Knowledge that Transforms

Previous analyses have concluded that expectations of future excess stock returns rather than future real dividend growth or real interest rates are responsible for most of the volatility in stock prices. In this paper, we employ a state-space model to model the dynamics of the log price-dividend ratio along with long-term and short-term interest rates, real dividend growth, and inflation. The advantage of the state-space approach is that we can parsimoniously model the low-frequency movements present in the data. We find that, if one allows permanent changes, even though very small, in real dividend growth, real interest rates, and inflation-but not excess stock returns-then expectations of real dividend growth and real interest rates become significant contributors to fluctuations in stock prices. However, we also show that stock price decompositions are very sensitive to assumptions about which unobserved market fundamentals have a permanent component. When we allow excess stock returns to have a permanent component but not real dividend growth, excess stock returns become an important contributor to stock price movements, whereas real dividend growth does not. Unfortunately, the data is not particularly informative about which of these alternative models is more likely.

A model in which women search for husbands characterized by their wages predicts increasing within-group male wage inequality, raises the expected value of continued marital search, and so lowers female marriage propensities. Using 1970, 1980, and 1990 census data, I test this hypothesis within geographically, racially, and educationally defined marriage markets. The estimates suggest rising male wage inequality accounted for 7% to 18% of the decline in the propensity to marry between 1970 and 1990 for white women and more-educated black women. Growing wage inequality appears to have had little effect on the marriage behavior of less-educated black women.

We empirically test implications from location theory using the location of Los Angeles-area gasoline stations in physical space and in the space of product attributes. We consider the effect of demand patterns, entry costs, and several proxies for competition on the tendency for a gasoline station to be physically located more or less closely to its competitors. Using an estimation procedure that controls for spatial autocorrelation and spatial autoregression, and controlling for market characteristics and nonspatial product attributes, we find considerable evidence that firms locate their stations in an attempt to spatially differentiate their product as market competition increases.

In this paper, we estimate the impact of dynamic externalities, using direct measures of total factor productivity (TFP) growth at the regional level. We find that, at the one-digit level, significant dynamic externalities exist for the finance, services, and wholesale and retail trade industries, but-contrary to the findings of most previous research-these externalities do not exist for the manufacturing industry.

This paper analyzes the evolution of inequality in Poland during the economic transition that began in 1989-1990. Using microdata from the Household Budget Surveys, we find that, after a brief spike in 1989, income and consumption inequality actually declined to below pretransition levels during 1990-1992 and then increased gradually, rising only moderately above pretransition levels by 1997. In sharp contrast, inequality in labor earnings increased markedly and consistently throughout the 1990-1997 period. We find that social transfer mechanisms, including pensions, played an important role in mitigating increases in both overall inequality and poverty. We argue that, from a political economy perspective, transfer mechanisms were well designed to reduce political resistance to market-oriented reforms in the early years of transition, paving the way for rapid growth. Finally, we provide cross-country evidence from the transition economies that is consistent with our interpretation of the Polish experience and is also consistent with recent work in growth theory suggesting that redistribution that reduces inequality can enhance growth.

The paper examines the effects of pupil-teacher ratios and type of school on educational attainment and wages using the British National Child Development Survey (NCDS). The NCDS is a panel survey that follows a cohort of individuals born in March 1958 and has a rich set of background variables recorded throughout the individuals' lives. The results suggest that, once we control for ability and family background, the pupil-teacher ratio has no impact on educational qualifications or on men's wages. It has an impact on women's wages at the age of 33, particularly those of low ability. We also find evidence that those who attend selective schools have better educational outcomes and, in the case of men, higher wages at the age of 33. The impact is greater for the type of individuals who are less likely to attend selective schools but for whom a comparison group does exist among those attending.

This paper develops a new technique for measuring the effect of computer usage on U.S. productivity growth. Standard National Income and Product Accounts (NIPA) measures of the computer capital stock, which are constructed by weighting past investments according to a schedule for economic depreciation (the rate at which capital loses value as it ages), are shown to be inappropriate for growth accounting because they do not capture the effect of a unit of computer capital on productivity. This is due to technological obsolescence: machines that are still productive are retired because they are no longer near the technological frontier, and anticipation of retirement affects economic depreciation. Using a model that incorporates obsolescence, alternative stocks are developed that imply a larger computer-usage effect. This effect, together with the direct effect of increased productivity in the computer-producing sector, accounted for the improvement in U.S. productivity growth over 1996-1998 relative to the previous twenty years.

This paper examines the effect of inflation on stock valuations and expected long-run returns. Ex ante estimates of expected long-run returns are constructed by incorporating analysts' earnings forecasts into a variant of the Campbell-Shiller dividend-price ratio model. The negative relation between equity valuations and expected inflation is found to be the result of two effects: a rise in expected inflation coincides with both lower expected real earnings growth and higher required real returns. The earnings channel mostly reflects a negative relation between expected long-term earnings growth and expected inflation. The effect of expected inflation on required (long-run) real stock returns is also substantial. An increase of one percentage point in expected inflation is estimated to raise required real stock returns about one percentage point, which on average would imply a 20% decline in stock prices. But the inflation factor in expected real stock returns is also in long-term Treasury yields; consequently, expected inflation has little effect on the long-run equity premium.

We examine the reliability of alternative output detrending methods, with special attention to the accuracy of real-time estimates of the output gap. We show that ex post revisions of the estimated gap are of the same order of magnitude as the estimated gap itself and that these revisions are highly persistent. Although important, the revision of published data is not the primary source of revisions in measured output gaps; the bulk of the problem is due to the pervasive unreliability of end-of-sample estimates of the trend in output. Multivariate methods that incorporate information from inflation to estimate the output gap are not more reliable than their univariate counterparts.

In this paper, we examine the impact of enforcement of the U.S.-Mexico border on wages in U.S. and Mexican border regions. The U.S. Border Patrol polices U.S. boundaries, seeking to apprehend any undocumented entrants. It concentrates its efforts on the Mexican border. We examine labor markets in border areas of California, Texas, and Mexico. For each region, we have high-frequency data on wages and person-hours the U.S. Border Patrol spends policing the border. For a range of empirical specifications and definitions of regional labor markets, we find little impact of border enforcement on wages in U.S. border cities and a moderate negative impact of border enforcement on wages in Mexican border cities. These findings are consistent with two hypotheses: border enforcement has a minimal impact on illegal immigration, and illegal immigration from Mexico has a minimal impact on wages in U.S. border areas.