Knowledge that Transforms

Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat by Eckhard Janeba. Published in volume 90, issue 5, pages 1508-1519 of American Economic Review, December 2000

Mistakes give us a window into the brain. Just as optical illusions help us understand visual information processing, mistaken choices help us understand decision-making. The mistakes described below suggest that economics can usefully segregate decision mechanisms into two broad categories - those based on thoughts and those based on feelings. Consideration of these mistakes suggests that economists will be better able to interpret the growing body of seemingly anomalous evidence about human behavior if they treat thoughts and feelings more symmetrically.

Economists have not explicitly denied the existence and significance of visceral factors but have traditionally left them out of their analyses, whether because their influence is perceived as transient and hence unimportant, or because they are seen as too unpredictable and complex to be amenable to formal modeling. An attempt is made to show that both of these assumptions are false. Visceral factors have important, but often underappreciated, consequences for behavior. Moreover, both the determinants of visceral factors and their impact on behavior are not only systematic, but amenable to formal modeling.

This paper introduces various sources of consumer heterogeneity in one-sector representative consumer (RC) growth models and develops tools to study the evolution of the distribution of consumptions, assets, and incomes. These tools are applied to the Ramsey-Cass-Koopmans model of optimal savings and the Arrow-Romer model of productive spillovers. The RC property per se places very few restrictions on the nature of observed distributions, and a wide range of distributive dynamics and income mobility patterns can arise as the equilibrium outcome. An example illustrates how to use these tools to generate quantitative predictions and compare them to the data.

Floating, Fixed, or Super-Fixed? Dollarization Joins the Menu of Exchange-Rate Options by Blake LeBaron and Rachel McCulloch. Published in volume 90, issue 2, pages 32-37 of American Economic Review, May 2000

Understanding Black-White Wage Differentials, 1960-1990 Author(s): James J. Heckman, Thomas M. Lyons, Petra E. Todd Source: The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Association, (May, 2000), pp. 344 -349 Published by: American Economic Association Stable URL: http://www.jstor.org/stable/117248 Accessed: 16/08/2008 00:56

Evaluating a Simple Method for Estimating Black-White Gaps in Median Wages by William Johnson, Yuichi Kitamura and Derek Neal. Published in volume 90, issue 2, pages 339-343 of American Economic Review, May 2000

We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets—i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a “bank lending channel” of monetary transmission, though they do not allow us to make precise statements about its quantitative importance.

This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on Income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. It also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data.