Aggregate Price Adjustment: The Fischerian Alternative
Evan F. Koenig
Abstract: I consider an economy in which a fraction of contracts is renegotiated each period. In the spirit of Fischer (1977) and in contrast to Taylor (1979, 1980), Calvo (1983), and Fuhrer and Moore (1992, 1995a,b), contracts specify a price path rather than a fixed price level. The aggregate price adjustment rule derived from these assumptions is an expectations-augmented Phillips curve with a built in "speed" or "Lipsey Loop" effect. The rule is consistent with the natural rate hypothesis and implies that disinflations are unambiguously contractionary. When supplemented with a specification of aggregate demand, the model can be used to find the money-supply path required to achieve a given desired path of the aggregate price level. Alternatively, the model can be used to find the aggregate-price-Ievel path implied by a given monetary policy. Policy-induced recessions can be quite persistent even when contracts are renegotiated frequently. For realistic parameter values, the model generates a liquidity effect: disinflations are initially accompanied by a rising short-term interest rate and a declining money supply.


The Effect of the Minimum Wage on Hours of Work
Madeline Zavodny
Abstract: Recent studies of the effects ofthe minimum wage have focused on employment, but employers may adjust hours as well. This study examines the effect of increases in the minimum wage on teen hours of work and employment using both state- and individual-level panel data from the Current Population Survey. The results indicate that teens who are likely to be affected by minimum wage increases are less likely to remain employed than unaffected teen workers, but experience greater increases in hours conditional on remaining employed. The effect of the minimum wage on hours among workers likely to be affected remains non-negative even when accounting for teens who do not remain employed. The results suggest that aggregate data mask employment shifts among teen workers with different skill levels.


Oil Prices and Aggregate Economic Activity: A Study of Eight OECD Countries
Stephen P.A. Brown, David B. Oppedahl and Mine K. Yücel
Abstract: This article uses impulse response functions based on vector autoregressive models for eight OECD countries to analyze how oil price shocks move through major channels of the economy to affect aggregate economic activity and inflation. For each country, the model represents the interactions between real oil prices, aggregate economic activity and monetary and financial variables. The results suggest that for energy-importing countries, an oil price shock presents a trade-off between an increased price level and a GDP loss. Although it does not appear that an energy-importing country can use its intemal macroeconomic policies to eliminate the effect of oil price shocks on GDP, countries seem to be able to defer and reduce the effect by accepting higher rates of inflation.


The Policy Sensitivity of Industries and Regions
Lori L. Taylor and Mine K. Yücel


Does the Choice of Nominal Anchor Matter?
David M. Gould
Abstract: The conventional wisdom on nominal anchors is that exchange rate-based inflation stabilizations lead to economic booms while monetary-based stabilizations lead to recessions. The study finds strong evidence against this view. Rather than determining the path of economic growth, the choice of nominal anchor appears to be endogenously determined by the state of the economy. To peg or manage the exchange rate, a high level of international reserves is important, especially when a government's credibility is low after a period of high inflations. After controlling for the level of international reserves and the rate of inflation, growth after monetary-based stabilizations does not significantly differ from that following exchange rate-based stabilizations.


What's Good for GM...? Using Auto Industry Stock Returns to Forecast Business Cycles and Test the Q-Theory of Investment
Gregory R. Duffee and Stephen Prowse
Abstract: We examine the ability of auto industry stock returns to forecast quarterly changes in the growth rates of real GDP, consumption and investment. We find that auto stock returns are superior to aggregate stock market returns in predicting growth rates of GDP and various forms of consumption. The superior predictive power of auto returns holds for both in-sample and out-of-sample forecasts and has not declined over time. We then apply this finding in this paper — that market returns have no explanatory power for future output or consumption growth when auto returns are included in the regression — to analyze the causal relation between the stock market and investment. We use auto returns to proxy for forecasts of future fundamentals, allowing market returns to capture the effect of the stock market on investment. We find that aggregate returns forecast equipment investment in the presence of auto returns, providing empirical support for q-theory. Results for structures investment are less convincing.


An Equilibrium Analysis of Relative Price Changes and Aggregate Inflation
Nathan S. Balke and Mark A. Wynne
Published as: Balke, Nathan S. and Mark A. Wynne (2000), "An Equilibrium Analysis of Relative Price Changes and Aggregate Inflation," Journal of Monetary Economics 45 (2): 269-292.
Abstract: Inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross-section distribution of prices, and also with the third moment (skewness) of the cross-section distribution of prices. The conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks. In this paper we question this interpretation. First, we show that similar correlations among the moments exist in alternative measures of underlying technology shocks. Second, when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices, the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross-section distribution.


