the role of real and monetary shocks in explaining business cycle fluctuations the essay brings empirical evidence to bear on the ability of real and monetary shocks to explain busines cycles using vector autoregressive techniques it is found that both real and monetary shoc

putting free riding to work a partnership solution to the common property problem the common property problem results in excessive mining hunting and extraction of oil and water the same phenomenon is also responsible for excessive investment in r d and excessive outlays in rent seeking contests we propose a partnership solution to eliminate or at least mitigate these excesses each of n players joins a partnership in the first stage and chooses his effort in the second stage under the rules of a partnership each member must pay his own cost of effort but receives an equal share of the partnership s revenue the incentive to free ride created by such partnerships turns out to be beneficial since it naturally offsets the excessive effort inherent in such problems in our two stage game this institutional arrangement can under specified circumstances induce the social optimum in a subgame perfect equilibrium no one has a unilateral incentive 1 to switch to another partnership or create a new partnership in the first stage or 2 to deviate from socially optimal actions in the second stage the game may have other subgame perfect equilibria but the one associated with the partnership solution is strictly preferred by every player we also propose a modification of the first stage which generates a unique subgame perfect equilibrium antitrust authorities should recognize that partnerships can have a less benign use by organizing as competing partnerships an industry can reduce the excessive output of cournot oligopoly to the monopoly level since no partner has any incentive to overproduce in the current period there is no need to deter cheating with threats of future punishments

sectoral shocks and aggregate fluctuations abstract this paper presents a multisector dynamic general equilibrium model of business cycles with a distinctive feature aggregate fluctuations are driven by independent sectoral shocks the model hypothesizes that trade among sectors provides a strong synchronization mechanism for these shocks due to the limited but locally intense interaction that is characteristic of such input trade flows limited interaction characterized by a sparse intermediate input use matrix reduces substitution possibilities among intermediate inputs which strengthens comovement in sectoral value added and leads to a postponement of the law of large numbers in the variance of aggregate value added the chief virtue of this model is that reliance on implausible aggregate shocks is not necessary to capture the qualitative features of macroeconomic fluctuations building on horvath 1998 review of economic dynamics 1 781 808 which establishes the theoretical foundation for the relevance of limited interaction in the context of a stylized multisector model this paper specifies a more general multisector model calibrated to the us 2 digit standard industrial code economy simulations prove the model is able to match empirical reality as closely as standard one sector business cycle models without relying on aggregate shocks

the strategic equivalence of rent seeking innovation and patent race games abstract we establish the strategic equivalence of a variety of rent seeking contests innovation tournaments and patent race games the results allow us to disentangle negative and positive externalities and to apply theorems and results intended for rent seeking games to other games and vice versa we conclude with several examples that highlight the practical utility of our results

nominal and real wage cyclicality during the interwar period although there have been numerous attempts to study the cyclicality of real wages in the u s no consensus has formed as to the implications of the various findings for business cycle theory this paper will demonstrate that separating the real wage into its nominal and price level components can shed new light on the interwar u s labor market more specifically we will show that an evolution from a relatively laissez faire labor market during the 1920s to a more highly regulated labor market during the 1930s may have resulted in a more countercyclical real wage rate if we could be certain that equilibrium business cycle models provided the correct specification of the labor market then interpretation of real wage cyclicality would be relatively straightforward during periods dominated by labor demand shocks real wages would move procyclically and during periods dominated by labor supply shocks real wages would move countercyclically in a disequilibrium model context however interpretation of real wage cyclicality is much more problematic if nominal wages are sticky then unanticipated price level changes can induce countercyclical real wage movements that mimic the real wage movements generated by shifts in the supply of labor perhaps the most famous and controversial example occurred during the first three years of the great depression when a massive decline in hours worked and production was associated with a sharp increase in the aggregate real wage rate see figure 1 even greater complexity results from governmental attempts to influence the aggregate nominal wage policies that attempt to artificially change the nominal wage rate can result in either procyclical or countercyclical real wages depending on whether the direct impact of changes in the price of labor on the quantity of labor demanded outweighs the impact of wage changes on aggregate demand and output separating the aggregate real wage rate into its nominal and price level components will allow us to discriminate between these two hypotheses if labor markets are correctly characterized by equilibrium models then the price level and real wage are determined independently and separating the real wage into its nominal and price

