Depending on ethical beliefs, different decisions emerge for resolving the carbon dioxide (CO/sup 2/) issue. It is doubtful that an international consensus can be reached on a correct ethical criterion. Perhaps the best strategy would be to delay acceptance of either a particular set of beliefs or the existing scientific evidence and wait for more-accurate and conclusive research to emerge. If the scientific evidence is accepted as valid, and all future generations that will exist are evaluated equally, then the optimal current regulatory strategy is to restrict, as much as possible, current emissions of CO/sup 2/. 17 references, 2 figure, 1 table.

Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting By MARTIN D . D . EVANS AND RICHARD K . LYONS* This paper compares the true, ex ante fore- casting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer-horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to over- lap). Over our three-year forecasting sample, we find that the micro-based model consistently outperforms both the random walk and the macro model. Micro-based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes. These results pro- vide a level of empirical validation as yet unat- tained by other models. The forecasting experiment proposed by Richard Meese and Kenneth Rogoff (1983) re- mains a benchmark against which exchange- rate models are judged. Their result that structural macro models cannot outperform a naive random walk has proved robust over the decades. Yet, the Meese-Rogoff paper was never about forecasting in the true sense (i.e., using tirrie-f information to forecast exchange rates at t + 1). B y using concurrent, realized values of the forcing variables, their regressions were more about concurrent explanation than about ex ante forecasting. Their only forecast- ing element is in their reliance on ex ante data to estimate equation parameters, which appro- priately penalized models whose estimated pa- rameters were unstable. tion for the random-walk nature of exchange rates is that there exists some unobserved fun- damental that itself follows a random walk (un- observed being important because fundamentals proposed in most macro models do not follow random walks). They offer a different explana- tion, one rooted in the asset approach to ex- change rates and the present-value relation that follows from it. Specifically, they show that i f fundamentals are 1(1), but not necessarily ran- dom walks, then as the discount factor in the present-value relation approaches 1, the ex- change rate will follow a process arbitrarily close to a random walk. Intuitively, given that an 1(1) process can be split into random-walk and stationary components, a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future, ex- pectations of which are dominated by the random- walk component. Charles Engel and Kenneth West (2004, 2005) provide a valuable perspective on the forecastability of exchange rates. One explana- This paper takes the analysis of Engel and West as an important reorientation of thinking and brings it to the natural next step. Specifi- cally, if there is little room for forecasting based on stationary components of fundamentals, then one needs to focus on where all the action is, namely, exchange-rate dynamics that come from expectational surprises. Though the sur- prise part is, by definition, orthogonal to public information, our micro-based model shows that there should exist types of nonpublic infor- mation that are useful for forecasting this part, and where to look for these types of informa- tion. We then locate data on these types of nonpublic information and test whether they have true, ex ante forecasting power. We should * Evans: Department of Economics, Georgetown Uni- versity, Washington, DC 20057, and NBER; Lyons: Haas School of Business, University of California, Berkeley, C A 94720-1900, and NBER. We are grateful to Ken West for his comments and to the National Science Foundation for financial support. We refrain from using the word news because it has too strong an association with macro information that is public, which, even in the most careful of event studies, explains less than 5 percent of exchange-rate variation in total (see Torben Andersen et al., 2003).

School policies that cause a large demand shift between public and private schooling may cause some private schools to enter or exit the market. We study how the policy effects differ under a fixed versus changing market structure in the context of a public school funding reform in New York City. We find evidence of a reduction in private schools in response to the reform. Using a model of demand for and supply of private schooling, we estimate that 20 percent of the reform’s effect on school enrollments came from increased private school exit and reduced private school entry.

The comments of Firouz Gahvari and of Cecil Bohanon and T. Norman Van Cott provide useful extensions of our earlier analysis. Nonetheless, our central point remains intact: the traditional labor-leisure analysis is invalid because it ignores the effects of changes in government spending on individual welfare. Gahvari points out that, in the case of public goods, the linkage between changes in tax rates and labor supply is more complex than we implied. Individuals, unable in the large number case to transform leisure into public goods, will be affected differently when the government provides a public good rather than an transfer. In Gahvari's world, where government goods are irrelevant to all private decisions (complete separability in the utility functions and no ability to purchase public goods privately), the quantity of government goods can be safely ignored in the analysis of private decisions. The decision proceeds as it would if tax revenues were totally wasted, even though the citizens' total utility is assumed constant when tax revenues change, with changes in government goods exactly offsetting the utility impacts of the change in private goods. However, we think it is misleading to label the ambiguously signed element beyond the substitution as an effect. How can there be an income effect when total utility remains constant? As the quotes cited by Gahvari from our initial paper (p. 447) illustrate, this is not the envisioned by the traditional work-leisure analysis, which refers to a change in of (utility) and reflects the notion that a tax cut will encourage individuals to work less (consume more leisure) by giving them a higher standard of living through more after-tax pay.' Implicitly, this view ignores the negative impact on living standards associated with the reduction in the supply of government provided goods (or transfers). Gahvari recognizes that when government goods replace private goods such as public education, medical services, food stamps, or cash (and ignoring any cross elasticities), our original analysis stands and there is only the substitution effect. Bohanon and Van Cott make another refinement, pointing out some secondary effects of government's tax-transfer activity. While changes in tax rates and in government-provided goods will influence the individual's budget constraint, or ability to trade off among goods, a complete analysis must also account for the fact that any such shift will move the individual into a new region of his indifference surface. His willingness to trade off among the goods may well change. The individual's view of the substitutability or complementarity among government-provided goods, private goods, and leisure becomes relevant. If the government good is strongly enough complementary to leisure and/or substitutable for private goods, the standard substitution could indeed be overcome. Returning to our original paper, we reiterate its central point. The income effect component of traditional work-leisure analysis for an individual ignores the individual's utility derived (foregone) from increased (decreased) government spending accompanying changes in revenues. To treat that indi-