The Effects of Monetary Policy in a Model with Reserve Requirements
Joseph H. Haslag
Abstract: In this paper, the effects of monetary policy are examined in a simple convex model with endogenous growth. In an economy with a reserve requirement, monetary policy has growth-rate effects. I compare quantitatively the effect that changes in money growth cum inflation have on growth, on the welfare costs of inflation, and on seignorage revenue, contrasting the results with a reserve requirement with other types of distortions considered in the literature. I show that the inflation rate affects the growth rate in a model with reserve requirements. More specifically, the growth-rate effects are larger in a model with reserve requirements than previous estimates in which other distortions are present. Not surprisingly, larger growth-rate effects translate into larger estimates of the welfare costs of inflation. Indeed, the welfare costs of moderate inflations are moderately higher than previous estimates. Finally, I show that if seignorage revenue is a small contributor to total tax revenues then the growth-rate effects more than offset a decline in the inflation rate or reserve requirements.


The P* Model of Inflation, Revisited
Evan F. Koenig
Abstract: Error-correction M2-demand and inflation equations are estimated simultaneously in a combined model that includes the p* model and the Federal Reserve Board's M2 model as special cases. The ability of the combined model to explain movements in inflation is significantly better than that of the standard p* model. However, the forecasting performance of the combined model breaks down in the 1990s. A reformulation of the M2-demand equation markedly improves the model's in-sample and out-of-sample performance. Even in the post-1990 period, M2 growth is explainable and serves as a reliable indicator of future inflation.


The Role of Tax Policy in the Boom/Bust Cycle of the Texas Construction Sector
D'Ann Petersen, Keith Phillips and Mine Yücel
Abstract: The boom and bust of the Texas construction sector is well known, yet its causes and effects are less well understood. At first glance the rise and fall of the Texas construction sector seems to have followed the movements in oil prices. However, a closer look at the data suggests that there may have been other factors which exacerbated the effects that oil price swings had on the construction industry. Of particular interest are the effects of the tax law changes in 1981 and 1986 which made real estate investing more lucrative in the first half of the decade. In this article we attempt to determine how much of an impact such factors had on the excessive buildup and subsequent crash of tle Texas construction industry. We use a vector-autoregressive (VAR) model to analyze the roles tax laws, interest rates and oil prices played in the movements of both residential and nonresidential construction in Texas.


The Information Content of the Paper-Bill Spread
Kenneth M. Emery
Published as: Emery, Kenneth M. (1996), "The Information Content of the Paper-Bill Spread," Journal of Economics and Business 48 (1): 1-10.
Abstract: In a series of articles, Benjamin M. Friedman and Kenneth N. Kuttner maintain that the difference between the commercial paper rate and the Treasury bill rate has highly significant predictive value for real output even in the presence of money and regardless of sample. The results presented in this paper do not support Friedman and Kuttner's claims.


Monetary Base Rules: The Currency Caveat
R. W. Hafer, Joseph H. Haslag, and Scott E. Hein
Abstract: Monetary policy rules that rely on the monetary base have been forwarded by Meltzer (1984) and McCallum (1988). They claim that following monetary base rules would minimize fluctuations around the target growth rate for nominal GNP. Critics ofsuch rules contend that currency has not been properly accounted for in their simulations. This paper examines the properties ofseveral monetary base rules, explicitly taking the demand for currency into account. Assuming that currency is supplied elastically, our investigation quantities changes in the composition of the monetary base under these rules and provide an estimate of how these compositional changes might affect the variability around the target nominal GNP growth rate.


U.S. Banks, Competition, and the Mexican Banking System: How Much Will NAFTA Matter?
William C. Gruben, John H. Welch and Jeffery W. Gunther


The Role of Intellectual Property Rights in Economic Growth
David M. Gould and William C. Gruben
Published as: Gould, David M. and William C. Gruben (1996), "The Role of Intellectual Property Rights in Economic Growth," Journal of Development Economics 48 (2): 323-350.
Abstract: This paper examines the role of intellectual property rights in economic growth, utilizing cross-country data on patent protection, trade regime, and country-specific characteristics. The evidence suggests that intellectual property protection is a significant determinant of economic growth. These effects appear to be slightly stronger in relatively open economies and are robust to both the measure of openness used and to other alternative model specifications.


On the Political Economy of School Deregulation
Shawna Grosskopf, Kathy Hayes, Lori Taylor, and William Weber
Abstract: In this paper, we simulate the likely impacts of deregulation. The simulation indicates that parents and students in poor school districts with a relatively high proportion of minority students are resource constrained rather than bounded by regulation in pursing better education for their students. The potential gains from deregulation increase as property wealth and expenditures per student increase. The simulation also indicates that in regulation-constrained school districts, many education professionals are extracting rents (in terms of excess employment) from the current system, and that deregulation and incentives for increased efficiency would lead many school districts to substitute teacher aides for teachers, administrators, and professional staff.


