inflation and relative price variability in the euro area evidence from a panel threshold model the impact of inflation on relative price variability rpv generates an important channel for real effects of inflation this article provides first evidence on the empirical relation between inflation and rpv in the euro area stirred by the widespread use of inflation caps or target bands in monetary policy practice we are particularly interested in threshold effects of inflation in line with the predictions of monetary search models our results indicate that expected inflation significantly increases rpv only if inflation is either very low below 0 95 per annum p a or very high above 4 96 p a

informed trading information uncertainty and price momentum in this paper we investigate the effects of informed trading pin and information uncertainty in determining price momentum we find that trading strategies based on buying high uncertainty good news stocks and shorting high uncertainty bad news stocks work well when limited to high pin stocks while stocks with low pin do not exhibit price continuations even when the uncertainty level of those stocks is high in contrast momentum returns are always significant for high pin stocks irrespective of information uncertainty overall we show that the informed trading effect is both independent of and stronger than that of information uncertainty in determining price momentum

inflation regimes core inflation measures and the relationship between producer and consumer price inflation to date an overwhelming majority of the literature has addressed mean relationships between producer and consumer price inflation granger et al 1986 represent the only attempt to investigate second moment relationships we examine the consumer producer price relationship employing a multivariate garch m framework that allows simultaneous estimation of the bivariate system along with providing explicit times series estimates of the variances of consumer and producer price inflation this research also breaks new ground in the use of core and over all inflation variance measures as well as examining state dependent mean and variance relationships we find that mean relationships are generally sensitive to the measure of inflation used food and energy prices play an important role in transmitting changes in aggregate input prices to aggregate output prices when food and energy prices are eliminated from consumer and producer price inflation measures mean relationships break down irrespective of whe

inflation and relative price variability parks study reexamined the authors show that richard w parks 1978 widely cited evidence on the correlation between the rate of inflation and the variability of relative prices in the united states during 1948 75 depends on one observation 1974 when the sample period is extended through 1989 the correlation depends on the observations for 1974 and 1980 since both are years of large oil price shocks the authors make the case that causation is likely to run from these shocks to relative price variability and inflation with accommodating monetary policy playing a role copyright 1993 by ohio state university press

wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

the long run relationship between openness and government size evidence from bounds test the bounds test is applied to determine the existence of a level relationship between government size openness terms of trade volatility and external risk using time series data from australia canada england norway sweden and the usa bounds test results show that the existence of a long run relationship in the usa and canada but not in any of the other countries long run parameters are estimated using both autoregressive distributed lag and fm ols procedures results vary from country to country with some evidence that government size is significantly affected by openness and terms of trade volatility however contrary to argument and evidence developed using cross section data empirical evidence presented in this paper show that the size of the government has not changed to mitigate the effect of increased income risks associated with greater openness

the theory of public goods non nash behaviour abstract most treatments of equilibrium public goods provision assume zero conjectural variations in the sense that each individual regards the behaviour of the rest of the community as independent of his own this paper introduces nonzero conjectural variations into the model a diagram is introduced which can depict both the individual s and the community s equilibrium in the presence of nonzero conjectural variations equilibrium and optimal outcomes are compared and a specific functional form is used to investigate the effect of community size on the nature of equilibrium finally we discuss the requirement that conjectures should be consistent

relative price variability and inflation evidence from us cities we test whether the time series positive correlation of inflation and intermarket relative price variability is also present in a cross section of u s cities we find this correlation to be a robu

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

evidence on the functional relationship between relative price variability and inflation with implications for monetary policy this paper considers the functional relationship between relative price variability rpv and inflation using quarterly personal consumer expenditure data in the us over 1967q1 2003q1 deriving some implications for monetary policy non parametric regression techniques are used to explore the shape of the rpv function and this shape is related to the theory outlined by rotemberg 1982 1983 the empirical rpv function yields a plausible optimal value of inflation in the region of five percentage points which is consistent with this theory and lies within the range of values cited by recent evaluations of sand and grease effects

