Showing papers in "Research Papers in Economics in 1989"

Lectures on Macroeconomics

Abstract: Lectures on Macroeconomics provides the first comprehensive description and evaluation of macroeconomic theory in many years. While the authors' perspective is broad, they clearly state their assessment of what is important and what is not as they present the essence of macroeconomic theory today. The main purpose of Lectures on Macroeconomics is to characterize and explain fluctuations in output, unemployment and movement in prices. The most important fact of modern economic history is persistent long term growth, but as the book makes clear, this growth is far from steady. The authors analyze and explore these fluctuations. Topics include consumption and investment; the Overlapping Generations Model; money; multiple equilibria, bubbles, and stability; the role of nominal rigidities; competitive equilibrium business cycles, nominal rigidities and economic fluctuations, goods, labor and credit markets; and monetary and fiscal policy issues. Each of chapters 2 through 9 discusses models appropriate to the topic. Chapter 10 then draws on the previous chapters, asks which models are the workhorses of macroeconomics, and sets the models out in convenient form. A concluding chapter analyzes the goals of economic policy, monetary policy, fiscal policy, and dynamic inconsistency. Written as a text for graduate students with some background in macroeconomics, statistics, and econometrics, Lectures on Macroeconomics also presents topics in a self contained way that makes it a suitable reference for professional economists.

Quality Ledders In The Theory Of Growth

Abstract: We develop a model of repeated product improvements in a continuum of sectors. Each product follows a stochastic progression up a quality ladder. Progress is not uniform across sectors, so an equilibrium distribution of qualities evolves over time. But the rate of aggregate growth is constant. The growth rate responds to profit incentives in the R&D sector. We explore the welfare properties of our model. Then we relate our approach to an alternative one that views product innovation as a process of generating an ever expanding range of horizontally differentiated products. Finally, we apply the model to issues of resource accumulation and international trade.

Precautionary Saving in the Small and in the Large

Abstract: The theory of precautionary saving is shown in this paper to be isomorphic to the Arrow-Pratt theory of risk aversion, making possible the application of a large body of knowledge about risk aversion to precautionary saving, and more generally, to the theory of optimal choice under risk In particular, a measure of the strength of precautionary saving motive analogous to the Arrow-Pratt measure of risk aversion is used to establish a number of new propositions about precautionary saving, and to give a new interpretation of the Oreze-Modigliani substitution effect

Transmission of Volatility Between Stock Markets

Abstract: This paper investigates why, in October 1987, almost all stock markets fell together despite widely differing economic circumstances. The idea is that "contagion" between markets occurs as the result of attempts by rational agents to infer information from price changes in other markets. This provides a channel through which a "mistake" in one market can be transmitted to other markets. Hourly stock price data from New York, Tokyo and London during an eight month period around the crash offer support for the contagion model. In addition, the magnitude of the contagion coefficients are found to increase with volatility.

Saving and Liquidity Constraints

Abstract: This paper is concerned with the theory of saving when consumers are not permitted to borrow, and with the ability of such a theory to account for some of the stylized facts of saving behavior. When consumers are relatively impatient, and when labor income is independently and identically distributed over time, assets act like a buffer stock, protecting consumption against bad draws of income. The precautionary demand for saving interacts with the borrowing constraints to provide a motive for holding assets. If the income process is positively autocorrelated, but stationary, assets are still used to buffer consumption, but do so less effectively, and at a greater cost in terms of foregone consumption. In the limit, when labor income is a random walk, it is optimal for impatient liquidity constrained consumers simply to consume their incomes. As a consequence, a liquidity constrained representative agent cannot generate aggregate U.S. saving behavior if that agent receives aggregate labor income. Either there is no saving, when income is a random walk, or saving is contracyclical over the business cycle, when income changes are positively autocorrelated. However, in reality, microeconomic income processes do not resemble their average, and it is possible to construct a model of microeconomic saving under liquidity constraints which, at the aggregate level, reproduces many of the stylized facts in the actual data. While it is clear that many households are not liquidity constrained, and do not behave as described here, the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life-cycle models.

Empirical studies of innovation and market structure

Abstract: A central theme of this survey is to emphasize the already perceptible movement of empirical scholars from a narrow concern with the role of firm size and market concentration toward a broader consideration of the fundamental determinants of technical change in industry.

