convergence to the law of one price without trade barriers or currency fluctuations using a panel of 51 prices from 48 cities in the united states we provide an upper bound estimate of the rate of convergence to purchasing power parity we find convergence rates substantially higher than typically found in cross country data we investigate some potentially serious biases induced by i i d measurement errors in the data and find our estimates to be robust to these potential biases we also present evidence that convergence occurs faster for larger price differences finally we find that rates of convergence are slower for cities farther apart however our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders

securitization of taxes implicit in payg pensions to preserve solvency a pay as you go payg pension system needs to adjust contribution rates and pension promises over time currently it is not possible to hedge in the financial market against politically determined uncertainty as regards these parameters i consider a policy reform whereby property rights are established on the implicit lifetime tax levied by payg finance and are assigned to the pension institution these property rights are well defined if the reform also features rule based allocation of aggregate risk in the form of defined contribution or defined benefit schemes i show that a payg pension system may indeed be instantly restructured so as to minimize political risk and allow financial market diversification of risk a side benefit is securitization of human capital flows which are not traded in existing financial markets the new securities if traded in appropriately competitive financial markets are complementary to the notional account reforms of the 1990s however fiscal instability can increase if securitization is implemented in the absence of initial solvency and credible adoption of rule based methods to allocate aggregate risk salvador valdes prieto

do better schools matter parental valuation of elementary education the evaluation of numerous school reforms requires an understanding of the value of better schools given the difficulty of calculating the relationship between school quality and student outcomes i turn to another method and use house prices to infer the value parents place on school quality i look within school districts at houses located on attendance district boundaries houses then differ only by the elementary school the child attends i thereby effectively remove the variation in neighborhoods taxes and school spending i find that parents are willing to pay 2 5 percent more for a 5 percent increase in test scores this finding is robust to a number of sensitivity checks

the optimal level of social security benefits the optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior the primary such cost is the distortion in private saving the present paper derives the level of social security benefits that is optimal in three basic cases in the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving the second and third sections then derive optimal benefits for two different definitions of incomplete myopia

monetary union price level convergence and inflation how close is europe to the usa abstract the pattern of price dispersion across european and us cities from 1990 to 2004 is documented there is a striking decline in dispersion for traded goods prices in europe most of which took place prior to the launch of the euro dispersion in the euro area is now quite close to that of the usa this evidence provides useful facts for future work assessing the importance of various developments in europe harmonization of tax rates convergence of incomes and labor costs liberalization of trade and factor markets and increased coherence of monetary policy

global demographic trends and social security reform how sustainable are the current social security systems in the developed economies given the projected demographic trends the most recent literature has answered this question through dynamic general equilibrium models in a closed economy framework this paper provides a new quantitative benchmark of analysis for this question represented by a two region model south and north of the world economy where capital flows across regions the timing and the extent of the demographic transition and the associated economic forces shaping capital accumulation and equilibrium factor prices are very different in the two regions thus the projected paths of interest rate and wage rate in the north diverge substantially between closed and open economy we perform a wide range of policy experiments under both scenarios our main conclusion is that if one is interested in quantifying the path of the fiscal variables e g the value of the payroll tax needed to keep the social security system viable or to finance a transition towards a fully funded system then these two benchmarks yield similar results however if the focus is on quantifying the path of factor prices aggregate variables and ultimately welfare then the two approaches can diverge significantly

x efficiency and economies of scale in pension fund administration and investment pension funds operating costs impair pension benefits so it is crucial for pension funds to operate at the lowest cost possible in practice we observe substantial differences in costs per member for dutch pension funds both across and within pension fund size classes this article presents new estimates of scale economies of pension funds and is the first that also measures pension fund x inefficiency we use a unique supervisory data set which distinguishes between administrative and investment costs and apply various approaches and models our estimates show large economies of scale for pension fund administrations but modest diseconomies of scale for investment activities we also found that many pension funds have substantial x inefficiencies for both administrative and investment activities the two kinds of inefficiency differ across types of pension funds therefore most pension funds should be able to improve their cost performance and hence increase pension benefits

real exchange rates and relative prices an empirical investigation abstract this paper uncovers a striking empirical regularity the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country this fact seems to hold for all goods except very simple homogeneous products models of real exchange rates are likely to have predictions regarding this relation so this fact may provide a useful gauge for discriminating among models