search sticky prices and inflation this paper examines equilibrium in a deflationary environment in a market with free entry where consumers search and firms set prices on individual units of the commodity prices attached to newly produced goods are continuously adjusted prices attached to previously produced goods can only be changed at a cost deflation cuts into the market power created by the need to search for the good thus consumers welfare is inverse u shaped in deflation

economics of alliances the lessons for collective action this essay provides an up to date summary of the findings of the literature on the economics of alliances we show that the study of the economics of alliances has played a pivotal role in understanding and applying public good analysis to real world applications we establish that the manner in which alliances address burden sharing and allocative issues is related to strategic doctrines weapon technology perceived threats and membership composition past contributions are evaluated and areas needing further development are identified the theoretical and empirical knowledge gained from the study of alliances is shown to be directly applicable to a wide range of international collectives

explaining the worldwide decline in the length of mandatory military service 1970 2010 compulsory military service has declined considerably since 1970 this explained by changes on both the extensive and intensive margins by governments while the decision to use conscription for military purposes has been studied extensively in this paper we examine empirically the factors underlying the decline in the duration of military service obligations employing data from the economic freedom of the world index observed at 5 year intervals from 1970 to 2010 we find that the probability of a shorter military service time is positively associated with smaller country populations smaller lagged army sizes increases in primary schooling among young males and having common law legal origins our empirical approach also highlights how the elderly population exhibits a nonlinear relationship with the length of conscriptees time in uniform

on the granger causality between median inflation and price dispersion the granger causal relationship between the size and dispersion of fluctuations in sub components of the us consumer price index cpi is examined using both in sample and out of sample tests and data from january 1968 to december 2008 strong in sample evidence is found for feedback between median inflation and price dispersion the evidence for granger causation from median inflation to price dispersion remains strong in out of sample testing but is less strong for granger causation in the opposite direction the implications of these results for the variety of price level determination models in the literature are discussed

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

inflation and relative price variability new evidence for the united states this article provides new evidence on the empirical relationship between inflation and relative prices in the united states in line with the predictions of recent monetary search models we find that the impact of expected inflation on relative price variability rpv has disappeared during the recent period when inflation expectations have been stabilized on a low level endogenous break point tests are applied to identify the timing and to confirm the significance of the changing role of inflation for rpv the empirical findings are robust with respect to different price indices disaggregation levels and measurement concepts

a quantile framework for analysing the links between inflation uncertainty and inflation dynamics across countries in contrast to the conventional conditional mean approaches this study uses quantile regression techniques to present some new statistical evidence on the links between inflation uncertainty and the level of inflation with cross sectional data from 90 countries during the period 1961 to 2006 the results suggest that positive inflation shocks have stronger impact on inflation uncertainty which varies across the quantiles furthermore popular time series models are evaluated for their ability to reproduce measures of uncertainty and indicate similar results regarding the relationships between inflation and inflation uncertainty

does inflation targeting matter a reassessment this paper uses a number of identification approaches using instrumental variables assumptions about heteroscedasticity and panel fixed effects to estimate the effect of inflation targeting on inflation generally it finds the effect is small and insignificant

discounting the free ride alliances and security in the postwar world the collective goods theory of alliances and neorealist theory yield conflicting expectations about the security policies of states the former emphasizes the temptation to ride free on the efforts of others while the latter emphasizes the incentives for self help in the cases of britain china and france during the early cold war the constraints identified by neorealist theory reinforced by the advent of nuclear weapons prevailed each discounted the value of the security benefits superpower partners could provide the second ranking powers decisions to shoulder the burden of developing independent nuclear forces are at odds with collective goods arguments that portray especially strong temptations to ride free in the circumstances that prevailed at that time an international system dominated by two superpowers each possessing large nuclear deterrent arsenals that could easily be employed on behalf of allies this analysis suggests that present efforts to discourage additional states from acquiring nuclear weapons by offering them international security guarantees are unlikely to succeed

complementarity free riding and the military expenditures of nato allies abstract this paper examines the major influences of an ally s demand for military expenditures demand equations are estimated for a sample of nato nations using the iterative seemingly unrelated regressions technique evidence is presented indicating that structural changes occured in these equations in the early 1970s this instability is the predicted effect of the doctrine of flexible response adopted by nato during this time period the statistical tests show that the medium sized nuclear powers military expenditures responded identically to income and defense spillins the same held true for the lowland allies

