a multivariate posterior odds approach to assessing competing exchange rate models a horse race is performed among competing models of bilateral exchange rates between the united states and canada the united kingdom germany and japan the authors compute posterior odds that any of the competing models is true using standard bayes rule formulae the distinguishing feature of this horse race is that the posterior odds incorporate the information contained in the covariances among the forecast errors of competing models it is found in contrast to meese and rogoff 1983 that the random walk model is dominated by one of the dornbusch overshooting model the flexible price monetarist model or the hooper morton model for all bilateral rates for almost all of the sample the authors are able to replicate the random walk dominance results by forcing the posterior odds to ignore covariance information so that in a sense their results encompass those of earlier studies copyright 1991 by mit press

quality and quantity in primary care mixed payment models evidence from family health organizations in ontario abstract we study the impact of a mixed capitation model the family health organization fho on quality and quantity outcomes among primary care physicians in ontario using a panel of administrative data covering one year before and two years after the fho model was introduced we find that physicians in the fho model provide about 6 to 7 fewer services and visits per day but are between 7 and 11 more likely to achieve preventive care quality targets these results suggest that the mixed capitation model with contractible quality indicators may be welfare improving relative to the ffs model

why interest rates react to money announcements an explanation from the foreign exchange market abstract when the fed announces a money supply greater than had been expected interest rates rise why one explanation is that the market raises its estimate of the future rates of money growth and inflation and bids up nominal interest rates we offer contrary evidence on such days the dollar appreciates not depreciates an alternative explanation is that the market perceives the change in the money stock as a transitory fluctuation that the fed will reverse in the future the anticipated future tightening raises today s real interest rate causes a capital inflow and appreciates the dollar the result in fact observed

monetary policy homeostasis and the transmission mechanism philip howrey 1967 william poole 1970 and john kareken 1970 initiated a formal debate over monetary policy using some variant of an is lm model thomas sargent and neil wallace 1975 extend this work by incorporating a lucas type aggregate supply function and rational expectations in spite of the effort spent in following up on the seminal work by howrey poole and kareken little progress has been made in resolving the debate the central theme of this paper is that the lack of progress is the result of ignoring homeostasis and the nature of the transmission mechanism in order to illustrate the importance of homeostasis and the transmission mechanism this paper extends the standard is lm framework in two ways first it introduces a homeostatic mechanism that generates shortrun responses which correspond to standard is lm behavior and long run responses which reflect full employment second it provides for alternative transmission mechanisms by dropping the assumption that markets clear continuously the paper is organized as follows the model is developed in the next section the following section examines the role of homeostasis and the transmission mechanism in the debate over policy the final section presents the conclusions

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

viewpoint estimating the causal effects of policies and programs estimation inference and interpretation of the causal effects of programs and policies have all advanced dramatically over the past 25 years we highlight three particularly important intellectual trends an improved appreciation of the substantive importance of heterogeneous responses and of their methodological implications a stronger focus on internal validity brought about by the credibility revolution and the scientific value that follows from grounding estimation and interpretation in economic theory we discuss a menu of commonly employed partial equilibrium approaches to the identification of causal effects emphasizing that the researcher s central intellectual contribution always consists of making an explicit case for a specific causal interpretation given the relevant economic theory the data the institutional context and the economic question of interest we also touch on the importance of general equilibrium effects and full cost benefit analyses

incorporating risk in production analysis risk is the farmer s perennial problem unfortunately agricultural economists have made little progress in analyzing or measuring production risk in ways that provide useful information for farm management therefore it is fair to say that the social returns to existing research on production risk are probably low it is from this perspective that i will discuss incorporating risk in production analysis my purpose is not to survey the literature or to catalog all the ways risk concepts have been incorporated in production models rather i intend to evaluate critically some of the basic concepts and approaches in the literature and to indicate the directions i believe research must take to arrive at a paradigm for incorporating risk in production analysis that could yield higher social returns in my view the conventional conceptual framework used for risk analysis has not led agricultural economists to ask the most important questions about the effects risk has on agricultural decision making the extension of the static neoclassical production model to incorporate price and production uncertainty has led agricultural economists to rationalize observed behavior in terms of the arrow pratt risk aversion concept this approach has led in turn to qualitative comparative static theorems which are appealing to theorists but have little relation to the decision problems farmers face to increase the relevance of their models and methods i believe agricultural economists need to understand specifically how risk affects agricultural production this in turn will suggest how risk affects agricultural decision making and why farmers are or should be concerned with it my analysis of these issues leads me to discount the hypothesis that risk matters primarily because of the psychic disutility it causes rather i hypothesize that risk matters primarily because production is a dynamic phenomenon and therefore production and price uncertainty affect expected productivity and expected income i hypothesize that these firstorder effects are why farmers are and should be concerned with risk the analysis of dynamic uncertain models shows that farmers optimal decisions are affected by risk whether they are risk neutral or risk averse this suggests that dynamic risk neutral models may be more useful than conventional static risk averse models for understanding the role production risk plays in farm management

