Knowledge that Transforms

Eight Reasons Why Real versus Nominal Interest Rates Is the Most Important Concept in Macroeconomics Principles Courses by Peter E. Kennedy. Published in volume 90, issue 2, pages 81-84 of American Economic Review, May 2000

According to the IMF, in the mid-1970’s approximately 85 percent of developing countries had pegged exchange-rate arrangements. Since then, the situation has changed drastically; today most developing countries have either managed floats or flexible exchange rates. Argentina, Hong-Kong, and a few others may persevere with their currency boards; additional nations may well imitate them. And movements toward common currencies, a la the European Union, may gain strength here and there. Nonetheless, it seems clear that the political and financial prerequisites to adopt such hard pegs are extremely stringent. New attempts are the exception, not the rule. The question for most emerging market economies is no longer “To float or not to float?” but “How to float?” In this note we review some key issues in defining the right answer to this question.

The ability of an incumbent firm to deter entry by writing exclusionary contracts with customers has been a subject of contention in the antitrust literature. The courts ’ concern with such exclusionary contracts has been challenged by those who argue that an incumbent, faced with buyers whose interest is to promote entry and competition, would have to pay buyers more for the inclusion of exclusionary provisions than it could possibly gain from exclusion. In a provocative article, Eric B. Rasmusen et al. (1991) (henceforth, RRW) have argued that an incumbent may in fact be able to exclude rivals profitably using such contractual provisions

This paper uses a new database on foreign aid to examine the relationships among foreign aid, economic policies, and growth of per capita GDP. We find that aid has a positive impact on growth in developing countries with good fiscal, monetary, and trade policies but has little effect in the presence of poor policies. Good policies are ones that are themselves important for growth. The quality of policy has only a small impact on the allocation of aid. Our results suggest that aid would be more effective if it were more systematically conditioned on good policy.

Productivity Levels and International Competitiveness between Canadian and U.S. Industries by Frank C. Lee and Jianmin Tang. Published in volume 90, issue 2, pages 176-179 of American Economic Review, May 2000

The large literature that analyzes the impact of immigration on the United States typically focuses on measuring the labor market and fiscal consequences. This literature, however, has ignored the impact of immigration on other sectors of society. One sector that is of great interest is the American university, where the share of nonresident aliens in the graduate student population rose from 5.5 percent in 1976 to 10.5 percent in 1996. Despite the rapid growth in the number of foreign students, little is known about their impact on the educational process. Nevertheless, undergraduates frequently complain that the lack of English language proficiency among many foreign-born Teaching Assistants affects adversely their understanding of the material. This paper addresses the question that is at the heart of these complaints: Do foreign-born teaching assistants have an adverse impact on the scholastic achievement of American undergraduates? To provide empirical evidence on this issue, I use data drawn from a survey of undergraduates enrolled in economics principles classes at a large public university. The data suggest that foreign-born Teaching Assistants have an adverse impact on the class performance of undergraduate students.

This paper investigates the Bayesian decision-theoretic foundations of the Wall Street adage that `timing is everything'. One might think that a `small' risk-neutral trader wishes to act immediately upon any private information he possesses. I begin with a counterintuitive nding that trade timing doesn't matter for an Arrow security, as one's expected return per dollar invested is a martingale. This timing irrelevance discovery motivates an analysis of general compound securities. While timing there is ambiguous, I nd that natural monotone likelihood ratio assumptions on both private and public information restore the intuition that one should trade with all due dispatch.(This abstract was borrowed from another version of this item.)

This paper investigates the impact on bank stock prices of emerging market currency crises and bailouts. The stock market distinguishes between banks with exposure to a crisis country and other banks. In general, banks with exposures to a crisis country are affected adversely by currency events and positively by bailouts. Other banks are mostly unaffected by events in countries experiencing a crisis. The paper uses the impact of the LTCM crisis on bank stock prices to put the emerging market events in perspective. The LTCM crisis had no significant contagion effects in the banking sector either, but banks that participated in the LTCM rescue experienced negative stock returns when the rescue was announced.

In many countries, equality of political rights, including the right to vote over taxes and transfers, goes along with substantial inequality of economic conditions. This observation lies at the root of one fundamental issue in political economy, one about the factors that limit the extent of redistribution in democracies. The conventional economic wisdom on this issue can roughly be summarized by two arguments. Firstly, redistributive taxation may be limited by various kinds of incentive costs of taxation [as, e.g., in James A. Mirrlees (1971), Kevin W.S. Roberts (1977), Dennis N. Epple and Thomas Romer (1991), and Thomas Piketty (1995)]. Secondly, redistribution may be dampened by the lobbying activity of high-income groups and by various imperfections inherent to the political process that determines the tax system [as, e.g., in Gary S. Becker (1983) and John E. Roemer (1995)]. While both arguments offer illuminating insights into the phenomenon of redistribution, they are also based on a very crude description of human behavior, one which ignores social motivations of action, both in the economic and the political sphere. The present paper develops an explanation that takes such motivations into account. Specifically, it shows that limits to redistribution may arise when economic inequality has an informational value for social decisions. Our approach is based upon the following observation: many goods and decisions that heavily affect an individual’s quality of life are not allocated or made through markets but through social interactions (Thomas Scitovsky, 1976). For instance, although people have strong preferences over how they are treated by others and over whom they mate with, these things are not the object of market transactions. A number of sources of satisfaction, like conversation, dinners and parties, playing with others, and being observed and admired, are nonmarket goods, for which a keen social competition between individuals often develops. As shown by Harold Cole et al. (1992), the existence of social—rather than market—competition for some goods can endogenously generate a concern for relative position in the income distribution. When information about relative income is private, individuals become interested in the observable consumption differentials between them and their social competitors. Since consumption differentials are influenced by redistributive taxation, the political attitudes of people toward redistribution will be shaped by its expected impact on social competition. In some identifiable environments, this concern for social success may be the crucial factor that limits the extent of redistribution desired by a majority of voters. Specifically, while the middle class may obtain economic benefits from a large amount of redistributive taxation, it may oppose an equalization of living standards since this would harm its social success. The fear of losing social status in favor of the poor induces the middle class to enter a political alliance with the rich which supports conservative taxation programs. In the sociological literature, scholars of voting behavior have often suggested that the need for social recognition plays a crucial role in shaping political attitudes. Seymour M. Lipset (1967) pointed out that white-collar workers tend to be socially valued similarly as those higher in the system and, although their income may be only slightly larger than that of manual workers, white collars are much more likely to * Corneo: Department of Economics, University of Osnabruck, Rolandstrasse 8, D-49069 Osnabruck, Germany, CESifo, Munich, and CEPR, London; Gruner: Department of Economics, University of Mannheim, D-68131 Mannheim, Germany, IZA, Bonn, and CEPR, London. We would like to thank Emmanuelle Auriol, Dieter Bos, Peter Funk, Mike Hout, Olivier Jeanne, Peter Jonas, Georg Noldeke, Thomas Piketty, Regis Renault, John Roemer, Jens Weidmann, and three anonymous referees for insightful comments and suggestions. We have also benefited from the comments of participants at workshops and conferences in Barcelona, Bonn, Davis, Jena, Maastricht, Magdeburg, Mannheim, Montreal, Munich, Rotterdam, Silvaplana, Tel Aviv, Tilburg, Toulouse, and Warwick, at which we presented earlier versions of this work. Financial support from the Deutsche Forschungsgemeinschaft, SFB 303 at the University of Bonn, is gratefully acknowledged.