inflation targeting and relative price variability what difference does inflation targeting make author affiliation chi young choi cychoi uta eduyoung se kim acknowledgment the authors are grateful to coeditor kent kimbrough and two anonymous referees for constructive comments that helped to improve this article the authors also wish to thank steve cecchetti kang liu shin ichi nishiyama margie tieslau taka tsuruga and the seminar participants at the academia sinica national chung cheng university national sun yat sen university national taiwan university texas tech university and the university of texas at arlington for helpful comments and vikas kakkar for providing cpi data for hong kong any remaining errors are the authors 1 introductionvariability in relative prices is known to be a major channel through which inflation can induce welfare costs by impeding an efficient allocation of resources in the economy consequently substantial effort has been devoted in the literature to examining the link between relative price variability rpv and aggregate inflation although much of the existing theoretical and empirical literature points to a positive monotonic relationship newer contributions suggest that the relationship between inflation and rpv is more complicated particularly in terms of its sensitivity to the inflation regime 1the primary purpose of this study is to investigate whether the connection between inflation and rpv is influenced in an important way by the monetary policy framework chosen by a central bank specifically this article focuses on exploring whether the adoption of an inflation targeting it framework exerts any significant impact on rpv as measured by the standard deviations of sectoral inflation rates relative to the aggregate rate since it was first implemented in new zealand more than two decades ago the popularity of it has spread with some twenty five countries worldwide implementing the framework to date freedman and laxton 2009 the literature is now replete with studies pointing to reductions in both the level and the volatility of inflation in countries that have adopted it e g mishkin and schmidt hebbel 2007 2 while studies of the impact of it on aggregate inflation performance are plentiful little attention has been paid to the impact of it on rpv the question of whether and indeed how it affects rpv is an important one for several reasons first exploring the potential connection between it and rpv is a worthwhile exercise given the popularity of it as a monetary framework and the centrality of rpv to the current generation of macromodels the importance of rpv is recognized in standard new keynesian dynamic stochastic general equilibrium dsge models where the variance of relative prices is viewed as a useful summary statistic as noted by amano ambler and rebei 2007 for example in dsge models the optimal rate of target inflation and the optimal variability of inflation relative to output depend on the quantitative effects of price dispersion on macroeconomic equilibrium second answering the question helps us identify the driving force behind the change in rpv distinguishing between it adoption itself and its subsequent impact on inflation if the relationship is monotonically positive as is often believed in the literature one should expect that it adoption would bring about a decline in rpv in the same way as it has led to a decline in inflation if the relationship is more complex however the effect of it adoption on reducing rpv may hinge on the change in inflation regimes after it adoption third our answer to the question also sheds additional light on the empirical evidence for the relative effectiveness of it across different stages of development while there is strong evidence that developing countries benefit more from it than industrial countries in combating inflation and its volatility e g petursson 2004 lin and ye 2009 we are aware of no empirical research that has assessed this issue with respect to rpv

predation by public enterprises abstract this paper demonstrates that in addition to the usual niskanen type losses generated by excess production by public firms there is an unrecognized second type of loss in order to sell their excess production public firms have to price their output below the competitive price and thereby cause more efficient firms at the margin to be eliminated the discussion is then extended to include the case where public enterprises finance additional expansions of output by price discriminating against inframarginal customers but then face the threat of competition for these inframarginal customers from new potential entry public enterprises are further shown to provide more credible threats to potential entrants since unlike private firms they value the increased output associated with predation and not merely the higher future benefits produced by it

sectoral variability and the foundations of optimal inflation rate abstractthe recent monetary search models argue that the real effects of inflation on economic activity can be gauged through relative price variability rpv our study uses a large panel data of