house prices and the provision of local public services capitalization under school choice programs abstract while the theoretical public finance literature argues that house prices should be influenced by the demand for local public services there is little direct evidence concerning changes in house prices when these services are altered previous empirical studies have relied on cross sectional identification of the relationship between house prices and variables that may proxy for the perceived quality of local public services this paper instead examines a policy change the adoption of a public school choice program to identify the capitalization effects associated with the diminished importance of school district boundaries using data from inter district choice in minnesota i find that residential properties appreciate significantly in school districts where students are able to transfer to preferred school districts whereas residential property values decline in districts that accept transfer students these general equilibrium effects also influence school districts local property tax revenues mitigating the incentive for schools to improve in order to attract or retain students

do the eu countries import at the same price the case of coffee the establishment of the economic and monetary union was expected to determine price convergence in the market of the european union leading to the equilibrium theorized by the law of one price this article investigates prices convergence in the coffee market among european importers coffee is not only a tradable and traded good but also one of the most valuable traded commodities we account for different qualities of coffee in a hedonic regression model which isolate and remove the effects of factors that might affect price dispersion adjusted import prices result to be significantly different between european member states and do not support the hypothesis of a deepening european market integration

price determinants in top quality e auctioned specialty coffees we analyze the price determinants of specialty coffees traded at e auctions we hypothesize that since specialty coffees are a highly differentiated product prices will be determined by both sensory and reputation attributes to test our hypotheses we estimate a hedonic price function using data from central and south american e auctions and calculate the implicit prices of sensory and reputation attributes the results show that market clearing prices are a function of sensory characteristics and reputation variables including third party quality ranking country of origin coffee variety and quantity the additional attribute information disclosed at e auctions results in substantially higher prices relative to conventional commodity coffee market prices

fair demographic risk sharing in defined contribution pension systems in this article we formulate and solve the optimal design problem of a defined contribution public pension fund in a highly stylized but still rather general non stationary framework we adopt the viewpoint of a benevolent social planner who aims at treating in a fair manner the successive overlapping generations participating to such a long term mandatory system using the approach of el karoui and jeanblanc 1998 for the optimal consumption and portfolio choice problem with random income in a complete market we exhibit a solution to our intertemporal stochastic control problem where each generation receives a fair lumpsum retirement benefit it is proportional to the contributions she has paid during her active worklife and follows a fixed common rule although her pension value itself may depend on variables only observable at her retirement time we next relax the assumption that the collective pension system is mandatory and investigate the performance of individual investment plans in the market comparing the outcomes of both alternatives we derive a condition under which the collective fund can be expected to overperform the individual plan in the special case of a stationary economy such a possibility has been pointed out by gollier 2008 in fact this effect results from the possibility for the collective fund to borrow today against contributions of future generations which allows to implement riskier strategies and may improve its performance

pareto improving social security reform when financial markets are incomplete this paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a pareto improvement when returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations our quantitative analysis shows that abstracting from the capital crowding out effect the introduction of social security represents a pareto improving reform even when the economy is dynamically efficient however the severity of the crowding out effect in general equilibrium tends to overturn these gains

some pitfalls in testing the law of one price in commodity markets abstract several articles find no support for the lop in commodity markets a few articles find some support rejecting the lop would strike at the heart of economic theory rejection would suggest that firms do not maximize wealth and households do not maximize utility our objective is to show how four common pitfalls can cause tests of the lop to fail when in fact the lop holds all tests that fail to support the lop fall in to at least two pitfalls all of these pitfalls are the result of ignoring important practical implications of arbitrage

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

decreasing absolute risk aversion and utility indices derived from cake eating problems abstract this paper establishes the following characterization of decreasing absolute risk aversion dara utility indices j exhibits dara if and only if it is the indirect function corresponding to an infinite horizon cake eating problem for some nondecreasing and concave utility function of consumption the characterization is applied to the analysis of resource extraction under uncertainty and to an inverse optimal problem

