# Working Papers

Stimulating discussion and critical comment on research in progress.

#### 1987

- WP 87-19
- Interest Rate Rules are Infeasible and Fail to Complete Macroeconomic Models
- A discussion of the circumstances under which interest rate rules are consistent with nominal determinacy in macroeconomic models. (PDF)
- WP 87-18
- Monetary Policy under Rational Expectations with Multiperiod Wage Stickiness and an Economy?Wide Credit Market
- An examination of the provisional estimates of real GNP growth, concluding that these early estimates are not efficient forecasts of the final GNP numbers. (PDF)
- WP 87-17
- Turnover Wages and Adverse Selection
- An explanation of the observed relationships between voluntary job turnover and wages over a worker’s lifetime, using a model featuring adverse selection. (PDF)
- WP 87-16
- Monetary Policy under Rational Expectations with Multiperiod Wage Stickiness and an Economywide Credit Market
- A reconsideration of the role of monetary policy in a multiperiod sticky-wage model that incorporates rational expectations and displays the natural rate property. (PDF)
- WP 87-15
- Exit from the U.S. Steel Industry
- The development of a test for whether an industry reduces capacity by first closing its highest-cost plants, using plant-level data from the U.S. steel industry. (PDF)
- WP 87-14
- Deposit Insurance and the Cost of Capital
- The impacts of deposit insurance and forbearance on the costs and value of uninsured deposits and equity capital are shown under three regimes. (PDF)
- WP 87-13
- A Test of Two Views of the Regulatory Mechanism: Averch-Johnson and Joskow
- A test of the Averch-Johnson and the Joskov models of the electric utility regulatory process. (PDF)
- WP 87-12
- Implicit Contracts, On-the-Job Search and Involuntary Unemployment
- This paper extends the implicit contracts framework to allow for on-the-job search. It is shown that involuntary unemployment can arise in such a framework without placing any a priori restrictions on either wages or severance payments. The model also implies that firms will practice a two-tier system of adjusting their labor force. In the first stage, workers who receive outside job offers leave the firm. The second stage consists of firms hiring additional workers during good states of nature, and laying off workers during bad states of nature. Furthermore, during "bad enough" states of nature, firms will offer a severance payment or bonus for those who want to voluntarily leave, and then lay off workers without offering a large enough severance payment to compensate them for being unemployed. (PDF)
- WP 87-11
- Estimating Multivariate Arima Models: When is Close Not Good Enough?
- The purpose of this study is to examine the forecasting abilities of the same multivariate autoregressive model estimated using two methods. The first method is the "exact method" used by the SCA System from Scientific Computing Associates. The second method is an approximation method as implemented in the MTS system by Automatic Forecasting Systems, Inc. The two methods were used to estimate a five-series multivariate autoregressive model for the Quenouille series on hog numbers, hog prices, corn prices, corn supply, and farm wage rates. The 82 observations were arbitrarily divided into two periods: the first 60 observations were used to estimate the models; then forecasts for one through eight years ahead were calculated for each possible point in the remaining 22 observations. The root mean square error (RMSE) using the SCA-estimated parameters was smaller than the RMSE using the MTS-estimated parameters for 38 of the 40 possible values (five variables by eight forecast horizons) and tied for one point. The average increase in the RMSE when using the MTS parameters was approximately 9 percent. Using the SCA parameters for forecasting provided smaller mean absolute error (MAE) for 35 of the 40 values, with the average increase from using the MTS parameters being approximately 5.6 percent. Using the SCA parameters provided smaller mean errors (ME) for 39 of the 40 values, with the average increase from using the MTS parameters being approximately .023. Thus, the SCA estimation method is shown to provide better forecasts than the MTS method for this one example. (PDF)
- WP 87-10
- Monetary Policy in an Economy with Nominal Wage Contracts
- A demonstration that optimal monetary policy can be either procyclical or countercyclical in a model where wages are "sticky" because of a nominal contracting constraint. (PDF)
- WP 87-09
- Amenities and the Returns to Human Capital
- A demonstration that regional differences in the returns to human capital do not necessarily imply structural differences in regional labor markets, but could be reflecting compensation for regional differences in amenities. (PDF)
