Showing papers on "Price level published in 1979"

Comovements in Stock Prices in the Very Short Run

Abstract: Correlations among price changes in common stocks of companies in one industry are found to decrease with the length of the interval for which the price changes are measured. This phenomenon seems to be caused by nonstationarity of security price changes and by the existence of correlations between price changes in the same stock—and in different stocks—in successive periods. Although such correlations are not necessarily inconsistent with market efficiency, the data do reveal the presence of lags of an hour or more in the adjustment of stock prices to information relevant to the industry.

Unanticipated Money and Economic Activity

Abstract: This paper discusses ongoing research on the relation of money to economic activity in the post-World War I1 United States. As in previous work, the stress is on the distinction between anticipated and unanticipated movements of money. Part I deals with annual data. Aside from updating and refinements of earlier analysis, the principal new results concern joint, cross-equation estimation and testing of the money growth, unemployment, output and price level equations. The present findings raise some doubts about the specification of the price equation, although the other relations receive further statistical support. Part I1 applies the analysis to quarterly data. Despite the necessity to deal with pronounced serial correlation of residuals in the equations for unemployment, output and the price level, the main results are consistent with those obtained from annual data. Further, the quarterly estimates allow a detailed description of the lagged response of unemployment and output to money shocks. The estimates reveal some lack of robustness in the price equation, which again suggests some misspecification of this relation.

Comparing Survey and Rational Measures of Expected Inflation: Forecast Performance and Interest Rate Effects

Abstract: THE MEASUREMENT OF EXPECTED INFLATION continues to be an important and perplexing issue in empirical studies of macroeconomic relations. Although most researchers have followed Fisher [10] in assuming that a distributed lag of past price changes serves as an adequate proxy for anticipated inflation, several recent investigations employ instead direct observations on inflation forecasts from surveys. Simultaneously with this work, there has been a growing emphasis, particularly in the theoretical literature, that expectation formation should conform to the notion of rationality advanced by Muth [17]. A potential conflict thus arises if the survey data violate the rationality hypothesis. The main survey source is the Livingston survey of professional economists, which iIlcludes their forecasts of future price levels. These data have often been used in empirical tests of the effects of anticipated inflation on interest rates [ 1 1, 19, 13, 5]. Tests by Pesando [18] and Carlson [6] the latter using his reworking of the survey responses indicate, however, that the survey data are indeed in-

Anticipations and the Nonneutrality of Money

Abstract: This paper examines the responses of the capital stock, output, and the price level to changes in the money stock in a neoclassical growth model in which money may not be neutral. The nonneutrality...

The Hedonic Price Approach to Measuring Demand for Neighborhood Characteristics

Abstract: Publisher Summary This chapter reviews the hedonic price approach as a technique for measuring the implicit prices of goods that are not themselves explicitly traded in markets but are characteristics of traded goods. The hedonic technique is a method for estimating the implicit prices of characteristics that differentiate closely related products in a product class. The estimation of the demand for a characteristic of housing involves a two-step procedure in which first the implicit price of the characteristic is estimated by the application of the hedonic price technique. There are several assumptions that must be satisfied to apply the hedonic technique to estimating the demand for neighborhood characteristics. For the use of the hedonic price approach at all, it is necessary to assume that the observed housing prices approximate equilibrium prices, that is, the prices that just make everyone willing to hold the existing stock of houses. In other words, the assumption of rapid price adjustment is basic to the technique. One of the virtues of the hedonic price technique is that the problem can be handled through the choice of variables included in the hedonic price function.

