interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

aggregate investment and consistent intertemporal technologies it is frequent practice to model an industry or economy as if it were a single agent solving a single optimization problem a model of firm behavior which has had extensive use as an aggregative model is the adjustment cost model of investment we assume there are a number of competitive firms in an industry that choose investment paths to maximize their present value the technologies of the firms exhibit capital stock adjustment costs for general concave technologies of the firms there is no aggregate concave technology that can represent the technological possibilities available to the industry we find conditions on the technologies of the firms that are necessary and sufficient for the existence of an aggregate technology that can consistently model the industry s behavior and discuss their empirical implications

competitive storage rational expectations and short run food price determination this paper demonstrates that lags between retail and wholesale food prices can be explained by inventory behavior of retailers theoretical considerations indicate that the markup model should be modified to include a jorgenson type user cost variable which depends on expected future wholesale price the rational expectations hypothesis is used to derive price expectations the retail price specification therefore depends on the stochastic process generating expected wholesale price the econometric methodology employing both causality testing and nonlinear estimation is illustrated by estimating monthly price relationships for beef the results are consistent with the theory and indicate rejection of the markup model

factor endowments factor proportions and the allocative efficiency of u s interregional trade the heckscher ohlin h o theory of trade has been subjected to numerous international tests based upon the empirical evidence presented in the literature it appears that the theory s explanatory power of the actual pattern of international trade is somewhat limited this may not be surprising however when one considers a host of extraneous factors such as tariffs quotas and other policy and institutional barriers to trade which distort the pattern of trade on the other hand some of the requisites of the h o theory are more nearly satisfied in interregional trade within a nation the extent of policy distortions on the overall pattern of commodity trade should be far less in interregional trade than in international trade likewise both production technologies and demand conditions assumed to be identical between nations in the h o theory should be more nearly so among regions within a nation while the theoretical basis of regional trade is of course the same as that of international trade it is primarily for these reasons that a number of researchers have more recently turned to interregional trade for the purpose of testing the h o theory the current literature on the u s regional comparative advantage includes the contributions by moroney and walker 1966 moroney 1972 1975 estle 1967 and klaasen 1973 whereas these studies focused primarily on the pattern of regional production as revealed by value added concentration ratios for the u s south the major objectives of this paper are i to design and perform factor proportion tests based upon the actual interregional pattern of trade and ii to investigate one neglected empirical aspect of the h o theory bearing upon the substitutive role that commodity trade plays for direct factor mobility in section ii we present estimates of the regional distribution of major input supplies in the united states the input classes considered are capital equipment human capital labor and renewable and nonrenewable natural resources in particular we have found that there are fairly distinct differences among u s census regions pertaining to relative aggregate input supplies defined by physical capital labor ratio human capital labor ratio renewable natural resource labor ratio and nonrenewable resource labor ratio section iii presents the methodology and major empirical findings of the factor proportions test as adapted to interregional trade section iv extends the analysis to consider an alternative hypothesis of the h o theory based on the substitutive relationship between direct factor movements and commodity trade as embedded in the original h o theory this aspect of the theory has not been explicitly dealt with in the empirical literature and we consider its practical implication concerning the allocative efficiency of trade a summary section concludes the paper

the dynamic behavior of business loans and the prime rate abstract the purpose of this research is to determine the relevant variables channels of influence and dynamics characterizing the business loan market to achieve this goal the statistical approach of vector autoregressive time series analysis popularized by sims 1980 1981 and litterman 1979 is applied to a group of variables suggested by the portfolio and liability allocation problems of a representative bank and a representative business firm the variance and historical decomposition analyses suggest that innovations in the level of business inventories and commercial bank financial assets are the most important casual variables in the business loan market

the specification and estimation of interrelated factor demands under uncertainty abstract this paper studies a model of the firm s interrelated demands for the factors of production incorporating exogenous variables with uncertain future values multiple quasi fixed factors depreciation in use and non symmetric internal costs of adjustment the inputs considered are production labor non production workers capital inventories of non finished goods and capacity and non production worker utilization rates a simultaneous system of factor demand equations with constraints is estimated and using u s manufacturing data the model is shown to be tractable under certain assumptions the results are encouraging given the complexity and the nature of the model

analyzing the indirect production function for u s manufacturing in recent years there has been considerable research conducted in applied production economics to estimate the firm s structure of technology and its production characteristics the main concept used in this research is the duality principle relating production and cost or profit together with the use of flexible form econometric specifications for estimating production technologies under the assumption of cost minimization or proft maximization duality implies that for any production function there exists a cost or profit function that provides an equivalent description of the technology what is less well known however is that the firm s technology can be equally well described by the indirect production function a production analog of the indirect utility function in consumer theory 5 8 9 the indirect production function is based on the firm s output maximization subject to a budget constraint on input costs of course it is evident enough that a firm choosing inputs to maximize output for a given input cost produces that output at the minimum cost by implication the indirect production and cost functions are equivalent ways of characterizing the firm s technology and as will be seen there exists a unique correspondence between the two functions in empirical application however the choice between the two functions hinges on the exogeneity or endogeneity of output for the indirect production function the level of output is an endogenous variable in the case of the cost function on the other hand output is exogenously given in most situations it is the indirect production function not the cost function that is more compatible with observed behavior of firms and industries while numerous studies have been conducted recently to estimate the cost or profit function in a variety of firms and industries 1 2 3 6 no attempts have been made to employ the indirect production function as a working tool in applied production analysis this paper attempts to provide empirical evidence from analyzing the indirect production function within the context of an application of the duality principle using the well known data set utilized by berndt and wood 3 and berndt and khaled 2 it reexamines the production structure of u s manufacturing based on a translog specification of the indirect production function for the underlying technology an important question is how the choice of a model the indirect production or cost function

reducing u s vulnerability to oil supply shocks the 1990 crisis in the middle east has raised concern about the united states s vulnerability to oil supply disruptions in addition a number of trends point to increased us dependence on imported oil oil imports have increased and production has declined in the united states for the last eight years imports now comprise 42 percent of total oil consumption and us dependence on oil imports is projected to increase over the next 20 years the energy modeling forum forecasts imports to be more than twice domestic production by the year 2010 there are many studies examining the effects of various policies to protect us energy security not many consider the strategic petroleum reserve spr which can be a powerful tool in combating energy supply shocks the spr can dramatically increase the domestic short run supply elasticity which has been found to be a key element in the welfare cost of protectionist policies upon examining 5 policies the author finds that the spr together with a protectionist policy works best against a supply disruption 27 refs 3 tabs

