Optimization-based macroeconomic models, and, in particular, dynamic stochastic general equilibrium (DSGE) setups, are popular nowadays for analyzing a multitude of macroeconomic questions such as the effects of monetary policy. But as models of this sort become increasingly complex, featuring many types of markets, various rigidities, and different non-linearities, the decision of whether to use a limited or full information (LI or FI) approach for estimation becomes a central question for model developers. Indeed, there appears to be a conflict in the conclusions of available published studies based on one or the other method. A striking example is the ongoing debate in the sizeable empirical literature with regard to the importance of the forward-looking component of the New Keynesian Phillips Curve (NKPC) equation. Recent contributions to this discussion include Gal?, Gertler, and Lopez-Salido (2005) that uses LI methods, and Linde (2005) that uses FI methods, and which report opposite outcomes with respect to the forward-looking nature of the curve.
The LI/FI trade-off is an enduring econometric problem, often presented as one of weighing specification bias versus efficiency, but there are also other concerns. In particular, advances in econometrics regarding weak-instruments and weak-identification have revealed that the latter plague LI and FI methods equally, thus presenting a set of new challenges for applied researchers.
The question what door should investors care about? remains central in Asset Pricing and a variety of models continue to provide alternative answers. Investment opportunities are risky and investors face multiple sources of financial and macroeconomic risks that they should hedge themselves against when constructing their portfolios. This paper provides and supports the evidence that long-term investors care not only about variation between future and present consumption levels, but also and perhaps mostly about variation between future and present macroeconomic uncertainties.
ADRs bring the advantages of liquidity, transparency, and ease of trade of the US markets to emerging markets. As investors (both foreign and local) choose ADRs, local exchanges, brokers, and regulatory authorities come under pressure to modernize operations, enhance disclosure standards, and strengthen enforcement in order to make the local market more liquid, transparent, and efficient.
Through these activities, the local market becomes more developed. We would then expect that, in addition to increased participation by local companies and investors, the more sophisticated US investors would increasingly buy and sell in the home markets of foreign shares rather than through ADRs. Thus, many foreign companies would use the US markets as a temporary mechanism to access US funds and gain international investor credibility and visibility. The development of the ADR market would then result in the further development of the local market, as more local investors and companies enter this more efficient market.