The Relationship between Relative Prices and the General Price Level: A Suggested Interpretation

Abstract: In a thought-provoking paper in this Review, Daniel Vining and Thomas Elwertowski examine empirically the relationship between the variability of the rate of inflation in the general level of prices, and the variance of the rate of change in relative prices. They find a positive association between these two variances and interpret this finding as a contradiction to a modern stochastic version of the neoclassical model as presented by Robert Lucas (1973). They state: ". . . thus, in contrast to many of his other conclusions, Lucas' remark in an otherwise extremely controversial paper, namely 'that there is no reason to expect X to vary systematically with demand policies' (1976, p. 39), has gone utterly uncontested" (p. 706).' The implication is obviously that this type of model is inconsistent with the above mentioned finding. They go on to interpret their result in light of a recent paper by Robert Barro and interpret this paper as an ". . . effort to account for the observed dependence of heightened relative price change dispersion on general price change instability, relying upon a chain of causality running from general price level change instability to relative price change instability" (p. 707). They finally challenge empirical economists to discriminate between two hypotheses: ". . . i.e., to determine the direction of causality between individual price change dispersion and general price change instability" (p. 708). I claim and demonstrate in this note that: 1) If correctly interpreted the type of manymarkets stochastic model presented by Lucas is perfectly consistent with the finding that there is a positive association between individual price change dispersion and general price change dispersion. 2) It is wrong to interpret the Barro model as providing a rationale for "a chain of causality running from general price level change instability to relative price change instability" (Vining and Elwertowski, p. 707). It should rather be viewed as a conceptual framework in which both the variance of general price change and the variance of individual price change are influenced2 by some common exogenous variances like the variance of aggregate excess demand shocks and the variance of relative excess demand shocks.3 3) Within a framework in which both the variance of general price change and the variance of relative price change are determined endogenously the question regarding the direction of causality between those two variances becomes ambiguous. If for example both variances increase because the variance of the (exogenous) rate of change in nominal income increases, it does not follow logically that either the variance of general price change causes the variance of relative price change, or vice versa. However, the question raised by Vining and Elwertowski does make sense if interpreted as a question concerning the direction of causality between some attributes of aggregate variability and some attributes of relative variability. Such an interpretation is suggested later.

An Analysis of Annual and Multiperiod Quarterly Forecasts of Aggregate Income, Output, and the Price Level

Abstract: This paper examines several sets of forecasts representing a variety of sources, models, and techniques. Predictions of percentage changes in GNP are relatively accurate, but partly because of negative correlations between errors in the corresponding forecasts of real growth and inflation. For the last two variables, the multiperiod quarterly forecasts for the 1970s have errors that show unusually rapid cumulations over longer spans. The accuracy and properties of the forecasts depend heavily on the economic characteristics of the periods covered but only weakly and not systematically on the differences among the forecasters.

Wage Indexing Rules and the Behavior of the Economy

Abstract: Explaining economic fluctuations by the existence of imperfect wage rules begs the question of why such rules are chosen in labor contracts. The form of wage rules is not exogenous but determined by cost and efficiency considerations. Fully contingent rules preserve efficiency but are costly to write and enforce. Noncontingent rules may lead to large inefficiencies. Actual rules, which index the wage only to the price level, may be the optimal compromise. This paper characterizes the equilibrium of an economy in which the form of wage rules is endogenous. It shows the effects of the distributions of exogenous shocks on the equilibrium distribution of output and the form of the rule. It then studies the role of policy in such an economy.

An Analysis of Annual and Multiperiod Quarterly Forecasts of Aggregate Income, Output, and the Price Level

Abstract: How and how well economists forecast, and how much their predictions help or hurt public and private decision making, are matters that ought to receive much attention from the profession. This is so not only because of their direct interest to the authors, users, and critics of the forecasts, but also because of their intrinsic but less evident academic interest. What is the practical applicability of economic analysis in this critical area? What is the quality of foresight and counsel that can be expected of responsible economists? These are broad questions which are not easy to answer, but they are basic and surely deserve to be tackled. This requires that we systematically confront forecasts as indications of how economists ex ante thought events are likely to This paper examines several sets of forecasts representing a variety of sources, models, and techniques. Predictions of percentage changes in GNP are relatively accurate, but partly because of negative correlations between errors in the corresponding forecasts of real growth and inflation. For the last two variables, the multiperiod quarterly forecasts for the 1970s have errors that show unusually rapid cumulations over longer spans. The accuracy and properties of the forecasts depend heavily on the economic characteristics of the periods covered but only weakly and not systematically on the differences among the forecasters.

