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Abstract:
This paper analyzes the statistical evidence bearing on whether transitory components account for a large fraction of the variance in common stock returns. The first part treats methodological issues involved in testing for transitory return components. It demonstrates that variance ratios are among the most powerful tests for detecting mean reversion in stock prices, but that they have little power against the principal interesting alternatives to the random walk hypothesis. The second part applies variance ratio tests to market returns for the United States over the 1871-1986 period and for seventeen other countries over the 1957-1985 period, as well as to returns on individual firms over the 1926- 1985 period. We find consistent evidence that stock returns are positively serially correlated over short horizons, and negatively autocorrelated over long horizons. The point estimates suggest that the transitory components in stock prices have a standard deviation of between 15 and 25 percent and account for more than half of the variance in monthly returns. The last part of the paper discusses two possible explanations for mean reversion: time varying required returns, and slowly-decaying "price fads" that cause stock prices to deviate from fundamental values for periods of several years. We conclude that explaining observed transitory components in stock prices on the basis of movements in required returns due to risk factors is likely to be difficult.

Abstract:
Policymaking for posterity involves current decisions with distant consequences. Contrary to conventional prescriptions, we conclude that the greater wealth of future generations may strengthen the case for preserving environmental amenities; lower discount rates should be applied to the far future, and special effort should be made to avoid actions that impose costs on future generations. Posterity brings great uncertainties. Even massive losses, such as human extinction, however, do not merit infinite negative utility. Given learning, greater uncertainties about damages could increase or decrease the optimal level of current mitigation activities. Policies for posterity should anticipate effects on: alternative investments, both public and private; the actions of other nations; and the behaviors of future generations. Such effects may surprise. This analysis blends traditional public finance and behavioral economics with a number of hypothetical choice problems.

Business and Government Policy, International Economics, Microeconomics, Environment and Natural Resources, International Affairs/Globalization, Science¿ Technology and Public Policy

Abstract:
This paper estimates the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news. First, we consider macroeconomic news and show that it is difficult to explain more than one third of the return variance from this source. Second, to explore the possibility that the stock market responds to information that is omitted from our specifications, we also examine market moves coincident with major political and world events. The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases, casts doubt on the view that stock price movements are fully explicable by news about future cash flows and discount rates.

Abstract:
No abstract is available for this paper.

Abstract:
The paper questions the common view that share price increases of firms involved in hostile takeovers measure efficiency gains from acquisitions. Even if such gains exist, most of the increase in the combined value of the target and the acquirer is likely to come from stakeholder wealth losses, such as declines in value of subcontractors` firm-specific capital or employees` human capital. The use of event studies to gauge wealth creation in takeovers is unjustified. The paper also suggests a theory of managerial behavior, in which hiring and entrenching trustworthy managers enables shareholders to commit to upholding implicit contracts with stakeholders. Hostile takeovers are an innovation allowing shareholders to renege on such contracts ex post, against managers` will. On this view, shareholder gains are redistributions from stakeholders, and can in the long run result in deterioration of trust necessary for the functioning of the corporation.

Abstract:
This paper tests several competing hypotheses about the economic effects of dividend taxation. It employs British data on security returns, dividend payout rates, and corporate investment, because unlike the United States, Britain has experienced several major dividend tax reforms in the last three decades. These tax changes provide an ideal natural experiment for analyzing the effects of dividend taxes. We compare three different views of how dividend taxes affect decisions by firms and their shareholders. We reject the"tax capitalization" view that dividend taxes are non-distortionary lump sum taxes on the owners of corporate capital. We also reject the hypothes is that firms pay dividends because marginal investors are effectively untaxed. We find that the traditional view that dividend taxes constitute a "double-tax" on corporate capital income is most consistent with our empirical evidence. Our results suggest that dividend taxes reduce corporate investment and exacerbate distortions in the intersectoral and intertemporal allocation of capital.

Abstract:
Should managers, when making investment decisions, follow the signals given by the stock market even if those do not coincide with their own assessments of fundamental value? This paper reviews the theoretical arguments and examines the empirical evidence, constructing and using the new US time series of data on the q ratio from 1900 to 1988. We decompose q - the ratio of the market value of corporate capital to its replacement cost - into the product of two terms, reflecting "fundamentals" and "valuation", the ratio of market value to fundamentals. We then examine the relation of investment to each of the two, using a number of alternative proxies for fundamentals. We interpret our results as pointing, strongly but not overwhelmingly, to a larger role of "fundamentals" than of "valuation" in investment decisions.

