structural change in an open economy we study the importance of international trade in structural change our framework has both productivity and trade cost shocks and allows for non unitary income and substitution elasticities we calibrate our model to investigate south korea s structural change between 1971 and 2005 we nd that the shock processes propagated through the model s two main transmission mechanisms non homothetic preferences and the open economy explain virtually all of the evolution of agriculture and services labor shares and the rising part of the hump shape in manufacturing counterfactual exercises show that the role of the open economy is quantitatively important for explaining south korea s structural change

learning by doing and the introduction of new goods a dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain the set of goods produced in any period is endogenously determined and learning by doing is the force behind sustained growth it is shown that the set of produced goods changes in a systematic way over time with goods of higher quality entering each period and those of lower quality dropping out the model is then used to study the effect of introducing a traditional sector in which there is no learning

term premiums in bond returns abstract this paper examines expected returns on u s treasury bills and on u s government bond portfolios expected bill returns are estimated from forward rates and from sample average returns both estimation methods indicate that expected returns on bills tend to peak at eight or nine months and never increase monotonically out to twelve months reliable inferences are limited to treasury bills and thus to maturities up to a year the variability of longer term bond returns preempts precise conclusions about their expected returns

arbitrage and the expectations hypothesis this paper shows that all traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage if markets are incomplete a key implication is that the validity of the expectations hypothesis is purely an empirical issue the expectations hypothesis cannot be ruled out on a priori theoretical grounds one of the oldest and best known models in finance is the expectations hypothesis of the term structure introduced by fisher 1896 more than a century ago the expectations hypothesis has become a standard framework for explaining how yields of different maturities are related and it provides an important empirical benchmark from a theoretical perspective however the expectations hypothesis is not generally viewed as a viable model of the term structure in particular cox ingersoll and ross 1981 show that the traditional expectations hypothesis is actually a set of mutually exclusive propositions and offer a proof that most forms of the expectations hypothesis admit arbitrage recently mcculloch 1993 and fisher and gilles 1998 present counterexamples to the cox et al proof showing that the traditional forms of the expectations hypothesis can be consistent with the absence of arbitrage they acknowledge however that their counterexamples are somewhat contrived and view them as economically implausible these results leave the impression that the expectations hypothesis is only consistent with the absence of arbitrage in pathological cases of little practical interest in this paper we argue that the expectations hypothesis is much more theoretically defensible than commonly believed an important point often overlooked is that the cox et al 1981 results are developed in an economic setting where bonds are redundant securities in the more realistic case where bond prices display security specific variation and there is mounting evidence of this traditional forms of the expectations hypothesis can hold quite generally without arbitrage only weak conditions guaranteeing the existence of an equivalent martingale measure need be satisfied for the various forms of the expectations hypothesis to hold without arbitrage a key

information production and the term structure the difference between the forward rate of interest implicit in the term structure of interest rates and the expected future spot rate is usually referred to as a liquidity premium this paper examines the determinants of the liquidity premiums implicit in the term structure of real interest rates using a three date economy with production the sign of the liquidity premium is characterized in terms of the parameters that describe the uncertainty in the economy the results suggest that the liquidity premiums implicit in the real term structure of interest rates may sometimes be negative

the food problem and the evolution of international income levels in most poor countries large fractions of land labor and other productive resources are devoted to producing food for subsistence needs we show that a model incorporating the food problem can provide new and useful insights into the evolution of international income levels in particular we find that the food problem can explain why some countries started to realize increases in per capita output more than 250 years later in history than others we also show that the food problem has important implications for growth miracles and the speed at which a country converges to its balanced growth path

