Knowledge that Transforms

Old age, like beauty, is in the eye of the beholder. If by old age we mean the period of life characterized by a significant reduction in market work, then a major phenomenon of the last three decades has been that the old among us have gotten considerably younger. Here we briefly review this phenomenon, discuss a parallel growth in broadly defined income support, both public and private, and then provide a mechanism for relating the two.

In a recent article in this Review, Alex Cukierman and Paul Wachtel (henceforth C-W) develop a theoretical relationship between the cross-sectional variance of expectations about inflation and the variance in aggregate demand and in the inflation rate over time. They also present some empirical evidence in support of these linkages. The purpose of this comment is to indicate several weaknesses in their analysis. First, an error in C-W's theoretical analysis leads to an error in their Proposition 3(b). A correction renders the set of conditions for the variance in expected inflation as they define it to move together with the variance in actual inflation even more complex than their Proposition 3 suggests. Second, C-W use the Livingston data in some tests of their Propositions 2 and 3, which link the variance of expected inflation as they define it to aggregate demand variance and to the variance of inflation. In doing so, they misinterpret the Livingston Survey in the context of their model. Actually, the model has much more straightforward implications for the variance in the Livingston inflation forecasts than those derived by C-W. Third, upon closer examination, their empirical evidence from the Livingston Survey data is not consistent with these implications of their model. This is because a minor C-W data mistake makes their preliminary evidence look more striking than it actually is, and because their regressions are marred by extreme serial correlation correcting for which alters their results.

Philip Howrey (1967), William Poole (1970), and John Kareken (1970) initiated a formal debate over monetary policy using some variant of an IS-LM model. Thomas Sargent and Neil Wallace (1975) extend this work by incorporating a Lucas-type aggregate supply function and rational expectations. In spite of the effort spent in following up on the seminal work by Howrey, Poole, and Kareken, little progress has been made in resolving the debate.' The central theme of this paper is that the lack of progress is the result of ignoring homeostasis and the nature of the transmission mechanism. In order to illustrate the importance of homeostasis and the transmission mechanism, this paper extends the standard IS-LM framework in two ways. First it introduces a homeostatic mechanism that generates shortrun responses which correspond to standard IS-LM behavior, and long-run responses which reflect full employment. Second, it provides for alternative transmission mechanisms by dropping the assumption that markets clear continuously. The paper is organized as follows. The model is developed in the next section. The following section examines the role of homeostasis and the transmission mechanism in the debate over policy. The final section presents the conclusions.

Although environmental problems are common in many countries or affect large regions, the threats of carbon dioxide-induced climate change and depletion of stratospheric ozone are perhaps the most credible global environmental problems presently facing humankind. While there are many differences between the CO2 and 03 problems the diffuse, global hazards share a number of common characteristics. The threats are due to anthropogenic chemical changes of a slow, cumulative nature. Early effects may be disguised by normal environmental variation which generates considerable scientific uncertainty. By the time all the mechanisms and consequences are known and evaluated, it may be too late to avoid the majority of effects which may persist for centuries. In addition, the climate or stratosphere so affected is not the property of any individual or nation. The vulnerable natural and social systems require on-going monitoring, research, and risk assessment as uncertainties are defined and, hopefully, reduced. In short these are threats to the global commons for which there is no precedent in human history. This paper examines the different national responses to the threat of chlorofluorocarbon (CFC) depletion of stratospheric ozone as the first of the global atmospheric problems for which nations have taken concrete action beyond scientific study and risk assessment.