capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

price changes in the euro area and the united states some facts from individual consumer price data prices of goods and services do not adjust immediately in response to changing demand and supply conditions this paper characterizes the average frequency and size of price changes in the euro area and its member countries investigates the determinants of the probability of price changes and compares the evidence for the euro area with available u s results the facts documented in this paper are based on evidence from individual price data recorded at the store level in all euro area countries except ireland and greece that is in datasets covering austria belgium finland france germany italy luxembourg the netherlands portugal and spain which together account for around 97 percent of euro area gdp the data used are the monthly price records underlying the computation of national consumer price indices and harmonized consumer price indices these data cover a large number of products selected on the basis of extensive household budget surveys

upstream vertical integration in the aluminum and tin industries a comparative study of the choice between market and intrafirm coordination abstract this paper explores whether williamson s theory of vertical integration holds for the upstream stages of the aluminum and tin industries it concludes that the structure of these industries is broadly consistent with williamson s predictions the higher degree of upstream vertical integration in aluminum can be explained by greater scale economies higher barriers to entry higher transportation costs and greater asset specificity similarly differences in vertical integration within the tin industry can be explained in terms of the same variables

welfare analysis and intertemporal substitution abstract this paper explores the structure of welfare comparisons when direct utility is weakly separable over time the lifetime welfare effect of a reform is then the sum of atemporal hicksian variations and intertemporal variations reflecting intertemporal substitution these latter are shown to be of only second order importance in lifetime welfare comparisons approximations to the intertemporal variations when preferences are intertemporally additive are derived pointing to the welfare significance in this context of not only the intertemporal elasticity of substitution but also within period income effects numerical examples illustrate the analysis and suggest possible orders of magnitude

understanding the inventory cycle abstract careful examination of aggregate data from the u s and other oecd countries reveals that production and inventory behavior exhibit paradoxical features 1 inventory investment is strongly countercyclical at very high frequencies e g 2 3 quarters per cycle it is procyclical only at relatively low cyclical frequencies such as the business cycle frequencies e g 8 40 quarters per cycle 2 production is less volatile than sales around the high frequencies it is more volatile than sales only around business cycle or lower frequencies 3 unlike capital investment or gdp the bulk of the variance of inventory investment is concentrated around high frequencies rather than around business cycle frequencies these features of production and inventory behavior at the low and high frequencies provide a litmus test for inventory theories this paper shows that the stockout avoidance theory kahn j 1987 inventories and the volatility of production american economic review 77 667 679 has much better potential than other competing theories for explaining the seemingly paradoxical features of inventory fluctuations observed at different cyclical frequencies my analysis suggests that demand shocks are the main source of the business cycle

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

adjustment costs durables and aggregate consumption abstract previous tests of the permanent income hypothesis pih have focused on either non durables or durables expenditures in isolation this paper studies consumer purchases of non durables and durables as the outcome of a single optimization problem it is shown that with non separability in utility the presence of adjustment costs of changing durables stocks may affect the time series properties of both components of expenditure an econometric test of the pih based on the model developed in the paper is both more efficient and less prone to bias than those in some previous studies however this test confirms earlier rejections of the pih in aggregate quarterly data

vertical integration in the u s pulp and paper industry 1900 1940 a transaction cost model of vertical integration is tested based on detailed descriptions of every pulp and paper mill operating in the united states between 1900 and 1940 this study contributes to the literature on integration through the use of a large disaggregated database that allows identification of individual mills over time vertical integration of pulp and paper production is found to be positively associated with regional concentration paper mill capacity and production of standardized grades of paper over time new entrants behaved differently than established mills because few mills switched between integration and specialization once established copyright 1994 by mit press

taking stock a critical assessment of recent research on inventories empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s no one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories macroeconomists routinely thought of inventories as a destabilizing factor yet the prevailing micro theory viewed inventories as a stabilizing factor it was a fascinating question that was barely explored instead somewhat inexplicably interest in inventories dried up as if inventories were of minor economic significance and little intrinsic interest by the early 1980s then economists once again knew something they had known in the 1950s that inventory investment is of first order importance in business cycles but they were also beginning to realize that the standard production smoothing buffer stock model of inventories was in deep trouble this paper focuses on developments since that realization

seasonal fluctuations and the life cycle permanent income model of consumption this paper examines a new possible explanation for the recent rejections of the life cycle permanent income model of consumption the treatment of seasonal fluctuations the paper shows that when the seasonal fluctuations in consumption purchases are included in an analysis of the life cycle permanent income model there is no evidence in the aggregate data against the model the estimates of the parameters of agents utility functions obtained with seasonally unadjusted data are plausible and the unadjusted data do not reject the overidentifying restrictions on the model

