an illustration, we duplicate a test of the expectations hypothesis (EH) in Sola & Driffill (1994) on 3 and 6 month US bills on quarterly data, and find that their results may be fragile. JEL Classification No: C12, C32. Keywords: VAR, Markov chain, regime switching...

* This is a revised version of the 1999 World Economy Lecture, delivered at the University of Nottingham, on October 28th, 1999. I have benefited from discussions with Ed Leamer. I thank David Greenaway for his hospitality and I am grateful to Igal Magendzo for his assistance. 1 I.

This paper introduces an upgraded version of MSVARlib, a Gauss and Ox-Gauss compliant library, focusing on Multivariate Markov Switching Regressions in their most general specification. This new set of procedures allows to estimate, through classical optimization methods, models belonging to the MSI(M)(AH)-VARX “intercept regime dependent ” family. This research enhances the first package MSVARlib 1.1, which has been deeply inspired by the works of Hamilton and Krolzig. Not to mention the extension to a generalized multivariate regression framework, it notably augments the range of models with a possibly unlimited finite number of Markov states, offers automatic or manual intialization procedures and adds new statistical tests. The first part of this article provides the basic theoretical grounds of the related Markov-switching models. Following sections give some illustrations of the programs through univariate and multivariate examples. One is based on a nonlinear reading of the american unemployment rate. A second study is focused on coincident stochastic models of US recessions and slowdowns. The paper concludes on possible extensions and new applications. Detailed guidelines in appendices and tutorial programs are provided to help the reader handling the Gauss package and the joined replication files.

This paper develops a valuation framework for a perpetual American call option when the underlying asset return dynamic is modelled by a regime switching process. In particular, asset return dynamic is governed by a stochastic dividend process which randomly switches between two regimes that are characterized by different rates of both drift and volatility. This regime-switching characterization of dividend growth is supported by empirical works. We provide analytical results by solving the fundamental differential equation. The analysis reveals that the option value may differ between states. Our empirical application shows that these differences may be quantitatively very important.

: In a discrete choice situation, information about the tastes of each sampled customer is inferred from estimates of the distribution of tastes in the population. First, maximum likelihood procedures are used to estimate the distribution of tastes in the population using the pooled data for all sampled customers. Then, the distribution of tastes of each sampled customer is derived conditional on the observed data for that customer and the estimated population distribution of tastes (accounting for uncertainty in the population estimates.) We apply the method to data on residential customers' choice among energy suppliers in conjoint-type experiments. The estimated distribution of tastes provides practical information that is useful for suppliers in designing their offers. The conditioning for individual customers is found to differentiate customers effectively for marketing purposes and to improve considerably the predictions in new situations. JEL Classifications: C25, D12, L94. Ac...

Reproduction partielle permise avec citation du document source, incluant la notice ©. Short sections may be quoted without explicit permission, if full credit, including © notice, is given to the source. CIRANO Le CIRANO est un organisme sans but lucratif constitué en vertu de la Loi des compagnies du Québec. Le financement de son infrastructure et de ses activités de recherche provient des cotisations de ses organisationsmembres, d’une subvention d’infrastructure du ministère de la Recherche, de la Science et de la Technologie, de même que des subventions et mandats obtenus par ses équipes de recherche. CIRANO is a private non-profit organization incorporated under the Québec Companies Act. Its infrastructure and research activities are funded through fees paid by member organizations, an infrastructure grant from the Ministère de la Recherche, de la Science et de la Technologie, and grants and research mandates obtained by its research teams. Les organisations-partenaires / The Partner Organizations PARTENAIRE MAJEUR. Ministère du développement économique et régional [MDER]

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For a long time, macroeconomic indiscipline and runaway inflation were two of Latin America’s most serious economic problems. Throughout the 1970s, for example, the region’s average annual rate of inflation was an extraordinary 42%. During 1980-92 the macroeconomic picture became even more chaotic, as average annual inflation

Forecasts of the realized volatility of the exchange rate returns of the Euro against the U.S. Dollar obtained directly and through decomposition are compared. Decomposing the realized volatility into its continuous sample path and jump components and modeling and forecasting them separately instead of directly forecasting the realized volatility is shown to lead to improved out-of-sample forecasts. Moreover, gains in forecast accuracy are robust with respect to the details of the decomposition.