Some Implications of Increased Cooperation in World Oil Conservation
Stephen P.A. Brown and Hillard G. Huntington
Abstract: This paper combines recent studies of world oil markets and the recent literature on damage estimates from CO2 emissions to derive cost and benefit curves for the reduction of CO2 emissions through cooperative programs of oil conservation. The analysis shows that the desirability of extending cooperation in global energy conservation policies is essentially an empirical issue, rather than a conceptual one. The current evidence suggests that over the next two decades, the OECD will have more than sufficient incentive to reduce oil consumption and the associated CO, emissions through unilateral actions. During this period, extending cooperation to the oil-importing developing countries may be unneccesary and undesirable.


Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?
Kathy J. Hayes and Leola B. Ross
Published as: Hayes, Kathy J. and Leola B. Ross (1998), "Is Airline Price Dispersion the Result of Careful Planning or Competitive Forces?" Review of Industrial Organization 13 (5): 523-541.
Abstract: We develop a model of price dispersion to distinguish the impact of price discrimination from that of peak load pricing schemes or atypical competition resulting from the financial difficulties of the early 1990s. By utilizing three alternative measures of dispersion and appealing to economic theory for our specification, we find robust results suggesting an estrangement between price dispersion and price discrimination. While some discrimination continues to persist at monopolized endpoints, most dispersion is associated with fare wars and peak load pricing schemes.


An Exploration into the Effects of Dynamic Economic Stabilization
Jim Dolmas and Gregory W. Huffman
Published as: Dolmas, Jim and Gregory W. Huffman (1997), "An Exploration into the Effects of Dynamic Economic Stabilization ," in Business Cycles and Macroeconomic Stability: Should We Rebuild Built-in Stabilizers?, ed. Jean-Olivier Hairault, Pierre-Yves Henin and Franck Portier (Springer), 3-30.
Abstract: This paper analyzes the stochastic properties of a dynamic general equilibrium model under two government policies which might be interpreted as ‘countercyclical’ fiscal policies. In one case, we examine the effects on fluctuations of government spending on infrastructure investment in an economy in which public capital is an input to the aggregate production function. In the other, we examine the effects on aggregate business cycle fluctuations of a proportional tax on lay-offs. Our results find only weak evidence for the stabilizing effects of either policy.


Endogenous Tax Determination and the Distribution of Wealth
Gregory W. Huffman
Published as: Huffman, Gregory W. (1996), "Endogenous Tax Determination and the Distribution of Wealth," Carnegie-Rochester Conference Series on Public Policy 45: 207-242.
Abstract: In this paper a dynamic model is constructed in which labor and capital taxes are determined endogenously through majority voting. The wealth distribution of the economy is shown to influence the voting behavior and hence the equilibrium levels of the tax rates, which in turn affect the future distribution of wealth. It is shown that the economy exhibits a unique dynamic behavior. Because the tax rates are endogenously determined, asset prices, wealth distribution, and the tax rates can display persistent fluctuations or cycles in reaction to exogenous disturbances, or even due to initial conditions. “Tax smoothing” does not necessarily appear to arise naturally in such an environment. The features in the model that can produce these fluctuations are studied in detail.


The Response of Local Governments to Reagan-Bush Fiscal Federalism
D. Boisso, Shawna Grosskopf and Kathy Hayes


Inflation, Unemployment, and Duration
John V. Duca
Published as: Duca, John V. (1996), "Inflation, Unemployment, and Duration," Economics Letters 52 (3): 293-298.
Abstract: In the earky 1990s, core CPI inflation and employment cost inflation have been overpredicted by Phillips curve models, while the duration of unemployment has been unusually high. Duration adds significant information about core inflation in the post-Volcker disinflation period.


Regional Productivity and Efficiency in the U.S.: Effects of Business Cycles and Public Capital
Dale Boisso, Shawna Grosskopf and Kathy Hayes
Published as: Boisso, Dale, Shawna Grosskopf and Kathy Hayes (2000), "Productivity and Efficiency in the U.S.: Effects of Business Cycles and Public Capital," Regional Science and Urban Economics 30 (6): 663-681.
Abstract: We add to the literature on the US productivity slowdown and effects of public capital on productivity by employing Malmquist productivity indexes to measure productivity. These indexes allow us to decompose productivity growth into efficiency change and technological innovation. We derive these components for each observation, which we exploit to explore factors which may lead to differences in productivity across regions, including business cycles, both own-state and cross-border public infrastructure investment, and relative sizes of the manufacturing, service and public sector. Our results suggest that the components of total factor productivity change lend important insights into the fairly complex effects of public capital on productivity growth.


The Monetary Policy Effects on Seignorage Revenue in a Simple Growth Model
Joseph H. Haslag
Abstract: Monetary policy has two levers with which to manipulate seignorage revenue collection. Generally speaking, the inflation rate affects the tax rate while reserve requirements affect the size of the tax base. In this paper, I ask how seignorage revenue responds to changes in these two levels, both separately and together. Because both monetary policy variables affect the growth rate, the tradeoff is whether the growth-rate effects dominate the policy impact. I begin with an examination of statistical regularities between seignorage revenue and these two monetary policy measures, using cross-country data.