Knowledge that Transforms

T HIS study considers the market for Eurodollar deposits as a structural system with determinate demand and supply relationships. It is important at the outset to distinguish the stock demand for Euro-dollar deposits, which we shall be investigating here, from the flow demand for Euro-dollar credit. Machlup (1970) points out that the demand for Euro-dollar credit is a demand for a flow of funds to borrowers who, in turn, plan to pay out the funds they have borrowed. The demand for Euro-dollar deposit balances is, on the other hand, a demand for money, or near-money, to hold. We shall be concentrating upon the factors affecting the demand for a stock of Eurodollar deposits to hold.1 Since we shall not be taking the stock of Euro-dollar deposits in existence at a point in time as exogenously given, we shall also be identifying an equation to determine the stock of Euro-dollar balances supplied by Euro-dollar issuing institutions (hereafter Euro-banks). This will be based on an identifiable stock of reserves held by Euro-banks. Briefly, the procedure and results are as follows. Quarterly data from 1964-III through 1970-IV are employed to obtain parameter estimates for scale and substitution arguments in a stock demand function for Euro-dollar deposit balances as well as to obtain an estimated equation for the stock of dollar claims produced by Euro-banks. The empirical results suggest that a stable stock-demand function for Euro-dollar deposit balances exists along with a stable stock-supply function for Eurodollar deposits. The results also suggest that about 40 per cent of the growth of Euro-dollar deposits in the 1964-III 1970-IV period was due to the multiple deposit expansion process.

Paul R. Gregory, John M. Campbell, Benjamin S. Cheng, A Simultaneous Equation Model of Birth Rates in the United States, The Review of Economics and Statistics, Vol. 54, No. 4 (Nov., 1972), pp. 374-380

Yoel Haitovsky, George Treyz, Forecasts with Quarterly Macroeconometric Models, Equation Adjustments, and Benchmark Predictions: The U.S. Experience, The Review of Economics and Statistics, Vol. 54, No. 3 (Aug., 1972), pp. 317-325

Goldberger, A. S., Econometric Theory (New York: John Wiley and Sons, Inc., 1964). Johnston, J., Econometric Methods (New York: McGraw-Hill Book Company, 1963). Yotopoulos, P. A., and L. J. Lau, A Test for Balanced and Unbalanced Growth, this REVIEW, LII (Nov. 1970), pp. 376-383. Yule, G. U., and M. G. Kendall, An Introduction to the Theory of Statistics (14th edition) (London: Griffin and Company, Ltd. 1950).

"Inl statistical inference proper, the model is never questioned.... The methods of mathe-matical statistics do not provide us with a means of specifying the model. " 1

T HE purpose of this paper is to point out how the efficient instrumental-variables technique discussed by Brundy and Jorgenson (1971) can be modified to take into account auto-regressive properties of the error terms. The limited-information and full-information estimators proposed in this paper are consistent and have the same asymptotic distributions as the limited-information and full-information maximum likelihood estimators, respectively. The full-information estimation of simultaneous equations models with auto-regressive errors has been discussed by Sargan (1961), Hendry (1971), Chow and Fair (1973), and Dhrymes (1971). Sargan originally proposed the full-information maximum likelihood estimation of such models, and Hendry and Chow and Fair have recently developed computationally feasible methods for obtaining the maximum likelihood estimates. Hendry considered only the case of completely unrestricted auto-regressive coefficient matrices (i.e., no zero elements), whereas Chow and Fair considered the case of restricted auto-regressive coefficient matrices as well. Dhrymes has recently proposed the three-stage least squares estimator of simultaneous equations models with auto-regressive errors. Dhrymes also considered only the case of completely unrestricted auto-regressive coefficient matrices. The limited-information estimation of simultaneous equations models with auto-regressive errors has been discussed by Sargan (1961), Amemiya (1966), and Fair (1970), among others. Sargan proposed the limited-information maximum likelihood estimation of such models, and Amemiya and Fair considered various two-stage least souares estimators of such models. Most of the work on limited-information estimators has been concerned with the case of diagonal auto-regressive coefficient matrices. Brundy and Jorgenson's criticism of the twoand three-stage least squares estimators, namely, that the first stage involves estimating reduced form equations with a very large number of variables included in them, holds even more so for models with auto-regressive errors. For these models, the reduced form equations include not only all of the predetermined variables in the system but also all of the lagged endogenous and lagged predetermined variables. In fact, one of the main purposes of the work by Fair (1970) was to suggest ways in which the number of variables used in the first stage regressions of two-stage least squares might be decreased with perhaps small loss of asymptotic efficiency. The advantage of the instrumental-variables techniques proposed in the Brundy-Jorgenson paper and in this paper is that the first stage regressions need not be run.