Abstract:
The claim that financial markets are efficient is backed by an implicit argument that misinformed "noise traders" can have little influence on asset prices in equilibrium. If noise traders` beliefs are sufficiently different from those of rational agents to significantly affect prices, then noise traders will buy high and sell low. They will then lose money relative to rational investors and eventually be eliminated from the market. We present a simple overlapping-generations model of the stock market in which noise traders with erroneous and stochastic beliefs (a) significantly affect prices and (b) earn higher returns than do rational investors. Noise traders earn high returns because they bear a large amount of the market risk which the presence of noise traders creates in the assets that they hold: their presence raises expected returns because sophisticated investors dislike bearing the risk that noise traders may be irrationally pessimistic and push asset prices down in the future. The model we present has many properties that correspond to the "Keynesian" view of financial markets. (i) Stock prices are more volatile than can be justified on the basis of news about underlying fundamentals. (ii) A rational investor concerned about the short run may be better off guessing the guesses of others than choosing an appropriate P portfolio. (iii) Asset prices diverge frequently but not permanently from average values, giving rise to patterns of mean reversion in stock and bond prices similar to those found directly by Fama and French (1987) for the stock market and to the failures of the expectations hypothesis of the term structure. (iv) Since investors in assets bear not only fundamental but also noise trader risk, the average prices of assets will be below fundamental values; one striking example of substantial divergence between market and fundamental values is the persistent discount on closed-end mutual funds, and a second example is Mehra and Prescott`s (1986) finding that American equities sell for much less than the consumption capital asset pricing model would predict. (v) The more the market is dominated by short-term traders as opposed to long-term investors, the poorer is its performance as a social capital allocation mechanism. (vi) Dividend policy and capital structure can matter for the value of the firm even abstracting from tax considerations. And (vii) making assets illiquid and thus no longer subject to the whims of the market -- as is done when a firm goes private -- may enhance their value.

Abstract:
European unemployment has been steadily increasing for the last 15 years and is expected to remain very high for many years to come. In this paper, we argue that this fact implies that shocks have much more persistent effects on unemployment than standard theories can possibly explain. We develop a theory which can explain such persistence, and which is based on the distinction between insiders and outsiders in wage bargaining. We argue that if wages are largely set by bargaining between insiders and firms, shocks which affect actual unemployment tend also to affect equilibrium unemployment. We then confront the theory to both the detailed facts of the European situation as well as to earlier periods of high persistent unemployment such as the Great Depression in the US.

Abstract:
No abstract is available for this paper.

Abstract:
No abstract is available for this paper.

Abstract:
This paper reviews the current policies for fighting poverty and explores the impact they have had. We begin by reviewing trends in poverty, poverty spending and economic performance. It is immediately apparent that economic performance is the dominant determinant of the measured poverty rate over the past two decades. Government assistance programs expanded greatly over this period, but the growth in cash assistance was too modest to have major effects, and the large growth in in-kind benefits could not reduce measured poverty since such benefits are not counted as income. Next we focus on three groups: the disabled, female family heads, and unemployed black youth. We find little evidence that government deserves the blame for the problems of each group, and suggest that the broad outlines of current policies are defensible on economic grounds.

Abstract:
Much of the new growth literature stresses country characteristics, such as education levels or political stability, as the dominant determinant of growth. However, growth rates are highly unstable over time, with a correlation across decades of .1 to .3, while country characteristics are stable, with cross-decade correlations of .6 to .9. Shocks, especially those to terms of trade, play a large role in explaining variance in growth. These findings suggest either that shocks are important relative to country characteristics in determining long-run growth, or that worldwide technological change determines long-run growth while country characteristics determine relative income levels.

Abstract:
We lead off by discussing a number of theoretical reasons for expecting various relationships between a firm`s unfunded pension liability and its market value. We then discuss our doubts about the methodology of earlier papers which studied the empirical relation between funding and market value using standard cross sectional techniques. A modified cross sectional approach which alleviates some of these doubts, and a variable effect event study methodology which alleviates most of them are both employed to investigate the issues raised in the first part of the paper. Our conclusion confirms those of earlier studies that unfunded pension liabilities are accurately reflected in lower share prices.

Abstract:
This paper presents a multisector general equilibrium model that is capable of providing integrated assessments of the economy`s short- and long- run responses to tax policy changes. The model contains an explicit treatment of firm`s investment decisions according to which producers exhibit forward- looking behavior and take account of adjustment costs inherent in the installation of new capital. This permits an examination of both short-run effects of tax policy on industry profits and asset prices as well as 1ong-term effects on capital accumulation. The model contains considerable detail on U.S. industry, corporate financial policies, and the U.S. tax system. Simulation results reveal that the effects of tax policy differ significantly depending on whether the policy is oriented toward new or old capital measures like the investment tax credit stimulate investment without conferring significant windfall gains on corporate shareholders. Corporate tax rate reductions with the same revenue cost, on the other hand, yield large windfalls to shareholders while providing only a modest stimulus to investment in plant and equipment.

Abstract:
The economic changes associated with globalization tighten financial pressures on governments of high-income countries by increasing the demand for government spending while making it more costly to raise tax revenue. Greater international mobility of economic activity, and associated responsiveness of the tax base to tax rates, increases the economic distortions created by taxation. Countries with small open economies have relatively mobile tax bases; as a result, they rely much less heavily on corporate and personal income taxes than do other countries. The evidence indicates that a ten percent smaller population in 1999 is associated with a one percent smaller ratio of personal and corporate income tax collections to total tax revenues. Governments of small countries instead rely on consumption-type taxes, including taxes on sales of goods and services and import tariffs, much more heavily than do larger countries. Since the rapid pace of globalization implies that all countries are becoming small open economies, this evidence suggests that the use of expenditure taxes is likely to increase, posing challenges to governments concerned about recent changes in income distribution.