consumption and demand during the recent economic downturn anec dotal reports in the press indicate that some demands are recession resistant beer while others are very procyclical e g wine this naturally causes economists to attempt to infer something about engel curves just as macroe conomists think differently about growth and business cycles so it seems should microe conomists think differently about how con sumption responds to growth and business cycles using quarterly national income and product account nipa data figure 1 depicts consumption and food expenditure growth mean percentage growth rates for food con sumption was 2 3 in the period 1948 1977 and 1 85 in the period 1978 2009 while the standard deviation of growth rates fell from 0 37 in the earlier period to 0 27 in the later pe riod consistent with engel s law the growth rate of food consumption has fallen over time in either total or per capita forms unsur prisingly the quarterly growth rate of medical consumption not shown is higher than food with a mean growth of 5 97 in the earlier period and reduced growth of 3 4 and de clining in the later period interestingly stan dard deviation d of medical growth rate has fallen substantially from 0 51 to 0 18 the mean growth of overall consumption expendi tures was 3 9 d 4 15 in the earlier period and 3 1 d 2 62 in the later period finally housing expenditure growth rates not shown halved from 5 04 in the early period to 2 51 in the latter period with very stable rates of growth d 0 15 however negative growth rates occur during recessions 2001 is an ex ception indeed food expenditures fell almost 15 in the recent quarter from the previous quarter which was also negative growth sim ilar patterns of negative growth rates during re cessions occur for the other two categories of consumption in the period 1978 2009 and for total consumption as expected consumption and consumption growth behave very differ ently in recessions the question is are the negative growth rates just due to a fall in cur rent income or do they reflect uncertainty if uncertainty is key then one must funda mentally think about model future expecta tions in order to understand measure current demand as simple as these basic engel curve consid erations are one of the liveliest debates in eco nomics centers on consumption in response to income for decades there has been the steady accumulation of evidence for and against a keynesian type view that people consume out of current income the contrary view is most commonly called the permanent income hypothesis or pih due to modigliani and brumberg 1954 friedman 1957 and oth ers generally forward looking intertemporal models of consumption and savings might be called the life cycle hypothesis with pih as a special case yet economists have not been particularly successful at amassing convincing evidence that is consistent with the life cycle model of behavior in all of its ramifications and many find models of conventionally ra tional economic agents wanting e g laibson 1998 the pih is that individuals consume out of an annuity derived from expected lifetime wealth this is particularly relevant when dis cussing the effects of countercyclical fiscal pol icy john taylor 2008 recently sided with the pih against the keynesian or neo keynesian view a second major issue is whether liquid ity constraints mitigate the forward looking life cycle predictions a third issue is how un certainty affects consumption and saving pre cautionary behavior much research has focused on the demand response to changes in total expenditure or even food expenditure allocations to particu lar foods engel curve notions of this research could be stated as dqt dc 1 n where c is real total consumption expenditures c j2 i piqi where qt and pt are the th quantity and real price respectively macroeconomics fellows address rulon d pope is professor of economics at brigham young university the author would like to thank daniel sullivan for assistance fellows address was presented at the 2008 aaea annual meet ing in milwaukee wi august 2009 invited addresses are not sub jected to the journal s standard refereeing process

digitalized service multinationals and international business theory banalieva and dhanaraj argue that digital service multinationals dsmncs possess a new category of firm specific advantage fsa the network advantage and that contrary to extant theory they use networks as a mode of governance i review the business models used by dsmncs compare them to non digital ones and explore what we can learn about them from extant ib theory i conclude that network advantages are not a new category of fsas that networks are not a mode of governance and that their use by dsmncs is well explained by extant theory

a simple nonadditive preference structure for models of household behavior over time intertemporal separability is an almost universal assumption in empirical work on household behavior but a good deal of recent work on consumption and labor supply suggests that it may not be tenable the traditional weakening of this assumption is to allow for habit formation i propose an alternative structure for intertemporal preferences that nests intertemporal additivity in a simple way and yields closed form solutions for demand functions this structure includes the neoclassical durables model as a special case i derive a demand system that nests the almost ideal system as its time separable counterpart this model is estimated on u k aggregate time series data for seven goods time separability is decisively rejected moreover i find that ignoring temporal dependencies leads to considerable bias in the estimates of elasticities of the seven goods durables display the strongest nonseparable effect the estimated reactions are consistent with the neoclassical durables model

