Knowledge that Transforms

This paper analyzes the key issues and lessons from the experience with flexible exchange rates during the 1970s. It analyzes the efficiency of the foreign-exchange market and the volatility of exchange rates, as well as the relationships between exchange rates and interest rates. A key distinction is made between anticipated and unanticipated events, and it is shown that the key factor affecting exchange rates has been "news." The analysis then proceeds to analyze the relationship between exchange rates and prices. The deviations from purchasing power parities are being interpreted in terms of the modern asset-market approach to the exchange rate.

This paper estimates a reduced-form exchange-rate equation whose estimates are used to address questions on exchange-rate overshooting, intermediate-run exchange-rate dynamics, and long-run proportionality relationships between relative money supplies and exchange rates. Based on Swiss-U.S. data from the period 1973-79, the major findings are that following a monetary shock there is short-run exchange-rate overshooting by a factor of about two and that subsequent exchange-rate adjustments to a new long-run equilibrium take longer than 2 years and exhibit nonmonotonic patterns.

A price dispersion equation is tested with data from the German hyperinflation. The equation is derived from a version of Lucas's and Barro's partial information-localized market models. In this extension, different excess demand elasticities across commodities imply a testable dispersion equation, in which the explanatory variable is the magnitude of the unperceived money growth. In order to test this hypothesis a price dispersion series is constructed, and a measure of the unperceived part of money growth is estimated. The model receives support from the empirical analysis, although it is evident that unincluded variables have important effects on price dispersion.

There are two possible outcomes of transport regulation: (1) maintaining a carrier cartel and (2) imposing equalizing discrimination against advantaged and in favor of disadvantaged shippers. Both functions have required a complex rate structure to enforce the respective forms of price discrimination. Using a sample of freight bills from motor carriers and railroads, this paper demonstrates that the principal result of motor carrier regulation has been to maintain a cartel of truckers, while railroad regulation has thwarted the wishes of the railroad cartel by imposing equalizing discrimination on weak and strong shippers. Motor carrier rates respond in an economically rational manner to costs and shipper bargaining power; rail rates are either unresponsive or perversely responsive to the same factors. Deregulation should have divergent effects in the two industries.

This paper uses a formal model of search over multiattribute alternatives, analyzed in a product market setting, to investigate the theoretical foundations of the empirical literature on duration of search and turnover in product markets, labor markets, and marriage markets. A number of specific emirical predictions are also derived. In particular, whether "quality" is a "search" attribute or an "experience" attribute is related to the cost of search, the cost of inspection, the price of the good, and certain properties of the market distribution of price and quality.

We explore the conditions under which the welfare benefits of local public goods projects will be capitalized into land values. We find two types of sufficient conditions, one involving similar communities and the other involving differentiated communities. The form of capitalization differs between these cases, and we explore the nature of these differences. We also examine intermediate cases and identify models in which there will be no capitalization.

The conditions under which transactors can use the market (repeat-purchase) mechanism of contract enforcement are examined. Increased price is shown to be a means of assuring contractual performance. A necessary and sufficient condition for performance is the existence of price sufficiently above salvageable production costs so that the nonperforming firm loses a discounted steam of rents on future sales which is greater than the wealth increase from nonperformance. This will generally imply a market price greater than the perfectly competitive price and rationalize investments in firm-specific assets. Advertising investments thereby become a positive indicator of likely performance.

This paper formulates and estimates a structural intertemporal model of labor supply. Using theoretical characterizations derived from an economic model of lifetime behavior, a two-step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life-cycle wage growth and shifts in the lifetime wage path.