Knowledge that Transforms

This paper uses a two-country general equilibrium model of the world economy in order to analyze the effects of budget deficits and government spending on world rates of interest, consumption, and international indebtedness. It demonstrates the difference between the effects of fiscal expenditures and tax cuts as well as between the effects of current policies and expected future policies. It is shown that the qualitative effects of fiscal policies depend on whether the country introducing the policies runs a surplus or a deficit in its current account. Following the positive analysis of the short-run and the steady-state effects, the paper concludes with a normative analysis of the welfare implications of budget deficits.

The sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics, the analysis of social security and pensions, and the study of life-cycle patterns of work. This paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature. The first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation. The second approach is to estimate a first-difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations. The results indicate that intertemporal substitution elasticity for married men is positive but small.

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.

It is sometimes asserted that rational speculative activity must result in more stable prices because speculators buy when prices are low and sell when they are high. This is incorrect. Speculators buy when the chances of price appreciation are high, selling when the chances are low. Speculative activity in an economy in which all agents are rational, have identical priors, and have access to identical information may destabilize prices, under any reasonable definition of destabilization. It takes extremely strong conditions to ensure that speculative activity (of the commodity storage variety) "stabilizes" price, even in a very weak sense.

A formal restatement of the numerical example Ricardo invoked to explain his change of mind on the feasibility of the depressing effect of technology on labor underlines the analytical difficulty that he could not overcome and thus explains his inconclusive results. This difficulty is basically due to the absence of a clearly perceived demand theory--demands for goods, factor services, and money--characteristic of him and of classical economics in general. Since the focus of the technology labor issue is on the expected change of demand for labor in response to technical change, the failure of classical economists and of Ricardo to propose a relevant theory was inevitable.

Indivisibilities in consumption, investment, choice of employment, and so forth have been used by others to justify the behavior of the insurance-buying gambler. Unfortunately, these theories ignore the market incentives to make the indivisible divisible through leasing or variation in quality, as well as individual initiative through borrowing and lending. In this paper the same behavior toward risk is explained without resort to indivisibilities or market imperfections, using the effect of work rates and retirement decisions on lifetime earning profiles. This is done using assumptions normally consistent with risk aversion: diminishing marginal utility of consumption and time-separable utility.

Although many economists argue that resale price maintenance (RPM) enhances the efficiency of distribution systems, RPM has proven politically unpalatable. Opposition to RPM arises primarily from concern that it raises prices, an empirical judgment based on comparisons of prices in RPM states with prices in "free-trade" (non-RPM) jurisdictions. We develop a model of RPM pricing that shows that prices chosen by manufacturers under universal RPM are close to those chosen without RPM. Manufacturers "pay" for dealer services through lowered wholesale prices. When jurisdictions are mixed, manufacturers select compromise wholesale prices, and retail prices in RPM jurisdictions exceed those in free-trade states. We use the theoretical results as a basis for the analysis of the evolution of political attitudes toward RPM.

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?

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.

Recent work by David Lilien has argued that the positive correlation between the dispersion of employment growth rates across sectors (σ) and the unemployment rate implies that sectoral shifts in labor demand are responsible for a substantial fraction of cyclical variation in unemployment. This paper demonstrates that, under empirically satisfied conditions, traditional single-factor business-cycle models will produce a positive correlation between σ and the unemployment rate. Information on the job vacancy rate permits one to distinguish between a pure sectoral shift and a pure aggregate demand interpretation of this positive correlation. The finding that σ and the volume of help wanted advertising (a job vacancy proxy) are negatively related supports an aggregate demand interpretation.