on the employment effects of productivity shocks the role of inventories demand elasticity and sticky prices abstract whether technological progress raises or lowers employment in the short run has been the subject of much debate in the recent years we show that cross industry differences in inventory holding costs demand elasticities and price rigidities potentially all affect employment decisions in the face of productivity shocks in particular the employment response to a permanent productivity shock is more likely to be positive the less costly it is to hold inventories the more elastic industry demand is and the more flexible prices are using data on 458 4 digit u s manufacturing industries over the period 1958 1996 we find statistically significant effects of variations in inventory holdings and demand elasticities on short run employment responses but less conclusive evidence pertaining to the effects of measured price stickiness

constructing and estimating a realistic optimizing model of monetary policy abstract a dynamic stochastic general equilibrium dsge model with real and nominal both price and wage rigidities succeeds in capturing some key nominal features of u s business cycles additive technology shocks as well as multiplicative shocks are introduced and shown to be crucial monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression var literature the interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy the model is estimated by maximum likelihood on u s data and its fit is comparable to that of an unrestricted first order var besides producing reasonable impulse responses and second moments this model replicates a feature of u s business cycles never captured by previous research with dsge models that an increase in interest rates predicts a decrease in output two to six quarters in the future

expenditure allocation across nondurables services durables and savings an empirical study of separability in the long run the separability of categories of consumption expenditures and savings are empirically examined in the context of an error correction model of aggregate quarterly expenditure allocations in canada some evidence is found for separability of consumption allocations from savings in both the long run structure and short run dynamics of the model lending some support to the use of the assumption in modelling consumption behaviour

life cycle expenditure allocations and the consumption costs of children abstract in this paper we assess whether it is changing needs or intertemporal substitution that dominate household expenditure responses to the presence of children over the life cycle we construct lifetime expenditure paths for households with different demographic profiles and consider the shape of these paths and some possible implications for welfare measures simulated expenditure paths based on consistent single period and multi period models indicate that it is indeed changing needs that dominate such paths in periods when children are present in the household however allowing for intertemporal substitution is still shown to be important since it can introduce new information relevant to the calculation of household welfare

stochastic life cycle theory with varying interest rates and prices incorporating the assumption of rational expectations has produced some striking new predictions from many familiar economic theories one of the benefits of this development is that these new predictions provide additional means of testing well documented theories without necessarily requiring new data though it must be admitted that this is at the cost of an additional and for many a controversial assumption in his paper on life cycle and permanent income theory hall 1978 has given a very good example of such new predictions he demonstrated that if consumers are assumed to measure wealth using rational expectations of future income rather than a distributed lag of past income then a logical consequence of standard life cycle theory is that consumption will closely follow a first order autoregression subsequently bilson 1980 and flavin 1981 showed that the disturbance term in this autoregression will depend on the errors in predicting current and future income at first sight this remarkable result may seem to be inconsistent with the standard consumption function which relates consumption to income but an example will help explain why there is no necessary conflict consider the simple consumption function or absolute income hypothesis

towards a more general approach to testing the time additivity hypothesis a new procedure is proposed for re examining the assumption of additivity of preferences over time which although untenable is usually maintained in intertemporal analyses of consumption and labour supply the method is an extension of a famous work by browning however it is more general in permitting the estimation of intertemporal demand systems which are explicit in an unobservable variable price of utility but may lack a closed form representation in terms of observable variables such as prices and total outlay it also makes extensive use of duality theory to solve the endogeneity problem encountered in browning s study applying this method with an appropriate estimator to the australian aggregate data it is found that the time additivity hypothesis is decisively rejected which is consistent with browning s conclusion

surprises in the consumption function the life cycle hypothesis has been the dominant theoretical basis for empirical work on the aggregate consumption function for about a quarter of a century under it real consumption is proportional to real life cycle wealth where the factor of proportionality depends on real interest rate expectations and the demographic structure of the population life cycle wealth is the sum of financial and human wealth however because the latter is the present real value of the stream of labour and transfer income expected over the life cycle it is not directly observable this fact has led to a great variety of proxying devices in empirical applications and in consequence much looseness in the interpretation of very different models as being all consistent with life cycle theory indeed one can argue that this has protected the hypothesis from being seriously tested and perhaps rejected an insight associated with friedman 1957 is that the view taken by consumers of life cycle income does not alter by much from period to period since there is greater persistence in life cycle income than in current income this also explains the greater persistence of consumption than of current income intuitively this would suggest that lagged consumption being related to last period s perception of life cycle income which in turn is not much different from this period s perception should have a major role in predicting current consumption this intuition was formalised by hall 1978 using ideas familiar from the study of stock market prices and the term structure of interest rates hall showed that if the real rate of interest is constant and given a number of other assumptions including no transitory element in consumption then the life cycle hypothesis implies that

