Showing papers in "The Economic Journal in 1989"

Innovation and Learning: The Two Faces of R & D

Abstract: The authors assume that firms invest in R&D not only to generate innovations, but also to learn from competitors and extraindustry knowledge sources (e.g., university and government labs). This argument suggests that the ease of learning within an industry will both affect R&D spending, and condition the influence of appropriability and technological opportunity conditions on R&D. For example, they show that, contrary to the traditional result, intraindustry spillovers may encourage equilibrium industry R&D investment. Regression results confirm that the impact of appropriability and technological opportunity conditions on R&D is influenced by the ease and character of learning. Copyright 1989 by Royal Economic Society.

Competing technologies, increasing returns, and lock-in by historical events*

Abstract: This paper explores the dynamics of allocation under increasing returns in a context where increasing returns arise naturally: agents choosing between technologies competing for adoption. Modern, complex technologies often display increasing returns to adoption in that the more they are adopted, the more experience is gained with them, and the more they are improved.1 When two or more increasing-return technologies 'compete' then, for a 'market' of potential adopters, insignificant events may by chance give one of them an initial advantage in adoptions. This technology may then improve more than the others, so it may appeal to a wider proportion of potential adopters. It may therefore become further adopted and further improved. Thus a technology that by chance gains an early lead in adoption may eventually 'corner the market' of potential adopters, with the other technologies becoming locked out. Of course, under different 'insignificant events' - unexpected successes in the performance of prototypes, whims of early developers, political circumstances - a different technology might achieve sufficient adoption and improvement to come to dominate. Competitions between technologies may have, multiple potential outcomes. It is well known that allocation problems with increasing returns tend to exhibit multiple equilibria, and so it is not surprising that multiple outcomes should appear here. Static analysis can typically locate these multiple equilibria, but usually it cannot tell us which one will be 'selected'. A dynamic approach might be able to say more. By allowing the possibility of 'random events' occurring during adoption, it might examine how these influence ' selection' of the outcome - how some sets of random 'historical events' might cumulate to drive the process towards one market-share outcome, others to drive it towards another. It might also reveal how the two familiar increasingreturns properties of non-predictability and potential inefficiency come about: how increasing returns act to magnify chance events as adoptions take place, so that

Rice Prices and Income Distribution in Thailand: A Non-Parametric Analysis

Abstract: Rice is a staple crop in Thailand, significantly entering both household production and consumption. This paper examines the effect of rice prices on the distribution of real income across households, taking into account household characteristics and geographical location. The data set is a large-scale survey of 11,893 households. Simple nonparametric techniques for regression and density estimation are used. These methods depend on few assumptions and generate flexible graphical results that are directly informative about the problem at hand. The main results are that higher rice prices should benefit all rural households, but the largest benefits accrue to rural households in the middle of the income distribution. Copyright 1989 by Royal Economic Society.

The Economics of Development: A Survey

Abstract: I. THE SUBJECT Our definition of the subject will be the use of economic analysis to understand the economies of poor or developing countries. This includes, in particular, how standards of living in the population are determined, and how they change over time, and further how policy can or should be used in the influence of these processes. The definition contains, in principle, much or most of analytical methods in economics insofar as they can be put to use in the examination of the issues of interest. This is as it should be but it poses a problem for a survey in a journal. A comprehensive treatment is infeasible so we shall follow a different route. The survey will focus on what I take to be the major themes and approaches which characterise the productive aspects of the subject. There is, therefore, no pretence at being exhaustive. The purpose is rather to highlight some of the advances. Many of these have been of real substance. There are a number of possible purposes for a survey and it is important to be clear at the outset for whom it is intended, what it is, and what it is not. This survey is addressed to economists and students of economics who .know the tools of their trade but not necessarily how they have been applied to, and fashioned for, the analysis of the economics of developing countries. It is a description of the ways in which problems can be productively formulated and approached, in terms of examples chosen for their intrinsic importance and interest. The vastness of the subject means that we have to be highly selective. It does not seek to provide a summary evaluation of the current view of the 'appropriate' response to immediate policy questions. It is not a history of thought, nor a research manifesto nor an attempt to adjudicate or settle the major debates. Where they arise naturally from the major purpose some judgements on these subjects will be offered, but they do not themselves constitute the primary intent of this survey. There are three lines of enquiry, or sets of questions, which have, I suggest, been distinctive of the most fruitful work in development economics. They will