aggregate consumer behaviour and the measurement of inequality this paper presents an approach to inequality measurement based on an econometric model of aggregate consumer behaviour the novel feature of this model is that systems of individual demand functions can be recovered uniquely from the system of aggregate demand functions we present methods for evaluating social welfare based on an explicit social welfare function this social welfare function incorporates measures of individual welfare based on indirect utility functions for all consumer units we develop indexes of inequality based on actual and potential levels of social welfare

an econometric study of the demand for first and second class inland letter services a dynamic quarterly model for both first and second class u k inland letter traffic is estimated over the period 1976 88 the demand for first class letters is strongly influenced by aggregate expenditure but for second class letters this linkage is much weaker both letter streams respond to changes in the price of first and second class letters the price of telephone services and other prices as measured by an aggregate price index copyright 1990 by mit press

learning in expectation formation with applications to cattle and beef exports the paper briefly considers problems associated with rational expectations and formulates a more general model which allows for situations where economic agents do not immediately arrive at a fully rational solution it incorporates a learning mechanism whereby agents can provisionally adopt hypothetically derived expectations as a basis for comparison with the actual outturns utilizing the resultant past expectational errors as indicators of the likelihood of prospective future outcomes agents make explicit allowance a rational solution thus in situations where complete information is not freely available rationality would be approximated over time by means of a dynamic learning process which is founded on a firm empirical approach this essential empiricism requires that the problem be examined on the basis of direct observation of applied situations therefore the method is implemented and analysed with reference to irish foreign trade in fat cattle carcase and processed beef simultaneous equati

import demand with rational expectations estimates for bauxite cocoa coffee and petroleum abstrac t we offer a method for establishing the distributed lag structure in import demand models a priori we consider a firm which imports raw materials in a world of uncertainty traditional considerations of adjustment and inventory holding costs lead to a forward looking import decision rule linear rational expectations modelling allows us to transform the forward looking rule into a finite distributed lag specification while the resulting model is similar in form to earlier empirical models it is not subject to the lucas critique the model is fitted to u s data over the period 1954 1980

expectations and arms races recent empirical studies of arms races have produced two puzzling results first for several important arms races particularly the u s ussr case there appears to be no interaction arms acquisition appears to be driven only by internal factors second in several cases nations appear to be responding to the current military expenditures of their opponent this statistical result presents interpretation problems since nations do not know the current defense expenditure of their opponent at the time that they make their own military expenditure decision a number of interpretations for these results have been provided they include inappropriate model specification inappropriate operationalization of military threat and error ridden military expenditure data nevertheless the results persist and conflict with our more substantive and intuitive understanding of arms processes a process based upon expectations of current arms expenditures of the opponent is developed to deal with this puzzle in this paper several alternative expectation mechanisms are formulated and tested for a number of contemporary arms races

compositional change aggregation and dynamic factor demand estimates on a panel of manufacturing firms most empirical research on investment and dynamic factor demand has used aggregated data the large number of authors who have cited this as a source of problems strongly suggests possible benefits from analyzing individual firm data this paper presents an analysis of a panel dataset of us manufacturing firms several models based on cost minimization and a three factor cobb douglas technology are developed the differences concern whether the technology varies across two digit sic industries the presence of fixed adjustment lags and the determinants of adjustment costs identification relies on the rational expectations hypothesis and estimation on non linear 3sls the estimates indicate that versions with the adjustment lag perform better than others conditional elasticities reveal that factor demand responds rapidly to anticipated changes in output and factor prices a finding consistent with other recent work it appears that the factor demand of large firms is more price sensitive and less sensitive to output than small firms consistent with recent work on credit market imperfections comparison of the results based on the pooled and the industry varying technologies indicate that the use of aggregate data is indeed a source of problems

effects of site specific management on the application of agricultural inputs site specific management of inputs in agricultural production is receiving increased attention because of new technologies and concerns about excessive input use this paper provides a microeconomic analysis of its implications it shows that profit decreases with an increase in the variability of input requirements but that input and production effects can be quite complicated

rational expectations in agricultural economics research and policy analysis despite recognition by agricultural economists that price expectations are important in agricultural decision making few changes in the way price expectations appear in economic models of agriculture have been made during the past two decades for example in the major proportion of existing supply response studies it has been assumed that price expectations are formed adaptively for an illustration of the extent that this assumption has been used see askari and cummings that is expected price is assumed to be a weighted average of past prices with the weights declining geometrically over time in other supply response studies it is assumed that a polynomial distributed lag on product prices provides an adequate representation of the system s dynamic structure see for example meilke zwart martin or fisher however as muth p 315 noted there is little evidence to suggest that the presumed relations bear a resemblance to the way the economy works although data on anticipations are collected in many ways only a few studies have tried to determine how individual decision makers actually form expectations heady and kaldor turnovsky and fisher and tanner katona in calling for more research of this kind also identifies some difficulties in studying the psychology of individuals learning processes until psychologists make more progress in this area economists who incorporate anticipations in their models will have to use another approach however there are few choices the popular adaptive expectations hypothesis is inadequate not because it implies that the forecast of a particular variable is a distributed lag of its own past values but because it implies that the distributed lag parameters are restricted in an ad hoc way in general assuming that price expectations are formed adaptively is ad hoc because the parameter restrictions in the distributed lag are not the result of an optimization process alternative formulations such as the assumption that expectations are naive or generated by some other simple autoregressive form are inadequate for similar reasons the rational expectations hypothesis

estimation of the internal adjustment costs model using longitudinal establishment data this paper develops estimates of the internal costs measured in terms of foregone current output associated with the introduction of new plant and equipment into manufacturing establishments using the census bureau s longitudinal establishment data file a very large and rich source of production and investment data our estimates provide strong support for the internal adjustment costs hypothesis they indicate that one dollar increases in expansion and replacement investment cause on the average 35and 21 cent reductions respectively in current output the internal cost of adjusting to equipment appears to be higher than the cost of adjusting to plant