entry exit and investment specific technical change using european data this paper finds that i industry entry and exit rates are positively related to industry rates of investment specific technical change istc and ii the sensitivity of industry entry and exit rates to cross country differences in entry costs depends on industry rates of istc the paper con structs a general equilibrium model in which the rate of istc varies across industries and new investment specific technologies can be introduced by entrants or by incumbents in the calibrated model equilibrium behavior is consistent with stylized facts i and ii provided the cost of technology adop tion is increasing in the rate of istc jel g31 li 1 031 033 entry and exit rates differ significantly across industries over the period 1963 1982 timothy dunne mark j roberts and larry samuelson 1988 find that five year entry rates in us manu facturing data range from 21 percent in tobacco to 60 percent in scientific instruments high entry industries are high exit industries suggesting that entry and exit are largely due to the same industry specific factors at the same time little is known about what these factors might be this paper finds a strong positive link between industry entry and exit rates and the pace of technical progress in the capital goods that the industry uses the rate of investment specific technical change istc a significant fraction of entry and exit thus represents the introduction and replacement of capital embodied technologies istc is also positively related to the proportion of enterprises in each industry that displays large investment outlays in a given year that investment often occurs in spikes has been known since at least mark doms and dunne 1998 and the results link this pattern to the replacement of new capital embodied technologies by incumbents furthermore the decision of whether or when to exit appears sensitive to policy in countries in which the cost of entry is high rates of entry and exit are disproportionately suppressed in industries with high rates of istc to analyze these findings the paper develops a general equilibrium model in which chang ing the vintage of capital used by a particular enterprise is costly in the model this vintage is termed a technology and an enterprise is a technology manager pair the manager accumu lates expertise with a given technology over time and at any date may choose to upgrade to a newer technology at the expense of accumulated expertise as in boyan jovanovic and yaw

preferred habitat for liquidity in international short term interest rates abstract risk shifting window dressing and a preferred habitat for liquidity have been offered as possible explanations as to why us money market rates are higher before the year end than afterwards the two hypotheses differ in the timing of the rate decline at the year end and the evidence on the timing of the decline supports the preferred habitat hypothesis in us money markets this paper extends this line of research to the behavior of international short term interest rates at year ends and quarter ends using london interbank offer rates libor for 11 different currencies the results suggest that the behavior of libor for five currencies the us dollar euro japanese yen swiss franc and german mark is consistent with year end or quarter end preferred habitats for liquidity other currencies do not demonstrate consistently distinct patterns in turn of the year and turn of the quarter yields none of the results provides any support for risk shifting window dressing

vintage human capital growth and the diffusion of new technology we develop a model of vintage human capital in which each technology requires vintage specific skills we examine the properties of a stationary equilibrium for our economy the stationary equilibrium is characterized by an endogenous distribution of skilled workers across vintages the distribution is shown to be single peaked under general conditions there is a lag between the appearance of a technology and its peak usage a phenomenon known as diffusion an increase in the rate of exogenous technological change shifts the distribution of human capital to more recent vintages thereby increasing the diffusion rate

structural change and economic growth this paper presents a model in which a country s measured average propensity to save endogenously rises when its economy industrializes the model has agricultural and manufacturing sectors only agriculture uses land if at early dates income per capita is low agricultural consumption is important land is valuable and capital gains on land may constitute most wealth accumulation leaving the country s nipa aps low if exogenous technological progress raises incomes over time engel s law shifts demand to manufactured goods then land s portfolio importance relative to reproducible capital diminishes and the national income and products account saving rate can rise this paper presents a model illustrating that structural change due to the operation of engel s law can systematically affect an economy s measured saving rate according to the model a country s national income and product account average propensity to save will rise naturally if and when technological progress sufficiently lifts its income per capita this suggests a new interpretation of time series evidence while saving rates historically tend to be higher after industrialization than before one cannot automatically infer that changing wealth accumulation behaviour led to modernization rather structural change accompanying growth may have caused the rise in saving rates this paper also warns that international trade could lead to a contrasting pattern in cross sectional data highincome nations might contemporaneously have lower measured saving rates than poor countries recent work by mankiw romer and weil 1992 islam 1995 mankiw 1995 and others investigates long run patterns the analyses assume that each economy has attained or is moving toward a steady state equilibrium as in solow 1956 a country s steady state level of per capita gdp depends on its average propensity to save aps its rate of population growth the efficiency of its production sector etc regression outcomes seem consistent with the solow model s prediction that a higher aps will ceteris paribus lead to a higher level of income per capita the idea is that heterogeneity of exogenous preferences leads to international differences in aps s and in turn to long run differences

