testing for the long run relationship between nominal interest rates and inflation using cointegration techniques 1989 testing for the long run relationship between nominal interest rates and inflation using cointegration techniques applied economics vol 21 no 4 pp 439 447

cointegration tests of the fisher hypothesis with variable trends in the world real interest rate after seventy years the fisher hypothesis has proven to be one of the most durable and influential theories in economics yet after years of debate and testing the empirical accuracy of the proposition remains in question the fisher hypothesis simply states that a one point increase in inflation leads to a one point increase in the nominal interest rate leaving real interest rates unchanged this relationship does not rule out the possibility of other variables influencing the real interest rate or variable trends in the real interest rate arising from sources other than inflation this paper merges the literature on real interest rate parity with tests of the fisher hypothesis to control for variable trends in the real interest rate

unemployment in south africa the nature of the beast abstract unemployment in south africa is so widespread that it demands an explanation this paper examines a central question about south african unemployment why do the unemployed not enter the informal sector as is common in other developing countries the data do not support the idea that unemployment is largely voluntary the policy implications that government should diminish labor market segmentation and the obstacles to entering the productive informal sector may be relevant also to other developing countries with high unemployment

a respecified tax adjusted fisher relation how much will a 1 increase in expected inflation increase nominal interest rates irving fisher s famous equation implies that nominal interest rates will rise in proportion to an increase in expected inflation darby and feldstein correcting the fisher equation for taxation predict a nominal interest rate increase of 1 1 t where t is the marginal tax rate i e if t 3 then a 1 increase in expected inflation should cause a 1 4 rise in interest rates empirical evidence however suggests that the rise in interest rates is much smaller than the darby feldstein prediction estimates are around 9 varying mostly between 5 and 1 15 which is much closer to fisher s original prediction it is important to know the size of the interest rate response to inflation expectations in a world in which inflation and interest rates are volatile and in which tax laws are designed to influence savings and investment through interest rates in this paper we attempt to close the gap between theorized and estimated effects of inflation by incorporating into the fisher equation two important aspects of the u s tax code historic cost depreciation and the lower tax rate on capital gains our model shows that the effect of expected inflation on interest rates is dampened by the lower benefits from depreciation deductions arid the capital gains tax our corrected fisher equation predicts a 1 12 nominal interest rate increase rather than the 1 4 increase implied by the darby feldstein model the our model closes about 56 of the gap between theory and empirical evidence the remainder could be closed by additional refinements in the model or better empirical modeling

technological change and retirement decisions of older workers according to human capital theory technological change will influence the retirement decisions of older workers in two ways first workers in industries with high rates of technological change will retire later if there is a net positive correlation between technological change and on the job training second an unexpected change in the rate of technological change will induce older workers to retire sooner because the required amount of retraining will be an unattractive investment we matched industry data on productivity growth and occupational data on required training with data from the national longitudinal surveys of older men to test these hypotheses our results support both hypotheses

india s industrial development an interpretative survey in recent years there has been a significant shift in indian industrial strategy from a heavily regulated and inward oriented structure toward significant liberalization in both domestic and trade policy at the same time indian industry has sustained its historically impressive growth performance the two waves of liberalization in the 1980s and after 1991 have been associated with significant structural change there is some question however as to whether this change in strategic orientation is consistent with rising per capita incomes this paper reviews these changing strategic perspectives and the economic performance of the industrial sector in the post independence period it concludes that most studies which have been undertaken of indian industrialization have been macroeconomic in nature and that there has been a poor tradition of microeconomic research into the determinants of industrial competitiveness

trade and industrial policy on an uneven playing field the case of the deciduous fruit canning industry in south africa the deciduous fruit canning industry dfci is a resource and labor intensive industry with a high trade ratio it offers the prospect of being a significant source of employment and export earnings for a number of southern hemisphere countries which enjoy a considerable comparative advantage market distortions severely constrain this outcome however most importantly a combination of protection and subsidies in the industrially advanced countries in addition as in other sectors globalization is increasingly associated with processes in which value added activities are located in the major markets of the industrialized countries this paper examines the dfci in south africa and explores the consequences of market distortions and the shifting location of profitable activities for both industrial and trade policy in that country

the fisher effect and the term structure of interest rates tests of cointegration the literature on the fisher effect has ignored the potential relationship between inflation and long term interest rates using an expectations model of the term structure of interest rates the authors establish the conditions under which innovations in short term inflation will be transmitted to long term as well as short term interest rates cointegration tests find support for both the fisher effect and the expectations theory of the term structure copyright 1993 by mit press