Abstract:
This paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices. It demonstrates that volatility is only weakly serially correlated, implying that shocks to volatility do not persist. These shocks can therefore have only a small impact on stockmarket prices, since changes in volatility affect expected required rates of return for relatively short intervals. These findings lead us to be skeptical of recent claims that the stock market`s poor performance during the 1970`s can be explained by volatility-induced increases in risk premia.

Abstract:
This paper presents an analysis of the effects of tax policy on capital accumulation and valuation based on James Tobin's q theory of investment. As Tobin has explained, aggregate investment can be expected to depend in a stable way on q, the ratio of the stock market valuation of existing capital to its replacement cost. For example, increases in the rate of return on physical capital raise its market value and cause increased investment until equilibrium is restored. Although models linking the stock market to investment have been estimated, they have not previously been used to examine the impact of tax policies. The basic idea underlying the approach taken here can be described quite simply. It is generally assumed that the stock market valuation of corporate capital represents the present value of its future dividend stream. In the model of this paper, the effects of tax changes on future profits are used to estimate the impact of those changes on the stock market. These estimates in turn are used as a basis for gauging the impact of the tax changes on capital formation. This approach, working through q, can provide estimates of the effects of policy announcements and of personal tax reforms as well as estimates of the distributional impact of alternative reforms. A distinct feature of the model developed here is that it is rooted in a microeconomic theory that integrates the interests of the corporation and its shareholders.

Abstract:
This paper develops a model of dual labor markets based on employers' need to motivate workers. In order to elicit effort from their workers, employers may find it optimal to pay more than the going wage. This changes fundamentally the character of labor markets. The model is applied to a wide range of labor market phenomena. It provides a coherent framework for understanding the claims of industrial policy advocates. It also can provide the basis for a theory of occupational segregation and discrimination which will not be eroded by market forces. Finally, the model provides the basis for a theory of involuntary unemployment.

Abstract:
This paper argues that the versions of both permanent income and life-cycle theories which have recently become fashionable are inconsistent with the grossest features of cross-country and crosssection data on consumption and income. There is clear evidence tha: consumption and income gr:wth are much more closely linked than wOu be predicted by these theories. it appears that consumption smoothing takes place over periods cf several years not several decades. These results confirm Milton Friedman's (1957) initial view that: "The permanent income corrpcnent is not to be regarded as expected lifetime earnings... It is to be interpreted as the mean income at any age regarded as permanent by the consumer unit in question, which in turn depends on its horizon and foresightedness." They call into question the usefulness of standard representative Consumer apprcaches to the analysis of saving behavior. And they call for increased emphasis on liquidity constraints and short run precautionary saving as determinants of consumption behavior.

Abstract:
Using data from the United Nations Comparison Project and the Penn World Table, we find that machinery and equipment investment has a strong association with growth: over 1960-1985 each percent of GDP invested in equipment is associated with an increase in GDP growth of a 1/3 a percentage point per year. This is a much stronger association than found between growth and any of the other components of investment. A variety of consideration suggest that this association is causal, that higher equipment investment drives faster growth, and that the social return to equipment investment in well-functioning market economies is on the order of 30 percent per year.

Abstract:
No abstract is available for this paper.

Abstract:
This paper reviews a number of issues relating to the policy goal of increasing national savings. The first section considers the measurement and definition of national savings. Comparisons of current US savings rates with those of other countries and with the past US experience are presented. The second section considers possible avenues through which public policy can increase natianal savings. While most discussion has centered on the effects of changes in the rate of return received by savers, this is far from the only channel through which policy can effect savings. I conclude that changes in public savings or dissaving through budget surpluses or deficits are the most potent and reliable policy tool for altering the saving rate. The third section of the paper examines a crucial savings policy question. Where will extra savings go? Both empirical estimates and econometric model simulations suggest will find their way into increased plant and equipment investment. A major effect of increased savings would be to reduce capital inflows and improve American competitiveness.

Abstract:
No abstract is available for this paper.

Abstract:
While modern economic theorists have produced a variety of
explanations for the failure of wages to fall in the face of
unemployment, Keynes emphasis on relative wages has not been
reflected in most contemporary discussions. This short paper
suggests that relative wage theories in which workers'
productivity depends primarily on their relative wage provide
the best available apparatus for understanding actual
unemployment and its fluctuations. Such theories are very
closely related to the efficiency wage theories that have
received widespread attention in recent years.

Abstract:
No abstract is available for this paper.

Abstract:
This paper examines the discounting of depreciation allowances both theoretically and empirically. Economic theory suggests that depreciation tax shields should be discounted at the after tax riskless rates. However, a survey of 200 major corporations indicates that they employ much higher discount rates to depreciation allowances. Typical discount rates are in the 15 percent range. This finding suggests that "frontloaded" incentives like the ITC provide maximal stimulus to corporate investment.

Abstract:
In this paper, we re-examine the standard analysis of the short-run effect of a personal tax cut. If consumer spending generates more money demand than other components of GNP, then tax cuts may, by increasing the demand for money, depress aggregate demand. We examine a variety of evidence and conclude that the necessary condition for contractionary tax cuts is probably satisfied for the U.S. economy.

Abstract:
No abstract is available for this paper.

