INTERNATIONAL PRICE BEHAVIOR AND THE DEMAND FOR MONEY

Oil prices, commodity prices and American monetary policy, the last operating through a variety of channels, have all figured prominently in explanations of the international inflation process in the late 1960s and early 70s. OUT major purpose in this paper is to test these various hypotheses. We do so in the context of a reduced-form rational-expectations price equation which we estimate for the United States and seven other industrial countries using quarterly data for the period 1955 through 1976.
The principal conclusion that emerges from this exercise is that movements in domestic money in these countries served as the key link in the inflation process. The factors that produced these monetary changes, however, differed among countries. Price shocks of various sorts were clearly of secondary importance.
The other important set of conclusions concerns the demand for money. In place of a traditional stock adjustment model, we used GLS with a second-order correction for autocorrelation. We believe this produced more plausible estimates of the parameters of the long-run demand function and of the adjustment process itself.     

GASOLINE PRICES AND ROAD FATALITIES: INTERNATIONAL EVIDENCE

This study utilizes data for 144 countries from 1991 to 2010 to present the first international estimates of the gasoline price elasticity of road fatalities. We instrument each country's gasoline price with that country's oil reserves and the yearly international crude oil price to address potential endogeneity concerns. Our findings suggest that the average reduction in road fatalities resulting from a 10% increase in the gasoline pump price is in the order of 3%–6%. Around 35,000 road deaths per year could be avoided by the removal of global fuel subsidies. (JEL R41, H23, O18, Q43)     

THE CYCLICAL BEHAVIOR OF PRICES AND RELATIVE PRICES

Price and output shock correlations provide information concerning macroeconomic shocks. Previous research generally finds small or negative correlations between real gross domestic product (GDP) and GDP deflator shocks but positive correlations between industrial production (IP) and consumer price index (CPI) shocks at short forecast horizons. We show that mismatched price and output correlations may have different magnitudes or signs than matched pairs. Matched and mismatched correlations between disaggregated prices and output from the GDP accounts indicate the procyclical price of nondurables to durables makes correlations between mismatches misleading. Thus, there is reason to be skeptical of results based on IP and the CPI. (JEL E31, E32)     

INTERNATIONAL EVIDENCE ON FRIEDMAN'S THEORY OF THE BUSINESS CYCLE

Milton Friedman's theory of the business cycle implies two empirical regularities tested for here. One regularity is that business cycles are asymmetric: The size of a contraction affects the size of the following expansion, but not vice versa. The second regularity is that a supply-side ceiling to aggregate output limits the size of expansions. Friedman's correlation methods yield only very weak support for the asymmetry hypothesis when applied to real GNP data of eight OECD countries. A time series model with a ceiling component fits the data well for a majority of the countries.     

THE EFFECT OF HOUSE PRICE ON FERTILITY: EVIDENCE FROM HONG KONG

This article extends a standard Beckerian model of fertility behavior to formulate the effect of house price (HP) on fertility. The simple model predicts a negative effect of HP on the number of children for a representative household not only through the income effect but also through the compensated substitution effect. The prediction is confirmed by a cointegration analysis applied to the annual data at the aggregate level covering the period from 1971 to 2005 in Hong Kong. It is found that a 1% increase in HP is significantly related to a 0.45% decrease in total fertility rates (TFRs), which is robust in sensitivity tests with an alternative model specification and alternative measures of TFRs. This implies that high HP inflation can account for about 65% of the fertility decrease in Hong Kong in the past four decades. (JEL J13, J11, C32)     

DID THE EURO FOSTER ONLINE PRICE COMPETITION? EVIDENCE FROM AN INTERNATIONAL PRICE COMPARISON SITE

We study the impact of the Euro on prices charged by online retailers within the European Union. Our data span the period before and after the Euro was introduced, cover a variety of products, and include countries inside and outside of the Eurozone. After controlling for cost, demand, and market structure effects, we show that the pure Euro changeover effect is to raise average prices in the Eurozone by 3 % and average minimum prices by 7%. Finally, we develop a model of online pricing in the context of currency unions and show that these price patterns are broadly consistent with those of clearinghouse models. (JEL D400, D830, F150, L130, M370 )     