the econometrics of damage control why specification matters the contribution of damage control agents to production differs fundamentally from that of standard inputs lands labor capital this paper develops an econometric model based on the key characteristics of damage control agents and examines its properties it demonstrates that standard production function specifications overestimate damage control agent productivity and have erroneous implications for the evolution of damage control agent productivity and use in response to changing environments e g the spread of pest resistance it also proposes several alternative specifications and discusses methods for estimating them

the vanishing liquidity effect of money on interest analysis and implications for policy this paper seeks to re examine the effects of money on interest rates the earlier literature on this topic determined fairly well the pattern of response of interest rates to changes in money growth the notable studies of cagan 1972 cagan and gandolfi 1969 and gibson 1970 served to establish the professions stylized pattern as presented in section i section ii presents new evidence on the subject and finds that the old empirical generalizations no longer hold specifically the results suggest that the initial liquidity effect of faster money growth is likely to be offset within the month following the monetary policy change sections iii and iv investigate the reasons for the changing pattern of monetary effects on interest rates and discuss the policy implications of the new pattern

risk self protection and ex ante economic value abstract we develop three propositions about the ex ante value of reduced risk if there is a continuous outcome distribution and if self protection influences outcome probability and severity then 1 unobservable utility terms cannot be eliminated from the ex ante value expressions 2 knowledge of the convexity or the nonconvexity of dose response functions is insufficient to sign changes in these expressions and 3 self protection expenditures need not be a lower bound measure of these expressions therefore many restrictions applied in recent empirical work on the economic value of risk changes are not immediately transferable to settings where endogenous risks prevail

the structure of open economy macro models abstract the objectives here include a rigorous investigation of a walras law in an open economy b the generality or non generality of the monetary approach to the balance of payments c the logical consistency of the traditional keynesian models of the balance of payments d the relationship if any between a government budget imbalance and the balance of payments and e perhaps most importantly the underlying cause s of a non zero balance of payments many of the conclusions differ from the conventional wisdom

currency fluctuations in the post bretton woods era the international monetary landscape that has emerged since the felling of bretton woods is characterized by a hybrid exchange rate system that lies somewhere between the textbook polar cases of a gold standard and a pure float this system has relatively flexible exchange rates between major countries active central bank intervention in the market for the major currencies and predominantly fixed exchange rates relative to the dollar or to some basket of currencies for less developed countries and newly industrializing nations the majority of research on currency markets since the early 1970s has focused on the characteristics of flexible exchange rates under this hybrid regime my thesis is that this research has been unsuccessful the proportion of monthly or quarterly exchange rate changes that current models can explain is essentially zero even after the fact forecasts that use actual values instead of forecasted values of the explanatory variables cannot explain major currency movements over the post bretton woods era this result is quite surprising since exchange rate changes would be entirely unpredictable only in very special cases of the theoretical models discussed as the discussion below will argue it is not a general implication of market efficiency that exchange rates follow a random walk process 1

was it real the exchange rate interest differential relation over the modern floating rate period in this paper we explore the relationship between real exchange rates and real interest rate differentials in the united states germany japan and the united kingdom contrary to theories based on the joint hypothesis that domestic prices are sticky and monetary disturbances are predominant we find little evidence of a stable relationship between real interest rates and real exchange rates we consider both in sample and out of sample tests one hypothesis that is consistent with our findings is that real disturbances such as productivity shocks may be a major source of exchange rate volatility this paper investigates the empirical relationship between major currency real exchange rates and real interest rates over the modern post march 1973 flexible rate experience the exchange rates examined here include the dollar mark dollar yen and dollar pound rates our two major findings are as follows first the data do not indicate a strong correspondence between real interest rate differentials short term or long term and real exchange rates this finding appears to conflict with the predictions of most monetary and portfolio balance models of exchange rate determination though the conflict can be substantially reconciled if aggregate disturbances are primarily real in nature i e changes in productivity tastes etc it is true that in many cases the sign of the estimated exchange rate interest rate differential relationship is consistent with the possible predominance of financial market disturbances but the relationship is not stable enough to be statistically significant second although one does find some evidence of a unit root in both real exchange rates and long term but not shortterm real interest differentials these two series do not appear to be linearly cointegrated hence the nonstationarity or near nonstationarity in the two series cannot be attributed to the same factor in section i we briefly describe a class of small scale monetary models of exchange rate determination the importance of this class of models for empirical work derives from its strong predictions about how the exchange rate will move

