Knowledge that Transforms

In the past two decades, considerable progress has been made in studying the economic relationships between countries through the linkage of large-scale national econometric models. Examples of these projects include Project Link, the RDX2-MPS experiments of the Bank of Canada, and the multicountry model of the Federal Reserve Board. While these models tell us much, they typically suffer from several important problems. First, the linkages are often incomplete. In some cases the separate country models may only be linked via the trade accounts. Or, if capital and factor flows are considered, they are modeled in only a highly aggregated fashion. Second, as Ray Fair (1979) has noted, no model does an adequate job of linking the underlying sectoral flows of funds accounts with the national income accounts. Therefore, in the interest of modeling aggregate relationships, underlying balance sheet constraints may be violated or ignored. This could have, Fair argues, important consequences for empirical results.' In this paper we suggest our own strategy for modeling the economic linkages between any two countries. Our strategy focuses on the underlying flows between these two countries and the sectoral contributions to these flows. That is, we propose to merge the flow of funds accounts via their bilateral balance of payments. We envision an integrated flow of funds accounting framework with the two countries sharing a common balance of payments. This modeling strategy has several advantages. First, our suggested framework could be used, following the strategy of Fair, to supply the financial underpinning for future economic modeling of international linkages of prices and interest rates. The balance sheet constraints inherent in the framework will impart additional information in any statistical estimation of such a model. Second, this strategy should yield a better understanding of a country's balance of payments since it necessarily links domestic decision making with its international outcome. Third, our framework should be useful to policymakers since it would allow them to model the underlying financial implications of proposed policy changes. Finally, the implementation of our proposal could lead to improved accuracy in balance of payments statements. tDiscLussant: John A. Sawyer, University of Toronto.

We explore the implications of contract theory with regard to the effectiveness of aggregate economic policy. More specifically, we consider the relationship between contractually induced price rigidities and monetary policy. In examining this relationship, we restrict ourselves to market-clearing equilibrium models. In particular, we do not consider disequilibrium type models such as those of Robert Barro and Herschel Grossman (1976). Since Keynes' The General Theory, economists have blamed unemployment and economic fluctuations on sticky nominal wages. Until recently, however, there were no plausible explanations of this rigidity. About ten years ago, several scholars independently advanced the hypothesis that real wage stickiness might in fact be the result of contractual arrangements. This general idea (in the form of nominal wage stickiness) was subsequently applied to show that monetary policy affects real output by inducing additional flexibility in the real wage and can therefore be used to stabilize output fluctuations. While these arguments are based on explicit (rational expectations) macroeconomic models, no comparably articulated model of contracts is provided to account for the nominal wage stickiness. Our purpose here is to examine these arguments critically from the perspective of an explicit contractual model which

This paper applies the theory of social preference to interpret the results of opinion polls that included questions on the equality of access to housing, otherwise known as fair housing. Using social preference theory, a set that is decisive on the issue of fair housing for the years of the civil rights movement -designated as 1954 through 1968-and for the years since then is defined. Results of opinion polls with responses from whites to pro-integrative residential moves by blacks are used to estimate simple linear regression equations. These equations are, in turn, used to project the date when 90 percent of the set that is decisive on fair housing would favor these pro-integrative moves.

Barbara Katz and Machiko Nissanke have presented two comments that are critical of my application of the Barro-Grossman disequilibrium model to the Soviet Union. In the empirical work reported in my 1976 article, I found that the disequilibrium model performed well in that the Soviet data were consistent with the model's predictions. In the present paper, I will not only reply to the criticisms in the Katz and Nissanke papers, but will also report some additional results.

In a paper recently published in this Review, James Bennett and Thomas DiLorenzo (hereafter, B-D) estimate a model designed to test the hypothesis that conservatives, ceteris paribus, do in fact return a larger proportion of their staff allocations unspent than liberals (1982, p. 1160). While they make no claim to be modeling efficient management behavior, they are sufficiently confident in their ability to for what might be variously labeled as state effects, job effects, and political effects, to conclude that who are conservative in making collective decisions are also fiscally conservative in spending public funds under their direct control (p. 1160). Their regressions indicate that several such factors are significantly related to the percentage of staff funds returned by each senator and hence may influence the estimated relationship between measures of political and fiscal conservatism. However, B-D do not effectively for these variables. In this comment we suggest a natural alternative specification of their model which automatically controls for all state effects. If the B-D model were correct, our specification would produce parameter estimates statistically indistinguishable from those obtained by B-D. However, we find that this is not the case and, in particular, under our specification, the relationship between political and fiscal conservatism disappears. To measure senatorial frugality, B-D suggest using the treatment of clerk-hire budgets by the senators of the 95th Congress. These budgets, allocated to staff each senator's offices on the basis of state population, cannot be carried over from one fiscal year to the next. Any money not spent must therefore be returned to the Treasury. Some politically conservative senators have publicized the fact that they return a relatively large percentage of their clerk-hire allowance. While making no judgment on the prudence of such behavior, B-D correctly note that other factors may influence the percentage of the budget which a senator may return. In particular, they suggest variables which may influence the cost of staffing an office, including 1) the number of committees on which the senator serves, 2) the number of chairmanships held by the senator; 3) the number of years that the senator has held office; 4) whether or not the senator is up for reelection; and 5) a large number of variables describing the state which the senator represents (for example, area of state, per capita income, number of families, etc.) In spite of the fact that B-D tried unsuccessfully to include a number of additional state-related effects, it appears that they failed to take into account other such variables which may, in fact, confound the estimated relationship. A noteworthy example, which might be termed an allocation effect, may be seen by examining the clerk-hire allocation schedule (see B-D, Table 1, p. 1153). This schedule reveals that the state per capita senatorial staff allowance falls as state population increases. Although the costs of staffing an office undoubtedly depend, ceteris paribus, upon the ize of the state population served,' it seems likely that allocation errors which vary with state population may exist. Depending upon the relationship between such errors and state population on the one hand, and political conservatism on the other, it is possible to obtain a spurious relationship between fiscal and political conservatism when state effects are not fully taken into account. *Economists, Bureau of Labor Statistics, 600 E Street, NW, Washington, D.C. 20212, and Department of the Treasury, 15th & Pennsylvania Avenue, NW, Washington, D.C. 20220, respectively. We thank Robert Giflingham, John Greenlees, and Edward Murphy for their suggestions. The views expressed are our own and do not represent those of the BLS, the Treasury Department, or other members of their staffs. 'For example, a linear regression of staff expenditures upon state population levels explains 68 percent of the variation in the dependent variable.