Knowledge that Transforms

The natural rate of interest—the real interest rate consistent with output equaling its natural rate and stable inflation—plays a central role in macroeconomic theory and monetary policy. Estimation of the natural rate of interest, however, has received little attention. We apply the Kalman filter to estimate jointly time-varying natural rates of interest and output and trend growth. We find a close link between the natural rate of interest and the trend growth rate, as predicted by theory. Estimates of the natural rate of interest, however, are very imprecise and subject to considerable real-time measurement error.

This paper makes two contributions to the empirical literature on agglomeration economies. First, the paper uses a unique and rich database in conjunction with mapping software to measure the geographic extent of agglomerative externalities. Previous papers have been forced to assume that agglomeration economies are club goods that operate at a metropolitan scale. Second, the paper tests for the existence of organizational agglomeration economies of the kind studied qualitatively by Saxenian (1994). This is a potentially important source of increasing returns that previous empirical work has not considered. Results indicate that localization economies attenuate rapidly and that industrial organization affects the benefits of agglomeration.

We explore the effect of computerization on productivity and output growth using data from 527 large U.S. firms over 1987–1994. We find that computerization makes a contribution to measured productivity and output growth in the short term (using 1-year differences) that is consistent with normal returns to computer investments. However, the productivity and output contributions associated with computerization are up to 5 times greater over long periods (using 5- to 7-year differences). The results suggest that the observed contribution of computerization is accompanied by relatively large and time-consuming investments in complementary inputs, such as organizational capital, that may be omitted in conventional calculations of productivity. The large long-run contribution of computers and their associated complements that we uncover may partially explain the subsequent investment surge in computers in the late 1990s.

We show that macroeconomic movements have strong effects on the happiness of nations. First, we find that there are clear microeconomic patterns in the psychological well-being levels of a quarter of a million randomly sampled Europeans and Americans from the 1970s to the 1990s. Happiness equations are monotonically increasing in income, and have similar structure in different countries. Second, movements in reported well-being are correlated with changes in macroeconomic variables such as gross domestic product. This holds true after controlling for the personal characteristics of respondents, country fixed effects, year dummies, and country-specific time trends. Third, the paper establishes that recessions create psychic losses that extend beyond the fall in GDP and rise in the number of people unemployed. These losses are large. Fourth, the welfare state appears to be a compensating force: higher unemployment benefits are associated with higher national well-being.

The endogenous two-break unit root test of Lumsdaine and Papell is derived assuming no structural breaks under the null. Thus, rejection of the null does not necessarily imply rejection of a unit root per se, but may imply rejection of a unit root without break. Similarly, the alternative does not necessarily imply trend stationarity with breaks, but may indicate a unit root with breaks. In this paper, we propose an endogenous two-break Lagrange multiplier unit root test that allows for breaks under both the null and alternative hypotheses. As a result, rejection of the null unambiguously implies trend stationarity.

American Economic Association Universal Academic Questionnaire Summary Statistics by Charles E. Scott and John J. Siegfried. Published in volume 93, issue 2, pages 521-524 of American Economic Review, May 2003