THE REACTION OF EXCHANGE RATES TO ECONOMIC NEWS

This paper examines the short-run responses of spot exchange rates to several types of economic news. Survey data are used to divide economic announcements into expected and unexpected components with the latter measuring news. The results indicate that exchange rates are systematically related to unexpected money announcements after the October 1979 switch in Federal Reserve operating procedures but not before. This response does not appear to have changed, however, after the October 1982 Federal Reserve regime change. Short-run exchange rate movements are not systematically related to news on inflation or real activity.     

GOVERNMENT CONSUMPTION AND GROWTH

Using a simple stochastic growth model that nests both exogenous and endogenous growth, this paper shows that the growth rate should be mean stationary if growth is exogenous and difference stationary if growth is endogenous and any variable affecting investment is difference stationary. Permanent changes in the share of output devoted to government consumption should permanently affect the growth rate if and only if, growth is endogenous. I test these implications and find no evidence that growth is endogenous. Furthermore, even if growth is endogenous, the evidence indicates that its degree of endogeneity is likely to be small.     

INVESTMENT SHOCKS,CONSUMPTION PUZZLE,AND BUSINESS CYCLES

A mass of recent research shows that investment shocks are primary driving forces of business cycles. A thorny issue, however, arises due to countercyclical consumption behavior following the investment shocks. This article contributes to the literature by resolving this anomalous issue in a model that features time inconsistency, modeled as naïve hyperbolic discounting. The proposed model delivers positive responses of consumption to an investment shock and thus produces comovement of key macroaggregates, which is in line with the observed U.S. business cycles. Furthermore, this article also substantiates the validity of the proposed model by producing comovement following an investment news (or anticipated investment) shock. Additional analyses on changes in model structure and parameter value do not reverse the main finding. (JEL E3, E7)     

COMBAT EXPOSURE,CIGARETTE CONSUMPTION,AND SUBSTANCE USE

This study estimates the relationship between combat exposure and several risky health behaviors: cigarette consumption, binge drinking, and drug use. We find that the U.S. active duty military personnel deployed to combat zones with enemy firefight are more likely to subsequently smoke cigarettes, consume alcohol, and use illicit drugs than their counterparts deployed to noncombat operations. Our results suggest that the mental health effects of combat can explain up to two‐thirds of the estimated association between combat exposure and risky health behaviors. (JEL H56, I12)     

ADDICTION, COMPULSION, AND THE TECHNOLOGY OF CONSUMPTION

The consumption technology model of Lancaster and Becker is extended to include addictive activities. Assuming a utility function in which the individual places a premium on maintenance of self-esteem, the model generates empirically verified patterns of habituation, withdrawal, and the compulsive restarting of an abandoned habit. It is then applied to the analysis of public policies toward drug abuse. Their frequent ineffectiveness is shown to result from an unwarranted emphasis on deterring the addictive activity rather than on encouraging atceptable behavior.     

ECONOMIC NEWS ON TELEVISION: THE DETERMINANTS OF COVERAGE

This paper examines the television networks' coverage of theunemployment rate, the inflation rate as measured by the ConsumerPrice Index, and the growth rate of real GNP over the twelveyears from 1973 through 1984. This time period includes twomajor recessions, two severe bursts of inflation, and threepresidential elections. A common complaint is that the networksoveremphasize bad economic news. Using two measures of coverage,this paper examines whether the television networks give greatercoverage to these statistics when they are deteriorating. Theempirical results reveal that the networks do give greater coverageto bad economic news during nonelection years, but this patterndisappears during election years. The empirical results alsoreveal that presidential comments are very powerful in shapingthe amount of coverage given to these economic statistics.     

INSTITUTIONS, TRANSACTION COSTS AND ECONOMIC GROWTH

This essay develops a theoretical framework which explores the historical obstacles to economic growth. These obstacles are examined in the context of the political/economic institutional framework of economies in history and consequent transaction costs that determine economic performance and growth. The essay concludes with specific suggestions for the study of economic growth.     

COSTLY INTERMEDIATION AND CONSUMPTION SMOOTHING

This paper studies quantitatively how intermediation costs affect household consumption loans and welfare. Agents face uninsurable idiosyncratic shocks to labor productivity in a production economy with costly financial intermediation and a borrowing limit. Reducing intermediation costs has two effects: (1) For a given decrease in the interest rate on borrowing, agents' ability to smooth consumption over time improves. (2) The demand for loans increases, which increases the interest rate. The net welfare gain of reducing intermediation costs from 3.927% (U.S. level) to 1% is about 1.14% of equivalent consumption in the baseline economy for an endogenous interest rate and 1.90% for an exogenous interest rate. The gains are distributed unevenly: households at the bottom wealth decile improve welfare by 3.96% and 5.86% of equivalent consumption, while those at the top decile have welfare gains of 0.35% and 0.2%, respectively. Sufficiently high intermediation costs eliminate borrowing and hence the welfare gain of reducing costs is not substantial. The welfare analysis includes transitional dynamics between steady states. (JEL D91, E60, G38)     

SOCIAL SECURITY, THE FAMILY, AND ECONOMIC GROWTH

We show that a defined-benefits PAYG social security system distorts key family-based choices that affect economic growth. We identify human capital as the engine of growth, and the motivating forces linking the family's overlapping generations as mutually productive intergenerational transfers and/or altruism. The PAYG system is shown to affect adversely at least one of three determinants of the economy's growth path: fertility, savings, and investment in human capital. The specific effects may vary over different stages of economic development. The growth rate is expected to fall in advanced economies. Our analysis indicates that the effect may be sizeable. ( JEL 915, 111, 850)     

