Research Database

This paper examines the response of real wages and employment probabilities to nominal shocks using micro-panel data from the National Longitudinal Survey of Young Men. Both economy-wide and sector-specific responses to nominal shocks are examined. The observed response patterns are inconsistent with nominal contract based theories of unemployment. These theories predict that nominal surprises should be negatively correlated with real wages in sectors with nominal contracting. In fact, inflation surprises are found to be essentially uncorrelated with real wages in all sectors, while money growth surprises are positively correlated with real wages in manufacturing and uncorrelated with real wages elsewhere. The positive real wage-money growth correlation in manufacturing is robust to controls for real shocks and business cycle conditions, so it does not appear to be explicable by real business cycle models with endogenous money. The type of model described by McCallum (1980, 1986), in which commodity prices are more rigid than wages, is consistent with the result.

I present a search-based model in which money coexists with equity shares on a risky aggregate endowment. Agents can use equity as a means of payment, so shocks to equity prices translate into aggregate liquidity shocks that disrupt the mechanism of exchange. I characterize a family of optimal monetary policies, and find that the resulting equity prices are independent of monetary considerations. I also study monetary policies that target a constant, but nonzero, nominal interest rate, and find that to the extent that a financial asset is valued as a means to facilitate transactions, the asset’s real rate of return will include a liquidity return that depends on monetary considerations. Through this liquidity channel, persistent deviations from an optimal monetary policy can cause the real prices of assets that can be used to relax trading constraints to exhibit persistent deviations from their fundamental values.

Economists make extensive use of two separate descriptions of private saving behavior: the life-cycle (or overlapping generations) model, and models with intergenerational altruism. Analysis of the two frameworks is quite different, as are many of the long-run policy implications. This paper looks at evidence, at the microeconomic level, for and against altruism as a principal determinant of private wealth holdings. The database is new: this paper uses a sample of annuitants in the TIAA-CREF retirement system. We employ a combination of qualitative and quantitative information. Results are: (i) one-half or more of the sample appears altruistically motivated. And (ii) saving for intentional bequests—amounting to about $350,000–$400,000 per family (at retirement) for about half the sample—seems to account for about 25 percent of average lifetime net worth for the whole group. If the definition of parental transfers is broadened to include spending on higher education for children and gifts (rather than just estates), the contribution of intentional transfers to lifetime average net worth climbs to 35–40 percent—in our sample.