THE hypothesis attributed to Fisher (1930) and more recently the innovative investigation by Fama (1975) have predisposed many economists to treat the expected rate of interest as a constant. At the very least, as a magnitude, the expected interest rate is appealingly viewed as being independent of monetary phenomena. The late 1970s and early 1980s have produced events which force reevaluation of the maintained hypothesis of constancy of the expected rate (hereafter referred to as the real rate). For example, from December 1980 to June 1981 the expected rate of inflation fell by 165 basis points from an annual rate of 10.51 % to an annual rate of 8.86%.' Over the same period 3 month Treasury bill rates continued to remain largely between 14% and 16% with average yields of 15.02% in December 1980 and 14.95% in June 1981. In order to reconcile such facts, one must either believe that security markets no longer fully reflect changes in anticipated inflation in nominal market rates, or that a large drop in anticipated inflation which is not accompanied by a drop of similar magnitude in nominal interest rates, is due to an offsetting rise in the rate.2 Statistical investigations regarding the possibility of movements in the rate have appeared with increasing frequency since publication of Fama's (1975) provocative article.3 Nelson and Schwert (1977) argued that Fama's test of the joint hypothesis of market efficiency and constancy of the rate was not sufficiently powerful and after applying more powerful tests concluded that the data permitted rejection of the hypothesis of constancy of the rate. Other investigations including those by Carlson (1977), Garbade and Wachtel (1978) and Levi and Makin (1979) have rejected the hypothesis of constancy of the rate while tending to support the hypothesis that market interest rates include an efficient inflationary premium. Tanzi (1980) has, along with others, emphasized the role of taxes in interest rate determination. More recently investigators have moved from merely testing the hypothesis of constancy of the rate to searching for an explanation for the rate movements suggested by a large body of statistical evidence. Mishkin (1981) and Fama and Gibbons (1982) have investigated the relationship between the rate and anticipated inflation suggested by Mundell (1963) and Tobin (1965).4 Levi and Makin (1979, 1981), Hartman (1981) and Hartman and Makin (1982) have considered effects of inflation uncertainty on the rate. Dwyer (1981) has found that the rate is independent of predictable changes in the supply. This paper derives a Fisher-type interest rate equation from a structural model similar to that employed by Sargent (1973) for other purposes. The primary differences involve inclusion of a government sector and a simple open economy specification along with introduction of a role for Received for publication February 22, 1982. Revision accepted for publication September 3, 1982. *University of Washington and National Bureau of Economic Research. This work was supported by the National Science Foundation under (irant No. SES-8112687. I would like to thank without implicating Charles Nelson, Richard Hartman and especially Andrew Criswell for excellent help in estimating the equations. An earlier version of this paper was presented at an FMME Conference at NBER where many useful suggestions were provided. ' This figure is based on Livingston survey data for 6 month horizon expectations regarding the consumer price index (CPI). The 12 month horizon figure for CPI also indicated a drop of 165 basis points while 6 and 12 month horizon numbers for WPI indicated drops of 192 and 174 basis points, respectively. Updated Livingston survey data are now compiled by the Federal Reserve Bank of Philadelphia. 2Summers (1982) has argued that nominal interest rates do not adjust by the full amount implied by the Fisher hypothesis modified to allow for marginal tax rates on interest earnings. His results based on both preand post-World War II data arise from equations which employ actual inflation rates in place of anticipated inflation and which generally do not include variables to control for movements in the expected rate. 3Even well before the investigations discussed here Irving Fisher himself reported, based on an investigation of market interest rates during the late 19th and early 20th centuries in London, New York, Berlin, Calcutta and Tokyo, that ' the rate of interest in terms of commodities is from seven to thirteen times as variable as the market rate of interest expressed in terms of money (Fisher (1930), p. 415). 4 Mishkin (198 1) found a significant negative impact upon the rate of a lagged actual (CPI) inflation rate taken as a proxy for anticipated inflation. An ARIMA (0, 1, 1) inflation model with a seasonal MAI term also provided an expected inflation proxy with a significant negative impact on the rate. Mishkin (1982) is discussed below.

