Knowledge that Transforms

"July 1984, revised November 1985."

[This paper investigates whether agents can learn how to form rational expectations using standard econometric techniques in the case of a linear stochastic supply and demand model with a production lag. This model has a unique rational expectations equilibrium in which the expected price is a linear function of an observable exogenous random variable. Outside of rational expectations equilibrium agents predict the price by using a regression of past prices on the exogenous random variable where the regression is estimated by either ordinary least squares or Bayesian methods. If the agents are Bayesians, they may have diverse prior beliefs on the mean of the estimated parameter, but all have the same precision. This estimation procedure would be appropriate for an outside observer estimating the parameters of the model in rational expectations equilibrium the coefficient of the equation relating the mathematical conditional expectation of the price to the exogenous variable is constant through time. Outside rational expectations equilibrium this coefficient, which changes each time new data change the regression coefficient. The data are generated by a time-varying parameter model where the varying parameter is determined by past data and the estimation procedure. Agents fail to take this feedback into account and so are estimating a misspecific model.]

Donald W. K. Andrews, A Note on the Unbiasedness of Feasible GLS, Quasi-Maximum Likelihood, Robust, Adaptive, and Spectral Estimators of the Linear Model, Econometrica, Vol. 54, No. 3 (May, 1986), pp. 687-698

Seasonally adjusted monetary aggregate data as published by the Federal Reserve, are subject to large revisions, which can be interpreted as error in the preliminary measures. Since short-run monetary policy is set for seasonally adjusted data when only preliminary estimates for recent months are available, an interesting question is: Would policy have been much different if final data had been available? For the period of the seventies, we estimate what would have been the monthly Federal Open Market Committee targets for Ml and the federal funds rate if the preliminary estimate of the rate of growth of seasonally adjusted Ml had been equal to the final one. We find that, despite their large size, revision errors seem to have little impact on the setting of targets. The results suggest that the Fed reacts to a signal in the rate of growth of Ml which is smoother than the seasonally adjusted series and less affected by revisions. Since the error associated with the revision is orthogonal to the preliminary measurement, while the noise extracted is orthogonal to the true variable (the signal), the analysis illustrates the different effects of the two alternative error-in-variable specifications.

[A price equilibrium existence theorem is proved for exchange economies whose consumption sets are the positive orthant of arbitrary topological vector lattices. The motivation comes from economic applications showing the need to bring within the scope of equilibrium theory commodity spaces whose positive orthant has empty interior, a typical situation in infinite dimensional linear spaces.]

accuracy or precision of the results. Input-output analysis is no different. The results of input-output studies are almost always expressed as point estimates, and an assessment of the reliability of these estimates is left the reader. The stochastic analysis of errors is difficult undertake because of the lack of hard data of a probabilistic nature validate or refute empirically any conclusions drawn from such a study. This fact, combined with the complex interrelationships involved, has resulted in few applied input-output studies within a stochastic framework. Early contributors in this research area were Evans and Quandt. Evans [5] developed a formula for the coefficient of variation of the estimated output vector, under the assumption that all elements of the A matrix are fixed except for one row where the coefficient of variation is constant. Quandt [ 16] derived approximations of the variances and covariances of the elements in the Leontief inverse, and thus approximations of the variances of the estimated sector outputs. Using simulation techniques on a 3 x 3 hypothetical matrix, he proposed that the lognormal distribution can be used to establish approximate confidence limits for the

Studies in the production structure of any national economy, as revealed in its inputoutput table, have been closely related to the question of the interindustrial dependence or hierarchical structures of productive sectors leading from primary to final production. In particular, the notion of hierarchy provides a useful tool when one wants to draw inferences on the structural change or international difference of industrial structures. The standard technique for studying this notion is to triangularize the input-output table by interchanging sectors in order to maximize the entries below the main diagonal. In a perfect triangularized table, the entries above the main diagonal should be zero. For example, such a strong one-way interdependence relation as cotton-textiles-clothing can easily establish the hierarchy. Due to the existence of circular relations like coal-steel-mining equipment-coal, it is not possible to triangularize the input-output table perfectly. This paper extends and revises the previous triangulation method which is based on a permutation theorem deriving from the interchange of adjoining two industrial groups, into that among three industrial groups (Theorem 2). The new algorithm based on Theorem 2 is demonstrated by actually computing the suboptimal orderings for the four input-output tables for such more developed countries (MDC's) as the United States, Italy, Norway, Japan, and the two tables for such less developed countries (LDC's) as India and Korea. The empirical results suggest that sectors can be arranged in a similar hierarchical order among MDC's and LDC's. Transport Equipment, Machinery, Apparel, Leather and Products, Grain Mill Products, and Processed Foods, which link directly to the final demand, are recorded as higher-order sectors. Trade, Transport, and Services are lower-order ones, and Energy sectors such as Electric Power, Coal Products, Coal Mining, Petroleum, Petroleum Products and Natural Gas are the lowest. Consequently, this paper provides some more evidence in support of the similarity of hierarchical structures of production among these countries.

Most of the empirical work on investment is based on the existence of a relation between investment and the expected present val of marginal profits.Thus, in this paper we compute such a present value series, under various assumptions about demand and technology and examine its relation to investment.We find that variations in this present value series are, surprisingly,due more to variations in the cost of capital than to variations in marginal profit. We also find that the present value series, although significantly related to investment, still leaves unexplained a large, serially correlated fraction of investment.

Randall J. Olsen, D. Alton Smith, George Farkas, Structural and Reduced-Form Models of Choice among Alternatives in Continuous Time: Youth Employment under a Guaranteed Jobs Program, Econometrica, Vol. 54, No. 2 (Mar., 1986), pp. 375-394