"Revised April 1986."

This study presents the first evidence on the relation of consumption to lifetime wealth, based on data from the 1973 and 1975 Retirement History Survey that have been linked to Social Security earnings records.

This paper is an econometric analysis of the on-the-job training (OJT) decisions of a group of white American males during 1975. The data are obtained from the Panel Study of Income Dynamics, which asked a very careful series of questions concerning the individual's OJT status. Each individual's internal rate of return is estimated and used as an explanatory variable to predict the probability of taking OJT. The individual's marginal tax rate is also entered in the equation. The results suggest that income taxation has tended to increase the probability of being involved in OJT. I conjecture that this is because income taxation makes investment in physical capital a less desirable vehicle for carrying consumption into the future, and hence increases the attractiveness of human capital.

This paper examines the conventional monetary equation of exchange rate determination. Under certain exogeneity conditions, one can write the price level, at home and abroad, as the ratio of the nominal money supply to the demand for real money balances. Then, since the exchange rate is the domestic price of foreign exchange, one can equate the exchange rate to the ratio of domestic to foreign prices. This then allows one to write, and estimate, the exchange rate as a function of the money supply differential, income differential and interest rate differential. If the domestic and foreign money demand errors are autocorrelated, and if deviations from purchasing power parity are autocorrelated, tests based on the above model may be invalid. Only if all autoregressive parameters are equal will test results be valid. A full information maximum likelihood procedure is used to estimate and test the assumptions necessary for the conventional procedure to be correct. Finally, two alternative models of exchange rate determination are considered to illustrate the importance of introducing the error terms at the beginning of the analysis.

Work supported by the RANN Division of the National Science Foundation under Grant #GSF SIA 75-00379.

Prepared in association with the Sloan School of Management and the Dept. of Economics

Draft

T HE theory of the demand for financial assets has come in for a good deal of discussion in the last few years. Undoubtedly the discussion has been fruitful and has given us many new insights into the nature of financial processes. But it cannot be said that there is any generally agreed upon view as to the way in which those processes work. It would be appropriate at a conference of this kind to review the different hypotheses and give a systematic summary of the present state of knowledge. Unfortunately, though I have read the literature assiduously I have found it rather indigestible. I do not feel prepared to give a fair summary of other people's views. I must fall back therefore on giving my own. In this paper I shall deal with the demand for liquid assets and money by households and corporations. Those two groups hold over twothirds of all liquid assets, and the same general approach though not the details can probably be applied to the demands of unincorporated businesses, farmers, state and local governments. In dealing with the demand for liquid assets we must at least implicitly deal with the demand for other types of assets, but I shall not, except incidentally, say anything in detail about the demand for stocks, bonds, or physical assets. I shall confine myself to the demand for currency, demand deposits, commercial bank time deposits, mutual savings bank deposits, savings and loan shares, savings bonds, and short-term federal securities. There are, of course, other liquid assets, but I shall have little to say about them. I have occasionally used the term money in the sense of demand deposits and currency but have usually referred to those assets specifically to avoid any confusion with other definitions of money. But though I am happy to try to avoid the semantic confusion involved in arguments about whether any particular asset should be included under the heading money, I do cling to the view that commercial bank time deposits are significantly different from demand deposits. For that matter, so is currency, and so perhaps we ought to dispense with the term money in theoretical discussions and say clearly what we mean. In the first section of the paper I have discussed very briefly the conditions under which liquid assets are supplied. There follow in section 2 a discussion of corporate motives for holding liquid assets and money and a review of some empirical evidence on the relative importance of various factors influencing corporate decisions. In section 3, this theory of household demand for liquid assets and money is discussed together with some empirical evidence.

We provide cross-country and time series evidence on the extent of exchange rate pass-through into the import prices of 23 OECD countries. We find compelling evidence of partial pass-through in the short run, especially within manufacturing industries. Over the long run, producer-currency pricing is more prevalent for many types of imported goods. Countries with higher rates of exchange rate volatility have higher pass-through elasticities, although macroeconomic variables have played a minor role in the evolution of pass-through elasticities over time. Far more important for pass-through changes in these countries have been the dramatic shifts in the composition of country import bundles.

This paper develops and estimates a cost model for U.S. hospitals, analyzing the cost of excess bed capacity. A new estimate is worth making for at least two reasons. Recent changes in the economic environment of hospitals have caused their utilization rates to fall sharply, making previous estimates inaccurate. Second, we employ econometric techniques not previously applied to this problem, with estimation based on all short-term community hospitals from 1979-89. Our results, based on conservative estimates of the average optimal occupancy rate, indicate an annual cost of excess bed capacity of $17.2 billion in 1989, $24.1 billion in 1991, and over $25 billion in 1993.