Symposium Introduction

This symposium as a whole examines four groups of countries not normally studied by industrial relations specialists. This opening paper compares the questions asked by the four papers and seeks to generalize from their findings.     

Growth and government: Is there a difference between developed and developing countries?

I examine the role of government in the growth of 64 industrialized and developing countries, considering both expenditure and financing aspects of government. Recognizing that there may be differences between the two country groups, I estimate both standard OLS and dummy variable regressions. The general conclusion is that although most fiscal variables are not significantly related to economic growth, the means of financing matters more than government spending. I find that seigniorage and the budget surplus are important for growth, but the LDCs is the group that drive the results in all regressions.     

TIME-TO-BUILD EFFECTS AND THE TERM STRUCTURE

This paper shows that real macroeconomic variables have power to predict movements in the term structure of interest rates. This complements recent evidence that links the term structure to expected stock returns. We find that up to 86 percent of the variation in the term premia are due to the changes in macroeconomic variables. The predictive power can be attributed to the time-to-build effect of investments.     

Expected versus Ex Post Profitability in the Cross‐Section of Industry Returns

Asset pricing theory predicts a positive cross‐sectional relation between expected profitability and expected returns. However, empirical studies typically use lagged ex post profitability as a proxy for expected profitability. In this article, we use out‐of‐sample combination forecasts to estimate expected industry‐level operating profit, gross profit, operating cash flow, and net income. We then construct real‐time industry‐rotation strategies based on high and low expected profitability. For each measure except gross profit, these predicted‐profitability strategies earn significant alpha net of transaction costs and outperform strategies based on ex post profitability.     

A new approach to the demand for public goods

The individual demand for public goods is measured by a new survey research instrument which permits respondents to make hypothetical expenditure and tax recommendations with moveable penny coupons. Because each respondent faces an identical coupon budget constraint, it may be expected that observed expenditure and tax recommendations represent individual maximum utility. The instrument was applied to a random sample of 1000 residents of North Carolina. Statistical analysis of the resultant data indicates significant socio-economic differences in the preferences for particular spending and tax categories.     

Capital adjustment costs,time-to-build effects,and inflation nonneutrality

The paper examines how the presence of capital adjustment costs and time-to-build constraints weaken the Fisher effect and inflation neutrality, and hence attenuate the arbitrage opportunities implicit in intertemporal substitution and the investment decision. It is demonstrated that large and permanent changes in inflation affect nominal interest rates, intertemporal substitution, and investment choices differently than small or temporary changes. Small, transitory inflationary innovations will lower real interest rates, yet create no arbitrage opportunities since the benefits from these low rates will be insufficient relative to the adjustment costs implicit in altering investment. Large, permanent inflationary innovations will possess no real effects. The paper then presents empirical work to support the prediction that the expected inflation effect on nominal interest rates depends on the perceived size and permanence of the innovation.