In the year 2000, I was working in a remote area in North Western Australia . ... Robert Kiyosaki , Wallace Wattles. I wasn't really aware of it at the time; I was learning about The Law Of Attraction. My hunger for a mindset change was huge. I knew, for ...
Story - antoq - 09/30/2010 - 09:02 - 0 comments - 0 attachments
The last three decades saw an extraordinary increase in cross-border capital flows and the elimination of barriers to free capital mobility. From a historical perspective, however, financial globalization is not a new phenomenon. A first wave of globalization started in the middle of the 19th century and came to an abrupt end with World War I. This era was characterized by a high level of integration reached again only in the 1990s. Obstfeld and Taylor (2004) characterize the development stages of global financial markets, connecting financial globalization in the 19th century with the present, by the exchange rate regimes and their consequences for capital flows. During the period from 1870 until 1914, most countries successively adopted the classical gold standard and both capital and labor markets were highly integrated. Policymakers followed a laissez-faire policy and few restrictions were imposed on financial markets. The following period, between 1914 to 1945, was shaped by the two World Wars and the Great Depression leading to a rise in nationalism. During this time, policymakers increasingly focused on domestic goals and pursued protectionist policies. Capital controls were put in place to pursue monetary policy under more flexible exchange rates. As a consequence, private capital flows ceased and national financial markets decoupled.
The Bretton Woods system characterized the period between 1945 and 1971 when currencies were linked through a system of fixed but adjustable exchange rates to the US-Dollar. However, significant capital controls were in place and allowed countries some policy autonomy. Financial markets started to reintegrate; the process, however, was slow and mainly driven by international trade flows. After the breakdown of the Bretton Woods system in 1971, the developed countries moved towards more flexible exchange rates, capital account restrictions were successively lifted and capital increasingly flowed across borders. However, Obstfeld and Taylor (2004) and others estimate that only in the 1990s did capital mobility regain the degree achieved in 1914.
In recent years there has been a renewed interest in the study of optimal monetary policy under uncertainty. Typical formulations of optimal policy consider only additive sources of uncertainty, where in a linear-quadratic (LQ) framework the well-known certainty-equivalence result applies and implies that optimal policy is the same as if there were no uncertainty. Recognizing the uncertain environment that policymakers face, recent research has considered broader forms of uncertainty for which certainty equivalence no longer applies. While this may have important implications, in practice the design of policy becomes much more difficult outside the classical LQ framework.
One of the conclusions of the Onatski and Williams [31] study of model uncertainty is that, for progress to be made, the structure of the model uncertainty has to be explicitly modeled. In line with this, in this paper we develop a very explicit but still relatively general form of model uncertainty that remains quite tractable. We use a so-called Markov jump-linear-quadratic (MJLQ) model, where model uncertainty takes the form of different “modes” (or regimes) that follow a Markov process. Our approach allows us to move beyond the classical linear-quadratic world with additive shocks, yet remains close enough to the LQ framework that the analysis is trans-parent. We examine optimal and other monetary policies in an extended linear-quadratic setup, extended in a way to capture model uncertainty. The forms of model uncertainty our framework encompasses include: simple i.i.d. model deviations; serially correlated model deviations; estimable regime-switching models; more complex structural uncertainty about very different models, for instance, backward- and forward-looking models; time-varying central-bank judgment—information, knowledge, and views outside the scope of a particular model (Svensson [39])—about the state of model uncertainty; and so forth.
We derive and test a novel implication of q-theory on cross-sectional returns: the expected return investment relation should be steeper in firms with high investment frictions than in firms with low investment frictions. Initiated by Cochrane (1991, 1996), investment-based asset pricing argues that real investment is important for determining expected returns. Intuitively, all else equal, low costs of capital imply high net present values of new projects and high investment, and high costs of capital imply low net present values of new projects and low investment.
The literature has so far applied the negative expected return-investment relation predicted by q-theory to explain a wide range of capital markets anomalies (empirical relations between average stock returns and firm characteristics that cannot be explained by traditional asset pricing models). By exploring the previously ignored interaction between the expected return-investment relation and investment frictions, our tests can address whether these anomalies can indeed be attributed to q-theory.