The Intrinsic Limits of Modern Economic-Theory - the Emperor Has No Clothes

Abstract: Assumptions of the uniqueness and stability of general equilibrium in a Walrasian framework have no theoretical justification. This paper argues that the key reason for this is that the Walrasian model treats people as acting independently of one another, especially in their demand behavior. This independence plays an essential role in constructing economies with arbitrary excess demand functions. Thus, making individual behavior dependent or similar may open the way to obtaining meaningful restrictions on aggregate excess demand functions. Copyright 1989 by Royal Economic Society.

Unemployment and the Inter-Regional Mobility of Labour

Abstract: The relationship between unemployment and interregional labor migration in the United Kingdom is explored using data from the Labour Force Survey for 1984 and 1977. The authors conclude that the experience of unemployment increases the likelihood of migration and that households in areas of high unemployment are more likely to move. They also find that during periods of higher overall unemployment migration propensities are reduced. (ANNOTATION)

Segmented Trends and Non-Stationary Time-Series

Abstract: Since the influential work of Charles R. Nelson and Charles Plosser (1982), many empirical studies have concluded that macroeconomic time series are difference stationary. This paper proposes the segmented trend model as an alternative in which the series is the sum of a nonstationary trend and a stationary cycle, and where the trend shows infrequent shifts. The paper proposes tests between the difference stationary, and segmented trends models and applies these to the data of Nelson and Plosser. In general, the results indicate that prices are difference stationary but quantities follow segmented trend processes. Copyright 1989 by Royal Economic Society.

The underground economies : tax evasion and information distortion

Abstract: List of contributors Preface Introduction Edgar L. Feige Part I. The Meaning, Measurement and Policy Implications of the Underground Economies: 1. The meaning and measurement of the underground economy Edgar L. Feige 2. Information distortions in social systems: the underground economy and other observer-subject-policymaker feedbacks Robert R. Alford and Edgar L. Feige 3. Policy illusion, macroeconomic instability and the unrecorded economy Robert T. McGee and Edgar L. Feige 4. How large (or small) should the underground economy be? Bruno Frey Part II. The Underground Economy in Western Developed Nations: Measurement in Different Laboratories: 5. Monetary perspective on underground economic activity in the United States Richard D. Porter and Amanda S. Bayer 6. The unrecorded economy and the national income accounts in the Netherlands: a sensitivity analysis G. A. A. M. Broesterhuizen 7. Assessing the underground economy in the United Kingdom Michael O'Higgins 8. The underground economy in the Federal Republic of Germany: a preliminary assessment Enno Langfeldt 9. The underground economy in Sweden Ingemar Hansson 10. The irregular economy of Italy: a survey of contributions Bruno Contini 11. The hidden economy in Norway with special emphasis on the hidden labor market Arne Jon Isachsen and Steiner Strom 12. Canada's underground economy Rolf Mirus and Roger S. Smith 13. The underground economy in France Philippe Barthelemy Part III. The Underground Economy Under Central Planning: 14. The Soviet second economy in a political and legal perspective F. J. M. Feldbrugge 15. Second economy and socialism: the Hungarian experience Istvan R. Gabor Bibliography.

