James M. McGibany

Evaluating the long-run impacts of the 9/11 terrorist attacks on US domestic airline travel

Although the US airline industry began 2001 with 24 consecutive profitable quarters, including net profits in 2000 totaling

Do lower mortgage rates mean higher housing prices

7.9 billion, the impact of the 9/11 event on the industry was substantial. Whereas the recession that began in early 2001 signaled the end of profitability, the 9/11 terrorist attacks pushed the industry into financial crisis after air travel dropped 20% over the September–December 2001 period compared to the same period in 2000. Given the decline in domestic air travel, an important question is whether the detrimental impact of the attacks was temporary or permanent. That is, did airline travel return to the trend that existed prior to the terrorist attacks? There are theoretical reasons to the believe that it would not. Economists have long viewed travel-mode choices as the outcome of a comparison of opportunity costs and benefits. Thus, anything that permanently raises the opportunity cost of travel, holding benefits constant, should reduce the level of travel volume. To determine whether air travel was permanently reduced, we use econometric and time-series forecasting models to generate a counter-factual forecast of air travel volume in the absence of the terrorist attacks. These dynamic forecasts are compared to actual air travel levels to determine the impact of the terrorist attacks. The findings suggest that domestic air travel did not return to the levels that would have existed in the absence of the attack.

Exchange Rate Volatility and the Demand for Money in the U.S.

Much research has shown that mortgage rates exert a negative influence on housing prices. This study analyses the long- and short-run relationships between housing prices and mortgage rates using advanced nonstructural estimation methods. As expected, a bivariate specification and a four-variable housing demand specification both show that these variables have a long-run relationship, and that there is a rather inelastic response of housing prices to changes in mortgage rates. However, contrary to previous research, the results from Granger non-causality tests, impulse response functions and variance decompositions reveal that there is virtually no short-run influence from mortgage rates to housing prices.

Income taxes and the income velocity of money: An empirical analysis☆

Abstract This paper examines the effect of changes in the level and volatility of exchange rates on the demand for money. It hypothesizes that exchange rate volatility exerts a negative influence on money demand separate from the effect of the level of exchange rates. Using U.S. data covering the period from 1974.1 to 1990.4, it is found that, regardless of whether the adjustment process is modeled as an error-correction or a partial-adjustment model, exchange rate volatility is negatively related to the demand for real M2 balances. This relationship is found to be more pronounced when exchange rates are expressed in real terms. The results imply that money demand responds to both the volatility of domestic prices relative to foreign prices and to the volatility of nominal exchange rates. Little evidence is found in support of the hypothesis that the level of exchange rates exerts a significant influence on money demand.

The Effects of 9/11 on the Airline Travel Industry

Abstract From 1981 iv to 1983 ii , the growth rate of the income velocity of money declined sharoly. Almost all forecasts of this rate based on standard models overpredicted the velocity growth rate over this period. In this paper it is argued that income taxes exert a direct and discernible influence on velocity of money which has not been recognized by these models. As a result, most models failed to capture the 1981–1983 Reagan tax cuts and, consequently, overpredicted the velocity growth rate in this period. It is shown that the tax-velocity hypothesis is supported by the results of an empirical test. It is also shown that the inclusion of taxes in a model of velocity helps alleviate the overprediction of the velocity growth rate in the 1981–1983 period.

Money Demand and the Effects of Fiscal Policies: Comment

There are few events in modern history that can rival the immediate impact of the 9/11 terrorist attacks on the United States and indeed the world economy. The airline industry was particularly hard hit because commercial airliners were the weapon used by the terrorists in the attacks against the World Trade Center and the Pentagon. In the immediate aftermath of the attacks, the U.S. government grounded the commercial fleet for three days that resulted in a 31.6 percent reduction in travel volume in September of 2001 compared to that same month in 2000 and generated massive industry losses. The fallout prompted a swift congressional response to shore up the industry. Significant changes were also implemented by Congress to enhance transportation security. Specifically, the Transportation Security Administration (TSA) within the Department of Homeland Security was created and charged with maintaining the security of all forms of transportation including the airline industry. Since its formation, TSA has federalized all security personnel, and instituted extensive security precautions on commercial airlines. Although these steps have thus far prevented another successful attack on U.S. soil, they come at a cost. Specifically, they increase the time cost of travel and hence they alter the optimizing calculus of potential travelers.

Non-nested tests of three competing theories of business cycles

In a recent article, Mankiw and Summers (1986) examined the explanatory and predictive power of the demand functions for M1 and M2 under alternative speciElcations of the scale variable that enters these functions. They found that for the M 1 function consumer spending outperformed GNP, whereas for M2 disposable income and Elnal sales generated the best results. The replacement of GNP in money demand with consumption spending or disposable income has an interesting implication for the effect of tax policies. More than a decade ago, Holmes and Smyth (1972) showed that the sign of the tax multiplier is ambiguous when money demand depends on income taxes either through consumption or disposable income. To our knowledge, Mankiw and Summers are the Elrst to provide empirical insight into this issue. They found that when consumer spending is used as the scale variable in money demand, a necessary and sufElcient condition for the tax multiplier to be positive is satisfied. In reaching this conclusion, Mankiw and Summers used a partial equilibrium approach in that they estimated only the money market parameters needed to evaluate this condition. As a result, they had to turn to previous literature for estimates of product market parameters that also enter this condition. In this paper, we take a more general approach to the problem of determining the sign of the tax multiplier when money demand depends on income taxes. Based on a simultaneousequations model, we estimate the income tax multiplier using three alternative scale variables in the money demand function: GNP, consumption of nondurables and services, and disposable income. Our findings indicate that the tax multiplier remains negative when GNP is replaced with either of the latter two variables, but it becomes smaller in absolute value.

Interest Rate Volatility and the Demand for Money

This paper tests the Keynesian, new classical and real business-cycle theories against each other as non-nested hypotheses using quarterly data for the US covering the period 1959:1–1989:2. The results indicate that no one theory stands out as the dominant explanation of the business cycle. This contrasts with the findings of earlier work which is mostly concerned with testing the Keynesian against the new classical theory. We find that the introduction of a third theory, the real business-cycle theory which accounts of real factors, blurs the distinction between the demand-sided Keynesian, and the new classical theories.