rich regions poor regions and bank branch deregulation in spain abstractrich regions poor regions and bank branch deregulation in spain regional studies the links between financial deregulation and economic performance are evaluated in a european context specifically the study analyses the relaxation of bank branching restrictions in spain which triggered a remarkable interregional expansion of savings banks that coincided with an unprecedented period of sustained economic expansion although related questions have been widely investigated for the united states experiences in europe have received far less research attention an additional contribution of the paper lies in its use of quantile regression which enables the investigation of the possibility of economic effects taking into account the degree of regional development the potential endogeneity of some of the regressors is also explicitly considered results do not support the case for a positive effect of bank branch deregulation in spain out of region entry in particular does not seem to have had

creating modern art the changing careers of painters in france from impressionism to cubism paul cezanne died in october 1906 at the age of 67 in time he would be generally regarded as the most influential painter who had worked in the nineteenth century e g clive bell 1982 clement greenberg 1993 art historians and critics would also agree that his greatest achievement was the work he did late in his life in the judgment of historian meyer schapiro for example the years from 1890 to his death in 1906 are a period of magnificent growth meyer schapiro 1952 theodore reff 1977 roger fry 1989 in the spring of 1907 25 year old pablo picasso showed a few friends a large new painting that would be given the title les demoiselles d avignon this would become the most important painting of the twentieth century as the forerunner of cubism the most complete and radical artistic revolution since the renaissance which picasso and his friend georges braque went on to create in the next few years john golding 1988 galenson 2001 picasso would paint for another 66 years until his death in 1973 at the age of 92 during this enormously productive career he would become by far the most celebrated artist of the twentieth century yet he would never again execute a painting as important as the demoiselles nor produce another body of work as significant as that he made in the years between 1907 and the outbreak of world war i the dramatic contrast between the careers of cezanne and picasso raises intriguing questions about artists productivity art historians have not systematically addressed the question of when in their careers modem artists have typically done their best work and previous research consequently affords no basis for judging whether it is simply a matter of chance that cezanne and picasso made their greatest contributions so close in time in spite of the difference of more than 40 years in their ages but research by psychologists on the ages at which successful practitioners in other disciplines have done their best work is suggestive mathematicians theoretical physicists and poets typically make their most important contributions at younger ages than do astronomers biologists and novelists psychologists have argued that this is because creative ideations can be produced and elaborated more rapidly in disciplines that deal with abstract conceptual entities than in those whose central ideas are more complex and concrete harvey c lehman 1953 dean keith simonton 1988 1994 economists have also identified a number of factors that can change the relationship between age and productivity within a given activity yoram ben porath 1967 anne p bartel and nachum sicherman 1993 1995 in view of these results for other disciplines and the potential for change considered by economists we argue that it was not a matter of chance that cezanne and picasso made their greatest contributions at such different ages but rather that this was a result of the process that gave rise to the creation and early development of modem painting under the influence of the increased demand for innovation that had prompted the beginning of modern painting new generations of artists made painting an increasingly conceptual activity in which young practitioners could make important advances we will use evidence drawn from the twentieth century auction market to examine the relationship between artists ages and the value of their paintings for a group of artists including cezanne and picasso who dominated that early development this will allow a test of the hypothesis that this relationship changed systematically during the first century of that art galenson department of economics university of chicago chicago il 60637 and national bureau of economic research weinberg department of economics ohio state university columbus oh 43210 we thank gary becker britt salvesen tom sargent and two anonymous referees for comments and thomas walker for research assistance

capital intensity in south african manufacturing and unemployment 1972 1990 this paper explores the changing structure of investment and employment in south africa s manufacturing sector during 1972 1990 it considers the hypotheses that poor employment performance and high levels of capital intensity have arisen as a consequence of the overexpansion of capital intensive sectors and distorted factor prices in the main these hypotheses are rejected instead it is argued that poor employment performance arises largely from political factors which have dulled the private sector s investment in labor intensive sectors have stifled the development of the informal sector have held back productivity growth in manufacturing and have reduce the inflow of foreign direct investment although the paper is not primarily focused on the emerging policy agenda in the postapartheid era the data contained in this analysis would not appear to support the beliefs either that wages should be reduced or that the state should refrain from actively affecting allocative decisions

