Showing papers in "Journal of Political Economy in 1976"
TL;DR: In this paper, the authors developed a theory of exchange rate movements under perfect capital mobility, a slow adjustment of goods markets relative to asset markets, and consistent expectations, and showed that along that path a monetary expansion causes the exchange rate to depreciate.
Abstract: The paper develops a theory of exchange rate movements under perfect capital mobility, a slow adjustment of goods markets relative to asset markets, and consistent expectations. The perfect foresight path is derived and it is shown that along that path a monetary expansion causes the exchange rate to depreciate. An initial overshooting of exchange rates is shown to derive from the differential adjustment speed of markets. The magnitude and persistence of the overshooting is developed in terms of the structural parameters of the model. To the extent that output responds to a monetary expansion in the short run, this acts as a dampening effect on exchange depreciation and may, in fact, lead to an increase in interest rates.
4,766 citations
TL;DR: This article showed that the observed quality income elasticity would be relatively high and the quantity elasticity relatively low and sometimes negative, even if the true "unobserved" income elasticities for quantity and quality were equal and of average value.
Abstract: This paper brings together and integrates social interactions and the special relation between quantity and quality. We are able to show that the observed quality income elasticity would be relatively high and the quantity elasticity relatively low and sometimes negative, even if the true "unobserved� income elasticities for quantity and quality were equal and of average value. Moreover, the observed quality elasticity would fall, and the observed quantity elasticity would rise, as parental income rose.
1,161 citations
TL;DR: In this article, the authors estimate economies of scale for U.S. firms producing electric power and conclude that a small number of extremely large firms are not required for efficient production.
Abstract: We estimate economies of scale for U.S. firms producing electric power. Cross-section data for 1955 and 1970 are analyzed using the translog cost function. We find that in 1955 there were significant scale economies available to nearly all firms. By 1970, however, the bulk of U.S. electricity generation was by firms operating in the essentially flat area of the average cost curve. We conclude that a small number of extremely large firms are not required for efficient production and that policies designed to promote competition in electric power generation cannot be faulted in terms of sacrificing economies of scale.
1,074 citations
791 citations
TL;DR: In this article, a statistical definition of the natural unemployment rate hypothesis is advanced and tested, and a particular illustrative structural macroeconomic model satisfying the definition is set forth and estimated, implying a number of neutrality propositions asserting the invariance of the conditional means of real variables with respect to the feedback rule for the money supply.
Abstract: A statistical definition of the natural unemployment rate hypothesis is advanced and tested. A particular illustrative structural macroeconomic model satisfying the definition is set forth and estimated. The model has "classical" policy implications, implying a number of neutrality propositions asserting the invariance of the conditional means of real variables with respect to the feedback rule for the money supply. The aim is to test how emphatically the data reject a model incorporating rather severe classical hypotheses.
560 citations
TL;DR: In this article, the authors developed a theory of temporary layoffs and examined the role of unemployment insurance and of taxes in detail, and gave a detailed analysis of why employment is reduced instead of hours.
Abstract: The typical worker who is laid off is soon rehired by his original employer. This important and generally unnoticed fact requires a major reevaluation of our current theories of unemployment. This paper develops a theory of temporary layoffs. Specific attention is given to the question of why employment is reduced instead of hours. The role of unemployment insurance and of taxes is examined in detail.
520 citations
TL;DR: The marginal cost of public funds for taxes on labor income in the United States ranges from 1.09 to 1.16 per dollar of tax revenue, depending on the progressivity of the change in the tax structure as discussed by the authors.
Abstract: The marginal cost of public funds is the direct tax burden plus the marginal welfare cost produced in acquiring the tax revenue. This paper estimates that the marginal cost of public funds for taxes on labor income in the United States ranges from 1.09 to 1.16 per dollar of tax revenue, depending on the progressivity of the change in the tax structure. Thus, government expenditures must be at least 9-16 percent more productive than private expenditures to produce a net welfare gain. In addition, the total welfare cost of income taxes in 1974 is estimated at $19 billion.
466 citations
TL;DR: In this paper, the authors focus on the history of the Cobb-Douglas production function and use of time-series analysis in formulating the function, and the accuracy of the function.
Abstract: Focuses on the Cobb-Douglas production function. History of the introduction of the function; Use of time-series analysis in formulating the function; Accuracy of the function. (Из Ebsco)
377 citations
TL;DR: In this paper, the theory of exhaustible resources is modified to take account of the industrial organization of the world oil market, and the cartel is viewed as a unified enterprise which dominates other extractors because of its larger reserves.
