alternative approaches to money and growth this paper reexamines the issue of money and growth in an economy with both endogenous labor supply and endogenous capital stock using three recently developed approaches the money in the utility function approach the cash in advance approach and the transactions costs approach by establishing a qualitative equivalence between alternative setups the authors find economically justifiable conditions such that all comparative statics results derived from the aforementioned approaches are identical copyright 1992 by ohio state university press

occupational choice and the process of development this paper models economic development as a process of institutional transformation by focusing on the interplay between agents occupational decisions and the distribution of wealth because of capital market imperfections poor agents choose working for a wage over self employment and wealthy agents become entrepreneurs who monitor workers only with sufficient inequality however will there be employment contracts otherwise there is either subsistence or self employment thus in static equilibrium the occupational structure depends on distribution since the latter is itself endogenous we demonstrate the robustness of this result by extending the model dynamically and studying examples in which initial wealth distributions have long run effects in one case the economy develops either widespread cottage industry self employment or factory production employment contracts depending on the initial distribution in the other example it develops into prosperity or stagnation

money capital and real liquidity effects with habit formation the money in utility model is reconsidered in the presence of endogenous labour and habits with standard assumptions about preferences and a policy rule that sets the nominal interest rate by adjusting the growth rate of money the model exhibits superneutrality in the steady state nevertheless habits give rise to real liquidity effects in the short run after an increase in the nominal interest rate employment falls resulting in a fall in capital accumulation and in the short and long term real interest rates the adjustment of the capital stock is non monotonic employment and the short and long term real interest rates may also adjust non monotonically jel classification e22 e52 e58 monnaie capital et effets reels de liquidite quand il y a formation d habitudes on re examine le role de la monnaie dans un modele d utilite quand travail et formation d habitudes sont endogenes dans le cadre des postulats usuels a propos des preferences et d une regle de politique qui definit le taux d interet en ajustant le rythme de croissance de la monnaie le modele fait preuve de super neutralite en regime permanent neanmoins les habitudes entrainent des effets reels de liquiditea court terme apres un accroissement dans le taux d interet nominal l emploi chute ce qui entraine un ralentissement dans l accumulation du capital et une chute des taux d interet reels a court et a long terme l ajustement dans le stock de capital n est pas monotone l emploi et les taux d interet reels a court et a long terme peuvent aussi ne pas s ajuster de facon monotone

economic measurement progress and challenges the national income accounts together with the source data which they use form the core of our economic measurement system the development of the concepts and measurements of national income are among the most important achievements of modern economics replacing the older notions of national wealth of the physiocrats and mercantilists for example is national income and product confined to market activity the appropriate fundamental concept yes but we ask a lot of national income and product accounting it is used most importantly to gauge economic progress how much better off are we than our parents or grandparents is the economy growing adequately slowly or rapidly in recent years and are we at a cyclical turning point the information requirements of course will differ depending on the question gaps in inventory measurement may be an appropriate resource claimant to those interested in cyclical issues whereas finding identifying and incorporating new products and quality change more rapidly may be far more significant to long term economic growth we also tend to have a survivor selection bias in our concern with the speed with which new ideas and concepts are incorporated into the national accounts and other data series superlative indexes hedonic regression methods for quality change and many others were much more obvious after some years of diffusion throughout the profession than at their inculcation as a result the gap between major suggested improvements and their adoption by statistical agencies can be extensive often decades erwin diewert 1999 should national accounts be extended to nonmarket activity nonmarket work time is perhaps the most important area for supplemental information natural resources and the environment are close behind william d nordhaus and edward kokkenlenberg 1999 r d capital environmental capital human capital and other intangibles are high priority items but should be dealt with in the form of satellite accounting so i applaud the bea s recent initiatives in this direction i come to this conclusion for a variety of reasons not to suggest that technological capital and human capital are less important than tangible capital in fact perhaps quite the opposite they are all complementary boskin and lawrence lau 2000 but the issues in definition classification and measurements are still more problematic for these items than for traditional items and therefore i believe they should not be added directly to the national income and product accounts nipa in short my own view is that substantial improvements can and should be made in the traditional domain of the national accounts improvements in the core national accounts should not be sacrificed to a proliferation of satellite accounts in principle we should do both and sufficient resources should be provided to accomplish these tasks