the effects of shifts in a return distribution on optimal portfolios when the distribution of the returns of a risky asset undergoes a stochastically dominating shift a risk averse investor may not necessarily increase the investment in that asset this paper provides restrictions on the investor s utility function that are necessary and sufficient for a dominating shift to bring about no decrease in the investment in the respective asset if there are two risky assets in the portfolio these conditions are also necessary if there are n 2 assets and are necessary and sufficient if the utility function exhibits constant absolute risk aversion copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

keynesian involuntary unemployment and sticky nominal wages this paper presents a model in which sticky nominal wages and keynesian involuntary unemployment result as a consequence of the intertemporal optimisation decisions of profit maximising monopsonistic firms and fully rational and informed workers in an uncertain environment uncertainty associated with the business cycle and its impact on product price generates disequilibrium wages and identifies the labour demand function in contractions and the supply of labour in expansions the theoretical prediction of a negative relationship between real wages and employment during contractions and a positive relationship during expansions is strongly supported by the empirical evidence presented central to keynesian macroeconomics is the concept of involuntary unemployment the existence of which once was a commonly agreed upon stylised fact however as noted by hoover i988 and mccafferty i990 among others existing models either fail to provide a satisfactory reason why wages do not adjust to clear the market or seek some sort of equilibrium explanation in which unemployment is not strictly involuntary in the sense of keynes moreover the failure of recent empirical studies to support the keynesian prediction of a countercyclical wage has led some to doubt the relevance of keynesian economics and even the meaningfulness of the notion of involuntary unemployment lucas 1978 farmer 1993 keynes i 939 cited findings of a countercyclical real wage during the great depression argued that the relationship between real wages and employment depends upon whether changes in employment are due to changes in effective demand or due to other factors and recommended that observations on real wages ought to be classified by periods of contraction and expansion an examination of us data for the period 1920 89 presented in section ii of this paper confirms the importance of keynes s argument and motivated the development of the new keynesian model of employment and wages presented in section iii the model is characterised by a market structure in which representative monopsonistic firms post nominal wage rates which they may find optimal to partially but not totally index in advance of knowing product price and of hiring labourers who may have complete knowledge relevant to their choices price forecasts are assumed to be rational while prices vary with the state of the economy the theoretical framework i incorporates all of the characteristics of keynesian involuntary unemployment while not attributing the cause of unemployment to the supply behaviours of labourers 2 provides an explanation of why wages do not adjust to clear the market that is based explicitly on the optimising behaviour of firms and implicitly on that of

regional effects of energy price decontrol the roles of interregional trade stockholding and macroeconomic incidence policy debates over energy pricing frequently pit producing states against consuming states such a distinction ignores the fact that ownership of energy producing and energy using assets is geographically dispersed and that trade links regional economies incorporating these factors as well as alternative patterns of the incidence of higher gas prices into an analysis of natural gas decontrol reveals a significant influence on the net interregional transfers resulting from decontrol apparent consuming regions could benefit from gas decontrol and consuming regions generally do not benefit from policies that tax producer windfalls from decontrol and then redistribute the revenues as compensation to gas users

unionism mio the cyclical behavior of the labor tv rket in u s manufacturing t he traditional view of market dynamics implies that when demand varies intertemporal variation in quantities exchanged increases as prices become less flexible this reasoning leads to the proposition that wage and price rigidities are important contributors to cyclical fluctuations in output fischer 1977a and gray 1978 based formal macro models on this principle although this view is common it has little empirical support the coexistence of union and nonunion establishments engaged in similar activities contains potential for testing its merits economists have long maintained that in the short run union wages are less flexible than nonunion wages dunlop 1950 rees 1951 this difference should produce larger fluctuations in union employment and hours empirical studies have generally supported the union wage rigidity hypothesis lewis 1963 ashenfelter johnson and pencavel 1972 and hendricks 1981 2 but until recently lack of data precluded analysis of hours and employment definitive answers to the important questions concerning unions influence on cyclical behavior require yet unavailable information matching the behavior of firms and characteristics of workers but data from modem surveys have allowed considerable progress nevertheless it remains a challenge to determine how much of differences observed in the stability of labor utilization are attributable to differences in the stability of demand medoff 1979 and raisian 1979 report that cyclical variation of employment and hours is indeed greater for union labor but despite attempts to allay suspicion that their finding arises primarily from concentration of union members in cyclically sensitive industries both studies leave room for doubt raisian estimated functions relating an individual s wage and weeks worked in a year to a proxy for excess demand that year s unemployment rate in the worker s industry the technique is attractive but raisian s data included workers from the entire economy and the industries were broad aggregates thus differences in the union and nonunion groups compositions may play a large role medoff who confined his study to production workers in manufacturing and used data allowing finer partitions investigated the importance of composition more thoroughly but he did not estimate relationships between adjustments in employment or hours and a measure of demand furthermore his focus was principally on the composition of manhours adjustments rather than their size in this paper i combine the strongest features of the medoff and raisian studies in further examination of the influence of unionism on cyclical fluctuations using current population surveys u s department of commerce 1978 from may of 1973 75 my analysis covers production workers in manufacturing during a period of rising inflation and unemployment the heart of the analysis is a measure of residual employment that quantifies by three digit industry and year shortrun excess demand for labor i construct this variable from employment time series and use it to estimate union nonunion differences in the cyclical responses of unemployment hourly wage rates and hours worked the results are consistent with the view that increasing rigidity in wages amplifies cyclical fluctuations in the utilization of labor the wage regressions add further to the literature s already strong support for the union wage rigidity hypothesis the employment status and hours regressions imply that the sensitivities of employment received for publication august 12 1981 revision accepted for publication february 11 1983 federal reserve bank of dallas this paper is based on my ph d dissertation which was completed at ucla with financial assistance from the rand corporation and the department of labor comments by referees and by participants of labor workshops at ucla and the university of chicago as well as the computation assistance of brian mckee are gratefully acknowledged i am responsible for any remaining errors the views expressed should not be attributed to the federal reserve bank of dallas or the federal reserve system one study is gordon 1982 who concludes page 41 that macroeconomic instability in the united states has been aggravated by the unusually sluggish behavior of nominal wages in the postwar era 2see also johnson 1975 parsley 1980 and moore and raisian 1980

