|
|
Abstract: This paper addresses the problem of multiple equilibria in a model of time-consistent monetary policy. It suggests that this problem originates in the assumption that agents have rational expectations and proposes several alternative restrictions on expectations that allow the monetary authority to build credibility for a disinflationary policy by demonstrating that it will stick to that policy even if it imposes short-run costs on the economy. Starting with these restrictions, the paper derives conditions that guarantee the uniqueness of the model's steady state; monetary policy in this unique steady state involves the constant deflation advocated by Milton Friedman.
Abstract: This paper investigates the effects of permanent and transitory components of the exchange rate on firms' profitability under imperfect information. Utilizing a signal extraction framework, we show that the variances of these components of the exchange rate process will have indeterminate effects on the firm's growth rate of profits, but will have predictable effects on its volatility. An increase in the variance of the permanent (transitory) component in the exchange rate process leads to greater (lesser) variability in the growth rate of the firm's profits, thus establishing that the source of exchange rate volatility matters in analyzing its effects. Implications of our theoretical findings for the empirical modeling of the underlying relationships are discussed.
Abstract: This paper develops a method for combining the power of a dynamic, stochastic, general equilibrium model with the flexibility of a vector autoregressive time-series model to obtain a hybrid that can be taken directly to the data. It estimates this hybrid model via maximum likelihood and uses the results to address a number of issues concerning the ability of a prototypical real business cycle model to explain movements in aggregate output and employment in the postwar US economy, the stability of the real business cycle model's structural parameters, and the performance of the hybrid model's out-of-sample forecasts.
Abstract: This paper characterizes Federal Reserve policy since 1980 as one that actively manages short-term nominal interest rates in order to control inflation and evaluates this policy using a dynamic, stochastic, sticky-price model of the United States economy. The results show that the Fed's policy insulates aggregate output from the effects of exogenous demand-side disturbances and, by calling for a modest but persistent reduction in short-term interest rates following a positive technology shock, helps the economy to respond to supply-side disturbances as it would in the absence of nominal rigidities.
Abstract: Corruption and imperfect contract enforcement dramatically reduce trade. This paper estimates the reduction, using a structural model of import demand in which transactions costs impose a price markup on traded goods. We find that inadequate institutions constrain trade far more than tariffs do. We also find that omitting indexes of institutional quality from the model leads to an underestimate of home bias. Using a broad sample of countries, we find that the traded goods expenditure share declines significantly as income per capita rises, other things equal. Cross-country variation in the effectiveness of institutions offers a simple explanation of the observed global pattern of trade, in which high-income, capital-abundant countries trade disproportionately with one another.
Abstract: The desirability of trade reform paired with revenue neutral changes in other distortionary taxes is an empirical question. With a particular Computable General Equilibrium model of an economy, particular reforms can be evaluated, but the robustness of conclusions is suspect; they depend on a particular specification and parameterization of the model economy. This paper provides a diagnostic toolkit which permits sensitivity analysis across model specifications and parameterizations. Novel elements are an emphasis on the concept of compensated Marginal Cost of Funds (MCF), development of the MCF of quotas and analysis of the relationship between aggregate MCF and social welfare.
Abstract: International trade policies are often compared across countries and over time for a variety of purposes. Analysts use such measures as arithmetic or trade-weighted average tariffs, Non-Tariff Barrier (NTB) coverage ratios and measures of tariff dispersion. All such measures are without theoretical foundation. In this paper we develop and characterise a theoretically-based index number of trade policy which is appropriate to trade negotiations. We characterize an index of trade policy restrictiveness defined as the uniform tariff equivalent which maintains the same volume of trade as a given set of tariffs, quotas, and domestic taxes and subsidies. We relate this volume-equivalent index to the Trade Restrictiveness Index, a welfare-equivalent measure, and relate changes in both indexes to changes in the generalised mean and variance of the tariff schedule. Applications to international cross-section and time-series comparisons of trade policy show that the new index frequently gives a very different picture than do standard indexes.
Abstract: This paper derives the restrictions imposed by Barro and Gordon's theory of time-consistent monetary policy on a bivariate time-series model for inflation and unemployment and tests those restrictions using quarterly US data from 1960 through 1997. The results show that the data are consistent with the theory's implications for the long-run behavior of the two variables, indicating that the theory can explain inflation's initial rise and subsequent fall over the past four decades. The results also suggest that the theory must be extended to account more fully for the short-run dynamics that appear in the data.
