Knowledge that Transforms

Previous use of plots of stock prices and "perfect-foresight" prices p*"t as evidence of either "excess volatility" or nonconstant discount rates is invalid since by construction p*"t will differ form and be much smoother than rational prices if discount rates are constant. Further, prices appear nonstationary, which can account for the previously reported gross violations of variance bounds. Conditional variance bounds that are valid under nonstationarity are not violated for Standard and Poor's data. The results are consistent with changes in expectations of future cash flows causing changes in expectations future cash flows causing changes in stock prices.

This paper investigates the possibility that the observed deviations of major bilateral exchange rates from values implied by market fundamentals are a consequence of rational asset market bubbles. When a new econometric methodology for detecting asset market bubbles is used, the joint hypothesis of no bubbles and stable autoregressive processes for relative money supplies and real incomes is rejected for the dollar/deutsche mark and dollar/pound ratesusing monthly data over the period 1973-82. Additional tests for coefficient stability and for lack of cointegration between exchange rates and market fundamentals suggest that the bubble findings must be interpreted with care.

A collection of items is to be distributed among several bidders, and each bidder is to receive at most one item. Assuming that the bidders place some monetary value on each of the items, it has been shown that there is a unique vector of equilibrium prices that is optimal, in a suitable sense, for the bidders. In this paper we describe two dynamic auction mechanisms: one achieves this equilibrium and the other approximates it to any desired degree of accuracy.

Household-level data from Sierra Leone are used to test whether higher caloric intake enhances family farm labor productivity. This is the notion behind the efficiency wages hypothesis, which has found only weak empirical support. A farm production function is estimated, accounting for the simultaneity in input and calorie choice. Instruments include prices, household demographic characteristics, and farm assets. The latter two sets of instruments are later dropped to explore the robustness of the results to different specifications of exogeneity. The exercise shows a highly significant effect of caloric intake on labor productivity, providing solid support for the nutrition-productivity hypothesis. The marginal effect on productivity falls drastically as calorie consumption rises but remains positive at moderately high levels of intake. One result is a fall in the effective price of food, a decline that is larger for households that consumer fewer calories.

We generate an empirical method aimed at predicting the timing and magnitude of devaluations forced by speculative attacks on fixed exchange rate systems. Using the Mexican experience as an example, we produce time-series estimates of the one-period-ahead probability of devaluation, the expected value of the new fixed exchange rate, and the confidence interval of the forecasted exchange rate. The results of the empirical exercise are encouraging. Devaluations, both in and out of sample, did occur when "predicted" by the model. Furthermore, the probabilities of devaluation reached relatively high values prior to actual devaluations.

This paper presents a fully specified model of long-run growth in which knowledge is assumed to be an input in production that has increasing marginal productivity. It is essentially a competitive equilibrium model with endogenous technological change. In contrast to models based on diminishing returns, growth rates can be increasing over time, the effects of small disturbances can be amplified by the actions of private agents, and large countries may always grow faster than small countries. Long-run evidence is offered in support of the empirical relevance of these possibilities.

This paper compares monopsonistic and competitive search equilibria. While the competitive equilibrium is efficient, the monopsonistic equilibrium is not: there is too much search, and the employment rate is too low.

This paper reports the results of tests of the major implications of the two-parameter capital asset pricing model. The findings indicate that the relationship between stock returns and systematic risk contains important nonlinearities during 1935-82. These nonlinearities cannot be ascribed to previously documented anomalies related to firm size or January seasonality. Moreover, the test results appear to be sensitive to the choice of the proxy for the market portfolio.