Knowledge that Transforms

The gold standard in 1890-1908 period was efficient by any criterion: the number of gold point violations was small; violations did not persist; gold movements occurred in the predictable, profitable, direction in response to violations; and the mean absolute exchange rate (for 1881-1900) was at exactly half the average of the gold points. The actions of the Bank of England and U.S. Treasury in manipulating gold points were consistent with the "rules of the game" and in fact facilitated the efficiency of the gold standard. In contrast, the operations of banking syndicates were of a nature to generate inefficiencies, but the evidence is that they did not have this effect.

This paper generalizes Samuelson's well-known analysis concerning the use of fiat or outside money to support Pareto-optimal allocations in an overlapping- generations framework. While maintaining an elementary demographic structure butexpanding the list of available commodities in each period, we establish the following result: If there is a fixed supply of fiat money, and individuals are also permitted to issue bonds or inside money, then there always exists at least one stationary equilibrium yielding a Pareto-optimal allocation.

A model economy is described that integrates job search and signal extraction analysis. Equilibrium differs from search models without signal extraction in that, even with a fixed real sector, unemployment fluctuates stochastically. It differs from standard signal extraction models because search introduces persistence. In fact, unemployment follows a second-order difference equation with coefficient that are functions of current and lagged values of the stochastic shocks. Thus the model has the potential to mimic actual business cycle data despite the fact that the underlying shocks are independently and identically distributed. Policy implications are discussed.

This paper evaluates the hypothesis that the influence of "traditional" market variables on migration in Canada has diminished over time. This is attributed to a crowding-out process whereby growth of social security--type programs has cushioned the effects of, say, unemployment and thus motivation to migrate for jobs, and fiscal policies have exerted unintended effects. Implications are that market forces that would work naturally to induce migration from low-to high-income regions (and thus equalize earned incomes) have been short-circuited and that traditional tools of manpower policy for influencing migration, such as job creation, skill enhancement, or wages, are less effective currently than they might have been in the past.

It is widely believed that one of the Federal Reserve's first important monetary policy achievements was the deseasonalization of interest rates. The Federal Reserve supposedly accomplished this by introducing appropriate seasonal movements into the supplies of currency and high-powered money. This view implicitly assumes that there was no interaction between American and foreign financial markets. Two findings are reported that challenge this conventional view. First, interest rate seasonals disappeared in the United States and other countries at approximately the same time. Second, interest rate seasonal ended approximately 3 years before the seasonal movements of currency and high-powered money changed.

This paper investigates whether predatory price cutting reduces a trust's cost of acquiring its competitors. A variant of the Litzenberger-Rao valuation model is estimated with the expenditures for 43 rival firms purchased by the old American Tobacco Company between 1891 and 1906. The coefficient estimates indicate that, ceteris paribus, alleged predation significantly lowered the acquisition costs of the tobacco trust both for asserted victims and, through reputation effects, for competitors that sold out peacefully. Although qualified by data limitations, these results support the classical view of predatory pricing as a systematic business practice.

Empirical studies indicate that unconditional intergovernmental grants have a flypaper effect. Several authors have modeled recipient government spending under fiscal illusion to explain this phenomenon. In short, grants reduce the perceived marginal cost of recipient government output. This paper develops a more general model of illusion that incorporates the grantor government, thereby eliminating inconsistencies encountered in previous models. The more general model implies that grant finance increases the perceived marginal cost of grantor government output. Thus grant-induced illusion should have two effects: an increase in recipient output and a decrease in grantor output. The empirical work supports this hypothesis.

The output-inflation trade-off is investigated in a rational expectations equilibrium economy in which costly price setting makes it inefficient for agents to vary their prices at every instant. It is shown that "sticky prices" are not some exogenous source of output fluctuation but result from the monetary policy process. An economy with slow and counterinflationary money growth exhibits staggered changes in sticky prices as assumed in some "new-Keynesian" analyses. An economy with fast money growth and a high degree of monetary accommodation exhibits either flexible prices or "bunched," frequently changing sticky prices.

The paper analyzes the impact of a stabilization policy based on a temporary reduction in the rate of devaluation. Against a background in which a constant rate of devaluation has no real effects, it is shown that the temporary policy does and, furthermore, that the real effects tend to become bigger (in absolute value) as the horizon of the temporary policy is shortened. The central discussion is carried out in terms of a one-good, cash-in-advance model, with perfect capital mobility and Ramsey-type consumers. Results are extended to account for home goods and variable velocity; the roles of capital mobility and banking liberalization are briefly discussed.

Since 1971, no major currency has a formal link to a commodity. For the first time in history, every currency is wholly irredeemable, not as a temporary expedient but as a permanent matter. Monetary economists have generally treated irredeemable paper money as involving negligible real resource costs compared with a commodity currency. To judge from recent experience, that view is clearly false as a result of the decline in long-term price predictability. A key question for the future is, What if any substitute for a commodity standard will emerge as a long-term anchor for the price level?