sources of fluctuations in real and nominal exchange rates this paper attempts to distinguish empirically real versus nominal sources of fluctuations in real and nominal exchange rates the distinction is obtained by imposing the following restriction on the bivariate vector autoregression of real and nominal exchange rates over the current flexible rate period nominal shocks are required to have no permanent effect on the level of the real exchange rate given this identification scheme the author analyzes the dynamic effects and relative importance of real and nominal shocks with regards to exchange rates the findings indicate that real shocks dominate nominal shocks for both exchange rate series over short and long frequencies copyright 1992 by mit press

public expenditure under uncertainty the net benefit criteria public expenditure under uncertainty is modeled as the problem of determining the quantities of l public goods and m private goods to be provided to n consumers when the private goods are claims to a single commodity dollars which are contingent upon the occurrence of one of m possible states of nature a real valued net benefit function is identified and criteria based upon this function are provided that are both necessary and sufficient for pareto improving or pareto efficient solutions to this problem copyright 1992 by american economic association

contracting for health services when patient demand does not reflect quality this paper analyses contracts to keep down costs while maintaining quality of health services when patient demand does not reflect quality there is then a natural role for forms of contract that have emerged during the reforms of the nhs in britain that differ from pure fixed price or cost reimbursement contracts the optimal form depends on whether the provider is entirely self interested or benevolent in having genuine concern for patient welfare with fully benevolent providers there are roles for block and cost and volume contracts with partially benevolent providers some degree of cost sharing is typically optimal

the loanable funds theory and the dynamics of exchange rates the mundell model revisited abstract this paper shows that mundell s model of perfect capital mobility is logically consistent only in the framework of the loanable funds theory it then develops a loanable funds version of the mundell model and shows that exchange rate overshooting or undershooting naturally occurs in this corrected version of the mundell model

public insurance and child hospitalizations access and efficiency effects abstract the 1983 1996 period saw enormous expansions in access to public health insurance for low income children we explore the impact of these expansions on child hospitalizations while greater access to inpatient care may increase hospital utilization improved efficiency of care for children who are also newly eligible for primary care could lower hospitalization rates we use a large sample of child discharges from the national hospital discharge survey nhds to assess the net impact of medicaid expansions on hospitalizations during this period we find that total hospitalizations increased significantly with each 10 percentage point rise in eligibility leading to an 8 4 increase in hospitalizations thus the access effect strongly outweighs any efficiency effect produced by expanded coverage however we find some support for an efficiency effect the increase in hospitalizations for unavoidable conditions is much larger than that for avoidable conditions that are most sensitive to outpatient care indeed the increase in avoidable hospitalizations is less than half that of unavoidable hospitalizations and it is not statistically significant we also find that expanded medicaid eligibility reduced the average length of stay but increased the utilization of inpatient procedures so that the net impact on total costs per stay is ambiguous

ambiguity aversion and incompleteness of contractual form subjective uncertainty is characterized by ambiguity if the decision maker has an imprecise knowledge of the probabilities of payoff relevant events in such an instance the decision maker s beliefs are better represented by a set of probability functions than by a unique probability function an ambiguity averse decision maker adjusts his choice on the side of caution in response to his imprecise knowledge of the odds the non additive expected utility model allows a formal characterization of such behaviour using this model this paper shows that ambiguity aversion can explain the existence of incomplete contracts the setting for the demonstration is the investment hold up model which has been the focus of much of the recent research on the implications of incomplete contracts

anomalies foreign exchange most all behavior can be explained by assuming that agents have stable well defined preferences and make rational choices consistent with those preferences in markets that eventually clear an empirical result qualifies as an anomaly if it is difficult to rationalize or if implausible assumptions are necessary to explain it within the paradigm this column will present a series of such anomalies readers are invited to suggest topics for future columns by sending a note with some reference to or better yet copies of the relevant research comments on anomalies printed here are also welcome the address

parental and social valuations of child health information abstract we construct an endogenous risk model of the influence of more precise hazard information on the parental demand for child health a 256 observation data set is used to estimate the marginal value to parents and to society of risk information about the future consequences of children s body lead burdens our results indicate that the social value of risk information greatly exceeds the cost of providing it and that parents will purchase too little of this information