military conscription and the socially optimal number of boots on the ground author affiliation peter berck pberck berkeley edujonathan lipow jlipow nps edu acknowledgment the authors would like to thank claude berrebi martin feldstein kenneth kuttner francois melese jay simon ellis tallman john warner and seminar participants at the 2007 assa meetings and the 2008 nber economics of national security winter workshop as well as three anonymous referees for their invaluable comments and corrections all remaining errors are our own 1 introductionmilitary conscription has existed since ancient times and it remains remarkably popular today mulligan and schlieffer 2004 found that 95 of the 164 countries that they examined continue to rely upon conscription to man their armies 1 the continued popularity of conscription however stands in stark contrast to the unpopularity of forced military labor among economists to illustrate this point lee and mckenzie 1992 examined 12 textbooks in basic economics and found that all 12 were in agreement that an all volunteer military force avf was inherently more efficient than resorting to conscription this seemingly wall to wall consensus has its origins in a number of highly influential articles including those of friedman 1967 hansen and weisbord 1967 and oi 1967 summarizing the arguments articulated in these articles first the draft imposes a discriminatory tax on recruits equal to the difference between their market wages and the below market military wage second below market pricing of personnel under the draft leads to a military with too many recruits third the all volunteer approach attracts those recruits with the lower opportunity costs and hence secures a given number of recruits at less cost 2not all of these objections are given equal weight the argument that the all volunteer army is cheaper than the draft because the former is far better at discriminating between low and high opportunity cost recruits lies at the heart of the opposition to the draft amongst economists 3in recent years a number of articles have challenged this perspective the reasoning underpinning these articles is that conscription should not be compared to a volunteer army but rather to the taxes required to finance a volunteer army when viewed that way conscription could be a desirable form of taxation if the deadweight welfare losses associated with conscription are lower than those associated with other taxes 4 prominent among these articles are those of garfinkel 1990 lee and mckenzie 1992 ross 1994 warner and asch 1996 and warner and negrusa 2005 5in this article we extend and develop the ideas featured in the literature on military manpower mobilization cited above in particular we widen the discussion to consider i the optimal size of the military and how that size is influenced by manpower mobilization choices ii mixed systems that combine volunteers and draftees iii initiatives that may reduce the inefficiencies inherent in both avf and conscript based systems and iv how changes in the relationship between the civilian and military marginal product of recruits alter the efficacy of alternative manpower mobilization systems our analysis indicates that an avf will generally tend to be too small when compared to a first best social optimum forces that rely on conscription however will tend to exploit high value civilian manpower for low value military activities just as predicted by friedman 1967 and oi 1967 and ironically they too will generally tend to be too small relative to the first best we also find that under conditions in which recruits civilian and military marginal products are similar the manpower misallocation costs associated with conscription decline and may even disappear our analysis of methods available to reduce the inefficiencies associated with military manpower mobilization indicates that avf militaries would probably lower the social cost of recruitment by offering college benefits to new recruits while conscript based armies would probably lower the social cost of the draft by excusing or deferring the college bound from service

donor funding of multilateral aid agencies determining factors and revealed burden sharing the paper reports an empirical study of the factors affecting burden sharing among oecd s 22 dac members in bankrolling the multilateral aid agencies these are the un agencies world bank s ida and non ida programmes regional development banks european community and other multilateral agencies that include the global environmental facility and the montreal protocol on environment annual data over 1970 2000 pooled across the donor countries form the basis for the empirical estimation of each donor s share in the oda aid receipts for each multilateral agency our findings suggest the existence of reverse exploitation i e the financial burden of the agencies is disproportionally carried by the smaller donors the study also finds that

the theory of collective action and burden sharing in nato mancur olson s theory of collective action could account for much of the variance in the defense burdens of the allied nations of the north atlantic treaty organization nato in the early years of the cold war but the association between economic size gross domestic product or gdp and defense burden the ratio of military expenditures to gdp has declined to insignificant levels two influences are shown to be important in producing this change the increased pursuit of private goods by greece turkey and portugal and the growing cooperation among the other european allies since cooperation in the military realm has not provided the europeans with credible means of self defense it appears to be a consequence of the general growth of interdependence in europe during the postwar period nato is still essentially a uniquely privileged group producing a relatively pure public good accordingly the theory of collective action continues to provide valuable insights into the operation of the alliance