a dynamic model for the forward curve this article develops and estimates a dynamic arbitrage free model of the current forward curve as the sum of i an unconditional component ii a maturity specific component and iii a date specific component the model combines features of the preferred habitat model the expectations hypothesis et and affine yield curve models it permits a class of low parameter multiple state variable dynamic models for the forward curve we show how to construct alternative parametric examples of the three components from a sum of exponential functions verify that the resulting forward curves satisfy the heath jarrow morton hjm conditions and derive the risk neutral dynamics for the purpose of pricing interest rate derivatives we select a model from alternative affine examples that are fitted to the fama bliss treasury data over an initial training period and use it to generate out of sample forecasts for forward rates and yields for forecast horizons of 6 months or longer the forecasts of this model significantly outperform those from common benchmark models jel c53 e43 e47 the structure of forward rates for fixed maturity loans to begin at various dates in the future can be inferred from the prices of treasury securities or directly observed from the extremely active eurodollar futures market the constellation of these rates or of the related yields plays a central role intheallocationofcapital therandombehaviorofthis yieldcurve or the relationship between the yields and the term to maturity is a subject of considerable theoretical and empirical study

the role of the structural transformation in aggregate productivity we investigate the role of sectoral differences in labor productivity in explaining the process of structural transformation the secular reallocation of labor across sectors and the time path of aggregate productivity across countries using a simple model of the structural transformation that is calibrated to the growth experience of the united states we measure sectoral labor productivity differences across countries productivity differences between rich and poor countries are large in agriculture and services and smaller in manufacturing moreover over time productivity gaps have been substantially reduced in agriculture and industry but not nearly as much in services in the model these sectoral productivity patterns generate implications that are broadly consistent with the cross country evidence on the structural transformation aggregate productivity paths and relative prices we show that productivity catch up in industry explains about 50 percent of the gains in aggregate productivity across countries while low relative productivity in services and the lack of catch up explains all the experiences of slowdown stagnation and decline observed across countries

the rise of mass consumption societies this paper studies mechanisms behind the rise of mass consumption societies the development process depicted follows the flying geese pattern in which a series of industries take off one after another as productivity improves in these industries each consumer good becomes affordable to an increasingly large number of households which constantly expand the range of goods they consume this in turn generates larger markets for consumer goods which leads to further improvement in productivity for such virtuous cycles of productivity gains and expanding markets to occur income distribution should be neither too equal nor too unequal with too much equality the economy stagnates in a poverty trap with too much inequality the development stops prematurely

endowment structures industrial dynamics and economic growth this paper develops a dynamic general equilibrium model to explore industrial evolution and economic growth in a closed developing economy the authors show that industries will endogenously upgrade toward the more capital intensive ones as the capital endowment becomes more abundant the model features a continuous inverse v shaped pattern of industrial evolution driven by capital accumulation as the capital endowment reaches a certain threshold a new industry appears prospers then declines and finally disappears while the industry is declining a more capital intensive industry appears and booms ad infinitum explicit solutions are obtained to fully characterize the whole dynamics of perpetual structural change and economic growth implications for industrial policies are discussed

structural change in a multisector model of growth we study a multi sector model of growth with differences in tfp growth rates across sectors and derive sufficient conditions for the coexistence of structural change characterized by sectoral labour reallocation and constant aggregate growth path the conditions are weak restrictions on the utility and production functions commonly applied by macroeconomists we present evidence from us two digit industries that is consistent with our predictions about structural change and successfully calibrate the historical shift from agriculture to manufacturing and services we show quantitatively that reasonable deviations from our conditions do not have a big impact on the properties of the model

beyond balanced growth balanced growth models are commonly used in macroeconomics because they are consistent with the well known kaldor facts regarding economic growth these models however are inconsistent with one of the most striking regularities of the growth process the massive reallocation of labour from agriculture into manufacturing and services this paper presents a simple model consistent with both the kaldor facts and the dynamics of sectoral labour reallocation

