An investment model is suggested as an improvement over intuition in setting government policies aimed at providing an optimal social infrastructure for boom towns. Using the decision environment and economic characteristics of a Rocky Mountain state boom town, the model shows that low interest rates and early front-end investment produce the greatest stability, while delayed investment contributes to instability. Policy implications derive from the fact that ad valorem property taxes for investment are generally collectible only after construction is completed. Of equal importance to the timing and amount of investment funds is the source of repayment funds. These could be broadened to include wage or use taxes during the construction period.
I enjoyed the story of the plumbing fixtures cartel being drained of its assets. But if I need a plumber's friend, David Mills and Kenneth Elzinga have failed me. With the possible exception of their second paragraph,' nothing in their comment convinces me to eliminate the offending material. I will try to explain why in paragraphs 1) and 2) below. Then I will comment briefly on the antitrust implications in paragraph 3). 1) Mills and Elzinga maintain that my resolution of the deterrence problem is either ineffectual or unnecessary. It is ineffectual in the absence of detection and unnecessary in its presence. They are right about the first. No deterrence is possible without detection. But who would think otherwise, or that I had claimed otherwise? As for the second, they appear to believe that deterrence follows immediately from detection. This belief is obviously mistaken-as our crowded jails prove. More direct proof is furnished by the experience of the International Air Transport Association (IA TA). For detection, this cartel depends on our Civil Aeronautics Board and Department of Justice and its own compliance department (consisting of some fifty investigators) to inspect tickets, receipts, and accounting records at offices of the 'members and their approved travel agents (see IATA Review). For deterrence, it relies on the fines determined by due process before its Breaches Commission or the federal courts. In 1974, the Breaches Commission levied fines of $1.9 million (see Aviation Week); in fiscal 1975, the Civil Aeronautics Board obtained judgments totaling $556,594 (see its Reports to Congress); in September of 1975 the Justice Department obtained fines totaling $655,000 (see Aviation Week). These fines measure IA TA's success at detection and its failure at deterrence. In the same way that lax enforcement of the criminal laws leads to jails full of prisoners, inadequate punishment of cartel breaches increases their expected payoff and stimulates both the breaches and the fines in which they result. The IA TA's penalties have been too small or too uncertain to be regarded as anything more than a normal cost of doing business. Deterrence does not follow from detection.2 2) Mills and Elzinga object to the minimum-variance criterion for choosing among several joint maximizing points. I will be glad to consider an alternative if Mills and Elzinga will offer one. Instead of suggesting a definite alternative or, even better, the principles which govern its choice, they declare in effect that it could be anything.3 If focal points really do depend on analogy, accident, casuistry, and the other things in the list quoted from Thomas Schelling, they are analytically useless: being consistent with everything they explain nothing. 3) Mills' and Elzinga's remarks about antitrust implications disquiet me. They themselves do not recommend that we go about prosecuting oligopolists for having stable market shares, but their remarks alert me to the danger that my analysis will *Federal Reserve Bank of Dallas. IThere they object to my mild chastisement of standard theory for its fascination with the prisoners' dilemma. But since they advance the objection in an incidental manner I will disregard it, pointing out, however, that standard theory consists of the unwritten as well as the written word. For a more detailed criticism of the prisoners' dilemma as a model of oligopoly, see my (1976) paper. 2For more on these problems, see my (l977a,b) papers. 3Concerning the two examples they give (the gasoline marketers and the firms separated by the MasonDixon line), it is impossible to say whether the assumed arrangements indicate the unique joint maximum or a choice from among many.
In a rapidly inflating domestic economy, explanation of the inflationary process must of necessity focus on the determinants of the money supply. By analogy, in a closely integrated economy under fixed exchange rates the behavior of the sum of individual countries' money stocks-the ,world money should play an important role in determining the behavior of the world price (an index of national price levels). This is recognized in analytical models of the international monetarist variety where, under the assumption that all goods are traded (or more generally that relative prices are not affected in the long run by monetary disturbances), the price level adjusts to equate the demand for money with the supply. Strictly fixed exchange rates imply that national money stocks can be treated as components of a Hicksian composite commodity, the money stock, since exchange-stabilization operations prevent variations in the relative values of national currencies. Closely integrated capital markets insure that the money stock is redistributed rapidly from country to country in response to payments disequilibria of monetary origin, thus ensuring a tendency towards rapid return to balance-of-payments equilibrium (which can, of course be frustrated by systematic attempts at neutralization of reserve flows). Closely integrated goods markets insure that the price levels of various countries move in harmony abstracting of course, from divergent trends in productivity and/or tastes that may cause changes in relative prices, including both the terms of trade and the ratio of the price of nontraded to traded goods. In such a world, one can view the stock of money as determining the price of a composite commodity, the components of which are national output levels. Though far too simple for many purposes, this Humean or Ricardian view of the economy is instructive in periods dominated by disturbances of monetary origin. For this type of analysis to be complete, however, the question of what determines the supply of money in the must be answered. This paper seeks to answer this question within the confines of a conceptually (though not necessarily algebraically) very simple model. The is assumed to be divided into two parts, Europe and the United States. money stocks consist of commercial bank liabilities only, and the money stock is defined as the sum of the money balances held by the public of each country.' Various institutional arrangements are considered, including a gold standard, a dollar standard, and the Euro-dollar system. The model provides a first answer to such questions as: does it make any difference to inflation whether monetary expansion originates in one region or the other; what asymmetries does a dollar standard introduce into the international monetary system; what determines the size of the Euro-dollar market and in what sense, if any, is its growth inflationary? Two key assumptions are used to answer these questions, namely, 1) that reserve * Professor of international economics, Graduate Institute of International Studies, Geneva, and visiting professor of economics, Harvard University. The original version of this paper was prepared for the Money Study Group's Oxford Seminar in honor of James Meade, September 25-27, 1974. It includes material developed in connection with a research project on National Economic Policy and the International Monetary System at the Graduate Institute of International Studies under a grant from the Ford Foundation. ITo sum national money stocks, they must of course be expressed in terms of the same currency, existing fixed exchange rates providing the required conversion factor.
