American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 10931109 Does Exchange-Rate Stability Increase Trade and Welfare? PhilippeBacchettaEricvan Wincoop 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 11101124 Market Contagion: Evidence from the Panics of 1854 and 1857 MorganKellyCormacO Grada 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 1850s 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 11251135 Monetary Aggregates and Output ScottFreemanFinn E.Kydland 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 11361159 Endogenous Business Cycles and the Dynamics of Output, Hours, and Consumption StephanieSchmitt-Grohe 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 11601183 Does Schooling Cause Growth? MarkBilsPeter J.Klenow 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 11841208 Schooling, Labor-Force Quality, and the Growth of Nations Eric A.HanushekDennis D.Kimko 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 12091238 Does Competition among Public Schools Benefit Students and Taxpayers? Caroline M.Hoxby 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 12391254 "Globalization" and Vertical Structure JohnMcLaren 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." http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 12551275 Diversity and Trade Gene M.GrossmanGiovanniMaggi 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 12761296 Economic Integration and Political Disintegration AlbertoAlesinaEnricoSpolaoreRomainWacziarg 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 12971322 The Determinants of Equilibrium Unemployment EranYashiv 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 13231345 Aggregate Employment Fluctuations with Microeconomic Asymmetries Jeffrey R.CampbellJonas D. M.Fisher 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 13461361 Performance Pay and Productivity Edward P.Lazear 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. http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 13621396 Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment DavidNeumarkWilliamWascher http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 13971420 Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply DavidCardAlan B.Krueger http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14211431 Central-Bank Credibility: Why Do We Care? How Do We Build It? Alan S.Blinder http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14321446 Nominal Wage Rigidity and Industry Characteristics in the Downturns of 1893, 1929, and 1981 ChristopherHanes http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14471463 Money, Sticky Wages, and the Great Depression Michael D.BordoChristopher J.ErcegCharles L.Evans http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14641476 Output Fluctuations in the United States: What Has Changed since the Early 1980's? Margaret M.McConnellGabrielPerez-Quiros http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14771490 Social Interactions and the Institutions of Local Government Robert W.HelsleyWilliam C.Strange http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 14911507 Social Limits to Redistribution GiacomoCorneoHans PeterGruner http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 15081519 Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat EckhardJaneba http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 15201534 Selective versus Universal Vouchers: Modelling Median Voter Preferences in Education ZhiqiChenEdwin G.West http://www.aeaweb.org/aer/contents/dec2000.html American Economic Association Nashville, Tennessee 0002-8282 American Economic Review 90 5 December 2000 15351535 Erratum: A Reconsideration of the Twentieth Century R. A.Mundell http://www.aeaweb.org/aer/contents/dec2000.html