Inflation-Induced Distortions in Government and Private Saving Statistics

Abstract: PROBABLY the single most important statistic measuring the impact of government fiscal policy on the economy is the magnitude of the government surplus or deficit. Justifiably or not, this single figure has taken on such importance that the Congressional Budget and Impoundment Control Act of 1974 established a process whereby the Congress is forced to consider overall receipts and outlays and commit itself under a binding resolution to these totals. Because of the importance of the budget figure, economists have continually sought to modify the raw data to better assess the impact of the government on aggregate demand. A major breakthrough was the concept of the " FullEmployment Surplus," which was popularized by the Council of Economic Advisers in their 1962 report, although its roots go back to World War II. I This concept recognized that due to the endogeneity of expenditures and particularly tax receipts, the actual budget deficit or surplus, uncorrected for the level of output, gives a biased indication of the stance of fiscal policy. Although the concept of the full employment surplus was an improvement, dissatisfaction with the single summary statistic remained. Several economists have experimented with different weights on the components of taxes and spending, recognizing the differential spending propensities out of the different sources of income.2 This approach has not been successful due to the difficulty of reaching a consensus on a weighting scheme. Another problem with the full employment surplus was the failure to adjust for changing price levels or rates of inflation. Fixed nominal income tax brackets, specific taxes, and taxes on nominal interest and capital gains all suggest that the impact of the budget should allow for the behavior of price level variables.3 Although standardization to an exogenous level of potential output seems plausible (given normal "growth" or "frictional" unemployment), there is no "normal" price level associated with any given level of output. Furthermore, with the breakdown of the Phillip's Curve relationship in recent years, there appears to be no normal rate of inflation associated with a full employment level of output. This paper attempts to demonstrate that price level changes are important for measuring fiscal impact apart from any attempt to determine what price level behavior would exist at full employment. Since the deficit is equivalent to the amount of government bonds sold to the public,4 analysis of the impact of the supply of bonds is incomplete without allowing for changes in the real value of the debt caused by inflation or deflation. Real value accrual accounting, which is making considerable headway in private sector accounts, can also be employed in the public sector.5 A redefinition of the deficit along these lines can be integrated easily with the full employment surplus or any variant definition to yield a better measure of fiscal impact. Section II of this paper presents a brief theoretical discussion of real value accrual accounting. Section III Received for publication April 4, 1977. Revision accepted for publication April 28, 1978. * University of Pennsylvania. I would like to thank Milton Friedman, Ben McCallum, and the members of the University of Chicago's and University of Virginia's Money and Banking Workshops for their helpful comments on earlier versions of this work. Steve Thompson provided valuable research assistance and computer programming. 1 Initial references to the concept were Ruml and Sonne (1944), Committee for Economic Development (1947), and Friedman (1948). For an excellent discussion of the concept, see Okun and Teeters (1970). 2 In particular see Gramlich (1966), Musgrave (1964), Okun and Teeters (1970), and Hymans and Wernette (1970). Warren Smith in Okun and Teeters (1970) gives yet another impact statistic. 3 See Committee for Economic Development (1947), Gramlich (1968) and Okun and Teeters (1970) for attempts at price level standardization. 4 For simplicity it is assumed throughout this paper that the money supply is held constant. One can alternatively regard the profits (seigniorage) from steady-state monetary expansion as tax revenue, so that monetary financing is considered only as an inflationary tax on real cash balances. 5 For an excellent summary of purchasing-power accrual accounting as applied to the corporate sector, see Shoven and Bulow (1975, 1976).