income distribution and growth the kuznets hypothesis revisited this study develops a general equilibrium model in which the evolution of income inequality and output conforms with the kuznets hypothesis the paper presents a novel endogenous mechanism that generates the inverted u relation between income inequality and per capita output and captures the reciprocal influence between the two unlike previous attempts for a comprehensive theoretical modelling of this phenomenon the evolution of the economy is consistent with another important empirical observation namely that output growth is accompanied in the early stages of development by a widening wage differential between skilled and unskilled labour whereas in a later stage this wage differential declines this study develops a general equilibrium model in which the evolution of income inequality and output conforms with the kuznets hypothesis the paper presents a novel endogenous mechanism that generates the inverted u relation between income inequality and per capita output and captures the reciprocal influence between the two unlike previous attempts for a compre hensive theoretical modelling of this phenomenon the economic evolution is consistent with another important empirical observation namely that output growth is accompanied in early stages of development by a widening wage differential between skilled and unskilled labour whereas in a later stage this wage differential declines the relationship between the distribution of income and economic growth has been a focus of research for several decades in a seminal contribution kuznets 1955 explored the historical evolution of income distribution and per capita output his study demonstrated that income inequality widens in the early phase of economic growth and narrows in the later stage of development kuznets s inverted u hypothesis has been debated in the last few decades and has been confirmed by a large number of cross section empirical studies and refuted by others time series analysis indicates that the hypothesis is consist 2 ent with the experience of most of the developed world furthermore these studies suggest that output growth is accompanied in early stages of develop ment by a widening wage differential between skilled and unskilled labour and that in a later stage this wage differential declines see e g williamson 1985 throughout the years the link between income distribution and economic growth has been interpreted mostly as a causal relation from growth to income distribution recently however the nature of this link has been re examined and attention has been paid to the causality in the other direction galor and zeira 1993 have demonstrated that owing to borrowing constraints income

prices and regional variation in welfare one would expect regional differences in prices to influence conclusions concerning levels and distributions of well being although there is anecdotal evidence of significant price dispersion across regions there is no governmental source of data that measures differences in price levels in this paper i integrate estimates of regional prices with expenditure data from the consumer expenditure surveys to assess the influence of price differences on living standards in the united states while prices have little effect on inequality estimates of poverty and the standard of living change substantially with the inclusion of regional price variation

religious participation and children s education a social capital approach abstract based on the argument in both economic and sociological literature that religion is conducive to children s human capital formation this paper provides a model of religious participation and explores a mechanism that social capital affects children s education a la coleman coleman j s 1988 social capital in the creation of human capital american journal of sociology 94 s95 s120 the model generates several interesting implications which help explain some important stylized facts about education and religion further in a dynamic setting the model shows that there exists a steady state in which individuals allocate a positive amount of time and resources to religious activities thus it complements the existing literature to explain why seemingly unproductive religions can be everlasting

fiscal policy and the term structure of interest rates an intertemporal optimizing analysis the effects of government expenditure on the dynamic evolution of the term structure of interest rates are analyzed in an infinite horizon intertemporal optimizing macroeconomic framework three types of disturbances are discussed unanticipated and anticipated permanent increases and a temporary decrease in the case of anticipated future and temporary disturbances the lead time in the former and the duration in the latter are critical determinants of the dynamics for a very temporary shock the short term and long term rates will diverge in the short run while most of the analysis focuses on infinitesimally short and infinitely long bonds the dynamics of the entire yield curve are also considered copyright 1992 by ohio state university press

the long run relationship between inflation and output in postwar economies abstract we investigate the relationship between inflation and real output in a large sample of postwar economies our methodology is to use a structural vector autoregression to estimate the response of the level of real output to permanent inflation shocks separately for each country we find that a permanent shock to inflation is not associated with a permanent movement in the level of real output for most countries in our sample the main exceptions are certain low inflation countries in which permanent inflation shocks permanently increase the level of output we also find that permanent inflation shocks do not permanently influence real output growth rates in our sample

human capital kuznets curve with subsistence consumption level abstract we examine the human capital kuznets curve in a simple model that does not assume increasing returns to scale in human capital formation with a utility function that specifies a subsistence consumption level consumption is a necessary good and education is a luxury good as the children of poor households receive a low level of education the gap in human capital endowments expands between poor and rich households eventually economic development increases income and expenditure for education and income inequality declines

stock returns and inflation with supply and demand disturbances we account for the relation between stock returns and inflation with two independent disturbances supply shocks and demand shocks supply shocks reflect real output shocks and cause a negative relation between stock returns and inflation while demand shocks are mainly due to monetary shocks and generate a positive relation between stock returns and inflation we show both theoretically and empirically that the stock return inflation relation varies over time and across countries depending on the relative importance of the two types of shocks our empirical evidence is based on pre and postwar periods in the united states as well as the postwar period in the united kingdom japan germany article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