Abstract:
Although the return to capital is a focus of research in both macroeconomics and public finance, each specialty has approached this subject with an almost total disregard for the other`s contribution. Macroeconomic studies of the effect of inflation on the rate of interest have implicitly ignored the existence of taxes and the problems of tax depreciation. Similarly, empirical studies of the incidence of corporate tax changes have not recognized that the effect of the tax depends on the rate of inflation and have ignored the information on the rate of return that investors receive in financial markets. Our primary purpose in this paper is to begin to build a bridge between these two approaches to a common empirical problem.

Abstract:
No abstract is available for this paper.

Abstract:
No abstract is available for this paper.

Abstract:
This paper examines the hypothesis that financial markets are myopic by studying the term structure of interest rates. White rejecting decisively the traditional expectations hypothesis regarding the term structure, our statistical results also lead us to conclude that long term interest rates do not overreact to either the level or the change in short termrates. This finding suggests that participants in bond markets are not myopic or overly sensitive to recent events. Our statistical results also suggest that most variations in the yield curve reflect changes in liquidity premia rather than expected changes in interest rates.

Abstract:
No abstract is available for this paper.

Abstract:
This paper suggests that to a large extent. the increases in the value of housing and decreases in the value of corporate capital may have a common explanation, the inter- action of inflation and a nonindexed tax system. The acceleration of inflation has sharply increased the effective rate of taxation of corporate capital income, while reducing the effective taxation of owner- occupied housing. These changes have been capitalized in the form of changing asset prices. In the long run, they will lead to significant changes in the size and composition of the capital stock. The first section of the paper describes in more detail the nonneutralities caused by inflation. A simple model showing how inflation and taxation interact to determine asset prices is presented in the second section. The third section presents some crude empirical tests suggesting that increases in the expected rate of inflation may account for a significant part of the asset price changes which have been observed. A final section concludes the paper by commenting on some implications of the results.

Abstract:
No abstract is available for this paper.

Abstract:
This paper analyzes the dynamics of youth unemployment. Three broad conclusions emerge. First, the problem of youth joblessness extends beyond the unemployed. We find that over one-half of youth unemployment spells end in labor force withdrawal. Much of youth non-employment is not picked up in the official unemployment statistics, because many young people give up the search for work and leave the labor force. Second, a large part of youth unemployment is accounted for by a relatively small, hard core group of young people who experience long spells of unemployment. While most unemployment spells are short, this is due to the high rates of labor force withdrawal, rather than to job finding. Among male teenagers out of school, for example, we find that over half of unemployment was due to those with more than six months of unemployment in the year. Third, a shortage of attractive jobs is the principle source of long term non-employment. While instability and frequent turnover are major factors in determining the overall pattern of teenage unemployment, we find that the lack of desirable employment opportunities is the crux of the problem for those most seriously affected by youth unemployment.

Abstract:
The recent European experience of high persistent unemployment has led to the development of theories of unemployment hysteresis embodying the idea that the equilibrium unemployment rate depends on the history of the actual unemployment rate. This paper summarizes two directions of research on hysteresis that appear especially promising. Membership theories are based on the distinction between insiders and outsiders and explore the idea that wage setting is largely determined by firms` incumbent workers rather than by the unemployed. Duration theories explore the idea that the long term unemployed exert much less downwards pressure on wages than do the short term unemployed.

Abstract:
Since 1984, Texaco and Pennzoil have been engaged in a legal battle over Texaco's usurpation of Pennzoil in the takeover of the Getty Oil Company. The stakes are huge: the jury award that has been upheld through several appeals calls for Texaco to pay Pennzoil more than $10 billion. The Texaco-Pennzoil case presents a unique natural experiment for studying debt burdens and bargaining costs. Essentially continuous market assessments of the prospects of both parties in a high stakes bargaining game are rarely as observable as they are in the case of publicly traded companies like Texaco and Pennzoil. Further, unlike in the Texaco case, financial distress is usually brought on by events impinging directly on a firm's operations, thus making the costs of distress difficult to measure.

This paper uses data on the abnormal returns earned by the shareholders of Texaco and Pennzoil to examine whether resources were "lost" in the course of the litigation. We find that the leakage involved in the forced transfer is enormous: each dollar of value lost by Texaco's shareholders has been matched by only about 30 cents gain to the owners of Pennzoil. Our estimates suggest that the Texaco-Pennzoil conflict has reduced the combined equity value of the two companies by about $2 billion. Further losses have been suffered by Texaco's bondholders, though these may be offset by the tax collections that would result if Texaco made a large payment to Pennzoil.

After documenting the large joint losses that Texaco and Pennzoil have suffered, we seek to identify their causes. Clearly one explanation is the fees that both companies will pay to the many lawyers, investment bankers, and advisors that have been retained. Even making generous allowance for these costs, however, we are unable to account for a large fraction of the loss in combined value. It appears that there have been additional costs to Texaco's shareholders from disruptions in Texaco's operations, difficulties in obtaining credit, incentive problems created by fears that Texaco would cease operations, and distraction of top management.