The Regulated Industries and the Economy

Abstract: This small book is a fine survey of the literature dealing with the costs and benefits of regulation. One chapter deals with regulation of public utilities, airlines, and surface freight transportation, and another focuses on environmental and safety regulation. MacAvoy extends the research on the costs of regulation by comparing prices, investment, and rates of return for regulated industries with unregulated. It is to be hoped that this book will have extensive sales in Washington. My only regret is that a number of small inaccuracies and overstatements subtract from the general excellence. MacAvoy starts with a broad description of the spread of regulation. Even though he does not make it clear, his emphasis is on federal controls; state regulation has usually preceded federal regulation but remains practically unmentioned in this volume. The author attributes the growth in regulation basically to the government's attempts to control prices and qualities in markets where competitive forces were absent or small. This is the traditional view of the causes of regulation, but it is a view increasingly questioned. Perhaps he has oversimplified the factors involved in the establishment of regulation to keep down the size and cost of the book. The author in earlier works has written extensively of the reasons behind the establishment of the Interstate Commerce Commission. In these works MacAvoy has shown that the railroads themselves were supportive of the concept of federal control, yet he writes, "For instance, they [regulatory commissions] gained jurisdiction over railroads in response to public antagonism toward oligopolistic pricing practices" (p. 19). Chapter 2 deals with price and entry control in the traditional regulated industries. In discussing regulation of such industries as electric power, gas retailing, telephone, and airlines, the author argues that during the 1950s and early 1960s "regulation could produce either (1) lower prices by constraining monopoly power, or (2) the same price level because of ineffective procedures, or (3) higher prices in order to expand investment and capacity so as to provide subsidized services" (p. 35). But his third possibility is not logical. The most profitable position is the unconstrained monopoly. Regulation might be able to force monopolists to dissipate some of their rents on certain desired goals, but that would not mean that prices were higher. It is true that regulation might also force up costs such

Price/performance patterns of U. S. computer systems

Abstract: Econometric models of the U.S. computer market have been developed to study the relationships between system price and hardware performance. Single measures of price/performance such as “Grosch's Law” are shown to be so oversimplified as to be meaningless. Multiple-regression models predicting system cost as a function of several hardware characteristics do, however, reveal a market dichotomy. On one hand there exists a stable, price predictable market for larger, general purpose computer systems. The other market is the developing one for small business computer systems, a market which is relatively unstable with low price predictability.

National hospital input price index.

Abstract: The national community hospital input price index presented here isolates the effects of prices of goods and services required to produce hospital care and measures the average percent change in prices for a fixed market basket of hospital inputs. Using the methodology described in this article, weights for various expenditure categories were estimated and proxy price variables associated with each were selected. The index is calculated for the historical period 1970 through 1978 and forecast for 1979 through 1981. During the historical period, the input price index increased an average of 8.0 percent a year, compared with an average rate of increase of 6.6 percent for overall consumer prices. For the period 1979 through 1981, the average annual increase is forecast at between 8.5 and 9.0 percent. Using the index to deflate growth in expenses, the level of real growth in expenditures per inpatient day (net service intensity growth) averaged 4.5 percent per year with considerable annual variation related to government and hospital industry policies.

The Influence of Exchange Rate Changes on Prices: A Study of 18 Industrial Countries

