Showing papers in "Journal of Economic Literature in 1999"

The Science of Monetary Policy: A New Keynesian Perspective

Abstract: The paper reviews the recent literature on monetary policy rules. We exposit the monetary policy design problem within a simple baseline theoretical framework. We then consider the implications of adding various real world complications. Among other things, we show that the optimal policy implicitly incorporates inflation targeting. We also characterize the gains from making a credible commitment to fight inflation. In contrast to conventional wisdom, we show that gains from commitment may emerge even if the central bank is not trying to inadvisedly push output above its natural level. We also consider the implications of frictions such as imperfect information.

The Provision of Incentives in Firms

Abstract: I NCENTIVES ARE the essence of economics. Despite many wide-ranging claims about their supposed importance, there has been little empirical assessment of incentive provision for workers. The purpose of this paper is to critically overview existing work on the provision of incentives. Since the interests of workers and their employers are not always aligned, a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm's interest. This literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers. These include piece rates, options, discretionary bonuses, promotions, profit sharing, efficiency wages, deferred compensation, and so on. My objective here is to evaluate this literature in the light of a growing empirical literature on compensation. Where possible, I will address the literature from two perspectives. First, an underlying assumption of this literature is that individuals respond to contracts that reward performance. Accordingly, I consider whether agents behave in this way, and whether these responses are always in the firm's interest. Second, I address whether firms write contracts with these responses in mind. In other words, do contracts look like the predictions of the theory? Incentives are provided to workers

An Essay on Fiscal Federalism

Abstract: vogue. Both in the industrialized and in the developing world, nations are turning to devolution to improve the per- formance of their public sectors. In the United States, the central government has turned back significant portions of federal authority to the states for a wide range of major programs, including wel- fare, Medicaid, legal services, housing, and job training. The hope is that state and local governments, being closer to the people, will be more responsive to the particular preferences of their con- stituencies and will be able to find new and better ways to provide these ser- vices. In the United Kingdom, both Scot- land and Wales have opted under the Blair government for their own regional parliaments. And in Italy the movement toward decentralization has gone so far as to encompass a serious proposal for the separation of the nation into two in- dependent countries. In the developing world, we likewise see widespread inter- est in fiscal decentralization with the ob- jective of breaking the grip of central planning that, in the view of many, has failed to bring these nations onto a path of self-sustaining growth. But the proper goal of restructuring the public sector cannot simply be de- centralization. The public sector in nearly all countries consists of several different levels. The basic issue is one of aligning responsibilities and fiscal in- struments with the proper levels of gov- ernment. As Alexis de Toqueville ob- served more than a centuty ago, "The federal system was created with the in- tention of combining the different ad- vantages which result from the magni- tude and the littleness of nations" (1980, v. I, p. 163). But to realize these "dif- ferent advantages," we need to under- stand which functions and instruments are best centralized and which are best placed in the sphere of decentralized levels of government. This is the sub- ject matter of fiscal federalism. As a subfield of public finance, fiscal feder- alism addresses the vertical structure of the public sector. It explores, both in normative and positive terms, the roles of the different levels of government and the ways in which they relate to one another through such instruments as intergovernmental grants.2

The microfinance promise

Abstract: In the past decade, microfinance programs have demonstrated that it is possible to lend to low-income households while maintaining high repayment rates--even without requiring collateral. The programs promise a revolution in approaches to alleviating poverty and spreading financial services, and millions of poor households are served globally. A growing body of economic theory demonstrates how new contractual forms offer a key to microfinance success--particularly the use of group-lending contracts with joint liability. For the most part, however, high repayment rates have not translated into profits, and studies of impacts on poverty yield a mixed picture. In describing emerging tensions, the paper highlights the diversity of innovative mechanisms beyond group-lending contracts, the measurement of financial sustainability, the estimation of economic and social impacts, the costs and benefits of subsidization, and the potential to reduce poverty through savings programs rather than just credit. The promise of microfinance has pushed far ahead of the evidence, and an agenda is put forward for addressing critical empirical gaps and sharpening the terms of policy discussion.

The New Growth Evidence

Abstract: Why do growth rates differ? This paper surveys the recent empirical literature on economic growth, starting with a discussion of stylized facts, data problems, and statistical methods. Six research questions are emphasized, drawing on growth and convergence research. In answering these questions, the paper argues that efficiency has grown at different rates across countries, casting doubt on neoclassical models in which technology is a public good. The latter half of the paper rounds up a variety of findings before providing answers to all six questions, including a short summary of how differences in growth rates arise.

