Knowledge that Transforms

The recent debate questioning whether unemployment in the 1970s represents sectoral adjustment or cyclical variation is expanded to examine comparable causes of real wage variability. Using Panel Study of Income Dynamics panel data, real wages respond more to persistent sectoral shocks than cyclical shocks in the 1970s, making recent estimates of procyclical wage variability appear weak in perspective. Employing a model of endogenous sector-specific individual skills, older workers earning economic rents are shown to have the greatest wage response to sectoral shocks. These results are consistent with the hypothesis that short run cyclical shocks may be met with hours adjustment, as specified in implicit or explicit contracts, but that persistent shocks require wage adjustment. Copyright 1989 by MIT Press.

Stephen C. Farber, Robert J. Newman, Regional Wage Differentials and the Spatial Convergence of Worker Characteristic Prices, The Review of Economics and Statistics, Vol. 71, No. 2 (May, 1989), pp. 224-231

A common feature to most aggregative studies of the labor market is a marginal productivity expression in which the quantity of labor appears on the left hand side of the equation, and the right hand side includes the real wage and output. A number of researchers have cautioned that if the output variable is treated as exogenous, serious econometric difficulties may result. However, the assumption that output is exogenous has not been tested. In this paper, we estimate an equilibrium model of the labor market, and use it to test the assumption of output exogeneity. We find that the assumption that output is exogenous cannot be rejected by the data.

While quarterly consumption data are known to be well fitted by an integrated first-order moving average process--IMA(1, 1)--with a positive coefficient, monthly consumption data are found to be well fitted by an IMA(1, 1) process with a negative coefficient. Without measurement errors, one implication is that, if R. Hall's (1978) random walk model of consumption behavior is true, then the agents' decision interval must be greater than a month. (In particular, this evidence rejects the possibility of continuously taken decisions.) Another implication is that, if consumption decisions are generated by an IMA(1, 1) process at intervals shorter than a month, the coefficient must be negative. The paper also discusses the case of monthly data corrupted by measurement errors. Copyright 1989 by MIT Press.

Yoon Dokko, Are Changes in Inflation Expectations Capitalized into Stock Prices? A Micro-Firm Test for the Nominal Contracting Hypothesis, The Review of Economics and Statistics, Vol. 71, No. 2 (May, 1989), pp. 309-317

This paper analyzes price adjustment in markets where trade takes place through both spot-market and long-term-contract transactions. The authors develop a model illustrating the role of the resulting two-price system in describing price adjustment to transitory shocks; persistence effects of these shocks on prices depends on, inter alia, the fraction of trades carried out through contracts. The model is tested on price data from the world copper and crude oil markets. Econometric tests of the model provide support for the hypothesis that the increase in the importance of spot markets in copper and oil is associated with an increase in the speed of adjustment of spot prices to supply and demand disturbances. Copyright 1989 by MIT Press.

This study estimates the underlying parameters in a dynamic game between the fiscal and monetary authorities over the determination of public debt. These estimates reveal the policymakers attitude towards the goal of stabilizing the time path of public debt. The central finding is that, in the United States during the 1955-85 period, this goal has been pursued by the fiscal authority, but not by the central bank. Monetary policy has not monetized the stock of public debt outstanding, whereas cyclically-adjusted, net of interest, fiscal deficits have been reduced to offset increases in the stock of debt in circulation. Copyright 1989 by MIT Press.

Based on the decision to file an escape clause petition by a firm, a Poisson regression model of the macroeconomic determinants of the total number of these petitions yearly is developed and estimated. The Poisson specification conforms to the fact that the number of escape clause petitions is a non-negative integer with a skewed probability distribution. In addition, the number of potential petitioners is controlled for in the specification. The empirical results suggest that both domestic and international factors affect the decision to file an escape clause petition. The legal environment is found to be a determinant as well. Copyright 1989 by MIT Press.

This paper offers the first integrated test of the electoral model of business cycles. The test begins with unrestricted estimates of presidential electoral patterns in U.S. economic outcomes (real GNP, unemployment, and inflation) and policies (money growth and the adjusted budget surplus). These estimates are then used to determine whether the estimated electoral patterns in macropolicy yield predicted electoral patterns for macro outcomes that are consistent with estimates of both actual electoral patterns in outcomes and voting behavior. The results indicate that four-year electoral cycles in macroeconomic outcomes and policies are strongly significant for the United States for the period 1951I to 1986II. Copyright 1989 by MIT Press.