Knowledge that Transforms

When firms set nominal prices in advance, optimal monetary policy insulates aggregate output against shocks to demand. It can do so, however, by following the constant money growth rule advocated by Milton Friedman; it need not respond to the shocks in an actively countercyclical way. In addition, to the extent that output fluctuations are driven by shocks to supply, money growth should be procyclical.

When offered a new product whose attributes are unknown, customers can determine whether they like the product by trying it themselves or can wait to observe the experience of other customers who try the product. The authors specify a rational decision process and investigate the implications of learning from others on the sales of new products and the impact of advertising.

Inferences about the effects of money on economic activity may depend importantly on the choice of a monetary index because simple-sum aggregates cannot internalize pure substitution effects. This hypothesis is investigated by replicating five recent studies that have challenged an aspect of the "conventional wisdom" about the effects of money on aggregate activity. In four of the five cases, the qualitative inference in the original study is reversed when a simple-sum monetary aggregate is replaced by a Divisia index of the same asset collection. The results are mixed in the fifth case.

Built between 1974 and 1977, the Trans-Alaska Pipeline was the largest privately financed construction project in world history. The Alaskan labor market during the pipeline era provides an ideal opportunity to view labor market responses to a large, anticipated, and temporary shock to labor demand. The paper presents several theoretical models of market responses to temporary demand shocks and then assesses the ability of each model to explain the Alaskan data. Among the findings are that Alaskan wages were very flexible, labor supply was quite elastic on both the intensive (hours per worker) and extensive (number of workers) margins, and even a major short-run demand shock need not have a long-run impact.

This paper documents the variation in dealer discounts for new cars using transactions price data from the Consumer Expenditure Survey. Consumer-specific characteristics fail to explain dealer discounts, whereas model, market-specific, and purchase transaction variables (e.g., first-time purchase, trade-in, and financing through dealer) do explain them. The results contradict earlier findings of race and gender discrimination based on a controlled experiment. This contradiction is reconciled by examining the higher moments of the empirical discount distribution; while mean and median markups do not vary by race and gender, minority purchases are characterized by higher dispersion. This may rationalize the disparate treatment of minorities by dealers documented in the controlled experiment.

Willingness to pay (WTP), most economists believe, is an appropriate benefits metric for government expenditure and regulatory policies that reduce risks to human life. It depends, however, on the distribution of risk and wealth. Currently, society's expenditures overemphasize concentrated risks, say after-the-fact treatment as opposed to prevention. A "dead-anyway" effect complements excess attention to intense interests in explaining this. Our normative criterion for spending on risk reduction is what a rational, albeit uninsured, individual confronting lotteries on future risks to life and wealth would choose for himself. This requires correcting WTP to eliminate the dead-anyway effect but continues to reflect that wealth enhances the utility of living.

This paper studies the price fluctuations of storable commodities that are traded in open markets and are subject to random shocks to demand or, more particularly, to supply. It relaxes the common assumption that the shocks are identically and independently distributed in favor of temporally dependent and periodic disturbances. The existence of a unique stationary rational expectations equilibrium is demonstrated for each of the models analyzed and testable implications of the models are derived. An illustrative empirical investigation is then undertaken for the model with periodic disturbances using monthly time-series observations for seven commodities over the period 1960-93.

This paper uses an equilibrium multifactor model to interpret the cross-sectional pattern of postwar U.S. stock and bond returns. Priced factors include the return on a stock index, revisions in forecasts of future stock returns (to capture intertemporal hedging effects), and revisions in forecasts of future labor income growth (proxies for the return on human capital). Aggregate stock market risk is the main factor determining excess returns but, in the presence of human capital or stock market mean reversion, the coefficient of relative risk aversion is much higher than the price of stock market risk.

This paper develops and estimates a monetary model that offers an explanation of some puzzling features of observed returns on equities and default-free bonds. The key feature of the model is that some assets other than money play a special role in facilitating transactions, which affects the rate of return that they offer. The model is capable of producing a low risk-free rate, a high equity premium, and an average positive relationship between maturity and term premium for default-free bonds. The model's implications for the joint distribution of asset returns, velocity, inflation, money growth, and consumption growth are also compared to the behavior of these variables in the U.S. economy.