PpT HE issue is stated that after Phase II the United States faces or competition. Leading economists Charls Walker, Charles Schultze, Murray Weidenbaum and others who oppose controls in principle nevertheless caution (forecast?) against expecting an early return to free markets. The general prescription comes to something like Weidenbaum's: Basically, we need to deal with those concentrations of private economic power which have become insulated from the influences of aggregate monetary and fiscal policy. 1 Charls Walker, Undersecretary of the Treasury, recently predicted voluntary controls for Phase III in a talk before the Manufacturing Chemists Association.2 Walker said this will require what Paul McCracken, former Chairman of the President's Council of Economic Advisers, called a 'social compact'a consensus among business and labor that substantial gains in real economic growth must be paid for by wage and price stability. Arguments supporting such a definition of the issue are grounded in believed about concentration of economic power and concern derived from accepted interpretations of these facts. The evidence concerning these facts will be reviewed in a moment.

FEW economic magnitudes have commanded as much attention from economists as the earnings of capital. Despite this emphasis, it is interesting that there exists scant empirical evidence concerning the determinants of capital income over the relatively long run. This is rather surprising since the short-term behavior of profits has come under considerable scrutiny by econometric model builders. Existing evidence concerning long-run behavior stems primarily from recent studies of the incidence of the corporation income tax.' In order to isolate the effects of the tax, investigators have had to identify and eliminate the effects of the nontax determinants of profit. As would be expected, conclusions regarding tax incidence have turned out to be extremely sensitive to the underlying model of profit. It is the purpose of this paper to ascertain the extent to which a model based upon standard competitive behavior is capable of explaining the time path of corporation earnings over a period of almost forty years. Since most incidence studies have been based upon models which explicitly or implicitly assume nonprofit maximizing behavior, such a study will provide a useful extension of the empirical evidence concerning the behavior of profit as well as a test of the relative efficacy of standard economic theory. Furthermore, unlike existing studies, the model will be tested in such a way that the contribution of such determinants of profit as technological change, capital intensity and aggregate demand can be isolated. Since indirect evidence on such factors exists from studies of aggregate production functions and business cycle behavior, the plausibility of the estimates can be determined. Finally, the model can be used to provide additional evidence concerning the shifting of the corporation income tax. If the model is specified correctly, the introduction of a corporation income tax variable into the estimating equation should have little effect. In what follows, a model of corporation earnings is developed and tested for the manufacturing sector of the United States economy for the period 1930-1968. The model is based upon the hypothesis that the return to capital depends upon its marginal productivity and short-run fluctuations in output. It is found that the model does quite well in explaining the time path of manufacturing earnings over the sample period; all coefficients are statistically significant, have the right sign, and are of reasonable magnitude. These estimates also provide evidence concerning the underlying aggregate production function. Specifically, the estimates imply an elasticity of factor substitution of less than one, and technical progress which is not solely of the Harrod-neutral variety. At this point the question of short-run corporation tax shifting is taken up. A suitably defined tax variable is introduced into the statistical model. It is found that the tax variable does not significantly add to the explanatory power of the model; its coefficient is small in absolute value and is statistically insignificant. It is concluded, therefore, that corporations bear the full burden of the corporation income tax in the short run.