Knowledge that Transforms

This paper investigates trend and cycle dynamics in per capita income for the major U.S. regions during the 1956–1995 period. Cointegration and serial correlation common features information are used in jointly decomposing the series into trend and cycle components. We find considerable differences in the volatility of regional cycles. Controlling for differences in volatility, we find a great deal of comovement in the cyclical response for all regions but the Far West. Possible sources underlying differences in regional cycles are explored, such as the share of a region's income accounted for by manufacturing, defense spending as a proportion of a region's income, oil price shocks, and the stance of monetary policy. Somewhat surprisingly, we find that the share of manufacturing in a region seems to account for little of the variation in regional cycles relative to national cycles, but manufacturing share differentially affects trend growth for four of the seven regions studied.

This paper theoretically and empirically examines ownership structure in foreign direct investment (FDI) projects. We show that in choosing an ownership structure, foreign investors, local entrepreneurs, and government consider the specific, costly-to-market assets that the participants and the country bring to the project. In equilibrium, the foreign equity share rises with the importance of foreign investor assets and declines with the contribution of local assets towards the amount of surplus generated in the project. Government policies and the institutional structure of the country also affect ownership structure.

This paper tests a textbook consequence of competitive markets: that an industry-wide increase in the price of labor is passed on to consumers through an increase in prices. Using several data sources on restaurant prices, I explore the price impact of minimum-wage hikes in Canada and the United States. Particular attention is paid to the timing of these price responses to gauge the ‘stickiness’ of minimum-wage cost shocks. I find that restaurant prices generally rise with changes in the wage bill and that this response is concentrated in the quarter surrounding the month during which the legislation is enacted.

Several authors have recently investigated the predictability of exchange rates by fitting a sequence of long-horizon error-correction equations. We show by means of a simulation study that, in small to medium samples, inference from this regression procedure depends on the null hypothesis that is used to generate empirical critical values. The standard assumption of a stationary error-correction term between exchange rates and fundamentals biases the results in favor of predictive power. Our results show that evidence of long-horizon predictability weakens when using empirical critical values generated under the more stringent null of no cointegration. Likewise, results are weakened using critical values generated under the null that exchange rates and fundamentals are generated by an unrestricted VAR with no integration restrictions.

Although prior studies of job displacement and disability have measured the impact of these shocks in terms of lost earnings, no previous research has linked these permanent earnings shocks to the long-run consumption smoothing behavior of these households. Because consumption is generally considered a better measure of well-being than is income, understanding the link between these earnings shocks and consumption is important in trying to gauge the magnitude of the long-run impact caused by such events. Using the Panel Study of Income Dynamics, the analysis finds the percentage change in consumption is generally less than that of the head's earnings and total family income, especially at the time of the shock. The results also indicate that displaced households respond to an increase in the probability of future job losses by reducing their consumption prior to a job loss. These results suggest that only focusing on earnings overestimates the impact of these shocks on household well-being.

The study explores the influence of domestic competition on international trade performance, using data from a broad sample of Japanese industries. Domestic rivalry is measured directly using market-share instability rather than employing structural variables such as seller concentration. We find robust evidence that domestic rivalry has a positive and significant relationship with trade performance measured by world export share, particularly when R&D intensity reveals opportunities for dynamic improvement and innovation. Conversely, trade protection reduces export performance. These findings support the view that local competition—not monopoly, collusion, or a sheltered home market— pressures dynamic improvement that leads to international competitiveness.

We use panel data to analyze the determinants of speaking fluency and wages of immigrants. Our model takes account of two problems that may bias OLS estimates of the impact of speaking fluency on earnings. First, subjective variables on an ordinal discrete scale, such as self-reported language ability, can suffer from misclassification errors. The model decomposes misclassification errors into a time-persistent and a time-varying component. Second, the model accounts for correlated unobserved heterogeneity in language and earnings equation. The main finding is that these two generalizations of the standard model both lead to substantial changes in the estimated effect of speaking fluency on earnings.

We test the hypothesis that price discrimination increases with competition in the airline market. Using a large cross section of tickets offered by several carriers on various routes, we approximate price discrimination with marginal implicit prices of ticket restrictions that carriers typically use to price discriminate: Saturday-night stayover re-quirements and advanced-purchase discounts. We find that the restrictions are associated with lower airfares, but that the discounts are smaller on routes with higher market concentration. The results suggest that price dispersion attributed to ticket restrictions increases as markets becomemore competitive.

In this paper, we examine empirically whether risk pooling is more advantageous among altruistic compared to selfish agents in a framework where individuals cannot make binding commitments. In particular, we incorporate altuism into a model of risk sharing under imperfect commitment and use simulation methods to establish tests of the roles of both altruism and commitment problems in determining the extent of insurance and the intertemporal movements in interhousehold transfers. The tests are carried out using three panel data sets from two countries of rural South Asia that provide detailed information on transfers and enable the measurement of income shocks. The estimates provide strong support for the notion that imperfect commitment substantially constrains informal transfer arrangements, whether kin-based or not, but also provide evidence that altruism plays an important role in ameliorating commitment constraints and thus in increasing the gains from income pooling.

This paper proposes a measure of dynamic comovement between (possibly many) time series and names it cohesion. The measure is defined in the frequency domain and is appropriate for processes that are costationary, possibly after suitable transformations. In the bivariate case, the measure reduces to dynamic correlation and is related, but not equal, to the well known quantities of coherence and coherency. Dynamic correlation on a frequency band equals (static) correlation of bandpass-filtered series. Moreover, long-run correlation and cohesion relate in a simple way to co-integration. Cohesion is useful to study problems of business-cycle synchronization, to investigate short-run and long-run dynamic properties of multiple time series, and to identify dynamic clusters. We use state income data for the United States and GDP data for European nations to provide an empirical illustration that is focused on the geographical aspects of business-cycle fluctuations.