intergenerational risk sharing and risk taking of a pension fund abstract by using their financial reserves efficiently pension funds can smooth shocks on their asset returns and can thus facilitate intergenerational risk sharing in addition to the primary benefit of improved time diversification this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium which also favors the consumers in this paper our aim is twofold first we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management capital payments to retirees and dividend payments to shareholders we examine both the first best rules and the second best rules where in the latter case the fund is constrained by a solvency constraint and by a guaranteed minimum return to workers contributions second we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement we estimate that the certainty equivalent return of the pension saving scheme goes from 3 23 per year to 3 76 when intergenerational risk sharing is introduced one of the main results of the paper is that better intergenerational risk sharing does not reduce the risk born by each generation rather it increases the expected return to the workers contributions

the effect of school capital investments on local housing markets and household sorting in california abstractin this paper i investigate what effect school capital investments have on housing values and household location choice in the context of the tiebout model this research identifies an exogenous variation in school capital investments by exploiting the lottery allocation of entitlement to an interest free construction bond among districts in california although the lottery is exogenous additional non lottery allocation complicates identification this paper develops an empirical model based on sample selection methods in order to create a counterfactual state in which additional non lottery allocation would not have existed i find that receiving the interest free construction bond increases school capital expenditure and housing values at the district level i view the increase in housing values as the capitalization of school capital investments i find little evidence for the effect of the interest free construction bond on household sorting and student s academic outcomes

new directions for stochastic open economy models the paper develops a simple stochastic new open economy macroeconomic model based on sticky nominal wages explicit solution of the wage setting problem under uncertainty allows one to analyze the effects of the monetary regime on welfare expected output and the expected terms of trade despite the potential interplay between imperfections due to sticky wages and monopoly the optimal monetary policy rule has a closed form solution to motivate our model we show that observed correlations between terms of trade and exchange rates are more consistent with our traditional assumptions about nominal rigidities than with a popular alternative based on local currency pricing 2000 elsevier science b v all rights reserved

one money one market the effect of common currencies on trade currency unions their dramatic effect on international trade a gravity model is used to assess the separate effects of exchange rate volatility and currency unions on international trade the panel data bilateral observations for five years during 1970 90 covering 186 countries includes 300 observations in which both countries use the same currency i find a large positive effect of a currency union on international trade and a small negative effect of exchange rate volatility even after controlling for a host of features including the endogenous nature of the exchange rate regime these effects statistically significant imply that two countries sharing the same currency trade three times as much as they would with different currencies currency unions like the european emu may thus lead to a large increase in international trade with all that that entails andrew rose

the economics of quality in the specialty coffee industry insights from the cup of excellence auction programs this study estimates price determinants for specialty green coffee auctions using records from the 2004 2010 cup of excellence programs hosted by the alliance for coffee excellence while some literature on coffee has focused on certifications and sustainability labels the discussion of price determinants has been limited this article replicates one of the first publications on price determinants and formulates a new model to more accurately describe the market we include the necessary additional variables and estimate the model using a truncated maximum likelihood estimation technique while sensory quality has a strong effect on price the highest premiums stem from obtaining a top rank compared to other coffees from the same country and north american buyers are more responsive to sensory quality than buyers in asian and european markets jel classifications c24 d44 q13

the latte revolution regulation markets and consumption in the global coffee chain abstract coffee is a truly global commodity and a major foreign exchange earner in many developing countries the global coffee chain has changed dramatically as a result of deregulation new consumption patterns and evolving corporate strategies from a balanced contest between producing and consuming countries within the politics of international coffee agreements power relations shifted to the advantage of transnational corporations a relatively stable institutional environment where proportions of generated income were fairly distributed between producing and consuming countries turned into one that is more informal unstable and unequal through the lenses of global commodity chain analysis this paper examines how these transformations affect developing countries and what policy instruments are available to address the emerging imbalances

the effect of school construction on test scores school enrollment and home prices abstract this paper provides new evidence on the effect of elementary and middle school construction projects on home prices academic achievement and school enrollment combining the staggered implementation of a comprehensive school construction project in a poor urban district with panel data on student test scores and neighborhoods of residence we find that by six years after building occupancy school construction increases reading scores by 0 15 standard deviations relative to the year before building occupancy we do not observe similar effects for math scores school construction raised home prices in affected neighborhoods by roughly 10 and led to increased public school enrollment