capital skill complementarity and the interregional distribution of human capital in us manufacturing 1989 capital skill complementarity and the interregional distribution of human capital in us manufacturing applied economics vol 21 no 8 pp 1087 1098

agents as empirical macroeconomists thomas j sargent s contribution to economics thomas j sargent has fundamentally changed and in the words of art rolnick who interviewed him in 2010 irrevocably transformed the field of macroeconomics whether as sole author as co author with collaborators as an author influenced by others or as a teacher of the profession influencing others this paper is about his contribution to our field the nobel memorial prize to thomas j sargent and christopher a sims has been awarded for the empirical research on cause and effect in the macroeconomy or more broadly for macroeconometrics one often likes to distinguish between theorists on the one hand and empiricists and econometricians on the other thomas j sargent holds a unique position in between a key theme in a large part of his work has been to put the agents in his model on equal footing with the econometrician who is observing data from the model i e to assume that agents are themselves empirical macroeconomists or macroeconometricians in this paper i use this theme to examine his work and his contributions to the study of economics

expectations and factor demand this paper develops and estimates a model of interrelated factor demand with rational expectations in the presence of internal adjustment costs invariant technological parameters are distinguished from the firm s adjustment parameters which change when the exogenous processes faced by the firm change the capital demand equation is derived by solving the euler equations which stem from minimization of the present value of costs future exogenous variables are supplied from solutions of arima equations the model is tested on postwar quarterly data for u s manufacturing a regime change in the process for energy prices is simulated as is a temporary suspension of the investment tax credit

a rational expectations equilibrium model of inventories of finished goods and employment abstract a critical roadblock to modeling inventories of finished goods has been the claim that the production and inventory decisions of a perfectly competitive firm are determined independently of each other a basic goal of this study is to specify fundamental preferences of economic agents technologies constraints and market structures that are in a rough way capable of generating patterns of serial correlations and cross correlations between inventories and employment of factors of production that are consistent with those observed in the data the claim is made that the time series for inventories output and employment can in principle be interpreted as emerging from a well specified dynamic stochastic competitive equilibrium in which economic agents are assumed to form rational expectations about variables not included in their information sets inventories and employment will not be related in a direct way if and only if the price elasticity of demand for output is equal to infinity

comovements in aggregate and relative prices some evidence on neutrality abstract this paper develops an alternative test of the neutrality of anticipated monetary policy a multi good equilibrium model along the lines of barro and hercowitz is used to derive a neutrality proposition for anticipated movements in the aggregate price level and to demonstrate its equivalence econometrically to the exogeneity of relative prices with respect to the aggregate price level multivariate causality tests provide a basis for testing these restrictions the empirical results provide mixed evidence for the equilibrium models while the variation in the findings across industries suggests a role for supply side disturbances in explaining comovements in aggregate and relative prices

short run fluctuations in fertility and mortality in pre industrial sweden abstract this paper describes and interprets annual swedish data from 1750 to 1869 on weather harvests real wages birth rates and death rates using vector autogression impulses due to unexplained increases in wealth whether this occurred through increased real wages improved agricultural yields or warmer winters led in the short run to increased fertility and decreased infant and non infant mortality and hence to increased rates of population growth unexplained or unanticipated fluctuations in infant mortality led to replacement cycles in fertility within one to three years although only a negligible cumulative effect on fertility persisted after five to ten years fluctuations in deaths among persons older than one year evoked a fertility response several years later but this replacement response persisted after more than a decade although vector autoregression is not designed to account for long term trends and their consequences the interrelationships found here among exogenous weather shocks and fluctuations in economic conditions and demographic rates provide support for the homeostatic mechanisms hypothesized by classical economists and discussed by malthus the methodology of vector autoregression appears useful for studying historical series on climatic economic and demographic variables where we do not yet have a sufficient theoretical foundation for specifying and estimating structural models

granger causality and the time series analysis of political relationships political scientists have employed causal modeling techniques for quite some time in most cases however they have relied on methods of a static cross sectional variety time series methods have been disseminated and applied but these have not been expressly causal the problem of assessing the causal character or direction of political relationships over time has not been addressed granger 1969 has suggested a notion of causality that is applicable in longitudinal analysis the study and application of granger s idea of causation now is widespread in economics and business this discussion evaluates the usefulness of applying granger causality in the study of political relationships granger s definition of causality is introduced several popular procedures for assessing granger causality are reviewed and certain problems surrounding interpretation of those empirical tests are elucidated the virtues and pitfalls of granger causal analysis then are illustrated in an analysis of an important topic in international political economy and also in a reanalysis of a recent granger causal investigation of arms races

economic behavior under temporal uncertainty a considerable amount of research has focused on the effects of uncertainty on economic behavior in the absence of complete risk markets private risk bearing is widely believed to influence economic decisions arrow 1 sandmo 23 chavas 4 dalal 6 and others have investigated the role of uncertainty in resource allocation for example sandmo 23 has proposed a theory of the firm under risk he showed how risk and risk aversion can have a negative effect on production decisions

vector rational error correction abstract systems of forward looking linear decision rules can be formulated as vector rational error correction models the closed form solution of the restricted error corrections is derived and a full information estimator is suggested the error correction format indicates that the assumptions of convex adjustment costs and rational expectations impose different types of a priori restrictions on the dynamic structure of the error corrections an empirical model of the producer decision rule for capital investment illustrates that the data rejects dynamic restrictions imposed by a standard model of adjustment costs but supports a more general description of convex frictions

protectionist oil policies a dynamic comparison for the usa rising us oil imports have spawned a variety of policies for increasing energy security we provide a qualitative comparison of policies using a dynamic optimal control model thirty year price and output paths for opec and the usa are simulated assuming that us producers are competitive and opec is a dominant firm we find that the policies have quite different effects on imports and welfare the tariff reduces imports the most followed by the gasoline tax a per unit tariff and gasoline tax are costly in terms of us welfare whereas an ad valorem tariff can both lower imports and enhance us welfare

