International Financial Aggregation and Index Number Theory: A Chronological Half-century Empirical Overview

This paper comprises a survey of a half century of research on international monetary aggregate data. We argue that since monetary assets began yielding interest, the simple sum monetary aggregates have had no foundations in economic theory and have sequentially produced one source of misunderstanding after another. The bad data produced by simple sum aggregation have contaminated research in monetary economics, have resulted in needless “paradoxes,” and have produced decades of misunderstandings in international monetary economics research and policy. While better data, based correctly on index number theory and aggregation theory, now exist, the official central bank data most commonly used have not improved in most parts of the world. While aggregation theoretic monetary aggregates exist for internal use at the European Central Bank, the Bank of Japan, and many other central banks throughout the world, the only central banks that currently make aggregation theoretic monetary aggregates available to the public are the Bank of England and the St. Louis Federal Reserve Bank. No other area of economics has been so seriously damaged by data unrelated to valid index number and aggregation theory. In this paper we chronologically review the past research in this area and connect the data errors with the resulting policy and inference errors. Future research on monetary aggregation and policy can most advantageously focus on extensions to exchange rate risk and its implications for multilateral aggregation over monetary asset portfolios containing assets denominated in more than one currency. The relevant theory for multilateral aggregation with exchange rate risk has been derived by Barnett (J Econom 136(2):457–482, 2007) and Barnett and Wu (Ann Finance 1:35–50, 2005).

Strategic Interactions Among Central Bank and National Fiscal Authorities in a Monetary Union Subject to Asymmetric Country Shocks

In this paper we extend Nordhaus’ (Brookings Pap Econ Act (2):139–199, 1994) results to an environment which may represent the current European situation, characterised by a single monetary authority and several fiscal bodies. We show that, even assuming that the monetary and the fiscal authorities share the same ideal targets, in the presence of asymmetric shocks the “symbiosis” result found by Dixit and Lambertini (J Int Econ 60:235–247, 2003) no longer obtains. Thus, fiscal rules as those envisaged in the Maastricht Treaty and in the Stability and Growth Pact may work as monetary/fiscal coordination devices that improve welfare. The imposition of common targets, however, may work as a substitute for policy coordination only if these are made state contingent, an aspect that the recent version of the Stability and Growth Pact takes into account in a more appropriate way than its original version.

Market structure and the link between migration and trade

Many recent studies have looked at the impact of international migration on trade and found a significant effect. They posit that migration fosters trade by lowering costs or by means of a preference bias. However, to my knowledge, market structure has not as yet been considered. Using data from Switzerland, this paper empirically assesses the extent to which migration affects trade, taking goods differentiation into account. A monopolistic model with a multisector economy (Chaney in Am Econ Rev 98(41):1707–1721, 2008) is then empirically estimated. The findings show that market structure explains the different channels through which migration affects trade.

The Costs of Increasing Transparency

In their seminal paper, Morris and Shin (Amer Econ Rev 92(5): 1521–1534, 2002a) argued that increasing the precision of public information is not always beneficial to social welfare. Svensson (Amer Econ Rev 96: 448–451, 2006) however has disputed this by saying that although feasible, the conditions for which this was true, were not all that likely. In that respect, therefore, increasing ‘transparency’ remains most of the times beneficial to social welfare. In this paper, we extend the Morris and Shin attempt by setting it up as an explicit interactive game between the Central Bank, the objectives of which we model explicitly, and the private sector. We show that in the absence of costs, both players benefit from transparency in the manner described previously in the literature, and point the differences in their gains. Following that, we then introduce the fact that increasing transparency comes at some costs and show how both players face incentives to free ride on each other as a result. The presence of costs thus alters the way in which greater transparency is attained.

Minorities’ Fields of Expertise in Economics and Employment Demand in These Fields

Efforts by public and private institutions to increase the number of minorities participating in graduate economics programs has contributed to a growing supply of Ph. D. trained minority economists. However, minorities are still under-represented as faculty members in economics departments. This presidential address explores whether the concentration of minorities in a few fields of specialization creates a demand-supply mismatch for these individuals.

Taking Advantage of an Untapped Pool: Assessing the Success of African American Head Coaches in the National Football League

Noting that only five African American coaches had been hired to lead National Football League (NFL) teams from 1989–2002, Madden (J of Sports Econ, 5(1):6–19 2004) found that teams coached by African Americans in the NFL outperformed their counterparts in the regular season but were significantly below average in the playoffs. This analysis, with data that includes nine African American coaches and extends through 2007, reconfirms Madden’s finding that African American head coaches outperform their rivals in the regular season, but also finds that African American coaches no longer suffer from poor playoff performance. Using fixed effects pooled cross section time series models, this analysis confirms that teams with African American head coaches can expect more wins in the regular season than their peers, other things equal. However, there is some evidence that as the pool of African American coaching talent diminishes from additional hires their extraordinary performance may be slightly regressing. The playoff analysis shows that that when controlling for seeding, organizational strength and regular season wins, African American coaches perform at the same level as their counterparts.