Inequality and Economic Growth: The Perspective of the New Growth Theories

Abstract: Depuis plus d'un siecle, l'une des principales preoccupations des chercheurs en sciences humaines est l'etude des origines de l'inegalite et de la facon dont celle-ci perdure. Pourtant on est encore loin d'avoir eclairci les relations entre l'inegalite et le processus de developpement economique. Ces quarante dernieres annees notamment auront ete marquees par une vision economique conventionnelle erronee sur deux points. Sur l'effet de l'inegalite sur la croissance dans les economies de marche, l'argument standard est que l'inegalite est un facteur d'incitation et de ce fait un atout pour la croissance, bien qu'il puisse y avoir un arbitrage entre, d'un cote, les considerations d'incitation et de croissance, et, de l'autre, les considerations d'equite et d'assurance. Inversement, sur les relations de causalite de la croissance a l'inegalite, la vision economique conventionnelle voudrait que l'inegalite obeisse a l'hypothese dite de Kuznets selon laquelle l'inegalite de revenu et le PNB par habitant ont une relation de forme cloche. L'objectif de cette etude est de remettre en question cette vision, contredite par les resultats de travaux empiriques recents. L'introduction d'autres aspects tels les imperfections du marche du credit, l'alea moral, le changement technique et organisationnel non neutre, et les institutions du marche du travail, donne une image plus complexe, et sans doute plus realiste, des relations entre inegalite et croissance.

Trying to Explain Home Bias in Equities and Consumption

Abstract: Investors hold a substantially larger proportion of their wealth portfolios in domestic assets than standard portfolio theory would suggest, a phenomenon called "equity home bias." In the absence of this bias, investors would optimally diversify domestic output risk using foreign equities. Therefore, consumption growth rates would tend to co-move across countries even when output growth rates do not. Empirically, however, consumption growth rates tend to have a lower correlation across countries than do output growth rates, a phenomenon I call "consumption home bias." In this paper, I discuss these two biases and their potential relationship as suggested by the literature.

Explaining African Economic Performance

Abstract: Africa has had slow growth and a massive exodus of capital In many respects it has been the most capital-hostile region We review and interpret the aggregate-level and microeconomic literatures to identify the key explanations for this performance There is a reasonable correspondence of the two sets of evidence, pointing to four factors as being important These are a lack of openness to international trade; a high-risk environment; a low level of social capital; and poor infrastructure These problems are to a substantial extent attributable to government behaviour and the paper includes a review of the political economy literature which addresses that behaviour

Macroeconomic Performance and Collective Bargaining: An International Perspective

Abstract: This paper critically reviews the research on how collective bargaining systems influence macroeconomic performance in industrialized countries. The review considers effects of bargaining level, coordination, and corporatist institutional arrangements. Key empirical results turn out to be quite fragile, and much of the paper explores issues of measurement and specification that account for the fragility. The paper concludes that complementarities between key institutions and between institutions and the economic environment may be more important for macroeconomic performance than the effects of individual institutions, and it suggests research strategies.

Nash Equilibrium and the History of Economic Theory

Abstract: John Nash's formulation of noncooperative game theory was one of the great breakthroughs in the history of social science. Nash's work in this area is reviewed in its historical context to better understand how the fundamental ideas of noncooperative game theory were developed and how they changed the course of economic theory.

The New Growth Evidence

Abstract: Why do growth rates differ? This paper surveys the recent empirical literature on economic growth, starting with a discussion of stylized facts, data problems, and statistical methods. Six research questions are emphasized, drawing on growth and convergence research. In answering these questions, the paper argues that efficiency has grown at different rates across countries, casting doubt on neoclassical models in which technology is a public good. The latter half of the paper rounds up a variety of findings before providing answers to all six questions, including a short summary of how differences in growth rates arise.

The Numerical Reliability of Econometric Software

Abstract: Numerous examples show that some econometric software packages contain serious flaws, and that users cannot safely assume that their software is accurate. A brief survey of the fundamentals of computer arithmetic discusses the sources of numerical error and emphasizes that computer arithmetic is not at all like pencil-and-paper arithmetic. Both users and developers of econometrics software should first pay attention to accuracy, and only later consider user-friendliness. Details are provided for assessing the accuracy of basic estimation routines, statistical distributions, and random number generators. More accuracy benchmarks are needed, especially for specialized econometric procedures.

Adam Smith: Critical Theorist?

Abstract: The bicentenary of Adam Smith's Wealth of Nations in 1976 was marked by the publication of a new complete edition of his works and correspondence, bringing together for the first time all extant published and unpublished writings. A basis was thereby provided for serious reconsideration of Adam Smith's work, and since the early 1980s many conventional assumptions concerning Smith's work and contemporary significance have been challenged. This paper surveys the foundations upon which this new, "historical" Adam Smith has been constructed, and assesses the merits of the principal claims which have recently been made for his work.

The Young Person's Guide to Writing Economic Theory

Abstract: I formulate recommendations to young authors for writing economic theory well. I state general principles of good writing, and emphasize the role of the different components of a paper and the importance of the structure of one's work being clear. I explain how to choose notation and language, and how to present and illustrate proofs.

Corrigenda: The Numerical Reliability of Econometric Software

Abstract: CORRIGENDA Volume 37, June 1999 In "The Numerical Reliability of Econometric Software", by B. D. McCullough and H. D. Vinod, there are misprints in some equations on page 647 in the upper part of the left-hand column. The passage should read as follows: The normal equations are 6?^ + 61.5? ^ = 7.261 61.5?^ + 630.55? ^ = 74.5053 which yields a regression line of Y^ = ?3.478 + 0.457X. Suppose that the normal equations had been computed only to four significant digits as 6?^ + 61.5? ^ = 7.261 61.5?^ + 630.6? ^ = 74.50.