fiscal foresight and information flows news or foresight about future economic fundamentals can create rational expectations equilibria with non fundamental representations that pose substantial challenges to econometric efforts to recover the structural shocks to which economic agents react using tax policies as a leading example of foresight simple theory makes transparent the economic behavior and information structures that generate non fundamental equilibria econometric analyses that fail to model foresight will obtain biased estimates of output multipliers for taxes biases are quantitatively important when two canonical theoretical models are taken as data generating processes both the nature of equilibria and the inferences about the effects of anticipated tax changes hinge critically on hypothesized information flows different methods for extracting or hypothesizing the information flows are discussed and shown to be alternative techniques for resolving a non uniqueness problem endemic to moving average representations

how oecd countries subsidize oil and natural gas producers and modeling the consequences a review abstract since fossil fuel subsidies entail significant economic fiscal social and environmental costs more and more attention is being paid to phasing out fossil fuel subsidies the oecd has recently completed a report quantifying the amount of both producer and consumer subsidies for their member countries and some work has been implemented on analyzing the effects of consumer subsidy removal however there is hardly any investigation of the consequences of producer subsidies in this paper we focus on oil and gas producer subsidies of oecd countries and their effects first we describe the transfer mechanisms indicated by the oecd report for producer subsidies in order to recommend models to analyze the influence of removing producer subsidies we review upstream oil and gas models and provide a taxonomy for them from them we recommend the most appropriate models for each type of producer subsidy to model upstream decision making our contribution in this paper is to categorize the upstream models we have found compare their main features as well as recommending best in class models for analyzing the effects of each type of upstream producer subsidy

the conquest of south american inflation we infer determinants of latin american hyperinflations and stabilizations by using the method of maximum likelihood to estimate a hidden markov model that assigns roles both to fundamentals in the form of government deficits that are financed by money creation and to destabilizing expectations dynamics that can occasionally divorce inflation from fundamentals levels and conditional volatilities of monetized deficits drove most hyperinflations and stabilizations with a notable exception in peru where a cosmetic reform of the type emphasized by marcet and nicolini occurred

a dynamic nash game model of oil market disruptions and strategic stockpiling in this paper we present and analyze a nash dynamic game model for investigating public and private sector oil inventory policies in unstable world oil markets conceptual results about the model include simple verifiable conditions for uniqueness and stability of solutions along with characterizations of optimal policies we also present results and discuss computational issues that arise in determining subgame perfect infinite horizon equilibria using a steady state policy iteration approach

rational expectations and the smoothing properties of inventories of finished goods abstract this paper formulates and estimates a dynamic rational expectations equilibrium model of inventories of finished goods and employment of labor the view that the primary role of inventories of finished goods is to act as a buffer stock in the face of fluctuating demand is examined both the model and estimation results indicate that this is the case because of differences in the costs involved for firms in changing their inventory stocks and labor force in addition to providing some new evidence on the behavior of inventories of finished goods and employment the paper illustrates a technology for maximum likelihood estimation of structural parameters under the hypothesis of rational expectations

comparative statics under uncertainty for a class of economic agents abstract this paper explores trade offs between assumptions on risk preferences ordinal preferences under certainty and cumulative distribution function cdf changes of an exogenous random variable needed for determinate comparative statics results specifically we ask absent restrictions on risk preferences what cdf changes lead all agents whose choice under certainty is monotonic in the exogenous variable to increase their choice variable under uncertainty we find that the desired class of changes are those satisfying monotone likelihood ratio mlr dominance we also note that mlr improvements are behaviorally identical to decreased risk aversion a result that illuminates the relationship between changes in risk and risk aversion journal of economic literature classification number d81

human capital adaptive ability and the distributional implications of agricultural policy the ability to adapt efficiently to an economic environment that has been altered in a specific way may be a scarce resource in agriculture schultz 1 the setting that i wish to focus upon is one in which farmers face uncertainty about the future course of events production technologies prices and governmental policies and production is dynamic a large share of inputs is purchased from the nonfarm sector and a significant share of output is exported information is available on past realizations of events storing and analyzing information is costly consequently farmers are not assumed to have complete information farmers are assumed to differ in their adaptive ability which is viewed as a form of human capital and to employ efficiently the information that they acquire the thesis of this paper is that adaptive ability is unimportant when the processes generating the variables which farmers take as exogenous are stationary and unaltered however when these processes undergo structural change adaptive ability is expected to affect the quality of production marketing and investment decisions farmers who have superior adaptive skills are expected on average to make better decisions furthermore given the highly competitive nature of u s agriculture successfully adapting to structural change is selective farmers possessing poor adaptive skill can be expected to comprise a relatively large share of the persons forced by economic circumstances to seek alternative employment or retirement provided governmental intervention does not neutralize this selection process when farmers make production marketing and investment plans their decision rules can be expected to incorporate the anticipated values of uncertain variables that are exogeous to their choices the unanticipated components of these exogenous variables however may confuse them and reduce the efficiency of otherwise good plans 2 when shocks occur because of domestic or foreign macroeconomic policy u s agriculture is saddled with transmitting business cycle disturbances

generalizing the taylor principle reply forward looking economic agents base decisions not only on monetary policy choices today but also on the expected future path of policy choices davig and leeper 2007b examine the implications of this basic feature of rational expectations in environments in which policy rules or regimes undergo recurring changes when agents expectations functions embed the possibility of policy regime changes in the future the nature of rational expectations equilibria can be altered in fundamental ways spillovers from anticipated future regimes can dramatically change the current equilibrium even if current policy hawkishly reacts to combat incipient inflation for example the possibility of moving to a more dovish regime in the future can raise the volatility of inflation today because determinacy of equilibrium depends on policy behavior in the long run conditions for a determinate equilibrium depend on current policy all possible future policies and the transi tion probabilities among policy regimes characteristics of the entire policy process some thing akin to davig and leeper s long run taylor principle determine whether a model has a

