Knowledge that Transforms

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.

Two modifications are introduced into the standard real-business-cycle model: habit preferences and a two-sector technology with limited intersectoral factor mobility. The model is consistent with the observed mean risk-free rate, equity premium, and Sharpe ratio on equity. In addition, its business-cycle implications represent a substantial improvement over the standard model. It accounts for persistence in output, comovement of employment across different sectors over the business cycle, the evidence of “excess sensitivity” of consumption growth to output growth, and the “inverted leading-indicator property of interest rates,” that interest rates are negatively correlated with future output. (JEL D10, E10, E20, G12)

Standard econometric analysis incorporates racial classification as an exogenous binary variable. However, econometric specification of racial identity by a simple binary variable masks differences in the meaning and use of racial/ ethnic identity across social groups. Consider an analysis of earnings differences between nonHispanic whites and Hispanics. A white/brown dichotomous variable in the earnings equation is clearly inappropriate since a large fraction of Hispanics either self-identify as white (regardless of how they are seen by others) or have physical features that are indistinguishable from non-Hispanic whites (though they may self

In this paper we investigate how telecommunications infrastructure affects economic growth. We use evidence from 21 OECD countries over a 20-year period to examine the impacts that telecommunications developments may have had. We jointly estimate a micromodel for telecommunication investment with a macro production function. We find evidence of a significant positive causal link, especially when a critical mass of telecommunications infrastructure is present. Interestingly, the critical mass appears to be at a level of telecommunications infrastructure that is near universal service. (JEL O57, O47, L69)

Using U.S. Consumer Expenditure Surveys, we estimate “quality Engel curves” for 66 durable goods based on the extent richer households pay more for each good. The same data show that the average price paid rises faster from 1980 to 1996 for goods with steeper quality Engel curves, as if households are ascending these curves. BLS prices likewise increase more quickly for goods with steeper quality Engel curves, suggesting the BLS does not fully net out the impact of quality upgrading. We estimate that annual quality growth averages 3.7 percent for our goods, with 2.2 percent showing up as higher inflation. (JEL D12, O40, E31)

Normative judgments embodied in the American legal system mandate that, in certain respects, public policy should treat all members of the population uniformly. Nevertheless, the legal system permits many forms of disparate treatment of the population. The Medicare program provides health-care benefits to persons age 65 and older, but not to younger Americans. The federal welfare-to-work program known as TANF permits states to treat welfare recipients differentially, placing some in job-training and others in basic-skills classes. Judicial sentencing guidelines variously permit or require judges to sentence convicted offenders differentially based on past convictions. Public high schools track students, making class assignments vary with past student achievement. In these and other settings where legal constraints do not preclude disparate treatment, society may choose among many alternative treatment rules. A program could mandate uniform treatment of the population or require that treatment vary in particular ways with observable covariates of the persons treated (e.g., age in the case of Medicare, past convictions in the case of sentencing), or permit agents of society (e.g., judges, welfare case managers, school counselors) to make their own treatment choices, subject to specified constraints. Research on program evaluation can help to inform public policy through efforts to learn the consequences of alternative treatment rules. In particular, evaluation research should seek to characterize how treatment response varies across the population. If we learn that all persons respond to treatment in much the same manner, then the best policy may be one that treats all persons uniformly. However, if we learn that treatment response varies with observable covariates of the persons treated, then society may be able to do better by designing programs in which treatment varies appropriately with these covariates. For example, society may be able to lower recidivism among criminal offenders by sentencing some offenders to prison and others to probation. It may be able to increase the life-cycle earnings of welfare recipients by placing some in job-training and others in basic-skills classes. In these and many other cases, the key to success is to determine which persons should receive which treatments. Regrettably, evaluation research has had little to say about how treatment response varies with observable covariates of the persons treated. A common practice, especially in observational studies, has been to assume that all persons respond to treatment in the same manner. Studies that are sensitive to possible variation in treatment response may report findings by race or gender or age, but they rarely disaggregate the population more finely. As a consequence, policymakers seeking to design programs for heterogeneous populations have to speculate on the consequences of alternative treatment rules. This short article draws on my recent research (Manski, 1997, 2000a, b) to argue that increased attention to observable variation in treatment response would enhance the value of evaluation research.

