Knowledge that Transforms

Improved information allows home firms to rule out more potential foreign trade partners in advance of attempting to form a match. The increased responsiveness to country wage or goods price differentials resulting from this better first cut causes the general-equilibrium elasticity of substitution between national labor forces or the Armington elasticity of substitution between domestic and imported output to increase. Further results include an increase in the elasticity of domestic labor demand, an increase in the extent to which reductions in conventional trade barriers equalize national wages, and reduced “natural protection” for domestic producers.

The following sections are included:The ModelAn Example with a Continuum of StrategiesAn Example with Finitely Many StrategiesDiscussionAppendixReferences

This paper presents a model of rational Bayesian agents with speculative attacks in a regime of exchange rate which is pegged within a band. Speculators learn from the observation of the exchange rate within the band whether their mass is sufficiently large for a successful attack. Multiple periods are necessary for the existence of speculative attacks. Various defense policies are analyzed. A trading policy by the central bank may defend the peg if it is unobserved and diminishes the market's information for the coordination of speculators.

In a standard New Keynesian model, a myopic central bank concerned with stabilizing inflation and changes in the output gap will implement a policy under discretion that replicates the optimal, timeless perspective, precommitment policy. By stabilizing output gap changes, the central bank imparts inertia into output and inflation that is absent under pure discretion. Even a fully optimizing (i.e., non-myopic) central bank operating in a discretionary policy environment achieves better social outcomes if it focuses on inflation and changes in the output gap than are achieved under inflation targeting.(This abstract was borrowed from another version of this item.)

During the 1990’s the Earned Income Tax Credit (EITC) emerged as a primary means of providing income support for low-income families in the United States. In an effort to keep the program well targeted, the credit largely restricts eligibility to tax filers with children. One potentially unintended consequence of this design is that it might encourage childbearing. We raise the question of whether the EITC, through its generous benefits to families with children, actually increases fertility. We approach this topic for three reasons. The first is to expand upon an existing literature of economic incentives and fertility using the EITC expansion as a large exogenous variation in the price of childbearing. Findings in the welfare literature are inconclusive (Robert A. Moffitt, 1998), and the income tax literature typically finds small, but statistically significant effects of the income-tax system on fertility behavior (e.g., Leslie A. Whittington et al., 1990). Second, declining fertility rates in many Western counties raise the general issue of whether the tax system can be used as a tool for encouraging fertility. Finally, by considering the link between the EITC and fertility, we question a common, yet untested, assumption in the literature on the EITC and the labor supply of single parents: that the presence of a child is exogenous to the value of the EITC.

Exchange-Rate Regimes and International Trade: Evidence from the Classical Gold Standard Era by J. Ernesto López-Córdova and Christopher M. Meissner. Published in volume 93, issue 1, pages 344-353 of American Economic Review, March 2003

Willingness To Pay and Willingness To Accept: How Much Can They Differ? Comment by Edoh Y. Amiran and Daniel A. Hagen. Published in volume 93, issue 1, pages 458-463 of American Economic Review, March 2003

The purpose of this note is to look at the rationale behind popular advice on portfolio allocation among cash, bonds, and stocks. We argue that the typical investment advice is not inconsistent with the behavior of risk-averse expected-utility maximizers. We propose an additional solution to the asset allocation puzzle posed by Niko Canner et al. (1997), who argue that popular advice contradicts financial theory because it is inconsistent with the capital asset pricing model (CAPM) mutual-fund separation theorem. The CAPM asserts that investors should hold the same selection of risky assets, while popular advice is that investors should hold a proportion of bonds to stocks that increases with risk aversion. Using mean-variance (MV) analysis and the CAPM, Canner et al. show that recommended portfolios are far from optimal and that losses from the apparent failure of optimization are not substantial. However, they failed to explain the popular advice within an economic model. We offer a rational model based on stochastic dominance to demonstrate that all popular financial advice portfolios belong to the efficient set for all risk-averse investors. Using the historical annual real returns on bonds and stocks in Canner et al., we cannot ascertain that investment advisors indeed offer bad advice. Rather, we maintain that acting as agents for numerous clients, advisors recommend portfolios that are not inefficient for all risk-averse investors. I. Overview

Studying the implications of uncoordinated borrowing, the paper first looks at whether and when countries borrow too much in the aggregate. It then revisits the “original sin” debate, analyzing whether and when equity portfolio investment, international portfolio diversification, domestic currency denomination and longer maturities enhance borrowing countries’ access to international lending. The paper thereby relates a country’s level and quality of access to international capital markets to a variety of institutional features such as the level of domestic savings, their location, the extent of control rights held by political authorities, and the interests of dominant domestic political forces.

Organizational Design and Technology Choice under Intrafirm Bargaining: Comment by Catherine C. de Fontenay and Joshua S. Gans. Published in volume 93, issue 1, pages 448-455 of American Economic Review, March 2003