Knowledge that Transforms

Ananth N. Madhavan, Robert T. Masson, William H. Lesser, Cooperation for Monopolization? An Empirical Analysis of Cartelization, The Review of Economics and Statistics, Vol. 76, No. 1 (Feb., 1994), pp. 161-175

This paper investigates pricing behavior in Korean manufacturing. The two questions investigated are whether price behavior in the two markets are distinctly different in the pass-through of exchange rate into export and domestic prices and, if so, the subsequent question is whether observed differences in the price behavior can be explained by the price discrimination hypothesis. Using data from six manufacturing sectors for the period 1976-90, the authors find that Korean manufacturing firms appear to have followed distinctly different pricing rule in the two markets and the hypothesis of price discrimination in the two markets cannot be rejected. Copyright 1994 by MIT Press.

It has been widely argued that government budget deficits reduce national saving. Estimated relations indicate otherwise, both for the traditional or conventional, 'official' measure of national saving and a broader, more relevant measure, encompassing government and household as well as private business investment in tangible capital. Greater price-adjusted, high-employment deficits, increases in the real monetary base, and declines in real exchange rates have all been associated with more subsequent national saving. These relations, manifest in AR(1) regressions over the 1972-91, period were confirmed in vector autoregressions. Copyright 1994 by MIT Press.

We consider two competing theories that provide potentially important explanations of price rigidity. The first theory argues that prices are sticky at the aggregate level because of the cumulative effects of relatively short adjustment lags at the firm level. In contrast, the second theory argues that aggregate prices are slow to adjust because individual prices are slow to adjust. We estimate a structural model in which imperfectly competitive firms set prices in order to maximize profits subject to quadratic costs of price adjustment. The results suggest that to the extent that aggregate price rigidity exists, it can be explained by sluggishness of individual price adjustment. However, prices at both the aggregate and individual level are found to adjust rapidly to nominal cost innovations. Copyright 1994 by MIT Press.

Jaime Marquez, The Econometrics of Elasticities or the Elasticity of Econometrics: An Empirical Analysis of the Behavior of U.S. Imports, The Review of Economics and Statistics, Vol. 76, No. 3 (Aug., 1994), pp. 471-481

This paper estimates the role of insider power in wage determination in a unionized industry, examining the direction and magnitude of biases that may arise through failure to control for variation in both hours of work and the composition of the labor force and through failure to control for the endogeneity of measured profits. Furthermore, by examining the extent to which rent-sharing is related to exogenous demand shocks rather than to potentially endogenous productivity, the authors provide a test of the bargaining and pure efficiency wage models, finding that the majority of the insider weighting can be explained by the bargaining model. Copyright 1994 by MIT Press.

An alternative form of the proportional hazard model is proposed. It allows one to introduce correlation between exit rates at the same (calendar) time for different individuals. One can, in the context of this model, still allow for, and estimate, duration effects. These should be parametrized. These modifications to the original Cox model are possible by reversing the roles of duration and calendar time. It is argued that flexibility with respect to the effects of these macro processes is of particular relevance in economic models. An example using Dutch data on labor market transitions illustrates the idea that to ignore calendar time effects may have severe consequences for the estimation of duration dependence. Copyright 1994 by MIT Press.

Stephen G. Cecchetti, Georgios Karras, Sources of Output Fluctuations During the Interwar Period: Further Evidence on the Causes of the Great Depression, The Review of Economics and Statistics, Vol. 76, No. 1 (Feb., 1994), pp. 80-102

This paper reports a Monte Carlo study of the Box-Cox model and a nonlinear least squares alternative. Key results include the following: the transformation parameter in the Box-Cox model appears to be inconsistently estimated in the presence of conditional heteroskedasticity; the constant term in both the Box-Cox and the nonlinear least squares models is poorly estimated in small samples; conditional mean forecasts tend to underestimate their true value in the Box-Cox model when the transformation parameter is not equal to one; and conditional heteroskedasticity tends to worsen the bias in the Box-Cox predicted values. Copyright 1994 by MIT Press.

To facilitate maximum likelihood estimation for Box-Cox models, several authors have suggested dividing the dependent variable by its sample geometric mean. This paper points out previously unmentioned drawbacks of this 'recalling.' First, the 'resealed' model is not actually equivalent to the untransformed one, so that the procedure involves more than a unit change. Second, there is no clear interpretation of the parameters after such resealing. The authors suggest an interpretation but find that the usual formulas for standard errors and confidence intervals are not asymptotically valid. Only tests for zero coefficients are valid. Thirdly, the authors discuss the appropriate way of measuring elasticities in such models. Copyright 1994 by MIT Press.