a defense of traditional hypotheses about the term structure of interest rates expectations theories of asset returns may be interpreted either as stating that risk premia are zero or that they are constant through time under the former interpretation different versions of the expectations theory of the term structure are inconsistent with one another but i show that this does not necessarily carry over to the constant risk premium interpretation of the theory i present a general equilibrium example in which different types of risk premium are constant through time and dependent only on maturity furthermore i argue that differences among expectations theories are secondorder effects of bond yield variability i develop an approximate linearized framework for analysis of the term structure in which these differences disappear and i test its accuracy in practice using data from the crsp government bond tapes in a well known article in this journal cox ingersoll and ross cir 4 reexamine and find wanting certain hypotheses about the term structure of interest rates a striking feature of cir s re examination is that it is entirely theoretical cir show that different versions of the pure expectations theory of the term structure which traditionally were regarded as equivalent are in fact inconsistent with one another when interest rates are random furthermore in a fairly general continuous time arbitrage pricing framework when interest rates are random all versions of the theory except one are incompatible with equilibrium at first sight cir s results appear to be devastating to traditional empirical work on the term structure they suggest that researchers must specify arbitrage pricing models with a small number of state variables before proceeding to empirical work such models must restrict not only the deterministic components

structural change in an interdependent world a global view of manufacturing decline this paper presents a simple model of the world economy in which productivity gains in manufacturing are responsible for the global trend of manufacturing decline and yet in a cross section of countries faster productivity gains in manufacturing do not necessarily imply faster declines in manufacturing in doing so it aims to draw attention to the common pitfall of using the cross country evidence to test a closed economy model and argues for a global perspective in order to understand cross country patterns of structural change one needs a world economy model in which the interdependence across countries is explicitly spelled out jel f43 o11 o14 o19

the expectations hypothesis of the term structure tests on us german french and uk euro rates abstract this paper tests the expectations hypothesis of the term structure on us german french and uk euro rates three tests are examined the first is based on forward rates and the other two are based on the interest rates spread first we show that the sign puzzle highlighted by campbell and shiller campbell j y shiller r j 1991 yield spreads and interest rate movements a bird s eye view review of economic studies 58 495 514 for us data does not arise in the cases of french and uk short term rates second we propose tests for the expectations hypothesis based on error correction models with these tests the sign puzzle disappears but the country puzzle remains

transitional dynamics and economic growth in the neoclassical model neoclassical transitional dynamics are a central element of standard macroeconomic theory quantitative experiments with the fixed savings rate models of the 1960s showed lengthy transitions thus potentially rationalizing sustained differences in growth rates across countries the authors investigate quantitative transitional dynamics in various neoclassical models with intertemporally optimizing households lengthy transitions occur only with very low intertemporal substitution generally when one tries to explain sustained economic growth with transitional dynamics there are extremely counterfactual implications these result from the fact that implied marginal products are extraordinarily high in the early stages of development copyright 1993 by american economic association

the term structure of very short term rates new evidence for the expectations hypothesis abstract empirical researchers have frequently rejected the expectations hypothesis the expectations hypothesis however has seldom if ever been tested at the extreme short end of the term structure where maturities are measured in days or weeks using overnight weekly and monthly repo rates i find that term rates are almost unbiased estimates of the average overnight rate this evidence provides new support for the expectations hypothesis

a reexamination of traditional hypotheses about the term structure a comment an example of a continuous time economy is given whose general equilibrium term structure of interest rates obeys the expectations hypothesis for continuously compounded interest rates and returns contradicting the 1981 claim by cox ingersoll and ross that such an economy is mathematically impossible this example does not generate exploitable arbitrage opportunities of the type cox ingersoll and ross claim must arise the logarithmic expectations hypothesis as we call it it therefore an acceptable benchmark from which to measure term premia in continuous time term structure modeling the expectations hypothesis eh broadly construed postulates that expected returns on risk free bonds of different maturities are equal or equivalently that appropriately calculated forward interest rates equal expected future spot interest rates in comparing the expected returns on two bonds of different maturities however the returns may be compounded in any of four natural ways continuously to the shorter bond s maturity to the longer bond s maturity or to the nearest available future date it has long been understood that if the eh holds in terms of any one of these methods and if interest rates are stochastic jensen s inequality will in general preclude it from holding in terms of any of the other three in practice the convenience and simplicity of continuously compounded interest rates and returns have led many researchers e g roll 1970 mcculloch 1975 fama 1984 to use the first method and therefore what