The Conduct of Monetary Policy

Abstract: Nowadays the Central Bank of a country is the monopoly supplier of legal tender currency. The commercial banks are committed to making their deposits convertible at par into such currency. So the banks need to keep reserves in the form of currency and deposits at the Central Bank. The Central Bank primarily conducts its policy by buying and selling financial securities, e.g. Treasury bills or foreign exchange, in exchange for its own liabilities, i.e. open market operations. Academic economists generally regard such operations as adjusting the quantitative volume of the banks' reserve base, and hence of the money stock, with rates (prices) in such markets simultaneously determined by the interplay of demand and supply. Central Bank practitioners, almost always, view themselves as unable to deny the banks the reserve base that the banking system requires, and see themselves as setting the level of interest rates, at which such reserve requirements are met, with the quantity of money then simultaneously determined by the portfolio preferences of private sector banks and non-banks. This difference in perceptions is discussed again in Section III. Whether the monetary policy operations of Central Banks should be viewed primarily in terms of quantity, or rate, setting actions, (though, of course, one is the dual of the other), these had allowed inflation, and inflationary expectations, to become entrenched by the end of the I970s. A selection of representative statistics for a number of the leading industrialised countries is given in Table i below. This table indicates a common pattern, among the countries, of interaction between interest rates, inflation and the growth of output. The first period, I969-78, is marked by high inflation, negative real interest rates, and slightly above average growth; the second period, I979-82, by very high nominal, and high real, interest rates, high (but falling) inflation, and very low output growth. The final period, i983-7, is marked by much lower inflation, lower nominal, but still high real, interest rates, and a recovery in output growth, in some cases to above average rates. In contrast, the relationship in these countries between the growth of their chosen key monetary aggregate and nominal incomes appears much weaker; also see Clinton and Chouraqui (I987), especially p. 7. Whether measured in terms of monetary growth, or in terms of' real' interest rates, i.e. after adjustment for prospective future inflation, policy during the

Modelling household energy expenditures using micro-data*

Abstract: This paper is concerned with the empirical modeling of domestic demand for energy in the United Kingdom at the level of the individual household. A two-stage budgeting model of household demand for energy conditional on durable ownership is developed. At the first stage, income is allocated between energy and nonenergy consumption, while at the second stage, energy expenditure is disaggregated. The second-stage allocation is assumed to be between gas, electricity, and a composite good "other fuels." Estimation takes place using a sample of some 50,000 households drawn from the annual U.K. Family Expenditure Survey for the years 1972-83, a source that has not been fully exploited in the analysis of energy demand to date. Copyright 1989 by Royal Economic Society.

Trends and Cycles in the Net Barter Terms of Trade: A New Approach

Abstract: This study has two objectives. First, it uses time-series techniques (including unit root tests) to reexamine the classic Prebisch-Singer hypothesis that the relative prices of primary commodities, in terms of manufactured goods, are characterized by secular deterioration. Second, commodity price movements are decomposed into permanent and cyclical components using the Beveridge and Nelson (1981) technique. The latter information is valuable when assessing the viability of commodity stabilization funds and formulating countercyclical macroeconomic policy responses to commodity booms and busts. Copyright 1989 by Royal Economic Society.

Intertemporal substitution, risk aversion and the Euler Equation for consumption

Abstract: This paper investigates the empirical performance of intertemporal optimization models that relax the restriction imposed by expected utility that risk aversion and intertemporal substitution are negatively related. The authors estimate a system of rates of return and consumption growth equations, and interpret their results in the light of the expected utility, the ordinal certainty equivalence, and the Kreps and Porteus (1978) models. Their results are based on average cohort data for consumption, and thus should not reflect births or deaths. They suggest that non-expected-utility models afford major efficiency gains in the estimation of the elasticity of intertemporal substitution by providing simple cross-equation restrictions.

A Comparison of Naive and Experienced Bidders in Common Value Offer Auctions: A Laboratory Analysis

Abstract: Laboratory economics experiments typically use financially motivated students as subjects. An ongoing issue is whether this is an appropriate subject pool since the students are typically inexperienced in the types of decision-making required of them in the lab. This paper addresses this issue in the context of common value offer auctions as we compare the -behaviour of experienced business executives in the construction contract industry ('experts') with that of ('naive') student subjects. Results of previous research of this sort have been equivocal; in some cases experts make the same errors as novices, in other cases they do not (Hogarth and Reder, I987). A series of sealed-bid, common value offer auctions in which bidders compete for the right to supply an item of unknown cost were conducted. Inherent to common value auctions (CVAs) is an adverse selection problem which may result in below normal or negative profits (the winner's curse). Experimental studies have documented the presence of the winner's curse with financially motivated student subjects in high price demand-side auctions (Kagel et al., I986; Kagel and Levin, I986). The experiments reported here generalise these earlier studies from bid to offer auctions. Also, in employing offer auctions we establish a setting with which our 'experts' are familiar, thus allowing their experience the best chance to manifest itself.'

