Knowledge that Transforms

Inflation Is Always and Everywhere a Monetary Phenomenon: Richmond vs. Houston in 1864 by Richard C. K. Burdekin and Marc D. Weidenmier. Published in volume 91, issue 5, pages 1621-1630 of American Economic Review, December 2001

Contrary to the standard economic advice, many regulations of financial intermediaries, as well as other regulations such as blue laws, fishing rules, zoning restrictions, or pollution controls, take the form of quantity controls rather than taxes. We argue that costs of enforcement are crucial to understanding these choices. When violations of quantity regulations are cheaper to discover than failures to pay taxes, the former can emerge as the optimal instrument for the government, even when it is less attractive in the absence of enforcement costs. This analysis is especially relevant to situations where private enforcement of regulations is crucial.

We study a dynamic game in which all players initially possess the same information and coordinate on a high level of activity. Eventually, players with a long string of bad experiences become inactive. This prospect can cause a coordination avalanche in which all activity in the population stops. Coordination avalanches are part of Pareto-efficient equilibria; they can occur at any point in the game; their occurrence does not depend on the true state of nature; and allowing players to exchange information may merely hasten their onset. We present applications to search markets, organizational meltdown, and inefficient computer upgrades. (JEL D83)

Growth economists have spent more than forty years slowing chipping away at the Solow residual, largely by attributing increasingly larger chunks of it to investment in human capital. A few years ago we were reasonably certain that this was the way to go. But an increasing number of studies seem to be telling us that the effect of schooling variables on productivity vanishes when we turn to what seem to be the appropriate econometric techniques for the purpose of estimating growth equations. Should we take these results at face value? Before we do so and abandon the only workable models we have, it seems sensible to search for ways to reconcile recent empirical findings with some kind of plausible theory. In this paper we argue that we can make a fair amount of progress in this direction by combining two ingredients: better data on human capital, and a further extension of the human capital-augmented neoclassical model that allows for cross-country productivity differentials and for technological diffusion.

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level “jumps” to assure fiscal solvency. In this non-Ricardian regime, fiscal policy—not monetary policy—provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes. (JEL E60, E63)

This study assesses five common explanations for the large decline in U.S. total factor productivity (TFP) during the Great Depression: changes in capacity utilization, factor input quality, and production composition; labor hoarding; and increasing returns to scale. The study finds that these factors explain less than onethird of the 18 percent TFP decline between 1929 and 1933. The rest of the decline remains unexplained. The study offers a potential explanation: declines in organization capital, the knowledge firms use to organize production, caused by breakdowns in relationships between firms and their suppliers, for example. As some firms failed during the Depression, efficiency in surviving firms decreased; managers had to shift time away from production in order to establish new relationships, and firms had to shift to unfamiliar technologies that initially were operated inefficiently. This article originally appeared in the American Economic Review. © 2001 by the American Economic Association. The views expressed herein are those of the author and not necessarily those of the Federal

This paper investigates how openness to international goods markets affects pollution concentrations. We develop a theoretical model to divide trade's impact on pollution into scale, technique, and composition effects and then examine this theory using data on sulfur dioxide concentrations. We find international trade creates relatively small changes in pollution concentrations when it alters the composition of national output. Estimates of the trade-induced technique and scale effects imply a net reduction in pollution from these sources. Combining our estimates of all three effects yields a somewhat surprising conclusion: freer trade appears to be good for the environment. (JEL F11, Q25)

Recent studies have shown that the dynamics of firms (growth, job reallocation, and exit) are negatively correlated with the initial size of the firm and its age. In this paper we analyze whether financial factors, in addition to technological differences, are important in generating these dynamics. We introduce financial-market frictions in a basic model of industry dynamics with persistent shocks and show that the combination of persistent shocks and financial frictions can account for the simultaneous dependence of firm dynamics on size (once we control for age) and on age (once we control for size). (JEL D21, G3, L2)

The author discusses the U.S. monetary policy proposed and developed by John B. Taylor (1993) within the context of economic theory and economic welfare.

The assumption that nominal price adjustment is costly for firms (there are "menu costs") has generated a stream of important theoretical papers over the last decade or so. 1 In so far as this literature generates asymmetric adjustments, it provides a theoretical underpinning for the (old)Keynesian assumption that nominal prices are more flexible upward than downward. 2Yet, the empirical evidence, while confirming that asymmetri es exist, does not indicate the dominance of any particular form of asymmetry (see Dennis W. Carlton, 1986; Alan S. Blinder, 1991).In this paper we argue that the gap between theory and practice may be the result of the focus of menucost models on specific forms of market structure.Existing menu -cost models are based on the assumption of relatively uncompetitive market structures -monopoly, oligopoly, or monopolistic competition with a fixed number of firms.We widen the scope of the analysis by examining what we call a quasi-competitive industry and demonstrate that it displays a pattern of adjustment quite different from that found in other models.The Keynesian asymmetry is reversed, with nominal price being more flexible downward than upward. 3 We suggest therefore that a relationship exists between market structure and the pattern of nominal price adjustment.Since there is presumably a variety of market structures, this may help explain the inconclusive empirical evidence.We model the most competitive market configuration compatible with menu costs:Bertrand oligopoly in a dynamic setting with free entry.It is assumed that (a) an incumbent in one period can continue to sell at its existing nominal price in the next period without incurring any additional menu cost, whereas an entrant would have to incur a menu cost; and (b) among the firms willing to sell at the lowest price in any given period, one is chosen randomly to sell the