Abstract: The theory of exhaustible resources is modified to take account of the industrial organization of the world oil market. The cartel is viewed as a unified enterprise which dominates other extractors because of its larger reserves. Equilibrium price and sales paths are derived giving neither the dominant extractor nor the competitive fringe any incentive to change its intertemporal behavior. Under standard but simplified cost assumptions, it is shown that a disproportionate share of the increased profits results from the formation of the cartel goes to non-members and that the cartel's restriction on sales eventually leaves it the sole supplier of oil.
339 citations
TL;DR: In this article, the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float were examined.
Abstract: This paper deals with the effects of transaction costs on the efficacy of covered interest arbitrage during three periods: 1962-67, the tranquil peg; 1968-69, the turbulent peg; and 1973-75, the managed float. Several conclusions emerge: (i) during the managed float transaction costs have risen dramatically, (ii) these costs played a similar role in accounting for deviations from parity during the periods of the tranquil peg and the managed float but not during the turbulent peg. Similar conclusions emerge from a time-series analysis of the various exchange rates with the implication that a classification of periods according to the degree of turbulence is preferred to a classification based on the legal arrangement (e.g., pegged or floating rates), and (iii) covered interest arbitrage does not seem to entail unexploited opportunities for profits.
328 citations
TL;DR: In this article, the authors reexamine the incidence and efficiency cost of the discriminatory taxation of capital income in the United States and compare the corrected results of the Harberger model with those achieved with an algorithmic solution procedure for a general equilibrium model.
Abstract: This article reexamines the incidence and efficiency cost of the discriminatory taxation of capital income in the United States. It is argued that Harberger's 1966 estimates of the static welfare loss were subject to two important mistakes. Their correction lowers the efficiency cost estimates approximately 38 percent. The paper also compares the corrected results of the Harberger model with those achieved with an algorithmic solution procedure for a general equilibrium model. When the latter approach is used with the same two-sector division of production, the results are very similar to those of Harberger's model. With disaggregation to 12 production sectors, however, the loss estimates increase by an average of 40 percent.
TL;DR: In this paper, the effect of organized futures trading on information in spot markets is investigated, and the empirical evidence indicates that futures trading increases traders' information about forces affecting supply and demand.
Abstract: This paper investigates the effect of organized futures trading on information in spot markets. First, a model is developed that relates spot-price behavior and market information. The model can be viewed as a particular efficient markets model; this connection provides additional implications about price behavior and information. Next, price series for six different commodities are investigated for an information effect of futures trading. For each commodity, the empirical evidence indicates that futures trading increases traders' information about forces affecting supply and demand.
TL;DR: In this article, an empirical investigation of lifetime earnings of U.S. male high school and college graduates based on the theory of optimum capital accumulation was carried out, and a natural extension of familiar rate-of-return methods was applied in this work.
Abstract: This paper summarizes an empirical investigation of lifetime earnings of U.S. male high school and college graduates based on the theory of optimum capital accumulation. Suppose we observe the lifetime earnings pattern for some individual. (i) What process generated it? (ii) What can be learned about the generating process from the age-experience observations themselves? These are the central questions raised by the theory of human capital, and a natural extension of familiar rate-of-return methods is applied in this work. In order to avoid the appearance of excessive product differentiation in the face of unfamiliar technical manipulations in what follows, it will be helpful to present a broad overview of the method. More than a decade ago, Becker (1962) and Mincer (1962b) showed how it may be possible to identify and estimate human capital investments from observations on life earnings patterns and estimates of rates of return on human capital investments. That approach simply is reversed in this work. I start with a specific form of the theory that in effect imposes restrictions on investment costs over working life. These imply other restrictions on observed earnings patterns and identify some parameters of the assumed underlying process. Embodied skill and knowledge (capital) and learning (investment) are treated as "latent," unobservable variables in this approach. The
TL;DR: The authors describes and elaborates a process first discovered by Edward H. Clarke that motivates individuals to reveal their true preferences for public goods by paying a special charge equal to the net cost to others that results from including their vote in the decision.
Abstract: This paper describes and elaborates a process first discovered by Edward H. Clarke that motivates individuals to reveal their true preferences for public goods. The essence of the process is that each individual is offered a chance to change the outcome that would occur without his vote by paying a special charge equal to the net cost to others that results from including his vote in the decision. Because the special charge on any one person is not paid to any other person, a very small budget surplus results. Applications to both discrete and continuous decisions are illustrated.
TL;DR: The concept of "economically rational" expectation formation is developed for a regime in which the acquisition and use of some information sets are nonnegligible as discussed by the authors, and the concept provides a middle ground between "autoregressive" expectation forming and "rational" expectation creation.