dimension reduction and model averaging for estimation of artists age valuation profiles abstract in hedonic regression models of the valuation of works of art the age or period at which an artist produces a particular work is often found to have highly significant predictive value most existing results are based on regressions that pool many painters although the uniqueness of artists career paths makes it interesting to estimate such regressions for individual artists sample sizes are often inadequate for a model that would also include the large number of other relevant variables we address this problem of inadequate degrees of freedom in individual artist regressions by using two statistical methods model averaging and dimension reduction to incorporate information from a potentially large number of predictor variables despite relatively small samples we find that individual age valuation profiles can differ substantially from general pooled profiles suggesting that methods that are more responsive to the unique features of individual artists may provide better predictions of art valuations at auction and may be useful more generally in hedonic valuation problems

how auctions work for wine and art interview auctioneers and even to buy a little wine in the meantime i have also had the opportunity with john abowd 1988 to observe and collect data on the auction sale of impressionist and contemporary paintings this paper reports on some of the empirical regularities that i and others have observed in the actual operation of the auction markets for these items in view of the rich and diverse array of theoretical literature on auctions it seems high time economists began to spell out precisely what facts it is meant to explain 2

formalizing the informal sector in a changing south africa small scale manufacturing on the witwatersrand abstract this paper examines a recent south african policy initiative aimed at assisting small mainly informal black traders and manufacturers by providing facilities assistance and a comparatively deregulated work environment in desegregated industrial parks outside the black urban townships the impact on these businesses has been generally positive thus far with some dramatic improvements recorded it is necessary however to understand these efforts to semi formalize the informal sector within the broader south african context during the 1980s the state and major capitalist interests sought to modernize apartheid not least by promoting the evolution of a sizable black middle class this process is currently becoming even more crucial as the struggle to secure the continued dominance of capitalist relations of production in postapartheid south africa intensifies

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

on some international parity conditions an empirical investigation abstract this paper investigates weak semi strong and strong forms of the following international parity conditions a uncovered interest parity b the hypothesis of equal ex ante real interest rates and c ex ante purchasing power parity the main results are as follows using data which roughly cover the 1975 1984 decade we find little evidence in favor of the strong form of the parity conditions under consideration however most test results are consistent with the weak forms finally regarding the semi strong forms the results are mixed

inflation taxation and interest rates this paper demonstrates that the response of nominal interest rates to changes in inflationary expectations should lie between that predicted by the fisher and darby effects the exact nature of the response will depend on the relative size of the income and capital gains tax rates and the relative size of the derivatives of investment and savings to their respective after tax real rates the other major conclusion of this paper is that capital gains taxation offsets the negative effect on investment produced by treating depreciation on a historic rather than a replacement cost basis in the 1960s and early 1970s the economics profession and the financial community increasingly accepted irving fisher s analysis of the effect of changes in anticipated inflation on the rate of interest in the last several years darby 4 and feldstein 5 have elaborated fisher s theory and have arrived at the conclusion that in a world with taxes an increase in inflationary expectations should result in a more than proportional increase in the nominal rate of interest since investors base their investing and saving decisions on the after tax and not the pretax expected consequences of their actions darby 4 has argued that if income taxes are proportional at rate t and interest receipts are taxable and interest payments are tax deductible the real after tax interest rate is

art as an investment the market for modern prints repeat sales of modern prints at auction are used to estimate a semiannual index of prices for the period 1977 92 as in other studies of art as an investment prints do not compare favorably to traditional financial assets there is substantial noise in auction prices but little or no support for the proposition that some artists command higher prices in certain countries or that masterpieces outperform the market one puzzle is the continuing tendency for prices realized at certain auction houses to exceed those realized at others notably at sotheby s relative to christie s in new york copyright 1993 by american economic association

the postwar stability of the fisher effect most research concerning the fisher relationship has concentrated on the magnitude and significance of the response of nominal interest rates to anticipated inflation recently attention has shifted to the stability of that response according to previous estimates the impact of anticipated inflation on interest rates varies substantially over time by extending a standard model to include tax and aggregate supply shock effects we are able to reduce such instability considerably our results also reveal that increased foreign demand for bonds lowers the interest rate

