Knowledge that Transforms

How important is monopolistic competition to an understanding of the effects of aggregate demand on output? The authors ask this question at three levels. Can monopolistic competition, by itself, explain why aggregate demand affects output? Can it, together with other imperfections, generate effects of aggregate demand in a way that perfect competition cannot? If so, can it give an accurate account of the res ponse of the economy to aggregate demand movements? The answers are no, yes, and yes.

Current 1 -year forward rates on 1 - to 5-year U.S. Treasury bonds are information about the current term structure of 1-year expected returns on the bonds, and forward rates track variation through time in 1-year expected returns. More interesting, 1 -year forward rates forecast changes in the 1 -year interest rate 2- to l-years ahead, and forecast power increases with the forecast horizon. We attribute this forecast power to a mean-reverting tendency in the 1-year interest rate

[This paper compares outcomes of alternative allocation systems (queues, convertible and nonconvertible rations, and unhindered market) to distribute limited quantity of a deficit good among heterogeneous individuals. It is shown that, for the poor, the ranking of systems (from better to worse) is convertible rations, nonconvertible rations, queues, and nonintervention. The rich are better off under nonintervention than under other systems. These and other positive results are robust to certain types of commodity taxes and administrative costs.]

[This paper develops a rigorous partial-equilibrium analysis of the determinants of the marginal welfare cost (MWC) of taxes on labor earnings. It shows that four key parameters interact to determine the magnitude of MWC. Using aggregate data and plausible ranges of values for the parameters, MWC can vary from under 10 percent to more than 300 percent of marginal tax revenue, suggesting that, given available evidence, we cannot estimate MWC with much precision.]