the inflation tax in a real business cycle model money is incorporated into a real business cycle model using a cash in advance constraint the model economy is used to analyze whether the business cycle is different in high inflation and low inflation economies and to analyze the impact of variability in the growth rate of money in addition the welfare cost of the inflation tax is measured and the steady state properties of high and low inflation economies are compared

search unemployment and the production of jobs the authors investigate the performance of the economy when search is required to find employment and when the duration of unemployment varies across sectors they assume that in one sector factor markets are frictionless while in the other se ctor idle factors of production must actively search each other out i n order to produce they focus on how well the economy allocates work ers across sectors and the conditions under which the factor mix with in a sector is correct the authors demonstrate that in equilibrium t he search sector is too small and its factor intensity is too asymmet ric copyright 1987 by royal economic society

the effects of total factor productivity and export shocks on a small open economy with unemployment abstract the paper analyzes the dynamic effects of a supply side shock and a demand side shock which hit an open economy with unemployment the supply side shock is modeled as a reduction in total factor productivity whereas the demand side shock is caused by a drop in exports the model builds upon the small one sector two good open economy framework described in turnovsky 2000 chapter 11 3 in contrast to this standard framework in which walrasian labor markets are assumed search unemployment and wage bargaining are introduced and unemployment results from time consuming and costly matching of vacancies with searching agents using a plausible calibration of the model the dynamic adjustments of unemployment output and other economic key variables are analyzed we find that a negative export shock primarily has effects on consumption and welfare but not on unemployment and output whereas the supply side shock leads to considerable responses of unemployment output consumption and welfare if both shocks together hit the economy the changes in consumption and welfare almost double

real capital market integration in the eu how far has it gone what will the effect of the euro be real capital market integration how far has integration gone what euro effect much effort has been devoted to the study of financial market integration in europe little is known however about real capital market integration the degree to which plants and equipment move to take advantage of locally high returns this paper looks at the evidence an analysis of flows of foreign direct investment in europe shows that integration was quite limited in the early 1980s but has increased considerably since then another analysis looks at rates of return of a large number of firms it reveals that country specific factors play a significant role in explaining corporate returns even after taking risk into account this finding is incompatible with the capm definition of market integration the view that integration is limited in europe is further strengthened when the same approach is carried out for the usa and canada part of the national specificity appears to be related to labour and goods market regulations which harm firms profitability if by introducing more transparency and eliminating currency risk emu strengthens competition on the real capital market one obvious economic benefit will be a more rational and efficient use of capital but the most important potential consequences are political special interest regulations of an exclusively national nature will not survive they will either fall in a wave of internationalist liberalization or become embedded in harmonized regulations at the federal level a reduction in excessive regulatory burdens notably in the labour market could lead to substantial and shared productivity gains georges de menil

are german money market rates well behaved abstract we test the expectations hypothesis eh of the term structure of interest rates for the german money market at the short end of the maturity spectrum using a variety of metrics and on balance we argue that the results tend to broadly support the hypothesis we utilise monthly data on pure discount bonds with a maturity from 1 to 12 months over the period of 1976 to 1993 the var methodology is used to forecast future interest rates which under the eh results in a set of cross equation restrictions as well as tests based on the correspondence between the best forecast referred to as the theoretical spread and the actual spread the var methodology allows explicit consideration of potential non stationarity in the data as do our tests based on the cointegration literature we also perform more conventional tests based on applying the rational expectations re hypothesis in a single equation framework our relatively favourable results for the eh are in sharp contrast to those found in studies using us data and this we attribute in part to the policy of sustained credible monetary targeting by the bundesbank

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

competitive search equilibrium in this paper i construct an equilibrium for markets with frictions which is competitive in the sense that all agents are price takers and maximize utility subject to a set of market parameters i show that the equilibrium allocation is socially optimal i also show how the competitive search equilibrium can be achieved if employers with vacancies can advertise publicly the wages they pay

the heckscher ohlin samuelson model with implicit contracts in a world with multiplicative production uncertainty and implicit labor contracts we show that the rybczynski theorem retains its validity therefore the quantity version of the heckscher ohlin theorem survives as well we also show that the stolper samuelson theorem may not hold a small increase in the price of the capital intensive good may benefit labor we derive a strong version of the factor price equalization theorem that shows free trade tends to equalize sector specific unemployment rates and sector specific factor prices across countries finally we relate trade patterns to international differences in the degree of risk aversion

inflation and real short term interest rates a kalman filter analysis of the term structure this paper applies the kalman filter technique to look at the relationship among real interest rates inflation and the term structure of interest rate under the expectations hypothesis using quarterly data from 1960 1 to 1991 1 for inflation three month nominal short term interest rates and long term yields with maturities from one to five years this paper finds that the expectations hypothesis of the term structure holds up well for the data under the assumptions of a time varying premium and a random walk real interest rate in other words a reconciliation of the expectations hypothesis with the data is attained by assuming time varying term premium and non stationary real interest rate

job destruction and propagation of shocks this paper considers propagation of aggregate shocks in a dynamic general equilibrium model with labor market matching and endogenous job destruction cyclical fluctuations in the job destruction rate magnify the output effects of shocks as well as making them much more persistent interactions between capital adjustment and the job destruction rate play an important role in generating persistence propagation effects are shown to be quantitatively substantial when the model is calibrated using job flow data incorporating costly capital adjustment leads to significantly greater propagation