Abstract: The concept of "economically rational" expectation formation is developed for a regime in which the acquisition and use of some information sets are nonnegligible The concept provides a middle ground between "autoregressive" expectation formation and "rational" expectation formation A necessary condition for the use of nonnegligible cost information sets is that such sets serve as leading indicators or more formally satisfy the causality conditions of Granger (1969) Using a time series modeling identification methodology developed by Box and Jenkins (1970) and Haugh (1972), we test the causal relationship between the rate of inflation and various monetary and fiscal aggregates Surprisingly, we cannot reject the hypothesis that the rate of inflation is independent of the monetary and fiscal aggregates considered Since the proposed leading indicator series contain no incremental predictive power once the information contained in the past history of inflation is efficiently utilized, we conclude that au
TL;DR: In this paper, the authors examined the interdependent nature of monetary policies in an n-country game where each monetary authority decides on its credit expansion to maximize its objective function, and showed that the Cournot (or noncooperative) solution and the Stackelberg leadership solution do not lie on the contract curve, unless the aggregated preference over the balance of payments is exactly matched by the creation of international reserves.
Abstract: Applying the monetary approach to the balance of payments, this paper examines the interdependent nature of monetary policies. In an n-country game where each monetary authority decides on its credit expansion to maximize its objective function, it is shown that the Cournot (or noncooperative) solution and the Stackelberg leadership solution do not lie on the contract curve, unless the aggregated preference over the balance of payments is exactly matched by the creation of international reserves. If the creation of international reserves exceeds the aggregated preference, the monetary expansion takes on the nature of public bads, leading to international inflation.
TL;DR: In this article, the authors develop an explanation for the emergence of media of exchange through the unconcerted market behavior of individuals, where individuals are assumed to accomplish their ultimate exchanges through trading sequences which minimize the expected time spent searching for complementary trading partners.
Abstract: The paper develops an explanation for the emergence of media of exchange through the unconcerted market behavior of individuals. Individuals are assumed to accomplish their ultimate exchanges through trading sequences which minimize the expected time spent searching for complementary trading partners. If individual perceptions of the trading environment are appropriately restricted, then the equilibrium pattern of trade will be some mixture of direct barter and use of a common good as medium of exchange. Although full monetization is always a locally stable exchange pattern, the economy may remain in universal direct barter or partially monetized states.
TL;DR: In this article, the authors show that there are always alternative ways of writing the reduced form, one being observationally equivalent with the other, so that each is equally valid in the estimation period.
Abstract: The usual proof that Friedman's simple k-percent growth rule for the money supply is suboptimal comes from mechanically manipulating a reduced-form equation. Those manipulations, in general, show that pursuing a rule with feedback from current economic conditions to the money supply is better than following Friedman's advice. To be valid, the proof requires that, as written in one particular way, the reduced-form equation will remain unaltered when the monetary authority departs from the old "rule" used during the estimation period and follows a new one. Here I point out that there are always alternative ways of writing the reduced form, one being observationally equivalent with the other, so that each is equally valid in the estimation period. If one assumes that the first form is invariant when the policy rule is changed, the proof of the superiority of rules with feedback over Friedman's rule goes through. But if one assumes that it is the reduced form as written in the second way that remains unchanged, the proof that Friedman is wrong does not obtain-instead, the implication is that Friedman's rule does as well as any other deterministic feedback rule and better than a stochastic rule. Therefore, estimates of reduced forms alone will not permit one to settle the difference between Friedman and advocates of rules with feedback. Given any set of reduced-form estimates, there is an invariance assumption that will permit a member of either camp to make his point. In effect, then, this paper poses the question: Does the view that Friedman's k-percent feedback rule is as good as any other deterministic feedback rule place any restrictions on reduced forms? The answer is no. This is distressing since, for a given sampling interval and estimation period, the reduced-form estimates summarize everything that the data can ever tell
TL;DR: In this paper, the authors explore the analytical distinction between employment and unemployment effects in the hope of providing some understanding of the observations and find that despite the statistical difference there is no apparent recognition of a conceptual as well as substantive distinction between minimum wage effects on employment and those on unemployment.
Abstract: Empirical investigation of employment effects of minimum wage legislation is a subject of continuing interest, judging by a growing number of studies. The older studies were concerned mainly with changes in employment in low-wage industries. In the more recent work, attention has shifted to effects on unemployment in low-wage demographic groups, such as teenagers. Despite the statistical difference there is no apparent recognition of a conceptual as well as substantive distinction between minimum wage effects on employment and those on unemployment. The purpose of this paper is to explore the analytical distinction between employment and unemployment effects in the hope of providing some understanding of the observations. Though related empirical work is far from being definitive the findings appear to be informative.
