AEAweb: AER: Contents: June 2000

The American Economic Review
Vol. 90, No. 3, June 2000

Contents

A Reconsideration of the Twentieth Century
R. A. Mundell      327-340

Saving and Growth with Habit Formation
Christopher D. Carroll, Jody Overland, and David N. Weil      341-355

Tax Policy and Aggregate Demand Management Under Catching Up with the Joneses
Lars Ljungqvist and Harald Uhlig      356-366

Habit Formation in Consumption and Its Implications for Monetary-Policy Models
Jeffrey C. Fuhrer      367-390

Habit Formation in Consumer Preferences: Evidence from Panel Data
Karen E. Dynan      391-406

What Do a Million Observations on Banks Say About the Transmission of Monetary Policy?
Anil K Kashyap and Jeremy C. Stein      407-428

Federal Reserve Information and the Behavior of Interest Rates
Christina D. Romer and David H. Romer      429-457

What Inventory Behavior Tells Us About Business Cycles
Mark Bils and James A. Kahn      458-481

Job Destruction and Propagation of Shocks
Wouter J. den Haan, Garey Ramey and Joel Watson    482-498

Efficiency and Information Aggregation in Auctions
Wolfgang Pesendorfer and Jeroen M. Swinkels       499-525

Ownership Risk, Investment, and the Use of Natural Resources
Henning Bohn and Robert T. Deacon      526-549

Standardization in Decentralized Economies
Emmanuelle Auriol and Michel Benaim     550-570

The Labeling Effect of a Child Benefit System
Peter Kooreman      571-583

A Time-Series Analysis of Crime, Deterrance, and Drug Abuse in New York City
Hope Corman and H. Naci Mocan      584-604

A Theory of Rigid Extremists and Flexible Moderates with an Application to the U.S. Congress
S. Brock Blomberg and Joseph E. Harrington, Jr.      605-620

Sovereign Debt as Intertemporal Barter
Kenneth M. Kletzer and Brian D. Wright      621-639

Role Models and Arguments for Affirmative Action
Kim-Sau Chung      640-648

Political Influence and the Dynamic Consistency of Policy
Michelle R. Garfinkel and Jaewoo Lee      649-666

The Role of a Variable Input in the Relationship Between Investment and Uncertainty
Jaewoo Lee and Kwanho Shin      667-680

Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates: Comment
Momi Dahan and Michel Strawczynski      681-686

Capital Mobility in Neoclassical Models of Growth: Comment
Petr Duczynski      687-694

Herd Behavior and Investment: Comment
Marco Ottaviani and Peter Sørensen      695-704

Herd Behavior and Investment: Reply
David S. Scharfstein and Jeremy C. Stein      705-706

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Saving and growth are strongly positively correlated across countries. Recent empirical evidence suggests that this correlation holds largely because high growth leads to high saving, not the other way around. This evidence is difficult to reconcile with standard growth models, since forward-looking consumers with standard utility should save less in a fast-growing economy because they know they will be richer in the future than they are today. We show that if utility depends partly on how consumption compares to a "habit stock'' determined by past consumption, an otherwise-standard growth model can imply that increases in growth can cause increased saving.

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This paper examines the role for tax policies in productivity-shock driven economies with catching-up-with-the-Joneses utility functions. The optimal tax policy is shown to affect the economy countercyclically via procyclical taxes, i.e., "cooling down'' the economy with higher taxes when it is "overheating'' in booms and "stimulating'' the economy with lower taxes in recessions to keep consumption up. Thus, models with catching-up-with-the-Joneses utility functions call for traditional Keynesian demand-management policies but for rather unorthodox reasons.

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This paper explores a monetary-policy model with habit formation for consumers, in which consumers' utility depends in part on current consumption relative to past consumption. The empirical tests developed in the paper show that one can reject the hypothesis of no habit formation with tremendous confidence, largely because the habit-formation model captures the gradual hump-shaped response of real spending to various shocks. The paper then embeds the habit-consumption specification in a monetary-policy model and finds that the responses of both spending and inflation to monetary-policy actions are significantly improved by this modification.

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This paper tests for the presence of habit formation using household data. A simple model of habit formation implies a condition relating the strength of habits to the evolution of consumption over time. When the condition is estimated with food consumption data from the Panel Study on income Dynamics (PSID), the results yield no evidence of habit formation at the annual frequency. This finding is robust to a number of changes in the specification. it also holds for several proxies for nondurables and services consumption created by combining PSID variables with weights estimated from Consumer Expenditure Survey data.

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We study the monetary-transmission mechanism with a data set that includes quarterly observations of every insured U.S. commercial bank from 1976 to 1993. We find that the impact of monetary policy on lending is stronger for banks with less liquid balance sheets$63i.e., banks with lower ratios of securities to assets. Moreover, this pattern is largely attributable to the smaller banks, those in the bottom 95 percent of the size distribution. Our results support the existence of a ""bank lending channel'' of monetary transmission, though they do not allow us to make precise statements about its quantitative importance.

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This paper tests for the existence of asymmetric information between the Federal Reserve and the public by examining Federal Reserve and commercial inflation forecasts. It demonstrates that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. It also shows that monetary-policy actions provide signals of the Federal Reserve's information and that commercial forecasters modify their forecasts in response to those signals. These findings may explain why long-term interest rates typically rise in response to shifts to tighter monetary policy.

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The countercyclical pattern of inventory-sales ratios is a striking feature of inventory behavior. In a model where inventories are productive for sales, both the markup of price over marginal cost and expected changes in marginal cost are key determinants of that ratio. This paper argues that costly variation in factor utilization gives rise to countercyclical markups in production-to-stock manufacturing industries. Time markup turns out to be more important than intertemporal substitution in explaining the behavior of inventory-sales ratios.

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This paper considers propagation of aggregate shocks in a dynamic general-equilibrium model with labor-market matching and endogenous job destruction. Cyclical fluctuations in the job-destruction rate magnify the output effects of shocks, as well as making them much more persistent. Interactions between capital adjustment and the job-destruction rate play an important role in generating persistence. Propagation effects are shown to be quantitatively substantial when the model is calibrated using job-flow data. incorporating costly capital adjustment leads to significantly greater propagation.

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The tension between allocative efficiency and information aggregation is explored in the context of an auction: k identical objects of unknown quality are auctioned off to n bidders whose tastes affect their valuation of an object of given quality. Bidders receive a signal about the quality of the objects. The k highest bidders get an object and pay a price equal to the k + first highest bid. We find conditions under which, in the limit, objects are allocated efficiently to those with the highest tastes, and price converges in probability to the value of an object to the marginal taste type.

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The effect of insecure ownership on ordinary investment and natural resource use is examined. Insecure ownership is postulated to depend on the type of government regime in power and the prevalence of political violence or instability. The political determinants of economy-wide investment are estimated from cross-country data, and the results are used to form an index of ownership security. When introduced into empirical models of natural resource use, this index has a significant and quantitatively important effect on the use of forests and petroleum. Contrary to conventional wisdom, ownership risk slows resource use in some circumstances.

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This paper presents a dynamic model, inspired by evolutionary game theory, of how standards and norms emerge in decentralized economies. It shows that standardization outcomes depend on adopters' attitudes to problems caused by incompatibility. If individuals display aversion to incompatibility, standardization never fails to happen eventually, but societies sometimes end up picking inferior standards. In this case, official action can be useful to quickly achieve sensible standardization. On the other hand, when individuals display tolerance or neutrality to incompatibility, there is neither path-dependency nor a lock-in problem, and regulation seems a poor alternative to laissez-faire.

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