on the role of money in real business cycle models within the equilibrium explanation of busines cycles there are two major classes of models real business cycle models emphasize real factors such as technological changes in determining economic fluctuation while monetary business cycle models advocate the role of money in generating business cycles recent theoretical efforts have atempted to provide a reconcilation by allowing technology to be endogenous in an empirical model that accounts for endogenous technology technological changes are statistically significant in determining fluctuations in real activity in contrast monetary surprises do not induce significant effects that determine the growth of real industrial output nonetheless anticipated technological advances are endogenous with respect to anticipated changes in the money supply this endogeneity provide the sole channel through which the effects of monetary policy can be transmitted to real activity that is anticipated policy changes have long lasting effects that determine the

comment on endogenous objectives and the evaluation of targeting rules for monetary policy 1 four mccallum principles itis bothanprivilege andapleasureformetoparticipateinthisconferenceinhonorofbennettt mccallum henceforthbtm thus beforeproceedingtomakespeci c comments regarding carl walsh s elegant paper on endogenous objectivesand targeting rules i would like to begin by providing some context in light ofbtm snumerouscontributionstotheanalysisofmonetarypolicy forthispurpose itishelpfultohighlightfourbasicprinciplesofeffectivemonetarypolicythatbtmhas consistently emphasized over the past several decades given the logicalcoherencyandintuitiveappealofhisworkonthissubject itisonlynaturaltorefertothesefourpointsasthe mccallumprinciples the rstmccallumprincipleisthatmonetarypolicymatters thatis theconductof monetary policy can have important consequences for social welfare btmanalyzedthetheoreticalandempiricalunderpinningsofthisprincipleinaseriesof

on real and sticky price theories of the business cycle after presenting some facts about the growth of government in western industrialized countries possible causes of this development are analyzed from a public choice perspective next some empirically tested theories which seek to explain this growth are discussed finally possible consequences for efficiency and individual liberty are examined it is shown that both the number and size of interest groups age of democracy as stated by mancur olson 1982 and the increasing share of government expenditure in gdp seem to exert a negative influence on the growth rate of gdp copyright 1986 by ohio state university press

on the absence of positive wage indexation this paper rationalizes the absence of positive wage indexation in labour contracts that is of indexing provisions that link wage increases to inflation we investigate the equilibrium of a policy game in a stochastic economy in which wage setters and a policy maker interact strategically in order to determine the preferred degree of wage indexation and an optimal stabilization rule respectively our conclusion is that nominal wage rigidity and counterinflationary economic policy represent the best courses of action when price stability is valued and negative responses of contractual wages to price shocks are ruled out under these assumptions moreover the stochastic structure of the economy has no bearing on the optimality of maximal real wage flexibility this paper presents an argument for explaining nominal wage rigidity in labour contracts we investigate the equilibrium of a policy game in a stochastic economy in which wage setters and a policy maker interact strategically in order to determine the preferred degree of wage indexation and an optimal intervention rule respectively our conclusion is that indexing provisions that maximize the flexibility of real wages and counter inflationary economic policy represent the best courses of action for the players in the absence of schemes that create a negative correlation between wage and price movements maximal real wage flexibility is attainable through zero indexation or rigid nominal wages the crucial assumption that drives this result is that some price stability is desirable for the policy maker the introduction of price stability as a goal seems eminently justified from a practical standpoint the federal reserve system s legislative mandate from the federal reserve reform act of 1977 the ongoing debate about the house joint resolution 409 and the delors report which speaks of an unequivocal commitment to maintain price stability as the primary objective of the european system of central banks

democracy and national economic performance the preference for stability appear to arise because democracies ameliorate the effects of social cleavages another mechanism that might explain democratic stability when growth and volatility are jointly examined democracies reveal highly favorable economic results oes democracy affect national economic performance and if so how no question is more central to the study of political economics almost all previous work on democracy and economic performance has focused exclusively on growth rates with contradictory and confusing results in this article we argue that to reveal the impact of democratic institutions on economic performance scholars must consider two dimensions of economic performance growth rate and volatility we begin with a novel hypothesis economic policy in democracy is risk avoiding relative to policy in nondemocracies 1 because voters are riskaverse they penalize incumbent governments for economic volatility and democratic governments respond accordingly in nondemocracies we posit that elites are more likely to seek risk that voters would reject consequently autocracies produce systematically more economic volatility than

