Knowledge that Transforms

Transport time increases with distance traveled, and time is valuable. We show the implications of these facts for global specialization and trade: products where timely delivery is important will be produced near the source of final demand, where wages will be higher as a result. In the model, timely delivery is important because it allows retailers to respond to final demand fluctuations without holding costly inventories, and timely delivery is possible only from nearby locations. Using a unique dataset that allows us to measure the retail demand for timely delivery, we show that the sources of U.S. apparel imports have shifted in the way predicted by the model, with products for which timeliness matters increasingly imported from nearby countries.

The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence by Emmanuel Saez and Michael R. Veall. Published in volume 95, issue 3, pages 831-849 of American Economic Review, June 2005

Meese-Rogoff Redux: Micro-Based Exchange-Rate Forecasting By MARTIN D . D . EVANS AND RICHARD K . LYONS* This paper compares the true, ex ante fore- casting performance of a micro-based model against both a standard macro model and a random walk. In contrast to existing literature, which is focused on longer-horizon forecasting, we examine forecasting over horizons from one day to one month (the one-month horizon being where micro and macro analysis begin to over- lap). Over our three-year forecasting sample, we find that the micro-based model consistently outperforms both the random walk and the macro model. Micro-based forecasts account for almost 16 percent of the sample variance in monthly spot rate changes. These results pro- vide a level of empirical validation as yet unat- tained by other models. The forecasting experiment proposed by Richard Meese and Kenneth Rogoff (1983) re- mains a benchmark against which exchange- rate models are judged. Their result that structural macro models cannot outperform a naive random walk has proved robust over the decades. Yet, the Meese-Rogoff paper was never about forecasting in the true sense (i.e., using tirrie-f information to forecast exchange rates at t + 1). B y using concurrent, realized values of the forcing variables, their regressions were more about concurrent explanation than about ex ante forecasting. Their only forecast- ing element is in their reliance on ex ante data to estimate equation parameters, which appro- priately penalized models whose estimated pa- rameters were unstable. tion for the random-walk nature of exchange rates is that there exists some unobserved fun- damental that itself follows a random walk (un- observed being important because fundamentals proposed in most macro models do not follow random walks). They offer a different explana- tion, one rooted in the asset approach to ex- change rates and the present-value relation that follows from it. Specifically, they show that i f fundamentals are 1(1), but not necessarily ran- dom walks, then as the discount factor in the present-value relation approaches 1, the ex- change rate will follow a process arbitrarily close to a random walk. Intuitively, given that an 1(1) process can be split into random-walk and stationary components, a discount factor near 1 means that most all of the weight is placed on fundamentals far into the future, ex- pectations of which are dominated by the random- walk component. Charles Engel and Kenneth West (2004, 2005) provide a valuable perspective on the forecastability of exchange rates. One explana- This paper takes the analysis of Engel and West as an important reorientation of thinking and brings it to the natural next step. Specifi- cally, if there is little room for forecasting based on stationary components of fundamentals, then one needs to focus on where all the action is, namely, exchange-rate dynamics that come from expectational surprises. Though the sur- prise part is, by definition, orthogonal to public information, our micro-based model shows that there should exist types of nonpublic infor- mation that are useful for forecasting this part, and where to look for these types of informa- tion. We then locate data on these types of nonpublic information and test whether they have true, ex ante forecasting power. We should * Evans: Department of Economics, Georgetown Uni- versity, Washington, DC 20057, and NBER; Lyons: Haas School of Business, University of California, Berkeley, C A 94720-1900, and NBER. We are grateful to Ken West for his comments and to the National Science Foundation for financial support. We refrain from using the word news because it has too strong an association with macro information that is public, which, even in the most careful of event studies, explains less than 5 percent of exchange-rate variation in total (see Torben Andersen et al., 2003).

This paper suggests a mechanism that describes individuals' positive self-image in subjective assessments of their relative abilities. The mechanism assumes individuals have heterogeneous production functions that determine ability as a function of multiple skills; make skill-enhancing investments with the goal of maximizing their ability; and make ability comparisons using their own production function. Within this framework, the paper provides conditions under which there is positive self-image. Positive self-image is increasing in the ease of the task, the number of different skills needed for the task, and the variability of production technologies in the population.

Involving Undergraduates in Research To Encourage Them To Undertake Ph.D. Study in Economics by Ronald G. Ehrenberg. Published in volume 95, issue 2, pages 184-188 of American Economic Review, May 2005

Few health policy issues have been both subjects of more consensus and yet more debate than that of expanding insurance coverage of the uninsured. On the one hand, surveys show a majority of the public identifies the absence of insurance coverage for fifteen

When Optimal Choices Feel Wrong: A Laboratory Study of Bayesian Updating, Complexity, and Affect by Gary Charness and Dan Levin. Published in volume 95, issue 4, pages 1300-1309 of American Economic Review, September 2005

We provide an empirical assessment of the comparative advantage gains from trade argument. We use Japan’s nineteenth-century opening up to world commerce as a natural experiment to answer the following counterfactual: “By how much would real income have had to increase in Japan during its final autarky years of 1851–1853 to afford the consumption bundle the economy could have obtained if it were engaged in international trade during that period?” Using detailed historical data on trade flows, autarky prices, and Japan’s real GDP, we obtain upper bounds on the gains from trade of about 8 to 9 percent of Japan’s GDP.

We analyze stock trades made by individuals holding stock in both taxable and tax-deferred accounts. By comparing trades across these two types of accounts, we uncover a capital gains lock-in effect in taxable accounts. The lock-in effect is more pronounced for large stock transactions and for stocks held for at least 12 months. Over shorter horizons, the disposition effect outweighs the lock-in effect. Comparison of loss realizations in taxable and tax-deferred accounts yields evidence of tax-loss selling throughout the year. Effective accrual tax rates for stocks that experience substantial appreciation are substantially below the statutory tax rate on long-term gains.