Understanding, Speaking, Reading, Writing, and Earnings in the Immigrant Labor Market by Anthony P. Carnevale, Richard A. Fry and B. Lindsay Lowell. Published in volume 91, issue 2, pages 159-163 of American Economic Review, May 2001

The Response of Expenditures to Anticipated Income Changes: Panel Data Estimates by Martin Browning and M. Dolores Collado. Published in volume 91, issue 3, pages 681-692 of American Economic Review, June 2001

past half century has seen a dramatic multilateral reduction in tariff barriers under General Agreement on Tariffs and Trade (GATT) negotiations. However, as tariff barriers have fallen, attention has shifted to the use of domestic policies as secondary trade barriers. A primary concern is that, as countries sign trade agreements that constrain their ability to pursue trade goals through trade policy, there will be unilateral incentives for governments to distort their domestic policies as a secondary means of protection.1 Increasingly, international trade disputes revolve around a country's use of internal regulations as a means of restricting trade. United States has successfully challenged the of liquor taxes in both Japan and Korea as discriminating against imported liquor, while Venezuela and Brazil have challenged American standards for reformulated and conventional gasoline as trade protection masquerading as environmentalism. GATT contains several articles concerning the international regulation of domestic policies, but the question of how to fully incorporate domestic policies within GATT negotiations (and other international trade agreements) remains contentious. Indeed, at both the Ministerial Meeting in 1994 (at the close of the Uruguay round) and the recent unsuccessful Ministerial Conference in Seattle, many GATT delegates renewed demands for the relationship between trade and various domestic policies (e.g., environmental policy, labor standards, or competition policy) to be examined. Despite the importance that has recently been placed on international cooperation over domestic policies, no theoretical basis exists for considering how to cooperate over both trade and domestic policies within an international agreement. Previous papers on negotiation over two instruments of protection (e.g., Copeland, 1989, 1990; Thomas L. Hungerford, 1991) have assumed asymmetric limitations on cooperation (i.e., they assume that one of the two instruments is either nonobservable or nonnegotiable). This paper extends such work by investigating cooperation over two negotiable instruments of protection under symmetric limitations on cooperation, and provides insight into the design of international trade agreements that incorporate cooperation over domestic policies. I adopt the view that enforcement issues are central to the understanding of international cooperation. One of the challenges of international cooperation is the absence of a central authority to enforce the terms of an agreement. Without access to an external enforcement mechanism, international agreements are viable only as long as member countries view continued cooperation to be in their own self-interest (i.e., the benefits from cooperating outweigh the potential gains from cheating).2 While the GATT/ * Department of Economics, University of Miami, P.O. Box 248126, Coral Gables, FL 33124 (e-mail: [email protected]). I would like to thank Bob Staiger, Bob Baldwin, Wolfgang Keller, Phillip McCalman, Jenny Minier, seminar participants at the NBER Conference on Trade, the Environment and Natural Resources, and two anonymous referees for comments on earlier versions of this paper. Any remaining errors are, of course, my own. ' For example, Brian R. Copeland (1990) examined negotiation over one trade barrier, leaving a secondary trade barrier (e.g., nontariff barriers, domestic legislation, etc.) to be set noncooperatively. He shows that trade liberalization will induce substitution toward the less efficient, nonnegotiable instrument of protection due to the unilateral incentives to maintain trade protection facing countries. Thus, within a cooperative framework, the two types of barriers serve as imperfect substitutes for each other. 2 As stated by Kenneth W. Dam in his review of the GATT institution: The best guarantee that a commitment of any kind will be kept (particularly in an international setting where courts are of limited importance and, even more important, marshals and jails are nonexistent) is that the parties continue to view adherence to their agreement in their mutual interest ... Thus, the GATT system, unlike most legal systems ... , is not designed to exclude self-help in the form of retaliation. Rather, retaliation, subjected to established procedures and kept within prescribed bounds, is made the heart of the GATT system (Dam, 1970 pp. 80-81).