integration of inventory and pricing decisions with costly price adjustments motivated by the widespread adoption of dynamic pricing in industry and the empirical evidence of costly price adjustments in this paper we consider a periodic review inventory model with price adjustment costs that consist of both fixed and variable components in each period demand is stochastic and price dependent the firm needs to coordinate the pricing and inventory replenishment decisions in each period to maximize its total discounted profit over a finite planning horizon we develop the general model and characterize the optimal policies for two special scenarios namely a model with inventory carryover and no fixed price change costs and a model with fixed price change costs and no inventory carryover finally we propose an intuitive heuristic policy to tackle the general system whose optimal policy is expected to be very complicated our numerical studies show that this heuristic policy performs well

policy effectiveness in an open multi market economy with risk neutral exchange rate speculation abstract in an open multi market equilibrium model of the business cycle the informational role of a forward exchange market is that the forward rate aggregates individual perceptions of the aggregate state of the economy in the case of risk neutral exchange rate speculation the forward rate perfectly reveals average expectations of current nominal shocks that hit the economy this paper analyzes the informational implications of forward speculation when markets are structurally diverse the two types of structural diversity considered are heterogeneous price elasticities of output demand and supply and asymmetric information between traders in output markets and traders in asset markets in contrast to previous results the paper shows that risk neutral speculation is not in general sufficient to generate a fully revealing rational expectations equilibrium in which monetary policy is ineffective

real wages employment and the phillips curve a recent study by bils found real wages to be procyclical contradicting previous findings by geary and kennan who found no consistent relationship and neftci who found countercyclical movements in real wages these studies differed in both methodology and sample period in this study we found that real wages were either procyclical or countercyclical depending on the sample period chosen employment changes generated by aggregate supply shocks were associated with procyclical real wage movements while during years dominated by shifts in aggregate demand real wages were highly countercyclical

business cycle models with endogenous technology this paper compares real and monetary business cycle models with and without endogenous technical change if technology is endogenous the properties of these models change significantly in particular both real and monetary models yield very similar output processes if growth is endogenous and changes in aggregate demand can result in permanent changes in productivity employment and output the effect of depreciation of technology is examined and the pattern of real wage movements over the cycle when money wages are fixed but technology is changing is briefly considered copyright 1990 by american economic association

sticky prices as coordination failure this paper links the coordination failure and menu cost approaches to the microeconomic foundations of keynesian macroeconomics if a firm s desired price is increasing in others prices then the gain from price adjustment after a nominal shock is greater if others adjust this strategic complementarity leads to multiple equilibria in the degree of rigidity welfare may be much higher in the equilibria with less rigidity thus nominal rigidity arises from a failure to coordinate price changes jel e12 e30 keynesian macroeconomics waned in the 1970 s because economists grew disenchanted with its weak microeconomic foundations the central difficulty was that keynesian models were based on ad hoc rigidities in nominal wages and prices the 1980 s produced two approaches to reviving keynesian theory the menu cost literature n gregory mankiw 1985 george akerlof and janet yellen 1985 seeks to provide rigorous explanations for nominal rigidities these papers argue that small frictions in price setting are enough to produce large nominal rigidities in contrast the coordination failure literature russell cooper and andrew john 1988 abandons nominal rigidities and seeks alternative foundations for keynesian models the central idea is that many economic activities such as production e g john bryant 1983 trade e g peter diamond 1982 and investment e g nobuhiro kiyotaki 1988 exhibit synergism or strategic complementarity one agent s optimal level of activity depends positively on others activity strategic complementarity can lead to multiple equilibria with high activity equilibria superior to low activity equilibria thus an economy may be stuck in an underemployment equilibrium even though a superior equilibrium exists models with nominal rigidities and models with coordination failures are often presented as competing paradigms 1 this paper shows that this view is incorrect we take a step toward unifying the foundations of keynesian economics by showing that the two sets of ideas are highly complementary nominal rigidity arises from a failure to coordinate price changes this failure has the essential features of coordination failures in previous models flexibility in one firm s price increases the incentives for other firms to make their prices flexible this strategic complementarity leads to multiple equilibria in the degree of nominal rigidity equilibria with less rigidity more active price adjustment are often pareto superior to equilibria with more rigidity these results contribute to our understanding both of coordination failure and of nominal rigidity the range of keynesian phenomena explained by coordination failures is greatly expanded previous coordination failure models contain only real variables and thus ascribe no role to monetary policy or other determinants of nominal spending our results suggest that coordination failure is at the root of inefficient nonneutralities of money theories of nominal rigidities gain new empirical and policy im

