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Rogoff suggested in 1996 that the dollar–yen real exchange rate represented a ‘canonical’ case of a trend in the equilibrium real exchange rate. The implied speed of adjustment of the dollar–yen real exchange rate is found to be substantially faster, with half-life shocks of less than 2 years, from estimates of a non-linear model which incorporates a deterministic trend proxying the equilibrium level. We also examine the power of unit root tests against smooth transition non-linear models which incorporate a deterministic trend and the robustness of such non-linear estimations using Monte Carlo and bootstrap simulations.

Estimates of insider trading in the betting on individual races, conditional on the Shin model (Economic Journal, Vol. 103 (1993), pp. 1141–1153), are employed in an analysis of the market anomaly observed by Gabriel and Marsden (Journal of Political Economy, Vol. 98 (1990), pp. 874–885) that Tote payments on winning bets consistently exceed those paid by bookmakers. Use of more appropriate statistical methods suggests that the original anomaly disappears, but that another remains: bookmakers pay more generously than the Tote on winning bets on favourites, but less generously on winning longshot bets. This discrepancy is shown to be associated with the incidence of insider trading in the betting on each race, and it is argued that it cannot be arbitraged away because of the bookmakers’ dominant market position.

Attempts by governments to finance a substantial proportion of expenditure by seigniorage can lead to multiple inflationary equilibria. Theoretical models suggest that, in these circumstances, inflation follows a non-linear process with up to three steady states and that the stability characteristics of these depend on the process by which expectations are formed. In this paper we show that the exponential smooth transition autoregression (ESTAR) model is capable of exhibiting the required characteristics and so provides a suitable vehicle for analysing inflation in high inflation economies. We estimate ESTAR models for three well-known inflationary episodes—the German hyperinflation of the early 1920s and post-Second World War inflations in Argentina and Brazil. Our results imply that, during the periods in question, each of these economies possessed a stable low-level equilibrium rate of inflation but that the variances of inflation shocks were large enough to drive each economy into a high inflation state. For Brazil, this high inflation state is stable around a particular value but in the cases of Argentina and Germany the high inflation state is characterized by inflation cycles.

The authors examine the time series properties of spot rates, forecast errors, and forward premia for several countries in both the interwar and postwar floating exchange rate periods. They find that forward premia often appear to be well described by fractional processes, suggesting that risk premia follow fractional processes given rational expectations. This empirical finding is consistent with existing theoretical models if the underlying forces driving the risk premium involve fractional processes. Copyright 1996 by Blackwell Publishers Ltd and The Victoria University of Manchester

In a general model in which forward exchange rates include risk premia, the one would expect the sources of risk relating to forward contracts with different maturities to have common components and, therefore, to be correlated. In this paper, the authors attempt to exploit the correlation between risk premia to examine whether it is possible to rule out one of the competing explanations of forward rate inefficiency. Copyright 1995 by Blackwell Publishers Ltd and The Victoria University of Manchester