A number of empirical studies would seem to cast doubt upon the neo-classical view of the supply side of an economy. Estimates of Cobb-Douglas production functions and the apparent procyclical movement of real wages would seem to contradict the assumption of diminishing returns to labor and the implication of neo-classical theory that factors of production are paid the value of their marginal product.' Recently, Lucas (1970) and Sargent and Wallace (1974) have outlined a theory that could reconcile these statistical results with a basically neo-classical view of supply relationships; essentially, they suggest that these paradoxical empirical observations are the result of specification error, of aggregating labor and wages over straight-time and overtime work shifts. This paper reports an attempt to evaluate empirically both the allegations against the neo-classical view and the Lucas-SargentWallace response within the context of the Canadian economy. In the first section, evidence concerning the diminishing returns to aggregate Canadian labor and the cyclical behavior of average real Canadian wages is presented. In the second, the effect of disaggregating labor is discussed. Conclusions will be found in the last section.

The authors propose a view of optimal currency areas that is based on the principles of public finance. Inflation taxes are distortionary, and an optimal spreading of tax distortions may require high inflation in one region and low inflation in another. Each region would need its own currency to do this. On the other hand, multiple currencies imply valuation and currency conversion costs, which impede trade between regions. This tradeoff is explored in the context of the European Community's debate over a common currency, using a two-country variant of Robert Lucas and Nancy Stokey's cash-in-advance model.

We propose a view of optimal currency areas that is based on the principles of public finance. Inflation taxes are distortionary, and an optimal spreading of tax distortions may require high inflation in one region and low inflation in another. Each region would need its own currency to do this. On the other hand, multiple currencies imply valuation and currency conversion costs, which impede trade between regions. This tradeoff is explored in the context of the European Community's debate over a common currency, using a two-country variant of Lucas and Stokey's cash-in-advance model.

The fiscal theory of price determination suggests that if primary surpluses evolve independently of government debt, the equilibrium price level “jumps” to assure fiscal solvency. In this non-Ricardian regime, fiscal policy—not monetary policy—provides the nominal anchor. Alternatively, in a Ricardian regime, primary surpluses are expected to respond to debt in a way that assures fiscal solvency, and the price level is determined in conventional ways. This paper argues that Ricardian regimes are as theoretically plausible as non-Ricardian regimes, and provide a more plausible interpretation of certain aspects of the postwar U.S. data than do non-Ricardian regimes.

Optimal monetary policy rules are derived in a rational expectations cum contracting framework. Monetary policy is redundant if wage setters exploit the incomplete current information embodied in today's nominal interest rate. However, the monetary authorities can save wage setters the costs of “indexing†to the interest rate. A contemporaneous money supply feedback rule is as effective as wage indexation. A lagged rule, relevant under a regime of money supply targeting, is also as effective if investors use the interest rate. Both rules have the same implications for the real interest rate as Poole's combination policy. However, the two rules have strikingly different implications for the nominal interest rate.