We conclude the paper by discussing a number of implications of the results for economic analysis. First, the huge joint losses suffered by the continued disagreement illustrate that efficient bargains will not always be struck even in situations where neither side possesses much relevant private information. Second, the losses evidence the adverse effects that financial distress can have on productivity. This may have implications for bankruptcy cost explanations of firms' debt-equity choices, macroeconomic theories that stress credit disruptions as an important element in business cycle fluctuations, and arguments that debt relief for major debtor nations would make all parties to the LDC debt crisis better off.

The paper is organized as follows. Section I briefly recounts the history of the Texaco-Pennzoil dispute and describes the event study methodology employed in our analysis. Section II demonstrates the large losses in combined value during the litigation. Section III considers the effects of the dispute on Texaco's bondholders and the government's tax claim. Section IV examines potential causes of the loss in joint value. Section V concludes by discussing some implications of our findings.

Abstract:
This paper uses historicaI U.S. data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation. The evidence presented indicates that intergenerational transfers account for the vast majority of aggregate U .S. capital formation; only a negligible fraction of actual capital accumulation can be traced u, life-cycle or "hump" savings. A major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age-earnings and age-consumption profiles. These profiles are simply too flat to generate substantial lifecycle savings. This paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers. fife-cycle models of savings that emphasize savings for retirement as the dominant form of apical accumulation should give way to models that illuminate the determinants of intergenerational transfers.

Abstract:
This paper presents evidence on the characteristic speculative dynamics of a wide range of asset returns. It highlights three stylized facts. First, returns tend to be positively serially correlated at high frequency. Second, returns tend to be negatively serially correlated over long horizons. Third, deviations of asset values from proxies for fundamental value have predictive power for returns. These patterns emerge repeatedly in our analyses of stocks, bonds, foreign exchange, real estate, collectibles, and precious metals, and they appear too strong to be attributed only to small sample biases. The pervasive nature of these patterns suggests that they may be lie to inherent features of the speculative process, rather than to variation in risk factors which affect particular markets.

Abstract:
This paper reviews theoretical argumrents and empirical evidence regarding the interest elasticity of savings. It concludes that there are strong theoretical reasons to expect an increase in after tax rates of return to increase private savings. Moreover, the empirical rrethods used in most previous studies are likely to produce underestimates of the interestelasticity of savings. New evidence based on direct estimation of utility function parameters suggests that savings are likely to be highly interest elastic. The paper concludes by noting that too little time has passed to evaluate the effects of the savings incentives contained in recent tax legislation.

Abstract:
This detailed examination of the effect of inflation on the taxation of capital used by nonfinancial corporations considers not only the tax paid by the corporations them- selves but also the tax paid by the individuals and institutions that provide capital to the corporate sector. Although corporations deduct nominal interest payments that exceed real interest, the additional taxes that lenders pay slightly exceed the tax saving by corporate borrowers. Our calculations indicate that inflation raised the 1977 tax burden on corporate sector capital income by more than $32 billion, a 50 percent increase in the total tax burden.

Abstract:
Real interest rates in the United States have reached extremely high levels in the last several years. This surge in real rates at all maturities has not lacked explanations. Large current and prospective deficits, tight money, better profit prospects, financial deregulation, and increased uncertainty are among the factors than have been blamed for high real rates. If one looks only at the performance of the U.S. bond market, it is difficult to discriminate among possible explanations for the behavior of real interest rates. This paper examines the worldwide behavior of interest rates and the performance of other asset markets besides the U.S. bond market in order to better explain high real rates.

Abstract:
No abstract is available for this paper.

Abstract:
This paper uses British data to examine the effects of dividend taxes on investors` relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors` valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.

Abstract:

This paper develops an algorithm for analyzing discrete events, such as labor market transitions, when some of these transitions are spurious because of measurement errors. Our algorithm extends the standard multinominal logit model, although our basic approach could be used with other stochastic models as well. We apply this algorithm to study the effect of unemployment insurance (UI) on transitions from unemployment to employment and out of the labor force. Our results suggest that UI lengthens unemployment spells by reducing both transition rates, and show that correcting for measurement error strengthens the apparent effect of UI on spell durations.

Abstract:
This note demonstrates that Bennett McCallum`s recent critique of low frequency estimates of macro-economic relationships is of little empirical significance. It also demonstrates that readily available and frequently used techniques can be used to diagnose the problem McCallum raises. Finally, it shows that the standard critique of expectational distributed lags is not warranted once the role of learning by economic agents is recognized.

Abstract:
Policymaking for posterity involves current decisions with distant consequences. Contrary to conventional prescriptions, we conclude that the greater wealth of future generations may strengthen the case for preserving environmental amenities; lower discount rates should be applied to the far future, and special effort should be made to avoid actions that impose costs on future generations. -- Posterity brings great uncertainties. Even massive losses, such as human extinction, however, do not merit infinite negative utility. Given learning, greater uncertainties about damages could increase or decrease the optimal level of current mitigation activities. -- Policies for posterity should anticipate effects on: alternative investments, both public and private; the actions of other nations; and the behaviors of future generations. Such effects may surprise. -- This analysis blends traditional public finance and behavioral economics with a number of hypothetical choice problems.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This paper develops an asset price approach to the analysis of capital taxation. The costs of adjusting capital stocks cause tax changes to have important impacts on the valuation of existing capital. The recapitalizations associated with tax reforms represent an important aspect of their incidence. These effects are studied within the context of an empirically calibrated general equilibrium model. The model extends previous work by explicitly treating the process of adjustment following tax reforms, treating in detail the relationship between tax rules and interest rates and examining the differential incidence effects of corporate tax reductions and investment incentives.

