Knowledge that Transforms

One of the leading hypotheses concerning the dynamics of production over time is the production smoothing hypothesis. Given a planning horizon which spans a number of production periods, the firm need not produce in each period an amount equal to expected sales. Rather, resorting to inventory accumulation and liquidation, the firm may follow a production plan temporally smoother than the path of demand. If firms faced with convex cost functions chose to smooth the rate of output in order to minimize costs, one would expect to observe that the rate of output would vary less than the rate of sales, with variations in inventory stocks absorbing some of the fluctuations in sales. Recently, work on the testing of the production smoothing hypothesis has cast doubt on its empirical validity. The evidence presented by Alan Blinder seems to indicate that the variance of production exceeds that of sales in seven out of eight two-digit retail industries (1981) and in eighteen out of twenty two-digit manufacturing industries (1983 and 1986). The purpose of this paper, then, is to examine the validity of such tests when seasonally adjusted aggregated data are used. The evidence presented show that the relative size of the variances of the seasonally adjusted production and sales does not provide valid tests of the production smoothing hypothesis. In addition, aggregating over firms where the seasonal patterns differ may also distort tests of production smoothing. Blinder realized that the use of seasonally adjusted data may not provide an adequate test of the hypothesis, stating Had they been available, I would have preferred to use data that were not seasonally adjusted since the production smoothing model presumably applies to seasonal fluctuations in sales. However, such data are not (1983, fn. 19). In this paper I focus on the cement industry because the unadjusted disaggregated data are available for the direct testing of the conjecture that aggregate seasonally adjusted data mask production smoothing phenomenon. Aggregate monthly data on five other industries will also be examined.

This paper presents a general-equilibrium model in which all prices and quantities transacted are the direct choices of econom ic agents: there is no Walrasian auctioneer. Multiple subgame perfect equilibria exist with prices and wages at their Walrasian levels. Among the equilibrium allocations are the Walrasian ones, but there a re also outcomes in which price- and wage-taking workers are rationed in the labor market and are unable to sell all the labor they want a t the prevailing wage. This involuntary unemployment results from sel f-fulfilling expectations of inadequate excess demand as in some inte rpretations of Keynes's ideas.

A local governmental welfare function is specified to explore two of its central characteristics: the equity-productivity trade-off and differential weights across neighborhoods. The constrained maximization model is estimated using service outcomes (safety) in the welfare function, as opposed to publicly provided inputs (police), over neighborhoods. The equity-productivity trade-off is found to be considerable, and not all neighborhoods are weighted equally. The results show that inequality aversion and unequal concern by local government over service outcomes must be addressed explicitly to understand the observed distribution of publicly provided inputs, with important implications for standard analysis of local governmental behavior.

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Despite the fact that the most theoretical analyses (with the notable exception of the Ricardian equivalence approach) indicate that increased deficits cause interest rates to rise, the empirical evidence is at best inconclusive.1 In this note the relationship between interest rates and deficits is examined with the announcement effect methodology which has not previously been used in this context. We find evidence of a positive relationship between unanticipated announcements of the projected Federal government deficit and interest rates. In an efficient market, information about any determinant of interest rates should be quickly incorporated into observed rates. Thus, when information about the size of the deficits is released, a relatively quick impact on interest rates can be anticipated. More specifically, if an increase in the deficit is, in fact, associated with higher interest rates, then an unanticipated announcement of a larger deficit should lead to a response in financial markets, which increases interest rates. This paper provides evidence on the announcement effects of information on the deficit. The advantage of the announcement effect approach is that it precludes the necessity of specifying a structural model for interest rates.2 Projections of current and future Federal government deficits are made on a regular basis by both the Office of Managementand Budget (OMB) and the Congressional Budget Office (CBO), and receive wide attention in the financial press. These projections provide data that are related to the change in interest rate on government securities from the day before the announcement to the end of the announcement day. The macroeconomic hypothesis underlying this investigation is simply that an increase in the current or future deficit leads to an increase in yields on government securities in anticipation of higher levels of debt financing. In a rational expectations framework, an announcement of higher future deficits will lead to a current increase in interest rates in anticipation of future financing. Thus, the examination of announcement effects enables us to substantiate a relationship between interest rates and deficits without encountering the econometric problems of reduced form modeling. Section I begins with a description of the data. This is followed by a discussion of the methodology in Section II. Section III presents the empirical results. This is followed by our conclusions in Section IV.

This paper argues that the empirical disagreement as to whether capital and energy are complements or substitutes is not likely to be reconciled with aggregate data. It demonstrates that price-induced changes in the composition of output can cause either outcome in the aggregate, even if no technical substitution is possible. Substitution by consumers and changes in the relative incomes of consumers and foreigners are identified as key factors in determining which outcome arises.

The family is distinguished from other social institutions, such as firms, by its crucial role in the production and nurture of children and its rationale is ultimately to be found in the preferences of individuals for own children. Sexual reproduction means that the production of one's own child requires the participation of another person of the opposite sex. The production of a child who will survive, become a successful adult, and produce his or her own children requires the expenditure of both personal and purchased resources over a lengthy period of time. Although interesting insights on the family can be culled from the classics, systematic development of the economics of the family is a recent phenomenon, beginning in the late 1950's when Harvey Leibenstein (1957) and Gary Becker (1960) attempted to address the determinants of fertility behavior within the framework of consumer theory. In this paper, I provide a brief overview of the history of family economics since 1960 and, along the way, offer a selective assessment of what has been learned from it. I attempt this assessment by asking how far we have progressed in answering a few of the larger theoretical, empirical, and policy questions that have motivated economists' interests in an area customarily studied by sociologists and demographers, or that have caused economists dealing with more traditional subject matter to incorporate the family into their work. Among the set of questions that have been addressed within the literature during the past twenty-five years are: 1) What are the causes of the historical association between economic growth and development and demographic transition from high to low levels of fertility and mortality? Of what relevance is the historical experience of currently developed countries to contemporary LDCs? Should fertility reduction be a primary goal of policy in the developing countries? Are the developed countries in danger of extinction because of fertility below replacement levels? 2) What was the cause of the post-World War II and subsequent bust? Was the baby boom a one-time aberration from a secular decline in fertility, or can we expect substantial fluctuations in the birth rate in the future? What are the consequences of the baby boom for the economic welfare of cohorts born during and after the boom? 3) Is the traditional family dead in the United States and other developed countries? Why did the divorce rate double in a decade? Why the growth in female-headed households? Why do so many divorced fathers fail to support their children? Has the sexual division of labor within the family changed as a consequence of the growth of female labor supply? To what extent are these changes in the family caused by social policy, and to what extent are they a product of basic market forces associated with modern economic development? What are the consequences of these changes for the welfare of future generations? I attempt to touch on some issues from each of the three areas in which the questions are grouped. However, constraints imposed by limitations of space, time, and most imtDiscussants: Kenneth Wolpin, Ohio State University; Robert Pollak, University of Pennsylvania; T. Paul Schultz, Yale University.