interest rates and inflation a consensus has emerged among practitioners that the instrument of monetary policy ought to be the short term interest rate that policy should be focused on the control of inflation and that inflation can be reduced by increasing short term interest rates at the center of this consensus is a rejection of the quantity theory such a rejection is a difficult step to take given the mass of evidence linking money growth inflation and interest rates increases in average rates of money growth are associated with equal increases in average inflation rates and interest rates these observations need not rule out a constructive role for the use of short term interest rates as a monetary instrument one possibility is that increasing short term rates in the face of increases in inflation is just an indirect way of reducing money growth sell bonds and take money out of the system another possibility is that while control of monetary aggregates is the key to low long run average inflation rates an interest rate policy can improve the short run behavior of interest rates and prices the shortrun connections among money growth inflation and interest rates are very unreliable so there is much room for improvement these possibilities are surely worth exploring but doing so requires new theory the analysis needed to reconcile interest rate policies with the evidence on which the quantity theory of money is grounded cannot be found in old textbook diagrams

inflation forecast targeting implementing and monitoring inflation targets abstract inflation targeting is shown to imply inflation forecast targeting the central bank s inflation forecast becomes an explicit intermediate target inflation forecast targeting simplifies both implementation and monitoring of monetary policy the weight on output stabilization determines how quickly the inflation forecast is adjusted towards the inflation target money growth or exchange rate targeting is generally inferior than inflation targeting and leads to higher inflation variability commitment to target rules may be better than commitment to instrument rules

agrarian structures urbanization and inequality summary this study examines the impact of agrarian structures on income inequality over the long run first it exhibits the relationship between land and income distribution by developing a theoretical model based on harris and todaro 1970 and lewis 1954 high land inequality increases income gini coefficients in the urban sector as well as the rural sector not only by creating congestion in the urban subsistence sector but also by feeding the growth of the urban reserve army of labor which pulls down the wages in the urban capitalist sector next the study investigates the empirical relationship between land inequality level of urbanization and income inequality using cross country datasets the estimation results support the theoretical model and indicate that the level of land inequality has a significant impact on determining the level of urbanization and urban and overall income inequalities moreover the analysis finds that overurbanization increases income inequality the empirical analysis controls for institutional factors like education inequality and the level of democracy the results present a stronger evidence on the land inequality s influence through urbanization than through education and democracy these results suggest that policymakers should have a broader view as to the importance of agrarian policies a progressive land reform or and subsidies protecting small peasantry can also reduce urban income inequality and poverty over the long run

a dynamic theory of the transition to democracy abstract a model of the transition to democracy is presented within a dynamic general equilibrium framework we demonstrate that democratic transitions occur endogenously in the course of economic growth or with economic contraction being fundamentally driven by the economic position of the middle class democratic transitions can occur rapidly or slowly because the autocrat faces an informational asymmetry regarding the effect of his policies on the political economic environment the model shows that the primary factors affecting the speed of democratic transitions are inequality the planning horizon of the autocrat the autocrat s perceived legitimacy and the rate of economic growth

retrospectives price indexes and general exchange values the spreading use of indexes in the nineteenth century raised basic questions concerning the nature of absolute value in a neoclassical world of relative exchange values where walsh held that the right index for the general exchange value of money would identify true values jevons marshall and especially keynes were highly skeptical that such values could be defined without interpersonal comparisons of utility subsequent political debates over the use of indexation especially those of world war ii and the current period have underlined the difficulty of identifying a true cost of living index applicable to all components of the population

labor market institutions and income inequality an empirical exploration this paper presents evidence on the impact of labor regulations on income inequality using a recently published database on labor institutions and outcomes as well as different panel data analysis techniques for a large sample of countries for 1970 2000 when applying our preferred technique we find that both de jure and de facto regulations improve the distribution of income although the former appear to be non robustly associated with improving income inequality this result partly reflects the fact that regulations are endogenous and more interestingly that different regulation yield distinct effects

do underlying measures of inflation outperform headline rates evidence from australian data many central banks often focus on underlying measures of inflation when assessing inflation trends this paper compares the accuracy of underlying measures of inflation relative to the headline rates by using australia data it is found that the underlying measures did have smaller errors in predicting the long term trend in inflation than the quarterly headline rate due to the volatility in the headline rate as compared to the year ended headline rate the statistical test results however support only the measure of market prices excluding volatile items not the others there is some weak evidence of the weighted median measure outperforming the headline rate in the sub period after 1993 with respect to directional accuracy the test statistics cannot reject the null hypothesis of an equal probability correctly predicting the moving direction of the inflation trend though the headline rates have a higher probability