inflation risk premia and the expectations hypothesis abstract we study the properties of the nominal and real risk premia of the term structure of interest rates we develop and solve the bond pricing implications of a structural monetary version of a real business cycle model with taxes and endogenous monetary policy we show the relation of this model with the class of essentially affine models that incorporate an endogenous state dependent market price of risk we characterize and estimate the inflation risk premium and find that over the last 40 years the ten year inflation risk premium has been has averaged 70 basis points it is time varying ranging from 20 to 140 basis points over the business cycle and its term structure is sharply upward sloping the inflation risk premium explains 23 42 of the time variation in the five ten year forward risk premium and it plays an important role in help explain deviations from the expectations hypothesis of interest rates

time varying term premia and traditional hypotheses about the term structure empirical evidence of time varying term premia in bond returns is frequently interpreted as evidence against the expectations hypothesis this paper shows that the expectations hypothesis can actually imply time varying term premia if the time frame for which the expectations hypothesis holds differs from the return measurement period furthermore many of the properties of these term premia are consistent with those of observed term premia these results are important because they imply that the case against the expectations hypothesis is weaker than claimed in the empirical literature many recent studies have presented empirical evidence that term premia in bond returns are time varying for example fama and bliss 1987 document that term premia in treasury bond returns vary reliably through time and can be forecast using the information in forward rates similar evidence of variation through time in term premia is given by shiller 1979 startz 1982 shiller campbell and schoenholtz 1983 fama 1984 mankiw 1986 shiller 1986 campbell 1987 engel lilien and robins 1987 shiller and mcculloch 1987 froot 1989 simon 1989 and others these empirical results have been interpreted in the literature as strong evidence against the expectations hypothesis eh 1 the reason for this interpretation is the widely held view that the eh is consistent only with term premia that are constant through time 2 in this paper we show that the eh need not imply constant term premia specifically we present an example in which an important form of the eh implies nonzero term premia that vary randomly through their dependence on the volatility of the term structure we show that the variation in these term premia can be significant relative to the variation in expected returns for longer maturity bonds furthermore we show that these term premia are directly related to the forward spot rate differential the key insight of this example is that the empirical implications of the eh depend critically on the length of the period over which the eh is assumed to hold if this interval is shorter than the period over which bond returns are measured aggregation over time can induce rich patterns of variation in observable term premia

union wage rigidity the default settings of labor law current discussions of wage norms begin with george perry s analysis 1980 he argued that the rate of wage change appeared to shift in discrete steps although his study concerned aggregate wage adjustments the union sector has long been identified as the primary source of wage rigidity and hence of wage norms the stylized explanation for the rigidity of any market price in the efficient contracting literature is the presence of high transaction costs high transaction costs emanate from the internal rather than the external labor market these costs make it inefficient to update wages continuously to changing market conditions alternatively stated wage rigidity or norms is a nash equilibrium for firms under ordinary circumstances see costas azariadis 1985 the equilibrium position is maintained until the transaction costs of making the change are less than the costs of maintaining the old regime once the regime changes however the new regime or equilibrium can be a discrete rather than a marginal change from the prior regime the regime in the unionized sector today is one of concession bargaining although concessions have been concentrated in those sectors that have experienced competition in a setting of deregulation and increased international trade increased competition is more likely to be a consequence of earlier relative wage and cost changes than an exogenous cause of concessions today in fact the common thread that binds together the industries that have exhibited concession bargaining is that they have emerged from a prior regime of significant and prolonged increases in union wage premiums indeed as shown by peter linneman and myself the increases in union wage premiums have caused a statistically significant and quantitatively large decrease in union employment concession bargains thus represent a shift in regimes as the parties attempt to deal with the effects of the prior regime of increasing premiums there is little doubt that the increase in union premiums was related to the supply shocks of the 1970 s that is while nonunionized wages declined in response to these shocks union real wages continued to increase in this sense the puzzle is why the unionized sector did not shift to lower wage norms during the 1970 s and not the presence of concessions today the expansion of union wage premiums over the past decade cannot be explained by the traditional model of union nonunion wage differentials that model states that premiums remain steady over time unless changes occur in the underlying labor demand elasticities i e the hicks marshall conditions change or the unions tastes reflecting the wages employment tradeoff labor markets however have become more rather than less competitive in the 1970 s as a consequence of deregulation and increasing international trade in disequilibrium variation in the union wage premium can occur due to the fixedcontracting periou indeed union wage rigidity is typically explained by the existence of 3 year contracts that permit only incomplete wage adjustments during the contract period in this paper the extent of union wage rigidity is shown to be related to contracting lags but the lags are not identified with contract expiration and renegotiation dates rather the lags and the resulting wage rigid professor of economics law and management university of pennsylvania philadelphia pa 19104 costas azariadis david hall clyde summers lea vandervelde and susan wachter provided many helpful suggestions and rodrigo quintanilla and nancy zurich provided valuable research assistance the research was supported by the institute for law and economics university of pennsylvania see peter linneman and myself 1986 for a discussion of the endogeneity of increased international competition and to a lesser extent deregulation