economics coursework and long term behavior and experiences of college graduates in labor markets and personal finance i introduction if economics is a unique way of thinking as many economists like to claim some level of coursework in economics may provide enough specific knowledge and skills to lead students to make different choices in their adult roles as consumers workers and voters citizens of course the same could be claimed for training in business and other areas even though or perhaps because it could be argued that most content and training in business courses is more applied and pragmatic than what is presented in economics courses some empirical evidence though not really a great deal suggests that training in economics and business is associated with different adult behaviors and outcomes for example golec 1996 finds that mutual funds perform better if mutual fund managers have an mba and chevalier and ellison 1999 also report a positive correlation between mutual fund performance and the educational background of mutual fund managers black sanders and taylor 2003 found that economics majors earn almost 20 more than graduates in other social science majors and about 10 more than those who major in business administration in fields with large numbers of graduates they find that only engineering majors earn more than economics majors similarly hecker 1995 reported that males majoring in economics had median earnings 3 higher than all majors for the age cohort of 25 34 and 53 more than average for the cohort aged 35 44 craft and baker 2003 find that lawyers with an undergraduate major in economics earn 13 more than otherwise comparable lawyers with other undergraduate majors and economics is the only major with a statistically significant effect on earnings 1 hamermesh and donald 2008 however find that higher earnings by economics majors are partly due to economics majors working more hours than others the relationship between financial literacy knowledge and adult behavior and outcomes in financial markets has been addressed in several recent studies many sponsored by federal reserve banks hilgert hogarth and beverly 2003 and braunstein and welch 2002 find that knowledge about credit saving and investment is significantly related to recommended financial practices in cash flow management credit management saving and investment unfortunately there is also evidence of widespread financial illiteracy in u s households and particularly among elderly women see lusardi and mitchell 2007 2008 employee education programs have been found to affect workers savings retirement and investment behaviors bayer bernheim and scholz 2009 bernheim and garret 2003 state mandates for precollege education in personal finance appear to succeed in at least exposing students to more information and sources on financial education and students from states with such mandates report higher levels of savings and net worth as adults bernheim garrett and maki 2001 tennyson and nguyen 2001 much less research exists linking college coursework or majoring in economics to personal finance outcomes 2 but christiansen joensen and rangvid 2008 find that those trained in economics in college courses or employee education programs are more likely to invest in stocks than those who receive training in other areas guiso and jappelli 2005 report that among college graduates having a degree in economics is positively associated with knowledge about financial assets chert and volpe 1998 107 concluded that business majors had better knowledge about personal financial literacy than other students but that in general college students were not knowledgeable about personal finance 3 in this paper we use a large and unique data set to investigate the relationships between taking college coursework in economics or majoring in economics with long term labor market and personal finance behaviors and outcomes our information on long term behaviors and outcomes is drawn from a detailed questionnaire we mailed in january 2003 to over 25 000 graduates who attended four public universities in 1976 1986 or 1996

what drives unemployment disparities in european regions a dynamic spatial panel approach abstractwhat drives unemployment disparities in european regions a dynamic spatial panel approach regional studies this study analyzes unemployment differentials in european regions during the period 2000 11 to that end a theoretical model with substantive spatial interactions among regions is developed the solution implies a dynamic spatial durbin model specification including regional and institutional level factors as explanatory variables in conjunction with dynamic spatial panel estimates relative importance metrics are used to quantify the effect of regional disequilibrium equilibrium and national level factors relative importance analysis suggests that during the pre crisis period unemployment disparities were mainly driven by regional level equilibrium factors nevertheless labour market institutions are of major importance to explain increasing disparities during 2009 11

a test of the expectations hypothesis of the term structure of interest rates for sri lanka this paper tests the expectations hypothesis of the term structure of interest rates for sri lanka the data support the hypothesis that forward and spot rates are cointegrated suggesting a stochastic trend in the structure of interest rates however the hypothesis that forward rates are unbiased predictors of future spot rates is rejected

trade and search generated unemployment we argue that trade economists should begin to seriously consider environments in which unemployment is carefully modeled we introduce such a model derive several results and compare them to results derived in full employment models we argue that some traditional results are probably too narrow the determinants of comparative advantage and that some results do not generalize to models with unemployment the link between trade and income distribution for employed factors we also show that in some important cases results do generalize there is an extended stolper samuelson theorem that links trade to the distribution of income for searching factors and that our model allows us to address issues that traditional models cannot handle the impact of trade on unemployment and the welfare of the unemployed 1999 elsevier science b v all rights reserved

the handbook of international macroeconomics preface 1 introduction rick van der ploeg amsterdam 2 quantity constrained models of open economies neil rankin warwick 3 imperfect competition and open economy macroeconomics huw d dixon york 4 relative price movements in dynamic general equilibrium models of international trade david backus nyu patrick kehoe pennsylvania and finn kydland carnegie mellon 5 international fiscal policy coordination and competition assaf razin and efraim sadka tel aviv 6 capital taxation in the world economy a lans bovenberg tilburg 7 history of the international monetary system implications for research in international macroeconomics and finance barry eichengreen berkeley 8 on inflation unemployment and the optimal exchange rate regime george alogoskoufis athens 9 macroeconomic policy speculative attacks and balance of payments crisis pierre richard agenor and robert p flood imf 10 continuous time models of exchange rates and intervention giuseppe bertola princeton 11 stylized facts of nominal exchange rate returns casper g de vries leuven 12 partial versus general equilibrium models of international capital market equilibrium 13 sovereign debt kenneth kletzer santa cruz 14 growth and external debt daniel cohen cepremap 15 growth and deficits in an interdependent world index

the nash bargaining solution is optimal abstract we consider the problem faced by players in a two person bargaining game who have different opinions about what is the appropriate solution concept to use a procedure is proposed to resolve such a conflict and it is shown that the nash bargaining solution constitutes the unique equilibrium of the game induced by the procedure as a by product we obtain that in the axiomatic characterization of the nash solution the controversial independence of irrelevant alternatives axiom can be replaced by a much weaker recursivity axiom which amounts to requiring independence of alternatives that cannot be obtained as an outcome of a risk sensitive solution