The Impact of the Mariel Boatlift on the Miami Labor Market

Abstract: This paper presents an empirical analysis of the impact of the Mariel Boatlift on the Miami labor market, focusing on the effects on wages and unemployment rates of less-skilled workers. The Mariel immigrants increased the population and labor force of the Miami metropolitan area by 6-7 percent. Most of the immigrants were relatively unskilled: as a result, the proportional increase in labor supply to less-skilled occupations and industries was probably much greater. Nevertheless, an analysis of wages of non-Cuban workers in Miami over the 1979-85 period reveals virtually no effect of the Mariel influx. Likewise, there is no indication that the Boatlift lead to an increase in the unemployment rates of less-skilled blacks or other non-Cuban workers. Even among the Cuban population wages and unemployment rates of earlier immigrants were not substantially effected by the arrival of the Mariels.

Data-snooping biases in tests of financial asset pricing models

Abstract: Tests of financial asset pricing models may yield misleading inferences when properties of the data are used to construct the test statistics. In particular, such tests are often based on returns to portfolios of common stock, where portfolios are constructed by sorting on some empirically motivated characteristic of the securities such as market value of equity. Analytical calculations, Monte Carlo simulations, and two empirical examples show that the effects of this type of data snooping can be substantial. Article published by Oxford University Press on behalf of the Society for Financial Studies in its journal, The Review of Financial Studies.(This abstract was borrowed from another version of this item.)

Axioms of Cooperative Decision Making

Abstract: Axioms of Cooperative Decision Making provides a unified and comprehensive study of welfarism, cooperative games, public decision making, and voting and social choice theory - technically heterogeneous subjects that are linked by common axioms. HervA© Moulin studies these areas from an axiomatic perspective. Every axiom conveys a certain ethical principle (e.g. 'one man one vote', or 'to each according to his contribution'). Axiomatic theory examines the compatibility of various combinations of axioms. The book describes recent successes of this method. It gives many examples of the axiomatic approach, ranging from the construction of numerical indices for measuring inequality, to the pricing of a regulated monopoly, to the comparison of various voting rules. The book will be useful to mathematical modellers, especially those interested in economics and political science.

Agent-based Computational Finance

Abstract: This chapter surveys research on agent-based models used in finance. It will concentrate on models where the use of computational tools is critical for the process of crafting models which give insights into the importance and dynamics of investor heterogeneity in many financial settings.

New Indexes Of Coincident And Leading Economic Indicators

Abstract: The system of Leading and Coincident Economic Indicators, currently maintained by the U.S. Department of Commerce (DOC), was developed as part of the NBER research program on business cycles over fifty years ago. This paper uses recent developments in econometric methodology and computing technology to take a fresh look at this system. The result is three experimental indexes. The first, constructed using a dynamic factor model, is numerically similar to the current index of coincident indicators maintained by the DOC. The second, an alternative index of leading indicators, is designed to forecast the growth in the DOC index over a six month horizon. The third-a "Recession Index"-estimates the probability that the economy will be in a recession six months hence. Only two of the seven series in the proposed leading index are used by the DOC to construct their index. Of these new series, interest rates (a public-private risk premium and the slope of the yield curve) are found to be particularly useful predi...

Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records

Abstract: Estimates of the effect of veteran status on civilian earnings may be biased by the fact that certain types of men are more likely to serve in the armed forces. In this paper, an estimation strategy is employed that enables measurement of the effects of veteran status while controlling for differences in other personal characteristics related to earnings. The randomly assigned risk of induction generated by the Vietnam era draft lottery is used to construct instrumental variables that are correlated with earnings solely by virtue of their correlation with veteran status. Instrumental variables estimates tabulated from Social Security Administration records indicate that in the early 1980's the earnings of white veterans were approximately 15 percent less than nonveteran earnings. In contrast, there is no evidence that nonwhite veterans suffered any lasting reduction in earnings. In an attempt to explain the loss of earnings to white veterans, experience-earnings profiles are estimated jointly with time-varying veteran status coefficients. The estimates suggest that the effect of Vietnam era military service on white veterans is equivalent to a loss of two years of civilian labor market experience.

