Consumer protection policies and rational behavior

How consumers behave has important consequences when assessing the effectiveness of particular consumer protection policies. In this paper it is argued that policies that rely strongly on consumer rationality, such as information provision requirements, are considerable less effective in practice than what is foreseen under the usual assumptions of economic models. The relation between consumer behavior and a variety of consumer protection issues, such as unfair business practices, the benefits of standardization. informatioll regulation, education campaigne, large scale scams and advertising, is analyzed

A unified approach to the study of sums, products, time-aggregation and other functions of ARMA processes

Conditions under which sums, products and time-aggregation of ARMA processes follow ARMA models are derived from a single theorem. This characterizes these processes in terms of difference equations satisfied by their autocovariance function. From this we obtain necessary and sufficient conditions for a function of a Gaussian ARMA process and the product of two possibly dependent Gaussian ARMA processes to be ARMA. We show that the sum and product of two ARMA processes related by a Box and Jenkins transfer function model belong to the ARMA family

Three Strikes and You’re Out: Reply to Cooper and Willis

Cooper and Willis (2003) is the latest in a sequence of criticisms of our methodology for estimating aggregate nonlinearities when microeconomic adjustment is lumpy. Their case is based on “reproducing” our main findings using artificial data generated by a model where microeconomic agents face quadratic adjustment costs. That is, they supposedly find our results where they should not be found. The three claims on which they base their case are incorrect. Their mistakes range from misinterpreting their own simulation results to failing to understand the context in which our procedures should be applied. They also claim that our approach assumes that employment decisions depend on the gap between the target and current level of unemployment. This is incorrect as well, since the ‘gap approach’ has been derived formally from at least as sophisticated microeconomic models as the one they present. On a more positive note, the correct interpretation of Cooper and Willis’s results shows that our procedures are surprisingly robust to significant departures from the assumptions made in our original derivations

Explaining investment dynamics in U.S. manufacturing: a generalized (S; s) approach

In this paper we derive a model of aggregate investment that builds from the lumpymicroeconomic behavior of firms facing stochastic fixed adjustment costs. Instead of theŽ.standard sharp S, s bands, firms’ adjustment policies take the form of a probability ofŽ.adjustment adjustment hazard that responds smoothly to changes in firms’ capacity gap.The model has appealing aggregation properties, and yields nonlinear aggregate timeseries processes. The passivity of normal times is, occasionally, more than offset by thebrisk response to large accumulated shocks. Using within and out-of-sample criteria, wefind that the model performs substantially better than the standard linear models ofinvestment for postwar sectoral U.S. manufacturing equipment and structures investmentdata.We are grateful to Olivier Blanchard, Whitney Newey, James Stock, an editor, three anonymousreferees, and seminar participants at Brown, CEPR-Champoussin, Chicago, Columbia, EconometricŽ.Society Meetings Caracas and Tokyo , EFCC, Harvard, IMPA, LSE, NBER, Princeton, Rochester,Ž.SITE, Toronto, U. de Chile, and Yale for their comments. Financial support to Caballero from theŽ. Ž .National Science and Sloan Foundations and to Engel from FONDECYT Grant 195-510 and theŽ.Mellon Foundation Grant 9608 is gratefully acknowledged.2Since plants’ entry is excluded from their sample, these statistics are likely to represent lowerbounds on the degree of lumpiness in plants’ investment patterns.3We use the word ‘‘project’’ to emphasize the fact that the actual implementation of a projectmay cover more than a year-observation; realistic time-to-build aspects of investment are not incontradiction with the view that investment episodes are lumpy in nature.4Ž.See Chirinko 1994 for a survey of the empirical investment literature

Microeconomic Adjustment Hazards and Aggregate Dynamics

The basic premise of this paper is that understanding aggregate dynamics requires considering that agents are heterogeneous and that they do not adjust continuously to the shocks they perceive. We provide a general characterization of lumpy behavior at the microeconomic level in terms of an adjustment-hazard function, which relates the probability that a unit adjusts to the deviation of its state variable from its moving target. We characterize rich, cross-sectionally dependent aggregate dynamics generated by nonconstant hazards. We present an example based on U. S. manufacturing employment and job flows, and find that increasing- hazard models outperform constant-hazard-partial-adjustment models in describ- ing aggregate employment dynamic

Heterogeneity and Output Fluctuations in a Dynamic Menu-Cost Economy

When firms face menu costs, the relation between their output and money is highly nonlinear. At the aggregate level, however, this needs not be so. In this paper we study the dynamic behavior of a general equilibrium menu-cost economy where firms are heterogeneous in the shocks they perceive, and the demands and adjustment Costs they face. In this context we (i) generalize the Caplin and Spulber [1987] steady state monetary neutrality result; (ii) show that uniqueness of equilibria depends not only on the degree of strategic complementarities but also on the degree of dispersion of firms' positions in their price-cycle; (iii) characterize the path of output outside the steady state and show that as strategic complementarities become more important, expansions become longer and smoother than contractions; and (iv) show that the potential effectiveness of monetary policy is an increasing function of the distance of the economy from its steady state, but that an uninformed policy maker will have no effect on output on average

Price Rigidities. Asymmetries and Output Fluctuations

In this paper we characterize the average response of output to aggregate demand shocks in an economy where individual firms follow state-dependent pricing rules. We find that: (i) the average response of output to aggregate demand shocks decreases with core inflation and varies non-monotonically with aggregate uncertainty, (ii) there is an asymmetry in the response of output to aggregate demand expansions and contractions, which increases with core inflation and decreases with aggregate uncertainty, and (iii) this asymmetry also rises with the degree of asymmetry of aggregate demand shocks. Using annual data from 37 moderate-low inflation countries for the period 1960-1982, we find support for the basic implications of the model

Microeconomic rigidities and aggregate price dynamics

This paper is an attempt to enrich the characterization of the sluggish behavior of the aggregate price level. Our contribution to this vast literature is to explicitly consider microeconomic heterogeneity and its interaction with nonlinear microeconomic price adjustment policies. The model we propose outperforms the constant-probability-of-adjustment/partial-adjustment model in describing the path of postwar U.S. inflation. Using only aggregate data, we infer that the probability that a firm adjusts its price depends on the sign and the magnitude of the deviation of the price from its target Level. At the aggregate level we find that the aggregate price level responds tess to negative shocks than to positive shocks, that the size of this asymmetry increases with the size of the shock, and that the number of firms changing their prices - and therefore the flexibility of the price ieve1 to aggregate shocks - varies endogenously over time in response to changes in economic conditions

The Chilean Plebiscite: Projections Without Historic Data

On October 5, 1988, Chileans decided by plebiscite to oust General Pinochet from power and have free presidential elections in 1989. This article describes the projections that the authors made for the results of the plebiscite from early returns. From a statistical point of view, what made these projections different from those made in other countries was the complete lack of historic data. Furthermore, the Pinochet government carried out a campaign to discredit the projection effort. Uncertainty about both the data and the unpredictable political climate on the night of the plebiscite influenced the choice of the statistical methodology. The predictions, based on a 10% sample of the first one-third of the votes counted, were within one-half a percentage point of the true outcome. The described methodology could prove useful in projections of other elections that will take place under similar conditions (e.g., in Eastern Europe)