a comparison of foreign exchange forward and futures prices abstract in theory futures resettlement should create systematic pricing differences between futures and forward contracts however previous empirical studies do not demonstrate such differences in the foreign exchange markets on the other hand inferences from these studies are suspect since they do not directly implement theortical measures of resettlement effects and are unadjusted for sub gaussian data properties in this paper these limitations are addressed through the use of the multivariate autoregressive moving average model our findings provide evidence of systematic pricing influences arising from futures resettlement

an analysis of factors affecting price volatility of the us oil market abstract this paper studies the price volatility of the crude oil market by examining the market structure of opec the stable and unstable demand structure and related elasticity of demand in particular the impacts of prosperity and recession of the world economy and the resulting demand shift on crude oil price are investigated the error correction model is used to estimate the demand relations and related elasticity the income effect on demand functions is evaluated to shed light on future prices a simulation of potential oil prices under different scenarios on a cut of one million barrels per day by opec is evaluated from our simulation given the 4 cut in opec production the oil price is expected to increase unless the recession is severe the magnitude and scope of a price hike would be diminished if non opec or domestic production were greatly expanded

the political manipulation of macroeconomic policy conventional wisdom and some research indicate that macroeconomic policies follow cycles corresponding to political as well as economic forces using vector autoregression analysis i test three models of monetary policy determination for the united states 1953 1984 the electoral cycle model that reelection motivations on the part of presidents create a policy cycle the party differences model that policy changes reflect revolving presidential party administrations and the referendum model that changes in presidential approval create in effect a continuing referendum allowing presidents to monitor their success and change macroeconomic policies when necessary analysis shows that monetary policies as measured by the monetary base and short term interest rates respond to the election cycle and presidential approval although the effect on macroeconomic outcomes is ambiguous party differences are found in real income but are not very significant in other variables

capacity utilization and depreciation in use in this paper the effect capacity utilization has on the depreciation of capital goods is studied starting from a quadratic approximation to a normalized short run cost function expressions for the optimal rate of capacity utilization the demands for labour and energy and for investment are obtained investment is a function of past capital stock expected future capital stock expected future relative prices and expected future depreciation rates expectations are modelled via instruments the model is tested using us total manufacturing quarterly data depreciation dependent upon usage is found to be both statistically and economically significant

short and long run adjustments in u s petroleum consumption long run adjustments in petroleum consumption are not only larger than short run adjustments they may also be motivated by entirely different price events this analysis shows that new price peaks have both short run and long run consumption responses a result that is starkly different than price changes that track previous price paths it also establishes significant trend effects where gasoline and residual fuel oil consumption decline over time the analysis explores these adjustments by establishing long run cointegrating relationships for different petroleum product groupings an important implication is that price increases above historical levels may be providing substantially greater incentives for significant long run demand adjustments than would be the case otherwise

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

tobin s q and financial policy abstract recent research in macroeconomics has emphasized the importance of linking the financial and real sectors and working with optimizing models tobin s q model of investment would appear to provide a framework satisfying these two criteria in contrast to the original presentation of the q model the formal development has not recognized that the firm actively participates in a number of financial markets in this broader context q may be an uninformative and possibly misleading signal for investment expenditures we then endeavor to turn this negative theoretical result to positive advantage in resolving a number of empirical problems with q models

the impact of bad writing in economics we find significant style differences between articles written by economists for their professional journals and articles by the same economists in the wall street journal we find no evidence that style influences the professional success of economists which suggests that the private rewards to improving the quality of writing are low indeed each community of scholars has probably adopted a professionally correct writing style from which its members diverge little however scholars do alter their rhetorical style to communicate effectively with audiences other than the professional community this suggests that intra and inter group written communication by economists is efficient

compensating variation consumer s surplus via succesive approximations many economists agree that the best measure of consumer s surplus is the compensating variation consumer s surplus cvcs howerver because the compensated demand function is not observable there are problems in using this measure in emperical applications there are ways around this limitations that work well under certain circumstances however until now there has been no solution that always works well we introduce a sucessive approximations method of calculating compensating variation consumer s surplus using data from the ordinary demand curve in doing so we numerically identify the compensated demand fuction over the price interval involved this procedure can be made extremely small we also use our method to calculate cvcs for three applications in the literature where marshallian surplus was reported

an aggregate petroleum consumption model abstract this paper presents an aggregative model of us consumption of petroleum and products of a type which might potentially be used to derive short term forecasts of us petroleum consumption and imports the model attempts to separate income and weather related changes from those induced by changes in relative prices with emphasis on the dynamic path of consumption responses to price changes estimation results suggest that there are still significant price effects six years after a change in the relative price of petroleum

rejecting capital skill complementarity at all costs any serious empirical study of factor substitutability has to allow the data to display complementarity as well as substitutability the standard approach reflecting this idea is a translog specification this is also the approach used by numerous studies analyzing the relative capital skill complementarity hypothesis formulated by griliches 1969 according to this hypothesis the degree of substitutability between skilled labor and capital is lower than that for unskilled labor and capital yet the results of empirical studies investigating this hypothesis are controversial this paper offers a straightforward explanation using a translog approach reduces the issue of actor substitutability or complementarity to a question of cost shares our review of translog studies mentioned in hamermesh s 1993 summary on the demand for heterogeneous labor demonstrates that this argument is empirically relevant all these studies can be reconciled with each other on the basis of the cost share argument

macroeconomic modeling for monetary policy evaluation we describe some of the main features of the recent vintage macroeconomic models used for monetary policy evaluation we point to some of the key differences with respect to the earlier generation of macro models and highlight the insights for policy that these new frameworks have to offer our discussion emphasizes two key aspects of the new models the significant role of expectations of future policy actions in the monetary transmission mechanism and the importance for the central bank of tracking of the flexible price equilibrium values of the natural levels of output and the real interest rate we argue that both features have important implications for the conduct of monetary policy

dynamic factor demands and the effects of energy price shocks a dynamic model is used to understand how sharp changes in energy prices affect investment behavior employment and energy use the authors discuss the theory behind their model selection model specifications estimation methods and data list parameter estimates and elasticities for the selected model and describe the simulations they conclude that 1 the data strongly reject the hypothesis of constant returns to scale within their specification of aggregate production 2 the data indicate adjustment costs on labor are small and 3 their results help reconcile some of the conflicting estimates of energy demand elasticities appearing in recent literature 23 references 3 figures 3 tables

