Knowledge that Transforms

A simulation study is designed to evaluate the sensitivity of inference in a Vector Autoregression in which the variables of interest (GNP, the money stock, the price level, and a short-term interest rate) are treated as trend stationary processes. Using the normal asymptotic theory, the authors find that an artificially generated random walk Granger-causes the genuine variables in the model as often as 60% of the time for a 5% level test. They also observe substantial bias when other persistent stochastic processes are included in the autoregressions. The number of rejections are two to five times greater than if the variables are not linearly detrended prior to analysis. Copyright 1991 by MIT Press.

Economics is the basis for a substantial portion of the formal policy analyses conducted in government though the effect of analysis is seldom investigated. The 5-Year Offshore Leasing Plan of the Department of the Interior is the specific basis for a schedule of auctions in each of twenty-six planning areas. The schedule is investigated for its relationship to data presented in the plan using a Poisson regression. The conclusion is that the data are statistically related to the number of sales, but that estimated coefficients are of such small size that only major changes in the data would alter the outcome. Copyright 1991 by MIT Press.

Economics is the basis for a substantial portion of the formal policy analyses conducted in government though the effect of analysis is seldom investigated. The 5-Year Offshore Leasing Plan of the Department of the Interior is the specific basis for a schedule of auctions in each of twenty-six planning areas. The schedule is investigated for its relationship to data presented in the plan using a Poisson regression. The conclusion is that the data are statistically related to the number of sales, but that estimated coefficients are of such small size that only major changes in the data would alter the outcome. Copyright 1991 by MIT Press.

Previous empirical studies of bureaucratic power have employed testing procedures that are sensitive only to complete bureaucratic power in which the bureaucrat is able to force an all or nothing choice on his legislative sponsor. This paper suggests a test for incomplete bureaucratic power in which micro-based, survey estimates of the cost elasticity of demand and marginal propensity to spend out of lump-sum aid are compared with estimates of these same parameters taken from governmental expenditure studies. Empirical tests with 205 non-SMSA school districts in Michigan yield results that are consistent with incomplete bureaucratic power. Copyright 1991 by MIT Press.

If labor is able to capture a portion of the economic rents in profitable industries, industry profitability and the relation between market structure and profitability may both be mismeasured. This paper estimates a simultaneous equation system in which both the price-cost margin and compensation per worker (including fringe benefits) are endogenous variables. The authors' sample consists of eighty-five well-defined producer goods industries. They find that labor compensation does include some capture of economic rents. Further, when they correct for this rent capture, the relation between market concentration and the price-cost margin is strengthened significantly. Copyright 1991 by MIT Press.

This paper tests the exclusion of lagged growth rates of money and output from regression equations, with serially correlated disturbances, for the expected real interest rate. The authors empirical approach is an extension of the empirical strategies of Eugene F. Fama (1975) and Frederic S. Mishkin (1981)--which invoke the orthogonality of the inflation forecast error to predetermined regressors under the maintained hypothesis of rational expectations. They discuss the implications of their tests for simple real-business-cycle models. Copyright 1991 by MIT Press.

The authors examine the importance of a disequilibrium real balance effect on non-durable consumers' expenditure in the U.K. Using cointegration techniques and the Johansen procedure they first establish a desired long-run demand function for liquid assets depending on income, wealth and a set of interest rates. Deviations of liquidity from this desired level cause changes in consumption via intertemporal substitution but via its effect on disequilibrium liquidity. Consumption is modeled in an error-correction framework and is also found to depend on income and financial wealth. Both the disequilibrium liquidity and wealth terms may be picking up the effects of financial liberalization (e.g. "mortgage leak") on consumption as funds released will be temporarily held in financial assets. They also find some evidence that changes in the distribution of income have an independent effect on aggregate consumption. Copyright 1991 by MIT Press.

In large demand systems, when the unknown error covariance matrix is approximated by its usual maximum likelihood estimator, the coefficient estimates are known to suffer from two problems: (1) the asymptotic standard errors severely understate the sampling variability of the estimates and (2) the efficiency of the maximum likelihood coefficient estimates is greatly impaired. In this paper, the author proposes an alternative estimator for the covariance matrix and evaluates its performance. Using time-series data for OECD countries, the author finds that there is a spectacular improvement. Copyright 1991 by MIT Press.

This paper constructs a time-series band for ex ante profits from forward speculation and examines the permanent components of the median of the band for six different exchange markets. The unpredictability of ex ante profits is rejected using nonparametric tests. Deviations of ex ante profits from forward premia are attributed to deviations of nominal exchange rates from martingale processes. It is shown that movements in the terms of trade are responsible for most of the variability and serial correlation properties of ex ante profits. Copyright 1991 by MIT Press.