the structure of simple general equilibrium models with frictional unemployment we develop a two sector general equilibrium model in which equilibrium unemployment arises endogenously because of trading frictions in the labor market of one sector externalities inherent in the search process lead to inefficient equilibria and this has important implication for the basic structure of the economy in particular the relationship between factor rewards and commodity prices is fundamentally different from the analogous relationship in a frictionless economy one implication is that the economy s relative supply curve may be downward sloping especially when the search sector is small we also present several applications of the analysis

cross sectional efficiency and labour hoarding in a matching model of unemployment we study positive and normative aspects of steady state equilibrium in a market where firms of endogenous size experience idiosyncratic shocks and undergo a costly search process to hire their workers the stylized model we propose highlights interactions between job security provisions and sectoral shocks in determining the natural rate of unemployment the allocation of labour and the extent of labour hoarding and rationalizes cross sectional asymmetries of gross employment flows at the firm level in our model where productivity and search costs are dynamically heterogeneous across firms decentralized wage bargains imply important cross sectional inefficiencies which overshadow the static search inefficiencies on which simpler models focus

the dynamics of technological unemployment this article compares the short and long run effects of technological progress on employment it presents a simple model of frictional unemployment capturing the negative creative destruction effects of technological change on employment in the long run faster technological change accelerates job obsolescence which reduces the equilibrium level of employment but it is also shown to have short run positive and potentially important effects on employment this tends to partially reconcile the schumpeterian view of the effects of technological change on labor markets with facts such as the response of most oecd unemployment rates to the 1970s productivity slowdown

separating the effects of aggregate and sectoral shocks with estimates from a markov switching search model abstract a two sector stochastic model of labor market search is estimated in order to identify aggregate and sectoral shocks which impact upon the recruitment intensity decisions of firms separation of aggregate and sectoral recruitment effects is achieved through the use of data for two canadian regions which were affected in opposite directions by recent resource price shocks the results of the estimation process suggest that sectoral shocks can have significant quantitative effects on unemployment duration and the unemployment rate

the optimal inflation tax when money reduces transactions costs abstract it has been argued that if money acts as an intermediate good the optimal inflation tax is zero this paper reexamines such a claim in the context of a model in which money reduces transactions costs it is shown that modeling money as an intermediate good does not necessarily imply that the optimal inflation tax is zero the optimality of a zero inflation tax depends on the properties of the transactions costs technology in particular if the transactions costs technology does not exhibit constant returns to scale it is optimal to resort to the inflation tax

efficiency in the use of technology in economic education some preliminary results this paper reports preliminary results of a project funded by the andrew f mellon foundation that is intended to ascertain whether technology enhanced introductory economics courses are more effective and also more efficient than traditionally taught courses blecha s 2000 survey of faculty at different types of institutions of higher education documents that economics instructors now use a continuum of technological enhancements ranging from e mail web sites presentation software computerized games and spreadsheets to computerized instruction and distance learning while several studies investigate the consequences of using technology on student performance there has been little attempt to compare the efficacy and efficiency of the various types of available technologies

the intertemporal substitution model of labour market fluctuations an empirical analysis the paper uses two approaches to study whether aggregate fluctuations in employment and unemployment may be explained within a market clearing framework as intertemporal substitution in labour supply first log linear equations for labour supply and unemployment are estimated using a forecasting model to measure wage and price expectations second a utility function is used to derive and estimate an equation for labour supply as a function of the current real wage and consumption the influence of expected future real wages and interest rates is captured by the consumption variable the empirical results do not support the intertemporal substitution model

learning matching and growth we examine an endogenous growth model in which market frictions are an integral part of the economic environment workers invest in education when young which raises their productivity onice employed the level of schooling also acts as a key determinant of the rate of economic growth by influencing workers ability to accumulate additional human capital on the job once schooling is completed workers search for employment the division of the surplus between vacancies and searching workers is characterized as is the optimal level of education the economy may display multiple steady state growth paths

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

indivisible labor and the business cycle abstract a growth model with shocks to technology is studied labor is indivisible so all variability in hours worked is due to fluctuations in the number employed we find that unlike previous equilibrium models of the business cycle this economy displays large fluctuations in hours worked and relatively small fluctuations in productivity this finding is independent of individuals willingness to substitute leisure across time this and other findings are the result of studying and comparing summary statistics describing this economy an economy with divisible labor and post war u s time series

do stationary risk premia explain it all evidence from the term structure abstract predictable variations in excess returns have often been attributed to the presence of time varying risk premia in this paper we use an insight based upon new techniques from time series analysis to test whether stationary risk premia can alone explain the behavior of excess returns to long bonds relative to rolling over short rates surprisingly we reject this hypothesis using u s t bill returns we then show that either permanent shocks to the risk premia and or rationally anticipated shifts in the interest rate process could produce anomalous results

unemployment dynamics with international capital mobility abstract we study the response of domestic unemployment rates to shocks in total factor productivity for economies with high capital mobility and low labour mobility we show that high capital mobility amplifies the impact on the domestic unemployment rate of domestic fluctuations in total factor productivity shortens the lag of the response to shocks and raises the variability of unemployment but average unemployment is unaffected capital flows increase the riskiness of labour income and reduce the riskiness of capital income but do not reduce mean welfare

the welfare costs of moderate inflations in the recent past the view that a little bit of inflation was good for the economy was widely held the phillips curve in its earlier incarnations implied that moderate inflation was worth tolerating because it would permit lower unemployment this justification for tolerating inflation has long since been abandoned by economists and policymakers because both theory and experience showed it to be false nevertheless one legacy of this era seems to be a fairly widespread tolerance for moderate inflation recently there has been much discussion of removing this inflationary bias by passing legislation that would require the federal reserve to target zero inflation in this paper we examine some of the consequences of achieving that goal we appraise the revenue and welfare costs of policies designed to reduce moderate inflation rates to zero much has been written about why government policies may have an inflationary bias in this paper we don t address the issue of what motivates governments to inflate implicit in our analysis however is the notion that one important motive for inflation is the revenue raising potential of the inflation tax it would be difficult to argue that the inflation tax constitutes an important revenue source for the united states one indirect and very imperfect measure of this would be contributions by the federal lleserve to the treasury in recent years those rebates have amounted to

