The Metropolitan Council for Educational Opportunity (Metco) is a desegregation program that sends students from Boston schools to more affluent suburbs. Metco increases the number of blacks and reduces test scores in receiving districts. School-level data for Massachusetts and micro data from a large district show no impact of Metco on the scores of white non-Metco students. But the micro estimates show some evidence of an effect on minority third graders, especially girls. Instrumental variables estimates for third graders are imprecise but generally in line with ordinary least squares estimates. Given the localized nature of these results, we conclude that peer effects from Metco are modest and short lived.
In human capital intensive industries where it is difficult to contract upon the training effort of skilled agents a socially suboptimal level of training may occur. We show how partnership organisations can overcome this problem by tying human and financial capital. Partnerships are opaque so that the willingness of clients to pay depends upon reputation. Partnerships are illiquid and partners must stay with the firm until clients discover their type and update the firm's reputation. This renders unskilled agents, who will aversely affect reputation, unwilling to accept partnerships. Skilled agents therefore train the next generation so as to ensure that there is an adequate market for their own shares. We comment upon the salient differences between partnerships and joint stock firms.
What are good voting rules if voting is costly? We analyze this question for the case that an electorate chooses among two alternatives. In a symmetric private value model of voting we show that majority voting with voluntary participation Pareto-dominates majority voting with compulsory participation as well as random decision-making.
There is ample evidence that emotions affect performance. Positive emotions can improve performance, while negative ones can diminish it. For example, the fears induced by the possibility of failure or of negative evaluations have physiological consequences (shaking, loss of concentration) that may impair performance in sports, on stage, or at school. There is also ample evidence that individuals have distorted recollection of past events and distorted attributions of the causes of success or failure. Recollection of good events or successes is typically easier than recollection of bad ones or failures. Successes tend to be attributed to intrinsic aptitudes or effort, while failures are attributed to bad luck. In addition, these attributions are often reversed when judging the performance of others. The objective of this paper is to incorporate the phenomenon that emotions affect performance into an otherwise standard decision theoretic model and show that in a world where performance depends on emotions, biases in information processing enhance welfare.
This paper considers a prototypical New Keynesian model, in which the equilibrium is undetermined if monetary policy is “passive.” The likelihood-based estimation of dynamic equilibrium models is extended to allow for indeterminacies and sunspot fluctuations. We construct posterior weights for the determinacy and indeterminacy region of the parameter space and estimates for the propagation of fundamental and sunspot shocks. According to the estimated model, U.S. monetary policy post-1982 is consistent with determinacy, whereas the pre-Volcker policy is not. We find that before 1979 indeterminacy substantially altered the propagation of shocks.
In this paper I suggest a unified explanation for two puzzles in the inventory literature: first, estimates of inventory speeds of adjustment in aggregate data are very small relative to the apparent rapid reaction of stocks to unanticipated variations in sales. Second, estimates of inventory speeds of adjustment in firm-level data are significantly higher than in aggregate data. The paper develops a multi-sector model where inventories are held to avoid stockouts, and price markups vary along the business cycle. The omission of countercyclical markup variations from inventory targets introduces a downward bias in estimates of adjustment speeds obtained from partial adjustment models. When the cyclicality of markups differs across sectors, this downward bias is shown to be more severe with aggregate rather than firm-level data. Similar results apply not only to inventories, but also to labor and prices. Montercarlo simulations of a calibrated version of the model suggest that these biases are quantitatively significant.
I plan to sketch the key developments of the past decade and a half of monetary policy in the United States from the perspective of someone who has been in the policy trenches. I will offer some conclusions about what I believe has been learned thus far, though I suspect, as is so often the case, the passing of time, further study, and reflection will deepen our understanding of these developments. This is a personal statement; I am not speaking for my current colleagues on the Federal Open Market Committee (FOMC) or the many others with whom I have served over these many years. The tightening of monetary policy by the Federal Reserve in 1979, then led by my predecessor Paul Volcker, ultimately broke the back of price acceleration in the United States, ushering in a two-decade long decline in inflation that eventually brought us to the current state of price stability. The fall in inflation over this period has been global in scope, and arguably beyond the expectations of even the most optimistic inflationfighters. I have little doubt that an unrelenting focus of monetary policy on achieving price stability has been the principal contributor to disinflation. Indeed, the notion, advanced by Milton Friedman more than 30 years ago, that inflation is everywhere and always a monetary phenomenon, is no longer a controversial proposition in the profession. But the size and geographic extent of the decline in inflation raises the question of whether other forces have been at work as well. I am increasingly of the view that, at a minimum, monetary policy in the last two decades has been operating in an environment particularly conducive to the pursuit of price stability. The principal features of this environment included (i) increased political support for stable prices, which was the consequence of, and reaction to, the unprecedented peacetime inflation in the 1970’s, (ii) globalization, which unleashed powerful new forces of competition, and (iii) an acceleration of productivity, which at least for a time held down cost pressures. I believe we at the Fed, to our credit, did gradually come to recognize the structural economic changes that we were living through and accordingly altered our understanding of the key parameters of the economic system and our policy stance. The central banks of other industrialized countries have grappled with many of the same issues. But as we lived through it, there was much uncertainty about the evolving structure of the economy and about the influence of monetary policy. Despite those uncertainties, the trauma of the 1970’s was still so vivid throughout the 1980’s that preventing a return to accelerating prices was the unvarying focus of our efforts during those years. In recognition of the lag in monetary policy’s impact on economic activity, a preemptive response to the potential for building inflationary pressures was made an important feature of policy. As a consequence, this approach elevated forecasting to an even more prominent place in policy deliberations. After an almost uninterrupted stint of easing from the summer of 1984 through the spring of 1987, the Fed again began to lean against increasing inflationary pressures, which were in part the indirect result of rapidly rising stock prices. We had recognized the risk of an adverse reaction in a stock market that had recently experienced a steep run-up—indeed, we actively engaged in contingency planning against that possibility. * Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington, DC 20551. 1 I, nonetheless, wish to thank my colleagues David Stockton, David Wilcox, Don Kohn, Ben Bernanke, and John Taylor, for their many suggestions and reminiscences.
Transparency of Information and Coordination in Economies with Investment Complementarities by George-Marios Angeletos and Alessandro Pavan. Published in volume 94, issue 2, pages 91-98 of American Economic Review, May 2004
Can Demand-Side Variables Explain the Low Numbers of Minority Faculty in Higher Education? by Stephen Cole and Elizabeth Arias. Published in volume 94, issue 2, pages 291-295 of American Economic Review, May 2004
Multinational sales have grown at high rates over the last two decades, outpacing the remark-able expansion of trade in manufactures. Con-sequently, the trade literature has sought to incorporate the mode of foreign market access into the “new ” trade theory. This literature rec-ognizes that firms can serve foreign buyers through a variety of channels: they can export their products to foreign customers, serve them through foreign subsidiaries, or license foreign firms to produce their products. Our work focuses on the firm’s choice be-tween exports and “horizontal ” foreign direct investment (FDI). Horizontal FDI refers to an investment in a foreign production facility that