Showing papers in "The American Economic Review in 1980"

An Almost Ideal Demand System

Abstract: Ever since Richard Stone (1954) first estimated a system of demand equations derived explicitly from consumer theory, there has been a continuing search for alternative specifications and functional forms. Many models have been proposed, but perhaps the most important in current use, apart from the original linear expenditure system, are the Rotterdam model (see Henri Theil, 1965, 1976; Anton Barten) and the translog model (see Laurits Christensen, Dale Jorgenson, and Lawrence Lau; Jorgenson and Lau). Both of these models have been extensively estimated and have, in addition, been used to test the homogeneity and symmetry restrictions of demand theory. In this paper, we propose and estimate a new model which is of comparable generality to the Rotterdam and translog models but which has considerable advantages over both. Our model, which we call the Almost Ideal Demand System (AIDS), gives an arbitrary first-order approximation to any demand system; it satisfies the axioms of choice exactly; it aggregates perfectly over consumers without invoking parallel linear Engel curves; it has a functional form which is consistent with known household-budget data; it is simple to estimate, largely avoiding the need for non-linear estimation; and it can be used to test the restrictions of homogeneity and symmetry through linear restrictions on fixed parameters. Although many of these desirable properties are possessed by one or other of the Rotterdam or translog models, neither possesses all of them simultaneously. In Section I of the paper, we discuss the theoretical specification of the AIDS and justify the claims in the previous paragraph. In Section II, the model is estimated on postwar British data and we use our results to test the homogeneity and symmetry restrictions. Our results are consistent with earlier findings in that both sets of restrictions are decisively rejected. We also find that imposition of homogeneity generates positive serial correlation in the errors of those equations which reject the restrictions most strongly; this suggests that the now standard rejection of homogeneity in demand analysis may be due to insufficient attention to the dynamic aspects of consumer behavior. Finally, in Section III, we offer a summary and conclusions. We believe that the results of this paper suggest that the AIDS is to be recommended as a vehicle for testing, extending, and improving conventional demand analysis. This does not imply that the system, particularly in its simple static form, is to be regarded as a fully satisfactory explanation of consumers' behavior. Indeed, by proposing a demand system which is superior to its predecessors, we hope to be able to reveal more clearly the problems and potential solutions associated with the usual approach.

Do Stock Prices Move Too Much to be Justified by Subsequent Changes in Dividends

Abstract: This paper will develop the efficient markets model in Section I to clarify some theoretical questions that may arise in connection with the inequality (1) and some similar inequalities will be derived that put limits on the standard deviation of the innovation in price and the standard deviation of the change in price. The model is restated in innovation form which allows better understanding of the limits on stock price volatility imposed by the model. In particular, this will enable us to see (Section II) that the standard deviation of p is highest when information about dividends is revealed smoothly and that if information is revealed in big lumps occasionally the price series may have higher kurtosis (fatter tails) but will have lower variance. The notion expressed by some that earnings rather than dividend data should be used is discussed in Section III, and a way of assessing the importance of time variation in real discount rates is shown in Section IV. The inequalities are compared with the data in Section V.

Output and welfare implications of monopolistic third-degree price discrimination

Abstract: Focuses on output and welfare implications of monopolistic third-degree price discrimination Maximization of profits by charging different prices to different markets or classes for customers; Maldistribution of resources for different uses (From Ebsco)

Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered

Abstract: When monthly data on production, prices, and the money stock are interpreted, via a vector autoregression, as generated by dynamic responses to "surprises" in each of the variables, a remarkable similarity in dynamics between interwar and postwar business cycles emerges, though the size of the "surprises" is much larger in the interwar period. Furthermore, the money stock emerges as firmly causally prior, in Granger's sense, in both periods and accounts for a substantial fraction of variance in production in both periods. When a short interest rate is added to the vector autoregression, the remarkable similarity in dynamics between periods persists, but the central role of the money stock surprises evaporates for the postwar period. While there are potential monetarist explanations for such an observation, none of them seem to fit comfortably the estimated dynamics. A non-monetarist explanation of the dynamics, based on the role of expectations in investment behavior, seems to fit the estimated dynamics better. That this explanation, which is consistent with a passive role for money, could account for so much of the observed postwar relation between money stock and income may raise doubts about the monetarist interpretation even of the interwar data.