Abstract: A key issue in contemporary economic policy-making concerns the effect of exchange rate changes on prices. The traditional view of exchange rate movements, prevalent up to the 1 960s, took it almost for granted that a devaluation would reduce the foreign currency price of exports and increase the home currency price of imports. The empirical debate centred on the price elasticities of demand for those exports and imports. If the elasticities were sufficiently large, the devaluation would "work"; i.e., the volume effects (higher exports, lower imports) would outweigh the adverse movement in the terms of trade (cheaper exports, dearer imports) and the trade balance would improve (Robinson, 1947). This classic analysis was essentially static and was attacked on the grounds that it ignored the long-run effect on prices of a parity change. These effects are taken account of by the monetary view of the balance of payments, which stresses the effect of balance of payments disequilibrium on the money supply and hence on prices. On this view (summarized in Johnson, 1972) a devaluation may initially create a balance of payments surplus, but this will then increase the money supply and set in motion an inflationary process which restores the price level of the devaluing country, measured in foreign currency terms, to its pre-devaluation level. At this point the external surplus disappears and the country is back in its original position, but with a once-for-all increase in its reserves, accumulated while the price adjustment was occurring. The above analysis justifies the claim that the exchange rate, being an essentially monetary phenomenon, can affect only "money things" (i.e. the general price level) and cannot permanently change the underlying real phenomena such as the trade balance or the terms of trade. This view of exchange rate changes can be justified by another line of argument: the tradeable output of each country has a determinate real value. In other words, if trade was conducted by barter, a hundred Leyland Minis would be freely exchanged for some definite number of Volkswagen Golfs or Renaults 5s, the "real barter rate of exchange" of those goods. In equilibrium, UK, French and German prices and exchange rates should be such that the sterling value of the hundred Minis should, when converted into German marks or French francs at the market rate of exchange, exactly purchase the number of Volkswagens or Renaults given by the real barter rate of exchange. Clearly, a change in the exchange rate is not going to alter people's preferences for Minis as against Volkswagens or Renaults. Hence, starting from a position in which prices and exchange rates are in equilibrium, any exchange rate change must in the long run be completely offset by price movements which restore the real rate at which Minis are exchanged for Volkswagens and Renaults.

A State Price Index

Abstract: No cross-sectional consumer price index is currently available by state, and the BLS's cross-sectional "family budget" index for metropolitan areas is not well-suited for cross-state analyses. In this paper we propose an algorithm for constructing a state-specific Laspeyres price index using conveniently available information from the Census of Business and the Survey of Current Business. The index is calculated for each state (and for Census divisions and regions) for 1967 and 1972. Its characteristics are discussed, and it is used to deflate nominal per capita income by state. Comparing "real" income by state with nominal income by state, the former has substantially less variation cross-sectionally but greater variation over time (between 1967 and 1972).

Demand for Fixed Factors, Inflation and Adjustment Costs

Abstract: The purpose of this paper is to examine some of the real effects of a " fully expected" inflation. In particular, such real effects may exist if inflation is predicted only in the aggregate, while relative prices are allowed to vary randomly. Under such circumstances, firms will find it profitable to inform customers about their specific prices and, consequently, it will become costly to change these prices continuously. We adopt a micro, partial equilibrium approach, and consider a single firm which operates under inflationary expectations. The firm possesses a monopoly power which allows it to set the nominal price of its output or, alternatively, the price of one of its inputs. There are (non-convex) costs of adjustment associated with varying nominal prices. As a result, the firm will change nominal prices by discrete jumps, allowing real prices and output to vary continuously within repeated intervals of time over which the nominal price is held fixed. Clearly, the change in output need not imply a corresponding change in all inputs. Some inputs, such as the hours of work of the existing labour force, are flexible and will vary between successive price changes. Others, such as physical capital and employment, may be costly to vary continuously and will consequently be fixed over such intervals. The analysis starts with the case in which the time interval between price changes is predetermined. This assumption is intended to capture lags in the adjustment of institutional arrangements, such as the duration of labour contracts, when the rate of inflation changes (see Friedman (1977, pp. 464-468)). The main question which we address is the effect of changes in the expected rate of inflation on the demand for fixed factors. We provide a characterization of the forces which determine this relation. Two distinct effects are identified: first, the average complementarity between the fixed intputs and the initial real price during the period in which nominal price is fixed; second, the relative speed at which the marginal profitability of the fixed factor and of the initial price vary over the same interval. We present three models of costs of price adjustments: a monopoly and two types of a monopsony with respect to variable inputs. Under quite standard assumptions, namely constant elasticity demand and production functions, it is shown that the employment of fixed factors is reduced when an increase in the rate of inflation is expected. This result, however, is not necessary, as shown by another example based on linear demand functions. There is an intuitive explanation for this ambiguity. Increased inflationary expectations will induce the firm to choose a higher initial nominal and real price in each period. Due to the higher rate of inflation, real price fluctuations are amplified. It is, in general, not