monetary variability and real output abstract utilizing engel s econometrica 1982 50 987 1008 autoregressive conditional heteroskedasticity arch model to consistently parameterize the conditional variance of money growth i find an inverse relationship between monetary variability and real output this provides some additional evidence in favor of friedman s journal of political economy 1977 85 451 472 famous conjecture

tightening environmental standards the benefit cost or the no cost paradigm ms ff ichael porter and claas van der linde have written a paper that is interesting and to us at least somewhat astonishing it is a defense of environmental regulation indeed an invitation to more stringent regulation that makes essentially no reference to the social benefits of such regulation this approach contrasts starkly with the methods that economists and other policy analysts have traditionally used when assessing environmental or other regulatory programs the traditional approach consists of comparing the beneficial effects of regulation with the costs that must be borne to secure these benefits for environmental regulation the social benefits include the reductions in morbidity or premature mortality that can accompany cleaner air the enhanced recreational opportunities that can result from water quality improvements the increased land values that might attend the cleanup of a hazardous waste site the enhanced vitality of aquatic ecosystems that might follow reductions in agricultural pesticide use or any of the other potentially significant benefits associated with tighter standards from this benefit cost approach emerges the standard tradeoff discussed in virtually every economics textbook porter and van der linde deny the validity of this approach to the analysis of environmental regulation claiming it to be an artifact of what they see as a static mindset in their view economists have failed to appreciate the capacity of

rent seeking contest when the prize increases with aggregate efforts the objective of this article is to investigate contests in which efforts are productive tullock s standard rent seeking model is extended by making the rent itself increase with the aggregate efforts a positive externality is thereby introduced into the contest because a contender s private effort in quest of the rent generates a benefit for other contenders coupled with a negative externality presented in the standard rent seeking model the net effect on the social efficiency of the contest is a priori ambiguous it is shown that the extended contest generates socially wasteful excessive aggregate efforts

toward a new conception of the environment competitiveness relationship accepting a fixed trade off between environmental regulation and competitiveness unnecessarily raises costs and slows down environmental progress studies finding high environmental compliance costs have traditionally focused on static cost impacts ignoring any offsetting productivity benefits from innovation they typically overestimated compliance costs neglected innovation offsets and disregarded the affected industry s initial competitiveness rather than simply adding to cost properly crafted environmental standards can trigger innovation offsets allowing companies to improve their resource productivity shifting the debate from pollution control to pollution prevention was a step forward it is now necessary to make the next step and focus on resource productivity

the importance of monetary shocks evidence from pre federal reserve data abstract monetary innovations explain more of output fluctuations than interest rates do in a variance decomposition using pre federal reserve data this is consistent with mccallum s economics letters 1983 13 167 conjecture that the relative importance of interest rates in postwar data results from the federal reserve targeting interest rates

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

the relevance of unanticipated money growth in explaining output variation this paper tests a reduced form equation in which real gnp for the united states is explained by deviations of multi period m1 growth rates from ex ante expectations of those rates formed from one to eight quarters earlier the theoretical model is suggested by stanley fischer s 1977 article and may be thought of as a new keynesian model the equations are tested in both level and first difference specifications to allow for possible unit roots empirical results strongly support this model in preference to new classical and keynesian alternatives ex ante expectations or m1 growth are formed from multi period forecasts made by chase econometrics inc between 1970 and 1979

capital allocative disturbances and economic fluctuations permanent sector specific productivity shocks alter the relative marginal products of capital and labor across sectors such that the existing factor allocations are suboptimal the subsequent factor reallocations may involve the costly movement and redeployment of capital and labor across sectors to proxy the magnitude of these disturbances this paper focuses on capital rather than labor allocative disturbances since firms can make temporary adjustments in employment levels in response to transitory sectoral shocks empirical evidence is provided that these costs reduce output from what it otherwise would have been and that this effect persists for up to three quarters copyright 1993 by mit press

sticky prices new evidence from retail catalogs this paper presents new results on the size frequency and synchronization of price changes for twelve selected retail goods over the past 35 years three basic facts about the data are uncovered first nominal prices are typically fixed for more than one year although the time between changes is very irregular second prices change more often during periods of high overall inflation third when prices do change the sizes of the changes are widely dispersed both large and small changes occur for the same item and the sizes of these changes do not closely depend on overall inflation