markov switching models rational expectations and the term structure of interest rates in order to evaluate the efficiency of the monetary transmission mechanism we develop the formulas for testing rational expectations theory in the term structure of interest rates with var models of stochastically switching regimes in which all the parameters are regime dependent these formulas are obtained for the strict version of rational expectations as well as for the case where measurement errors are assumed in the expectations relationship they are extensible to other contexts that involve variables linked by rational expectations behaviours the testing procedure is implemented on interest rates of the spanish inter bank money market measurement errors must be assumed to find signs favourable to the theory

market structure in the production of economics ph d s a century ago economics began to develop as a separate and significant part of the curriculum in american colleges and universities along with increased popularity and enrollment came the need for faculty specifically trained in economics a number of american scholars turned to europe germany in particular for their training and brought the german ph d back as a model for graduate education the first economics ph d s earned in this country were awarded by harvard 1875 yale 1877 and johns hopkins 1878 1 these first ph d s were two year degrees by 1900 economists had generally upgraded the ph d to three years beyond the baccalaureate degree consisting of two years of course work and another year for the dissertation graduate classes were taught in seminar format with considerable interaction between professors and students as the production process matured dissertations became longer more sophisticated and more specialized i e they were no longer the mark of a cultured gentleman but the demonstration of a professional skill 15 11 the newly formed american economic association began to keep track of doctoral candidates in economics in 1904 6 in 1904 there were 8 institutions which reported having men working on ph d s and by 1928 that number had increased to 27 2 while the american economic association did not tabulate the output of completed ph d s the national research council has compiled a database containing the number of ph d s by institution by year since 1920 their survey of earned doctorates indicates that 22 ph d s were awarded in economics by 6 different universities in 1920 by 1992 that number had grown to 910 ph d s from 123 different institutions

job search and cyclical unemployment a model economy is described that integrates job search and signal extraction analysis equilibrium differs from search models without signal extraction in that even with a fixed real sector unemployment fluctuates stochastically it differs from standard signal extraction models because search introduces persistence in fact unemployment follows a second order difference equation with coefficient that are functions of current and lagged values of the stochastic shocks thus the model has the potential to mimic actual business cycle data despite the fact that the underlying shocks are independently and identically distributed policy implications are discussed

welfare costs of inflation in a dynamic economy with search unemployment abstract we present a monetary general equilibrium model with labor market frictions in the form of search unemployment which is calibrated for the us economy interestingly both employment and output may even increase with the rate of inflation depending on the elasticity of labor supply considering the transition dynamics following a change in the monetary policy the optimal quarterly inflation rate is found to amount to approximately 0 6 in the benchmark case a reduction of the inflation rate from its current level to its optimal value only results in small welfare gains equal to 0 08 of total consumption

is the friedman rule optimal when money is an intermediate good in contrast to the recent literature on the optimal inflation tax we show that in models where money reduces transactions costs it is optimal to set the inflation tax to zero when seigniorage is replaced by revenue from distortionary taxes the main reasons for this result are that the variable costs of supplying real balances are negligible and the inflation tax is a unit tax we also show that the intermediate good optimal taxation rules in the public finance literature cannot be directly applied both when money is costless and when it requires resources to be produced

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

dynamic behavior of capital accumulation in a cash in advance model abstract this paper analyzes the dynamic behavior of capital accumulation in stockman s cash in advance model if the cash in advance constraint applies only to consumption then money is superneutral along the transition path as well as in the long run alternatively if the cash in advance constraint applies to gross investment as well as consumption then a permanent increase in the rate of monetary growth reduces the steady state capital stock the effect on the speed of adjustment depends on the sign of a certain simple function of the parameters of preferences and technology

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

testing the term structure of interest rates using a stationary vector autoregression with regime switching abstract the expectations model of the term structure for us data on three and six month treasury bills for the period 1962 1 1987 3 is explored the analysis allows for the nonstationarity of the data and for unobserved stochastic switches of regime by estimating vars in the yield spread and the change in the three month rate which allow the time series processes to change between regimes in contrast to other results for the expectations model such as those of hamilton 1988 mankiw and miron 1986 and others we find that the data do not reject the model

multiple free trade equilibria in micro models of unemployment abstract neoclassical theory suggests that trade patterns are linked to autarkic differences in relative opportunity costs we demonstrate that when the heckscher ohlin samuelson model is extended to allow for unemployment there are forces present that create multiple free trade equilibria even when both countries are identical and autarkic equilibrium is unique there is no necessary link between relative opportunity costs and trade patterns while our primary focus is on search generated unemployment we argue that the analysis also applies to situations where unemployment is generated by minimum wages efficiency wages or implicit contracts

dynamics of the trade balance and the terms of trade the j curve the authors provide a theoretical interpretation of two features of international data the countercyclical movements in net exports and the tendency for the trade balance to be negatively correlated with current and future movements in terms of trade but positively correlated with past movements they document the same properties in a two country stochastic growth model in which trade fluctuations reflect in large part the dynamics of capital formation the authors find that their general equilibrium perspective is essential the relation between the trade balance and the terms of trade depends critically on the source of fluctuations copyright 1994 by american economic association

banks and macroeconomic disturbances under predetermined exchange rates abstract as the recent mexican crisis vividly illustrates latin american countries often go through boom bust cycles caused by both domestic policies and external shocks such cycles are typically magnified by weak banking systems which intermediate large capital inflows this paper develops a simple optimizing model to analyze how the banking sector affects the propagation of shocks in particular we show how the world business cycle and shocks to the banking system affect output and employment through fluctuations in bank credit we also analyze the countercyclical use of reserve requirements econometric evidence for chile and mexico supports the main predictions of the model