monetary anticipation and the demand for money in the u k testing rationality in the shock absorber hypothesis the carr darby shock absorber hypothesis that unanticipated changes in the money supply cause changes in real balances but anticipated changes have a unit impact on the price level and therefore leave real balances unchanged is tested using two step and joint estimation techniques for the u k two step methods appear to support the shock absorber hypothesis but the superior joint estimation technique decisively rejects the hypothesis particularly the implicit rational expectations cross equation restrictions

dynamic factor demands and market structure under rational expectations some estimates for the italian manufacturing system this paper deals with a dynamic model of the behaviour of firms under rational expectations the adjustment cost framework is followed to describe production technologies the objective of firms is to maximize the stream of future profits under rational expectation first order conditions for the optimum are derived with respect to input demands and one output supply the output market structure is modelled in order to test price taking behaviour the adjustment costs of quasi fixed inputs are internal and interrelated the model is estimated for the italian manufacturing system with encouraging results

econometric policy evaluation note for successive values of the endogenous variables y with the x treated as deterministic forcing variables here 0 is a parameter vector and the et are random shocks lucas correctly observed that such a formulation is inconsistent with a view of agents as optimizers except in special cases in which the future is irrelevant to present decisions it makes no sense to think of agents as optimizing if they know that their budget constraints are liable to shift arbitrarily i e in a way which is not characterized probabilistically as government policy changes lucas was led to augment the foregoing equation by adding to the system a government policy function

monetary anticipations and the demand for money in the u s further results a flourishing debate has arisen in the literature concerning both the interpretation of the original carr darby 1 c d shock absorber approach to the demand for money and the choice of an appropriate estimation technique for empirical tests of the hypothesis the c d shock absorber hypothesis holds that unanticipated shocks to the money supply are partially accommodated by a temporary increase in short run real money balances whilst anticipated monetary movements are reflected in the current price level and so are neutral with respect to the level of real money holdings c d test this proposition by generating monetary anticipations series by fitting univariate arima processes which are then substituted into fairly standard partial adjustment money demand equations using this two step technique they find empirical support for the shock absorber hypothesis for a number of countries mackinnon and milbourne 13 m m argue that the c d method may be subject to a simultaneity bias which can be corrected by an appropriate reparameterisation they then produce empirical evidence using their reparameterisation which appears to overturn the c d results at least for u s data in a rejoinder to m m carr darby and thornton 2 c d t argue that standard monetary economics and indeed the logic of the c d shock absorber hypothesis suggests that the money stock should be taken as exogenous at the aggregate level and that the aggregate money demand equation is in fact a price equation if this is the case then the money variable appears on the left hand side of the aggregate money demand equation merely to impose price level homogeneity and in particular the augmented or shock absorber money demand equation can be consistently estimated by ordinary least squares ols assuming the exogeneity of other regressors we argue below that the shock absorber hypothesis does not make sense unless money is taken as exogenous

substitution between production labor and other inputs in unionized and non unionized manufacturing the ease of substitution between labor and other factors of production is an important determinant of the elasticity of demand for labor and thus of the economic effects of unionism all else the same the greater the elasticity of substitution the greater is the elasticity of derived demand and the greater the displacement of labor for a given union induced wage increase in sectors where this elasticity is large unions are likely to be relatively weak and able to win only slight wage gains freeman and medoff 1981 and forthcoming or if they win large gains will have to pay a high price in terms of lost jobs in the sectors where the elasticity is small unions may be able to extract a substantial wage premium at little cost in terms of employment moreover as a simple general equilibrium model indicates the elasticity of substitution between labor and other factors in the unionized sector is a key parameter in determining the impact of the iiunion wage effect on the earnings of nonunion workers and on the efficiency of the economy johnson and mieskowski 1970 despite the importance of the elasticity of labor demand for an analysis of unionism little attention has been given to the absolute and relative magnitude of this elasticity under collective bargaining while there is some discussion of technological change and the substitution of capital and nonproduction workers for organized production workers in the institutional literature e g slichter 1941 slichter healy and livernash 1960 bok and dunlop 1970 modern econometric work provides no estimates of the relevant parameters as a result johnson and mieskowski 1970 rees 1963 lewis 1964 and others have been forced to evaluate union effects with guesstimates of the elasticities of concern in union settings this paper attempts to fill some of the gap in our knowledge by providing estimates for u s manufacturing of the constant output elasticity of demand for unionized and nonunionized production workers and of the elasticity of substitution between these workers and other inputs the analysis concentrates on what we call the relative inelasticity hypothesis which states that the demand for production workers will be more inelastic in the presence of a union for two reasons the likelihood that unions have organized and survived in sectors with low elasticities and the effects of various contract provisions on the ability of management to substitute other factors for production labor the study is divided into four sections section i develops the rationale for the relative inelasticity hypothesis and describes the nature of the empirical analysis conducted to test its validity the second section uses a 1972 state by 2 digit standard industrial classification sic industry data file for manufacturing to estimate the elasticity of substitution between production labor and both nonproduction labor and capital in the union and nonunion sectors of u s manufacturing industries section iii provides estimates based on a 1968 72 sample of manufacturing establishments of the elasticity of substitution between production and nonproduction labor the only two inputs for which information is available the final section briefly summarizes the findings and discusses their implications for understanding the impact of trade unionism on the u s economy to preview the ensuing discussion our main conclusion is substitution between production labor and other inputs is generally lower in union received for publication march 6 1978 revision accepted for publication august 17 1981 both authors are with harvard university and the national bureau of economic research supported by u s department of labor grant no j 9 m 6 0094 national science foundation grant no apt77 16279 and the national bureau of economic research under its program of research on labor economics we are especially grateful to jane mather for her invaluable assistance on this project and to greg bialecki charles brown gary chamberlain kathy coons jon fay martin van denburgh and lori wilson for their significant contributions the study has not been reviewed by the board of directors of the national bureau

