This paper presents estimates of the distributional welfare impacts ofthe actual price rises of energy and nonenergy commodities during the1970-80 decade in the United States. Measures of welfare changes basedon net compensating variations are computed for families that differ with respect to demographic characteristics, initial total expenditurelevels, and total expenditure growth profiles over the decade. For comparison, measures of welfare change based solely on the changes inenergy prices are computed. The author shows that welfare differencesdue to initial expenditure levels or demographic profiles are minor incomparison to welfare differences due to different expenditure growthprofiles. Copyright 1986 by American Economic Association.
Economists generally test for the effect of interest rates on inventories by including some measure of the real interest rate in a standard flexible accelerator-buffer stock model. This paper presentsseveral reasons for concluding that this approach is incorrect and demonstrates how interest rate effects can be introduced into decisionrules derived under the assumption of optimizing behavior by firms. Decision rules for finished good inventories, output, and price are estimated using monthly observations on the food and kindred product industry. The results generally conform to the predictions of the theory. Copyright 1986 by American Economic Association.
The oil-price shocks of 1973-74 and 1979-80 reduced output growth in oil-importing countries. Using monetary policy to accommodate exogenous shocks of this kind undoubtedly works. But the more such monetary policy is used, the less effective it becomes. And discretionary monetary policy has a negative effect on economic growth in the long run. This is how we interpret the econometric results reported below. We find that money is neutral neither in the medium term nor in the long run. The effects of current and lagged money growth shocks on output growth are significantly positive. Over time, however, discretionary monetary policy creates a higher variance of money growth shocks. The period-average variance of money growth shocks together with our indicator of an accommodative monetary policy regime are both negatively related to the rate of growth in real gross domestic product (GDP). Higher variance of money growth shocks reduces both the medium-term impact of discretionary monetary policy on output growth and output growth itself in the long run (see Robert Lucas, 1973, and Roger Kormendi and Philip Meguire, 1984, 1985). The only way of testing both the mediumand long-run effects of discretionary monetary policy is by pooling time-series data across countries; we use 647 observations for 55 developed and developing countries. We believe this to be the first appropriate test. Monetary accommodation of exogenous shocks, specifically accommodation of the 1973-74 oil-price increase, works temporarily to offset the output growth-reducing impact of the shock. However, accommodation adds noise to the economic environment and reduces output growth in the longer run. Indeed, we find that our monetary accommodation variable performs in virtually the same way as the variance of money growth shocks. Expansionary fiscal policy has mediumand long-run effects on output growth that are similar to monetary accommodation. Specifically, expansionary fiscal policy raises the ratio of net government credit to total domestic credit in countries lacking well-developed direct financial markets. In the medium term, a positive government credit shock raises output growth by stimulating aggregate demand. But a higher government credit ratio lowers output growth in the long run by starving the private sector of finance for productive investment.
The late 1970's and early 1980's proved to be extremely trying economic times for the developing countries. Throughout most of the period, a combination of exogenous shocks, such as worsening terms of trade, falling growth rates in industrial countries, and sharp changes in the cost and availability of foreign financing, created serious macroeconomic management problems for policymakers in these countries. Adjustment to these shocks required fiscal and monetary restraint to control both public and private spending, and the adoption of a flexible exchange rate policy to prevent the emergence of unsustainable current account deficits, growing foreign debt burdens, and steady losses of international competitiveness. With certain exceptions, developing countries generally did not follow this policy prescription, and consequently compounded the negative effects of the exogenous shocks. The purpose of this paper is to evaluate the exchange rate responses of developing countries to the variety of exogenous shocks they faced in recent years. Essentially this involves an analysis of the behavior of the real exchange rate. Exchange rate policy responses have to be judged in terms of how the authorities used combinations of nominal exchange rate action and other policies to restrain domestic prices and factors to either support or offset the movements in the real exchange rate caused by external shocks. In this paper I discuss first the principal external shocks that occurred during the past decade, and then the likely effects of these on the real exchange rate. The picture is completed by a description of how real exchange rates actually evolved in developing countries during the period under consideration.
Recently several economists (Richard Thaler, 1980; Jack Knetsch and J. A. Sinden, 1984), following suggestions of psychologists (Daniel Kahneman and Amos Tversky, 1979), have argued that current economic models of consumer behavior fail to explain observed asymmetries in how individuals respond to gain vs. losses in perceived entitlements. Attention to their arguments is increasing because they relate to many current policy issues-especially those associated with undesirable land uses. Most of the papers suggesting this limitation with the conventional economic framework have been motivated by the large differences between the estimates of willingness to pay vs. willingness to accept as measures of the change in individual well-being that would result from a change in the conditions of access to (or the quality of) a commodity.' In this paper we report the first evidence of a sizable property rights effect using only willingness-to-pay measures. This change is potentially important because both the recent appraisal of contingent valuation surveys (see Ronald Cummings et al.. 1986), an important source of the available empirical evidence, and laboratory experiments suggest that individuals may have difficulty in dealing with the concept of compensation. This is especially true when there is no opportunity for individuals to learn about transactions that involve compensation through experience. Based on a contingent valuation survey of households in suburban Boston, we found that respondents bid significantly more to reduce risk than they indicated they were willing to pay to avoid an equivalent risk increase. While our findings support suggestions that changes in the implied entitlements (to safety) can lead to large differences in welfare measures for risk changes, several of these earlier arguments would have implied that individuals were willing to pay more to avoid a risk increase-the opposite to our results. Thus, these differences imply that the determinants of individuals' valuations for risk changes are more complex than past studies have acknowledged.