Knowledge that Transforms

This paper discusses the role of fiscal and monetary policies in an LDC with a major commodity export that is facing a depression abroad. The analysis is conducted in the context of a general equilibrium model which comprises a commodity-producing sector and an import-competing sector. Idle capacity and labor unemployment areassumed. Flexibility of the real exchange rate and industrial output responses to demand are the main adjustment mechanisms. The key to understanding the behavior of the Brazilian economy in 1930s is the government coffee-support policy which held the income of the export sector at a high level and hence enabled the manufacturing sector to expand. The fact that industrial output expanded in the face of both real depreciation and appreciation points to the importance of expenditure effects relative to price effects during the 1930s.

A framework is developed for decomposing product price changes into changes in input prices, technical efficiency, and deviations of price from unit cost. This framework facilitates the measurement of productivity growth in noncompetitive industries. The history of American steel rail prices between 1879 and 1910 is analyzed, and it is concluded (in contrast with much recent work) that productivity growth remained rapid until the twentieth century and that the steel industry was sufficiently collusive so that the rail producers received the benefits of that productivity growth as excess profits.

The purpose of this paper is to argue that the pursuit of an activist monetary policy may make economic sense even when people's expectations are formed rationally. The paper presents a simple model in which (1) prices are costly to adjust, (2) there is uncertainty concerning the parameters affecting aggregate demand, and (3) there are positive costs of gathering and processing information. By reference to this model it can be shown that an activist monetary policy may or may not be useful in offsetting aggregate disturbances, depending upon the extent of information costs and of parameter uncertainty.

Energy-production subsidies are, paradoxically, shown to be likely to increase U.S. dependence on imported oil. Standard studies of net energy yields are shown to be seriously biased upward for two reasons. First, many omit indirect energy inputs, which, our input-output calculation shows, probably causes large errors. Second, those studies all omit the energy opportunity costs of nonenergy inputs (e.g., the fuel substituted elsewhere for the labor used to produce energy). We prove that, absent externalities, any fuel-output subsidy which causes an otherwise unprofitable expansion must yield an incremental fuel output smaller than the increment in energy input plus the energy opportunity costs of other inputs.

This paper examines the controversy concerning the relative desirability of fixed versus flexible exchange rates by examining whether a country can achieve a smaller variance of domestic output around its full employment path operating under an exchange rate rule or under a money supply rule. The paper finds that neither policy will always dominate the other. However, it does find that if shocks in one market of the economy are large relative to shocks to other markets, then one type of rule can be shown to dominate the other.