fisher phillips friedman and the measured impact of inflation on interest a reply the purpose of this paper is to demonstrate that empirical findings which persistently appear to contradict the fisher hypothesis that the nominal rate of interest should rise by the full amount of an increase in anticipated inflation are due basically to a failure to control for changes in the real rate of interest that are associated with changes in anticipated inflation we are guided in our search for proper specification of a fisher equation by a simple general equilibrium model which is employed to derive the impact of a change in anticipated inflation upon nominal interest given the requirement that commodity money and labor markets remain in equilibrium in effect we depart from the empirical tradition which has grown up around testing of the fisher hypothesis that takes the real interest rate to be independent of anticipated inflation and argues that for anticipated inflation properly measured the data ought to support the fisher hypothesis 1

are art auction estimates biased this article considers whether presale auction estimates are unbiased predictors of price when no sales are considered utilizing a newly constructed sample of over 500 works by eight early twentieth century american artists unbiased presale auction estimates in predicting price while expected are generally not supported in previous work but these studies excepting one do not include no sales in the calculations in order to study the question we employ a standard approach that uses an inverse mills ratio arising from a sample selection probit to correct for selection bias we find that controlling for selection bias presale auction estimates appear to be biased downward and we offer possible reasons for this result

pricing the groove hedonic equation estimates for rare vinyl records this contribution adds to the economic literature on the market value of rarity in markets for cultural collectible goods by studying the price of rare audio recordings chiefly vinyl sold on the

inflation real returns and capital investment we find evidence for the hypothesis of mundell 1963 and tobin 1965 that the expected real return component of interest rates is negatively related to the expected inflation component in the mundell tobin model the variation in expected real returns is caused by the variation in expected inflation our evidence suggests however that the variation in expected real returns is more fundamentally an outcome of the capital expenditures process equilibrium expected real returns vary directly with capital expenditures in order to induce equilibrium allocations of resources between consumption and investment this positive relation between expected real returns and real activity which comes out of the real sector combines with a negative relation between expected inflation and real activity which is traced to the monetary sector thus inducing the negative relation between expected inflation and expected real returns predicted by mundell and tobin but explained in terms of a model much different from theirs

real interest rate parity new measures and tests abstract international financial theory implies that for international comparisons the appropriate measure of the real interest rate is one defined in terms of traded goods prices alone new measures of the real interest rate are constructed using changes in price indexes for traded goods as deflators these new measures are tested for international real rate equality and the results are compared to those of similar tests using measures based on the change in the cpi and the wpi there are important differences between the traded goods real rate measures and those based on either the cpi or the wpi however in general the tests support the hypothesis that the real interest rate is approximately measured in terms of traded goods jel f30

reputation price and death an empirical analysis of art price formation i introduction art prices are often claimed to substantially increase when the artist dies these claims appear to be largely based on anecdotal evidence they are promulgated by hearsay and sometimes cleverly insinuated by art dealers who attempt to convince naive customers that it is justified to mark up the artwork of recently deceased artists this study provides a theory guided empirical analysis of the so called death effect on art prices the analysis employs hedonic price regressions and makes use of a dataset which exceeds the sample size of traditional studies in cultural economics by an order of magnitude thereby shedding a new light on previous investigations of art price formation even though the literature on art auctions art price indices and rates of return in the visual arts market is by now quite voluminous see respectively ashenfelter and graddy 2006 ginsburgh mei and moses 2006 frey and eichenberger 1995 the death effect has not received much attention so far to be sure there are a few empirical studies which allow for a death effect but these studies do so in a rather cursory and off hand manner by merely including in their regressions a dummy variable that distinguishes between works of art created by living and late artists see e g agnello 2002 worthington and higgs 2006 the first investigation that has squarely addressed death induced changes in art prices is by ekelund ressler and watson 2000 these authors go some way in providing a theoretical underpinning of the death effect by pointing out that artists produce durable goods under market conditions of monopolistic competition thus given rational actors in the art market the coase conjecture applies coase 1972 even though artists have in principle some discretion in setting prices they cannot exert market power because they are unable to credibly commit to not lowering their prices in the future by spoiling the market with an inflationary increase in production during an artist s lifetime prices will therefore settle well below the monopoly price death of course is the ultimate device to commit to discontinuing production art prices thus increase when the artist dies because her oeuvre all of a sudden becomes scarcer than originally anticipated after having laid this theoretical foundation ekelund ressler and watson proceed to empirically identify the death effect with the help of a hedonic price regression their data consists of a panel of auction records relating to the work of 21 latin american artists who died near or during the observation period 1977 1996 the prices are shown to peak in the years immediately following an artist s death thus lending support to the existence of a death effect from a theoretical point of view the main concern with this pioneering analysis relates to the artists age at death since the probability of dying increases with age the information of an old artist s death is not very surprising and should therefore already be largely reflected in the price implying a small death effect the death of an old artist moreover causes a relatively small reduction in the anticipated size of her oeuvre which again translates into a relatively small price increase when her death is made public assuming rational expectations one would therefore expect the death effect to decrease with the artist s age at death a formal rendering of this argument is shown by itaya and ursprung 2008 who investigate the death effect in an infinite horizon dynamic general equilibrium setting it therefore stands to reason that the death effect depends on the age at death neglecting this relationship in empirical investigations may of course give rise to a seriously misspecified econometric model a recent study by maddison and jul pedersen 2008 acknowledges that the prices of an artist s works should depend on the expected total supply which in turn depends on the artist s conditional life expectancy at the time of sale

