Many households received income tax rebates in 2001 of $300 or $600. These rebates represented advance payments of the tax cut from the new 10 percent tax bracket. Based on a survey of a representative sample of households, this paper finds that only 22 percent of households receiving the rebate would spent it. Instead, they would either save it or use it to pay off debt. This very low rate of spending represents a striking break with past behavior, which would have suggested a much higher rate of spending. The low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand.
We investigate the performance of forecast-based monetary policy rules using five macroeconomic models that reflect a wide range of views on aggregate dynamics. We identify the key characteristics of rules that are robust to model uncertainty; such rules respond to the one-year-ahead inflation forecast and to the current output gap and incorporate a substantial degree of policy inertia. In contrast, rules with longer forecast horizons are less robust and are prone to generating indeterminacy. Finally, we identify a robust benchmark rule that performs very well in all five models over a wide range of policy preferences.
Death is an integral part of life. Yet the economic modeling of death is perfunctory, with most of the controversy focused on whether people's planning horizon ends with their own life or extends beyond that. In contrast, one might expect that, of all aspects of life, decisions that require facing up to one's own mortality engender unique fears and psychological reactions.1 That we are forwardlooking and can anticipate death distinguishes human beings from other species. Sigmund Freud's student Otto Rank (1941) argued that mortality anxiety was the fundamental human fear, and he attributed the genesis of man's religious impulses and the source of humanity's construction of meaning and order to the awareness of one's personal finitude. Rank's ideas were revived and popularized in Ernest Becker's (1973) book The Denial of Death. The idea that many people live in denial of their own mortality is common in literature and philosophy, perhaps best summarized in the words of the 17th-century French epigrammist Francois La Rochefoucauld: One cannot look directly at either the sun or Many central issues in economics, such as the intertemporal pattern of consumption, are at stake if people systematically deviate from the predictions of standard models with regard to decisions concerning their own death. Assessing whether this is true requires enriching the models of how people behave in the face of death and testing them against observed patterns of behavior.
The permanent-income hypothesis (PIH) of Milton Friedman (1957) states that the agent saves in anticipation of possible future declines in labor income (John Y. Campbell, 1987). He also saves for precautionary reasons, and dissaves because of impatience. To justify the PIH in an intertemporal optimization framework, it has been conventional to assume both (i) quadratic utility, to turn off precautionary motives (Robert E. Hall, 1978), and (ii) equality between the subjective discount rate and the interest rate, in order to rule out dissavings for lack of patience. Neither assumption is plausible. Much work on consumption in the past decade has focused on individual’s precautionary savings motives and liquidity constraints. Impatience is a standard result in heterogeneousagents general-equilibrium incomplete-markets models, generally known as Bewley models. This paper shows that the PIH is in any case the optimal rule, in a Bewley model, in which each agent solves the precautionary-savings model of Caballero (1990, 1991). In addition to the demand for savings for a “rainy day,” Caballero’s model also predicts a constant precautionary-savings demand and constant dissavings due to impatience. In equilibrium, I show that these two forces must cancel each other. As a result, the agent behaves in accordance with the PIH. Section I describes the model. Section II concludes. The Appendix provides a heuristic derivation and a proof of the optimal consumption rule.
There is much discussion of the relationships between crime, inequality, and unemployment. We construct a model where all three are endogenous. We find that introducing crime into otherwise standard models of labor markets has several interesting implications. For example, it can lead to wage inequality among homogeneous workers. Also, it can generate multiple equilibria in natural but previously unexplored ways; hence two identical neighborhoods can end up with different levels of crime, inequality, and unemployment. We discuss the effects of anti-crime policies like changing jail sentences, as well as more traditional labor market policies like changing unemployment insurance.(This abstract was borrowed from another version of this item.)
