Knowledge that Transforms

We use data on imports of computer equipment for a large sample of countries between 1970-90 to investigate the determinants of computer-technology adoption. We find strong evidence that computer adoption is associated with higher levels of human capital and with manufacturing trade openness vis-à-vis the OECD. We also find evidence that computer adoption is enhanced by high investment rates, good property rights protection, and a small share of agriculture in GDP. Finally, there is some evidence that adoption is reduced by a large share of government in GDP, and increased by a large share of manufacturing. After controlling for the above-mentioned variables, we do not find an independent role for the English- (or European-) language skills of the population.

Meyer (1999) has suggested that episodes of heightened uncertainty about the NAIRU may warrant a nonlinear policy response to changes in the unemployment rate. This paper offers a theoretical justification for such a nonlinear policy rule, and provides some empirical evidence on the relative performance of linear and nonlinear rules when there is heightened uncertainty about the NAIRU.

This paper shows that a small amount of individual-level money illusion may cause considerable aggregate nominal inertia after a negative nominal shock. In addition, our results indicate that negative and positive nominal shocks have asymmetric effects because of money illusion. While nominal inertia is quite substantial and long lasting after a negative shock, it is rather small after a positive shock. (JEL C92, E32, E52)

This paper examines the risk aspects of an investment-based defined contribution Social Security plan. We focus on the risk after the plan is fully phased in. Individuals deposit a fraction of wages to a Personal Retirement Account (PRA), invest these funds in a 60:40 equity-debt mix, and in a similarly invested annuity at age 67. The value of the assets follows a random walk with mean and variance of a 60:40 equity-debt portfolio over the period 1946-95, a mean log return of 5.5 percent (net of administrative costs of 0.4 percent) and a standard deviation of 12.5 percent. We study he stochastic distributions of this process by doing 10, 000 simulations of the 80-year experience of the cohort that reached age 21 in 1998. The resulting annuities are compared to the future defined benefits specified in current law (the benchmark' benefits). With no uncertainty, a 5.5 percent log return would permit the benchmark benefits to be purchased with PRA deposits of 3.1 percent of payroll, only one-sixth of the pay-as-you-go tax needed for the benchmark benefits. Saving a higher share of wages provides a cushion' that protects the individual from the risk of an unacceptably low level of benefits. For example, PRA deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0.17 and the probability that they are less than 61 percent of the benchmark to 0.05. PRA deposits of 9 percent of wages (half of the tax rate required in a pay-as-you-go system) would substantially reduce these risks. This pure investment-based plan is an extreme case. The investment risk can be reduced further by using a mixed system that combines pay-as-you-go and investment-based components or that makes intergenerational transfers conditional on the performance of stock and bond prices.

Title from cover

Preferences over Inflation and Unemployment: Evidence from Surveys of Happiness by Rafael Di Tella, Robert J. MacCulloch and Andrew J. Oswald. Published in volume 91, issue 1, pages 335-341 of American Economic Review, March 2001

This paper characterizes conditions under which interest-rate feedback rules that set the nominal interest rate as an increasing function of the inflation rate induce aggregate instability by generating multiple equilibria. It shows that these conditions depend not only on the monetary-fiscal regime (as emphasized in the fiscal theory of the price level) but also on the way in which money is assumed to enter preferences and technology. It provides a number of examples in which, contrary to what is commonly believed, active monetary policy gives rise to multiple equilibria and passive monetary policy renders the equilibrium unique. (JEL E52, E31, E63)

Research on productivity change in health care has surged in recent years. This interest reflects both policy interest in the value of health care and improving data capabilities and methods for productivity research. Because of the central importance of quality change in health care, this research has directly or indirectly considered not only changes in the costs of producing health services (e.g., the cost of a hospital day), but also changes in the benefits of health services for patient health. Some studies have compared overall changes in population health to changes in aggregate medical expenditures. For example, recent studies by Kevin Murphy and Robert Topel (1999) and William Nordhaus (1999) suggest that the value to current and future generations of Americans of improvements in life expectancy in recent decades has exceeded $2 trillion per year. Accounting for the improvements in ageadjusted functional health that also appear to have occurred in recent decades (e.g., Kenneth Manton et al., 1997) makes the improvement in health even greater. Cutler and Elizabeth Richardson (1999) estimate that, even if only 25 percent of the overall improvement in health is attributable to medical care, then health-care productivity has risen. Yet translating this into health-care productivity calculations leaves many issues unresolved. It is not immediately clear how to determine the share of health improvements that result from medical care. Further, even if overall productivity improvements have been high, it is possible that many changes in health-care productivity have been less valuable. Identifying areas of high and low past and potential future productivity improvements would be helpful for guiding policymakers. For all of these reasons, much of the recent research on health-care productivity has focused on explicit analysis of costs and outcomes for certain common, serious health problems, where other factors can be controlled for and relevant inputs and health outcomes can be measured. In this paper, we review the state of the art of the evidence on health-care productivity. We first summarize a set of recent productivity studies of common conditions that account for a substantial fraction of overall medical spending. These studies also illustrate the range of methods that have been used in disease-level productivity studies. In general, the studies show rather substantial productivity gains in care. We then present new evidence on productivity of treatment for breast cancer, a disease that, at least in its most common forms in adults, many experts believe has seen little improvement in benefits of care over time. Considering cancer allows us to focus on a condition where there is no presumption that medical care has been worthwhile, and where there are a host of complex issues related to case-finding, the timing of diagnoses, and chronic care. We find that the treatment of cancer has had at best small productivity improvements. Outcomes have improved more on a per-case basis than when considering the population as a whole.

According to conventional wisdom, long-term bonds are appropriate for conservative long-term investors. This paper develops a model of optimal consumption and portfolio choice for infinite-lived investors with recursive utility who face stochastic interest rates, solves the model using an approximate analytical method, and evaluates conventional wisdom. As risk aversion increases, the myopic component of risky asset demand disappears but the intertemporal hedging component does not. Conservative investors hold assets to hedge the risk that real interest rates will decline. Long-term inflation-indexed bonds are most suitable for this purpose, but nominal bonds may also be used if inflation risk is low. (JEL G12)