taxes subsidies and equilibrium unemployment this paper considers the effects of wage taxes employment subsidies and unemployment benefits in a simple model of equilibrium search unemployment is determined by the equality of job matchings and job separations job vacancies are determined by a zero profit condition and wages by a nash bargain between the meeting firm and worker i show that marginal wage taxes influence the firm s and worker s equilibrium sharing rule whereas employment subsidies and unemployment benefits influence only the surplus shared hence tax financed subsidies reduce wages and raise employment and vacancies whereas tax financed unemployment benefits raise wages and reduce employment and vacancies in this paper we consider the effects of wage taxes employment subsidies and unemployment benefits on equilibrium search unemployment in a model where wages are determined competitively by the meeting firm and worker discussions about the desirability of taxes and subsidies and their effect on employment and wages abound in the labour economics literature yet the only tax or subsidy that has been systematically discussed in a competitive search framework is a lump sum unemployment benefit the reason for this might be that the structure of the model is such that it is ideally suited to the study of unemployment benefits whereas traditional supply and demand analysis could arguably cope with other kinds of taxes this might be true in some cases but if it is at all appropriate to think of equilibrium unemployment as coming out of an essentially competitive framework when the process which brings together jobs and workers is characterized by frictions traditional supply and demand analysis may not be rich enough to give us all the answers we need 1 the model of this paper is a simple equilibrium model with endogenous unemployment supply of jobs i e demand for labour and real wages unemployment exists because unemployed workers and unfilled jobs cannot find each other instantaneously in the interval of time required to match all workers and jobs some existing job worker pairs break up providing a new flow into unemployment thus unemployment can never be eliminated in equilibrium flows into and flows out of unemployment are equal wages are set endogenously by generalized nash bargains between the individual firm and worker the equilibrium wage rate is shown to depend on all the parameters of the model and to be determined simultaneously with equilibrium unemployment the driving force in the model which provides the link between wages and unemployment is the rate of job vacancies the total number of jobs is determined by zero profit conditions because of constant returns to scale the number of jobs taken up each period depends positively on the number of job vacancies because a typical unemployed worker will have a better chance of locating a job when there are more vacancies if the real wage rate falls the expected profits from a job rise firms open up more vacancies to take advantage of this and so more jobs are taken up but as vacancies rise and

the welfare cost of inflation in a cash in advance economy with costly credit the paper presents a modification of the lucas stokey 1983 cash in advance economy in which the representative consumer decides based on relative prices which goods to buy with cash and which with costly credit an explicit baumol 1952 condition emerges that guides this consumer choice deriving and estimating a closed form welfare cost function in an example economy the paper shows that the welfare cost of inflation depends on the margins of substitution the consumer avoids inflation through costly credit and faces higher welfare costs of inflation than in standard cash in advance economies

research in economic education five new initiatives research is essential for improvement in teaching and learning economics william e becker et al 1991 called for new research on the relative merits of multiple choice and essay tests on the lasting effects of course work in economics and on the effects of instructors instructional techniques and new technologies on student learning to respond to the call the committee on economic education cee of the american economic association recruited robin bartlett william becker w lee hansen peter kennedy and the authors to organize a conference that would jump start new research projects the organizers chose three conference goals identifying research priorities recruiting new economists to economic education research and building teams to undertake identified priorities they recruited 21 economists to participate 1 provided them with a list of potential research questions and asked them which questions were most important and which they were willing to work on with survey results in hand the organizers divided participants into five teams corresponding to the following five topics teaching methods and incentives for collegelevel economics instruction ph d education in economics in the united states improving the assessment of student learning in college economics courses long term effects of learning economics and efficiency in the use of technology in economic education at the conference participants discussed briefing papers prepared for each topic worked on project design and funding issues and began writing proposals herein we describe our research priorities and our progress in developing research plans and securing financial support

the information content of the term structure of interest rates this paper presents the results of an alternative test of the rational expectations theory of the term structure of interest rates other researchers have also examined the validity of the expectations hypothesis of term structure while there is more often rejection of the expectations hypothesis no other theory data consistent with the entire yield curve provides an empirically adequate explanation of this phenomenon the study considers postwar us pure discount zero coupons bond yields with various maturities from one month to 60 months based on the ex post formation of rational expectations the expectations error is quantified and the level of truth of the expectations hypothesis tested that is the strength of the departure of the yield curve from the expectations theory the results suggest that a significant amount of information available at no cost to market agents is not incorporated in forming people s expectations

a theory of dual labor markets with application to industrial policy discrimination and keynesian unemployment this paper develops a model of dual labor markets based on employers need to motivate workers in order to elicit effort from their workers employers may find it optimal to pay more than the going wage this changes fundamentally the character of labor markets the model is applied to a wide range of labor market phenomena it provides a coherent framework for understanding the claims of industrial policy advocates it also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces finally the model provides the basis for a theory of involuntary unemployment

rational expectations econometric analysis of changes in regime an investigation of the term structure of interest rates abstract this paper is of interest both for its methodological contribution of new tools for analyzing rational expectations models and for its substantive conclusions concerning the term structure of interest rates during the monetary experiment of october 1979 the paper studies systems subject to changes in regime interpreted here as occasional discrete shifts in the parameters governing the time series behavior of exogenous economic variables the specification is shown to be quite tractable both theoretically and empirically the technique is used to analyze yields on three month treasury bills and ten year treasury bonds during 1962 to 1987 a constant parameter linear model for short term rates is shown to be inconsistent both with the univariate time series properties of short rates and with the observed bivariate relation between long and short rates under the expectations hypothesis of the term structure an alternative nonlinear model that admits the possibility of changes in regime affords a much better description of the univariate process for short rates moreover the cross equation restrictions implied by the expectations hypothesis of the term structure are consistent with the nonlinear specification indeed the residuals of the restricted relation have a standard error of only 0 8 basis points this is a third less than that of a completely unrestricted linear regression of long rates on short rates and compares with an unconditional standard deviation of long rates of 142 basis points i conclude that once the recognition by bond traders of changes in regime is taken into account the expectations hypothesis of the term structure of interest rates holds up fairly well for these data

