Knowledge that Transforms

Exchange-rate regimes in transition economies over the last decade have spanned the entire spectrum of possibilities, going from freely floating to permanently fixed (currency boards, DM-ization) through managed floats, preannounced crawling rates, and bands with or without intermittent adjustments. Such extreme diversity is due to differences in available foreign reserves and in initial macroeconomic imbalances (especially the presence of a monetary overhang in some transition economies) and to differences in government preferences between inflation and unemployment. Performance of alternative exchange-rate regimes is difficult to assess, (i) because performance can be mixed, (ii) because all exchange regimes if sustained have a tendency to validate themselves via their impact on inflation, and above all, (iii) because performance depends on the entire package of public policy instruments (fiscal, monetary, and structural) and on exogenous factors, as well as the exchange-rate regime itself.

This paper examines the generational aspect of the current Medicare system and some stylized reforms. We find that the rates of return on Medicare for today's workers are higher than those for Social Security and that the Medicare system is shifting a greater share of the burden on future workers than is Social Security. Nonetheless, the rates of return on Medicare, using the Medicare Trustees assumptions, are still not that high--roughly 2 percent for today's youngest workers. But forecasting future Medicare expenditures is quite difficult. Under an alternative higher-cost baseline, which we consider plausible, rates of return for today's youngest workers will exceed 3 percent. Putting Medicare on a sustainable basis by raising the payroll tax or reducing benefits would greatly reduce the rate of return for today's workers. Under the Trustees assumptions, for example, the payroll tax would have to be increased by 2.0 percent of payroll to put the Medicare system in balance in perpetuity. This policy would reduce the rate of return on today's youngest workers to about 1.3 percent.

The Japanese banking crisis provides a natural experiment to test whether a loan supply shock can affect real economic activity. Because the shock was external to U.S. credit markets, yet connected through the Japanese bank penetration of U.S. markets, this event allows us to identify an exogenous loan supply shock and ultimately link that shock to construction activity in U.S. commercial real estate markets. We exploit the variation across geographically distinct commercial real estate markets to establish conclusively that loan supply shocks emanating from Japan had real effects on economic activity in the United States.

Contributions to 401(k) plans are now the most important form of retirement saving. Since 401(k) plans were introduced in the early 1980’s, they have expanded rapidly and continuously. By 1998, roughly half of all households were eligible to participate in 401(k) plans, and more than 36 million workers made contributions to these employer-provided saving plans. In 1995, the last year for which the U.S. Department of Labor has released definitive data, 401(k) contributions amounted to $87.4 billion, or 55 percent of all contributions to employer-sponsored pension plans. The level of contributions, and their share of all pension contributions, is probably significantly higher today. The spread of 401(k) plans is the most important indicator of the move to personal retirement saving. In 1980, almost 92 percent of pension-plan contributions were to traditional employer-provided plans, and about 64 percent of these contributions were to conventional defined-benefit plans. Today, almost 60 percent of contributions are to personal retirement accounts, including 401(k), IRA, and Keogh plans. Including employerprovided, non-401(k) defined-contribution plans, over 76 percent of contributions are to plans that are controlled in large measure by individuals. These individuals make participation, contribution, asset-allocation, and withdrawal decisions. In this paper, we describe the likely importance of 401(k) assets for future older Americans and the effect of investment decisions on asset accumulation. We also examine the extent to which retirement assets may be affected by several decisions: preretirement withdrawals, management fees and expenses, contribution rates, and early retirement. Our analysis focuses on 401(k) saving, but applies more broadly to other forms of individual retirement saving.

This paper studies the business-cycle fluctuations predicted by a two-sector endogenous-business-cycle model with sector-specific external increasing returns to scale. It focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real-business-cycle models cannot explain. For empirically realistic calibrations of the degree of returns to scale, the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real-business-cycle models.

Ideas taught at the macroeconomics principles level should satisfy two goals. First, they should be simple enough to be both understandable and memorable for the beginning student. Second, they should be consistent both with the modern economy and with the macroeconomic models of this economy that are used in practice for policy evaluation. There is no necessary conflict between these two goals. The greater the consistency between the ideas taught in the classroom and the models used in practice, the easier the ideas are to understand and the worthier they are of being remembered. It would be an exaggeration to say that a consensus now exists in advanced research about how macroeconomics should evolve in the future. Debates continue, for example, about the usefulness of models with representative agents or what it means to have a fully articulated model of money. Nevertheless, at the practical level, a common view of macroeconomics is now pervasive in policy research projects at universities and central banks around the world. This view evolved gradually since the rational expectations revolution of the1970s and has solidified during the 1990s. It differs from past views, and it explains the growth and fluctuations of the modern economy; it can

A multicountry Schumpeterian growth model is constructed. Because of technology transfer, R&D-performing countries converge to parallel growth paths; other countries stagnate. A parameter change that would have raised a country's growth rate in standard Schumpeterian theory will permanently raise its productivity and per capita income relative to other countries and raise the world growth rate. Transitional dynamics are analyzed for each country and for the world economy. Steady-state income differences obey the same equation as in neoclassical theory, but since R&D is positively correlated with investment rates, capital accumulation accounts for less than estimated by neoclassical theory.

Population aging and rising health costs will cause dramatic increases in federal expenditures some decades from now (Lee et al., 1999). Rising immigration to the United States may help avert this future crisis by slowing population aging and helping to pay for Social Security and public health care. But many immigrants have low education and high fertility, so their net fiscal impact may be costly rather than beneficial. This paper revisits our earlier analysis of the fiscal impact of immigration (Lee and Miller, 1997), henceforth LM97, in light of higher projected rates of productivity growth, an unexpected increase in the effective federal income tax rate in recent years, and some revisions of the demographic projections. We will emphasize implications for Social Security, and address points raised by the recent literature (Holger Bonin et al., 1998; George Borjas, 1999; Alan Auerbach and Philip Oreopolis, 2000; Kjetil Storesletten, 2000).

Much of the theory in personnel economics relates to effects of monetary incentives on output, but the theory was untested because appropriate data were unavailable. A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates. In Safelite, productivity effects amount to a 44-percent increase in output per worker. This firm apparently had selected a suboptimal compensation system, as profits also increased with the change.