Knowledge that Transforms

Jeffrey A. Miron, J. Joseph Beaulieu, What Have Macroeconomists Learned about Business Cycles from the Study of Seasonal Cycles?, The Review of Economics and Statistics, Vol. 78, No. 1 (Feb., 1996), pp. 54-66

This paper investigates the income effects on the trade balance with particular attention to the distinction between permanent and transitory disturbances for the United States, Japan, Germany, and the United Kingdom. In all four countries, movements in the trade balance have mostly been associated with transitory changes in income. The latter also are negatively associated with the trade balance. In marked contrast, permanent changes in income have little to do with the trade balance. These results are examined in light of intertemporal models and real business cycle models. Copyright 1996 by MIT Press.

We study the relationship of non-quantitative news to bond prices. We select a set of major news events based solely on their significance as judged by historians, and examine the corresponding bond price movements. We find strong evidence that news has some influence on bond price movements, but we find no evidence that news can explain more than a small fraction of those movements.

Risk aversion plays an important role in explaining why antitrust cases settle instead of going to trial. Using a jointly estimated model of settlement and trial outcome, the authors find that a one percent increase in the probability that the plaintiff wins at trial raises the probability of a settlement by 0.13 percent. They also find that reputation effects are not a significant factor for defendants, so the risk aversion of the defendants does not play a dominant role in determining whether the parties settle. Plaintiffs are more likely to win in certain jurisdictions, which encourages venue shopping by plaintiffs. Copyright 1996 by MIT Press.

This paper uses a logit analysis to develop a new index for measuring occupational segregation by race and gender. The authors use the 'L Index' to decompose race and gender segregation into two components: the 'race' and 'gender' components, and the components attributable to the race-gender distribution of residence, education, age, and public-sector employment. They present results for the 1970s and 1980s. The authors' analysis suggests that gender-based occupational segregation increased within occupational categories in the 1980s and that within gender groups, black men were more segregated by race than black women in the 1980s. Copyright 1996 by MIT Press.

The authors search for a long-run cointegrating relationship among real money balances, real income, and interest rates, extending the work of Steve Ambler and Algin Paquet (1990), who explore this issue in the Canadian context employing the methods of Robert F. Engle and Clive W. Granger (1987). First, they uncover parameter estimates of the cointegrated relationships using three different methods of estimation. Second, the authors employ the Hansen (1992) procedure to search for structural instability in cointegrating relationships with unknown break points. They find empirical support for a stable cointegrating relationship among real M1, real income, and short-term interest rates in Canada for the period 1953:1-1990:4. Copyright 1996 by MIT Press.

Joseph Friedman, Hung-Gay Fung, Daniel A. Gerlowski, Jonathan Silberman, A Note On "State Characteristics and the Location of Foreign Direct Investment within the United States", The Review of Economics and Statistics, Vol. 78, No. 2 (May, 1996), pp. 367-368

Recent survey validation studies suggest that measurement error in earnings data is pervasive and violates classical measurement error assumptions, and therefore may bias estimation of cross-section and longitudinal earnings models.We model the structure of earnings measurement error using data from the Panel Study of Income Dynamics Validation Study (PSIDVS).We then use Rubin's (1987) multiple imputation techniques to estimate consistent earnings equations under nonclassical earnings measurement error in the PSID.Our technique is readily generalized, and the empirical results demonstrate the potential importance of correcting for measurement error in earnings and related data, particularly during recessions.

This paper presents empirically determined indifference functions for income and leisure which exhibit the phenomena of loss aversion and a utility reference point determined by adaptation, as expounded by Kahneman and Tversky and others. Data for this study were gathered in original surveys of seven diverse labor markets. The indifference functions of all show common features consistent with loss aversion/adaptation. These features help explain stability in labor markets in the face of an overtime premium which prevents the many workers in the United States from being at an optimal equilibrium and causes discontinuities in labor supply curves. Labor supply curves derived from indifference curves with the loss aversion adaptation features have much smaller discontinuities than those based on simulated curves without these features. Copyright 1996 by MIT Press.

Using the currency swap as the forward-exchange risk hedge, the covered interest parity condition in the long-date capital markets is evaluated. Of interest is the extent to which deviations from parity can be attributed to transactions costs. The empirical conclusions presented in the paper suggest that, although (on average) transactions costs account for deviations from parity, net deviations (in excess of transactions costs) are neither rare nor short-lived. Yet an analysis of the variance structure of covered interest parity reveals that these profit opportunities diminish over time and eventually disappear. Copyright 1996 by MIT Press.