NBER Reporter: Spring 2000

Fifteenth Annual Conference on Macroeconomics

The NBER held its Fifteenth Annual Conference on Macroeconomics in Cambridge on April 7 and 8. Ben S. Bernanke, NBER and Princeton University, and Kenneth S. Rogoff, NBER and Harvard University, organized the conference at which the following papers were presented and discussed.

Daron K. Acemoglu and Joshua D. Angrist, NBER and MIT, "How Large Are Human Capital Externalities? Evidence from Compulsory Schooling Laws" (NBER Working Paper No. 7444)
Discussant: Mark Bils, NBER and University of Rochester, and Cecilia E. Rouse, NBER and Princeton University

Allan Drazen, NBER and University of Maryland, "The Political Business Cycle after 25 Years"
Discussant: Alberto F. Alesina, NBER and Harvard University, and Carl E. Walsh, University of California, Santa Cruz

Steve E. Morris, Yale University, and Hyun S. Shin, Oxford University, "Rethinking Multiple Equilibria in Macroeconomic Modeling"
Discussant: Andrew G. Atkeson, NBER and University of Minnesota, and Helene Rey, London School of Economics

Hal Cole, Federal Reserve Bank of Minneapolis, and Lee Ohanian, University of California, Los Angeles, "Re-examining the Contributions of Money and Banking Shocks to the U.S. Great Depression"
Discussant: Michael D. Bordo, NBER and Rutgers University, and Mark Gertler, NBER and New York University

Francisco Rodriguez, University of Maryland, and Dani Rodrik, NBER and Harvard University, "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-national Evidence" (NBER Working Paper No. 7081)
Discussant: Chiang T. Hsieh, Princeton University, and Chad I. Jones, NBER and Stanford University

Maurice Obstfeld, NBER and University of California, Berkeley, and Kenneth S. Rogoff, "The Six Major Puzzles in International Finance: Is There a Common Cause?"
Discussant: Charles M. Engel, NBER and University of Washington, and Olivier Jeanne, International Monetary Fund

These papers and their discussions will be published by the MIT Press in the NBER Macroeconomics Annual 2000, Volume 15. Its availability will be announced in a future issue of the NBER Reporter. The conference versions of the papers can be found at Books In Progress.

Many economists and policymakers believe that education creates positive externalities. Indeed, the average level of schooling in the U.S. states is highly correlated with state wage levels, even after the direct effect of schooling on individual wages is considered. Acemoglu and Angrist use variation in child labor laws and compulsory attendance laws over time and across states to investigate whether this relationship is causal. They show that the private returns to education are around 7 percent, and that the external returns to education are approximately 1 to 2 percent.

Drazen surveys and assesses previous research on the political business cycle since the mid-1970s. He argues that models based on monetary surprises as the driving force are unconvincing explanations of either opportunistic or partisan cycles. Instead, fiscal policy is likely the driving force, with monetary effects occurring as the result of accommodation of fiscal impulses. Drazen's preferred political business cycle model combines active fiscal policy and passive monetary policy (he terms this the AFPM model).

Morris and Shin investigate whether beliefs are as indeterminate as models with multiple equilibriums suggest. Multiple equilibriums may be the unintended consequence of two modelling assumptions: that fundamentals are commonly known, and that economic agents know others' actions in equilibrium. Both assumptions are questionable. When others' actions are not known with certainty, for example, when these actions rely on noisy signals, then self-fulfilling beliefs lead to a unique outcome determined by the fundamentals and the simple knowledge that others are rational. Morris and Shin illustrate this approach in the context of a model of bank runs and with other similar applications. They conclude that public information has a disproportionately larger impact on the outcome than private information does.

Using general equilibrium models, Cole and Ohanian evaluate the contribution of deflationary money shocks (operating through imperfectly flexible wages in certain sectors) and financial intermediation shocks (operating through bank failures) to the Great Depression. Specifically, they ask whether these shocks could reasonably have driven down output per adult nearly 40 percent relative to trend between 1929 and 33. They find that money shocks and banking shocks operating this way explain only a relatively small fraction of the Great Depression. They also find that other predictions of the theories are at variance with the data. These results thus raise questions about the money and banking hypothesis as an explanation of the Great Depression in the United States.

Do countries with lower policy-induced barriers to international trade grow faster than other countries, once other relevant characteristics are taken into account? Rodriguez and Rodrik argue that in many cases, the indicators of "openness" used by earlier researchers have been poor measures of trade barriers, or were highly correlated with other sources of bad economic performance. In other instances, the methods used to ascertain the link between trade policy and growth had serious shortcomings. Rodriguez and Rodrik find little evidence that open trade policies -- in the sense of lower tariff and nontariff barriers to trade -- are significantly associated with economic growth.

Obstfeld and Rogoff claim that by explicitly introducing costs of international trade (narrowly, transport costs, but more broadly, tariff and nontariff barriers), economists can explain a number of the central empirical puzzles that they have struggled with over the last 25 years. If this one simple alteration to an otherwise canonical international finance model can help to explain the broad array of empirical puzzles that they describe, including some that previously seemed intractable, then a rich area for future research exists.

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