Research Database

Many unions in the United States have for several years engaged in what is known as pattern bargaining—a union determines a sequence for negotiations with firms within an industry where the agreement with the first firm becomes the take-it-or-leave-it offer by the union for all subsequent negotiations. In this paper, we show that pattern bargaining is preferred by a union to both simultaneous industrywide negotiations and sequential negotiations without a pattern. In recent years, unions have increasingly moved away from patterns that equalized wage rates across firms when these patterns did not equalize interfirm labor costs. Allowing for interfirm productivity differentials within an industry, we show that for small interfirm productivity differentials, the union most prefers a pattern in wages, but for a sufficiently wide differential, the union prefers a pattern in labor costs.

This paper considers model worlds in which there is a continuum of individuals who form finite-sized associations to undertake joint activities. We show how, through a suitable choice of commodity space, restrictions on the composition of feasible groups can be incorporated into the specification of the consumption and production sets of the economy. We also show that if there are a finite number of types, then the classical results from the competitive analysis of convex finite-agent economies can be reinterpreted to apply.

We consider the nature of optimal cyclical monetary policy in three different stochastic models with various shocks. The first is a pure liquidity effect model, the second is a cost of changing prices model, and the third is an optimal seinorage model. In each case we solve for the optimal monetary policy and describe how money growth and interest rates respond to shocks under the optimal policy. The shocks we consider are money demand shocks, productivity shocks, and government consumption shocks. All of the models have the feature that the Friedman rule of setting the nominal interest rate to zero is not optimal. Optimal policies are always time inconsistent even though lump sum taxation is allowed. At least in some instances we find that optimal policy dictates responses of money growth and interest rates which run counter to conventional wisdom.

In aggregate unadjusted data, measured Solow residuals exhibit large seasonal variations. Total Factor Productivity grows rapidly in the fourth quarter at an annual rate of 16 percent and regresses sharply in the first quarter at an annual rate of –24 percent. This paper considers two potential explanations for the measured seasonal variation in the Solow residual: labor hoarding and increasing returns to scale. Using a specification that allows for no exogenous seasonal variation in technology and a single seasonal demand shift in the fourth quarter, we ask the following question: How much of the total seasonal variation in the measured Solow residual can be explained by Christmas? The answer to this question is surprising. With increasing returns and time varying labor effort, Christmas is sufficient to explain the seasonal variation in the Solow residual, consumption, average productivity, and output in all four quarters. Our analysis of seasonally unadjusted data uncovers important roles for labor hoarding and increasing returns which are difficult to identify in adjusted data.

This paper develops a two-country model in which trade is central to the process by which technology diffuses from the innovating country (North) to the backward country (South). Innovation in North leads to the introduction of higher-quality equipment goods that South can import only after some resources have been spent to adapt those equipment goods to the local conditions of South. Barriers to trade and policies that increase the cost of adapting equipment goods to the local environment decrease the rate of technology adoption, leading to a lower steady state relative income level in South. The model is calibrated to quantify this negative impact of barriers to trade and technology adoption on relative income levels and explore some additional implications of the model.

A random matching model with money is used to study the nominal yield on small denomination, bearer, safe, discount securities issued by the government. There is always one steady state with matured securities circulating at par and, for some parameters, another with them circulating at a discount. In the former, a necessary and sufficient condition for a positive nominal yield on not-yet-matured securities is exogenous discriminatory treatment of them by the government. In the latter, the post-maturity discount on securities induces a deeper pre-maturity discount even without such discriminatory treatment.

Until the mid-19th century, shortages of currency were sometimes serious problems. One common response was to prohibit the export of coins. We use a random matching model with indivisible money to explain a shortage and to judge the desirability of a prohibition on the export of coins. The model, although extreme in many regards, represents better than earlier models a demand for outside money and the problems that arise when that money is indivisible. It can also rationalize a prohibition on the export of coins.

To illustrate the use of social accounting matrices (SAMs) in applied general equilibrium (GE) modeling, we use an aggregated SAM for the Spanish economy to calibrate a simple applied GE model. The idea is to construct artificial people—households, government, and a foreign sector—who make the same transactions in the equilibrium of the model economy as do their counterparts in the data. This calibration procedure can be augmented, or partially substituted for, by statistical estimation of key parameters. We show the usefulness of such a model by presenting the results of a comparative exercise that mimics the policy changes that took place in Spain during its 1986 integration into the European Community. Sub-sequent data shows the model results to be remarkably accurate, especially if we account for other major shocks affected the Spanish economy in 1986.

This paper surveys recently developed methods for Bayesian inference and their use in economic time series models. It begins by reviewing aspects of Bayesian inference essential to understanding the implications of the Bayesian paradigm for time series analysis. It next describes the use of posterior simulators to solve otherwise intractable analytical problems. The theory and the computational advances are brought together in setting forth a practical framework for decision-making and forecasting. These developments are illustrated in the context of the vector autoregressions, stochastic volatility models, and models of changing regimes.

We don’t really know why the U.S. banking industry is consolidating rapidly, as it has been doing for the last decade or so. After a large number of studies on the topic including this one, what seems clear is that consolidation is not producing significant efficiencies — at least not on average. Other dimensions of the consolidation trend — such as its heavy concentration in large banks — are just as poorly understood. Given this ignorance as to the “why” of consolidation, it is extremely risky to predict its future effects. Based on past experience and data, at least, we can conclude the following.