Knut Wicksell and Gustav Cassel on Secular Movements in Prices

Abstract: IN THE NINETEENTH CENTURY the price level in the United States, Great Britain, France, Germany, and the Scandinavian countries showed three secular trends. In the first half of the century, after the Napoleonic wars, the price level was falling secularly. Around 1850 prices started to rise and this trend continued for roughly twenty years until the early 1870s. This period of secular inflation was followed by twenty years of secular deflation. In the mid 1890s the trend in prices was reversed and a new period of inflation began that lasted to the end of the First World War. Within a period of about six years around the turn of the century, two Swedish economists, Knut Wicksell and Gustav Cassel, each offered a hypothesis to explain this picture of the secular behavior of prices in the nineteenth century. Wicksell suggested that it was due to real sector disturbances causing a divergence between the bank rate and the natural rate of interest. When the natural rate was above the bank rate, the money stock expanded and prices rose. In a similar way Wicksell explained the deflations as caused by a fall in the natural rate below the bank rate, which initiated a monetary contraction. Cassel regarded the secular trend of prices as the result of differential growth rates in the world demand and the world supply of

New Evidence That Fully Anticipated Monetary Changes Influence Real Output After All

Abstract: Robert Barro in his three papers on the topic(AER 1977, JPE 1978, and 1978 conference paper with Mark Rush) A distinction is drawn between the Lucas-Sargent-Wallace (LSW) theory that only unanticipated monetary changes influence real output, and the orthodox view that anticipated monetary changes influence real output in the short run during the interval of adjustment of prices to the monetary change The LSW proposition requires for its validity a contemporaneous and equiproportionate response of the expected price level to the anticipated level of money or nominal CNP, whereas the orthodox approach requires that price expectations depend at least partly on the past history of prices rather than entirely on the expected level of nominal demand The results uniformly support the orthodox approach The Livingston expectations series exhibits a highly significant response to past price changes, and only a slight response to current expectations about nominal GNP or money The actual inflation rate also depends heavily on past price changes, with an insignificant impact of current expectations of nominal GNP, or money The equations that relate real output to the deviation of changes of nominal income (both anticipated and unanticipated) from past price changes fit the data significantly better than Barro's approach using current and lagged values of money "surprises" The pure version of the LSW approach relating real output only to current surprises is decisively rejected

Quasi Optimality: The Price We Must Pay for a Price System

Abstract: The paper argues that, in the absence of lump-sum payments, a Pareto optimum is achievable by marginal-cost pricing and/or competitive equilibrium only when the boundary of the social production set happens to be linearly homogeneous near that optimal solution. Thus, contrary to widespread belief, both diminishing and increasing returns can be incompatible with achievement of optimality via parametric prices. Generally, the best that any set of fixed prices can achieve is the Ramsey solution constrained by Walras's law. The resulting welfare loss is the price society must pay for using a price system to allocate resources.

New Evidence that Fully Anticipated Monetary Changes Influence Real Output After All

Abstract: Robert Barro in his three papers on the topic(AER 1977, JPE 1978, and 1978 conference paper with Mark Rush). A distinction is drawn between the Lucas-Sargent-Wallace (LSW) theory that only unanticipated monetary changes influence real output, and the orthodox view that anticipated monetary changes influence real output in the short run during the interval of adjustment of prices to the monetary change. The LSW proposition requires for its validity a contemporaneous and equiproportionate response of the expected price level to the anticipated level of money or nominal CNP, whereas the orthodox approach requires that price expectations depend at least partly on the past history of prices rather than entirely on the expected level of nominal demand. The results uniformly support the orthodox approach. The Livingston expectations series exhibits a highly significant response to past price changes, and only a slight response to current expectations about nominal GNP or money. The actual inflation rate also depends heavily on past price changes, with an insignificant impact of current expectations of nominal GNP, or money. The equations that relate real output to the deviation of changes of nominal income (both anticipated and unanticipated) from past price changes fit the data significantly better than Barro's approach using current and lagged values of money "surprises." The pure version of the LSW approach relating real output only to current surprises is decisively rejected.