Union-Oligopoly Bargaining

Abstract: A model is developed highlighting interactions between firm-level union-employer bargaining and industry-level oligopolistic price-setting, combining models of parametric conjectural variation oligopoly and asymmetric Nash-bargaining. Wages can only be bargained up if product market behavior is noncompetitive or if unions act on an industry-wide basis. If bargaining is efficient, wages are monotonically increasing in product market collusion, but the relationship may be reversed if bargaining covers only the wage. The relationship between profit markets and wages and some macroeconomic implications are explored. Copyright 1989 by Royal Economic Society.

Covered Interest Arbitrage and Market Turbulence

Abstract: The covered interest parity theorem states that the covered interest differential between two similar assets denominated in different currencies should be zero. This paper utilizes high-quality data recorded by the dealers at the Bank of England to test covered interest parity during certain historical periods in which there is known to have been turbulence, as well as during a relatively calm, control period. The data is high-frequency and allowance is made for the bid-offer spread, brokerage costs, and other considerations. The results have three main implications. Firstly, profitable arbitrage opportunities do occasionally occur and sometimes persist during turbulent periods. Secondly, the degree of efficiency of the relevant markets appears to have increased over time. Thirdly, there appears to be a "maturity effect" whereby the existence and size of profitable arbitrage opportunities appear to be positive functions of the length of maturity. A rationalization of this phenomenon is offered in terms of the existence of credit limits. Copyright 1989 by Royal Economic Society.

Promises, Promises: Credible Policy Reform via Signalling

Abstract: Empirical experience and theory both suggest that policy reforms can be aborted or reversed if they lack sufficient credibility. One reason for credibility problems is the doubt regarding how serious the government really is about the reform. This paper considers a framework in which the private sector is unable to distinguish between a genuinely reformist government and a government that simply feigns interest in reform because it is a precondition for foreign assistance. The general conclusion is that the magnitude of the reform may serve to convey the government's future intentions and, hence, act as a signal of its "type." Copyright 1989 by Royal Economic Society.

The Rise and Fall of the Great Powers: Economic Change and Military Conflict from 1500 to 2000

Abstract: Thank you for reading the rise and fall of the great powers economic change and military conflict from 150

Macroeconomic forecasting: a survey*

Abstract: Developments in macroeconomic forecasting over the last twenty years are surveyed in this paper, which takes the I969 Presidential Address to the Royal Economic Society (Cairncross, I969) as its starting point. Sir Alec Cairncross had found no previous occasion on which the Royal Economic Society had discussed 'this new activity', and so selected economic forecasting as the topic for his address. As retiring Chief Economic Adviser to the Treasury he had been preoccupied with forecasting for the preceding few years, and was well placed to reflect on the new kind of economic forecasting that was. emerging and the new ways in which it was being organised. At the time these were changing fast, with forecasting becoming in particular more heavily based on computable models. A conference in April I969 heard that in the Treasury 'a more elaborate fully formalised model is being programmed for a computer' (Roy, I970); in August I969, at the National Institute of Economic and Social Research (NIESR), an econometric model of the whole economy became an integral part of the quarterly forecasting exercises that had begun, with the publication of the National Institute Economic Review, in I 959. These developments followed the inauguration by the London Business School (LBS) in I966 of the first series of published forecasts based on the direct application of a complete statistical model of the economy. In the late I960s and early I970S confidence in forecasting was growing. 'Extra resources were put in, and there were hopes that the accumulation of data and more sophisticated techniques would lead to major improvements in accuracy of forecasts and understanding of the economy' (Burns, I986). This confidence rested in part on the wide acceptance of the neoclassical synthesis as a framework for macroeconomic analysis. The phrase originated with Samuelson, who was largely instrumental in constructing and promulgating the 'grand neoclassical synthesis', which was given considerable prominence in the third edition of his textbook. Here it was noted that economists, instead of being Keynesian or anti-Keynesian, 'have worked toward a synthesis of whatever is valuable in older economics and in modern theories of income determination. The result might be called neo-classical economics and is accepted in its broad outlines by all but about 5 per cent of extreme left wing