social security and unsecured debt abstract in this paper we use a calibrated life cycle model to explore quantitatively ways of reducing the burden of social security in a world populated by both optimizing and rule of thumb consumers social security contributions force young households with upward sloping income profiles to save a sizeable portion of their income for retirement when their optimal consumption plan would likely have them either saving little or borrowing we first use household data to document that young households have accumulated social security contributions that are large relative to debt holdings then using a calibrated life cycle model we show that both allowing households to use social security wealth to pay off their debt and exempting young households from social security contributions but in both cases requiring higher contributions later mitigate many of the inefficiencies of social security from the perspective of life cycle financial planning specifically in our preferred experiment which exempts households whose heads are under 30 from making social security contributions we find that certainty equivalent consumption increases by 3 4 for optimizing households and by 3 3 for rule of thumb households

intergenerational risk sharing abstract in this paper we examine government debt and tax transfer policies that can be improve the allocation of risk between generations markets cannot allocate risk efficiently between two generations whenever the two generations are not both alive prior to the occurence of a stochastic event this implies that government policies transferring risk between generations have the potential to create first order welfare improvements our model provides a non keynesian justification for the debt finance of wars and recessions as well as an added rationale for social security type tax transfer schemes which aid unlucky generations e g the depression generation at the expense of luckier generations

is price adjustment asymmetric evaluating the market share and marketing bottlenecks hypothesis abstract export price adjustment is asymmetric with respect to currency fluctuations in at least two circumstances if firms face capacity constraints in distribution networks or quantitative trade restrictions then pricing to market may be greater during depreciations of the exporter s currency if firms attempt to build market share subject to the threat of trade restrictions then pricing to market may be greater during appreciations of the exporter s currency this paper tests for asymmetries using panel data on german and japanese 7 digit industry exports the data seldom reject the hypothesis of a symmetric response of prices to exchange rates

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

price level co movements within currency unions an alternative integration metric this paper analyses currency union integration by testing whether price levels in member countries possess a common stochastic trend the trace statistic test for cointegration proposed by johansen 1995 demonstrates the presence of such a trend for most unions a disaggregated analysis identifies a common stochastic trend for several though fewer than half of country pairs within a union some unions such as the eurozone have small shares of cointegrated country pairs yet the share of cointegrated country pairs is large relative to countries outside currency unions comparison to a control group country pairs where one country belongs to a given union and the other country does not indicates that the cointegration found within a currency union is a union specific trait and not a feature of the individual countries within the union these results provide an alternative metric to intraunion trade for gauging the extent of currency union integration

measuring regional cost of living accurate measures of regional cost of living are vital to businesses and individuals we compare a commonly used regional cost of living index produced by the american chamber of commerce research association accra to an index we calculate using consumer price index data and research from kokoski cardiff and moulton we find significant differences between the accra and the new indexes that are likely due to theoretical design data collection and sampling design the comparison of these indexes highlights sources of differences in regional cost of living measures and suggests caution in the use of accra indexes

inflation price dispersion and market integration through the lens of a monetary search model monetary search theory implies that the real effects of inflation via its impact on price dispersion depend on the level of search costs and thus on the level of market integration for less integrated markets the inflation price dispersion nexus is predicted to be asymmetrically v shaped which results in an optimal inflation rate above zero for highly integrated markets with low search costs however the impact of inflation on price dispersion should only be small using price data of the european union member states this paper is the first that tests and confirms these predictions of monetary search theory

voluntary participation and intergenerational risk sharing in a funded pension system we explore the feasibility of a funded pension system with intergenerational risk sharing when participation in the system is voluntary typically the willingness of the young to participate depends on their belief about the future young s willingness to do so we characterise equilibria with voluntary participation and show that the likelihood of their existence increases with risk aversion and financial market uncertainty we find that mandatory participation is often necessary to sustain a funded pension pillar and to let participants benefit from intergenerational risk sharing

the value of school facility investments evidence from a dynamic regression discontinuity design author s cellini stephanie riegg ferreira fernando rothstein jesse abstract despite extensive public infrastructure spending surprisingly little is known about its economic return in this paper we estimate the value of school facility investments using housing markets standard models of local public goods imply that school districts should spend up to the point where marginal increases would have zero effect on local housing prices our research design isolates exogenous variation in investments by comparing school districts where referenda on bond issues targeted to fund capital expenditures passed and failed by narrow margins we extend this traditional regression discontinuity approach to identify the dynamic treatment effects of bond authorization on local housing prices student achievement and district composition our results indicate that california school districts underinvest in school facilities passing a referendum causes immediate sizable increases in home prices implying a willingness to pay on the part of marginal homebuyers of 1 50 or more for each 1 of capital spending these effects do not appear to be driven by changes in the income or racial composition of homeowners and the impact on test scores appears to explain only a small portion of the total housing price effect c 2010 by the president and fellows of harvard college and the massachusetts institute of technology