the real real price of nonrenewable resources copper 1870 2000 over the past 40 years economists have devoted considerable effort to estimating long run trends in real commodity prices the results indicate that the real prices for many commodities have fallen suggesting to the surprise of many that resource scarcity is declining over time almost all of this work however uses the u s producer price index or other standard price deflators which recent research shows overestimate inflation for several reasons this article examines copper prices with adjusted deflators designed to eliminate this bias it finds that the trend over time which is significantly downward when no adjustment is made to the deflator displays no tendency in either direction or is significantly upward depending on the magnitude of the deflator adjustment employed these findings suggest that real resources prices provide less support than widely assumed for the hypothesis that resources are becoming more available or less scarce over time

consumer prices the consumer price index and the cost of living after presenting major findings and recommendations the cpi commission reiterates the estimate of a 1 1 percentage point per annum upward bias it rejects the contention that the bls already makes substantial corrections for quality change that quality improvements and new products accrue only to the rich and that procedures to make more extensive quality adjustments valuations of new products and adjustments for commodity and outlet substitution are impractical the bias in the cpi can be sharply reduced as the authors detail in this paper coauthors are ellen r dulberger robert j gordon zvi griliches and dale w jorgenson

accounting for forward rates in markets for foreign currency absteract forward and spot exchange rates between major currencies imply large standard deviations of both predictable returns from currency speculation and of the equilibrium price measure the intertemporal marginal rate of substitution representative agent theory with time additive preferences cannot account for either of these properties we show that the theory does considerably better along these dimensions when the representative agent s preferences exhibit habit persistence but that the theory fails to reproduce some of the other properties of the data in particular the strong autocorrelation of forward premiums since the advent of flexible exchange rates in the early 1970s a large body of statistical work has established that forward rates for major currencies are not optimal predictors of future spot rates relevant evidence is reported in studies by baillie lippens and mcmahon 1983 bekaert 1991 bilson 1981 boothe and longworth 1984 cumby 1988 cumby and obstfeld 1984 fama 1984 gregory and mccurdy 1984 hansen and hodrick 1983 hodrick and srivastava 1984 and korajczyk and viallet 1990 a more complete list of references is provided by hodrick 1987 these papers indicate that returns from speculation in forward and spot currency markets are predictable and that the predictable components vary considerably over time a number of alternative explanations have been offered for the predictable variation in foreign currency market excess returns kaminsky 1988 korajczyk 1985 and krasker 1980 suggest that infrequent extreme events may make returns appear predictable in small samples the so called peso problem lewis 1989 argues that rational learning following infrequent changes in the process governing equilibrium prices can explain part of the ex post predictability of currency returns froot and frankel 1989 and froot and thaler 1990 examine the hypothesis that market forecasts of future spot

inflation and real stock returns revisited i introduction this article empirically reinvestigates the relationship between real stock returns and inflation according to fisher 1930 1 in an efficient market real stock returns should reflect expectations only about real factors such as growth in output and time preference of savers such that real stock returns and inflation should vary independently in other words on average investors are fully compensated for erosions in purchasing power over time however this so called generalized fisher hypothesis has received little empirical support while kaul 1990 boudoukh and richardson 1993 solnik and solnik 1997 madsen 2005 and ryan 2006 find positive or weakly positive correlation between stock returns and inflation most empirical studies including nelson 1976 fama 1981 1983 geske and roll 1983 gultekin 1983 kaul 1987 and solnik 1983 uncover a negative effect of inflation anticipated and or unanticipated on real or nominal stock returns these apparent inconsistencies between the data and the predictions of economic theory have been termed as the stock return inflation puzzle and cited as evidence of monetary nonsuperneutrality or irrationality and market inefficiency 2 to reconcile the seemingly conflicting contributions danthine and donaldson 1986 provide a rational expectations equilibrium model in which a negative relation between stock returns and inflation arises from non monetary sources e g a real output shock and a positive relation is driven by purely monetary sources stulz 1986 marshall 1992 and bakshi and chen 1996 also assert that stock returns may be negatively correlated with inflation especially when the source of inflation is related to nonmonetary factors evidently hess and lee 1999 khil and lee 2000 and lee 2003 find that while monetary shocks drive a positive correlation real fiscal or real output shocks result in a negative correlation between stock returns and inflation from a different perspective kaul 1987 1990 argues that the relation between these two variables depends on both the money demand and the money supply specifically while the combination of money demand effects with a countercyclical monetary response accentuates a negative correlation money demand shocks along with a procyclical monetary response lead to a neutral or positive correlation between real stock returns and inflation similar arguments can be found in day 1984 kaul and seyhun 1990 boudoukh richardson and whitelaw 1994 and gallagher and taylor 2002 and are supported by compelling empirical evidence see e g kim 2003 lee 1992 as an alternative this article models the real stock return inflation relationship as intrinsically dynamic explicitly distinguishing between the short run and the long run such a distinction is crucial because imperfect information rigidity and or contractual obligations are more prevalent in the short run than in the long run in that sense the response of real stock returns to inflation could differ in the short run versus long run moreover we assess the long and short run impacts of inflation uncertainty on real stock returns as argued the real costs of inflation are associated with its uncertainty greater inflation uncertainty resulting from higher inflation may lead to economic inefficiency lower real investment and unemployment thereby reducing economic growth thus it is interesting to see if there are independent effects of inflation uncertainty on real stock returns both in the short run and in the long run in so doing this article uses an innovative econometric technique to explore the long and short run relationships between real stock returns and inflation both anticipated and unanticipated and the relationships with inflation uncertainty it departs from earlier work and complements recent evidence in at least three aspects