TL;DR: Barro as discussed by the authors showed that the substitution of debt for tax finance will have no expansionary effect on total spending, even if the future tax liabilities are fully capitalized, and even if they are, does this necessarily imply that the fiscal policy shift exerts no effect on the total spending?
Abstract: Is public debt issue equivalent to taxation? This is an age-old question in public finance theory. David Ricardo presented the case for the affirmative.1 Professor Robert J. Barro reexamines the question in his recent paper (1974) without, however, making reference to Ricardo or other early contributors. Although his discussion is carefully qualified to allow for exceptions under specified conditions, the thrust of Barro's argument supports the Ricardian theorem to the effect that taxation and public debt issue exert basically equivalent effects. Barro's central emphasis is on demonstrating that, under reasonable conditions which involve overlapping generations of persons with finite lives, taxpayers will capitalize the future obligations that public debt issue embodies. To the extent that this capitalization occurs, government bonds do not add to the perceived net wealth in the economy. From this Barro infers that the substitution of debt for tax finance will exert no expansionary effect on total spending. There are two questions here. Are the future tax liabilities fully capitalized? And, even if they are, does this necessarily imply that the fiscal policy shift exerts no effect on total spending? To establish the second result, it is necessary to examine the differential impacts of taxation and debt issue, quite apart from the question of the capitalization of future taxes. Barro wholly neglects this necessary part of any comparative analysis of the two fiscal instruments, and, because of this neglect, his conclusion is not nearly so relevant for policy as it seems to be. This neglect may stem from Barro's failure to specify properly the inclusive set of transactions that debt issue represents.
TL;DR: In this paper, the effects of unit and ad valorem taxes on the price of a product were investigated, and it was shown that, although the market will adjust in numerous changeable characteristics, the adjustment is constrained by the condition that the sum of the dollar value of the inefficiencies and of tax paid is minimized.
Abstract: Because commodities as transacted are complex, tax statutes could not cover all margins subject to optimization A tax will induce, then, substitution within the commodity away from the taxed attributes and into the others The results of a test on cigarettes are consistent with our prediction that the effects of unit and ad valorem taxes will differ both from each other and from those predicted by the conventional model It is shown that, although the market will adjust in numerous changeable characteristics, the adjustment is constrained by the condition that the sum of the dollar value of the inefficiencies and of tax paid is minimized
TL;DR: The shape of the earnings-age function and the way education affects it can explain all the empirically observed relations of migration measures to distance moved, age, and education.
Abstract: The shape of the earnings-age function and the way education affects it can explain all the empirically observed relations of migration measures to distance moved, age, and education. No other assumptions (which are often made)--such as attributing lower risk aversion and higher efficiency of job search to more-educated persons, or higher psychic cost of moving to older persons--are needed. The individual's search for jobs and the firm's search for employees are affected by the shape of the earnings function--and, thus, by age and education in a predictable way. In turn, the observed systematic behavior of the migration measures with respect to age and education is responsive to the search behavior.
TL;DR: In this paper, a mathematical model of applied research is formulated, which views applied research as a search in a given distribution; basic research shifts the distribution searched, and the productivity of the applied research effort is a function of the gap between technology in practice and basic knowledge.
Abstract: A mathematical model of applied research is formulated. It views applied research as a search in a given distribution; basic research shifts the distribution searched. The productivity of applied research effort is a function of the gap between technology in practice and basic knowledge. With constant basic and applied research a (stochastic) steady state emerges in which technological change is determined by the rate of progress of basic knowledge, and the technological gap by the level of applied research.
TL;DR: In this article, a model of government enterprise is developed which contrasts the supply behavior of government and proprietary organizations, and several specific implications are derived from an explicit information structure in which the productivity of management must be monitored indirectly and differently for the two types of organizations.
Abstract: A model of government enterprise is developed which contrasts the supply behavior of government and proprietary organizations. Refutable implications are derived from an explicit information structure in which the productivity of management must be monitored indirectly and differently for the two types of organizations. Managers of both are assumed to be wealth maximizers. It nevertheless is suggested that the output behavior of government enterprises will differ from that of proprietary enterprises in predictable ways--even where Congress intends the output of government bureaus to be identical to that of proprietary firms. Numerous specific implications are developed and tested with reference to the operation of Veterans' Administration hospitals.