housing markets and residential segregation impacts of the michigan school finance reform on inter and intra district sorting abstract local financing of public schools in the u s leads to a bundling of two distinct choices residential choice and school choice and has been argued to increase the degree of socioeconomic segregation across school districts a school finance reform aimed at equalization of school finances can in principle weaken this link between housing choice and choice of schools in this paper we study the impacts of the michigan school finance reform of 1994 proposal a on spatial segregation the reform was a state initiative intended to equalize per pupil expenditures between michigan school districts and reduce the role of local financing we find that proposal a led to a decline in neighborhood sorting within education markets as measured by changes in the value of housing stock and several socioeconomic indicators we also find that the reform affected the dispersion of incomes and educational attainment within school districts increasing within district heterogeneity in the lowest spending school districts while decreasing the same in the highest spending districts however there is a continued high demand for residence in the highest spending communities these findings are robust to various alternative definitions of education market and survive several sensitivity checks these spatial segregation patterns are not replicated in neighboring ohio that did not face similar school finance equalization

price convergence in the emu evidence from micro data abstract the establishment of the european monetary union emu was widely expected to cause price convergence among member states in an investigation of this claim the present study avoids problems of comparability and representativeness by using an extremely detailed and comprehensive scanner database on washing machine prices and sales volumes for 17 european countries a hedonic regression yields country specific time series for quality adjusted price differentials statistically and economically significant deviations from the law of one price emerge log t tests firmly reject price convergence among emu countries small convergence clusters can be identified but they are unrelated to emu membership

risk sharing across generations without publicly owned equities abstract the u s social security trust fund currently invests in government bonds investing some of it instead in equities while continuing to pay social security benefits under existing rules would alter potentially improve the sharing of financial risks across non trading generations this paper shows that the same risk sharing can be achieved without direct government ownership of equities if instead the government places a linear and symmetric tax on risky private capital returns this equivalence is very robust and holds even if some agents are endogenously borrowing constrained

a rational economic model of paygo tax rates abstract we argue that paygo rates are determined by a representative agent and a benevolent government jointly maximizing the expected life time utility of the agent the distributions of labor and capital income are calculated from national data on real gdp real wages and the real return to capital since 1950 with uniform risk aversion predicted rates explain 83 of the variance of observed rates the globalization of capital markets would lead to convergence of paygo rates our results are immune to crises like 2008

european product market integration after the euro using a detailed data set of prices of consumer goods in european cities from 1990 to spring 2003 we investigate the question of whether the introduction of the euro in january 1999 increased integration of consumer markets as reflected by consumer prices in fact we find no tendency for prices to converge after january 1999 this finding holds even when we control for a number of factors that might affect price dispersion on the other hand we find that there has been a significant reduction in price dispersion throughout the decade of the 1990s suggesting that efforts to reduce economic barriers initiated early in the decade may have in fact had the effect of significantly increasing the integration of consumer markets charles engel and john h rogers

intergenerational risk shifting through social security and bailout politics abstract this paper adopts a stochastic overlapping generations framework to analyze the allocation of aggregate financial risks under different social security systems and a majority voting rule we study whether there will be switches between pay as you go payg and fully funded ff systems in such an economy we show that in case of a negative aggregate shock low income young individuals will form a political coalition with the elderly to implement a payg system payg scheme is shown to persist even after a good aggregate shock if the system is redistributive enough

social security and risk sharing abstract in this paper we identify conditions under which the introduction of a pay as you go social security system is ex ante pareto improving in a stochastic olg economy with capital accumulation and land we argue that these conditions are consistent with realistic specifications of the parameters of the economy in our model financial markets are complete and competitive equilibria interim pareto efficient therefore a welfare improvement can only be obtained if agents welfare is evaluated ex ante and arises from an improvement in intergenerational risk sharing we also examine the optimal size of a given social security system as well as its optimal reform