self insurance self protection and the theory of the competitive firm several writers including magnusson 6 feldstein 5 batra 3 and ratti and ullah 9 have introduced production uncertainty into the theory of the firm by including a random variable in the firm s production function since a more favorable state of nature increases both output and the marginal product of the firm s controllable inputs in most of these analyses the random variable can be interpreted as a productive input which is complementary to the inputs chosen by the firm alternatively in this paper we view the production process as random because the firm is exposed to the possibility of production losses due to the disruptive effects of accidents the firm may then be able to undertake expenditure on resources which reduce the expected loss due to accident an increase in such expenditure will plausibly lead to a decrease in the variability of output a possibility which is precluded in most of the previous models of stochastic production this paper develops two models of the competitive firm under production uncertainty where resources can be devoted to loss reduction in the first model the firm can devote expenditure to care which reduces the magnitude of the loss without affecting the probability that a loss occurs self insurance for example the firm can reduce the severity of the loss due to fire by installation of a firm alarm system in the second model expenditure on care reduces the probability that a loss occurs without affecting the magnitude of the loss self protection for example the firm can lower the probability of fire by taking care to reduce sources of possible ignition for both models we examine the impact of increases in the degree of risk aversion and the probability of loss the distinction between self insurance and self protection is due to ehrlich and becker 4 who examined the demands for self insurance and self protection by the household when market insurance is available 2 in our model of the competitive firm market insurance is not available as is common for many production risks and we concentrate on the relationship between a traditional productive input and self insurance

parental altruism and child lead exposure inferences from the demand for chelation therapy we use parents decisions to treat their children s body burdens of lead to infer parental ex ante willingness to pay for reduced burdens willingness to pay is estimated with a data set containing 256 observations the data were originally gathered to assess the impact of children s body lead burdens upon their intellectual and behavioral development our results indicate that parental ex ante willingness to pay for a 1 percent reduction in child body lead burden exceeds the estimated ex post savings in medical treatment and compensatory education costs caused by the same reduction

a note on parental and child risk valuation the paper develops a model that allows the estimation of parent s valuation of own and child health in an endogenous risk framework where parents can employ multiple activities to protect themselves and their children from a health risk these risk reducing activities may differ in their effectiveness and their intensity of use we suggest how to estimate the parent s ex ante marginal willingness to pay for a reduction in the ambient level of health risk unencumbered by expected utility terms

towards a loanable funds amended liquidity preference theory of the exchange rate and interest rate abstract the objective is to develop a unified theory of the exchange rate and interest rate using a loanable funds amended liquidity preference approach in order to provide a new perspective on many puzzling facts associated with the post bretton woods international economy it is shown that i a monetary expansion can initially raise the interest rate but depreciate the home currency ii real demand shocks can cause interest rate and exchange rate overshooting iii an infinite interest elasticity for capital flows cannot cause exchange rate overshooting if an extended marshall lerner condition holds iv the home currency can appreciate when the current account is negative if the extended marshall lerner condition is not satisfied and v changes in the disequilibrium regime will cause instability in the estimates of reduced form coefficients

optimal health insurance and provider payment the authors derive optimal insurance for patients and payment method for physicians when neither the input decided by the patient quantity of treatment nor the input decided by the physician effort are contractible the equilibrium in this third best regime may sometimes be second best in which both the physician input and the report of treatment are verifiable otherwise truthful reporting forces a third best characterized by provider prospective payment and suboptimal effort while consumers demand becomes excessive the authors also analyze how professional ethics alters the equilibrium finally collusive reporting mechanisms imply more stringent constraints while competition among physicians relaxes them copyright 1997 by american economic association

trade flow lags monetary and fiscal policy and exchange rate overshooting abstract in this paper model a is constructed that combines trade slow lags with the model in the appendix to dornbusch s seminal paper on exchange rate dynamics here output is free to vary and inflation is determined by a simple phillips curve mechanism it turns out that because of the trade slow lags monetary expansion causes interest rates to decline but the exchange rate need not oveshoot as one would expect whereas fiscal policy always produces overshooting it follows that monetary policy may be a less important source of exchange rate variability than is commonly believed and fiscal policy more important

