revisiting wage earnings and hours profiles abstract for the youngest cohorts whose entire working life can be observed hours start falling much earlier than wages wages do not fall if they fall at all until one s late 60s the data suggest that many workers start a smooth transition into retirement by working progressively fewer hours while still facing an upward sloping wage profile this pattern is not an artifact of staggered abrupt retirement or selection this evidence imposes restrictions on dynamic models of the aggregate economy and provide updated numerical profiles that can be readily used in quantitative macroeconomic analysis to incorporate this new pattern into aggregate models

rational expectations and short run neutrality a reexamination of the role of anticipated money growth in the rarified air surrounding timeless general equilibrium models perfectly flexible wages and prices rational economic agents and the absence of information and adjustment costs ensure there is no need to distinguish between anticipated and unanticipated fluctuations in exogenous policy variables economic agents adjust completely and immediately to all changes anticipated or not money is always and everywhere neutral in the heavier air closer to the ground dynamic models which allow for imperfect and costly information as well as adjustment costs have appropriately placed considerable emphasis on the expectations of economic agents such models have forced researchers to confront directly the analytical and empirical timedimensioned relationship between the imperfect information and incomplete adjustment characterizing the short run and the full information and complete adjustment characterizing the long run such a focus naturally gives rise to the need to distinguish in the short run between anticipated expected and unanticipated unexpected fluctuations in exogenous policy variables the full analytical implications of this line of inquiry have been worked out by lucas sargent and others the basic proposition regarding monetary policy emanating from what has come to be called the rational expectations equilibrium business cycle hypothesis is that only unanticipated movements in monetary policy will have real albeit temporary effects on output and employment anticipated movements in monetary policy will only have price effects the major empirical work supporting these a priori theoretical predictions has been developed in a series of papers by robert barro 1977 1981 barro and rush 1980 given the implications of his findings and the controversy which has surrounded this entire body of work it is not surprising that analytical and empirical critiques abound 2 our focus in this paper is on the empirical work conducted by barro and most especially barro and rush 1980 hereafter b r particular emphasis is placed on the problems associated with the partitioning of monetary growth into anticipated and unanticipated components in the next section we briefly review the b r work and various critiques which have been directed at it the third section develops an alternative approach to the partitioning problem presents our empirical work and compares it to the results yielded by the b r approach the final section summarizes our major findings and develops the resulting implications

uncertainty and monetary policy in a wage bargaining model in a wage bargaining model increased uncertainty concerning monetary and real aggregates is shown to give rise to a higher equilibrium unemployment rate moreover the equilibrium unemployment rate is found to depend on the choice of monetary policy regime as this choice affects the uncertainty wage setters face when setting the nominal wage rate it is also shown that the equilibrium inflation rate may depend on uncertainty in such a way that increased uncertainty gives rise to a higher equilibrium unemployment rate as well as a higher equilibrium inflation rate or what has been called stagflation

stabilizing monetary injection policies abstract the primary concern of this paper is understanding how prices and interest rates respond to open market operations in a model economy developed by grossman and weiss but with more general utility functions we establish global existence of equilibrium paths and observe that prices and interest rates rise initially but thereafter oscillate around a new steady state also investigated are optimal monetary policies wherein injections take place in more than one time period and corresponding to which the equilibrium prices are most stable existence of such policies is established by mathematical analysis and its detailed structure explored by numerical simulation journal of economic literature classification numbers e50 e52

welfare for the elderly the effects of ssi on pre retirement labor supply abstract this paper studies pre eligibility age labor market disincentives created by the supplemental security income ssi program asset and income limits might induce individuals nearing the eligibility age to work less we exploit states supplementation of federal ssi benefits to estimate the effects of ssi on pre retirement labor supply using sipp data we find some evidence that generous ssi benefits reduce the pre retirement labor supply and earnings of men who are likely to participate in ssi after retirement as they near the eligibility age especially men who are eligible for early social security benefits which may be used to offset their reduced labor income