The impact of exchange rates and developing country debt on commodity prices

Abstract: A major feature of the international economy over the past decade has been the swings in the value of the US dollar. The dollar fell to a historically low level in the late I970s, but rose sharply over the period i982-4. By the beginning of I985 the dollar was generally considered to be over-valued by between 2o and 40 %. Since I985 there has been a depreciation of over one third. These wide fluctuations in the value of the dollar have had implications for all major traded goods. This paper focuses on the effects of changes in the value of the dollar on primary commodity prices, and possible interactions between LDC indebtedness and these effects. A rise (fall) in the value of the dollar must be expected to result in a fall (rise) in dollar commodity prices. Ridler and Yandle (I972) proposed a simple comparative static single-commodity model to analyse the effects of exchange rate changes on the price of an individual primary commodity.' They showed that the commodity price change would be given by the change in an appropriately weighted exchange rate index. Write the price of commodityj as

Strategic Behaviour and the Rules for International Taxation of Capital

Abstract: This paper examines the welfare of a capital exporting or source country and a capital importing or host country under tax credit and tax deduction systems for the international taxation of capital. Because the two tax systems may create quite different strategic incentives for the countries, the authors compare the equilibria in the tax-setting game played by the two countries under each system. They find that the tax credits system introduces an antitrade bias into the equilibrium, contrary to initial impressions, and that both capital exporting and capital importing countries will prefer the tax-deductions scheme to tax credits. Copyright 1989 by Royal Economic Society.

Money, Interest and Capital: A Study in the Foundations of Monetary Theory

Abstract: This book presents a study in the foundations of monetary theory with several unique features. It consists of two parts: a critique of the varieties of neoclassical monetary theory, and a rigorous statement of the foundations of Post Keynesian monetary theory. The two parts reflect Joseph Schumpeter's distinction between monetary theories in the divergent traditions of Real and Monetary Analysis. Part I offers a novel critique of Wicksellian and neo-Walrasian general equilibrium versions of Real analysis. The critique of Wicksell's monetary theory demonstrates the general impossibility of defining the natural rate of interest without which the loanable funds theory collapses. The critique of neo-Walrasian monetary theory, on the other hand, exploits the inessential role of 'money' in temporary equilibrium and overlapping generations models and develops a novel interpretation of the Patinkin controversy and the Clower finance constraint. The implications of these developments are then traced through the debates between monetarists and Keynesians. Part II presents a rigorous argument for securing the foundations of Post Keynesian monetary theory in the tradition of Monetary Analysis. In the context of the evolution of the monetary system from commodity money to credit money. Wicksell's natural rate of interest is replaced by Keynes's marginal efficiency of capital which is in turn applied to Myrdal's notion of monetary equilibrium to derive a formal definition of Keynes's point of effective demand. This leads to the most novel feature of the book: the demonstration of the existence of a long-run unemployment equilibrium without the assumptions of rigid wages. The principle of effective demand is shown to break Say's Law by placing a limit on the profitable expansion of output before full employment is reached.

Exit From Declining Industries and the Case of Steel Castings

Abstract: Because of conflicts between owners, managers and creditors, closure of unprofitable plants may be more difficult for an undiversified firm than a diversified firm. An examination of qualitative and quantitative evidence on plant closures in the U.K. steel castings industry between 1979 and 1983 supports the view that firm effects matter and suggests that closure patterns may have been inefficient. Copyright 1989 by Royal Economic Society.

Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances

Abstract: Analyzes the excess capacity, monopolistic competition and international transmission of monetary policy disturbances in the United States. Sheds light on the international Impact of monetary policy; Emphasis on the spillover effects of monetary disturbances; Similarity of framework used with open economy macroeconomics.

