The Purchasing Power of Money and Nominal Interest Rates: A Re-Examination

While it has been known for some time that, under uncertainty, the original version of the Fisher hypothesis is not precisely correct, empirical researchers have largely ignored this fact. Such an omission has possibly resulted in erroneous conclusions concerning other hypotheses; most notably the impact of prices on the real economy. This paper clarifies some of the previous interpretations of the existing empirical literature and provides a theoretical version of the relation between prices and interest rates. Empirical tests based on both the Livingston survey data and data from time-series forecasting models provide support for the Fisher effect and the hypothesis that only covariance risk is priced in the Treasury bill market.     

Comparative Advantage and Heterogeneous Firms

This paper examines how country, industry, and firm characteristics interact in general equilibrium to determine nations' responses to trade liberalization. When firms possess heterogeneous productivity, countries differ in relative factor abundance, and industries vary in factor intensity, falling trade costs induce reallocations of resources both within and across industries and countries. These reallocations generate substantial job turnover in all sectors, spur relatively more creative destruction in comparative advantage industries than in comparative disadvantage industries, and magnify ex ante comparative advantage to create additional welfare gains from trade. The improvements in aggregate productivity as countries liberalize dampen and can even reverse the real-wage losses of scarce factors.     

Uncertainty and Investment Dynamics

This paper shows that with (partial) irreversibility higher uncertainty reduces the responsiveness of investment to demand shocks. Uncertainty increases real option values making firms more cautious when investing or disinvesting. This is confirmed both numerically for a model with a rich mix of adjustment costs, time-varying uncertainty, and aggregation over investment decisions and time and also empirically for a panel of manufacturing firms. These "cautionary effects" of uncertainty are large—going from the lower quartile to the upper quartile of the uncertainty distribution typically halves the first year investment response to demand shocks. This implies the responsiveness of firms to any given policy stimulus may be much weaker in periods of high uncertainty, such as after the 1973 oil crisis and September 11, 2001.     

Is Fraud Contagious? Coworker Influence on Misconduct by Financial Advisors

Using a novel data set of U.S. financial advisors that includes individuals' employment histories and misconduct records, we show that coworkers influence an individual's propensity to commit financial misconduct. We identify coworkers' effect on misconduct using changes in coworkers caused by mergers of financial advisory firms. The tests include merger‐firm fixed effects to exploit the variation in changes to coworkers across branches of the same firm. The probability of an advisor committing misconduct increases if his new coworkers, encountered in the merger, have a history of misconduct. This effect is stronger between demographically similar coworkers.     

An American View on CLERP

Problems of interpretation and acceptability do not appear to have deflected the Australian government from its determination to impose international accounting standards as the basis of the country's accounting practice. This analysis finds no persuasive explanation for the government's approach.     

The Dynamics of Growth and Income Inequality under Progressive Taxation

This paper develops an endogenous growth model having a progressive income tax structure in which heterogeneous agents, who differ in terms of their rates of time preference, supply labor elastically. We analyze the dynamic adjustment to an increase in progressivity and show that the economy will converge to an equilibrium growth path with nondegenerate distributions of both income and wealth. The role of the endogeneity of labor supply is emphasized and shown to have a major impact on the nature of the transitional path, as a result of the impact of the progressive tax on agents’ work incentives. Our theoretical analysis is supplemented with, and supported by, numerical simulations, which generally match the empirical evidence rather closely. We also show that the responses of the different income groups contrast sharply from one another so that focusing on the economy‐wide average provides an incomplete picture.     

Banks’ Financial Reporting and Financial System Stability

The use of accounting measures and disclosures in banks’ contracts and regulation suggests that the quality of banks’ financial reporting is central to the efficacy of market discipline and nonmarket mechanisms in limiting banks’ development of debt and risk overhangs in economic good times and in mitigating the adverse consequences of those overhangs for the stability of the financial system in downturns. This essay examines how research on banks’ financial reporting, informed by the financial economics literature on banking, can generate insights about how to enhance the stability of the financial system. We begin with a foundational discussion of how aspects of banks’ accounting and disclosures may affect stability. We then evaluate representative papers in the empirical literature on banks’ financial reporting and stability, pointing out the research design issues that empirical accounting researchers need to confront to develop well‐specified tests able to generate reliably interpretable findings. To this end, we provide examples of settings amenable to addressing these issues. We conclude with considerations for accounting standard setters and financial system policy makers.     

A COMPARISON OF MEXICAN MIGRANT REMITTANCES ACROSS U.S. REGIONS

Since 1990, the United States has experienced a geographic dispersion of Mexican migrants from traditional gateways to new regions. Using data from the Mexican Migration Project, we find significant differences in both the likelihood of remitting and the amount remitted by Mexican migrants across U.S. regions. Specifically, Mexican migrants living in U.S. regions that have experienced considerable increases in migrant populations since 1990 (the Northeast, Southeast, Mountain, and Midwest regions) remit at higher rates and in larger quantities than migrants living in more traditional migrant destinations (the Pacific and South Central regions), even after controlling for observed differences in migrant populations. ( JEL F22, F32, J11, R23)     

An Assignment Theory of Foreign Direct Investment

We develop an assignment theory to analyse the volume and composition of foreign direct investment (FDI). Firms conduct FDI by either engaging in greenfield investment or in cross-border acquisitions. Cross-border acquisitions involve firms trading heterogeneous corporate assets to exploit complementarities, while greenfield FDI involves setting up a new production division in the foreign country. In equilibrium, greenfield FDI and cross-border acquisitions coexist within the same industry, but the composition of FDI between these modes varies with firm and country characteristics. Firms engaging in greenfield investment are systematically more efficient than those engaging in cross-border acquisitions. Furthermore, most FDI takes the form of cross-border acquisitions when production-cost differences between countries are small, while greenfield investment plays a more important role for FDI from high-cost into low-cost countries. These results capture important features of the data.     

TRADE UNIONS AND FINANCIAL PERFORMANCE

This paper investigates the relationship between trade unionsand financial performance using British establishment-leveldata. We estimate the average overall impact of manual unionrecognition in 1990 to be roughly half what it was in 1984.We report results suggesting that in 1990 unionized establishmentshave lower financial performance only where there are closedshop arrangements and the establishments have some product marketpower and that this effect is greater where managerial freedomto allocate tasks is limited by union work rules. This lattercombination occurs in only about one in ten of the unionizedworkplaces in our sample.