Knowledge that Transforms

The U.S. and U.K. Great Depressions Through the Lens of Neoclassical Growth Theory by Harold L. Cole and Lee E. Ohanian. Published in volume 92, issue 2, pages 28-32 of American Economic Review, May 2002

This paper offers new evidence on the sources of cross-country income differences. It exploits the idea that observing immigrant workers from different countries in the same labor market provides an opportunity to estimate their human-capital endowments. These estimates suggest that human and physical capital account for only a fraction of cross-country income differences. For countries below 40 percent of U.S. output per worker, less than half of the output gap relative to the United States is attributed to human and physical capital.

Studies of the motherhood wage penalty typically focus on the “pure” effect of children, holding all else equal. But as all parents know, the arrival of a child means that nothing stays the same. One change especially salient to labor economists is that many mothers exit the work force. Absences from the labor market are likely to reduce wages because general and firmspecific skills depreciate and workers lose rents associated with good job matches. Low-skilled workers may be less vulnerable to such earnings erosion, since they have less human capital and their wages reflect less rent. If so, these workers may escape a motherhood wage penalty. Conversely, we would expect highly skilled women to experience the largest penalties for exiting the labor force to care for their children.

Savings and Portfolio Choice in a Two-Period Two-Asset Model by Saku Aura, Peter Diamond and John Geanakoplos. Published in volume 92, issue 4, pages 1185-1191 of American Economic Review, September 2002

The well-known positive association between health and income in adulthood has antecedents in childhood. Not only is children’s health positively related to household income, but the relationship between household income and children's health becomes more pronounced as children age. Part of the relationship can be explained by the arrival and impact of chronic conditions. Children from lower income households with chronic conditions have worse health than do those from higher-income households. The adverse health effects of lower income accumulate over children’s lives. Part of the intergenerational transmission of socioeconomic status may work through the impact of parents' income on children’s health.

We develop a dynamic model with knowledge spillovers in production. The model contains two opposing forces. Imitation of other firms helps followers catch up with leaders, but the prospect of doing so makes followers want to free ride. The second force dominates and creates permanent inequality. We show that the greater are the average spillovers and the easier they are to obtain, the greater is the free-riding and inequality. More directed copying raises inequality by raising the free-riding advantages of hanging back. Using Compustat and patent-citation data we find that copying is highly undirected.

We measure monetary policy shocks as changes in the Fed funds target rate that surprise bond markets in daily data. These shock series avoid the omitted variable, time-varying parameter, and orthogonalization problem of monthly VARs, and do not impose the expectations hypothesis. We find surprisingly large and persistent responses of bond yields to these shocks. 10 year rates rise as much as 8/10 of a percent to a one percent target shock. The usual view that monetary policy only temporarily raises long term rates and influences inflation would lead one to predict a negative long rate response.

Although theory on corruption is well developed, it has proven difficult to isolate corrupt behavior empirically. In this paper, we provide overwhelming statistical evidence documenting match rigging in Japanese sumo wrestling. A non-linearity in the incentive structure of promotion leads to gains from trade between wrestlers on the margin for achieving a winning record and their opponents. We show that wrestlers win a disproportionate share of the matches when they are on the margin. Collusion, rather than increased effort, appears to explain the results. Wrestlers who are victorious when needing a victory lose more often than would be expected the next time they meet that same opponent, suggesting that part of the payment for throwing a match is future payment in kind. Cheating disappears in times of high media scrutiny. In addition to collusion by individual wrestlers, there is also evidence of reciprocity agreements across stables of wrestlers, suggesting a centralized element to the match rigging.

Within a simple New Keynesian model emphasizing forward-looking behavior of private agents, I evaluate optimal nominal income growth targeting versus optimal inflation targeting. When the economy is mainly subject to shocks that do not involve monetary policy trade-offs for society, inflation targeting is preferable. Otherwise, nominal income growth targeting may be superior because it induces inertial policy making, which improves the inflation–output-gap trade-off. Somewhat paradoxically, inflation targeting may be relatively less favorable the more society dislikes inflation, and the more persistent are the effects of inflation-generating shocks.