Fiscal Policy in More General Equilibrium
Jim Dolmas and Mark Wynne
Abstract: In this paper, we examine the sensitivity of existing results in the equilibrium analysis of fiscal policy to assumptions about the slope of the long-run supply curve of capital. In the 'standard' model, based on teh neoclassical growth model, the long-run supply of capital is perfectly elastic at the representative agent's fixed rate of time preference. This assumption is shown to have strong implications for the effects of government consumption purchases on output, employment, interest rates and other macroeconomic variables. We explore the implications of relaxing this assumption in a more general model that allows for flexible time preference. We show that the multiplier effect of permanent changes in government purchases on output is enhanced, primarily as a result of increased capital accumulation. In an interesting Keynesian twist, private consumption may in fact rise in response to increased goverment purchases.


The Dynamics of Recoveries
Nathan S. Balke and Mark A. Wynne
Abstact: In this paper, we examine whether the early stages of an expansion are different from its later stages. We find that growth in aggregate output is higher in the early stages of an expansion than in the later stages. We term this a recovery effect. In addition to finding a recovery effect for output, we find that the shape of the business cycle is characterized by concave expansions—output grows at a slower rate later in the expansion than in the beginning of the expansion—and linear recessions—the rate of contraction is not significantly different over the course of the recession. The high growth during the recovery seems to be associated with high inventory investment, purchases of consumer durables, and investment in residential structures. We also find that the strength of the recovery depends, in part, on the depth of the preceding recession. This bounce-back result is quite robust across alternative business cycle dates. In Monte Carlo analyses, we show that linear time series models are unable to generate significant bounce-back effects or replicate the actual shape of the business cycle.


Protecting Social Interest in Free Invention
Stephen P.A. Brown and William C. Gruben
Abstact: Although industrialized countries have increasingly pressured developing countries to tighten the protection of intellectual property, recent economic literature has questioned whether the developing countries should give into such pressure. The literature has found that for an invention-importing country, where domestic invention is scarce or nonexistent, protection of intellectual property developed elsewhere can reduce the country's welfare and, in some cases, world welfare. The analysis presented here concludes that this finding may not be applicable to products, such as antibiotics, fungicides, herbjcides and pesticides, whose effectiveness diminishes with cumulative use. Protecting the intellectual property rights for these products can increase welfare—even when invention is provided for free.


Energy Policy: Does it Achieve its Intended Goals?
Mine Yücel and Shengyi Guo
Abstract: A good understanding of markets targeted by energy policy is necessary for energy tax policy to be successful. This paper analyzes coal, natural gas and oil markets to determine the extent to which these fuel prices move together. We find that there was a stable long-run relationship between coal and oil prices until 19/4 and that this relationship changed after 1974. The long-run relationship found between coal, natural gas and oil prices implies that a single-fuel tax in these markets would not be effective as a single tax policy. Similarly, an equal percentage tax on these energy sources, which does not change relative prices initially, would not keep relative prices unchanged in the long run. Our results show that energy policy must take account of the long-run relationship between different energy prices. Otherwise, the long-run results of energy policy could be quite different than intended.


The Disappearing January Blip and Other State Employment Mysteries
Frank Berger and Keith R. Phillips


Capacity Utilization and the Evolution of Manufacturing Output: A Closer Look at the "Bounce-Back Effect"
Evan F. Koenig
Abstract: A simple error-correction model of output and utilization growth captures both the tendency for output growth to be especially rapid early in expansions and the tendency for deep recessions to be followed by strong recoveries. Estimates suggest that manufacturing capacity utilization typically peaks at around 83.5 percent. Once an expansion is underway, two thirds of the gap between actual utilization and normal peak utilization is closed each year. Output and utilization switch to a low-growth state during cyclical contractions. Capacity growth slows slightly during cyclical contractions and in response to weak output growth, but is independent of capacity utilization.


Adding Bond Funds to M2 in the P-Star Model of Inflation
Zsolt Becsi and John Duca
Published as: Becsi, Zsolt and John Duca (1994), "Adding Bond Funds to M2 in the P-Star Model of Inflation," Economics Letters 46 (2): 143-147.
Abstract: During the early 1990s, M2 growth has been unusually weak and the P-Star model has underpredicted inflation; at the same time, bond funds have grown rapidly. We find that the P-Star model performs well recently when M2 is adjusted for bond funds.