Since the publication (1976) of the classic Lucas critique, researchers in empirical macroeconomics have endeavored to specify models that capture the underlying dynamic decision-making behavior of consumers and firms who require forecasts of future events. Recently, a number of researchers have developed simple models that have become the workhorses for monetary policy analysis. The models vary considerably with regard to optimizing foundations and explicit treatment of expectations. However, relatively little effort has been devoted to testing the empirical importance of the Lucas critique for these simple models. Can one find specifications that are policy-invariant? This paper develops and implements a set of tests for several monetary policy models used extensively in the literature. In particular, we attempt to test the robustness of optimizing versus nonoptimizing models to changes in the monetary policy regime. We present evidence that shows that some forward-looking models from the recent literature may be less stable than their better-fitting backward-looking counterparts.

Because of common data limitations, the existing testing framework for the generalized composite commodity theorem (Lewbel, 1996) is incomplete. This note clarifies and strengthens the testing procedure by implementing modified Bonferroni procedures. The conditions are established for consistency between the existing and modified Bonferroni tests. In an empirical application, the Bonferroni tests provide more powerful support for the generalized composite commodity theorem than is obtained from the existing test.

This paper makes two contributions to the empirical literature on agglomeration economies. First, the paper uses a unique and rich database in conjunction with mapping software to measure the geographic extent of agglomerative externalities. Previous papers have been forced to assume that agglomeration economies are club goods that operate at a metropolitan scale. Second, the paper tests for the existence of organizational agglomeration economies of the kind studied qualitatively by Saxenian (1994). This is a potentially important source of increasing returns that previous empirical work has not considered. Results indicate that localization economies attenuate rapidly and that industrial organization affects the benefits of agglomeration.

A class of model-based filters for extracting trends and cycles in economic time series is presented. These lowpass and bandpass filters are derived in a mutually consistent manner as the joint solution to a signal extraction problem in an unobserved-components model. The resulting trends and cycles are computed in finite samples using the Kalman filter and associated smoother. The filters form a class which is a generalization of the class of Butterworth filters, widely used in engineering. They are very flexible and have the important property of allowing relatively smooth cycles to be extracted from economic time series. Perfectly sharp, or ideal, bandpass filters emerge as a limiting case. Applying the method to quarterly series on U.S. investment and GDP shows a clearly defined cycle.

The natural rate of interest—the real interest rate consistent with output equaling its natural rate and stable inflation—plays a central role in macroeconomic theory and monetary policy. Estimation of the natural rate of interest, however, has received little attention. We apply the Kalman filter to estimate jointly time-varying natural rates of interest and output and trend growth. We find a close link between the natural rate of interest and the trend growth rate, as predicted by theory. Estimates of the natural rate of interest, however, are very imprecise and subject to considerable real-time measurement error.

The endogenous two-break unit root test of Lumsdaine and Papell is derived assuming no structural breaks under the null. Thus, rejection of the null does not necessarily imply rejection of a unit root per se, but may imply rejection of a unit root without break. Similarly, the alternative does not necessarily imply trend stationarity with breaks, but may indicate a unit root with breaks. In this paper, we propose an endogenous two-break Lagrange multiplier unit root test that allows for breaks under both the null and alternative hypotheses. As a result, rejection of the null unambiguously implies trend stationarity.

Although bargaining is common in markets for heterogeneous goods, it has largely been ignored in the hedonic literature. In a break from that tradition, we establish sufficient conditions that permit one to identify the effect of buyer and seller bargaining on hedonic models. Our model is estimated using a previously overlooked feature of the American Housing Survey that permits us to observe characteristics of both buyers and sellers. Results suggest that household wealth, gender, and other demographic traits influence bargaining power. In addition, variation in bargaining power arising from the presence of school-age children accounts for anomalous seasonal patterns reported in various widely cited indices of quality-adjusted house prices.

Stigma is a negative attribute of real estate acquired by environmental contamination and reflected in its value (Elliot-Jones, 1996). Using a model of neighborhood turnover with external economies, we show that both temporary stigma and long-term stigma are possible equilibrium outcomes after the discovery and cleanup of a hazardous waste site. The existence and duration of stigma are examined using hedonic price techniques with data from housing sales prices in Dallas County, Texas. We find that results depend critically on distance from the hazardous waste site. Neighborhood turnover due to changes in the level of poverty also appears likely.

This paper develops a correlated probit model to describe dichotomous choices that may contain a public-goods component or some other forms of interdependency. The key contribution of the paper is to formulate tests for interdependent behavior among agents. In particular, we examine the decisions by nations whether or not to ratify the Montreal Protocol on Substances that Deplete the Ozone Layer. Specifically, we reject free riding as a motive for not ratifying the Protocol, and we find little evidence that individual nations were influenced by the behavior of their largest trading partners. Hence, the data suggest that, with respect to the Montreal Protocol, most nations acted without regard for the actions of other nations.

This paper reconciles two widely used decompositions of GDP into trend and cycle that yield starkly different results. The Beveridge-Nelson (BN) decomposition implies that a stochastic trend accounts for most of the variation in output, whereas the unobserved-components (UC) implies cyclical variation is dominant. Which is correct has broad implications for the relative importance of real versus nominal shocks. We show the difference arises from the restriction imposed in UC that trend and cycle innovations are uncorrelated. When this restriction is relaxed, the UC decomposition is identical to the BN decomposition. Furthermore, the zero-correlation restriction can be rejected for U.S. quarterly GDP, with the estimated correlation being -0.9.