Inflationary Effects in the Capital Investment Process: an Empirical Examination

Abstract: IT HAS BEEN SHOWN that correct capital budgeting decisions only can be made based on the real net present value (NPV) derived from inflation-adjusted cash flows and discount rates and that disregarding such inflationary impacts will result in suboptimal decisions in capital budgeting [2, 3, 12]. In regard to inflationary impacts on the amount invested by firms under a specific assumption that both cash revenue and costs are in exactly the same proportion as the general price level, Nelson [10] has recently stated that "The optimal level of capital investment will depend in general on the rate of inflation. The amount invested will typically be smaller the higher the rate of inflation." The principal reason for this decreasing investment under inflation is the overstatement of net income before taxes due to historical depreciation charges. Since there will be an additional tax, so called inflation tax, on this inflated income, the nominal cash flow does not increase in proportion to the general price level. Therefore the real NPV becomes less than before, thereby projects become less attractive. Under this perfect net operating income (NOI) sensitivity to inflation assumption, Nelson's analysis is correct. In general, economic activities are more sluggish in periods of deflation than inflation. A mild inflation (say, 3%) has been thought of as a driving force to booming economic and investment activities. These observations indicate that the ceteris paribus negative relationship between the rate of inflation and the amount of investment shown by Nelson may not hold true in the real world. It is the intention of this paper to theoretically and empirically investigate the inflation-investment relationship under more general conditions. The hypothesis that wages, which take a large portion of cash costs, lag behind the general price level is well known even though Kessel and Alchian [7] conclude that this hypothesis remains untested. Under the validity of the wage-lag hypothesis or for some reasons such as output excess demand, net operating income may increase at a higher rate than the rate of inflation and such an increase also may be large enough to offset any adverse inflationary effects of depreciation on investments. Van Horne and Glassmire [13] have noticed, in their analysis of inflationary impacts of depreciation, NOI, and others on the value of the firm, that the inflationary impact of NOI is more significant than the negative impact of depreciation. In this paper the assumption of the perfect NOI sensitivity to inflation is relaxed and then a model regarding the inter-firm differences in investment activities under inflation is developed and empirically tested. In the next section

Relationships among North American Fats and Oils Prices

Abstract: Over the last decade the North American fats and oils sector has been the subject of considerable economic research (Boutwell et al.; Duncker; Houck and Mann; Houck, Ryan, Subotnik; Labys 1975, 1977; Nyberg; Vandenborre). While much of this research effort has been directed toward developing econometric models of the sector, the price and substitution relationships among the various fats and oils also have been emphasized. There are at least four reasons why an understanding of the price relationships among the various fats and oils is of interest. First, the activities of some oilseed producers in restricting exports has caused concern over the security of oilseed supplies and access to markets. If these restrictive policies are repeated, both importers and exporters are vitally interested in the impacts on price levels and alterations in demand that will be forthcoming. Second, a number of fats and oils have been included in the UNCTAD proposals for international multicommodity agreements, and some (the lauric oils) have been proposed as candidates for an international buffer stock scheme (UNCTAD). Detailed analysis of the feasibility of buffer stock proposals cannot be made until it is established which oil or group of oils (if any) would be part of the stock, and such a decision depends to a large extent on the substitution possibilities between the various fats and oils. Third, in constructing econometric models of the total fats and oils complex, a difficult decision must be made about how to aggregate the many different commodities. Obviously the best solution is to aggregate only those commodities whose price movements are very similar. Fourth, although all of the fats and oils are subject to similar demand pressures (increasing population and income), the reactions to these variables are probably quite different. For this reason, certain commodity prices may, in the short run, lead or lag price changes of other commodities in the sector, or exhibit different degrees of response to price changes so that their stability over time will be different. Relationships between Fats and Oils: Technical Considerations