how government statistics adjust for potential biases from quality change and new goods in an age of digital technologies a view from the trenches abstract a key economic indicator is real output to get this right we need to measure accurately both the value of nominal gdp done by bureau of economic analaysis and key price indexes done mostly by bureau of labor statisticcs all of us have worked on these measurements while at the bls and the bea in this article we explore some of the thorny statistical and conceptual issues related to measuring a dynamic economy an often stated concern is that the national economic accounts miss some of the value of some goods and services arising from the growing digital economy we agree that measurement problems related to quality changes and new goods have likely caused growth of real output and productivity to be understated nevertheless these measurement issues are far from new and based on the magnitude and timing of recent changes we conclude that it is unlikely that they can account for the pattern of slower growth in recent years first we discuss how the bureau of labor statistics currently

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

resurrecting the weak credibility hypothesis in models of exchange rate based stabilization abstract we analyze how weak credibility affects the volatility of consumption spending in a model of exchange rate based stabilization that allows for both durable and nondurable goods the inclusion of durables greatly improves the explanatory power of the weak credibility hypothesis the hypothesis can account for the main qualitative properties of the boom bust cycle provided the elasticity of durables expenditure with respect to tobin s q is greater than the intertemporal elasticity of substitution moreover the quantitative effects are very large in numerical simulations based on conservative assumptions about the expenditure share of durables 20 and wealth effects none aggregate consumption increases 17 22 and the real exchange rate appreciates 24 26 when the crawl decreases from 100 to zero for 3 years in variants of the model that incorporate supply effects the consumption boom is equally strong but appreciation of the real exchange rate rises to 30 40

price inflation and stock returns abstract this letter demonstrates that price inflation and stock returns display differing relationships depending on the measure of inflation used the regularity that price inflation and stock returns are negatively related in post world war ii depends on the model specification

inflation wealth and interest rates in an intertemporal optimizing model abstract this paper analyzes the relationship between the growth of the money supply and capital accumulation in a monetary optimizing model under certain conditions we show that a large intertemporal elasticity of substitution makes the nominal rates of interest undershoot its long term value that a low elasticity gives rise to overshooting while a unitary elasticity is shown to make the nominal rate of interest a constant these considerations plus explicit attention paid to the income and substitution effects induced by the changes in the nominal rates of interest provide us with an understanding of the correlation between growth of money and capital accumulation

inequality and development across and within countries summary this paper provides a cross country comparison of how income inequality has evolved within countries at different levels of development it uses overlapping nonparametric regression which allows visual comparisons of inequality both within and across countries as a result the methodology allows more specific conclusions than cross country regressions and yet is more general than within country case studies the approach highlights the problematic conclusions that can arise with parametric regressions in particular with tests of the kuznets curve while some previous results are confirmed some new results on inequality across countries are also discovered