THE NATURE OF OUTSOURCING RELATIONSHIPS: EVIDENCE FROM OAP PRICES

This paper studies the extent and variation in production cost pass‐through for U.S. outsourcing imports. Data from 4,676 products imported through the U.S. overseas assembly program show that outsourcing imports were characterized by incomplete pass‐through of production and trade costs to import prices. Notably, pass‐through was higher for products assembled in high education countries while the response of outsourcing import prices to competing suppliers' prices was largest for products sold by firms in capital‐intense industries. The reasons for these cross‐country and cross‐industry differences, as they relate to theories of outsourcing and trade, are explored. (JEL F1, F2)     

THE OPTIMAL GOVERNMENT SIZE: FURTHER INTERNATIONAL EVIDENCE ON THE PRODUCTIVITY OF GOVERNMENT SERVICES

This paper estimates the optimal government size for several sets of economies by investigating the role of public services in the production process. I assume government services are optimally provided when their marginal product equals unity (the "Barro rule"). The empirical results suggest: (1) government services are significantly productive; (2) they are overprovided in Africa, underprovided in Asia, and optimally provided everywhere else; (3) the optimal government size is 23 percent for the average country but ranges from 14 percent for the average OECD country to 33 percent in South America; and (4) the marginal productivity of government services is negatively related to government size.     

NEW EVIDENCE ON INCOME AND THE VELOCITY OF MONEY

Time series and cross-country empirical results suggest that cash holding as a proportion of income rises, or equivalently that velocity falls, as income increases. Numerous cross sectional findings at many points in time, in several countries conclude oppositely. It is argued here that the former findings suffer from omitted variable bias by ignoring sociodemographic variables affecting the demand for cash balances. When one incorporates such demand shifters into the analysis the time series and cross-country findings are seen as consistent with the critically reexamined cross sectional result that velocity increases with income.     

SOME EVIDENCE ON THE ALCHIAN AND ALLEN THEOREM: THE THIRD LAW OF DEMAND?

This paper examines empirically the Alchian and Allen proposition that shipping charges induce consumers to opt for higher quality goods. We show in a household productions framework why this holds whether goods or buyers travel. Using a large sample of individual consumption data for football games, we find that buyers who travel the farthest, purchase the best tickets. In the end, we believe that the Alchian and Allen theorem is so broad and pervasive that it qualifies as the third law of demand.     

NEW EVIDENCE ON THE RETIREMENT AND DEPRECIATION OF MACHINE TOOLS

This paper uses data from machinery dealers to estimate the retirement and depreciation patterns for a broad set of conventional machine tools. According to the dealers, the average service life of these machines at the survey date was about thirty years. Service lives were even longer in the mid-1970s, with the reduction over time likely caused by the diffusion of superior, computer controlled machines. Consistent with the relatively long average life, the conventional machines have depreciated slowly. I use the results to assess the average service life assumed by the Bureau of Economic Analysis to construct capital stocks for metalworking machinery.     

THE EFFECTS OF STATE AUTOMOBILE DEALER ENTRY REGULATION ON NEW CAR PRICES

This paper examines the impact of state regulations restricting entry into new car retailing. The central hypothesis is that these regulations create artificial scarcity rents for existing dealers, which are collected through higher car prices. A reduced form multiple regression model is specified with retail price as the dependent variable. The model is estimated using transactions price data for a sample of over 5,000 Chevrolet dealers and seven car lines in 1978. The results confirm the hypothesis that entry restrictions cause higher car prices.     

PRICE FLEXIBILITY AND AGGREGATE STABILITY: NEW EVIDENCE AND IMPLICATIONS

The relation between price flexibility and aggregate real stability has been subject to recent debate. Increased price flexibility decreases the response of real output to aggregate demand shifts and, in turn, is stabilizing. The increased flexibility may exacerbate, however, the size of demand shifts induced by a given underlying shock. If the latter channel dominates, increased flexibility may prove destabilizing. This paper examines the real effects of specific shocks underlying aggregate demand across a group of eighteen major industrial countries. The stabilizing effect of price flexibility appears to dominate.     