dynamics of real interest differentials an empirical investigation abstract linear dynamic stochastic processes are derived for the ex ente real interest differentials from those followed by the ex post processes under the assumption of rational expectations the technique is used to test the equality of ex ante real rates between u s and a number of oecd countries the evidence against the short run equality of ex ante real rates is overwhelming in the long run the rates are co integrated but not always equal it takes approximately six months for the differentials to converge to their long run values

the death effect in art prices evidence from denmark analysing a panel of paintings by danish painters suggests that the conditional life expectancy of the artist at the time of sale has a negative impact on the sale price this is consistent with the idea that artists share some of the characteristics of durable monopolists and that the aging and ultimately the death of the artist represent acceptable forms of commitment not to overproduce in addition interest in an artist s work begins to wane after their death

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

the fisher hypothesis under different monetary regimes we examine the relation between inflation and nominal interest rates under the various monetary regimes in effect in the united states since the turn of the century our data include a newly constructed time series of short term municipal bond yields observed annually since 1902 the results generally support the hypothesis that after tax nominal yields adjust point for point with rationally forecasted inflation for the postwar years but strongly reject that hypothesis for the preceding years we suggest and offer supporting evidence that the difference between the two subperiods may be attributable to differences in the optimal forecasting technique for each era when forecasting is a costly endeavor

model averaging in economics an overview standard practice in empirical research is based on two steps first researchers select a model from the space of all possible models second they proceed as if the selected model had generated the data therefore uncertainty in the model selection step is typically ignored alternatively model averaging accounts for this model uncertainty in this paper i review the literature on model averaging with special emphasis on its applications to economics finally as an empirical illustration i consider model averaging to examine the deterrent effect of capital punishment across states in the usa

on the rate of return in the art market survey and evaluation abstract existing estimates of rates of return on single art objects and whole collections are surveyed and critically evaluated the psychic benefits from art are in the few cases they are considered at all derived from the difference to financial returns on other markets this paper discusses determinants of psychic benefits and suggests rental fees and willingness to pay studies as a possible way to analyze and estimate the psychic benefits from art

the international linkage of real interest rates the european us connection abstract in this paper we present evidence on several questions regarding the movement in short term real interest rates in eight countries have ex ante real estates in the united states and europe been high during recent years has there been a link between us real rates and those in other countries can this link be quantified the basic finding in this paper is that real rates have climbed dramatically from the 1970s to the 1980s in both the european countries and the united states there is also strong evidence that there is a positive association between movements in us real rates and those in europe however european real rates typically do not move one for one with us real rates still leaving open the possibility that european monetary policy can influence domestic economic activity

international expected real interest rates new tests of the parity hypothesis and u s fiscal policy effects abstract this paper investigates the links among expected real interest rates across countries and also those between international expected real interest rates and u s fiscal policy we analyze the cross sectional mean of international ex post real interest rates as an estimator for the mean international expected real interest rate our results strongly reject the international expected real interest rate parity hypothesis reveal that u s budget deficits have no independent effects on international real rates given the impact of u s government defense spending and suggest that forces other than u s fiscal policy account for the post 1980 rise in international real rates

monetary regime changes and the behavior of ex ante real interest rates a multi country study abstract previous research has found that u s monetary regime changes are related to changes in the behavior of ex ante real interest rates this paper examines monetary regime changes in other countries to test whether changes in expected real interest rates are related to monetary regime changes in a systematic manner the results show that while real rates have not been constant across monetary regimes the characteristics of the real rate process shifts differ across countries this evidence is consistent with theories that predict the neutrality of monetary regime changes with respect to real variables