Lawrence S. Davidson

A Discussion of Methods Employed in Analyzing the Impact of Short-Term Entertainment Events

As economists pay increasing attention to short-term entertainment events, it is constructive to evaluate the current methodology employed in studies. This study points out that the basic issue addressed by studies is the difference between what did happen and what might have happened—a difficult subject. Other criticisms are raised concerning definitions employed, the survey technique, the multiplier, and appropriate sampling and statistical techniques.

Testing the Satisficing Version of the Political Business Cycle: 1905-1984

This paper develops a test of the satisficing version of the political business cycle. Previous tests have focused on maximizing models of political behavior and are not sufficiently general to test for satisficing behavior. Using annual U.S. data for the period 1905 to 1984, we find evidence supporting the satisficing version of the political business cycle model, but we reject the maximizing version. In accordance with the satisficing hypothesis, we find that increasing inflation or unemployment and decreasing monetary base growth in the third year of a presidential term are followed typically by reversals during the election year.

Testing for political business cycles

Abstract This paper presents a new test of political business cycle and partisan theories of politico-economic interaction. It builds on the hypothesis that model dynamics and not just the intercept of a time-series model vary over electoral periods and party regimes. Using long-run data for the United States, we find evidence that Presidential elections and the political party of incumbent Presidents influence the behavior of economic targets and instruments. However, these outcomes do not arise independently of recent economic performance. Therefore, our results support the satisficing model of Frey and Schneider and reject the traditional version of the theory.

Changes in long-term economic trends: Before and after the 1930s☆

Abstract This article uses the transfer function technique to estimate and compare trends of five major macroeconomic time series over the time periods 1902–1931 and 1937–1985. We show that the transfer function is ideally suited for this purpose since it simultaneously captures several factors which independently generate a tendency for a shock to persist over time. Transfer function estimates and simulations of inflation, nominal and real interest rates, output, and unemployment suggest that trend behavior is markedly different after the mid-1930s than before. In the latter period, we find more pronounced positive trend behavior of nominal variables and a less persistent growth rate of output.

Estimates of the fisher effect: A neo-Keynesian approach

ConclusionThis paper has presented estimates of a structural model designed to study the processes by which inflationary expectations affect nominal interest rates. The theoretical framework expands upon previous analyses of the effects of expected inflation primarily by analyzing a wider range of resulting substitution effects both among financial assets as a group, and between financial assets and commodities. A possible substitution effect between leisure and both these groupings (commodities and financial assets) was also considered.The empirical work differs from previous studies in that we estimate the effects of inflationary expectations on nominal interest rates within the structure of a complete macroeconomic system rather than using the single-equation approach outlined in section II above. The results provide evidence on the magnitude of the Fisher effect and the market mechanisms which comprise this effect as estimated within the neo-Keynesian system. These market mechanisms were found to consist of direct effects in the long-term bond market and on the aggregate demand for and supply of commodities.The total adjustment consists of changes in all the endogenous variables with the final outcome being an increase in each of the nominal interest rates in the model. The implied increase in nominal interest rates is less than a full-adjustment to the increase in the expected inflation rate, thus for the time period considered here, the estimates imply a fall in the real rate of interest. Prices and nominal income were also found to vary positively with the expected inflation rate.

Relative price variability: evidence from supply and demand events

Abstract Previous studies of relative price variability assume that all supply changes are unanticipated or that supply elasticities are equal across markets. In this paper, we extend these models by relaxing these restrictive assumptions. Our resulting theoretical expression for relative price dispersion reveals an independent role for unanticipated and anticipated supply events. Subjecting our model to empirical testing, we find that this dichotomy of supply shocks is not rejected by the data for the period 1970–1981.

The Several Effects of Anticipated Inflation

The purpose of this paper is to examine the effects of an increase of anticipated future inflation in a general equilibrium model. In the comparative statics approach taken here an attempt is made to bring together the several theoretical effects which have been presented in the literature. While the results of this inquiry suggest that inflationary expectations have a variety of effects which often conflict, they also show the necessary conditions in the economy which determine whether inflationary expectations will lead to increases in employment and output. The approach taken in this paper is unique since it attempts to differentiate between effects of currently held expectations of the current price level and the future inflation rate. This approach is necessary because the reasons for uncertainty about current prices are quite different from those which explain uncertainty about future prices. The paper treats the future inflation rate as an exogenous variable and examines the effects of an increase in the anticipated future inflation rate. The size and direction of the results depend upon how accurately agents are able to perceive current prices. Making these distinctions we come to a unique and somewhat surprising policy prescription of lowering aggregate demand as a way of simultaneously lowering both inflation and unemployment rates. We also find that jawboning efforts designed to point the finger of blame at firms and which allow unions free reign can be highly counterproductive in an inflationary world. The second section of this paper briefly discusses some of the theoretical literature on inflationary expectations. The third section describes a general equilibrium model with inflationary expectations. The fourth section performs a comparative static exercise which shows the effects of an autonomous increase in expectations of the future inflation rate upon real wages, employment, output interest rates, wages, and prices. The various results are shown to depend crucially upon misperceptions of current prices which are themselves dependent upon the relative costs of information gathering of firms and households. Section V summarizes the findings and comes to a few policy conclusions.

Chapter 6 A South American Perspective: Regional Versus Global Trade Patterns

This study presents evidence of the increasing regionalization of the international trade of ten South American countries from 1980 to 2001. We found that the regionalization of trade in South America is best described as an increasing trade among Spanish-speaking countries and increasing trade within the two regional agreements: Andean Community and Mercosur. We also find evidence of border erosion in the continent, especially among the Mercosur members. These results are evident in a simple statistical analysis and are also economically significant when tested in a consistent gravity equation that controls for a set of macroeconomic and geographic variables.

Chapter 5 The Gravity of Globalization

Can changes in the trade of the worlds largest trading countries be considered more global? Or should they be labeled as more regional? We investigated these questions for the G7 countries for the time period from 1980 to 1997. We found that the usual dichotomy of global–regional is not rich enough to answer these questions because globalization can be measured in terms of both physical and cultural distance. Our new taxonomy allows for testing these separate impacts on world trade and suggests that trade changes are best described as regional, though with some qualification. With respect to physical distance, we find that trade is clearly becoming more regional. On the cultural dimension, however, we find conflicting results. These results are robust to a series of tests. We find the same pattern at industry level, except for paper products and motor vehicles. The regionalization pattern holds for both imports to and exports from the G7, but it is stronger for exports.

REGIONAL INTEGRATION OF U.S. BORDER STATES WITH CANADA: EVIDENCE FROM U.S. STATE EXPORTS

This paper examines the nature of regional trade integration between the United States and Canada by using a Similarity Index that summarizes the behavior of exports of states along the U.S./Canadian border relative to U.S. states that are not on the Canadian border. An export Similarity Index is used to show the considerable importance of industry mix relative to distance. Similarity Index changes suggest that increased export sales between the U.S. and Canada between 1996 and 2001 were not primarily driven by proximity factors that underlie a regional phenomenon. Industry factors independent of location and distance were important contributors to changes in U.S. exports to Canada. The upshot is that global, not regional, factors may underlie increasing trade between the U.S. and Canada. That is, an apparent global phenomenon may have been mistaken for a regional one.