Abstract: This paper confirms that the unemployment rate associated with stable inflation, the so-called "NAIRU," probably has declined in recent years, after having risen sharply during the late 1970s and early 1980s. Although a demographic shift toward a less experienced workforce and an unexpected slowdown in trend productivity growth are able to explain the earlier rise in the NAIRU, a reversal of these effects does not adequately explain the timing of the apparent decline in the NAIRU during the 1990s. I propose that an additional element needs to be incorporated into the assessment. I argue that the degree of integration of regional labor markets across the United States has accelerated over the recent past, leading to a greater degree of synchronization in the pattern of regional labor market conditions and regional business-cycle conditions. I provide evidence of this greater synchronization, and suggest that it may have led to a drift downward in the NAIRU.
Abstract: The effect of financial liberalization on private saving is theoretically ambiguous, not only because the link between interest rate levels and saving is itself ambiguous, but also because financial liberalization is a multi-dimensional and phased process, sometimes involving reversals. Some dimensions, such as increased household access to consumer credit or housing finance, might also work to reduce private savings rather than increasing them. Furthermore, the long-term effect of liberalization on savings may differ substantially from the impact effect. Using Principal Components, we construct a 25-year time series index of financial liberalization for each of eight developing countries: Chile, Ghana, Indonesia, Korea, Malaysia, Mexico, Turkey and Zimbabwe. This is employed in an econometric analysis of private saving in these countries. We find that the pattern of effects differs across countries. In summary, liberalization appears to have had a significant positive direct effect on saving in Ghana and Turkey, and a negative effect in Korea and Mexico. No clear effect is discernible in the other countries. There is no evidence of significant, positive and sizeable interest rate effects. For the present, our results must be taken as an indication that there is no firm evidence that financial liberalization will increase saving. Indeed, under some circumstances, liberalization has been associated with a fall in saving. All in all, it would be unwise to rely on an increase in private savings as the channel through which financial liberalization can be expected to increase growth.
Abstract: This article examines whether recent college graduates have fared as well as their predecessors. We examine changes in both the wage and occupational distributions. Specifically, we explore the claim that college educated workers are increasingly likely to be in "non-college" occupations. The latter are defined using standard economic concepts rather than the subjective groupings of occupations used in previous studies. We show that changes in the wage distribution and changes in the proportion of college-educated workers in "non-college" jobs reflect continued improvements through the mid-1980s, but a deterioration in the late 1980s and early 1990s.
Abstract: This paper investigates property tax systems (linear taxes on pre-development land value, post-development structure value, and post-development site value) from a partial equilibrium perspective. Particular attention is paid to characterizing property tax systems that are neutral with respect to the timing and density of development and to calculating the deadweight loss from non-neutral property tax systems.
Abstract: The assumption of conditional symmetry is often invoked to validate adaptive estimation and consistent estimation of ARCH/GARCH models by quasi maximum likelihood. Imposing conditional symmetry can increase the efficiency of bootstraps if the symmetry assumption is valid. This paper proposes a procedure for testing conditional symmetry. The proposed test does not require the data to be stationary or i.i.d., and the dimension of the conditional variables could be infinite. The size and power of the test are satisfactory even for small samples. In addition, the proposed test is shown to have non-trivial power against root-T local alternatives. Applying the test to various time series, we reject conditional symmetry in inflation, exchange rate and stock returns. These data have previously been tested and rejected for unconditional symmetry. Among the non-financial time series considered, we find that investment, the consumption of durables, and manufacturing employment also reject conditional symmetry. Interestingly, these are series whose dynamics are believed to be affected by fixed costs of adjustments.
Abstract: Excess returns earned in fixed-income markets have been modeled using the ARCH-M model of Engle et al. and its variants. We investigate whether the empirical evidence obtained from an ARCH-M type model is sensitive to the definition of the holding period (ranging from 5 days to 90 days) or to the choice of data used to compute excess returns (coupon or zero-coupon bonds). There is robust support for the inclusion of a term spread in a model of excess returns, while the significance of the in-mean term depends on characteristics of the underlying data.
Note: this paper was previously titled "Conditional heteroskedasticity models of excess returns: How robust are the results?"