a neglected social cost of a voluntary miilitary it would appear without exception that economists believe that a voluntary military is preferable to conscription it is my purpose to demonstrate that this institutional preference is questionable on purely a priori grounds a potentially important welfare cost may arise under voluntarism from the monopsonistic behavior of the defense establishment2 as a purchaser of enlisted personnel to analyze this possibility it will be necessary to develop a terse and simple model of choice in the market for enlisted personnel and to apply it to the institutions of conscription and voluntarism assume that the process of political exchange is efficient to a degree that the military s demand function for enlisted nmen is a close approximation to the social marginal value schedule of this input further the supply curve of this resource is taken to be an approximation of the value of its social alternatives given the usual assumptions for a specified level of employment a measure of net social benefit can be derived by measuring the area lying between these

credit ratings and stock liquidity we analyze contemporaneous and predictive relations between credit ratings and measures of equity market liquidity and find that common measures of adverse selection which reflect a portion of the uncertainty about future firm value are larger when credit ratings are poorer we also show that future rating changes can be predicted using current levels of adverse selection collectively our results validate widely used microstructure measures of adverse selection and offer new insights into the value of credit ratings and the specific nature of the information they contain copyright 2006 oxford university press

a model of competitive stock trading volume a model of competitive stock trading is developed in which investors are heterogeneous in their information and private investment opportunities and rationally trade for both informational and noninformational motives i examine the link between the nature of heterogeneity among investors and the behavior of trading volume and its relation to price dynamics it is found that volume is positively correlated with absolute changes in prices and dividends i show that informational trading and noninformational trading lead to different dynamic relations between trading volume and stock returns

international regimes and alliance behavior explaining nato conventional force levels with the end of the cold war the military posture of the north atlantic treaty organization nato has entered a period of profound change prior to the recent dramatic political events in europe however nato conventional force levels in the central region had been remarkably stable for some three decades this article seeks to explain this record of stability in terms of three widely used theories of international relations it argues that balance of power theory and public goods theory cannot alone provide a satisfactory account rather these traditional approaches for understanding alliance behavior must be supplemented by regime theory which emphasizes the constraining effects of enduring institutional factors even in the face of structural change specifically it shows how an international regime has influenced the provision of conventional forces in the central region by alliance members more generally this analysis seeks to contribute to the literature on international regimes in three ways first it demonstrates that regimes do matter by providing an example of their importance for explaining state behavior and international outcomes second it extends regime theory to relations among military allies third it elaborates a comprehensive model for understanding why states actually comply with regime injunctions the model stresses both the ways in which regimes effectively modify the international environment within which states operate altering the costs and benefits associated with different courses of action and the ways in which participating states may internalize regime norms and rules thereby making compliance increasingly automatic

inflation and efficiency in search markets this paper examines how inflation affects efficiency and output in monopolistically competitive search markets it formalizes the conventional wisdom linking higher inflation price dispersion and increased resources devoted to search it also brings to light the induced exit of arms which reduces rent dissipation but the most important effect of inflation is how it alters the distribution of real transactions prices whether this reduces or promotes efficiency and output is shown to depend critically on preferences and market structure and especially on whether search costs are large or small relative to consumer surplus

optimum pricing policy under stochastic inflation we describe aggregate inflation as a stochastic process in which the rate of change of the price level can be positive or zero where the times spent in each state are of random duration this class of processes includes two state markov chains and renewal processes as special cases it is shown that the optimal pricing policy of a monopolistic firm with non convex costs of price adjustment is s s in its real price i e its nominal price relative to the price level a basic certainty equivalence result is proved i e the firm behaves as if it faces a certain and fixed rate of inflation higher than the actual expected rate the difference between the two rates being a risk premium which depends on the real interest rate and the parameters of the stochastic process one can thus apply previous results from the case of certainty sheshinski and weiss review of economic studies 1977 to obtain comparative static results in particular one finds that an increase in the variance of expected inflation leads firms to choose a pricing policy with larger amplitude in real price the paper also addresses the question of consistency in firms expectations when the price level is determined by the firms actions in this paper we consider pricing policies of individual firms in an inflationary environment each firm expects the general price level to increase and must determine the rate of increase of its own price it is assumed that the firm incurs an adjustment cost when it changes its nominal price consequently firms choose to change prices occasionally rather than continuously

