Browsing by Author "Ito, Takatoshi"

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Capital Controls and Covered Interest Parity Between the Yen and the Dollar
(Center for Economic Research, Department of Economics, University of Minnesota, 1983-08) Ito, Takatoshi
A Comparison of Japanese and U. S. Macroeconomic Behavior by a Var Model
(Center for Economic Research, Department of Economics, University of Minnesota, 1982-06) Ito, Takatoshi
This paper focuses on macroeconomic behavior of the U.S. and Japan with a special attention to characteristics of Japanese financial markets and the pattern of Japan's trade with the rest of the world. Explanations of observed facts summarized by vector autoregressions (VAR) are given referring to the arrangement of Japanese financial institutions and the economic structure with respect to foreign trade. First, interest rates do not have any explanatory power on production in Japan, unlike in the U.S. This is explained by strong interventions in financial markets by the Bank of Japan. Second, stock prices in both Japan and the U.S. are exogenous. Third, bank loans in Japan plays a similar role to that of money. Last, contrary to our intuition, shocks from abroad in terms of import prices do not have a strong impact of domestic prices and production. This paper, which includes Japan, fills the lacuna in Sims' comparative study in macroeconomic behaviors of the U.S. and the European countries.
A Critical Survey of Disequilibrium Growth Theory
(Center for Economic Research, Department of Economics, University of Minnesota, 1982-01) Ito, Takatoshi
Disequilibrium Growth Theory
(Center for Economic Research, Department of Economics, University of Minnesota, 1979-09) Ito, Takatoshi
This paper is an attempt to extend an analysis of disequilibrium macroeconomics to a problem of capital accumulation. The real wage is assumed to be sluggish so that the labor market may be in disequilibrium. The transaction of labor takes place at the minimum of supply and demand. The interaction between wage adjustment and capital accumulation is studied. If wage adjustment is slow, and if the saving rate from profits is larger than that from wages, then an endogenous force of business cycles switching between unemployment and overemployment regimes can be demonstrated. An appendix to this paper shows a sufficient condition for the stability of differential equation systems in a two-dimensional Euclidean space with switching regimes. This is a mathematical contribution which bears an independent interest.
A Disequilibrium Macroeconomic Model with Stochastic Rationing
(Center for Economic Research, Department of Economics, University of Minnesota, 1980-04) Honkapohja, Seppo; Ito, Takatoshi
A purpose of this paper is to fill a gap between the recent development in the microeconomic analysis of quantity constraints and the conventional disequilibrium macroeconomics where the Clower-Benassy effective demand has been used. Although Gale and Svensson defined a concept of effective demand with rigorous microfoundations, which the Clower-Benassy effective demand lacks, their models do not provide with insights about macroeconomic consequences, such as a well-known classification of quantityconstrained equilibria: Keynesian unemployment, Classical unemployment, and Repressed inflation. This paper will (i) characterize simple macroeconomic framework with satisfactory microeconomic foundations; and (ii) show that multiple types of stochastic rationing equilibria, given the set of prices, are a very common phenomenon in contrast to the uniqueness in the conventional models.
An Economic Note on American Symphony Orchestras
(Center for Economic Research, Department of Economics, University of Minnesota, 1983-08) Ito, Takatoshi; Domian, Dale
Implicit Contract Theory: A Critical Survey
(Center for Economic Research, Department of Economics, University of Minnesota, 1982-07) Ito, Takatoshi
Implicit Contracts with Costly Search: The Incentive Constraint in Severance Payments
(Center for Economic Research, Department of Economics, University of Minnesota, 1984-04) Ito, Takatoshi
The Incentive Implications of Incomplete Insurance: The Multiplicative Case
(Center for Economic Research, Department of Economics, University of Minnesota, 1983-04) Ito, Takatoshi; Machina, Mark
Suppose that a fair insurance policy is available to risk-averse economic agents contingent on only "observable" variables. The risk-averse agents will purchase incomplete insurance to maximize their expected utility. The first order condition is typically an equality of expected "marginal" utility. whether or not weighted by the level of income, conditional on observable states. It is interesting to know how the "levels" of utility are ranked among these states given the first order conditions. We will show that the ranking of the "level" of expected utility depends on the degree of risk aversion. Suppose an implicit contract model with severance payments. Workers are laid off with a fixed known probability. When a worker is laid off, he is paid severance payments and released for a search of new employment. Whether he is reemployed or self-employed or how much he is earning is unverifiable by the original employer, so that severance payments cannot be contingent on income after layoff. In this sense, severance payments are incomplete insurance. Suppose that income after layoff is proportional to severance payments with the proportion being stochastic. The first order condition is given as an equality of an expected marginal utility of income after layoff weighted by that income to a marginal utility of wages for a retained worker weighted by the amount of severance payments. For example, when the relative risk aversion is more than one and constant, and the mean of proportion of yield on severance payments is less than one, the utility of the retained is larger than the expected utility of the laid off. Other cases are worked out, too. This claim is proved using the following theorem. Provided that the relative risk aversion is greater than one, the "level" of utility of sure income is greater (less) than the expected utility, if the utility function is of increasing (decreasing, respectively) relative risk aversion. The result is reverse for the case that the degree of risk aversion is less than one. All assertions are rigorously proved.