the law of one price revisited new evidence on the behavior of international prices i introduction the law of one price asserts that prices of identical goods should be equalized internationally when expressed in a common currency and adjusted for any contract differences transportation costs and trade distortions the intuition is that international arbitrage should work to eliminate any persistent price discrepancies due solely to differences in the country of origin or sale of goods thus stated the law of one price is frequently assumed to hold in theoretical and empirical models of international trade yet based on evidence from the 1950s 1960s and early 1970s the proposition does not appear to characterize the actual price behavior of many traded goods the evidence further indicates that deviations from absolute price equalization are often both large and protracted even during periods of comparative exchange rate stability 1 the relative version of the law of one price posits that rates of change in prices will be equalized meaning that exchange rate adjusted inflation rates should be the same for similar traded goods empirical support for this alternative has also been lacking 2 as isard 1977b indicates this evidence calls into question any appeal to microfoundations as a basis for macroeconomic price convergence in the form of purchasing power parity ppp it also casts doubt on the role of price linkages in both international market integration and the transmission of economic disturbances across national borders the prevailing view on international price equalization derives from evidence and analyses which are dated and need not apply to current economic conditions most published studies involve data from fixed rate periods very early episodes of floating rates or the first years of the present flexible rate system an analysis based on more contemporary data is warranted in view of the substantial exchange rate movements and the perceived increase in international integration that have occurred since these earlier studies 3 in addition a fresh look at the evidence can make use of both the longer time series data and new time series techniques that are now available accordingly this study updates the microeconomic evidence on international price equalization while investigating the existence and nature of the long run relationship between traded goods prices it analyzes the behavior of u s export prices relative to japanese and german dollar export prices for carefully matched identically weighted categories of manufactured goods over the current floating rate period stationarity and cointegration tests are used to assess the time series properties of these relative export prices and to determine the extent to which the common currency prices of similar exports are related internationally in the long run while these methods have been used in analyses of purchasing power parity they have not been extended to studies of traded goods prices at the microeconomic level ii data description this study is based on a set of quarterly relative dollar export price indexes constructed by the bureau of labor statistics bls the data represent ratios of u s export prices to german or japanese export prices expressed in dollars for highly comparable product groups conceptually the series measure the average price of a particular set of u s exports to all foreign markets relative to a dollar price index for a similar set of exports from germany or japan the indexes are weighted averages of transactions contract prices of individual exports reported on an f o b free on board or f a s free along side ship basis for the final month of each quarter and adjusted for quality changes the categories are fairly disaggregated e g valves trucks over 2000cc so that the comparison is between relatively narrow product categories two additional features in the bls s design of the series ensure a high degree of comparability between the pairs of export categories

time diversification liquidity constraints and decreasing aversion to risk on wealth abstract the aim of this paper is to provide a theoretical foundation to the notions of time diversification and decreasing absolute aversion to risk on wealth we examine the attitude towards risk on initial wealth when the agent allocate this wealth to consumption over his lifetime time diversification occurs in that case because the agent will optimally split the risk on wealth into small seemingly independent risks on consumption the introduction of liquidity constraints reduces the implicit time horizon of the consumer and thereby increases his risk aversion the negative relationship between initial wealth and the implicit time horizon where the consumer will be liquidity constrained provides an argument for decreasing aversion to risk on wealth

a short history of price level convergence in europe we study the evolution of price level dispersion in europe by combining time series information on harmonized indices of consumer prices hicps with occasional observations of absolute price levels we find that european price levels converged over much of the last 40 to 50 years in the united states our benchmark price level dispersion is more or less stable a back of the envelope calculation suggests that indirect tax rate harmonization convergence of nontraded input costs and convergence of traded input costs in the form of exchange rate stability and increased openness are all important in explaining european price level convergence

exchange rates and traded goods prices abstract this paper presents a partial equilibrium model of the determination of domestic and export prices by a monopolistic competitive firm the model stresses the role of exchange rate uncertainty and expectations the most important result of the analysis is that the stochastic properties of deviations from the law of one price are crucially affected by the currency of denomination of export prices using data on domestic and dollar export prices of japanese goods i find that deviations from the law of one price are due to exchange rate surprises but also to price staggering and ex ante price discrimination