tests for structural change in us oil consumption 1967 1982 abstract the purpose of this paper is to test us oil consumption for structural change over the period 1967 1982 a frequently used functional form is posited for total petroleum consumption as well as for gasoline distillate and residual fuel tests for abrupt change chow and gradual or conservation like change durbin brown evans and farley hinnich mcguire are employed at special break points 1973 embargo 1979 iranian crisis 1980 recession to check for abrupt changes and across years in general to detect gradual shifts both abrupt and gradual changes are found although the last five years may be the beginning of a new non changing period

energy consumption and economic activity in industrialized countries the dynamic aggregate time series relationship abstract most econometric studies suggest that the income elasticity of demand for energy is approximately unity for the developed market economies it is shown that over the period 1950 1978 the long run income elasticity is substantially higher than unity in terms of a ces energy demand function this result reflects the application of a generalized dynamic estimation methodology where serial correlation is regarded as a diagnostic guide to distributed lag fitting price elasticities are also estimated but these are in line with conventional estimates

how equilibrium prices reveal information in a time series model with disparately informed competitive traders abstract accommodating asymmetric information in a dynamic asset pricing model is technically challenging due to the problems associated with higher order expectations that is rational investors are forced into a situation where they must forecast the forecasts of other agents in a dynamic setting this problem telescopes into the infinite future and the dimension of the relevant state space approaches infinity by using the frequency domain approach of whiteman linear rational expectations models a user s guide university of minnesota press minneapolis 1983 and kasa forecasting the forecasts of others in the frequency domain rev econ dynam 3 2000 726 756 this paper demonstrates how information structures previously believed to preserve asymmetric information in equilibrium converge to a symmetric information rational expectations equilibrium the revealing aspect of the price process lies in the invertibility of the observed state space which makes it possible for agents to infer the economically fundamental shocks and thus eliminating the need to forecast the forecasts of others

tax policy and investment in major u s macroeconomic econometric models abstract in an analysis of six major u s quarterly models the predicted results of tax incentives for investment are found to vary widely differences are traced to critical specifications in investment equations when appropriately revised investment equations are reestimated the role of tax parameters is much reduced particularly among the high outliers and the variance among the models is narrowed decidedly full model simulations of revised equations suggest that current and proposed incentives such as the investment tax credit and accelerated depreciation are not cost effective increases in investment approximate only half of static tax losses and budget deficits widen

a single equation study of u s petroleum consumption the role of model specification the price responsiveness of u s petroleum consumption began to attract a great deal of attention following the unexpected and substantial oil price increases of 1973 74 there have been a number of large multi equation econometric studies of u s energy demand since then which have focused primarily on estimating short run and long run price and income elasticities of individual energy resources coal oil natural gas electricity for various consumer sectors residential industrial commercial following these early multi equation studies there have been several single equation studies of aggregate u s petroleum consumption 4 3 9 5 6 these singleequation studies have found that u s demand for petroleum products can be quite price inelastic in the short run estimates range from 0 04 to 0 08 but exhibits long lags of anywhere from 6 to 10 years that yield long run price elasticities ranging from 0 25 to 0 56 income or gnp elasticities are usually found to be much higher 0 69 to 1 13 with the complete response often assumed to occur in the current period single equation studies are often justified as efficient shortcuts or reduced forms for identifying the central behavioral aspects of a particular market the main issue addressed in this paper is the extent to which the existing empirical results from single equation studies of aggregate u s petroleum consumption have been influenced by the researchers choice of dynamic model specification this question is relevant because the econometric methodology usually followed in such studies is to start with a relatively simple specification such as a partial adjustment model or some kind of a distributed lag structure on price alone this initial specification choice is rarely justified except possibly to cite its previous success in similar work given that models which produce insignificant or perverse coefficient estimates are not usually publishable the reported specification is almost certain to provide reasonable statistically significant estimates with the correct signs the primary diagnostic test of the chosen specification is the durbin watson test statistic or perhaps durbin s h statistic in the presence of lagged dependent variables when this test gives evidence of serial correlation in the residuals the usual response is to correct for this by estimating a first or second order autoregressive model ar 1 or ar 2 should this easilyimplemented correction not solve the problem there is a tendency to chalk it up to some kind 1 an excellent survey of these results may be found in bohi 2 159

dynamic firm behavior and regional deadweight losses from a u s oil import fee this paper analyzes the national and regional efficiency aspects of a 5 per barrel fee on crude oil imported into the united states the emphasis of the paper is twofold firstly a dynamic model of firm behavior capturing explicitly both expectations formation and resource nonrenewability is used to assess the impact of the fee on domestic firm behavior and secondly the regional breakdown of the producer and consumer surplus changes tariff revenues and deadweight losses or gains is performed by taking explicit account of stock ownership in oil producing and oilconsuming corporations and consumption by end use sector the import fee is a politically contentious issue but one that refuses to go away in political circles the perceived benefits of the fee are usually seen as increased energy security and aid to a beleaguered domestic oil and gas industry perceived drawbacks are usually inflation and regional inequities the last point is the political downfall of the tariff producing states are seen to gain from the higher prices brought on by the tariff and consuming states are seen to lose representatives from states with little or no production and this of course covers most states are hard pressed to sell the idea to constituents this paper thus deals with two of the most important questions from a policy perspective the regional incidence of the tariff and its impact on domestic output in a related paper 20 i discuss the economic rationales for an oil import fee i find that any optimal tariff arguments based on u s monopsony power in the world oil market are not valid in today s market estimates show an import supply curve of approximately infinite elasticity and thus an optimal tariff near zero i dispense with the energy security rationale for a tariff as well arguing that any risk of a disruption of imports in the future and that risk may be small in today s market is best handled with other policy tools such as government owned or subsidized stockpiles these conclusions imply that a tariff would impose deadweight losses on the u s economy by encouraging overproduction of domestic petroleum resources and underconsumption of petroleum imports how much overproduction results from the tariff is the focus of section ii below a

the optimal tax for maximum economic yield fishery regulation under rational expectations abstract this paper examines the optimal tax to achieve maximum economic yield mey exploitation in a rational expectations model of a competitive open access fishery to analyze the dynamic evolution of resource use a structural model which explains the relationship between the firm and the industry is presented the unregulated equilibrium is contrasted with the potential mey conditions under which the unregulated equilibrium will be mey are explored in addition a tax is devised which will cause non mey competitive exploitation to become mey when the tax is implemented