Abstract:
This paper examines the recent United States experience with sustained budget deficits and concludes that the events of the last five years cast significant doubt on the proposition that the timing of taxes does not affect national savings. Rather than raising private saving, the recent deficits have if anything coincided with reduced saving and increased consumption. These findings suggest that realistic analysis of fiscal policies must recognize that consumers are liquidity constrained and/or myopic.

Abstract:
This paper develops a procedure for adjusting the Current Population Survey gross changes data for the effects of reporting errors. The corrected data suggest that the labor market is much less dynamic than has frequently been suggested. Conventional measures sy understate the duration of unemployment by as much as eighty percent and overstate the extent of movement into and out ofthe labor force by several hundred percent. The adjusted data also throw demographic differences in patterns of labor market dynamics into sharp relief.

Abstract:
This note shows that contrary to widespread belief there is little evidence that the business cycle is asymmetric. Using American data for the pre- and post-war periods and data on five other major OECD nations for the post-war period, we are unable to support the hypothesis that contractions are shorter and sharper than expansions. We conclude that there is not much basis for preferring some version of traditional cyclical techniques to more modern statistical methods.

Abstract:
Demographic differences in patterns of employment variation over the business cycle are examined in this paper. Three primary conclusions emerge. First, both participation and unemployment must be considered in any analysis of cyclical changes in the labor market. Second, young people bear a disproportionate share of cyclical employment variation. Third, failure to consider participation has led to undue pessimism about the effect of aggregate demand policy on high unemployment groups. If participation did not surge, reduction in overall unemployment to its 1969 level would reduce the unemployment of almost all demographic groups to very low levels.

Abstract:
No abstract is available for this paper.

Abstract:
This paper responds to Franco Modigliani's recent critique of our 1981 paper on the importance of intergenerational transfers for U.S. savings. Modigliani's paper is the latest salvo in a long running debate over the importance of intergenerational transfers in explaining savings behavior. While Modigliani corrects an algebraic error of minor consequences in our earlier paper, its correction does not, in our view, call into question the fundamental conclusion that life cycle considerations can account for only a small part of aggregate capital accumulation. Inevitably, it is possible to challenge aspects of any complex empirical calculation. Modigliani's attacks seem to us incorrect in most cases and generally fail to address our primary method of determining the importance of intergenerational transfers. Many considerations at least as important as those raised by Modigliani suggest that our method produces an overestimate of the importance of life cycle wealth.

Abstract:
One of the central questions in macroeconomics for many years has been whether government policy can affect private saving rates, and if so to what extent and through what channels. The question has remained controversial because, as with other macroeconomic questions, experiments to check divergent hypotheses cannot be deliberately performed, so economists must rely upon the often dubious evidence from the limited experiments with which nature and history have endowed us. This paper discusses the results of an exceptionally good natural experiment that has been provided by Canada and the U.S. over the past thirty-five years. After moving in tandem for almost 25 years, American and Canadian private saving rates have diverged dramatically over the last decade. The primary conclusion emerging from our analysis of this phenomenon is that tax policies can have a potent impact on private savings behavior. Differences in tax structures and in the interactions of taxation and inflation appear to be important factors explaining the divergent behavior of the American and Canadian private savings rates. Recognizing the importance of asset revaluations, caused partially but not entirely by tax effects, also helps to explain the different behavior of U.S. and Canadian savings. There may also be a relationship between government deficits and the private savings differential.

Abstract:
The theoretical and empirical results in this paper make a strong prima facie case for the proposition that increases in the after tax rate of return caused by tax policy are likely to bring forth significant increases in saving. Theoretical analysis using a variety of standard models tends to suggest that the aggregate response to savings incentives is likely to be substantial. It is argued that the existing empirical evidence sheds little light on the question. Empirical analyses are then conducted using three alternative approaches. All three confirm the hypothesis of a significant positive response of savings to changes in the rate of return.

Abstract:
We propose an explanation for the wide variation in rates of taxation across developed economies, based on differences in labor market institutions. In "corporatist" economies, which feature centralized labor markets, taxes on labor input will be less distortionary than when labor supply is determined individually. Since the level of labor supply is set by a small group of decision-makers, these individuals will recognize the linkage between the taxes that workers pay and the benefits that they receive. Labor tax burdens are indeed higher in more corporatist nations, and non-labor taxes are lower, which is consistent with this theory. There is also some evidence that the distortionary effects of labor taxes are lower in more corporatist economies.

Abstract:
We use the revised estimtaes of U.S. GNP construed by Christina Romer (1989) to assess the time-series properties of U.S. output per capita over the past century. We reject at conventional significance levels the null that output is a random walk in favor of the alternative that output is a stationary autoregressive process about a linear deterministic trend. The difference between the lack of persistence of output shocks either before WWII or over the entire century, on the one hand, and the strong signs of persistence of output shocks found by Campbell and Mankiw (!987) and by Nelson and Plosser (1982) for more recent periods is striking. It suggests to us a Keynesian interpretation of the large unit root in post-WWII U.S. output: perhaps post-WWII output shocks appear persistent because automatic stabilizers and other demand-management policies have substantially damped the transitory fluctuations that made up the pre-WWII Burns-Mitchell business cycle.