Abstract: This paper has two objectives. The first is to provide evidence on changes in short term job turnover using a previously underutilized data source, the Survey of Income and Program Participation (SIPP). The results from the SIPP are contrasted with data from the Panel Study of Income Dynamics (PSID), a more widely used data set. The second objective of the paper is to describe the changes in the events accompanying job turnover. The implicit normative assumption behind much of the public discussion of job turnover is that turnover is undesirable because it is either "involuntary" or leads to worsened outcomes, such as an increase in the probability of unemployment a or decrease in wages. We, therefore, also examine several of these outcomes to see if the perception that conditions have worsened reflects changes in these events.
Abstract: This paper provides an explicit welfare basis for evaluating economic mobility. Our social welfare function can be seen as a natural dynamic extension of the static social welfare function presented in Atkinson and Bourguignon (1982). Unlike Atkinson and Bourguignon, we use social preferences a la Kreps-Porteus, for which the timing of resolution of uncertainty may matter. Within this generalized framework, we show that welfare evaluation of mobility depends on the interplay between aversion to inequality, risk aversion, and aversion to intertemporal fluctuations. This framework allows us to provide a welfare analysis not only of "reversal" (which has been the focus of much of the literature) but also of "origin independence" (which has not received an explicit welfare foundation in the literature). We use our framework to develop welfare measures of mobility, and apply these measures to intergenerational mobility in the United States using PSID data. We show that the value of origin independence is quantitatively important. We also show that different subpopulations experience different mobility patterns: reversal is more important than origin independence for blacks but the opposite is true for non-blacks.
Abstract: This paper investigates the effects of exchange rate uncertainty on the volume and variability of trade flows. Employing a signal extraction framework, we show that the direction and magnitude of importers' and exporters' optimal trading activities depend upon the source of the uncertainty (general economic shocks, fundamental factors driving the exchange rate process, or noise in the signal of policy innovations), providing a rationale for the contradictory empirical evidence in the literature. We also show that exchange rate uncertainty emanating from general economic shocks and the fundamental factors reduces the variability of trade flows, while that related to noise in the signal of policy innovations increases variability.
Abstract: This paper models the dynamics of adjustment to long-run purchasing power parity (PPP) over the post-Bretton Woods period in a nonlinear framework consistent with the presence of frictions in international trade. We estimate exponential smooth transition autoregressive (ESTAR) models of deviations from PPP using both CPI- and WPI-based measures for a broad set of U.S. trading partners. We find clear evidence of a mean-reverting dynamic process for sizable deviations from PPP, with an equilibrium tendency varying nonlinearly with the magnitude of disequilibrium.
Abstract: Many continuous time term structure of interest rate models assume a factor structure where the drift and volatility functions are affine functions of the state variable process. These models involve very specific parametric choices of factors and functional specifications of the drift and volatility. Moreover, under the affine term structure restrictions not all factors necessarily affect interest rates at all maturities simultaneously. This class of so called affine models covers a wide variety of existing empirical as well as theoretical models in the literature. In this paper we take a very agnostic approach to the specification of these diffusion functions and test implications of the affine term structure restrictions. We do not test a specific model among the class of affine models per se. Instead, the affine term structure restrictions we test are based on the derivatives of the responses of interest rates to the factors. We also test how many and which factors affect a particular rate. These tests are conducted within a framework which models interest rates as functions of "fundamental" factors, and the responses of interest rates to these factors are estimated with non-parametric methods. We consider two sets of factors, one based on key macroeconomic variables, and one based on interest rate spreads. In general, despite their common use we find that the empirical evidence does not support the restrictions imposed by affine models. Besides testing the affine structure restrictions we also uncover a set of fundamental factors which appear remarkably robust in explaining interest rate dynamics at the long and short maturities we consider.
Abstract: In the winter of 1931, in the depth of the Great Depression, and under extremely adverse circumstances Boston longshoremen engaged in, and endured, a long and bitter strike because of a fundamental disagreement with their employers about what constituted a reasonable pace of work. This account of that strike illustrates the enduring need in a rational industrial relations system for institutional means for resolving fairly, unavoidable differences between employers and employees about the concrete meaning of distributive justice.
Abstract: Despite the common opinion that the Knights of Labor had virtually disappeared by the end of the 1890s, it remained as the dominant labor organization among railroad freight handlers and longshoremen in Boston until just prior to the outbreak of World War I. The seemingly solid position of the Knights in the Boston transportation industry crumbled almost overnight in 1912, when a strike by Boston longshoremen was defeated resoundingly. The longshoremen's experience in this strike led them to abandon the Knights of Labor and move en masse to the International Longshoremen's Association by the beginning of 1913.