The Consequences of Economic Rhetoric

Abstract: Preface Part I. Economic Rhetoric: Introduction and Comments: 1. Economics in the human conversation Arjo Klamer and Donald N. McCloskey 2. Comments from outside economics Stanley Fish 3. Comments from inside economics Robert M. Solow 4. Rhetoric and ideology Robert L. Heilbroner Part II. Economic Rhetoric: Further Arguments: 5. Marxian theory and the rhetorics of economics Stephen Resnick and Richard Wolff 6. Economic rhetoric: the social and historical context A. W. Coats 7. The ideas of economists Robert W. Clower 8. Should a scientist abstain from metaphor? Christina Bicchieri Part III. Economic Rhetoric Among Economists: 9. Shall I compare thee to a Minkowski-Ricardo-Leontief-Metzler matrix of the Mosak-Hicks type? Or, rhetoric, mathematics, and the nature of neoclassical economic theory Philip Mirowski 10. On the brittleness of the orange equilibrium E. Roy Weintraub 11. The significance of significance: rhetorical aspects of statistical hypothesis testing in economics Frank T. Denton 12. The rhetoric of self-interest: ideology of gender in economic theory Nancy Folbre and Heidi Hartmann Part IV. Economic Rhetoric in Politics and Journalism: 13. The heterogeneity of the economists' discourse: philosopher, priest, and hired gun Craufurd D. Goodwin 14. The grammar of political economy James K. Galbraith 15. The rhetoric of economics as viewed by a student of politics Robert O. Keohane 16. 'Yellow rain' and 'supply-side economics': some rhetoric that failed David Warsh Part V. Economic Rhetoric: Its Rhetoric and its Consequences: 17. Negotiating a new conversation about economics Arjo Klamer 18. The consequences of rhetoric Donald N. McCloskey Appendix Index.

Antitrust Enforcement Under Asymmetric Information

Abstract: Optimal antitrust policy toward collusion to fix prices is examined in an asymmetric information setting. The antitrust authority does not know cartel costs and so cannot distinguish between a high-cost competitive industry and a low-cost cartel. The problem differs from principal-agent models since firms can choose competitive or collusive behavior. With costly enforcement, the authority is shown to commit itself to a schedule of probabilities of bringing suit that depends on the observed market price. Collusive firms moderate markups to reduce the risk of being prosecuted. Copyright 1989 by Royal Economic Society.

A Survey of Some Recent Econometric Methods

Abstract: This survey is written mainly for the applied economist though we hope that the specialist econometrician will find something of interest too. Our aim has been to try to bring the applied worker as up to date as possible, and in the process to improve the quality of applied work, by providing access to the latest ideas in econometrics. We have tried to describe and explain in a relatively non-technical way the main developments that have taken place in the last ten years. Partly for reasons of space the survey is by no means exhaustive but it does cover a wide range of topics in both time-series and cross-section analysis. Among the subjects covered are the followoing: the nature of data (including integrated and fractionally integrated data), four estimation methods (maximum likelihood, method of moments, M-estimators and non-parametric estimation), inference (with stationary and integrated regressors), a comparison of various model evaluation principles, the formulation of models (including dynamic specification, cointegration and conditional expectations in mean and variance). Copyright 1989 by Royal Economic Society.

Preference Reversal: Information-Processing Effect or Rational Non-Transitive Choice?

Abstract: Preference reversal is often explained as an information-processing effect, whereby individuals respond differently to valuation problems than to straight choices. Regret theory offers the alternative explanation that individuals act on consistent, but nontransitive, preferences. Regret theory, in its most general form, is shown to make specific predictions about nontransitive pairwise choices that correspond with the preferences reversal phenomenon. Some experiments designed to discriminate between these two explanations are reported. The main finding is that, as regret theory predicts, the preference reversal phenomenon can be reproduced in situations in which subjects confront only choice problems. Copyright 1989 by Royal Economic Society.

Cointegration and Error Correction Mechanisms

Abstract: Starting from a multivariate Wold representation for N variables that are integrated of order 1, this paper shows that, given that the N variables have r cointegrating vectors, there is an equivalence between five alternative representations of the multivariate model: the autoregressive representation; the error-correction representation; the interim multiplier representation; the Bewley (1979) representation; and the common trend representation. Proof of the theorem uses a result based on the Smith-McMillan lemma for polynomial matrices. The paper concludes by commenting on the different representations. Copyright 1989 by Royal Economic Society.