Evaluating the Non-Market-Clearing Approach

Abstract: This paper is concerned with evaluating the non-market-clearing (NMC) approach of Robert Barro and Herschel Grossman and others from a purely positive point of view. That is, it deals with the broad question of the extent to which the approach provides a theoretically satisfactory explanation of certain stylized facts characterizing the dynamic behavior of aggregate output and the price level. It does not deal with the important and difficult normative questions involving stabilization policy that are often associated with the approach. From this viewpoint the main strength of the NMC approach is its compatibility with the evidence that 1) fluctuations in aggregate output are closely (positively) correlated with fluctuations in aggregate demand, 2) output appears to respond with a much shorter lag than does the price level to changes in aggregate demand, and 3) changes in output are serially correlated from quarter to quarter. The main weakness of the approach is its failure to provide any satisfactory account of how markets are organized. For example, it offers no explanation of how prices are formed, beyond the crude hypothesis that they move in the direction of excess demands, despite the fact that the assumption that prices fail to respond quickly enough to clear markets lies at the heart of the approach. Nor does it explain why agents should be constrained to trade at these prices, even though these constraints are what ultimately produce the multiplier process of the approach. This inattention to the details of market organization also appears to be responsible for the curious "supply multiplier," according to which an increase in aggregate demand, from an initial position of generalized excess demand or even of full employment equilibrium, causes a decrease in output-a prediction that threatens to undermine the compatibility of the approach with the positive correlation between aggregate demand and output unless some reason can be found why excess demand should be less common than excess supply. This shortcoming does not imply that the NMC approach is not useful for many purposes, nor that its predictions are inconsistent with the evidence (except for the predictions of the supply multipliers). But to be consistent with the evidence is not to explain it. What the approach lacks is a satisfactory theoretical underpinning that would at least make it consistent with the same notions of rational self-interest that underlie the rest of economic theory. This leaves us with the question of whether a satisfactory underpinning can be provided to the approach. In other words, can the approach be revised or replaced in such a way that the resulting theory contains a more satisfactory account of market organization, and explains the above mentioned stylized facts in a way that closely resembles the NMC approach. This question cannot now be answered with a great deal of confidence because no one has yet developed a satisfactory theory of market organization. However I think that an affirmative answer is likely, and that the key to developing the answer lies in recognizing that different markets are organized in different ways. In particular some markets, such as those for many labor services, personal credit, and heavy capital goods, are organized on a highly personal basis with individually negotiated contracts, whereas other markets, such as those for widely traded financial assets and for most consumer durables, are organized on a less personal basis by trading specialists like retailers, wholesalers, jobbers, brokers, and stock market specialists. The rest of this paper attempts to shed some light on the question of providing a satisfactory theoretical underpinning for the NMC approach by investigating how a market organized by such specialist *University of Western Ontario. I am indebted to David Laidler for helpful conversations on the topic of this paper, to Robert Solow for his critical comments, and to the Humanities and Social Sciences Research Council of Canada for financial support.

Dynamic Adjustment in an Open Economy with Flexible Exchange Rates

Abstract: A constantly recurring topic in international finance since the early sixties has been investigation of the potential impact and effectiveness of monetary and/or fiscal stimulus for different exchange rate regimes. In this paper we reexamine these issues using a relatively simple dynamic model of an open economy which is well integrated with the rest of the world and has a flexible exchange rate. The model is designed to analyze the effects of monetary and fiscal policy over an intermediate length period in which flow equilibria are reached in both goods and asset markets. Our "equilibria" may, however, involve continuing stock disequilibria, and to the extent that they do our analysis is intermediate-run in nature.' In some ways, the model presented in this paper occupies a center ground between standard open economy Keynesian models, on the one hand, and open economy monetary approach models on the other. Like the former, aggregate demand plays a major role in determining the level of real income and its dynamic behavior in our model. Like the latter our model assumes a high degree of capital mobility and extensive integration of domestic goods markets with those of the rest-of-the-world. Thus the domestic interest rate is closely linked to the foreign rate, while goods prices and the exchange rate move to achieve purchasing power parity as an equilibrium condition. This endogenous adjustment of the domestic price level distinguishes our model from the standard Keynesian one in which prices are generally exogenous. The endogeneity of real income both in the short-run and in equilibrium