aging and pensions in general equilibrium labor market imperfections matter we re examine the effects of population aging and pension reforms in an olg model with labor market frictions the most important feature brought about by labor market frictions is the connection between the interest rate and the unemployment rate exogenous shocks such as aging leading to lower interest rates also imply lower equilibrium unemployment rates because lower capital costs stimulate labor demand and induce firms to advertise more vacancies these effects may be reinforced by increases in the participation rate of older workers induced by the higher wage rates and the larger probability of finding a job these results imply that neglecting labor market frictions and employment rate dynamics may seriously bias the evaluation of pension reforms when they have an impact on the equilibrium interest rate

purchasing power parity in the short and long run a reappraisal of the post 1973 evidence in this paper an attempt is made to separate the short run and long run aspects of the purchasing power parity ppp relationship using the techniques of band spectral regression and cointegration for eight industrialized countries the long run ppp is first tested for all the eight countries with reference to their nominal bilateral exchange rates vis a visthe us dollar for five european currencies the analysis is repeated with respect to the deutschmark with a separate consideration of the post ems period in the concluding sections possible reasons for ppp deviations are examined

on low frequency estimates of long run relationships in macroeconomics abstract a number of recent studies have attempted to test propositions concerning long run economic relationships by means of frequency domain time series techniques that concentrate attention on low frequency comovements of variables the present paper emphasizes that many of these propositions involve expectational relationships that are not inherently related to specific frequencies or periodicities thus the association of low frequency time series test statistics with long run economic propositions is not generally warranted that such an association can be misleading is demonstrated by analysis of examples taken from notable papers by geweke lucas and summers

consumer bankruptcy a fresh start consumer bankruptcy provides partial insurance against bad luck but by driving up interest rates makes life cycle smoothing more difficult we argue that to assess this trade off one needs a quantitative model of consumer bankruptcy with three key features life cycle component idiosyncratic earnings uncertainty and expense uncertainty exogenous negative shocks to household balance sheets we find that transitory and persistent earnings shocks have very different implications for evaluating bankruptcy rules more persistent shocks make the bankruptcy option more desirable larger transitory shocks have the opposite effect our findings suggest the current us bankruptcy system may be desirable for reasonable parameter values jel d14 d91 k35

interest rates and inflation in the frequency domain new evidence abstract we employ new data on interest rates from the tax free sector to test the fisher hypothesis tax free rates permit a test without determining the appropriate marginal tax rate to assign to investors we use band spectral estimation

assets general equilibrium and the neutrality of money when government liabilities including money are held in private portfolios only as stores of value and do not provide additional services such as liquidity real variables are not affected by changes in the money supply due to the government s trading in real assets open market operations this neutrality of monetary policy fails if the government either trades in nominal assets or it distributes subsidies and levies taxes the ability of monetary policy to affect real variables is an important issue and has been the subject of numerous theoretical and empirical studies the most useful theoretical framework within which to address the problem is a model of asset markets where the demand for money or other government liabilities is determined by rational portfolio choice tobin 1958 these assets may of course provide additional services such as transactions and liquidity we assume here however that these services do not exist the standard argument for the effectiveness of monetary policy goes as follows changes in the supply of money affect the price level and hence the distribution of returns to money as an asset as individuals realign their portfolios and prices adjust to maintain market clearing the equilibrium holdings of physical assets change in this case money is not neutral we shall argue however that as long as changes in the supply of money are effected through the government s trading in real assets this argument is in general not valid it is well known that the effectiveness of monetary policy depends on the method of injection of new money into the economy two procedures are used by the government to effect changes in the supply of money it either trades in assets nominal or real open market operations or it distributes subsidies and levies taxes we show here that open market operations in real assets capital or indexed bonds have no effects on real variables in a general equilibrium model with market clearing the argument which can also be applied to the management of the public debt is presented in a most general framework in the next section it does not depend on the existence of a complete system of contingent securities or on an operative bequest motive furthermore it is compatible with incomplete and differential information the result is similar to the modigliani miller theorem in corporate finance that an argument along these lines can be employed to demonstrate the irrelevance of open