The aim of this study is to contribute to the measurement and analysis of errors in economists' predictions of changes in aggregate income, output, and the price level. Small sample studies of forecasts can be instructive, but their limitations must be recognized. Compilation of consistent forecast records extending over longer periods of tine is necessary to establish a reasonably reliable base for assessments of forecasting behavior and. performance. Thus the historical record of post-World War II forecasts assembled in the 1960's by the NBER is here extended and updated.
While most people would agree that familial responsibilities affect women's labor market behavior and wages, surprisingly little is known about how this process operates. Past investigations of women's wages have generally relied on data sets designed for other purposes, and, as a result, theoretically important determinants of women's wages may be measured imprecisely or omitted entirely from analyses. Familial responsibilities influence women's labor market behavior in at least two distinct ways. First, many women will withdraw entirely from labor market activities to bear and/or raise children. Not only does this reduce the total amounts of work experience and job tenure women acquire, but Jacob Mincer and Solomon Polachek further argue that women's human capital (work skills) will depreciate during such withdrawals and that such withdrawals will affect the timing of women's investments in on-the-job training. Second, women who choose to work may adjust their labor market activities to meet family responsibilities in ways which reduce productivity and hence wages. For instance, women with home responsibilities might restrict job locations or schedules, or might take off extra time from work to care for sick children. The 1976 Panel Study of Income Dynamics (PSID) is well suited for exploring female wages. The PSID is a longitudinal study of 5,000 families which began in 1968. In 1976, male heads of household, female heads of household, and wives were asked to provide detailed information on earnings, education, work history, absenteeism, and self-imposed restrictions on job hours and job location. These data are used to describe women's patterns of work history and labor force attachment, to specify the determinants of women's wages, and to investigate the wage gaps between white men and each group of women.
In an article in this Review, Christopher Sims presented an innovative statistical technique to determine the direction of causality, then applied this methodology to money and nominal income in the United States. He concluded: main empirical finding is that the hypothesis that causality is unidirectional from money to income agrees with the postwar U.S. data, whereas the hypothesis that causality is unidirectional from income to money is rejected (p. 540). In a more recent paper in this Review, David Williams, C. A. E. Goodhart, and D. H. Gowland applied Sims' statistical methodology to the United Kingdom and concluded: found for the U.K. some evidence of unidirectional causality running from nominal incomes to money but also some evidence of unidirectional causality running from money to prices. Taken together, this evidence suggests, perhaps, a more complicated causal relationship between money and incomes in which both are determined simultaneously (p. 423). Furthermore, Williams, Goodhart, and Gowland suggest some general possibilities for the differences between the United States and the United Kingdom, and they are careful to note that: Because of the various differences in context the finding that in the United Kingdom the relationship between money and income appears different from that found by Sims for the United States in no way casts any doubt on the validity of Sims' own (p. 417). The purpose of this paper is to present a concise model which draws together the findings of Sims for the United States and Williams, Goodhart, and Gowland for the United Kingdom. To accomplish this, a fixed exchange rate system is modeled in which one country, the United States, serves as the primary reserve currency country, while other countries, the United Kingdom in this case, hold a substantial portion of their international reserves denominated in terms of the reserve currency.' Particular attention is paid to the asymmetrical nature of the system with respect to money's influence on nominal income and vice versa. Indeed, the ability of the reserve currency country to create international reserve assets plays the primary role in explaining the asymmetrical nature of the system and the empirical results of Sims, and Williams, Goodhart, and Gowland. The model is couched in a world in which asset reallocations are viewed as adjustments toward maintaining general equilibrium. This equilibrium is based on a stable set of preferences regarding the structure of individual portfolios, broadly defined in terms of holdings of real consumption goods, real interest bearing financial assets, real money balances, and leisure time. The assumption of equilibrium conditions in all markets allows attention to focus directly on the money market to isolate the process of portfolio adjustment in international markets. As in similar models based on the monetary approach to *Economists, Chase Manhattan Bank, N.A. The views expressed in this paper are solely our own and do not necessarily represent those of the Chase Manhattan Bank. We wish to thank David T. King, the managing editor of this Review, J. Richard Zecher, J. E. Tanner, Walton T. Wilford, C. A. E. Goodhart, and Marc A. Miles for their comments on earlier drafts. 1One may note that for the Commonwealth countries the British pound acted as a reserve currency. However, the pound's relative world influence vis-avis the U.S. dollar was small during the Bretton Woods period.