Knowledge that Transforms

This article provides quantitative estimates from an econometric model of the output, price, interest rate, and exchange rate linkages among a number of countries. The linkages are examined by changing various policy variables and observing the resulting changes in the endogenous variable. The model is also used to estimate what is called the "exchanging rate effect" on inflation. One of the ways in which monetary and fiscal policies may affect a country's inflation rate is by first influencing its exchange rate, which in turn influences import prices, which in turn influence domestic prices. The model allows this exchange rate effect on inflation to be estimated.

In 1873 there appeared in Danish an essay by two Danish mathematicians, Frederik Bing and Julius Petersen. This essay has received almost no attention, yet it appears on close inspection to be a strikingly original and path-breaking contribution to neoclassical distribution theory. A detailed exposition of the authors' theory and some of their applications is presented in the light of an interpretive model expressed in modern terms. A concluding section gives some information about the authors and attempts to assess their contribution and its claims to a significant place in the history of economic analysis.

A simple stochastic model is developed which demonstrates that information on the nominal value of money conveys sufficient information about the disturbance to currency and deposit demand so that monetary prices, such as adjusting the level of bank reserves, have no impact on the dispersion of price level forecast errors. However, if information on monetary aggregates is obtained only with a lag, then reserve requirements can reduce the disturbances to the demand for high-powered money and hence prices. Such a reserve ratio depends critically on the variance-covariance matrix of shocks to the monetary demands.

Suppose a developing country has the choice of importing cars (I), or producing them at home in a subsidiary (S) of a transnational company, or in a domestic firm under a licensing (L) contract from a transnational which ties the import of components from the latter. If the criterion of national benefit is given by consumer surplus under I or S and by consumer surplus plus the profits of the domestic firm under L, we compare the benefits from the alternative regimes I, S, or L under different market structure assumptions. In most cases the regime S seems to dominate. The conclusions are then modified by pointing to factors excluded from the basic model.