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Although recent research suggests that intergenerational transfers play an important role in aggregate capital accumulation, our understanding of bequest motives remains incomplete. We develop a simple model of"exchange-motivated" bequests, in which a testator influences the decisions ofhis beneficiaries by holding wealth in bequeathable forms and by conditioning the division of bequests on the beneficiaries` actions. The model generates falsifiable empirical predictions which are inconsistent with other theories of intergenerational transfers. We present econometric and other evidence which strongly suggests that bequests are often used as a means of payment for services rendered by beneficiaries.

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This paper offers some observations on employee crime, economic theories of crime, limits on bonding, and the efficiency wage hypothesis. We demonstrate that the simplest economic theories of crime predict that profit-maximizing firms should follow strategies of minimal monitoring and large penalties for employee crime. Finding overwhelming empirical evidence that firms expend considerable resources trying to detect employee malfeasance and do not impose extremely large penalties, we investigate a number of possible reasons why the simple model's predictions fail. It turns out that plausible explanations for firms large outlays on monitoring of employees also justify the payment of premium wages in some circumstances. There is no legitimate a priori argument that firms should not pay efficiency wages once it is recognized that they expend significant resources on monitoring.

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This paper considers the problem of optimal long run monetary policy. It shows that optimal inflation policy involves trading off two quite different considerations. First, increases in the rate of inflation tax the holding of many balances, leading to a deadweight loss as excessive resources are devoted to economizing on cash balances. Second, increases in the rate of inflation raise capital intensity. As long as the economy has a capital stock short of the golden rule level, increases in capita intensity raise the level of consumption. Ignoring the second consideration leads to the common recommendation that the money growth rate be set so that the nominal interest rate is zero. Taking it into account can lead to significant modifications in the "full liquidity rule." Inter-actions of inflation policy with financial intermediation and taxation are also considered. The results taken together suggest that inflation can have important welfare effects, and that optimal inflation policy is an empirical question, which depends on the structure of the economy.

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This paper uses newly available data from the Social Security Administration's Retirement History Survey to examine the adequacy of saving. This data source is particularly rich; survey data for respondents covering the ydars 1969, 197 1( and 1953 have been matched with Social Security earnings records covering the years dating back to 1951. In addition to information on the path of lifetime earnhngs, the survey contains extensive data on individual asset holdings. The evidence indicates that surprisingly few couples currantly suffer significant reductions in their standard of living in their old age. This appears due, in large part, to our compulsory savings institutions, the Social Security and private pension systems. These institutions have succeeded in redistributing the lifetime consumption of private individuals from their youth to their old age.

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No abstract is available for this paper.

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This paper summarizes my recent research directed at the development of an asset price approach to the analysis of capital income taxation. While asset prices play a crucial role in many macroeconomic models, they have been subordinate in most previous efforts to study the effects of capital income taxation on economic behavior. A number of reasons for focusing on the role of asset prices in analyzing public finance questions are discussed. These include the role of asset prices in determining investment decisions, and the fact that changes in asset prices are indicators of the horizontal and vertical equity effects of tax reforms. Recent empirical research in which asset price information is studied in order to measure the effects on economic behavior of tax reforms and to distinguish between alternative models of the effects of capital income taxation is reviewed. Directions for future research in public finance, focusing on asset markets, are also discussed.

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This paper examines differences in pay for equally skilled workers in different industries. The major finding is that there is substantial dispersion in wages across industries, even after allowing for measured and unmeasured labor quality, working conditions, fringe benefits, transitory demand shocks, threat of unionization, union bargaining power, firm size and other factors. Some direct evidence in favor of efficiency wage theories is presented. The evidence suggests that industry wage differentials are successful in eliciting better performance through reduced turnover and increased effort.

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This note explores the sensitivity of the short-run savings effects of government deficits to assumptions about household planning horizons. Using a lifecycle simulation model, we show that even though deficit policies shift sizable tax burdens to future generations, individuals live long enough to make the assumption of an infinite horizon a good approximation for analyzing the short-run savings effects. In practice, periods of debt accumulation such as that in the United States during World War II are reversed sufficiently rapidly to make their short-run effects on consumption and national savings relatively small.

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While frequently invoked, the level playing field ideal and its practical embodiment in tax legislation has received relatively little analysis. This paper examines the economic arguments surrounding the level playing field doctrine. I conclude that leveling the playing field is an issue of little economic importance and that efforts to level the playing field like those recently enacted are likely to create more important nonneutralities than those they eliminate. They may however contribute to the perceived fairness of the tax system.

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No abstract is available for this paper.

