James E. Pesando

Measuring prices in resale housing markets in Canada: Evidence and implications*

The standard measure of resale prices in Canadian housing markets is the average price of units sold through the Multiple Listing Service (MLS). The widely-acknowledged limitation of MLS data is that the mix of units sold can vary over time. We use data for the City of Toronto from 1974 to 1989 to construct a quarterly price index based exclusively on the repeat sales of identical units. We use data on building permits to eliminate from the sample those dwelling units in which major renovations or improvements have occurred. We find quantitatively important differences in house price movements calculated from this benchmark index and the corresponding MLS index. Since house price movements do influence policy, we propose that the federal government estimate and publish an improved index of resale prices. We also find that house price movements, correctly measured, exhibit both persistence and a pronounced seasonal pattern. These, too, have potential implications for housing policy.

The Returns to Picasso's Prints and to Traditional Financial Assets, 1977 to 1996

This paper updates prior work by Pesando (1993) regarding art as an investment. Using world-wide auction prices for Picasso prints for the period 1977 to 1996, this paper establishes that (1) a recovery in the art market did occur in the mid-1990s, but (2) the real rate of return on this segment of the art market remains low relative to its risk. Indeed, the real rate of return is beneath that provided by U.S. Treasury Bills.

Retirement incentives contained in occupational pension plans and their implications for the mandatory retirement debate

The authors find, for the most prevalent type of pension plan in Canada, that plan provisions are not a close substitute for mandatory retirement. Special retirement provis ions, which have a strong potential to discourage work, typically do not come into play before age sixty and are far from universal. The p ostponed retirement provision that has the greatest potential to disc ourage work beyond age sixty-five has been deemed an unacceptable sub stitute for mandatory retirement in those jurisdictions (Quebec, Mani toba, Government of Canada) which have banned mandatory retirement.

On Forecasting Interest Rates: An Efficient Markets Perspective

This paper reviews, from an applied forecasting perspective, the properties of short- and long-term interest rates in an efficient market. The paper emphasizes that efficient markets do not preclude economic agents from successfully forecasting movements in short-term interest rates. For brief forecast intervals, however, ex ante changes in long-term rates are sufficiently close to zero that economic agents are not likely to improve upon the no-change prediction of the martingale model. Economic agents, in effect, are not likely to succeed in forecasting short-term movements in long-term interest rates. An analysis of three sets of Canadian interest rate forecasts provides results which are consistent with the theoretical discussion, Further, these results parallel those obtained in recent studies of recorded forecasts in the United States, although the authors of these latter studies apparently failed to appreciate the nature of their findings.

Wage-Pension Trade-offs in Collective Agreements

Analyzing 98 matched collective agreements and flat benefit pension plans in Ontario in 1984, the authors find evidence of a significant trade-off between wages and an actuarially constructed summary measure of the expected future pension costs for employers. With respect to the separate components of the pension plans, they find a significant trade-off between wages and the main item that is bargained over—the flat benefit rate—but not between wages and most of the early and postponed retirement options. These results obtain when the pension variables are specified as a proportion of wages, to capture the assumption that the generosity of pension plans is reflected in replacement rates, and when simultaneous equation procedures are used to account for the possible endogeneity of pensions; the trade-off disappears, however, when the pension variables are specified in dollar amounts.

The response of interest rates to the Federal Reserve's weekly money announcements: The 'puzzle' of anticipated money

Researchers, using the survey conducted by Money Market Services, Inc., have found that the anticipated component in the Federal Reserves weekly money supply announcement is negatively correlated with the post- announcement change in market yields. We prove that eliminating a (downward) bias in the measure of anticipated money can, in theory, eliminate this puzzle, but that improving the efficiency of an already unbiased measure cannot. We find, using Canadian as well as U.S. interest rate data, that correcting the downward bias in the survey measure reduces, but does not eliminate, the role of anticipated money.

Employee Valuation of Pension Claims and the Impact of Indexing Initiatives

There is discussion in both Canada and the United States of the governments requiring private pension plans to provide contractual cost-of-living protection. This paper employs both an auction and an implicit contract model to identify the compensating wage differentials required of possible indexing initiatives. The contract model, motivated by the prevalence (especially in Canada) of ad hoc cost-of-living adjustments to pensions in pay, presumes that workers have a call option on the investment earnings in excess of the interest rate assumption used to value the plan. The case for policy action would appear to rest on either (1) the assumption that workers misperceive the value (and, possibly, the security) of pension benefits or (2) the presumption that society should subsidize pension income by providing to pension plans an investment vehicle (such as an index bond) whose risk-return characteristics cannot be duplicated by portfolios of existing assets.

Rational Expectations and Distributed Lag Expectations Proxies

exogenous variables which actually generate the variable to be predicted. Empirical researchers, however, have employed a modified (and weaker) form of Muths hypothesis. Expectations are defined as rational if they fully incorporate all of the information contained in a specified information set that is available at the time that the forecast is made.3 When using distributed lag proxies, researchers implicitly assume that the information set used to generate forecasts consists solely of the information contained in the history of the variable which is being forecast. By invoking the hypothesis that expectations are rationally formed, one might hope to provide a more rigorous framework in which to guide the construction and evaluation of these distributed lag expectations proxies. The immediate purpose of this article is twofold: first, to review the properties of rational expectations in the context of autoregressive forecasting, the expectationsgenerating mechanism implicit in the use of distributed lag proxies; and second, to test the rational expectations hypothesis on an as yet unexplored set of directly observed expectations data. The broader objective, as just noted, is to provide insights into the usefulness of rationality as a criterion with which to analyze the performance of distributed lag expectations proxies. In so

Pension benefits and male-female wage differentials

Female members of defined benefit pension plans will receive greater pension benefits than males with identical work and earnings histories, since females have greater longevity. Yet females have higher turnover rates and lower earnings, both of which serve to reduce pension benefits relative to those received by males. The authors illustrate the net effect, on pension benefits in defined benefit plans, of gender differences in longevity, turnover, and wages. They conclude that females tend to receive lower pension benefits and, therefore, that pension benefits are more likely to exacerbate than to reduce the male-female wage gap.

Eliminating Mandatory Retirement: Economics and Human Rights

The arguments in favour of banning mandatory retirement namely, to relieve the pension burden on future generations, and to guarantee the human rights of olders workers merit more critical scrutiny than they appear to have received in the current debate. Similarly, one of the arguments against banning mandatory retirement that of opening employment opportunities for youth is ambiguous theoretically and requires further empirical evidence. More attention should be paid to the possibility that mandatory retirement can be both an efficient and equitable work rule.