Trade Policy as an Input to Development

Abstract: My topic is the question: what difference does the set of commercial policies chosen by a developing country make to its rate of economic growth? Three points are salient. First, in its present state, trade theory provides little guidance as to the role of trade policy and trade strategy in promoting growth. Second, the empirical evidence overwhelmingly indicates that there are important links between them. Third, a number of hypotheses as to the reasons for these links have been put forward, but there is not as yet sufficient evidence to enable us to estimate their relative importance.

The Slowing Down of the Engine of Growth

Abstract: Lecture to the memory of Alfred Nobel, December 8, 1979(This abstract was borrowed from another version of this item.)

R & D and the Productivity Slowdown

Abstract: The question I shall address in this pa-per is: Can the slowdown in productivity growth be explained, wholly or in part, by the recent slowdown in the growth of real R&D expenditures? But first we have to review the following questions: I) What is to be explained? Which productivity and what slowdown? 2) What is the mechanism by which R&D could have contributed to this slowdown? 3) What did happen to R&D in the relevant period? Besides traversing this somewhat familiar ground and reviewing some of the recent literature on this topic, I shall also report on some estimates of my own. The direct answer to the opening question is "probably not." But how we get there needs documenting and may prove instructive on its own merits.

Taxation, Human Capital, and Uncertainty

Abstract: This paper analyzes the effect of wage and interest taxation on investment in human capital. It is shown that results derived under the assumption that human.capital is a riskless asset fail to obtain when the return on human capi- tal is uncertain. The interaction of the human capital investment decision with savings, consumption and labor-leisure choices are taken into account. An implication of the analysis is that, when the rate of return on human capi- tal is stochastic, efficient taxation requires positive taxation of wage income even when lump-sum taxation is feasible. (This abstract was borrowed from another version of this item.)

On the "q" Theory of Investment.

Abstract: The neoclassical theory of corporate investment is based on the assumption that the management seeks to maximize the present net worth of the company, the market value of the outstanding common shares. An investment project should be undertaken if and only if it increased the value of the shares. The securities markets appraise the project, its expected contributions to the future earnings of the company and its risks. If the value of the project as appraised by investors exceeds the cost, then the company's shares will appreciate to the benefit of existing stockholders. That is, the market will value the project more than the cash used to pay for it. If new debt or equity securities are issued to raise the cash, the prospectus leads to an increase of share prices. [Tobin and Brainard, p. 242]

The Efficiency of Foreign Exchange Markets and Measures of Turbulence

Abstract: Since the move to generalized floating in1973, exchange rates between major currencies have displayed large fluctuations. This turbulence of foreign exchange rates is an important concern of government policy and its explanation is a challenge for theories of foreign exchange market behavior. In Section I of this paper, we document the extent of turbulence in foreign exchange markets by examining (i) the magnitude of short-run variations in exchange rates relative to other measures of economic variability; (ii) the degree of divergence between actual and expected changes in exchange rates; and (iii) the extent to which exchange-rate movements have diverged from movements of relative national price levels. In Section II, we provide a general explanation of this turbulence in terms of the modern "asset market theory" to exchange-rate determination. This theory emphasizes that exchange rates, like the prices of other assets determined in organized markets, are strongly influenced by the market's expectation of future events. In this context, we also discuss the narrower technical question of "foreign exchange market efficiency." Finally, in Section III, we address the question of whether turbulence in the foreign exchange markets has been "excessive" and what policy measures can (or should) be taken to reduce it.

Measuring technological bias

Abstract: In this paper, a model based on the translog cost function and designed to test for technological advancement, factor-input and scale biases arising from technological advancement, and induced technological bias is described. The model is estimated with data from the electrical utility generation industry. While the empirical results for that industry demonstrate the existence of technological advancement and technological bias, both with regard to factor inputs and scale economies, the results failed to demonstrate the existence of induced technological bias. The results of this study indicate an average annual rate of technological advancement of approximately 1.5 percent while the average observed rate is 1.7 percent.