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European unemployment is widely regarded as a problem of excessive real wages. This view as it is usually expressed carries the disturbing implication that there is a sharp conflict between the interests of those currently employed and the unemployed because it suggests that increases in employment will require reductions in the real wages of those currently employed. The first part of this paper shows that increases in employment in Europe are likely to be associated with rising real take-home pay for workers because of fiscal increasing returns. Increases in employment and output will make possible reductions in taxes sufficiently large to offset any effects of diminishing returns to labor. The second part of the paper considers alternative explanations for the failure of nominal wages to adjust so as to restore full employment and their implications for the efficacy of fiscal policies. It concludes that under a variety of plausible conditions tax cuts would succeed in stimulating employment.

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Financial economists have long favoured the use of a wind-up measure of the firm`s pension liabilities. Yet the pension liabilities of the firm also represent the pension wealth of its workers. It is reasonable to presume that workers and shareholders have a common view of the pension contract. If the wind-up measure depicts the true pension liabilities of the firm, then the wage concession granted by its workers must reflect the fact that the firm may choose to terminate the plan at any time. Data on the wage-service characteristics of the membership of a sample of final earnings plans in Canada suggest,contrary to the implications of the wind-up measure, that workers` wages do not internalize accruing pension benefits on a year-to-year basis. Instead, the data suggest that pension plans may be a vehicle through which a significant portion of the total compensation of individual employees is deferred until their later work years, and that the wind-up measure may well understate the pension liabilities of an on-going firm.

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This paper examines the changing cyclical variability of economic activity in the United States. It first shows that the decline in variability since World War II cannot be explained by changes in the composition of economic activity or by the avoidance of financial panics. We then show that increased automatic stabilization by the government, and the increased availability of private credit after World War II combined to stabilize consumption and reduce the variability of aggregate demand. The main argument of the paper holds that greater price rigidity in recent times may have contributed to economic stability by preventing destabilizing deflations and inflations. Empirical evidence is presented to support this proposition.

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Abstract:
This paper overviews the issues connected with proposals to spur investment using tax incentives. There are four main conclusions: (1) The rate of net capital formation in the U.S. has declined very substantially. This decline has been associated with a sharp fall in the after tax return to investors in the corporate sector. (2) Increasing the share of output devoted to business capital formation would not have a large effect on the rate of productivity growth, inflation or employment. However, it would contribute substantially to intertemporal economic efficiency. The welfare gains achievable through investment incentives approach $100 billion. (3) Measures to spur investment are likely to have substantial effects. The lags are, however, very long. For example, it is estimated that the elimination of capital gains taxes would raise the capital stock by 29 percent in the long run, but by only 4 percent within five years. (4) Through judicious design of tax policy, it is possible to spur investment with only a small revenue cost. It is crucial to take account of the effect of anticipated policy on the level of investment. Traditional Keynesian econometric approaches are ill-suited to this goal.

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No abstract is available for this paper.

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No abstract is available for this paper.

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This paper examines the recent dramatic increase in the ratio of US non-financial debt to GNP. It concludes that it is largely the result of federal budget deficits. There does not appear to have been a major change in traditional patterns of private sector borrowing in recent years. The excessive accumulation of Federal debt probably threatens financial stability more than recent increases in private debt.

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No abstract is available for this paper.

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This study departs from earlier analyses of the effects of taxes on capital income in several respects. Probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving. It is shown below that the common two-period formulation of saving decisions yields quite misleading results. A more realistic model of life cycle savings demonstrates that, for a wide variety of plausible parameter values, savings are very interest elastic. This implies that shifting away from capital income taxation would significantly increase capital formation, making possible long-run increases in consumption.

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No abstract is available for this paper.

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This paper uses Taylor`s model of overlapping contracts to show that increased wage and price flexibility can easily be destabilizing. This result arises because of the Mundell effect. While lower prices increase output, the expectation of falling prices decreases output. Simulations based on realistic parameter values suggest that increases in price flexibility might bell increase the cyclical variability of output in the United States.

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This paper reports preliminary estimates of an econometric simulation model capable of a comprehensive evaluation of the effects of unemployment insurance on measured and actual employment, unemployment and non-participation. The data are longitudinal comprising information on 75,000 households sampled in the Current Population Surveys of March and April 1978. The simulation model is constructed from multi- nomial logit equations characterizing individuals` labor force transitions. These equations provide estimates of the effects of UI on job loss, labor force exit, and entry into the labor force, as well as the effect of UI on unemployment duration and temporary layoffs. The results are rather inconclusive, but suggest the importance of further research on I21 and transitions in and out of the labor force.

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No abstract is available for this paper.

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This paper examines some positive and normative aspects of the inflation indexation of public and private pensions. The analysis showsthat alternative indexing arrangements may have far less impact on actual patterns of risk bearing than is usually thought to be the case. In so far as inflation indexing has real effects, there is no presumption that they are beneficial. In particular, the pre-commitment aspects of publicindexing may not be efficient. There are sound reasons to believe that voluntarily agreed on, non-indexed private pensions may well be efficient.Non-indexed pensions may result in an efficient allocation of risks given the other assets and liabilities of pension issuers and beneficiaries. In this case, indexation would impede the efficient allocation of risks. In this paper is also developed an ICOLI (interteinporal cost of living index) which is superior to conventional price indices as a way of evaluating the changes in real well being,associated with changes in wealth. The use of this measure has significant implications for the indexation of pensions, and for the question of what assets should be held in pension portfolios.

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No abstract is available for this paper.

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No abstract is available for this paper.