The Theory of Linear Economic Models

Abstract: In the past few decades, methods of linear algebra have become central to economic analysis, replacing older tools such as the calculus. David Gale has provided the first complete and lucid treatment of important topics in mathematical economics which can be analyzed by linear models. This self-contained work requires few mathematical prerequisites and provides all necessary groundwork in the first few chapters. After introducing basic geometric concepts of vectors and vector spaces, Gale proceeds to give the main theorems on linear inequalities—theorems underpinning the theory of games, linear programming, and the Neumann model of growth. He then explores such subjects as linear programming; the theory of two-person games; static and dynamic theories of linear exchange models, including problems of equilibrium prices and dynamic stability; and methods of play, optimal strategies, and solutions of matrix games. This book should prove an invaluable reference source and text for mathematicians, engineers, economists, and those in many related areas.

An Econometric Analysis of Nonsynchronous Trading

Abstract: We develop a stochastic model of nonsynchronous asset prices based on sampling with random censoring In addition to generalizing existing models of non-trading our framework allows the explicit calculation of the effects of infrequent trading on the time series properties of asset returns These are empirically testable implications for the variances, autocorrelations, and cross-autocorrelations of returns to individual stocks as well as to portfolios We construct estimators to quantify the magnitude of non-trading effects in commonly used stock returns data bases and show the extent to which this phenomenon is responsible for the recent rejections of the random walk hypothesis

A moment estimator for the index of an extreme-value distribution

Abstract: On generalise l'estimateur bien connu de Hill de l'indice d'une fonction de reparatition avec queue de variation reguliere a une estimation de l'indice d'une loi de valeurs extremes. On demontre la convergence et la normalite asymptotique. On utilise l'estimateur pour certaines estimations comme celle d'une quantile elevee et d'un point d'extremite

Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz

Abstract: This paper uses the historical record to isolate episodes in which there were large monetary disturbances not caused by output fluctuations. It then tests whether these monetary changes have important real effects. The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in effect decided to attempt to create a recession to reduce inflation. We find that a shift to anti-inflationary policy led, on average, to a rise in the unemployment rate of two percentage points, and that this effect is highly statistically significant and robust to a variety of changes in specification. We reach three other major conclusions. First, the real effects of these monetary disturbances are highly persistent. Second, the six shocks that we identify account for a considerable fraction of postwar economic fluctuations. And third, evidence from the interwar era also suggests that monetary disturbances have large real effects.

Equity Issues and Stock Price Dynamics

Abstract: This paper presents an information-theoretic, infinite horizon model of the equity issue decision. The model's predictions about stock price behavior and issue timing explain most of the stylized facts in the empirical literature: (a) equity issues on average are preceded by an abnormal positive return on the stock, although there is considerable variation across firms, (b) equity issues on average are preceded by an abnormal rise in the market, and (c) the stock price drops significantly at the announcement of an issue. In this model, the price drop at issue announcement is uncorrelated with the social cost of suboptimal investment due to asymmetric information; the welfare loss may be small even if the price drop is large.

Quality Ladders and Product Cycles

Abstract: We develop a two-country model of endogenous innovation and imitation in order to study the interactions between these two processes. Firms in the North race to bring out the next generation of a set of technology-intensive products. Each product potentially can be improved a countably infinite number of times, but quality improvements require the investment of resources and entail uncertain prospects of success. In the South, entrepreneurs invest resources in order to learn the production processes that have been developed in the North. All R&D investment decisions are made by forward looking, profit maximizing entrepreneurs. The steady-state equilibrium is characterized by constant aggregate rates of innovation and imitation. We study how these rates respond to changes in the sizes of the two regions and to policies in each region to promote learning.(This abstract was borrowed from another version of this item.)

Monitoring Agents with Other Agents

Abstract: The principal-agent literature typically assumes that principals are unable to observe the characteristics or the actions of the agents whom they monitor. The inability of the principal to observe characteristics or actions leads to complications in the design of incentive schemes. For surveys of this literature, see Hart and Holmstrom [1987] and Rees [1985 a], [1985 b]. However, in reality, it is often not the case that agents' characteristics or effort levels are really unobservable; rather, they simply may be very costly to observe. One may choose to model high-costs actions as being infeasible actions, but in doing so, one may miss some interesting phenomena. In particular, simply because information is costly to the principal doesn't mean that it is costly to everyone. It may happen that the agents themselves are in good positions to monitor or advise each other.