SURVEY EVIDENCE ON EXCESSIVE PUBLIC PESSIMISM ABOUT THE FUTURE BEHAVIOR OF UNEMPLOYMENT

Two of the questions in the Surveys of Consumer Attitudes undertakenby the Survey Research Center of the University of Michigandeal with households' expectations about inflation and the changein unemployment. We compare quarterly time series of the meanresponses with the actual behavior of inflation and unemploymentto see whether households are overly optimistic or pessimisticabout the future behavior of inflation and unemployment. Wefind an asymmetry. Over the 21 years of our analysis, on averagethe public is neither overly optimistic nor overly pessimisticabout future inflation. However, the public has been significantlytoo pessimistic about the future behavior of unemployment. Theseresults have an important implication for macroeconomic policy.If politicians respond to complaints from the public about inflationand unemployment they will target policy instruments at unemploymentto a greater extent than if the public was not so pessimisticabout the behavior of unemployment. The result may be a higherrate of inflation than if the public were not mistakenly pessimisticabout the behavior of unemployment.     

SOME EVIDENCE ON LUMP SUM VERSUS CONVEX COSTS OF CHANGING PRICES

Two models in which price stickiness results from price adjustment costs are tested. One, an (s,S) pricing model, assumes lump-sum adjustment costs and predicts firms will make relatively large, infrequent price changes. The other assumes convex adjustment costs and predicts frequent, partial price adjustments. Survey data of firms' price behavior reveal patterns consistent with the (s,S) model. However, many of the patterns are also consistent with partial-adjustment rules, although the high percentage of firms which fix prices for a quarter or more casts doubt on the plausibility of the partial-adjustment hypothesis.     

THE INFLUENCE OF SOCIAL FORCES: EVIDENCE FROM THE BEHAVIOR OF FOOTBALL REFEREES

Analyzing the neutrality of referees during 12 German premier league (1. Bundesliga) soccer seasons, this paper documents evidence that social forces influence agents’ decisions. Referees, who are appointed to be impartial, tend to favor the home team by systematically awarding more stoppage time in close matches in which the home team is behind. They also favor the home team in decisions to award goals and penalty kicks. Crowd composition affects the size and the direction of the bias, and the crowd’s proximity to the field is related to the quality of refereeing. (JEL J00)     

DIFFERENCES IN AVERAGE PRICES ON THE INTERNET: EVIDENCE FROM THE ONLINE MARKET FOR AIR TRAVEL

Using daily ticket price quotes, this article examines whether there are systematic differences in the airfares obtained through different online travel Web sites. I find that after controlling for ticket availability and heterogeneities that affect ticket prices, there is little systematic difference in the average fares. The parity in average fares observed in 2002 data is in contrast to differences as large as 18% documented by Clemons et al. (2002), and stems in part from the fact that airlines directly compete for online travel dollars today, but did not in 1997. (JEL L2 )     

THE DURABILITY OF HUMAN CAPITAL: SOME NEW EVIDENCE

This paper analyzes the effect of chronological aging, experience, job search, change of job and/or employer, and formal training on the wage growth of a sample of young men. Following the human capital literature, wage growth directly corresponds to human capital and the analysis allows for the assessment of the durability or rate of depreciation of human capital if further investments are not made. The findings suggest that human capital is not very durable, contrary to some previous estimates given in the literature.     

DO DEVALUATIONS IMPROVE THE TRADE BALANCE? THE EVIDENCE REVISITED

This paper reexamines the effectiveness of devaluation in trade balance adjustment. The question is addressed in a framework which improves the previous empirical literature in several respects. The evidence indicates that devaluations have been a successful tool in inducing trade balance adjustment. In particular, nominal devaluations are found to result in significant real devaluations that last for at least three years, and the real devaluation induces significant trade flows that are distributed over a two-to three-year period. The evidence comes from two different samples, 1953-73 and 1975-84, involving twenty-seven countries and sixty devaluation episodes.