Inventory Dynamics in a Simple Disequilibrium Macroeconomic Model
(Center for Economic Research, Department of Economics, University of Minnesota, 1979-11) Honkapohja, Seppo; Ito, Takatoshi
The paper formulates and analyzes a simple piecewise linear macroeconomic model with buffer stock inventories. Buffer stocks partly eliminate the rationing of the demand for goods, since rationing appears only when a stock-out in possible. This means that the region of Classical Unemployment necessarily shrinks, and it even disappears when buffer stocks absorb all the randomness of aggregate demand for goods. The inventory dynamics with constant wages and prices have steady states either in the region of Keynesian Unemployment or Repressed Inflation. In the former case the motion is oscillatory and either converges or ends in a limit cycle, while in the latter it is monotonic. Some of the complications caused by flexible wages and prices are sketched but the results are heavily dependent on the nature of wage and price adjustments.
Labor Contracts with Voluntary Quits
(Center for Economic Research, Department of Economics, University of Minnesota, 1986-08) Ito, Takatoshi
This paper considers characteristics of labor contracts between the risk-neutral firm and risk-averse workers who have heterogeneous outside opportunities (alternative wages). The alternative wage, not verifiable by the firm, becomes known to the worker after costly on the job search. The worker voluntarily quits if the outside wage is higher than the contract wage in the firm. If the alternative wage is deterministic, then self-selection among workers over a menu of contract wages would achieve the firstbest with efficient allocation of workers in different firms (industries), i.e., productive efficiency, and perfect risk-sharing. If the alternative wages are stochastic, the second-best contract would emerge on a tradeoff between productive efficiency and risk-sharing. Workers who are induced to search in the second-best contracts are fewer than in the first-best; and workers given search are less likely to quit than the first-best. The severance payment for a voluntary leaver serves only incomplete insurance because the exact outcome of search is not known to the firm; and unsuccessful search which force workers to stay is only partially compensated. If search effort is not monitored, even fewer workers conduct search. In sum, workers' stochastic alternative wages, which is a private information, yield a contract which induces workers to conduct less search and quits less often than the first-best.
Meteor Showers or Heat Waves? Heteroskedastic Intra-Daily Volatility in the Foreign Exchange Market
(Center for Economic Research, Department of Economics, University of Minnesota, 1988-04) Engle, Robert F.; Ito, Takatoshi; Lin, Wen-Ling
This paper defines and tests a form of market efficiency called market dexterity which requires that asset prices adjust instantaneously and completely in response to new information. Examining the behavior of the yen/dollar exchange rate while each of the major markets are open it is possible to test for informational effects from one market to the next. Assuming that news has only country specific autocorrelation such as a heat wave. any intra-daily volatility spillovers (meteor showers) become evidence against market dexterity. ARCH models are employed to model heteroskedasticity across intra-daily market segments. Statistical tests lead to the rejection of the heat wave and therefore the market dexterity hypothesis. Using a volatility type of vector autoregression we examine the impact of news in one market on the time path of volatility in other markets.
A Note on Long-Term Contracts
(Center for Economic Research, Department of Economics, University of Minnesota, 1984-06) Ito, Takatoshi
On Implicit Contracts and Involuntary Unemployment
(Center for Economic Research, Department of Economics, University of Minnesota, 1982-06) Geanakoplos, John; Ito, Takatoshi
We show that a firm can increase expected profits by undertaking the additional expense of paying unemployment compensation to the workers its lays off, it they are risk averse. When this argument is applied to the implicit contract models it makes the involuntary unemployment derived there disappear, where by involuntary unemployment we mean a situation in which one worker has a job at a wage wand another worker who is known to be productively identical and willing to take on the job at a lower wage h cannot find a job. We introduce into our model asymmetric information between sectors of the economy. Each agent knows the state of his own firm but not that of others. We suppose also that workers have specific skills which are conformable to some, but not all, firms in the economy. In this model we reestablish the phenomenon of involuntary unemployment in a general implicit contracts equilibrium in which the proportion of layoffs, the "stabilized" wage, and the severance payments are endogenously determined. Moreover, we show that the presence of involuntary unemployment is a signal that there is too little output in the most productive sectors of the economy, thereby restoring the link between underproduction and involuntary unemployment missing in the implicit contracts literature. Finally we ask how large should be the severance payment a profit maximizing firm gives to each worker from a branch it shuts down, when there is uncertainty about what jobs those workers will find. We prove that the rational expected-profit-maximizing firm will offer a contract which provides severance compensation so generous that on average the workers dismissed by the closing of a plant can expect to be better off than if they had been retained, in the case that they have decreasing absolute risk aversion.
