Knowledge that Transforms

Casual analysis of six high-inflation episodes indicates a strong positive relationship between movements in the relative price ratio, measured by (WPI/CPI), and the inflation rate. The authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances (fiscal, monetary, output, and exchange rate), identified using only long-run restrictions based on a general-equilibrium optimizing model. Analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces, although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries. Copyright 1993 by MIT Press.

This paper tests for the existence of expectational effects in very disaggregate price equations. Price equations are estimated using monthly data for each of 40 products. The dynamic specification of the equations is also tested, including whether the equations should be specified in level

Transactions (and precautionary) theories of money demand imply that the more unequal the distribution of income (or transactions), the lower the demand for money. This paper presents evidence that contradicts this implication of transactions theories of money demand. Using annual U.S. data, it is found that as income becomes more unequally distributed, the demand for money increases rather than decreases. The result is found to be robust to a variety of distribution measures and money-demand specifications. Copyright 1993 by MIT Press.

Several investigators have studied the role of import competition in explaining wage behavior, with apparently conflicting results: Some have found a significant effect of import competition on wages in manufacturing, while others have found no such effect in the aggregate. This paper highlights the role of the nontradable goods sector--not addressed in previous studies--to reconcile these results. The model demonstrates that a fall in the relative price of tradable goods has an ambiguous effect on aggregate real wages: while the lower price of tradable goods leads to lower labor demand in the tradable sector, it also leads to higher labor demand in the nontradable sector. Empirical results show considerable support for the model when tradable goods prices are measured by import or export prices, but not when they are measured by the real exchange rate. Copyright 1993 by MIT Press.

Choice of survey response format involves a tradeoff between information content and measurement error. Estimation precis ion is examined with (1) a Monte Carlo study where ordered logit fits of categorized data with no measurement error are compared with OLS fit s using the same data in continuous form but incorporating substantial measurement error; and (2) an OLS versus ordered logit comparison us ing actual data where 3, 800 Army officers stated their service intention s with both continuous and category format questions. In both investigations, continuous data do as well or better than category data. Suggesting that the widespread use of category data may be resulting in unnecessary loss of information. Copyright 1993 by MIT Press.

Bootstrap methods are investigated for approximating critical points to several widely used tests of serial correlation in regression models with lagged dependent variables. Simulation results suggest that the bootstrap accurately estimates the null distributions of the tests, in contrast to conventional approximations. Results of some studies on the size-adjusted power of the tests are also reported. Copyright 1993 by MIT Press.

A two-step procedure for estimating linear simultaneous structural equations with unit roots is presented. It generalizes the procedure of differencing for univariate time series via G. Box and J. M. Jenkins (1970). First, one finds the number of unit roots and the canonical variables that are stationary. Second, one retains only the stationary canonical variables and estimates a stationary model by standard methods. The procedure is easy to use. It is robus t against the difficult testing problem of finding the correct number of unit roots. A multiplier-accelerator model is estimated with interesting conclusions. Copyright 1993 by MIT Press.

James McIntosh, Fabio Schiantarelli, Jon Breslaw, William Low, Price and Output Adjustment in a Model with Inventories: Econometric Evidence from Categorical Survey Data, The Review of Economics and Statistics, Vol. 75, No. 4 (Nov., 1993), pp. 657-663

Recent research has suggested that employment programs for welfare recipients may be most effective if resources a re systematically targeted on those most likely to remain on public assistance a long time. Data from a series of random assignment fiel d experiments testing low- to moderate-cost welfare employment program s are utilized to examine targeting alternatives for adult Aid to Families with Dependent Children recipients. The empirical evidence does not provide unqualified supp ort for narrow targeting of either the least or most dependent welfare groups and suggests that a choice among strategies may depend on the relative weights policymakers place on reducing welfare versus increasing family income. Copyright 1993 by MIT Press.

John C. Beghin, C. A. Knox Lovell, Trade and Efficiency Effects of Domestic Content Protection: The Australian Tobacco and Cigarette Industries, The Review of Economics and Statistics, Vol. 75, No. 4 (Nov., 1993), pp. 623-631