Knowledge that Transforms

The paper examines the adjustment of the exchange rate and domestic prices to a monetary change under flexible exchange rates. The emphasis is on the dynamic interaction between the classical stock aspects, stressed by the monetary approach, and the flow aspects, stressed by the elasticity approach. It is shown that even in a very simple model of lagged asset adjustment the interaction between trade and capital flows can produce a large variety of adjustment paths, with and without overshooting, monotonic and cyclical.

Data on individual labor earnings are reported from two experimental economies where the primary factors responsible for income differences were differences in tastes for market income versus leisure and differences in abilities working manual job tasks. Measured income dispersion under these conditions was strikingly similar to that in the United states and other market economies, indicating that these two factors alone are sufficient to generate such income differences. Further, in tests of the functional form of the distributions of income, the hypothesis of lognormality fit better than the hypothesis of normality, just as it does in national data.

A problem in the use of adaptive expectations as a mechanism for generating expectations of inflation is the assumption that the speed with which individuals revise their expectations is constant. The purpose of this paper is to estimate the Cagan model of the demand for money for six hyperinflation countries allowing the coefficient of expectations (which measures the response to the error between the actual and the expected rate of inflation) to vary with the level and the change in the rate of inflation. The results indicate considerable support for this particular hypothesis.

If the choice of domestic versus foreign money and capital market instruments was on the basis of covered yields, funds would universally flow in one direction, from the smallest incentive, to the instruments of highest yields. This paper shows the consequences of different rates of taxation on interest and on exchange gains, the two components of foreign yields. By reference to the U.S.-Canadian situation it is shown how we might observe taxpayers in both countries simultaneously buying securities of the other, or simultaneously buying their own domestic securities. It is also shown how we might find taxpayers of both countries buying the securities with the lower pretax yields.

A model is presented in which open unemployment exists as a result of adverse terms of trade in rural areas, combined with a binding urban wage floor. In contrast to previous investigations involving sector-specific wage rigidity, the present analysis considers a third sector, transport, in addition to farming and manufacturing and deals with transport-infrastructure investments as policy instruments affecting employment. The three-sector model predicts that extensive unutilized land will be present despite high urban unemployment rates, a common phenomenon in sub-Saharan Africa. The model is tested empirically using primary data from the 1970 agricultural census of Zaire.

The purpose of this paper is to present a simple model, based on profit-maximizing behavior, that can be used to derive estimable equations for U.S. foreign direct investment in manufacturing. Our estimation of foreign-investment equations requires estimates of production functions for U.S. manufacturing subsidiaries abroad. Specifically, I estimate the production function to be a constant-returns-to-scale, homogeneous, transcendental logarithmic function. I also present evidence in the form of my estimated foreign-direct-investment equation that domestic and foreign markets may be imperfectly competitive.