do stronger age discrimination laws make social security reforms more effective supply side social security reforms to increase employment and delay benefit claiming among older individuals may be frustrated by age discrimination we test for policy complementarities between supply side social security reforms and demand side efforts to deter age discrimination specifically studying whether stronger state level age discrimination protections enhanced the impact of the increases in the social security full retirement age fra that occurred in the past decade the evidence indicates that for older individuals who were caught by the increase in the fra benefit claiming reductions and employment increases were sharper in states with stronger age discrimination protections

the real bills doctrine versus the quantity theory a reconsideration two competing monetary policy prescriptions are analyzed within the context of overlapping generations models the real bills prescription is for unfettered private intermediation or central bank operations designed to produce the effects of such intermediation the quantity theory prescription in contrast is for restrictions on private intermediation designed to separate money from credit although our models are consistent with quantity theory predictions about money supply and price level behavior under these two policy prescriptions the models imply that the quantity theory prescription is not pareto optimal and the real bills prescription is

retirement security in an aging population abstract elderly individuals exhibit wide disparities in their sources of income for those in the bottom half of the income distribution social security is the most important source of support program changes would directly affect their well being income from private pensions assets and earnings are relatively more important for higher income elderly individuals who have more diverse income sources the trend from private sector defined benefit to defined contribution pension plans has shifted responsibility for retirement security to individuals a significant subset of the population is unlikely to be able to sustain their standard of living in retirement without higher pre retirement saving

international market linkages and optimal monetary policy abstract the interrelation among portfolio choice and labor supply decisions and real balance effects is examined under flexible exchange rates on the asset menu are home currency domestic government bonds and foreign bonds with commodity market linkages the real balance effect is highlighted as the inefficiency of an economy with positive government bonds is demonstrated while the additional linkage of interest rates through covered interest parity may transform an economy where only money is useful into an economy in which both money and government bonds are beneficial

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

anticipated money inflation uncertainity and real economic activity this paper critically examines a number of maintained hypotheses that are necessarily being tested along with the basic notion derived from the rational expectations re formulation of lucas 1972 19 73 that only unanticipated money matters the trend stationary representation of secular real output of lucas and others is replaced by a difference stationary representation found by nelson and plosser 1980 to be consistent with u s historical data the impact of inflation uncertainty on real activity is considered attention is paid to possible mis measurement of agents ex ante anticipated money growth it is found that three alternative measures of anticipated money growth produce a stable impact on growth of output and employment contemporaneous and lagged values of unanticipated money growth have no significant additional explanatory power in the presence of any one of the three measures of anticipated money growth beyond this it is impossible to reject the hypothesis that the initial positive real impact of anticipated money is not temporary inflation uncertainty is found to act as a significant depressant of real economic activity in the presence of all tested combinations of anticipated and unanticipated money growth this abstract was borrowed from another version of this item

the long run relationship between interest rates and inflation some cross country evidence abstract this paper analyzes the effect of anticipated inflation on nominal interest rates paying special attention to the stability of this relationship over various regimes these regimes are analyzed to find out whether the inflation forecastability proposition recently advanced by barsky explains the observed poor performance of the fisher equation with historical data the analyses make use of the so called threshold and digression models and data from 11 western countries for 1875 1984 the main result of this paper is that the forecastability proposition does not explain the weakness of the anticipated inflation effect on interest rates rather various institutional factors seem to be of more importance

labor contracts and the role of monetary policy in an overlapping generations model abstract this paper characterizes labor contracts in a dynamic economy subject to both real and nominal shocks in this environment we compare alternative means of trading labor services spot markets fixed nominal wage contracts and price contingent contracts the welfare ordering of these market structures is shown to depend on the relative variability of the real and nominal shocks and the costs of contingent contracts the paper also investigates the role of monetary policy and the neutrality of feedback rules finally we demonstrate that the optimal policy is nonstochastic

the return of the liquidity effect a study of the short run relation between money growth and interest rates in this article i use band pass filters to investigate the short run relationship between money growth and interest rates i find a negative correlation between short run movements in money growth and interest rates which i interpret as evidence that the liquidity effect dominates the anticipated inflation effect