inflation inflation uncertainty and relative price variability this paper tests three models that predict a relationship between the variability of relative price changes rpv and aspects of inflation such as expected inflation unexpected inflation and inflation uncertainty these are respectively the menu costs model the lucas barro signal extraction model and the hercowitz cukierman extension of the lucas barro model that allows for different price elasticities of supply across markets the results imply rejection of the hypothesis that any one of the models entirely explains the relationship between inflation and rpv and also imply rejection of the hypothesis that the three models together jointly explain the relationship

the effects of real and nominal uncertainty on inflation and output growth some garch m evidence in this paper we use garch m methods to test four hypotheses about the effects of real and nominal uncertainty on average inflation and output growth in the united states from 1948 to 1996 we find no evidence that higher inflation uncertainty or higher output growth uncertainty raises the average inflation rate we also find no support for the idea that more risky output growth is associated with a higher average real growth rate our key result is that in a variety of models and sample periods inflation uncertainty significantly lowers real output growth copyright 2000 john wiley sons ltd

on inflation and inflation uncertainty in the g7 countries abstract the relationship between inflation and inflation uncertainty is investigated in the g7 countries from 1948 to 1993 garch models are used to generate a measure of inflation uncertainty and then granger methods are employed to test the causality between average inflation and inflation uncertainty in all g7 countries inflation significantly raises inflation uncertainty as predicted by friedman and ball weaker evidence is found that inflation uncertainty granger causes inflation in three countries us uk and germany increased inflation uncertainty lowers inflation while in two countries japan and france increased inflation uncertainty raises inflation

price dispersion and inflation new facts and theoretical implications abstract in workhorse macroeconomic models price dispersion is a central determinant of welfare the cost of business cycles optimal inflation and the tradeoff between inflation and output stability while price dispersion increases with inflation in the models this relationship is negative in the data due to sales prices the comovement of price dispersion and inflation for regular prices is positive a model with sales can quantitatively match the comovement in the data whereas a range of similar models without sales cannot even for regular prices these findings have important implications for welfare calculations optimal inflation and the effects of monetary shocks

a general equilibrium model of the volunteer military textbook discussions of the economics of the military labor market usually adopt the partial equilibrium reasoning used by oi 8 and hansen and weisbrod 5 in arguing for the efficiency of the volunteer military the basic argument is that a draft will tend to misallocate individuals between the civilian and military sectors without necessarily disagreeing with that conclusion we maintain that a volunteer military must be placed in a general equilibrium framework in order properly to analyze all of its important features our relatively simple model assumes a pure labor economy where all individuals have the same utility function and the same productivity as soldiers but individuals vary according to the civilian real wage they could earn the persons in the economy face an external threat which can be reduced by having some of them devote labor time to being soldiers the wages of soldiers are paid for by taxes on civilians the voluntary nature of military service requires that all soldiers are at least as well off as they would be as civilians equilibrium in the labor market requires that those serving as soldiers are the individuals with the lowest civilian wage rates since the formal model is timeless static in nature the volunteer decision to be a soldier is essentially moment to moment in actual practice volunteers agree to long term contracts for military service because long term contracts restrict the option to leave military service in the short term the utility of a soldier may not be as high as it would be as a civilian while the analysis of our simpler version of the volunteer military without long term contracts may lead to less realistic conclusions the model is more tractable and offers insights into why long term contracts may be desirable a virtue of a general equilibrium model is that it requires a rigorous specification of the factors giving rise to the demand for a military clearly a military is only useful if the labor of

search with learning from prices does increased inflationary uncertainty lead to higher markups aggregate cost uncertainty arising from real shocks or unanticipated inflation reduces the informativeness of prices by scrambling relative and aggregate variations but when agents can acquire additional information such increased noise may in fact lead them to become better informed and price competition will intensify we examine these issues in a model of search with learning where consumers search optimally from an unknown price distribution while firms price optimally given consumers search rules we show that the decisive factor in whether inflation variability increases or reduces the incentive to search and thereby market efficiency is the size of informational costs