Knowledge that Transforms

George M. von Furstenberg, The Effect of the Changing Size and Composition of Government Purchases on Potential Output: A Reply, The Review of Economics and Statistics, Vol. 64, No. 3 (Aug., 1982), pp. 527-528

This paper examines the conventional monetary equation of exchange rate determination. Under certain exogeneity conditions, one can write the price level, at home and abroad, as the ratio of the nominal money supply to the demand for real money balances. Then, since the exchange rate is the domestic price of foreign exchange, one can equate the exchange rate to the ratio of domestic to foreign prices. This then allows one to write, and estimate, the exchange rate as a function of the money supply differential, income differential and interest rate differential. If the domestic and foreign money demand errors are autocorrelated, and if deviations from purchasing power parity are autocorrelated, tests based on the above model may be invalid. Only if all autoregressive parameters are equal will test results be valid. A full information maximum likelihood procedure is used to estimate and test the assumptions necessary for the conventional procedure to be correct. Finally, two alternative models of exchange rate determination are considered to illustrate the importance of introducing the error terms at the beginning of the analysis.

Bradford G. Reid, The Effect of the Changing Size and Composition of Government Purchases on Potential Output: A Comment, The Review of Economics and Statistics, Vol. 64, No. 3 (Aug., 1982), pp. 525-527

Robert Tempest Masson, Lawrence Marvin DeBrock, The Structural Effects of State Regulation of Retail Fluid Milk Prices: A Reply, The Review of Economics and Statistics, Vol. 64, No. 3 (Aug., 1982), pp. 534-536

Ronald H. Ketellapper, Two-Stage Least Squares Estimation in the Simultaneous Equation Model with Errors in the Variables, The Review of Economics and Statistics, Vol. 64, No. 4 (Nov., 1982), pp. 696-701

In the May 1980 issue of this REVIEW, Masson and DeBrock (M-D) examine state regulation of fluid-milk retail prices. Although there have been numerous studies on this same topic, their econometric model is by far the most sophisticated, being the first to use a simultaneous system of equations to reveal the structural implications of this form of regulation. M-D test two hypotheses: (a) that regulation raises price, attracting entry and reducing plant scale, and (b) that deregulation temporarily plunges price below its longrun unregulated level.' My first objective here is to show that, when correctly interpreted, M-D's theoretical model implies that the short-run deregulated price may lie above or below the long-run unregulated price, not necessarily below it as the authors infer. My second objective is to retest their hypotheses after making a number of corrections and improvements in their data. As we shall see, my results are supportive of the authors' claims that regulation raises price and decreases plant scale. However, I do not find that market entry can be attributed to regulation unless a decision is made to exclude North Dakota, where two-thirds of the firms actually exitedl during the regulated period. As shown below, this decision hangs on whether 21 months was or was not sufficient time in which to build a processing plant. Like North Dakota, New Jersey also plays a pivotal role. Evidence presented below indicates that M-D misclassified New Jersey (a regulated state) when labeling it deregulated. This mistake alone can explain their finding that deregulation causes price to temporarily drop below the long-run unregulated price level.