Inflation Uncertainty and the Phillips Curve: Some Empirical Evidence

Abstract: The coincidence of high rates of unemployment and high rates of inflation, seemingly apparent in several countries for sustained periods of time, has led to a rethinking of the Phillips curve. One explanation for the appearance of a positive association between unemployment and inflation, advanced by Milton Friedman in his Nobel lecture, involves an observed linkage between the level and the variability in inflation. This note is an attempt to test whether inflation uncertainty, which should be related to variability, could explain the observed patterns of inflation and employment. It is shown that inflation uncertainty is negatively related to employment, and that failure to consider uncertainty of inflation can obscure the effect of inflation forecast errors on employment.

Strict Liability versus Negligence in a Market Setting

Abstract: This chapter analyzes strict liability and negligence in a market setting. The argument that both strict liability and negligence are efficient is correct in the short run when the number of firms causing harm is fixed. Interestingly, most informal discussions of strict liability and negligence have suggested that in a market setting negligence may be inefficient even when the administering authority has perfect information. Since the negligence outcome is not efficient when the standard equals the efficient level of care, the optimal second best standard is of some interest. A version of the entry problem with the negligence rule also can arise in a market setting in the short run. For example, suppose there are a certain number of firms operating in the short run in the absence of any regulation and that these firms have different costs of production.

Exchange Rates, Prices and Money: Lessons from the 1920s

Abstract: The experience with flexible exchange rates during the 1920's has proven to be extremely important in shaping our current thinking about a variety of issues including the choice among alternative exchange rate regimes, the role of speculation in the market for foreign exchange, the purchasing power parity doctrine, and the determinants of equilibrium exchange rates. Probably no event in monetary history has been studied more closely than the German hyperinflation. Economists have been attracted to study this episode since it provides an environment that is close to a controlled experiment which is so rare in the study of social sciences. It also provides a convenient starting point for the reexamination of theories in circumstances in which the predominant disturbance is of a monetary origin. However, interest in the experience with flexible exchange rates during the 1920's is not confined only to the lessons from the German hyperinflation. From the viewpoint of economic research, that experience provides also the opportunity to conduct a comparative study of the operation of flexible exchange rates under "normal" conditions. Specifically, until the return to gold by Britain (in 1925), many countries adopted a flexible exchange rate system. This system was successful in insulating most of the world from the direct consequences of the extraordinary German hyperinflation of 1921-23. Thus, during the same period in which Germany was experiencing the hyperinflation, much of the rest of the world was operating under practically "normal" conditions. This paper summarizes the results of an empirical study of the operation of flexible exchange rates during the 1920's under both the hyperinflationary conditions (based on the experience of Germany) and under the normal conditions (based on the experience of Britain, the United States and France). Section I deals with some general characteristics of the market for foreign exchange by examining the relationship between spot and forward exchange rates. Section II deals with the relationship between exchange rates and prices by examining aspects of the purchasing power parity doctrine. Section III deals with the determinants of exchange

Production sets, technological knowledge, and R and D: fragile and overworked constructs for analysis of productivity growth

Abstract: Three broad theoretical constructs almost universally applied in analyses of productivity growth (1) production sets and their efficiency frontiers (production functions) which sharply delineate the set of input-output possibilities known and available to firms at any time; (2) technological knowledge, which at any time determines production functions and the advance of which shifts production functions; and (3) research and development, specialized activities that advance technological knowledge. Economists tend to consider these broad constructs as solidly grounded and universally applicable. In contrast, the author argues that these are fragile and overworked, and actually misleading for thinking about productivity growth in some economic sectors. More than that, the presumption that they are applicable across all economic sectors obscures exactly those differences which may be the most important ones in explaining cross-sectoral variations in productivity growth rates.

Interactions between Industrialization and Exports

Abstract: The main effects of different types of trade and development strategy on industrial growth and structure are examined. The analytical approach treats internal and external factors together in an interindustry framework. The method takes advantage of information collected for this purpose and can encompass production functions and factor use by sector to provide a more complete analysis of the sources of growth and structural change. Although import substitution is an important feature of early stages of industrialization in all developing countries, it can be accelerated or retarded by trade policy. The later stage of expansion of manufactured exports is more susceptible to policy influence and is shown to have a large effect on the subsequent course of industrial development. The development of manufactured exports appears even more important as a source of foreign exchange than as a source of demand because it provides one of the principal means of exploiting comparative advantage and of avoiding balance of payments bottlenecks. Two tables display indicators of structure and growth and sources of growth in manufacturing output. Three figures display sources of increase in light and heavy industry and sources of increase in machinery. 7 references.