intergenerational risk sharing and fiscal policy abstract risk sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations ex ante efficiency is shown to be achievable with optimal transfers regardless of distributional concerns for crra preferences stylized real world policies notably safe debt and safe pensions are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations safe transfers can be rationalized as efficient if preferences display age increasing risk aversion such as habit formation the ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts

intergenerational risk sharing and endogenous labour supply within funded pension schemes funded defined benefit pensions add to welfare on account of providing intergenerational risk sharing but lower it on account of inducing labour supply distortions we show that a properly designed funded defined benefit pension scheme involves a welfare improvement even if contributions are distortionary and even if individuals face potentially correlated wage and equity risks numerical calculations indicate that diversification gains from risk sharing are large compared to the losses related to labour supply distortions this result withstands a number of extensions like the introduction of a short sale constraint for individuals or the inclusion of a labour income tax

economic effects of currency unions we develop a new instrumental variable iv approach to estimate the effects of different exchange rate regimes on bilateral outcomes the basic idea is that the characteristics of the exchange rate between two countries are partially related to the independent decisions of these countries to peg explicitly or de facto to a third currency notably that of a main anchor this component of the exchange rate regime can be used as an iv in regressions of bilateral outcomes we apply the methodology to study the economic effects of currency unions the likelihood that two countries independently adopt the currency of the same anchor country is used as an instrument for whether they share a common currency we find that sharing a common currency enhances trade increases price comovements and decreases the comovement of real gross domestic product shocks

the future of social security with an introduction by daniel l mcfadden the past and the present processes leading to social security legislation inform expectations regarding the future of social security and with international comparisons provide lessons to those who would learn them jel h55

school quality and residential property values evidence from vancouver rezoning abstract this study utilizes changes in the catchment areas of public schools in vancouver british columbia to measure the residential price capitalization of school quality specifications that employ repeat sales methods to control for time invariant neighborhood effects and disaggregated price indexes to capture time varying neighborhood price appreciation reveal significant effects of secondary school performance on residential prices however when we add controls for long run price trends in rezoned areas only prices of residences likely to be purchased by high income families appear to have been affected by changes in school quality induced by rezoning

adjustment costs and pricing to market theory and evidence abstract this paper develops an adjustment cost model of pricing to market the model consists of a monopolist who supplies an identical nondurable good to two foreign markets it is shown that the degree of pricing to market increases with the relative importance of the transitory component in exchange rates customs data from 1978 through 1987 on u s and canadian imports of seven german commodities are used to estimate the model s parameters and test its over identifying restrictions

investing in schools capital spending facility conditions and student achievement abstract public investments in repairs modernization and construction of schools cost billions however little is known about the nature of school facility investments whether it actually changes the physical condition of public schools and the subsequent causal impacts on student achievement we study the achievement effects of nearly 1400 capital campaigns initiated and financed by local school districts comparing districts where school capital bonds were either narrowly approved or defeated by district voters overall we find little evidence that these school capital campaigns improve student achievement event study analysis focused on the students actually affected by large campus renovations also generates very precise zero estimates of achievement effects thus u s school capital campaigns financed by local districts the predominant method through which facility investments are made may be a limited tool for realizing substantial gains in student achievement or closing achievement gaps

labor supply flexibility and portfolio choice in a life cycle model abstract this paper examines the effect of the labor leisure choice on portfolio and consumption decisions over an individual s life cycle the model incorporates the fact that individuals may have considerable flexibility in varying their work effort including their choice of when to retire given this flexibility the individual simultaneously determines optimal levels of current consumption labor effort and an optimal financial investment strategy at each point in his life cycle we show that labor and investment choices are intimately related the ability to vary labor supply ex post induces the individual to assume greater risks in his investment portfolio ex ante

currency unions and trade how large is the treatment effect currency unions and trade what can the data say the impact of a common currency on trade can be grossly mismeasured if countries that belong to currency unions are systematically different from those that do not and if the relationship between trade and its observable determinants is complex i argue that such complications are plausible and likely to distort the empirical results of a recent economic policy paper by andrew rose issue 30 2000 pp 7 45 using techniques designed to be robust in this situation i find that the effects of common currency on international trade are considerably less dramatic and much less precisely estimated torsten persson i have always maintained that the measured effect of a single currency on trade appears implausibly large but i am not convinced by torsten persson s diagnosis and proposed solution i apply a variety of estimation techniques to a new larger data set where many more instances of currency union creation and abandonment make it possible to rely on time series as well as cross sectional evidence the results are similar to my earlier ones the effect of a single currency on trade is large andrew rose