Tobin's average q has usually been well above 1, but fell below 1 during 1974 – 1984. Our model explains this pattern and reconciles it with unchanging aggregate investment. The stock market value in the numerator of q reflects ownership of physical capital and knowledge, but the denominator measures just physical capital. Therefore, q is usually above 1. Periodic arrivals of important new technologies, such as the microprocessor in the 1970's, suddenly render old knowledge and capital obsolete, causing the stock market to drop. National accounts measures of physical capital miss this rapid obsolescence. Then q appears to drop below 1.
We test whether a nonbinding price ceiling may serve as a focal point for tacit collusion, using data from the credit card market during the 1980’s. Our empirical model can distinguish instances when firms match a binding ceiling from instances when firms tacitly collude at a nonbinding ceiling. The results suggest that tacit collusion at nonbinding state-level ceilings was prevalent during the early 1980’s, but that national integration of the market reduced the sustainability of tacit collusion by the end of the decade. The results highlight a perverse effect of price regulation.
The Political Economy of Antiracism Initiatives in the Post-Durban Round by Samuel L. Myers Jr., Lajune Thomas Lange and Bruce Corrie. Published in volume 93, issue 2, pages 330-333 of American Economic Review, May 2003
I agree with the point made by Edoh Y. Amiran and Daniel A. Hagen (2003) that there can be a substantial, or even infinite, divergence between the WTA and WTP for a public good even where there is a nonzero elasticity of substitution between market goods and the public good, provided that the indifference curves are asymptotically bounded with respect to market goods in the manner they describe. This is an important point. They are also correct to point out that the elasticity of substitution is a local concept, whereas their asymptotic boundedness condition applies also for discrete changes. My 1991 paper used a local analysis because it was following the structure of the analysis in Robert D. Willig (1976) and Alan Randall and John R. Stoll (1980); I wanted to show that, while Randall and Stoll appeared to extend Willig’s local result on WTA versus WTP from price changes to changes in the quantity of a public good, the relevant elasticity was in fact different and involved the substitution elasticity as well as the income elasticity. I view these points by Amiran and Hagen as not two separate results but essentially the same result: their asymptotic boundedness condition generalizes my zero elasticity of substitution condition to discrete changes. The asymptotic boundedness condition can be expressed as follows: assuming a bivariate utility function u( x, q), and given a reference point ( x*, q*) associated with a reference utility level u* u( x*, q*), there exists some q q* such that, for all q q , there exists no x such that u( x , q) u*. In other words, no amount of x can substitute for the reduction in public good from q* to q q . In the case of a zero elasticity of substitution, q q* but, as Amiran and Hagen show in their Theorem 1, this is unnecessarily restrictive when dealing with a discrete reduction in q. Furthermore, their Theorem 2 can be viewed as a special case of their Theorem 1 in which q 0, which makes q an essential commodity. It is well known in consumer theory that the WTA to avoid the loss of an essential market good is infinite; their Theorem 2 extends this result to the case of an essential nonmarket good. But, as their Theorem 1 shows, essentialness is not necessary for an infinite WTA. The boundedness condition is the key, and this implies a fundamental lack of substitutability between money (market goods) and the public good.
I stand here with deeply conflicting emotions. I am honored to be delivering this prestigious lecture. I am profoundly sad that Rudi Dornbusch, who should have delivered the Ely Lecture, died in July last year and that I am here in his place. So I would like to start by talking about Rudi. Rudi was born and grew up in Krefeld, Germany. He was an undergraduate at the University of Geneva, and completed his Ph.D. at the University of Chicago in 1971, which is where we met. He was a student of Robert Mundell, and both the subject matter – the development of the Mundell-Fleming model – and the elegance and insights of his early work reflected Mundell’s influence. He taught at the University of Rochester and at the University of Chicago before accepting an offer from MIT in 1975. In 1976, soon after coming to MIT, Rudi wrote his most famous and influential theoretical article, “Expectations and Exchange Rate Dynamics”. As Ken Rogoff said in his celebratory lecture on the 25 th anniversary of its publication, “The ‘overshooting’ paper … marks the birth of modern international macroeconomics.” From the late 1970s, Rudi became increasingly interested in policy issues. Within