FACTOR AUGMENTATION,FACTOR ELIMINATION,AND ECONOMIC GROWTH

Economic growth theory distinguishes between reproducible and nonreproducible factors of production. In traditional growth models based on factor‐augmenting technical change, perpetual economic growth requires that each essential nonreproducible factor, such as labor, be augmented by a reproducible factor, such as human capital. Recent models of factor‐eliminating technical change deliver perpetual growth by eliminating the nonreproducible factors. Heretofore, the literature has kept factor augmentation and factor elimination separate. We analyze a model with both. The model generalizes the traditional factor augmentation approach by relaxing the usual restriction that factor elimination is absent. We obtain the striking result that factor‐augmenting technical change is a misspecification when factor‐eliminating technical change is present. The result raises several questions about technical change and endogenous growth. (JEL O41, O31, O33)     

BUFFER STOCKS, AGGREGATE ACTIVITY, AND ECONOMIC POLICY

The buffer motive for holding inventories would lead us to expect that at any point in time inventory stocks might deviate from their long-run desired level. These undesired inventory stocks will have subsequent effects upon output. This paper shows that if we fail to include a measure of the deviation of stocks from desired levels in a study of the effect of monetary and fiscal policy, we will attribute variability to the effect of policy that is not the result of the policies themselves.     

NEWS AND NOTES

No abstract available for this article.     

SENTIMENT BIAS AND ASSET PRICES: EVIDENCE FROM SPORTS BETTING MARKETS AND SOCIAL MEDIA

Previous research using attendance‐based proxies for sentiment bias in sports betting markets confirmed the presence of investor sentiment in these markets. We use data from social media (Facebook “Likes”) to proxy for sentiment bias and analyze variation in bookmakers' prices investor sentiment. Based on betting data from seven professional sports leagues in Europe and North America, we find evidence that bookmakers increase prices for bets on teams with relatively more Facebook “Likes,” indicating the presence of price‐insensitive investors with sentiment bias. These price changes do not affect informational efficiency in this market. (JEL L81, G14)     

CONSUMPTION, WEALTH, AND FINITE HORIZONS: TESTS OF RICARDIAN EQUIVALENCE

We find strongly non-Ricardian results when we re-estimate Evans's [1988] model using a better approximation of the market value of wealth. We also examine the long-run properties of the data and find results consistent with our regression evidence when we allow for declining labor income as modeled by Gali (1990]. Our findings in support of non-Ricardian behavior by consumers stand in sharp contrast to those of both Evans and Gali.     

TELEWORK: URBAN FORM,ENERGY CONSUMPTION,AND GREENHOUSE GAS IMPLICATIONS

A primary motivation of telework policy is to reduce energy consumption and greenhouse gas emissions. Using a numerical simulation of the standard urban model, we show telework causes sprawl, calling into question the idea that telework decreases energy consumption. Overall effects depend on wage changes due to telework, land‐use regulation such as height limits or greenbelts, and the telework participation rate. While energy consumption increases in some scenarios, emissions may fall due to changes in the energy mix between gasoline and other sources. (JEL R11, R28, C60)     

ENTERTAINING MALTHUS: BREAD,CIRCUSES, AND ECONOMIC GROWTH

Motivated by the basic adage that man does not live by bread alone, we offer a theory of historical economic growth and population dynamics where human beings need food to survive, but enjoy other things, too. Our model imposes a Malthusian constraint on food, but introduces a second good to the analysis that affects living standards without affecting population growth. We show that technological change does a good job explaining historical consumption patterns and population dynamics, including the Neolithic Revolution, the Industrial Revolution, and the Great Divergence. Our theory stands in contrast to models that assume a single composite good and a Malthusian constraint. These models generate negligible growth prior to the Industrial Revolution. However, recent revisions to historical data show that historical living standards—though obviously much lower than today's—varied over time and space much more than previously thought. These revisions include updates to Maddison's dataset, which served as the basis for many papers taking long‐run stagnation as a point of departure. This new evidence suggests that the assumption of long‐run stagnation is problematic. Our model shows that when we give theoretical accounting of these new observations the Industrial Revolution is much less puzzling. (JEL B10, I31, J1, N1, O30)     

THE ROAD TO GERMAN UNINY: MASS SENTIMENT IN EAST AND WEST GERMANY

This article explores mass sentiment about the pursuit of unificationin both East and West Germany from early 1989 to spring 1991,when formal unification was achieved and the first all-Germangovernment had been installed. Public opinion data from varioussources show that the German masses were supportive but alsosomewhat reluctant with regard to quick and comprehensive unification.The strong push for unification by the political leadershipwas not a response to grass roots sentiment but quite the contrary:the masses followed their leaders. Considerations of economicgains seem to be more important than idealistic pan-German sentimentsor national chauvinism. While the East Germans displayed moreenthusiasm early on, their disappointment steadily rose afterthe fact. As of early 1991, there are some warning signs oflooming internal strife. However, as long as the West Germaneconomy continues to prosper, there seems to be no imminentthreat to political continuity and stability in the united Germany.     

THE CULTURE OF CORRUPTION,TAX EVASION,AND ECONOMIC GROWTH

This study uses a dynamic general equilibrium model to quantify the effects of corruption and tax evasion on fiscal policy and economic growth. The model is calibrated to match estimates of tax evasion in developing countries. The calibrated model is able to generate reasonable predictions for net tax rates, the corruption associated with public investment projects, and the negative correlation between corruption and tax revenue. The presence of corruption and evasion is shown to have significant, but not large, negative effects on economic growth. The relatively moderate effects help explain the absence of a robust negative correlation between growth and corruption in cross‐country data. The model also implies that cracking down on tax evasion before addressing corruption can be a bad idea and that higher wages for public officials can improve welfare. (JEL H3, O4)