The determination of inflation is one of many examples in which economic outcomes are driven by an intricate interaction between private expectations and government policy. In these instances, achieving a good equilibrium outcome (e.g., low and stable inflation) requires the policymaker to adopt rules that are not only compatible with the desired outcome, but that also avoid the existence of different equilibria: it is a problem of strict implementation. Recently, some solutions to the implementation problem have generated a heated debate, spurred by a surprising disagreement on setting apart equilibrium conditions from restrictions on government policy that must hold under all contingencies. An example of this is the controversy over the fiscal theory of the price level. 1 In this paper, we consider an even more paradoxical case, namely, the zero bound on nominal interest rates. While most people view the bound to be a constraint on monetary policy, which cannot be violated under any contingency, the traditional macroeconomic models, based on a notion of competitive equilibrium adapted for the presence of a big player, make it equally possible to interpret the zero bound as an equilibrium condition. 2 Indeed, negative nominal
Changing Labor-Market Opportunities for Women and the Quality of Teachers, 1957-2000 by Sean P. Corcoran, William N. Evans and Robert M. Schwab. Published in volume 94, issue 2, pages 230-235 of American Economic Review, May 2004
We propose a model of addiction based on three premises: (i) use among addicts is frequently a mistake; (ii) experience sensitizes an individual to environmental cues that trigger mistaken usage; (iii) addicts understand and manage their susceptibilities. We argue that these premises find support in evidence from psychology, neuroscience, and clinical practice. The model is tractable and generates a plausible mapping between behavior and the characteristics of the user, substance, and environment. It accounts for a number of important patterns associated with addiction, gives rise to a clear welfare standard, and has novel implications for policy.
Economic globalization has drawn fresh attention to cultural issues. The Uruguay Round of trade negotiations debated whether there should be a protectionist “cultural exception” for television and movies, as practiced by the French, Canadians, Brazilians, South Koreans, and Chinese to varying degrees. Governments around the world subsidize culture, in part to favor one national tradition over potential competitors. More generally, cultural questions are central to broader critiques of trade and globalization (Cowen, 2002). Current analyses, however, have neglected some insights from economics. We will suggest that market competition across cultures is desirable and favors relevant notions of diversity. An underlying theme is that individuals hold unjustified prejudices—or, in economic jargon, “systematically biased beliefs”—about globalization.
Estimating the Value of a Statistical Life: The Importance of Omitted Variables and Publication Bias by Orley Ashenfelter and Michael Greenstone. Published in volume 94, issue 2, pages 454-460 of American Economic Review, May 2004
While empirical evidence finds only a weak relationship between nominal exchange rates and macroeconomic fundamentals, forex markets participants often attribute exchange rate movements to a macroeconomic variable. The variables that matter, however, appear to change over time and some variable is typically taken as a scapegoat. For example, the current dollar weakness appears to be caused almost exclusively by the large current account deficit, while its previous strength was explained mainly by growth differentials. In this paper, we propose an explanation of this phenomenon in a simple monetary model of the exchange rate with noisy rational expectations, where investors have heterogeneous information on some structural parameter of the economy. In this context, there may be rational confusion about the true source of exchange rate fluctuations, so that if an unobservable variable affects the exchange rate, investors may attribute this movement to some current macroeconomic fundamental. We show that this effect applies only to variables with large imbalances. The model thus implies that the impact of macroeconomic variables on the exchange rate changes over time.
Prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short-term nominal interest rate renders open-market operations ineffective for achieving macroeconomic stabilization goals. In an earlier paper, we showed that this reasoning does not hold, that open-market operations can provide substantial macroeconomic benefits and facilitate the use of powerful fiscal policy tools even in a liquidity trap. In this paper, we consider an alternative approach that has been suggested for use in a liquidity trap, a scheduled increase in consumption tax rates. We find that such a policy could, indeed, increase short-run consumption, but would be less effective at increasing welfare or accelerating a country's exit from a liquidity trap. Though a variant of this tax policy might induce exit from a liquidity trap, the impact of welfare is negative in this case as well. We also argue that this alternative tax-rate-based approach is subject to more severe credibility problems than the monetary policy approach explored in our original paper.
Toward National Well-Being Accounts by Daniel Kahneman, Alan B. Krueger, David Schkade, Norbert Schwarz and Arthur Stone. Published in volume 94, issue 2, pages 429-434 of American Economic Review, May 2004
As the fields of personnel economics and organizational economics have become more visible in recent years, more economists, practitioners, and policymakers have become interested in the internal workings of firms. Fortunately, at the same time as interest in these areas has grown, new data sets have emerged that provide consistent personnel data from a wide variety of firms. This paper provides an example of how newly available data can be used to analyze internal labor markets and suggests how such data can be used to address other issues. Basic questions in personnel economics include how firms set wages and how people move between jobs (within and across firms). Answering these questions is essential to assessing the relative importance of theoretical models as explanations of the nature of employment relationships. These models include agency theory, matching, and search theory, among others. Historically, most attempts to study these models were limited to data sets that are drawn from a random sample of individuals with no identification of firms, such as the Current Population Survey (CPS). While much can be learned from such studies, much of the inference is indirect and the data may suffer from inconsistent or inaccurate self-reported data. An alternative strategy, used by, for example, Lazear (1992), George Baker et al. (1994), and Kenn Ariga et al. (1999), is to procure detailed personnel information from a single firm and use it to study the policies at that firm. While these papers were successful at providing details of the individual firms, they leave open the question of how widely the results generalize, especially given that the results are not consistent even across these three papers, which are based on different firms. An important step in getting past the limits of CPS-style and individual-firm data is to find data sets that provide employee details for numerous firms. Such data sets have been created in the United States, France, Sweden, and other countries. As John M. Abowd and Francis Kramarz (1999) show, these data sets take many forms and, like the data that preceded them, have varying strengths and weaknesses. They have already been used, according to Abowd and Kramarz (1999), in over 100 studies of more than 15 countries. That paper provides details on many of these studies, as well as comparing some of the features of the various data sets. Although the U.S. data have many virtues, they lack job information. A key advantage of the Swedish data used here is its detailed and accurate job classifications. This makes it possible to determine whether job openings are filled internally or externally and to follow employees as they change jobs. The data include many firms, a long panel of years, and accurate wage data, allowing the study of the relative importance of firms and jobs on wage changes and levels. The main results of this paper are as follows. First, the Swedish firms studied fill a significant † Discussants: Henry Farber, Princeton University; Lawrence Katz, Harvard University; Derek Neal, University of Chicago.