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

international capital mobility and unemployment dynamics empirical evidence from oecd countries we use a panel of 20 oecd countries over a 30 year period to estimate the implications of international capital mobility for unemployment we nd that the increase in capital ows since the mid 1980s has contributed to an ampli cation of the impulse response of unemployment to country speci c shocks and to a fall in the persistence of unemployment in response to the same shocks

benchmarking the expectations hypothesis of the interest rate term structure an analysis of cointegration vectors i test cointegration restrictions that are consistent with the expectations hypothesis of the term structure by employing the full information maximum likelihood methods developed by johansen yield curves appear to be the result of cointegration among interest rates the cointegration vectors that best describe the long term impact of interest rate levels on interest rate changes can often be written as linear combinations of interest rate spreads there is however difficulty in keeping short term yields in such a restricted cointegrated system with other interest rates short term speculative returns from long term bonds do not conform to the expectations hypothesis

competitive pricing and efficiency in search equilibrium we consolidate and generalize some results on price determination and efficiency in search equilibrium extending models by rubinstein and wolinsky and by gale heterogeneous buyers and sellers meet according to a general matching technology and prices are determined by a general bargaining condition when the discount rate r and search costs converge to 0 we show that prices in all exchanges are the same and equal the competitive market clearing price given positive search costs efficiency obtains iff bargaining satisfies hosios condition and r 0 when prices are set by third party market makers however we show that search equilibrium is necessarily efficient

time series representations of economic variables and alternative models of the labour market accepting the hypothesis that the time series facts of the aggregate labour market may be summarized by the linear autoregressive and moving average representations of wages prices unemployment and interest rates implies that a useful theory ought to lead to predictions about these representations following this approach this paper first catalogues many of the time series facts about the aggregate labour market and then compares them against alternative models of the labour market based on the intertemporal substitution and staggered contract hypotheses

an empirical note on the term structure and interest rate stabilization policies the expectations theory of the term structure of interest rates supplemented by the rational expectations and time invariant risk premium assumption implies that the spread between the long and the short rate has in general predictive power for the short rate this implication was consistently rejected in recent studies shiller campbell and schoenholtz 1983 fama 1984 mankiw and summers 1984 with data at the short end of the maturity spectrum threeand six month treasury bills time variations of the risk premium which are probably important for the behavior of the yield on long term bonds are not an entirely satisfactory explanation for these findings in a more recent article of mankiw and miron 1986 who analyzed quarterly data for threeand six month interest rates over the period 1890 1979 an interesting new explanation for the failure of the expectations theory emerged they showed that the spread had substantial predictive power for changes in the short rate in the period before the founding of the federal reserve 1890 1914 whereas for all other periods considered 1915 1933 1934 1951 1951 1958 and 1959 1979 the spread did not help to predict the short rate thus mankiw and miron suggested that the rejection of the expectations theory with recent data is a consequence of the commitment of the federal reserve to stabilize interest rates resulting in random walk behavior of the short rate under these circumstances expected future short rates are equal to the actual short rate and variations of the spread are only brought about by changes in the risk premium in this note the short term interest rate stabilization explanation for the failure of the predictive implications of the expectations theory of the term structure is subjected to an additional empirical test using recent monthly data thereby the short end of the term structure of swiss german and u s interest rates is analyzed for the years 1974 1986 these three cases are of great interest in our context the swiss national bank and the german federal bank used the opportunity offered by the flexible exchange rate system to implement money supply targets and did not attempt to stabilize short term interest rates whereas the federal reserve was at

money and growth revisited abstract conventional wisdom is that if public policy can affect the growth rate of the economy the welfare implications of alternative policies will be large in this paper a stochastic dynamic general equilibrium model with endogenous growth and money is examined in this setting inflation lowers growth through its effect on the return to work however the welfare costs of higher inflation are modest the endogenous labor supply is important in producing this result

decentralized international exchange traditional models of international trade take place within trading environments in which trade is coordinated by a walrasian auctioneer who instantly matches buyers and sellers in world markets this assertion seems inconsistent with evidence suggesting that trading arrangements seem to economize on transactions costs associated with international trade recognizing these insights we depart from standard models of international trade by incorporating the difficulties in the coordination of exchange within a two country random matching model of international trade we capture a motivation for trade through comparative advantage and interpret trade across economies to be associated with an agent s endogenous choice to participate in foreign markets although an individual may decide to search abroad to obtain additional gains from trade resulting from comparative advantage she is less likely to meet trading partners abroad as search frictions are higher in the foreign country than in the domestic market using this framework we show that international trade is associated with convergence in relative prices across countries we also show that the extent of market frictions in the foreign country affects relative prices the volume of international trade and welfare levels due to market participation externalities associated with international trade we show that a movement from autarky to free trade may actually lower welfare levels we conclude by examining the possible inefficiencies associated with international trade due to the decentralized nature of exchange and the policy implications of our model

explaining the failures of the term spread models of the rational expectations hypothesis of the term structure contrary to the predictions of the rational expectations hypothesis of the term structure of interest rates empirical evidence suggests that the term spread between long and short rates fails to forecast future movements of long term rates although its forecasts of future short term rates are in the correct direction in this paper the authors show that this puzzling behavior of the term spread alone can be explained by a time varying term premium that is correlated with the term spread once this is accounted for neither expression of the expectations hypothesis is against the predictions of the theory copyright 1997 by ohio state university press

