THE HYPOTHESIS IS INVESTIGATED THAT THE TIMING OF STATE AND LOCAL GOVERNMENT CAPITAL OUTLAYS DEPENDS ON THE DIFFERENCE BETWEEN THE ACTUAL AND THE EXPECTED INTEREST RATE. THIS HYPOTHESIS IS FORMALIZED IN THE STOCK ADJUSTMENT MODEL IN WHICH THE ADJUSTMENT COEFFICIENT VARIES WITH THE DIFFERENCE BETWEEN THE ACTUAL AND THE EXPECTED INTEREST RATE. A STOCK ADJUSTMENT MODEL WITH A VARIABLE ADJUSTMENT COEFFICIENT WAS SET UP TO EXPLAIN STATE AND LOCAL GOVERNMENT CAPITAL OUTLAYS FOR HIGHWAYS FROM 1951 THROUGH 1966. THE MODEL IS DESCRIBED BY FIVE EQUATIONS WHICH EMBODY THE IDEA THAT CHANGES IN MONETARY POLICY CAUSE UNEXPECTED CHANGES IN INTEREST RATES THAT AFFECT THE SPEED OF ADJUSTMENT OF THE ACTUAL TO THE LONG RUN EQUILIBRIUM STOCK OF HIGHWAYS. THE ADJUSTMENT COEFFICIENT EQUATION MEASURES THE RATE AT WHICH STATE AND LOCAL GOVERNMENTS ADAPT THE ACTUAL STOCK OF HIGHWAYS PER HEAD TO ITS LONG RUN EQUILIBRIUM LEVEL. ONE TERM IN THIS EQUATION MAKES ALLOWANCE FOR THE FACT THAT UNEXPECTED CHANGES IN INTEREST RATES AFFECT THE TIMING OF DECISIONS ON INVESTMENT EXPENDITURES BY AFFECTING THE TIMING OF BOND SALES. TO TEST THE VALIDITY OF THE VARIABLE ADJUSTMENT COEFFICIENT HYPOTHESIS, IT IS NECESSARY TO MAKE AN ASSUMPTION ABOUT HOW STATE AND LOCAL FINANCE OFFICERS MAKE MUNICIPAL BOND RATE FORECASTS. EQUATIONS EMBODYING TWO THEORIES OF THE EXPECTED INTEREST RATE WERE TRIED. IT IS CONTENDED THAT IN THE PERIOD UNDER STUDY, THE INTEREST RATE DID NOT AFFECT THE LEVEL OF THE DESIRED CAPITAL STOCK. PERSONAL INCOME WAS USED AS A PROXY FOR THE DEMAND FOR TRAVEL BECAUSE IT INDICATES THE DEMAND FOR HIGHWAY SERVICES INDEPENDENTLY OF THE ACTUAL CURRENT STOCK OF HIGHWAYS. PERSONAL INCOME AND FEDERAL AID ARE TWO COMPONENTS WHICH APPEAR SEPARATELY IN THE DESIRED CAPITAL STOCK EQUATION BECAUSE EACH HAS A DIFFERENT IMPACT ON THE LEVEL OF PLANNED CAPITAL OUTLAYS. TEST RESULTS STRONGLY SUPPORT THE PRINCIPAL HYPOTHESIS. TABLES SHOW THE REGRESSION COEFFICIENT ESTIMATED WITH THE VARIABLE ADJUSTMENT COEFFICIENT MODEL THAT BEST EXPLAINS THE DATA, AND THE IMPACT OF CHANGES IN MONETARY POLICY ON THE LEVEL OF STATE AND LOCAL HIGHWAY INVESTMENT. IN THIS MODEL THE IMPACT OF A CHANGE IN MONETARY POLICY DEPENDS ON TWO THINGS: (1) THE SIZE OF THE UNEXPECTED CHANGE IN THE INTEREWT RATE, AND (2) THE SIZE OF THE GAP BETWEEN THE ACTUAL AND THE LONG RUN EQUILIBRIUM CAPITAL STOCK. THE MODEL IMPLIES THAT IF THE MONETARY AUTHORITIES SHOULD WANT TO DELAY EXPENDITURES FOR SEVERAL YEARS, THEY WOULD HAVE TO INCREASE INTEREST RATES CONTINUALLY.

William Baumol has written a very provocative article on the social rate of discount [1]. There is no doubt that the specification of the discount rate for evaluating governmental projects has perplexed economists for quite some time and will probably continue to do so. Baumol's major contribution to this problem is his formulation which, unfortunately, he did not fully exploit. Using his formulation, I will show that his conclusions are merely special cases of the general case; in addition the following conclusions emerge: (1) the social rate of discount is a weighted average of observable pre-tax market rates of return and is not itself directly observable. The weights depend on how individuals in the private sector react to the transferral of resources. (2) Both risks and time preferences are given their appropriate consideration in this weighting process and neither need to be explicitly considered again. Hence, the indeterminacy or the inconsistency that Baumol found disappears, and the question about what is the appropriate rate of discount becomes an empirical one. Section I contains an analysis of the social rate of discount when there are no risks in the economy and time preferences are ignored. Risks are introduced in Section II and time preferences in Section III.

This text teaches important theoretical models to help your students organize their investments. Your students will learn how to time investment decisions, analyze financial statements, and achieve successful investment results through a global outlook.