Monetary and Fiscal Policy Interaction in the Euro Area with Different Assumptions on the Phillips Curve

In this paper we apply a static version of a New Keynesian macromodel to a monetary union (see Bofinger et al., J Econ Educ, 37:98–117 (2006), Walsh, J Econ Educ, 33:333–346 (2002)). We show in particular that a harmonious functioning of a monetary union critically depends on the correlation of shocks that hit the currency area. Additionally a high degree of integration in product markets is advantageous for the ECB as it prevents national interest rates from driving a wedge between macroeconomic outcomes across member states. In particular small countries are in need for fiscal policy as an independent stabilization agent with room to breath.

Fiscal Leadership and Coordination in the EMU

We analyze the role of fiscal-monetary policy interactions and fiscal coordination in EMU under the assumption of strategic wage setting in unionized labour markets. We find that production subsidies and real wage distortions are strategic complements. The literature on macroeconomic stabilisation policies and policy games usually neglects this point and reaches overoptimistic conclusions about the desirable effects of accommodating fiscal policies. Central bank preferences also affect the desirability of fiscal coordination in a monetary union. In fact, contrary to Beetsma and Bovenberg (1998), we find that fiscal coordination improves outcomes in the case of a conservative central banker, whereas it leads to worse outcomes with a populist one.

Trade Costs,Trade Balances and Current Accounts: An Application of Gravity to Multilateral Trade

In this paper we test the well-known hypothesis of Obstfeld and Rogoff (NBER Macroeconomics Annual 7777:339–390, 2000) that trade costs are the key to explaining the so-called Feldstein–Horioka puzzle. Our approach has a number of novel features. First, we focus on the interrelationship between trade costs, the trade account and the Feldstein–Horioka puzzle. Second, we use the gravity model to estimate the effect of trade costs on bilateral trade and, third, we show how bilateral trade can be used to draw inferences about desired trade balances and desired intertemporal trade. Our econometric results provide strong support for the Obstfeld and Rogoff hypothesis and we are also able to reconcile our results with the so-called home bias puzzle.

Non-traded Goods,Technical Progress and Wages

We use a general equilibrium model of trade to show that technical improvement may indeed cause a fall in the wages of unskilled workers. Under some modest conditions, the wages of skilled workers may go down too.

Fiscal Policy and Macroeconomic Stabilizations: What are the Gains from Cooperation?

In this paper we extend the open-economy stochastic framework of Obstfeld and Rogoff (Q J Econ. 117:503–36, 2002) to include distortionary taxation, when prices are flexible but wages are sticky. We use the model to analyze the optimal design of tax rules that respond to productivity shocks, under non-cooperation and cooperation between the fiscal authorities, and evaluate the gains from coordination. We show that, although monetary policy would be preferred to fiscal policy as a stabilization tool both under competition (Nash) and under cooperation, there is a role for procyclical fiscal stabilization in a monetary union where the monetary authority cannot respond to asymmetric shocks. Moreover, we show that in the Nash game there will be an incentive for the fiscal authorities to try to manipulate the terms-of-trade in their favor, and we estimate the potential gains from fiscal policy coordination. The size of the gains depends crucially on the value of the Frisch elasticity of labor supply. For lower values of the Frisch elasticity (more in line with microeconometric estimates) the gains are relatively small, but for more elastic labor supplies (more in agreement with the business cycle literature) the gains can be very large.

Monetary Inflation’s Effect on Wealth Inequality: An Austrian Analysis

Austrian monetary inflation theory claims that changes in the money supply are disproportionately distributed throughout an economy, and as a result wealth is coercively redistributed. This study proposes and tests a model illustrating this connection by examining monetary inflation’s effect on wealth inequality. After testing the model’s validity, this study compares monetary inflation’s effect on several measures of wealth inequality, concluding that not only is monetary inflation a significant variable, but its effect on wealth inequality is more pronounced at the extremities of the distribution.

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The Transfer Problem in the Euro Area

Building on the celebrated Keynes–Ohlin debate and on Lane and Milesi-Ferretti (Rev Econ Stat 86:841–857, 2004), the paper investigates the transfer problem for the Euro area vis-à-vis the rest of the world. The analysis is developed in a theoretically and statistically consistent way and is intended as a contribution to the empirical literature on EMU. The main result of the paper is that the accumulation of net foreign asset in the Euro area is consistent with real exchange appreciation, largely through the relative price of nontradables rather than through the terms of trade.

The Lack of International Consumption Risk Sharing: Can Inflation Differentials and Trading Costs Help Explain the Puzzle?