I N Weber's (1929) theory of the location of industry, spatial firms produce under conditions of fixed-proportions and constant returns to scale, while their spatial consumers have priceinelastic demands. Weber's assumptions are relaxed separately in previous work. Moses (1958) and Alonso (1967) allow either for flexible technologies but inelastic demands or for pricesensitive demands but fixed-proportions technologies. This paper presents a behavioral and econometric model of spatial firms which simultaneously relaxes restrictive assumptions on both technology and demand. Assumptions of earlier models become testable hypotheses. The behavioral model is general to any spatial firm; the econometric model can be estimated for any industry. The paper reports an estimation of the model for a sample of fully-integrated steel plants in the United States. The steel industry is appropriate for illustrating the general model for two reasons. First, the important inputs in steel are localized, weight-losing materials, while transportation charges are a nontrivial part of the delivered prices of both these inputs and of steel products. Second, previous research lacks agreement about the principal determinants of steel plant locations. Disagreement also exists over the structure of production and the extent of scale economies in production, and the existence of substitution possibilities among inputs. Each of these disagreements is treated as a hypothesis within this paper. First, a model which includes the influences of both consumers and materials on location can distinguish the comparative influence of each. The literature lacks agreement on whether the steel industry is transport-oriented, in which case consumer demands are price-inelastic and an optimal location minimizes transport costs, or market-oriented, in which case, consumer demands are price-elastic and an optimal location reflects that sensitivity. Isard (1948) suggests the influences on location change over time, due to changes in technology and relative prices. Isard and Capron (1949) conclude the steel industry is transport-oriented. More recently, Hekman (1978) reports that the demand for steel is priceelastic. He concludes that locations in the steel industry are sensitive to consumer demands. The evidence in this paper portrays the steel industry as transport-oriented. Second, there are differing estimates of the extent of scale economies in steel production, ranging from constant returns to scale (Hekman, 1978), to a minimum efficient scale (m.e.s.) of twelve million tons (Cockerill, 1974). Scherer (1973) and Weiss (1976) estimate m.e.s. of four million tons, while Tarr (1977) gives the mid1970s m.e.s. at six million tons, an estimate reported in this paper as well. Third, the existence of substitution possibilities among inputs has implications for both location and production. If substitution possibilities are limited, Weber models of location may be applied to the steel industry. Previous research has characterized steelnmaking technology as fixed-proportions (Tsao and Day, 1971), Cobb-Douglas (Hekman, 1978) or having wide variation in substitution possibilities (Kopp and Smith, 1980; Moroney and Trapani, 1981). This paper presents estimated elasticities of substitution suggestive of great substitution possibilities among inputs. The behavioral model of location and production is presented and then transformed into an econometric model in section II. A brief discussion of regional markets for steel products and a description of the data appears in section III. Received for publication July 31, 1981. Revision accepted for publication July 7, 1982. * Wayne State University. This research is based on my Ph.D. dissertation at the University of Wisconsin-Madison. The advice of Frank M. Gollop, Eugene Smolensky and Charles A. Wilson is gratefully acknowledged. I have benefited from discussions with James Hamilton and Li Way Lee and comments by Jan Brueckner and several anonymous referees. Computing support has been provided by the Graduate Schools at the University of Wisconsin-Madison and Wayne State University. The responsibility for any remaining errors is mine. An earlier version of this paper was presented at the 1980 North American Meetings of the Econometric Society.

States. Rather, observed interregional differences in average real wages probably arise from different relative endowments of various heterogeneous labor types. Because these results conflict with findings of most previous studies, comparisons are made with the approaches taken by other investigators. Those comparisons indicate that empirical estimates of interregional differences in the structure of wage and earnings equations are sensitive to (1) the treatment of geographic cost of living differences, (2) the completeness of the specification of the regressors, particularly the human capital measures, and (3) whether part-time workers are included in the sample.

Results of an analysis show that the use of bonus payments in an experimental study of electricity demand is directly related to the income effects in the Slutsky equation. As with the income effect, it is not possible to predetermine the sign of the bonus effect. Theoretical results predict that if the relationship between the bonus payment and consumption of electricity is severed, then households would unambiguously increase consumption. The authors conclude that bonus plans will reduce electricity consumption and could be an alternative approach to promoting conservation. 10 references, 1 table.

Daniel H. Hill, Deborah A. Ott, Lester D. Taylor, James M. Walker, Incentive Payments in Time-of-Day Electricity Pricing Experiments: The Arizona Experience, The Review of Economics and Statistics, Vol. 65, No. 1 (Feb., 1983), pp. 59-65