Knowledge that Transforms

This paper reviews a previously offered model of electricity load management containing uncertainties. This analysis allows individual customer demand to fluctuate within a billing period. Also, it allows diversity or imperfect correlation among customer demands. The behavioral effects are examined for a fuse that allows utilities and customers to incur costs or ration the loads under excess demand charges. The behavioral implication is that the demand price is effective at each instant of the billing period. The fuse analogy suggests that demand and energy prices be kept separate, and that behavior is best understood as a two-stage procedure.

This paper highlights the institutional features of the inflation process and contrasts two stabilization efforts in 1964-66 and in 1986.The inflation process in Brazil is highly institutional. It does not resemble hyperinflations where pricing and wage setting are geared to the exchange rate by the hour, making it possible to stop inflation by simply containing money creation and fixing the exchange rate. The two stabilization programs demonstrate that an incomes policy is an essential ingredient to non-recessionary stabilization. But they also show that demand restraint is inevitable if disinflation is to be viable. The 1964 program was gradualist and two-handed, relying on the supply side on wage repression. The 1986 plan was a heterodox shock treatment centered around an uncompromising price freeze and paying insufficient attention to the need for fiscal restraint.

A casual glance through the Proceedings of past annual meetings of the American Economic Association reveals that in almost every year during the past twenty years, president-elects of the AEA have devoted at least one session to an examination of issues concerning the international monetary system. Prominent on the agenda has been the question of reform. How should the international monetary system be reformed so as to function more effectively? premise underlying this question is that the international monetary system has failed and that it must be reformed by an institutional change. In what follows I present some skeptical notes on both the verdict on the failure of the system and on some proposals for reform, especially the target-zones proposal. To set the stage, it is worth noting that one of the main sources of disenchantments with the present monetary system has been the unpredictability of exchange There has been nothing more confusing than reading through the ex post journalistic explanations offered for the day-to-day changes in the U.S. dollar. For example, over the past few years we were told that The dollar fell because the money supply grew faster than expected-thereby generating inflationary expectations, but on another occasion we were told that The dollar rose because the money supply grew faster than expectedthereby generating expectations that the Fed is likely to tighten up and raise interest rates. On another date we were told that The dollar fell since the budget deficit exceeded previous forecasts-thereby generating inflationary expectations on the belief that the Fed will have to monetize the deficit, but, on another occasion we were told that The dollar rose since the budget deficit exceeded previous forecasts-thereby generating expectations that government borrowing needs will drive up interest rates since the Fed is unlikely to give up its firm stance. On yet another day we were told that The dollar fell since oil prices fell-thereby hurting Mexico and other debtriddenoil-producing countries whose bad fortune may bring about the collapse of important U.S. banks, but, on another occasion we were told that The dollar rose since oil prices fell-thereby helping the debt-ridden oil-consuming countries whose improved fortune will help the vulnerable position of important U.S. banks. More recently the dollar changed again, and this time the explanation was a bit more sophisticated: The dollar changed because the extent of the revision of the estimated GNP growth rate was smaller than the expected revision of previous forecasts of these estimates. One cannot but sympathize with the difficulties shared by newspaper reporters and financial analysts who feel obligated to come up with daily explanations for daily fluctuations of exchange rates, and one can only imagine the deep frustration that yielded the recent headline in the International Herald Tribune according to which The dollar rose on no news. dismal performance of short-term forecasting does not reflect a lack of effort. Rather, it is an intrinsic characteristic of efficient asset markets. Difficulties in forecasting short-term indices of stock markets (like the Dow-Jones index) do not call however, for a reform of the way stock markets operate. For similar reasons one should not assess the performance of the international monetary system on the basis of short-term forecastability of exchange This does *International Monetary Fund, Washington, D.C. 20431, University of Chicago, and National Bureau of Economic Research. research reported here is part of the NBER's research programs in International Studies and Economic Fluctuations. Any opinions expressed are my own and not those of the National Bureau of Economic Research. 205

An increase in the length of a firm's labor contract contributes to rigidity in the aggregate price level. This increases the variance of aggregate demand but decreases the variance of other firms' real wages. Under certain conditions, the net effect is to increase the variance of other firms' employment. This negative externality implies that the equilibrium contract length in a decentralized economy is greater than the social optimum-in other words, wages are too rigid.

There is no dispute in the economic profession that a background in quantitative methods is essential for undergraduates majoring in economics. What may not be so clear is what is expected of the student who has completed the requirements in quantitative methods. Is the student expected to be able to advance the discipline of statistics and econometrics, or is he or she merely expected to be able to use the tools to find quantitative solutions to issues he might face in the profession? When the question is posed in this manner, the majority will consent to the second expectation. Do we, in the quantitative courses we teach, prepare them adequately to fulfill this expectation, or are we as instructors secretly driven to expose our students to all mathematical derivations that we studied in graduate school? If we dealt with only the brightest of students in an average university, it would not matter how we approached the subject, for these students have the ability to comprehend and absorb whatever they are taught. For the average student, however, it is important to limit ourselves to what we think should be their essential repertoire. This paper is not intended to cover the teaching of quantitative methods in a comprehensive manner, or to provide any systematic revaluation. Instead, it focuses on some changes in our teaching methods that may enhance certain segments of a quantitative course. Essentially, I find that we spend too much time on statistical theory on the one hand, and hand calculations on the other, at the expense of conceptual understanding of the material. Our method of teaching needs to be modified more than it has been in order to exploit advances in computer technology. There is a need for greater emphasis on the relevance of the material and practical applications of the tools we present.