the relative adjustment of wages and prices direct tests within a multiple equation system in order to assess the relative rigidity of the aggregate price level and the nominal wage rate most researchers have focused on the implied behaviour of the real wage rate in response to a purely demand disturbance the present work examines the explicit behaviour of the two variables and is therefore able to analyse the variables short run responses within the context of their defined long run behaviour while the paper reports evidence of long run stability in the real wage rate additional evidence is presented which supports both sticky price and sticky wage models the determining factor is the choice of lag

a neoclassical model of unemployment and the business cycle this paper investigates a general equilibrium model of unemployment and the business cycle in which specialization of labor plays a key role a rational expectations equilibrium with fully flexible wages and prices can exhibit unemployment in which the marginal product of employed workers exceeds the reservation wage of those who are without jobs workers are unemployed either because they are in the process of relocating for a better job or because they are waiting for conditions in the depressed sector to improve moreover seemingly small disruptions in the supplies of primary commodities such as energy could be the source of fluctuations in aggregate employment and can exert surprisingly large effects on real output

model evaluation based on residual analysis of two similar models models that may appear to have different properties may in fact produce residuals that differ only in subtle ways by analysing the relationships between model residuals the problems in distinguishing between models can perhaps be discovered as illustrated by the econometric examples considered regressing residuals gives the long memory residual which is the difference between two models but this difference is very subtle and deeply hidden which explains why the traditional standard technique does not find this difference

tests of the relation between money and output in the real business cycle model abstract the paper contains tests of the relation between money and output implied by a real business cycle model the tests control for a variety that may affect economic growth and the growth rates of monetary aggregates using u s data from 1953 1 1984 4 we find almost no evidence that the empirical relations between real growth and measures of monetary policy violate the restrictions imposed by the model changes in a set of real variables explain a majority of the variation in gnp growth however substantial variation in gnp growth remains unexplained by the real factors that we consider

on interest rate innovations and anticipated monetary policy abstract in this note i investigate whether anticipated money matters by following mccallum s 1983 suggestion that nominal interest rates be included in a var system estimated on data spanned by a policy of interest rate targeting the evidence is in favour of gordon s 1982 natural rate hypothesis gradual price adjustent model of policy ineffectiveness ambler and phaneuf 1988 have shown the results can be interpreted as evidence in favour of contract based models of the business cycle

the structure of a contract and the theory of a non exclusive resource the process of arriving at a useful concept of analysis is not only slow and painful but also may go astray and attain nothing useful someone begins with one example or observation followed by a theory which is intuitively plausible a theoretical term associated with a vague concept is coined examples of a seemingly different type emerge which call for another theory the process goes on as examples and theories continue to accumulate the different categories under the same heading of analysis serve only to confuse and each associated theory becomes ad hoc such has been the fate of the concept of externality a more useful approach i think is via contractual conditions the example chosen for illustration is marine fisheries where the fishing right is taken

keynesian real business cycles in a neoclassical framework abstract simple old fashioned keynesian models of cyclical fluctuations provide a legitimate alternative to neoclassical real business cycle models not only can these models mimic many of the characteristics of actual business cycles the ad hoc behavioral rules on which they are based are vastly simpler and easier to calculate than the often insoluble maximization problems faced by representative agents in neoclassical models in addition these simple rules often imply a negligible loss of utility compared to that achieved when decision rules are derived as solutions to an intertemporal optimization problem as a result even though keynesian models are apparently based on suboptimal behavior by individual agents one cannot assume that these models are dominated by neoclassical alternatives

the new keynesian synthesis the new keynesians made more rapid progress in understanding the microeconomics of unemployment than in understanding the microeconomics of nominal price rigidity but the past five years have seen important breakthroughs in this second area this paper will describe these breakthroughs discuss our current understanding of nominal rigidity and assess the work that remains to be done

a political model of monetary policy with application to the real fed funds rate abstract we construct an empirical model of u s monetary policy assuming that the federal reserve is an ordinary federal bureaucracy we use the real federal funds rate as our policy measure and show the existence of significant executive legislative and bureaucratic influence on the real rate of interest from 1961 to 1996 we find that presidential party is an adequate statistical measure of executive influence and that the voting scores of the senate banking committee leadership best represent legislative influence we argue that political changes cause systematic and predictable changes in monetary policy