The bulk of evidence on the lack of international risk sharing is based on regressions of idiosyncratic consumption growth on idiosyncratic output growth. This paper argues that the results from such regressions obtained from international data are, however, not directly comparable to those based on regional data: the standard practice of running such regressions on international data fails to account for persistent international differentials in consumer prices, whereas—implicitly—most of the literature based on regional data has accounted for these differences. When risk sharing regressions are set up in conceptually the same way in international and regional data sets, the estimated coefficients are also very similar. To explore this result further, we adapt the variance decomposition of Asdrubali et al. (Q J Econ 111:1081–1110, 1996) to allow for deviations from purchasing power parity across countries. While quantity (income and credit) flows are the dominant channel of risk sharing among regions, relative consumption and output price (internal terms of trade) fluctuations account for the bulk of the deviation from the complete markets outcome in international data. To the extent that persistent differences in consumer prices are an indication of goods market segmentation, our findings provide empirical evidence for the proposition by Obstfeld and Rogoff (NBER Macroeconomics Annual 2000, 2000) that segmented international goods markets rather than asset market incompleteness may account for the (apparent) lack of risk sharing between countries.

NEA Presidential Address: Black Economists of the World You Cite!!

Economists who publish research in the economics and political economy of race seem averse to citing similar research by black economists. As citations are an important determinant of success as a research economist, black economists can possibly offset the aversion of non-black economists in citing black economists, by citing black economists themselves. This NEA Presidential address considers the relevance of black economist citations, and evaluates the extent to which black economists cite other black economists.

Austrian Business Cycle Theory: A Corporate Finance Point of View

The Austrian business cycle theory (ABCT) has been criticized for not being a true theory of the business cycle. The main emphasis of the ABCT has been on the theory of the upper-turning point—the artificial expansion of credit, the manipulation of interest rates, the malinvestments committed by entrepreneurs and then the credit crunch and/or real resource crunch. The paper provides an illustration (from a corporate finance point of view) of how a company, by following market signals, will launch a project that is a malinvestment. The paper then demonstrates how a company can take a failing component from another business and turn it into a viable operation via the liquidation process. This paper then demonstrates how the Austrian theory can make superior recommendations for policies (through the usage of the liquidation process) to help stimulate economic recovery.

Ability, Openness, and Managerial Decision Making

Impact of the ability and the degree of openness of a manager on decision making is studied. Whether a more able manager increases or decreases the effort of a subordinate depends on the relative quality of information. Greater openness is a two-edged sword: it increases the likelihood that more information will be employed, but it reduces the manager’s incentive to expend effort on obtaining better information. A more open manager is more desirable when the position is relatively more important or the prior information is not very accurate.

Consistency or Heroics: Skewness,Performance, and Earnings on the PGA TOUR

The structure of the payments in professional golf tournaments is heavily weighted to reward the top performers more handily. On the PGA TOUR, for example, the winner typically receives 18% of the purse, second place receives 10.8%, and so on down to 0.2% for 70th place. This payment structure brings up the possibility that the PGA TOUR is disproportionately rewarding one-time, exceptional performances rather than consistent steady play. To examine the extent of this effect, this paper correlates the 2002 earnings of the top 100 PGA TOUR professional golfers with their average performances, the variance around the averages, and the skewness of the individual distributions of their scores. Mean performance, variance, and skewness are all significantly related to earnings per tournament in the theoretically predicted directions. The research makes connections to and has implications for several topics in the sports economics literature including competitive balance and the hot-hand phenomenon. Additionally, it uncovers a heretofore unappreciated consequence concerning the relationships among the distributions of effort, performance, and remuneration in the tournaments compensation model.

Local School Finance and Productive Efficiency: Evidence from Ohio

This paper examines the relationship between local financing of education and school district efficiency. In a system of local school finance, the capitalization of school quality in housing prices provides homeowners with verifiable information regarding the impact of school officials’ actions and strong incentives to act upon that information. I find evidence that school districts with a higher percentage of revenues from local sources perform better on state math tests. In addition, the amount of residential property within a school district is positively related to math test passage rates.

Government Funding Policy Towards Communicable Diseases

The paper investigates the choice of government to offer a grant to a potential entrant aimed at reducing its fixed cost of entry when a monopoly firm provides the needed pharmaceutical drug given the prevalence path of the disease in a dynamic economic framework. The results of present study suggest that government can use a grant to credibly threaten the entry of a new firm into the industry and to promote limit-output pricing by the incumbent firm. The paper therefore suggests that the government policy set includes subsidizing the potential entry of a new firm into an industry manufacturing pharmaceutical drugs for the treatment of a communicable disease. Clearly, foreign aid could also be used as a source of this credible threat. The study also extends the paper by Mechoulan (2007) through the introduction of the government’s choice into the model.