Oligopolistic Pricing and the Effects of Aggregate Demand on Economic Activity

Abstract: We construct a dynamic general equilibrium model in which the typical industry colludes by threatening to punish deviations from an implicitly agreed upon pricing path We argue that models of this type explain better than do competitive models the way in which the economy responds to aggregate demand shocks When we calibrate a linearized version of the model using methods similar to those of Kydland and Prescott (1982), we obtain predictions concerning the economy's response to changes in military spending which are close to the response we estimate with postwar US data

Economic Growth In A Cross Section Of Countries

Abstract: In neoclassical growth models with diminishing returns to capital, a country's per capita growth rate tends to be inversely related to its initial level of income per person. This convergence hypothesis seems to be inconsistent with the cross-country evidence, which indicates that per capita growth rates for about 100 countries in the post-World War II period are uncorrelated with the starting level of per capita product. However, if one holds constant measures of initial human capital-measured by primary and secondary school-enrollment rates - there is evidence that countries with lower per capita product tend to grow faster. Countries with higher human capital also have lower fertility rates and higher ratios of physical investment to GDP. These results on growth, fertility, and investment are consistent with some recent theories of endogenous economic growth. With regard to government, the cross-country data indicate that government consumption is inversely related to growth, whereas public investment has little relation with growth. Average growth rates are positively related to political stability, which may capture the benefits of secure property rights. There is also some indication that distortions of investment-goods prices are adverse for growth. Finally, the analysis leaves unexplained a good deal of the relatively weak growth performances of countries in sub- Saharan Africa and Latin America.

Maxmin Expected Utility with Non-Unique Prior

Abstract: Acts are functions from states of nature into finite-support distributions over a set of 'deterministic outcomes'. We characterize preference relations over acts which have a numerical representation by the functional J(f) = min > {∫ uo f dP / P∈C } where f is an act, u is a von Neumann-Morgenstern utility over outcomes, and C is a closed and convex set of finitely additive probability measures on the states of nature. In addition to the usual assumptions on the preference relation as transitivity, completeness, continuity and monotonicity, we assume uncertainty aversion and certainty-independence. The last condition is a new one and is a weakening of the classical independence axiom: It requires that an act f is preferred to an act g if and only if the mixture of f and any constant act h is preferred to the same mixture of g and h. If non-degeneracy of the preference relation is also assumed, the convex set of priors C is uniquely determined. Finally, a concept of independence in case of a non-unique prior is introduced.

Money and the Morality of Exchange

Abstract: This volume deals with the way in which money is symbolically represented in a range of different cultures, from South and South-east Asia, Africa and South America. It is also concerned with the moral evaluation of monetary and commercial exchanges as against exchanges of other kinds. The essays cast radical doubt on many Western assumptions about money: that it is the acid which corrodes community, depersonalises human relationships, and reduces differences of quality to those of mere quantity; that it is the instrument of man's freedom, and so on. Rather than supporting the proposition that money produces easily specifiable changes in world view, the emphasis here is on the way in which existing world views and economic systems give rise to particular ways of representing money. But this highly relativistic conclusion is qualified once we shift the focus from money to the system of exchange as a whole. One rather general pattern that then begins to emerge is of two separate but related transactional orders, the majority of systems making some ideological space for relatively impersonal, competitive and individual acquisitive activity. This implies that even in a non-monetary economy these features are likely to exist within a certain sphere of activity, and that it is therefore misleading to attribute them to money. By so doing, a contrast within cultures is turned into a contrast between cultures, thereby reinforcing the notion that money itself has the power to transform the nature of social relationships.