ex ante price offers in matching games non steady states a matching problem is considered in which sellers can publicly commit to a trading price that differs from the price at which buyers expect to trade elsewhere in the market when demand and supply are nearly equal the equilibrium ex ante price offer lies below the price associated with the nash bargaining split this relationship reverses when the level of excess demand is large sellers always have an incentive to make ex ante offers when prices elsewhere are determined by nash bargaining this can be interpreted to mean that nash bargaining is an unstable pricing institution copyright 1991 by the econometric society

growth and unemployment short run and long run tradeoffs abstract we consider the role of search unemployment and wage bargaining in determining the relationship between growth and unemployment while the long run tradeoffs between unemployment and growth are weak the short run tradeoffs are much stronger their comovement varies along the transitional path and depends upon the underlying structural change the consequences of the growth unemployment nexus for fiscal policy are addressed the analysis provides insights into the debate regarding the appropriate fiscal policy in light of the increased debt following the initial response to the recent financial crisis our analysis strongly supports an increase in government investment as the appropriate fiscal policy

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

what students remember and say about college economics years later in his presidential address to the american economic association george stigler 1963 offered the provocative hypothesis that students would retain very little knowledge from principles courses in economics five years or more after taking the courses the few empirical studies that have been published on this topic generally found no or small lasting effects at least for those who took fewer than four courses see e g g l bach and phillip saunders 1965 gerald j lynch 1990 that raises even broader questions about the long term effects of studying economics in college in terms of individuals behavior as consumers workers and voters which we are now beginning to investigate using both survey and transcript data we have two major goals in this study first we want to learn how students perceive their classroom experience in economics courses years after leaving school both in absolute terms and compared to other courses they took we drew samples of economics business and other majors who attended our four universities in 1976 1986 and 1996 and asked which topics regularly covered in economics courses they now viewed as being most and least important we asked whether they now viewed the economics courses they took as interesting important too difficult or too abstract we also compared their perceptions of teaching methods and grading rigor in economics courses to those developed in other courses our second major goal represents an empirical test of the common claim that economics is a unique way of thinking if it is we might reasonably expect people with more training in economics to have different views on policy issues and to make different decisions as consumers workers savers investors and voters we collected survey data on many of these choices and by matching those responses with transcript data we plan to investigate whether there are observable behavioral responses associated with being an economics major or simply taking some minimum number of economics courses compared to students who took fewer courses or none at all there are other uses for these data they can likely be used to study choice of major and course taking behavior as well as common laboreconomics issues such as human capital versus screening in the labor market certainly the data can provide insight into curriculum development for economics departments and business schools as well there is obviously the potential for response biases in the analysis of these data but we expect that having transcript data for respondents and nonrespondents will allow us to deal with these issues econometrically this first brief report from this ongoing project addresses only the first goal of the project specifically how our former students evaluate their experience with economics courses and instructors what economic courses and concepts do they now believe are most important do they wish they had taken more or less coursework in economics what do they think now about various economic issues and allgood department of economics university of nebraska lincoln ne 68588 e mail sallgood unlnotes unl edu bosshardt department of economics florida atlantic university boca raton fl 33431 e mail wbosshar fau edu van der klaauw department of economics university of north carolina chapel hill nc 27599 e mail vanderkl email unc edu watts department of economics purdue university west lafayette in 47907 and while this paper was written the german international school of management and administration hanover germany e mail mwatts mgmt purdue edu we thank the board of the calvin k kazanjian economics foundation for the grant that made this work possible and the aea committee for economic education for bringing us together to write the proposal as described in michael salemi et al 2002 mike salemi provided helpful comments on an earlier draft of this paper april fidler provided major assistance in project coordination administration and data entry georg schaur worked extensively with data organization and preliminary tabulations

loss aversion and the term structure of interest rates this article studies how the loss averse behaviour affects the term structure of real interest rates since the pro cyclical conditional expected marginal rate of substitution implied from the us consumption data is consistent with the proposition of loss aversion we incorporate the loss averse behaviour of prospect theory into the consumption based asset pricing model motivated by the similarity between habit formation and the prospect theory utility habit formation is exploited to determine endogenously the reference point of this behavioural finance utility the highly curved characteristic of the term structure of real interest rates can thus be captured by the additional consideration of loss aversion this model also fits the downward sloping volatility of the real yield curve in the data of us treasury inflation protection securities tips moreover depending on the effective risk attitude of the representative agent with the loss averse behaviour of prospect theory our model is capable of

foreign aid and economic growth the role of flexible labor supply this paper examines the link between foreign aid economic growth and welfare in a small open economy external transfers impinge on the recipient s macroeconomic performance by affecting resource allocation decisions and relative prices the endogeneity of the labor leisure choice plays a crucial role in the propagation of foreign aid shocks the efficacy of foreign aid also depends on externalities associated with the public good that it helps finance the impact of tied and untied aid on the recipient government s intertemporal fiscal balance is examined finally the transitional adjustment to a foreign aid shock is shown to be sensitive to the elasticity of substitution in production and the relative importance of the labor leisure choice in utility

borrowing constraints collateral fluctuations and the labor market abstract this paper studies the effects of changes in collateral requirements on the cyclical properties of unemployment and job creation i develop a general equilibrium model in which labor market frictions prevent the costless adjustment of employment financial frictions arise from an imperfect enforcement contract an environment in which borrowing limits are linked to the firm s physical capital stock can quantitatively account for the sluggish response of labor market variables to productivity shocks i find that fluctuations in those variables are mainly driven by changes in financial conditions the model can explain 75 of the variation in job creation observed in the data and it can also account for the persistent reduction in both output and leverage that follows a contraction in credit availability