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

employment tenure and earnings profiles in japan and the united states comments the relationship between job tenure and annual earnings in japan has received considerable attention from social scientists examining employment contracts and the japanese compensation system in their widely cited article masanori hashimoto and john raisian 1985 using data for 1980 showed that japanese men have greater job tenure than comparable workers in the united states and that the earnings of japanese men rise more rapidly with increased tenure they found that an additional year of tenure increases earnings in both small and large firms in japan more than does an additional year of general market experience their results for the united states indicate that general market experience increases earnings more than an additional year of job tenure the 1970 s and 1980 s were a period of substantial change in japanese labor markets due to the rapid aging of the population and the restructuring of the economy following the oil crisis the present analysis extends the work of hashimoto and raisian by estimating earnings equations for japanese men for the years 1971 1976 1981 and 1986 specifically we wish to investigate whether hashimoto and raisian s findings have been stable over time or whether changes in the labor market have altered the importance of tenure relative to total labor market experience in the japanese labor market i changes in the labor market

habit formation and intertemporal substitution in individual food consumption individual food consumption data are used to examine three issues first is food consumption linked intertemporally at the individual level second does the association between current and past consumption reflect habit or heterogeneity third what do the estimates imply about the intertemporal elasticity of substitution the authors find that habit matters that controlling for heterogeneity reduces estimated habit effects and that the product of the estimated intertemporal elasticity of substitution and the risk aversion parameter is less than one these results all lead to rejection of time separable specifications of intertemporal consumption behavior copyright 1996 by mit press

increasing returns human capital and the kuznets curve abstract we present a simple model of human capital accumulation which generates the kuznets curve as an equilibrium outcome the central ingredient that helps generate the kuznets curve in the model is what we call short run increasing returns to scale in the learning technology the learning technology exhibits increasing returns to scale but only in the short run since one of the factors of production time is bounded above by the endowment we show that short run increasing returns to scale is necessary to obtain the kuznets curve but not sufficient

distributive politics and economic growth a crude distinction between economics and politics would be that economics is concerned with expanding the pie while politics is about distributing it in this paper we analyze the relationship between the two we focus on how an economy s initial configuration of resources shapes the political struggle for income and wealth distribution and how that in turn affects long run growth our main conclusion is that inequality is conducive to the adoption of growth retarding policies we derive this result from a simple political economy model of growth and present cross country evidence consistent with it the key feature of our model is that individuals differ in their relative factor endowments we distinguish between two types of factors an accumulated factor called capital and a nonaccumulated factor called labor growth is driven by the expansion of the capital stock which is in turn determined by individual saving decisions long run growth is endogenous as the aggregate production function is taken to be linearly homogeneous in capital and productive government services taken together the provision of government services is financed by a tax on capital because government services are productive a small tax on

computing productivity firm level evidence we explore the effect of computerization on productivity and output growth using data from 527 large us firms over 1987 1994 we find that computerization makes a contribution to measured productivity and output growth in the short term using one year differences that is consistent with normal returns to computer investments however the productivity and output contributions associated with computerization are up to five times greater over long periods using five to seven year differences the results suggest that the observed contribution of computerization is accompanied by relatively large and time consuming investments in complementary inputs such as organizational capital that may be omitted in conventional calculations of productivity the large long run contribution of computers and their associated complements that we uncover may partially explain the subsequent investment surge in computers in the late 1990s

short term interest rates as predictors of inflation on testing the hypothesis that the real rate of interest is constant in an innovative and provocative paper in this review eugene fama presents evidence which appears to be consistent with the joint hypothesis that the real rate of interest ignoring taxes is a constant and that the market for u s treasury bills is efficient in the sense of embodying rational expectations those findings are strikingly at variance with a long list of previous studies which seemed to support the view that the real rate of interest varies over time and can be related to economic variables such as real output monetary policy and so forth 2 the methodologies which lead to these contradictory conclusions are quite different previous studies had followed the lead of irving fisher by relating nominal interest rates to distributed lags on past rates of inflation 3 these distributed lags are generally interpreted as approximations to the market s expected rate of inflation and thus any remaining variation is attributed to variation in the real rate 4 fama s methodology on the other hand draws on the fact that the difference between the market interest rate and the subsequently observed rate of inflation the ex post real interest rate consists by definition of the ex ante real interest rate plus a pure forecasting error 5 the hypothesis of market efficiency implies that these forecasting errors must be serially random thus observing ex post real rates is equivalent to observing ex ante real rates with random measurement error these errors of course confound the problem of identifying variation in the ex ante real rate in this paper we will argue that the relative magnitude of these measurement errors is such that the tests carried out by fama were not powerful enough to reject the joint hypothesis that the ex ante real rate is a constant and expectations are rational more powerful tests which are presented in this paper using the same data do lead to rejection of that hypothesis of course rejection