estimation of a labour supply model with censoring due to unemployment and underemployment this study proposes and implements a method of labour supply estimation which is appropriate when the sample contains unemployed and underemployed workers the estimation method consists of excluding unemployed and underemployed workers from the sample and then using to avoid selection bias an extension of heckman s approach to the case where two correlated selection rules generate the sample hausman s specification test is then used to determine whether ignoring constrained workers has led to biases in traditional labour supply estimates and the empirical results suggest that previous estimates of several important parameters are biased since the biases go in the direction that would be predicted by the hypothesis that the unemployed and underemployed are constrained the results support this hypothesis

social security investment in equities this paper explores the general equilibrium impact of social security portfolio diversification into private securities either through the trust fund or private accounts the analysis depends critically on heterogeneities in saving production assets and taxes limited diversification weakly increases interest rates reduces the expected return on short term investment and the equity premium decreases safe investment increases risky investment and increases a suitably weighted social welfare function however the effects on aggregate investment long term capital values and the utility of young savers hinges on assumptions about technology aggregate investment and long term asset values can move in opposite directions jel h55

savings and portfolio choice in a two period two asset model we extend arrow s analysis of portfolio choice in a one period model to savings and portfolio choice in a two period model this abstract was borrowed from another version of this item

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

accounting for u s real exchange rate changes this study measures the proportion of u s real exchange rate movements that can be accounted for by movements in the relative prices of nontraded goods the decomposition is done at all possible h

social security and demographic shocks an overlapping generations model of social security with shocks to the productivity of labor and capital and demographic shocks is studied we focus attention on stationary long run allocations an allocation is interim optimal if there does not exist another feasible allocation that improves the expected welfare of all generations computed conditionally on the state of the world when they are born we characterize the set of interim optimal allocations and study the equilibria associated with various institutional forms of social security from the point of view of this optimality criterion we obtain the analogs of the two traditional welfare theorems of microeconomic theory assume that there exists a financial asset in fixed quantity which supports some non null intergenerational transfers then the rational expectations equilibrium allocation of this economy is interim optimal conversely any stationary interim optimal allocation can be supported by such an equilibrium with adequate lump sum transfers

currency unions and international integration this paper characterizes the integration patterns of international currency unions such as the cfa franc zone we empirically explore different features of currency unions and compare them to countries with sovereign monies by examining the criteria for mundellos concept of an optimum currency area we find that members of currency unions are more integrated than countries with their own currencies for instance we find that currency union members have more trade and less volatile real exchange rates than countries with their own monies business cycles are more highly synchronized across currency union countries than across countries with sovereign monies

pension plan funding technology choice and the equity risk premium in this paper the impact of lazear contracts with defined benefit pensions on aggregate technology composition and the aggregate risk premium is examined in the presence of capital market constraints affecting workers defined benefit pensions bias the economy towards risk free production leveraging the risky technology relaxes the constraints and results in more risky production and a fall in the aggregate risk premium this effect holds with risky debt and low pension shortfall risk but breaks down with high pension shortfall risk a key prediction is that as lazear contracts become less common risky production will increase and the aggregate risk premium will fall

optimal dynamic trading with leverage constraints we solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint i e a limitation on his ability to borrow for the purpose of investing in a risky asset we assume that the investor has constant relative risk aversion and that the value of the risky asset follows a geometric brownian motion in the absence of the leverage constraint the optimal strategy involves investing a fixed proportion of wealth in the risky asset we prove that in the presence of the leverage constraint the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding however the two proportions are different reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future

the effects of investing social security funds in the stock market when fixed costs prevent some households from holding stocks with fixed costs of participating in the stock market consumers with high income will participate in the stock market but consumers with lower income will not participate if a fully funded defined contribution social security system tries to exploit the equity premium by selling a dollar of bonds per capita and buying a dollar of equity per capita consumers who save but do not participate in the stock market will increase their consumption thereby reducing saving and capital accumulation calibration of a general equilibrium model indicates that this policy could reduce the aggregate capital stock substantially by about 50 cents per capita