On Stochastic Rationing Equilibrium
(Center for Economic Research, Department of Economics, University of Minnesota, 1980-05) Honkapohja, Seppo; Ito, Takatoshi
Difficulties in the concept of effective demand in the standard approaches to the analysis of non-clearing markets have led to considerations of trading uncertainty or stochastic rationing. In the earlier litterature it has been shown that under certain conditions the stochastic rationing mechanism has a linearity property. The purpose of this -paper is to analyze the existence of an equilibrium with positive trading under a mechanism of stochastic rationing. Sufficient conditions for this kind of "non-trivial" equilibrium are developed in a model with overlapping generations and production. As a by-product it is shown how the theory of continuos probabilistic expectations, due to Grandmont can be extended to take into account the possibility of rationing expected in the future.
On the Interdependence of Exchange Rates and Interest Rates
(Center for Economic Research, Department of Economics, University of Minnesota, 1983-11) Ito, Takatoshi
On the Time Varying Risk Premium in the Yen/Dollar Exchange Market
(Center for Economic Research, Department of Economics, University of Minnesota, 1987-11) Canova, Fabio; Ito, Takatoshi
The purpose of this paper is two-fold. First, a vector autoregressive model (VAR) is constructed to investigate the relative importance of monetary and real factors in the determination of the the yen/dollar exchange rate. Second, the forecasts from the VAR model are used to calculate a risk premium series. We show that real factors, represented by the stock price indices, statistically account f9r the dollar appreciation better than monetary factors, represented by the intere5t rates. The dynamic structure of interdependence between the exchange rate and the domestic variables changed considerably after October 1982. The risk premium calculated from the model shows a volatile and time-varying nature. The hypothesis of no risk premium is strongly rejected for the entire sample and each of the two subsamples considered.
Stability with Regime Switching
(Center for Economic Research, Department of Economics, University of Minnesota, 1980-07) Honkapohja, Seppo; Ito, Takatoshi
The purpose of this paper is to analyze stability of a system of piecewise continuous differential equations, and its application to disequilibrium economic models. A unique solution in the sense of Filippov for such a system is defined and claimed to exist. This problem frequently appears in disequilibrium models, since the so-called " shortside" rule assigns either demand or supply to the transaction amount which is a state variable of an economic system. The concept of Filippov solution makes it possible to analyze a dynamic evolution of such a model. This paper demonstrates that (i) stability conditions for each piecewise system of differential equations are neither necessary nor sufficient for the overall stability with regime switching, except special cases such as a system of linear differential equations in R2, with two regimes separated by a linear boundary; (ii) several sufficient conditions for an overall stability with many regimes are available, making use of a Lyapunov function common to all regimes; (iii) stability theorems with regime switching are useful for disequilibrium economic models with several regimes.
Tests of the Equilibrium Hypothesis in Disequilibrium Econometrics: An International Comparison of Credit Rationing
(Center for Economic Research, Department of Economics, University of Minnesota, 1980-07) Ito, Takatoshi; Ueda, Kazuo
The purpose of this paper is threefold: (i) to develop various tests of the equilibrium hypothesis using a partial price adjustment scheme in disequilibrium, (ii) to estimate disequilibrium models of the business loan markets in the United States and in Japan by the method proposed and (iii) to compare the adjustment speeds of the prime rate and to test the equilibrium hypothesis in each country. In the United States, the loan market may be considered to be in equilibrium with the real interest rate adjusting to market pressures. In Japan, the nominal rather than the real interest rate is believed to adjust to the market pressure of disequilibrium and the equilibrium hypothesis is rejected. Moreover, it is clear that the prime rate adjusts more slowly in Japan than in the United States. Our results support the popular view that the United States financial markets are closer to equilibrium than their Japanese counterparts. However, there is no evidence of different upward and downward adjustment speeds for either country.
Use of (Time-Domain) Vector Autoregressions to Test Uncovered Interest Parity
(Center for Economic Research, Department of Economics, University of Minnesota, 1984-09) Ito, Takatoshi

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