do real business cycle models really exhibit business cycle behavior abstract previous research indicates that real business cycle models are capable of reproducing important features of u s business cycle behavior here i employ classical methods of business cycle analysis to determine how well the cyclical properties of simulated data from a representative real business cycle model match up with postwar u s business cycle characteristics while the simulated model reproduces qualitative features consistent with observed business cycle experience quantitative goodness of fit tests show that for many sectors of the economy the cyclical characteristics of the simulated data deviate significantly from u s business cycle experience

agreeing on efficient emissions reduction we propose a simple contest based mechanism providing incentives to reduce harmful emissions to their efficient level without infringing upon productive efficiency participation in the most stylized form of the scheme is voluntary and individually rational all rules are mutually agreeable and are unanimously adopted if proposed the scheme balances its budget and requires no principal in a perhaps more realistic stochastic output version which could potentially inform policy decisions we show that the transfers required by the efficient mechanism create a mutual insurance motive that can serve as an effective rationale for the gradual formation of international environmental agreements

interest rate innovations and the business cycle abstract recent evidence from vector autoregressions points towards the importance of interest rate innovations in explaining output variations we show that this evidence supports an interpretation of business cycles based on nominal contractual rigidities rather than cotinuous market clearing

a free lunch in the commons we derive conditions under which raising costs through a regulatory constraint or a fully expropriated tax can increase the profits arising from a common pool resource the basic model assumes a fixed number of identical agents with linear costs selling in a single period at an exogenous price a necessary and sufficient condition for a cost increase to be profitable is that aggregate output from the resource be locally convex in aggregate effort we also show that cost increases can be profitable even if price is endogenous agents are heterogeneous entry is costless or agents are playing a markov perfect equilibrium of a dynamic game we also discuss more general welfare implications of the result along with its relation to existing results for a cournot oligopoly

the source of fluctuations in money evidence from trade credit abstract this paper tests the relative importance of technology shocks and financial shocks as sources of fluctuations in money the model extends the theory of king and plosser 1984 by recognizing that both money and trade credit provide transactions services under certain conditions the co movements between money and trade credit can reveal the nature of the underlying shocks the empirical results strongly suggest that shocks to the financial system account for most of the fluctuations in money in the long run and at business cycle frequencies on the other hand technology shocks appear to be more important at seasonal frequencies

cooperation in the commons with unobservable actions we model a dynamic common property resource game with unobservable actions and non linear stock dependent costs we propose a strategy profile that generates a worst perfect equilibrium in the punishment phase thereby supporting cooperation under the widest set of conditions we show under what set of parameter values for the discount rate resource growth rate harvest price and the number of resource users this strategy supports cooperation in the commons as a subgame perfect equilibrium the strategy profile that we propose which involves harsh punishment after a defection followed by forgiveness is consistent with human behavior observed in experiments and common property resource case studies

do government policy multipliers decrease with inflation abstract we use cross country data to examine the effects of inflation on government spending and monetary policy multipliers in contrast to earlier work by ball mankiw and romer 1988 and defina 1991 we allow for differential impacts of both the monetary base and government spending and this difference turns out to be empirically quite important we find little evidence in favor of a new keynesian sticky price model

an empirical disequilibrium model of labor consumption and investment a macroeconomic disequilibrium model of the u s economy is constructed with three markets one each for labor consumption goods and investment goods demand and supply in each market are obtained from underlying microeconomic theory with adjustment costs and possible intermarket spillovers from quantity rationing taken into account indicators of excess demand for each market aid in estimation no evidence is found for walrasian market equilibrium copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

trends random walks and the expectations augmented phillips curve evidence from six countries two major empirical results are reported first it is shown that time series measuring real activity in major industrialized countries contain nonstationarities of the random walk type second it turns out that the estimated influence of unexpected changes in inflation and monetary growth strongly depends on the chosen approach concerning nonstationarity the popular assumption of a deterministic time trend proxying for growth generally yields the hypothesized positive coefficients the influence of nominal surprises however becomes indistinguishable from zero if the respective equations are estimated in stationary differences of real activity variables copyright 1988 by ohio state university press

