AEAweb: AER: Contents: December 2000

The American Economic Review
Vol. 90, No. 5, December 2000

Contents

Does Exchange-Rate Stability Increase Trade and Welfare?
Philippe Bacchetta and Eric van Wincoop      1093-1109

Market Contagion: Evidence from the Panics of 1854 and 1857
Morgan Kelly and Cormac Ó Gráda      1110-1124

Monetary Aggregates and Output
Scott Freeman and Finn E. Kydland      1125-1135

Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption
Stephanie Schmitt-Grohé      1136-1159

Does Schooling Cause Growth?
Mark Bils and Peter J. Klenow      1160-1183

Schooling, Labor-Force Quality, and the Growth of Nations
Eric A. Hanushek and Dennis D. Kimko      1184-1208

Does Competition Among Public Schools Benefit Students and Taxpayers?
Caroline M. Hoxby      1209-1238

"Globalization" and Vertical Structure
John McLaren      1239-1254

Diversity and Trade
Gene M. Grossman and Giovanni Maggi    1255-1275

Economic Integration and Political Disintegration
Alberto Alesina, Enrico Spolaore, and Romain Wacziarg       1276-1296

The Determinants of Equilibrium Unemployment
Eran Yashiv      1297-1322

Aggregate Employment Fluctuations with Microeconomic Asymmetries
Jeffrey R. Campbell and Jonas D. M. Fisher     1323-1345

Performance Pay and Productivity
Edward P. Lazear      1346-1361

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment
David Neumark and William Wascher      1362-1396

Minimum Wages and Employment: A Case Study of the Fast-food Industry in New Jersey and Pennsylvania: Reply
David Card and Alan B. Krueger      1397-1420

Central-Bank Credibility: Why Do We Care? How Do We Build It?
Alan S. Blinder      1421-1431

Nominal Wage Rigidity and Industry Characteristics in the Downturns of 1893, 1929, and 1981
Christopher Hanes      1432-1446

Money, Sticky Wages, and the Great Depression
Michael D. Bordo, Christopher J. Erceg, and Charles L. Evans      1447-1463

Output Fluctuations in the United States: What Has Changed Since the Early 1980's?
Margaret M. McConnell and Gabriel Perez-Quiros      1464-1476

Social Interactions and the Institutions of Local Government
Robert W. Helsley and William C. Strange      1477-1490

Social Limits to Redistribution
Giacomo Corneo and Hans Peter Grüner      1491-1507

Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat
Eckhard Janeba      1508-1519

Selective Versus Universal Vouchers: Modeling Median Voter Preferences in Education
Zhiqi Chen and Edwin G. West      1520-1534

Erratum: A Reconsideration of the Twentieth Century
R. A. Mundell      1535-1536

This paper develops a simple general-equilibrium framework to study the effect of the exchange-rate system on trade and welfare. An important feature of the model is deviations from purchasing-power parity, caused by rigid price setting in buyers’ currency. In a benchmark model with separable preferences and only monetary shocks, trade is unaffected by the exchange-rate system, consistent with most evidence. In general, both trade and welfare can be higher under either exchange-rate system, depending on preferences and on the monetary-policy rules followed under each system. There is no one-to-one relationship between the levels of trade and welfare across exchange-rate systems.

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To test a model of contagion—where individuals hear some bad news and communicate it to their acquaintances, who then pass it on, leading to a market panic— requires a knowledge of the information networks of participants, something hitherto unavailable. For two panics in the 1850’s this paper examines the behavior of Irish depositors in a New York bank. As recent immigrants, their social network was determined largely by their place of origin in Ireland, and where they lived in New York. During both panics this social network turns out to be the prime determinant of behavior.

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We ask whether the following observations may result from endogenously determined fluctuations in the money multiplier rather than a causal influence of money on output: (i) M1 is positively correlated with real output; (ii) the money multiplier and deposit-to-currency ratio are positively correlated with output; (iii) the price level is negatively correlated with output; (iv) the correlation of M1 with contemporaneous prices is substantially weaker than the correlation of M1 with real output; (v) correlations among real variables are essentially unchanged under different monetary-policy regimes; and (vi) real money balances are smoother than money-demand equations would predict.

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This paper studies the business-cycle fluctuations predicted by a two-sector endogenous-business-cycle model with sector-specific external increasing returns to scale. It focuses on aspects of actual fluctuations that have been identified both as defining features of business cycles and as ones standard real-business-cycle models cannot explain. For empirically realistic calibrations of the degree of returns to scale, the results suggest that endogenous fluctuations do not provide the dynamic element that is missing in existing real-business-cycle models.