TL;DR: In this article, the authors identify variation through time in expected real returns on Treasury bills as a function of the uncertainty of the inflation rate and find relationships between this source of inflation uncertainty and expected real return and premiums.
Abstract: At time t-1 there is uncertainty about the rate of inflation that will be observed between t-1 and t, and there is uncertainty about the expected values of future rates of inflation that will be assessed at t. The attempts to identify variation through time in expected real returns on Treasury bills as a function of the uncertainty of the inflation rate are unsuccessful. It is argued, however, that uncertainty of the inflation rate doesn't change much during the sample period (1953-71). Variation through time in uncertainty about future assessments of expected rates of inflation seems somewhat more systematic, and perhaps as a consequence relationships between this source of inflation uncertainty and expected real returns and premiums are found.
TL;DR: In this article, the authors treat three important relationships in industrial organization as a single simultaneous-equations system, and show that simultaneous equations bias is not an important factor in the estimation of structure-performance relationships.
Abstract: The industrial organization literature contains many empirical tests of hypothesized relationships among elements of industry structure and performance. Most of these studies used ordinary least-squares regression to estimate single-equation relationships. This approach is incorrect if the relationship being estimated is part of a simultaneous-equations system. This paper treats three important relationships in industrial organization as a single simultaneous-equations system. The results are consistent with those obtained from single-equation models and suggest that simultaneous-equations bias is not an important factor in the estimation of structure-performance relationships.
TL;DR: In this article, the authors present a model of price stabilization applicable to less developed economies and demonstrate that stabilization through an initial increase in the average nominal interest rate paid on money holdings has significantly more favorable short-run effects on real output than does stabilization through a reduction in the rate of monetary expansion.
Abstract: This paper presents a model of price stabilization applicable to less-developed economies. Distinctive features of the model are: (i) its explicit incorporation of a commercial banking system, (ii) its specification that the actual rate of inflation depends on inflationary expectations and on excess demand for output, and (iii) endogeneity of the growth rate of real output. Numerical simulations are also conducted. We demonstrate that stabilization through an initial increase in the average nominal interest rate paid on money holdings has significantly more favorable short-run effects on real output than does stabilization through an initial reduction in the rate of monetary expansion.
TL;DR: In this paper, an economic model was used to analyze the determinants of legislative decision-making using the statistical technique of n-chotomous multivariate probit analysis and empirically tested using a set of independent variables.
Abstract: This paper utilizes an economic model to analyze the determinants of legislative decision making The model is empirically tested using the statistical technique of n-chotomous multivariate probit analysis The legislative issue addressed is the 1973 amendment to the Fair Labor Standards Act The amendment proposed to increase the minimum wage and the number of workers covered The dependent variable denotes a representative's voting pattern on the minimum wage; the independent variables represent economic characteristics of a legislator's congressional district The hypothesized linkages between the set of independent variables and legislative voting patterns were generally substantiated in the empirical tests
TL;DR: In this paper, the joint determination of work and investment in human capital over the life cycle is analyzed, and conditions are provided to determine a critical level of time preference which is sufficient to induce a "normal" life-cycle pattern for investment and work.
Abstract: The joint determination of work and investment in human capital over the life cycle is analyzed. At low rates of impatience investment is decreasing throughout life, as in simpler models which assume hours of work to be fixed. The demand for leisure over the life cycle is "U shaped." Wages rise to a single peak which occurs after the peak in hours of work. Distinctly different patterns arise when the rate of impatience is high. Such individuals may prefer an increasing hours of work profile, and schooling need not be concentrated at the beginning of life. Conditions are provided to determine a critical level of time preference which is sufficient to induce a "normal" life-cycle pattern for investment and work.
TL;DR: Barro as discussed by the authors showed that the existence of such voluntary intergenerational transfers does not have the striking implication that Barro asserts, but instead follows instead from restrictive and empirically unwarranted assumptions.
Abstract: In a recent paper, Robert Barro (1974) presented a model in which government debt and social security are not perceived by households to add to net wealth. From this it follows that neither government debt nor social security affects private capital accumulation. These important results contradict the modern theory of government debt' and recent contributions to the analysis of social security.2 Barro's emphasis on bequests is an important extension of the traditional life-cycle model. Nevertheless, the existence of such voluntary intergenerational transfers does not have the striking implication that Barro asserts. I will show in this note that Barro's conclusions follow instead from restrictive and empirically unwarranted assumptions. In a more appropriate model that includes bequests, the introduction or increase of government debt or of social security will reduce private savings and the equilibrium ratio of capital to labor. The framework of Barro's analysis is a static intertemporal model with overlapping generations of the type first presented by Samuelson (1958).