Knowledge that Transforms

This study demonstrates that the mixed diffusion-jump process is superior to the stable laws or a mixture of normals as a model of exchange rate changes for the British pound, French franc, and the We st German mark relative to the United States dollar. The parameter value s for the mixed diffusion-jump process are dependent on the monetary policy regime in force in the United States, with the estimates for the franc and mark being intertemporally similar but different from the pound. Copyright 1988 by MIT Press.

The debt crisis that began in 1982 forced a number of developing countries that had relied on external financing into rapid adjustment of their current account positions. In many of these countries external adjustment mainly took the form of import reduction, or what has been termed 'import compression,' to generate trade balance surpluses necessary to service the existing stock of foreign debt. While the effects of import compression on consumption and growth have been discussed in the literature, there has been little concern expressed with regard to the direct effects such a policy can have on export performance. This paper develops a model that takes explicit account of the feedbacks between imports and exports that arise through the effects of imported inputs on exports and the availability of foreign exchange on imports. Empirical tests of this model for 34 developing countries tend to confirm both these hypotheses. These results point clearly for additional foreign financing to reduce the need for import compression and its attendant-negative effects on the supply of exports.

Jacques van der Gaag, Wim Vijverberg, A Switching Regression Model for Wage Determinants in the Public and Private Sectors of a Developing Country, The Review of Economics and Statistics, Vol. 70, No. 2 (May, 1988), pp. 244-252

Private transfer payments are modeled as outcomes of a constrained social choice pro blem facing donors. The approach is applied to a large household leve l data set for Java and hypotheses are tested concerning the performa nce of the "moral economy" as a social security system. Transfer be havior is found to be very different between rural and urban areas. W hile transfer receipts and outlays are income inequality reducing in rural areas, this is not the case in urban areas. There is also evidence of transfers being targeted to disadvantaged households such as the sick, elderly, and (for urban areas) the unemployed. Copyright 1988 by MIT Press.

Catherine Morrison, Quasi-fixed Inputs in U.S. and Japanese Manufacturing: a Generalized Leontief Restricted Cost Function Approach, The Review of Economics and Statistics, Vol. 70, No. 2 (May, 1988), pp. 275-287

Labor supply functions for married men and women are formulated as a dynamic simultaneous equations system , which is estimated using panel data. Controlling for fixed individu al effects allows marginal labor supply responses to be disentangled from permanent patterns in hours worked due to assortative mating. Th e results suggest that the labor supply of husbands and wives without preschool children is not jointly determined in the short run, while families with young children exhibit strong interactions in work hou rs and negative cross-earnings effects. Neither the joint utility mod el of family labor supply nor an ad hoc "traditional family" model is supported by these results. Copyright 1988 by MIT Press.

Real exchange rates between the United States and its major trading partners were calculated for the Bretton Woods and flexible exchange rate periods. Unit root tests indicate that Purchasing Power Parity performed poorly in both periods. Tests for cointegration reveal limited instances in which it is possible to estimate the deviations from PPP as an error correcting model. The estimated error correcting models indicate that foreign, but not U.S., prices responded to deviations from PPP. Frenkel's (1981b) finding that Purchasing Power Parity (PPP) worked better during the 1920s than the 1970s caused considerable controversy. For example, Davutyan and Pippenger (1985) contend that the socalled collapse of PPP is a result of an increase in the relative importance of real versus monetary shocks. They argue that the 1970s, as opposed to the 1920s, was characterized by real supply shocks and the international coordination of monetary policies. The argument is that PPP did not fail; rather, there was an increase in the volatility of those factors giving rise to deviations from PPP. Hakkio (1984) reestimated PPP over the 1920s and 1970s; using cross-country tests (i.e., SURE estimates) to improve the efficiency of his estimates, he was able to support the hypothesis that PPP worked better in the 1970s than in the 1920s. On the other hand, papers by Adler and Lehman (1983), Dornbusch (1980), Frenkel (1981a), Junge (1985), and Krugman (1978) report findings contrary to the PPP hypothesis. Moreover, Kenen and Rodrik (1986) find that the volatility of real exchange rates has increased throughout the flexible rate period. This paper tries to shed some light on the importance and persistence of the observed deviations from Purchasing Power Parity under alternative exchange rate systems. While it is interesting to compare PPP in the 1920s versus the 1970s, it is equally useful to compare the 1960s versus the 1970s and 1980s. If real supply shocks and lack of monetary coordination are characteristic of the latter period, PPP should perform better in the 1960s. To illustrate the issues involved, consider the following econometric model of (Relative) Purchasing Power

Those with greater earnings capacity are likely to choose safer jobs, assuming safety is a normal good. Those who e xperience greater returns to job may choose riskier jobs. This paper estimates wage premia for risk of fatality and injury, allowing unobs ervables to affect earnings capacity and the returns to risk. As the endogeneity of job risk causes bias in OLS estimation, the model is e stimated with simultaneous equations and modified selection bias tech niques. The results indicate that unobserved heterogeneity in the ret urns to risk is important and that OLS underestimates the wage premia for fatality and injury risk. Copyright 1988 by MIT Press.

Nonstationarity in the levels of spot exchange rates and domestic and foreign price indices makes the use of conventional tests of the absolute version of purchasing power parity (PPP) inappropriate. If PPP is true, inter-country commodity arbitrage ensures that deviations from a linear combination of spot exchange rates and domestic and foreign price levels should be stationary. Under these conditions, exchange rates and price levels should form a cointegrated system. We find the null hypothesis of no cointegration cannot be rejected for all five countries, thus violating the long-run absolute version of PPP.

The conventional paradigm that capital movements respond to differences in interest rates between countries and simultaneously reduce interest-rate differentials has been difficult to demonstrate empirically. This paper argues that such a demonstrati on may be feasible if a simultaneous model is specified that describe s the dynamics of adjustment and if a data interval is chosen that re veals the dynamics. Examination of U.S. and Canadian data from the 19 60s supports the argument-with monthly observations, that paradigm is strongly supported; with quarterly observations, capital flows and i nterest rates are not significantly related. Copyright 1988 by MIT Press.