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A number of economists find that growth and schooling are highly correlated across countries. A model is examined in which the ability to build on the human capital of one’s elders plays an important role in linking growth to schooling. The model is calibrated to quantify the strength of the effect of schooling on growth by using evidence from the labor literature on Mincerian returns to education. The upshot is that the impact of schooling on growth explains less than one-third of the empirical cross-country relationship. The ability of reverse causality to explain this empirical relationship is also investigated.

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Direct measures of labor-force quality from international mathematics and science test scores are strongly related to growth. Indirect specification tests are generally consistent with a causal link: direct spending on schools is unrelated to student performance differences; the estimated growth effects of improved labor-force quality hold when East Asian countries are excluded; and, finally, home-country quality differences of immigrants are directly related to U.S. earnings if the immigrants are educated in their own country but not in the United States. The last estimates of micro productivity effects, however, introduce uncertainty about the magnitude of the growth effects.

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Tiebout choice among districts is the most powerful market force in American public education. Naive estimates of its effects are biased by endogenous district formation. I derive instruments from the natural boundaries in a metropolitan area. My results suggest that metropolitan areas with greater Tiebout choice have more productive public schools and less private schooling. Little of the effect of Tiebout choice works through its effect on household sorting. This finding may be explained by another finding: students are equally segregated by school in metropolitan areas with greater and lesser degrees of Tiebout choice among districts.

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This paper analyzes the effects of international openness on vertical integration. Vertical integration can confer a negative externality, by thinning the market for inputs and thus worsening opportunism problems; this induces strategic complementarity and multiple equilibria in the integration decision, thus providing a theory of different “industrial systems” or “industrial cultures” in ex ante identical countries. International openness thickens the market, facilitating leaner, less integrated firms, thus providing gains from international openness quite different from those that are familiar from trade theory. This may be taken as one theory of “outsourcing,” “downsizing,” and “Japanization” as consequences of “globalization.”

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We develop a competitive model of trade between countries with similar aggregate factor endowments. The trade pattern reflects differences in the distribution of talent across the labor forces of the two countries. The country with a relatively homogeneous population exports the good produced by a technology with complementarities between tasks. The country with a more diverse workforce exports the good for which individual success is more important. Imperfect observability of talent strengthens the forces of comparative advantage. Finally, we examine the effects of trade on income distribution and the composition of firms in each industry.

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In a world of trade restrictions, large countries enjoy economic benefits, because political boundaries determine the size of the market. Under free trade and global markets even relatively small cultural, linguistic or ethnic groups can benefit from forming small, homogeneous political jurisdictions. This paper provides a formal model of the relationship between openness and the equilibrium number and size of countries, and successfully tests two implications of the model. Firstly, the economic benefits of country size are mediated by the degree of openness to trade. Secondly, the history of nation-state creations and secessions is influenced by the trade regime.

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The paper takes the search and matching model of the aggregate labor market to the data. It tests the model’s empirical validity and employs structural estimation to generate a characterization of the optimal behavior of firms and workers. The model is applied to Israeli data that are uniquely suited for this kind of empirical investigation. The structural estimates are used to quantify the frictions embodied in the model, including the costs of search, the congestion and trading externality effects, and the matching process. A calibration-simulation analysis then studies the effect of several key variables on equilibrium unemployment.

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We provide a simple explanation for the observation from the U.S. manufacturing sector that the job destruction rate fluctuates more than the job creation rate. In our model, proportional plant-level costs of creating and destroying jobs cause shrinking plants to be more sensitive to aggregate shocks than growing plants. We describe circumstances in which this microeconomic asymmetry is preserved in the aggregate and show that it can account for much of the observed asymmetries in gross job flows. This is so even though we abstract from job matching frictions, incomplete contracts, and aggregate congestion effects.

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Much of the theory in personnel economics relates to effects of monetary incentives on output, but the theory was untested because appropriate data were unavailable. A new data set for the Safelite Glass Corporation tests the predictions that average productivity will rise, the firm will attract a more able workforce, and variance in output across individuals at the firm will rise when it shifts to piece rates. In Safelite, productivity effects amount to a 44-percent increase in output per worker. This firm apparently had selected a suboptimal compensation system, as profits also increased with the change.

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Social Interactions and the Institutions of Local Government
Robert W. Helsley and William C. Strange      

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Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat
Eckhard Janeba      

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Selective Versus Universal Vouchers: Modeling Median Voter Preferences in Education
Zhiqi Chen and Edwin G. West      

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Erratum: A Reconsideration of the Twentieth Century
R. A. Mundell      

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