- WP 87-08
- The Structure of the Female/Male Wage Differential: is it Who You Are, What You Do, or Where You Work?
- This paper decomposes the observed wage difference between male and female workers into the portions associated with three types of segregation and with the individual’s sex. The contribution of each type of segregation is the product of two factors: the extent of segregation and the wage penalty (estimated coefficient) associated with working in a female-dominated constituent. In five Bureau of Labor Statistics Industry Wage Surveys, the earnings of men and women in the same occupation at the same establishment differ by only 1%. Much of the difference in pay between men and women is associated with segregation by occupation (this reduces women?s wages by 11% to 28%). But segregation by establishment and work group also lowers the wages of women by a total of 12%. Comparisons are also made between the union and nonunion sectors of two industries. Union establishments are characterized by less variation based on occupational and individual wage penalties, but more variation based on establishment segregation. (PDF)
- WP 87-07
- Identifying Productivity and Amenity Effects In Interurban Wage Differentials
- This study focuses on the relative importance of amenity and productivity differences in determining wage differentials across urban areas. The approach developed takes advantage of the connection between land and labor market clearing conditions required for locational equilibrium of households and firms. Data on recent movers are used to estimate equilibrium wages and rents for a sample of metropolitan areas. This information is then used to identify amenity and productivity components of wages for each city in the sample. Using national estimates of the relative share of land in consumption and production, differences in productivity and amenities are found to be roughly equal sources of wage variation across the sample. (PDF)
- WP 87-06
- Univariate and Multivariate Arima versus Vector Autoregression Forecasting
- The purposes of this study are two: 1) to compare the forecasting abilities of the three methods: univariate autoregressive integrated moving average (ARIMA), multivariate autoregressive integrated moving average (MARIMA), and vector autoregression (both unconstrained ? VAR ? and Bayesian ? BVAR) and 2) to study the idea that one advantage of vector autoregressions is that the models can easily and inexpensively be reestimated after each additional data point. All of these methods have been shown to provide forecasts that are more accurate than many econometric methods, which require more resources to implement. These methods were applied to seven economic variables: real GNP, annual inflation rates, unemployment rate, the money supply (Ml), gross private domestic investment, the rate on four- to six-month commercial paper, and the change in business inventories. The major results of this study are: 1) on average, the method that performs best in terms of the root mean square error (RMSE) is the multivariate ARIMA model; 2) the univariate ARIMA and BVAR methods perform approximately the same on average; 3) reestimating the VAR model after each data point increases the accuracy of this method; 4) reestimating the BVAR model after each data point becomes available decreases the accuracy of this method; and 5) the VAR method using reestimation is approximately as accurate as the BVAR method. (PDF)
- WP 87-05
- An Analysis of Causal Relations Among Inflation, Financial Structure, Tobin’s Q and Investment
- An examination of the short- and long-run effects of inflation on financial markets and investment. (PDF)
- WP 87-04
- A Technique for Estimating a Cost System that Allows for Inefficiency
- The presentation of a new econometric technique for estimating a system of cost and input share equations that allow for inefficiency. (PDF)
- WP 87-03
- Estimating the Relationship Between Local Public and Private Investment
- A discussion of whether public outlays influence private investment, modeling the timing and effectiveness of public infrastructure as a local policy instrument. (PDF)
- WP 87-02
- Estimating Total Factor Productivity in a Generalized Cost System
- A description of two ways of adding an equation for total factor productivity to the generalized cost system of Atkinson and Halvorsen; includes a discussion of testing for regulatory biases. (PDF)
- WP 87-01
- Unionization and Cost of Production: Compensation, Productivity, and Factor? ?Use Effects
- A demonstration that unionization can affect cost of production through increases in compensation, through shifts in technologies, and through deviations from the least-cost combination of inputs (the factor-use effect). (PDF)