testing the permanent income hypothesis the evidence from canadian data this paper investigates whether there are variants of the permanent income model that are consistent with seasonally unadjusted quarterly postwar canadian data the analysis is based on a misspecification test equation which nests the standard permanent income model the results obtained are somewhat unfavourable to the permanent income hypothesis the same results also apply to more general models in which the real interest rate is time varying and the utility function is non separable in consumption and the stock of durable goods un test de l hypothese du revenu permanent resultats derives a partir des donnees cana diennes ce memoire presente les resultats d une enquete pour etablir s il existe un ou des variantes du modele du revenu permanent qui soient compatibles avec les donnees trimestrielles canadiennes non desaisonnalisees pour la periode de l apres seconde guerre mondiale l analyse est fondee sur une equation qui encastre le modele de revenu perma nent standard mais qui est enrichie pour tester la specification de l 6equation les resultats obtenus sont quelque peu defavorables a l hypothese du revenu permanent les memes resultats s appliquent aussi a des modeles plus generaux dans lesquels le taux d interet reel

managing resource dependency the united states and japan in the markets for copper iron ore and bauxite abstract this study analyses the different arrangements through which the us and japan have procured their imports of non fuel minerals and attempts to shed light on the likely implications of these arrangements for the relations between these two countries it focuses on three critical minerals copper iron ore and bauxite which after oil constitute the core of every industrial society because both the us and japan exhibit high levels of dependence on foreign supplies of these three minerals it is clear that ensuring adequate supplies at reasonable costs will be a major guiding force in their respective future policies this paper examines factors affecting the international markets for these minerals the structure of investment production and trade and the relations with the source countries from the discussion of these issues two paradoxical themes emerge 1 that japan has been able to procure much of her raw materials during the 1960s and 1970s at more favourable terms than has the us even though the latter country had tighter links to its supply sources 2 that the changing conditions in the minerals industries under study have resulted in recent years in a convergence in the procurement mechanisms of the us and japan and this convergence is likely to increase strains on us japanese relations

learning dynamics in research alliances a panel data analysis the aim of this paper is to empirically test the determinants of research joint ventures rjvs group dynamics we develop a model based on learning and transaction cost theories which represent the benefits and costs of rjv participation respectively according to our framework firms at each period in time weigh the benefits against the costs of being an rjv member rjv dynamics can then be interpreted as a consequence of this evolving trade off over time we look at entry turbulence and exit in rjvs that have been set up under the us national cooperative research act which allows for certain antitrust exemptions in order to stimulate firms to co operate in r d accounting for unobserved project characteristics and controlling for inter rjv interactions and industry effects the tobit panel regressions show the importance of group and time features for an rjvs evolution we further identify an average rjvs long term equilibrium size and assess its determining factors ours is a first attempt to produce robust stylized facts about co operational short and long term dynamics a neglected dimension in research co operations but an important element in understanding how collaborative learning works

inventories and optimal monetary policy in a small open economy abstract we study how inventory investment affects the design of optimal monetary policy in a new keynesian small open economy model we find that under producer currency pricing when the intratemporal elasticity of substitution is smaller than 1 optimal monetary policy in our model with inventories is similar to a standard model without inventories however when the intratemporal elasticity of substitution is larger than 1 inventory investment increases the importance of nominal exchange rate stabilization relative to a standard model without inventories the importance of nominal exchange rate stabilization increases with the intratemporal elasticity of substitution

the intertemporal allocation of expenditure on non durables services and durables this paper presents estimates of the parameters of a consumption function for u s quarterly seasonally unadjusted data on non durables services and durables the theoretical novelty in the approach we present is in the derivation of the consumption function from an underlying many goods allocation problem applying this model with an appropriate estimator to the data we find i the homogeneity restrictions suggested by theory are not rejected ii there is no evidence of excess sensitivity to income iii there is no evidence to suggest that agents cannot adjust their durable stocks as they would wish and iv the intertemporal substitution elasticity is not well determined

economies of integration versus bureaucracy costs does vertical integration improve performance this study tested links between vertical integration cost structure and performance at the line of business level of analysis major findings were 1 vertical integration results in economies ev