insiders outsiders and nominal wage contracts while the consequences of nominal wage contracts have been rather thoroughly analyzed there is no generally accepted theory of why such contracts prevail in this paper i argue that the distinction between insiders and outsiders is important for understanding nominal wage contracts since most employment fluctuations take the form of fluctuations in hiring insiders are normally not affected by them since prices are primarily determined by costs demand shocks have small effects on real wages thus insiders have little incentive to change to more complicated contracts with rigid nominal wages nominal demand shocks have large effects on the employment opportunities of outsiders but outsiders have little influence on labor contracts

the relative stickiness of wages and prices i introduction a continuing challenge to macroeconomics is to explain how a purely nominal disturbance produces short term aggregate real effects in the classical paradigm in which wages and prices are perfectly flexible a positive nominal aggregate demand disturbance will cause nominal wages and output prices to rise in the same proportion leaving real wages unchanged thus neither employment nor output will be affected consequently many business cycle theories posit the existence of wage and or price stickiness to explain how nominal aggregate demand disturbances generate real macroeconomic effects according to these theories the failure of nominal wages or prices to fully adjust in the short run to purely nominal disturbances explains why shocks to aggregate demand will cause both employment and output to temporarily deviate from their natural rates the relative importance of wage and price stickiness in the transmission of nominal shocks to the real economy however remains an unsettled issue the purpose of this paper is to exploit evidence on the behavior of real wages in an attempt to assess the relative importance of these two sources of stickiness first consider models emphasizing sticky or slowly adjusting nominal wages 1 if for example output prices are free to adjust but nominal wages are sticky a positive aggregate demand shock will cause prices to rise and real wages to temporarily fall below market clearing levels the fall in real wages will stimulate employment and thus output as the aggregate demand shock induces movement along a stable labor demand curve consequently sticky wage models predict a negative correlation between aggregate demand shocks and real wages if on the other hand wages are flexible while output prices are sticky 2 aggregate demand disturbances and real wages will tend to be positively correlated in the short run in sticky price models imperfectly competitive firms may resist adjusting output prices in response to changes in demand perhaps due to menu costs instead increases in demand are met by corresponding increases in output this requires an increase in labor inputs which in turn requires an increase in the real wage rate if wages are flexible and the labor supply curve is positively sloped thus when prices are sticky but wages are flexible a positive aggregate demand shock is associated with an increase in real wages it may be that neither prices nor wages are fully flexible if prices and wages both exhibit stickiness we would expect real wages to be positively correlated or negatively correlated with aggregate demand shocks depending in large part on whether prices or wages are stickier thus knowledge of the direction of the short run response of real wages to aggregate demand disturbances would offer important evidence on the relative stickiness of nominal wages and output prices if all business cycle fluctuations are due solely to aggregate demand disturbances such evidence could be obtained by examining the cyclical behavior of real wages since regardless of the source of stickiness aggregate demand disturbances are positively correlated with employment and output countercyclical procyclical real wages would indicate that nominal wages are stickier more flexible than output prices indeed some consider the stylized fact of slightly procyclical real wages 3 to be an important challenge to models that emphasize wage stickiness for example bennett mccallum 1986 argues for the superiority of models with sticky output prices since if wage stickiness alone were responsible for the real effects of monetary actions with product prices adjusting flexibly then we should observe countercyclical movements in the real wage that we do not has recently been reconfirmed in a study by bils 1985 gregory mankiw 1987 107 has concluded the final and perhaps most serious problem with the unadorned nominal wage story is that real wages do not move over the business cycle as the theory predicts

when are nash equilibria independent of the distribution of agents characteristics author s bergstrom ted varian hal r abstract we present examples of nash equilibria that do not vary with the distribution of a parameter across agents and then offer a general theorem that characterizes this independence

do small menu costs explain large business cycles abstract the menu cost approach to business cycle theory is amended for the costs of adjusting factor demand this modification drastically reduces the size of the social externality commonly associated with small menu costs the existence of menu or other small adjustment costs is hence not likely to have explanatory power for large scale economic fluctuations

strategic groups and rent dissipation we consider a rent seeking contest in which players can form strategic groups before expending their outlays we examine the profitability of endogenous group formation and the effect of such group formation on rent dissipation we show the following when just one strategic group is formed in equilibrium group formation is beneficial both to the group members and to the nonmembers and rent dissipation is smaller than with usual individual rent seeking however when more than two strategic groups are formed in equilibrium group formation is never profitable to any players and rent dissipation is greater than with individual rent seeking jel