search wage bargains and cycles in this paper i describe an equilibrium model of job matchings with perfect foresight that has the following property the number of people looking for work changes temporarily when there is a temporary shock to the value of labour s marginal product it does not change when the shock is permanent by contrast real wages change temporarily by a small amount when the shock is temporary but change permanently and by a bigger amount when the shock is permanent thus the model offers an explanation for the observation that over the cycle small wage changes are associated with changes in unemployment whereas secularly wage growth does not seem to affect the rate of unemployment the two most common explanations for this observation in the literature the phelps lucas misperceptions model and the lucas rapping intertemporal substitution model are well grounded in equilibrium theory but they have not stood up well to empirical testing the misperceptions model requires more ignorance of aggregate changes than can be reasonably assumed whereas the intertemporal substitution model requires bigger wage elasticities of labour supply than those estimated in the model of this paper neither misperceptions nor changes in the supply of labour play a role in generating the unemployment cycle all agents observe the shocks when they occur and they anticipate correctly the economy s adjustment path but like the new classical explanations of the cycle the model is an equilibrium one in the sense that all private gains from trade are fully exploited at all phases of the cycle although the social gains from trade may not be fully exploited because of search externalities the cycle i derive here is not due to externalities unlike other related perfect foresight models such as diamond s 1982a the structure of the model is such that the externalities do not give rise to multiple equilibria the key element of the model which is responsible for the transmission of output shocks to unemployment is the equation for wages in markets where the allocation of jobs takes place through search both firms and workers have some monopoly power a point emphasised by mortensen 1970 though he attributed only temporary monopoly power and only to firms i use the nash bargaining solution to solve for the equilibrium wage rate and show that the firm s and worker s alternative returns threat points or

the expectation hypothesis in emerging financial markets the case of malaysia this article deals with the expectation hypothesis of the term structure of interest rates it is argued that the rapid progress and financial market liberalization that is occurring in emerging financial markets could provide additional evidence for testing the expectation hypothesis this article employs data from the malaysian government securities market which represents one of the examples of an emerging financial market cointegration and error correction analyses show significant empirical validity for the expectation hypothesis the long and short term interest rates are shown to be cointegrated and subject to a long run equilibrium path in addition to shedding some light on the experience of emerging financial market this article explicitly identifies the process of adjustment towards the long run equilibrium for the long run the results are in favour of the long to short version of expectation hypothesis with longer term interest rates playing a greater role as equilibrium attractor howeve

labor search and matching in macroeconomics abstract the labor search and matching model plays a growing role in macroeconomic analysis this paper provides a critical selective survey of the literature four fundamental questions are explored how are unemployment job vacancies and employment determined as equilibrium phenomena what determines worker flows and transition rates from one labor market state to another how are wages determined what role do labor market dynamics play in explaining business cycles and growth the survey describes the basic model reviews its theoretical extensions and discusses its empirical applications in macroeconomics the model has been developed against the background of difficulties with the use of the neo classical frictionless model of the labor market in macroeconomics its success includes the modelling of labor market outcomes as equilibrium phenomena the reasonable fit of the data and when inserted into business cycle models improved performance of more general macroeconomic models at the same time there is evidence against the nash solution used for wage setting and an active debate as to the ability of the model to account for some of the cyclical facts

the term structure of interest rates and regime shifts some empirical results abstract a test of the expectations theory of the term structure in the framework of a regime switching var model for a change in the short rate and the short long spread with euro us and euro swiss franc rate data points to the importance of uncertainty about the procedures of monetary policy for the rejection of the expectations theory in the us case whereas in the swiss case a time varying term premium also seems to be relevant

unemployment dynamics and labour market tightness an empirical evaluation of matching function models the implications of matching function models for the relationship between labour market tightness and the transition probability into employment are summarized these implications are then tested using monthly data for three canadian provinces british columbia ontario and quebec testing methods use flexible regression techniques so as to reduce the effect of any extraneous restrictions the results show rough concordance between theoretical assumptions and empirical facts evidence of non linearity in the estimated relationships favours a search theoretic model of labour markets over one based on queues and some quantitative results offer guidance to those using calibrated search models in theoretical analysis

a dynamic equilibrium model of search bargaining and money abstract this paper considers dynamic equilibria in a model with random matching strategic bargaining and money equilibrium in the bargaining game is characterized in terms of a simple differential equation when we embed this characterization into the monetary economy the model can generate outcomes such as limit cycles that never arise if one imposes a myopic nash bargaining solution as has been done in the past journal of economic literature classification numbers c78 d83 e31

endogenous growth and the welfare costs of inflation a reconsideration abstract many economists share the view that the welfare costs of moderate rates of money growth cum inflation are generally modest or small this paper investigates the sensitivity of this result to alternative model specifications and behavioral assumptions we first construct a monetary endogenous growth model with romer s 1986 style of capital externality and find that the real growth rate effect is substantially large thus lending to much higher welfare costs than those in existing studies to investigate the robustness of the result we then conduct a series of experiments by exploring the romer model with an alternative specification of money demand and a class of other endogenous growth models it is demonstrated quite consistently that our finding is confirmed in these models

job finding and separation rates in the oecd abstract we provide a set of comparable estimates of average monthly job finding and separation rates for over 20 oecd countries that can be used for the cross country analysis of labor markets

what matters when the impact of ecb communication on financial market expectations this article analyses financial markets reaction to european central bank s ecb communication we apply a novel indicator that quantifies the contents of the ecb s introductory statements and allows disentangling ecb statements on prices the real and the monetary sector we provide evidence that it matters what issue the ecb is speaking about especially the ecb s statements on price developments represent important news to financial markets it also matters when the ecb affects markets communication drives maturities above 4 months

efficiency wages in a ricardian model of international trade abstract this paper examines the implications of efficiency wages for international trade in a simple extension of the ricardian model in which labour performs two different tasks in production and where workers are imperfectly monitored in the performance of one of the tasks as a result of the factor market distortion the one factor economy may behave like a heckscher ohlin model an important result is that transfers of income have efficiency reducing effects and hence the standard aggregate analysis of trade policy may be inappropriate