around and around the expectations hypothesis we show how to construct models of the term structure of interest rates in which the expectations hypothesis holds mcculloch 1993 presents such a model thereby contradicting an assertion by cox ingersoll and ross 1981 but his example is gaussian and falls outside the class of finite dimensional markovian mode ls we generalize mcculloch s model in three ways i we provide an arbitrage free characterization of the unbiased expectations hypothesis in terms of forward rates ii we extend this characterization to a whole class of expectations hypotheses and iii we show how to construct finite dimensional markovian and non gaussian examples in one form or another the expectations hypothesis has played a central role in the analysis of the term structure of interest rates perhaps the most common form of the expectations hypothesis is the so called unbiased expectations hypothesis u eh which asserts that forward rates equal the conditional expectations of future spot rates but other forms exist as well cox ingersoll and ross cir 1981 characterize a number of mutually incompatible forms of the expectations hypothesis besides the u eh including the local expectations hypothesis l eh under which the expected rate of return on all zero coupon bonds on all assets in fact equals the short term risk free rate see jarrow 1981 for a similar analysis of the various expectations hypotheses they consider cir claim that only the l eh is consistent with general equilibrium in continuous time models as well as in discrete time models with continuous compounding of yields mcculloch 1993 provides a counterexample to cir s claim his example is in the spirit of heath jarrow and morton hjm 1992 in the sense that it does not admit a representation in terms of a finite number of markovian state variables the setting in cir indeed mcculloch suggests that cir s claim may be true within their setting as we show it is not there is a weak version of the u eh according to which forward rates are biased predictors of future spot rates but the bias or term premium is a constant that only depends on the forecast horizon a regression of future spot rates on current forward rates produces a slope coefficient equal to fisher is with the board of governors of the federal reserve system and gilles is with bear stearns co the views expressed herein are the authors and do not necessarily reflect those of the board of governors or the federal reserve system we thank greg duffee and huston mcculloch for extensive comments and an anonymous referee for suggesting improvements in the exposition

malthus to solow a unified growth theory is developed that accounts for the roughly constant living standards displayed by world economies prior to 1800 as well as the growing living standards exhibited by modern industrial economies our theory also explains the industrial revolution which is the transition from an era when per capita incomes are stagnant to one with sustained growth the authors use a standard growth model with several technologies the first denoted the malthus technology requires land labor and reproducible capital as inputs the second denoted the solow technology does not require land the authors show that in the early stages of development only the malthus technology is used and due to population growth living standards are stagnant despite technological progress eventually technological progress causes the solow technology to become profitable and both technologies are employed at this point living standards improve since population growth has less influence on per capita income growth in the limit the economy behaves like a standard solow growth model excerpt

modernization of agriculture and long term growth abstract this paper develops a two sector model that illuminates the role played by agricultural modernization in the transition from stagnation to growth when agriculture relies on traditional technology industrial development reduces the relative price of industrial products but has a limited effect on per capita income because most labor has to remain in farming growth is not sustainable until this relative price drops below a certain threshold thus inducing farmers to adopt modern technology that employs industry supplied inputs once agricultural modernization begins per capita income emerges from stasis and accelerates toward modern growth our calibrated model is largely consistent with the set of historical data we have compiled on the english economy accounting well for the growth experience of england encompassing the industrial revolution