In our 1983 paper we offered evidence that the law of demand operates inside the Federal Reserve. In particular, the Fed faces a requirement that it return all revenues in excess of operating expenses to the Treasury, and this constraint lowers the price of amenities in terms of foregone profits. The monetary authority accordingly buys more of the wage and nonwage perquisites of office than otherwise. Because we treated amenities as a monotone transformation of Federal Reserve System employment, our theory suggested that the Fed would pad its operating expenses by increasing the number of employees on its payroll. Moreover, given that expansionary open market operations raise the interest income earned by the Fed on its securities portfolio, bureaucratic incentives would impart an inflationary bias to monetary policy. In subsequent tests of the theory, we found a positive and significant ceteris paribus relationship between changes in the monetary base and the size of the Fed. This result suggested that one motivation for expansions in the money supply is to finance the growth in the Fed's bureaucracy. We also found evidence that employment causes money in the sense of Christopher Sims (1972), but not the reverse, and that the growth in Fed employment over time does not appear to have been due to the fact that more people are required to manage larger money stocks. In their comments, John Boyd and John Strong suggest that there are methodological and empirical problems with our paper. Both comments focus primarily on the, causality tests, but each raises other issues designed to cast doubt on the strength of our results. In what follows, we discuss the main points raised by our critics. I. Causality

Understanding the employment dynamics of disadvantaged families is increasingly important. We estimate duration models describing these dynamics for disadvantaged single mothers and use them to conduct a rich set of counterfactual analyses. We use a misreporting model to correct for “seam bias,” the problem that too many transitions are reported between reference periods in panel data. We find effects of demographics, minimum wages, unemployment rates, and maximum welfare benefits, but not policy changes introduced through state welfare waivers, on employment dynamics. We find that two commonly used ad hoc methods of addressing seam bias perform substantially worse than our approach.

This study analyzes the relation between chief executive officer (CEO) personal risk-taking, corporate risk-taking, and total firm risk. We find evidence that CEOs who possess private pilot licenses (our proxy for personal risk-taking) are associated with riskier firms. Firms led by pilot CEOs have higher equity return volatility, beyond the amount explained by compensation components that financially reward risk-taking. We trace the source of the elevated firm risk to specific corporate policies, including leverage and acquisition activity. Our results suggest that nonpecuniary risk preferences revealed outside the scope of the firm have implications for project selection and various corporate policies.

While the debt‐contracting literature has extensively examined financial covenants, there has been little attention paid to audit‐related covenants. We focus on a covenant that restricts the borrower from receiving a going‐concern audit report ( GCAR covenant). We hypothesize that a debt agreement is more likely to include a GCAR covenant as the borrower's credit quality decreases and the length of the loan period increases, and that it is more likely to impose a covenant restricting the choice of auditor when the debt includes a GCAR covenant. Also, we expect that an audit client with a GCAR covenant will be charged a higher audit fee and is more likely to receive a going‐concern audit report. We test these hypotheses on a sample of firms that issue private debt. Our results generally support our hypotheses. Our study suggests that lenders rely on the auditor's assessment in contracting, and audit‐related covenants influence auditor behavior.

We propose a novel human capital model that decomposes aggregate income risk into highand low-income risk. We find that high-income risk is priced, while low-income risk is insignificant. The high-income factor alone explains 77% of the cross-sectional variation in the twenty-five size and book-to-market portfolios, earns a risk premium of about 7% per year, and its pricing power extends to the full cross-section of individual stocks. It is also related to the value factor, suggesting that the value premium might be compensation for income risk. Overall, our evidence indicates that high-income risk is an important macroeconomic risk factor.

We quantify the linkages among banks’ equity performance and indicators of sovereign stress by using panel GMM to estimate a three-equation system that examines the impact of sovereign stress, as reflected in both sovereign spreads and sovereign ratings, on bank share prices. We use data for a panel of five euro-area stressed countries. Our findings indicate that a recursive relationship between sovereigns and banks operated during the euro-area crisis. Specifically, for the five crisis countries considered shocks to sovereign spreads fed-through to sovereign ratings, which affected commercial banks’ equity-prices. Our results also point to the importance of using levels of equity prices – rather than rates of return – in measuring banks’ performance. The use of levels allows us to derive the determinants of long-run equity prices.

Over the last decade, scientists have studied extensively the greenhouse effect, which holds that the accumulation of carbon dioxide (CO2) and other greenhouse gases (GHGs) is expected to produce global warming and other significant climatic changes over the next century (see Stephen Schneider, 1989). The present study presents an economic approach for analyzing policies to slow climate change.

It is often argued that the use of distortionary taxation lowers the optimal provision of public goods below its optimal level in a first-best economy, which contains no restrictions on lump-sum taxation. However, this issue is usually investigated using commodity-tax models that contain no lump-sum taxes. This paper examines a many-consumer economy in which the only tax instruments are commodity taxes and a poll tax (subsidies are negative taxes). The optimal level of public good provision in this economy typically exceeds the first-best level, at least for distributionally neutral public goods.