distance to hospital and children s use of preventive care is being closer better and for whom i introduction this article examines the effect of distance to hospital on the utilization of preventive care among children many poor children lacking alternative providers rely on hospitals and clinics for preventive care moreover in many poor neighborhoods the majority of private doctors offices are located in buildings adjacent to a hospital thus hospitals indirectly serve to attract physician services that would otherwise be lacking in the neighborhood this pattern of service provision raises several concerns first it is inefficient for children to be receiving preventive care directly from hospitals because preventive care can be delivered more cheaply in doctors offices and doctors offices also provide greater continuity of care an index of quality second even when children are receiving care in a doctor s office adjacent to a hospital continuation of that service may be jeopardized if the hospital were to close in this study we use distance to hospital as a proxy for access to medical services to examine the effect of distance to hospital on the use of preventive care services if the use of these services falls with distance other things being equal then we interpret this as evidence of lack of access to alternative providers most previous studies of the effects of distance have concentrated on specific geographical areas and or hospitalizations for specific procedures we are therefore unaware of any previous studies that have focused on the effects of distance on the utilization of preventive care among children 1 we use a national sample of children created by matching records from the national longitudinal survey of youth s child mother nlscm file with the american hospital association s 1990 hospital survey we allow the effects of distance to vary with race ethnicity insurance status and degree of urbanicity we control for other factors that might affect utilization of preventive care by including a rich set of control variables and by estimating models that include either city dummy variables or mother fixed effects in particular city dummies control for unobserved differences across cities in public transportation services and population density mother fixed effects control for unobserved differences in preferences for preventive health care robust estimates across models allow us to rule out these alternative explanations for why distance to hospital might affect different groups differentially these innovations address the important question of whether children who rely on hospitals for preventive ca re do so because they lack access to other providers we find that distance to hospital has significant effects on access to preventive care only among central city black children for these children each additional mile from the hospital is associated with a 3 decline in the probability of having had a checkup from a mean baseline of 74 this effect is comparable to the 3 increase in the probability of having a checkup which is associated with having private health insurance coverage rather than being uninsured a striking result is that among these children the size of the distance effect is similar for both the privately insured and those with medicaid suggesting that even black urban children with private health insurance have difficulty obtaining access to preventive care outside the area around hospitals thus for this group questions of access to providers may be as important as insurance coverage in predicting use of preventive care ii children who rely on hospitals for primary care prior research suggests that children who are members of minorities uninsured covered by medicaid or residing in rural areas are all more likely to rely on hospitals for preventive care this section discusses each of these groups in turn bloom 1990 demonstrates that nationally black children are twice as likely as white children to receive care in an institutional setting such as a clinic or emergency room and that they are more likely to be attended by residents than by staff physicians

evaluating the employment impact of a mandatory job search program this paper exploits area based piloting and age related eligibility rules to identify treatment effects of a labor market program the new deal for young people in the u k a central focus is on substitution displacement effects and on equilibrium wage effects the program includes extensive job assistance and wage subsidies to employers we find that the impact of the program significantly raised transitions to employment by about 5 percentage points the impact is robust to a wide variety of nonexperimental estimators however we present some evidence that this effect may not be as large in the longer run jel j18 j23 j38

monotone comparative statics under uncertainty this paper analyzes monotone comparative statics predictions in several classes of stochastic optimization problems the main results characterize necessary and sufficient conditions for comparative statics predictions to hold based on properties of primitive functions that is utility functions and probability distributions the results apply when the primitives satisfy one of the following two properties i a single crossing property which arises in applications such as portfolio investment problems and auctions or ii log supermodularity which arises in the analysis of demand functions affiliated random variables stochastic orders and orders over risk aversion

the buffer stock notion in monetary economics not the least of harry johnson s contributions to our discipline was the series of survey papers on aspects of monetary economics which he produced during the 1960s and 1970s it is no exaggeration to say that the way in which the literature of monetary economics is organised even now follows the design which johnson first set out in 1962 and built on in the subsequent decade nevertheless the subject has not stood still and one of the more interesting developments of the last few years has involved the introduction of what has been variously described as the disequilibrium money shock absorber or as i prefer to call it the buffer stock notion into monetary economics the development of this line of thought was getting underway before johnson s untimely death much of it indeed under the auspices of his own research programme at the lse even so this did not happen early enough for the relevant ideas to be put in their proper niche by johnson himself and the buffer stock approach is not yet fully integrated into the mainstream of monetary economics much of the relevant literature is empirical concerned with modelling particular aspects of the monetary experience of specific countries hence it is fragmented and contains few papers which attempt a coherent account of just what this approach is and how it relates to other approaches to monetary analysis although essays by goodhart 1982a b and judd and scadding 1982a contain important discussions of these issues to the best of my knowledge only jonson 1976a and knoester 1979a have devoted entire papers solely to this central issue and these are relatively inaccessible and hence less widely known than they deserve to be in this lecture i shall attempt to give a brief account of the essentials of this approach first i shall sketch out its microeconomic background and then i shall discuss those theoretical characteristics which differentiate it from the neo austrian analysis of robert e lucas jr and his associates as well as from the conventional keynesian approach to monetary economics last but by no means least i shall argue that it yields simple theoretical insights into important empirical and policy related issues which are troublesome for alternative approaches in short my tribute to harry