Government Spending and Budget Deficits in the Industrial Economies

Abstract: In this paper, we try to interpret several important trends in the size of governments and government deficits in the OECD economies : the rapid increase in the public spending to GDP ratio in the 1970s; the sharp rise in budget deficits and in debt-GNP ratios after 1973; and the early signs of a slowdown or reversal in the rise of the spending ratios in the 1980s. We show that the rise in size of the government was importantly associated with the slowdown in output growth after 1973, as well as with the gradual adjustment of spending ratios to long-run values. These long-run values appear to depend on the political and institutional characteristics of the various economies (the ideological orientation of the government, the degree of wage indexation, and the average number of parties in the governing coalitions). As for budget deficits, we argue that much can be explained by normal cyclical factors (the slowdown in growth and the rise in unemployment after 1973), but that in addition, the size of the budget deficits has been related to political as well as economic characteristics of the countries. Deficit reduction requires political consensus, at least among the parties belonging to the governing coalition. We note that such consensus is harder to achieve in multi-party coalition governments and that the failure to reach a consensus on budget cutting can help to explain why countries with multi-party coalition governments have experienced particularly large increases in the debt-GNP ratio.

Market Liquidity, Hedging and Crashes

Abstract: In the absence of significant news, hedging strategies were blamed for the stock market crash of October 1987; but traditional models cannot explain how a relatively small amount of selling could cause so large a price drop. The authors develop a rational expectations model in which prices play an important role in shaping expectations; markets are much less liquid in their model than in traditional models. Discontinuities (or "crashes") can occur even with relatively little hedging. The model is consistent with theories as disparate as Keynes' "beauty contest" insights and Thom's "catastrophe" analysis and suggests means to reduce volatility. Copyright 1990 by American Economic Association. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed (This abstract was borrowed from another version of this item.)

Explaining the Variance of Price Dividend Ratios

Abstract: This paper presents a bound on the variance of the price-dividend ratio and a decomposition of the variance of the price-dividend ratio into components that reflect variation in expected future discount rates and variation in expected future dividend growth Unobserved discount rates needed to make the variance bound and variance decomposition hold are characterized, and the variance bound and variance decomposition are tested for several discount rate models, including the consumption based model, and models based on interest rates plus a constant risk premium

Global environmental problems: the effects of unilateral actions taken by one country

Abstract: In global environmental problems, each country's own contribution to worldwide emissions is small, so there is little a country can do by itself. To solve global environmental problems one needs coordinated actions between countries. Environmental groups often advocate that in spite of the global character of the problem, a country ought to take unilateral actions to reduce its environmentally harmful emissions. The argument for such unilateral actions is that they at least give a contribution in the right direction (however small), and also that by “setting a good example” of this type one might affect the behavior of other countries, and/or improve the chances of reaching international agreements of coordinated reductions of harmful emissions. The paper gives an analysis of the consequences of unilateral reductions of harmful emissions. It is shown that such a policy will generally affect the outcome of international negotiations about reduced emissions. The outcome of such negotiations may very well imply higher total emissions when one country reduces its emissions unilaterally than if both countries act selfishly.

How Strong are Bequest Motives? Evidence Based on Estimates of the Demand for Life Insurance and Annuities

Abstract: This paper presents new empirical evidence in support of the view that a significant fraction of total saving is motivated solely by the desire to leave bequests. Specifically, I find that Social Security annuity benefits significantly raise life insurance holdings and depress private annuity holdings among elderly individuals. These patterns indicate that the typical household would choose to maintain a positive fraction of its resources in bequeathable forms, even if insurance markets were perfect. Evidence on the relationship between insurance purchases and total resources reinforces this conclusion.

Does unmeasured ability explain inter-industry wage differences

Abstract: This paper provides empirical assessments of the two leading explanations of measured inter-industry wage differentials: (1) true wage differentials exist across industries, and (2) the measured differentials simply reflect unmeasured differences in workers' productive abilities. First, we summarize the existing evidence on the unmeasured-ability explanation, which is based on first-differenced regressions using patched Current Population Survey (CPS) data. We argue that these existing approaches implicitly hypothesize that unmeasured productive ability is equally rewarded in all industries. Second, we construct a simple model in which unmeasured ability in not equally valued in all industries; instead, there is matching. This model illustrates two endogeneity problems inherent in the first-differenced regressions using CPS data: whether a worker changes jobs in endogenous, as is the industry of the new job the worker finds. Third, we propose two new empirical approaches designed to minimize these endogeneity problems. We implement these procedures on a sample that allows us to approximate the experiment of exogenous job loss: a sample of workers displaced by plant closings. We conclude from our findings using this sample that neither of the contending explanations fits the evidence without recourse to awkward modifications, but that a modified version of the true-industry-effects explanation fits more easily than does any existing version of the unmeasured-ability explanation.