Knowledge that Transforms

All in the Family: A Simultaneous Model of Parenting Style and Child Conduct by Peter Burton, Shelley Phipps and Lori Curtis. Published in volume 92, issue 2, pages 368-372 of American Economic Review, May 2002

An income tax provides implicit insurance by dampening the variability of disposable income and consumption. Using an empirical framework derived from the consumption insurance literature and data from the Panel Study of Income Dynamics we examine the effect of federal income tax reforms of the 1980's on automatic stabilization of consumption. Overall, ERTA and TRA86 reduced consumption stability by about 50 percent. Recently increased EITC generosity restored or enhanced consumption insurance. The welfare cost of moving to the post-TRA86 system is sizable for relatively risk-averse households facing large income risk but is much more modest for the typical household.

the 2002 meetings of the American Economics Association. Governments sometimes bail out banks by recapitalizing them, or offering to insure their liabilities. The government’s goal may be to rescue borrowers, bankers, or depositors – and economists have developed rationales why each of these constituencies may merit protection (e.g., Diamond [2001)). These potential benefits have to be weighed against the costs of a bailout, which are typically thought to be those of the damage to long-run incentives that such intervention engenders. In this paper, we would like to present a different effect of bank bailouts: Bank bailouts alter the availability of aggregate liquidity in the economy. While a well-targeted bailout can help rescue an otherwise collapsing banking system (see Diamond-Rajan [2001a]), a poorly targeted bailout can even tip a banking system into a systemic crisis. This (ex-post crisis) cost of bank bailouts has, to the best of our knowledge, not been examined elsewhere, and is the focus of this paper. The Framework We consider a world with entrepreneurs, investors, and lenders. The economy lasts for two periods and three dates-- date 0 to date 2. There are two kinds of goods in the economy-consumption goods and machinery. Each entrepreneur has a project, requiring 1 unit of

The scope for growth of trade in services is vast. Although services currently make up over 60 percent of world production, they account for only about 20 percent of world trade. A primary reason why international trade in services has been limited is that the performance of many services necessitates physical contact between producers and consumers, a condition that renders service provision to distant locations infeasible. New technology, in particular, the Internet, provides a medium of exchange that overcomes such historical trading hurdles for many services, effectively reducing transport costs from infinity to virtually nothing. There is ample anecdotal evidence that the Internet is having just this sort of an effect on services trade. The accounting firm Netlink maintains the books for 6,000 employees in Reyanosa, Mexico, from their offices in Manhattan. Infosys of India provides softwareconsulting services to international clients, including Apple Computers, Lucent Technologies, and Microsoft. A medical-transcription company in South Africa, ITS, receives digital recordings from abroad electronically and returns a transcribed text file the next day. Still, the question remains as to whether electronic sharing of information is an important enough development to alter significantly the geography of service provision. Indeed, many services need to be tailored to the consumer’s needs and monitored for quality, and these are likely to be more effective if the provider is close by and speaks the same language. In addition, in the event of a dispute, resolution will be less complicated if both parties are subject to the same legal system. Finally, there may be security concerns with allowing foreign access to some documents or systems. Thus, for some services, especially those where familiarity, communication, and non-standardization contribute to quality, the Internet would not be expected to have a large impact on international trade. To determine whether the Internet has significantly affected international service provision in practice, we estimate a general model of services trade across countries and examine whether the inclusion of data on Internet penetration, as measured by the number of Internet hosts in a country, is statistically significant. Overall, our results offer evidence that the Internet is related to growth in services trade. After controlling for GDP and exchange-rate movements, we find that a 10-percent increase in Internet penetration in a foreign country is associated with about a 1.7-percentage-point increase in export growth and a 1.1-percentagepoint increase in import growth. The results are robust to a number of alternative specifications.

A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can easily lead to chaotic dynamics. The result is obtained for feedback rules that depend on contemporaneous or expected future inflation. The existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies. The battery of fiscal policies that has recently been advocated for avoiding global indeterminacy induced by Taylor-type interest-rate rules (such as liquidity traps) are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper.

Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational-Expectations Models by Arturo Estrella and Jeffrey C. Fuhrer. Published in volume 92, issue 4, pages 1013-1028 of American Economic Review, September 2002

Immediately following World War II, many economists believed that a trade policy based on import substitution would best promote economic development. Subsequent experience instead revealed the costs of protectionism (Anne 0. Krueger, 1997). In the late 19th century as well, many political economists (such as Friedrich List) advocated import tariffs to promote the growth of domestic manufacturing in countries that were behind the industrial leader, then the United Kingdom. Unlike the recent period, however, the late 19th-century experience is often interpreted as confirming the wisdom of import substitution.' Recent work by Kevin H. O'Rourke (2000) and Michael A. Clemens and Jeffrey G. Williamson (2001) has strengthened this impression by finding a positive correlation between import tariffs and economic growth across countries from 1875 to 1914. Such a correlation does not establish a causal relationship between tariffs and growth, but it is tempting to view the correlation as constituting evidence that protectionist or inward-oriented trade strategies were successful during this period. This paper argues that such a conclusion is unwarranted and that the tariff-growth correlation should be interpreted with great care. First, several individual country experiences in the late 19th century are not consistent with the view that import substitution promoted growth. For example, the two most rapidly expanding, high-tariff countries of the period (Argentina and Canada) grew because capital imports helped stimulate export-led growth in agriculturalstaples products, not because of protectionist trade policies. Second, most land-abundant countries (such as Argentina and Canada) imposed high tariffs to raise government revenue, and revenue tariffs have a different structure than protective tariffs. The fact that labor-scarce, land-abundant countries had a high potential for growth and also tended to impose high revenue-generating tariffs confounds the inference that high tariffs were responsible for their strong economic performance during this period.

Auctions are generally not efficient when the object's expected value depends on private and common value information. We report a series of first-price auction experiments to measure the degree of inefficiency that occurs with financially motivated bidders. While some subjects fall prey to the winner's curse, they weigh their private and common value information in roughly the same manner as rational bidders, with observed efficiencies close to predicted levels. Increased competition and reduced uncertainty about the common value positively affect revenues and efficiency. The public release of information about the common value also raises efficiency, although less than predicted.

The empirical literature on intergenerational income mobility in the United States has focused predominantly on sons. This paper partly redresses that imbalance by using data from the Panel Study of Income Dynamics to investigate intergenerational mobility among daughters. We find that intergenerational transmission of income status is somewhat weaker for daughters than for sons, but is still quite substantial. We also find that assortative mating is an important element in the intergenerational transmission process. 1Intergenerational Income Mobility among Daughters in the United States I.

A longstanding question in economics is why some countries are so much richer than others. Today, for example, income per capita in the world's richest countries is roughly thirty-five times greater than it is in the world's poorest countries. Recent work argues that the proximate cause of the disparity is that today's poor countries began the process of industrialization much later and that this process is slow. In this paper we argue that a model of structural transformation provides a useful theory of both why industrialization occurs at different dates, and why it proceeds slowly. A key implication of this model is that growth in agricultural productivity is central to development, a message that also appears prominently in the traditional development literature.