Many researchers use GARCH models to generate volatility forecasts. Using data on three major U.S. dollar exchange rates we show that such forecasts are too high in volatile periods. We argue that this is due to the high persistence of shocks in GARCH forecasts. To obtain more flexibility regarding volatility persistence, this paper generalizes the GARCH model by distinguishing two regimes with different volatility levels; GARCH effects are allowed within each regime. The resulting Markov regime-switching GARCH model improves on existing variants, for instance by making multi-periodahead volatility forecasting a convenient recursive procedure. The empirical analysis demonstrates that the model resolves the problem with the high single-regime GARCH forecasts and that it yields significantly better outof-sample volatility forecasts.Key words: GARCH, Markov-switching, variance, forecasting, exchange rates. JEL classification: C52, C53, F31. * Department of Economics, University of Amsterdam, Roetersstraat 11, 1018 WB Amsterdam, the Netherlands; tel: +31-20-5254191; fax: +31-20-5254254; E-mail: klaassen@fee.uva.nl. I thank Harry Huizinga, Frank de Jong, Michael McAleer, Bertrand Melenberg, Theo Nijman, Arthur van Soest, Kenneth West, the editors of this issue, James Hamilton and Baldev Raj, and two referees for very useful and constructive comments.

We investigate the consequences of an increase in public spending for trade balances and budget deficits in the European Union, using a panel vector auto‐regression approach. Whereas the literature tends to treat the trade balance/GDP ratio as a single variable, we include exports and imports as separate variables. This allows us to track in more detail the sources of trade balance movements. Further, we use annual rather than quarterly data. This facilitates the interpretation of the shocks and reduces potential anticipation effects of fiscal policy changes. However, the identification assumptions become stronger, and we extensively check their validity. According to our baseline estimate, a 1% GDP increase in public spending produces a 1.2% on impact rise and a 1.6% peak rise in GDP. Rising imports and falling exports are responsible for a fall of the trade balance by 0.5% of GDP on impact and a peak fall of 0.8%. In addition, the spending increase produces a 0.7% impact (and peak) budget deficit, thereby pointing to the potential relevance of the twin deficits hypothesis for the European Union. (JEL: E62, H60)

"We explore international spill-overs from fiscal policy shocks via trade in Europe. To assess and quantify the channels through which a fiscal expansion stimulates domestic activity, foreign exports, and foreign output, we estimate a dynamic empirical model of government spending, net taxes, and output, and combine its estimates with a panel model of trade linkages across European countries. The baseline estimates of both models are quite robust and statistically significant. Our results indicate that trade spill-overs of fiscal shocks should be taken into account when assessing the character and intensity of economic integration in the European Union." Copyright CEPR, CES, MSH, 2006.

This article tests whether points in tennis are independent and identically distributed (iid). We model the probability of winning a point on service and show that points are neither independent nor identically distributed: winning the previous point has a positive effect on winning the current point, and at "important" points it is more dif cult for the server to win the point than at less important points. Furthermore, the weaker a player, the stronger are these effects. Deviations from iid are small, however, and hence the iid hypothesis will still provide a good approximation in many cases. The results are based on a large panel of matches played at Wimbledon 1992-1995, in total almost 90,000 points. Our panel data model takes into account the binary character of the dependent variable, uses random effects to capture the unobserved part of a player's quality, and includes dynamic explanatory variables.

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