wage declines among older men we examine the evidence on whether real wages decline with age among older men while the general human capital model of wage growth over the life cycle predicts that wages will fall as workers approach the end of their career alternative models of wage growth do not predict these wage declines we find that in longitudinal estimates of age wage profiles wage declines only set in for workers in their 60s furthermore these longitudinal declines are at least partly due to interactions with the social security system the earnings cap or other effects of social security appear to lead some workers to choose jobs and job characteristics associated with lower wages copyright 1996 by mit press

inflation and welfare in the steady state this is a paper on expected inflation and welfare in steady state equilibrium the demand for money is an inventory demand with an endogenous payment period the clower constraint is not imposed higher inflation reduces welfare by reducing consumption as people devote more of their real income to maintaining lower average money holdings high inflation does not necessarily promote an increase in the capital stock the mundell tobin effect is absent the policy conclusion is standard deflate at the rate of time preference because capital is held socially optimal consumption falls short of its golden rule level if inside money is allowed it drives out fiat money and welfare is again at a maximum

rational random walks the paper examines within the framework of a multi dimensional one step forward looking model a special category of rational expectations equilibria their support is infinite with two accumulation points steady states the stochastic motion of the system is of random walk type a general strategy for an existence proof associated with the study of a dynamical systemstresses necessary conditions in a simple overlapping generations model the proof is made complete no backwards bending labour supply is required in the pure sunspot case by continuity heteroclinic random walk equilibria are also shown to exist when shocks are real i introduction many economic models consider exogenous variables that follow stochastic processes of a random walk type the present paper considers a category of rational expectation equilibria in which the path of endogenous variables exhibits a similar qualitative feature the state of the system walks randomly furthermore this random walk takes place between two steady states of the system we call such equilibria random walk because of the temporal stochastic process followed by the equilibrium state heteroclinic because the support of the process connects two steady states in the state space equilibria the paper defines and discusses such equilibria and proposes a general methodology for assessing their existence it shows on a simple example that they do exist they may be either of sunspot type in the case where fluctuations are driven by beliefs only or extrinsic in cass shell 1983 terminology or non sunspot when some underlying fundamentals actually follow a random walk although the study has an exploratory dimension it strongly suggests that the random walk rational expectation equilibria under scrutiny exist within a large class of models in particular an explicit example of sunspot random walk equilibria is exhibited in a subclass of overlapping generations models that do not have traditional sunspot equilibria i e sunspot equilibria triggered by stationary markov processes finally when

easy come easy go moral hazard in the context of return to education this empirical study advances the understanding of the theory of investment in human capital by outlining limitations to its applicability in the context of return to education the study uses the concept of moral hazard to examine circumstances when financial support for education purpose generates less desirable post graduation incomes this study explores the relationship between financial support and post graduation incomes using data from the survey of income and program participation that is designed to measure the economic situation of individuals results suggest that students are less likely to engage in moral hazardous behavior to the degree to which they are older and to the degree to which they receive costlier financial assistance

two illustrations of the quantity theory of money of two central implications of the quantity theory of money that a given change in the rate of change in the quantity of money induces i an equal change in the rate of price inflation and ii an equal change in nominal rates of interest the illustrations were obtained by comparing moving averages of the three variables in question using quarterly u s time series for the period 1953 77 readers may find the results of interest as additional confirmation of the quantity theory as an example of one way in which the quantity theoretic relationships can be uncovered via atheoretical methods from time series which are subject to a variety of other forces or as a measure of the extent to which the inflation and interest rate experience of the postwar period can be understood in terms of purely classical monetary forces the theoretical background of the study is reviewed very briefly as it is familiar material in the next section the data processing methods are described and rationalized in section ii the illustrations

estimating the long run relationship between interest rates and inflation a response to mccallum abstract this note demonstrates that bennett mccallum s recent critique of low frequency estimates of macroeconomic relationships is of little empirical significance it also demonstrates that readily available and frequently used techniques can be used to diagnose the problem mccallum raises finally it shows that the standard critique of expectational distributed lags is not warranted once the role of learning by economic agents is recognized