A Reexamination of the Effect of Rapid Military Spending on Inflation

The hypothesis that rapid defense buildups contribute to inflation recently has been rejected by Donald F. Vitaliano. In this paper, it is argued that this result is misleading, given that it is obtained under the implausible assumption of constancy of the expected real rate of interest. The hypothesis is reexamined using a well-known measure of the expected inflation rate, and it is found that growth of defense spending has a statistically significant positive effect on the rate of price inflation

Openness and the Efficiency of FDI: A Panel Stochastic Production Frontier Study

This paper uses a stochastic translog production frontier to estimate technical inefficiency indices whose conditional mean is specified as a function of FDI and its interaction with openness of the economy. The model is estimated using an annual panel of 46 countries for the years, 1981–2001. The results suggest that increased FDI increases potential output in both developed and developing countries with the effect being more profound in the former. It is also found that increased FDI reduces technical inefficiencies the more open is the economy but that this effect holds only for developed economies. Thus qualified support is found for the “Bhagwati hypothesis” as the results reveal that the efficiency–enhancing effect of FDI depends not only on openness but also on the degree of development of the host country

(WP 2010-10) Assessing the Predictive Power of Labor-Market Indicators of Inflation

This paper examines two different measures of wages as predicators of prices in a vector error-correction framework using quarterly data for the U.S. for the period from 1947.Q1 through 2008.Q1. Based on cointegration and a series of exogeneity tests, it is found that: 1) there is a stable, long-run relationship between the Consumer Price Index (CPI) and the Personal Consumption Expenditure Deflator (PCED) on the one hand and unit labor costs (ULC) and average earnings per unit of output (AHE) on the other; 2) ULC is weakly exogenous for both price indices while the two price indices are weakly exogenous for AHE; 3) ULC is strongly exogenous for CPI but not for AHE; 4) ULC is super exogenous for CPI. Taken together, these findings lead to the conclusion that ULC is a reliable indicator of price inflation but productivity-adjusted hourly earnings is not. Thus monetary policymakers are justified in using information about the behavior of ULC in formulating policy actions for achieving the goal of price stability

Determinants of Economic Development Incentives Offered by States: A Test of the Arms Race Hypothesis

This paper tests the arms race hypothesis, which postulates that states tend to increase their incentive offerings to new firms if such incentive programs are in use in other states that are perceived to be direct competitors. Using a pooled time-series/cross-section sample of twelve states covering the period from 1969 through 1985 and a model that controls for the effects of various economic and political factors, we find strong support for the arms race hypothesis. This result is robust to the alternative specifications of the incentive offerings and different measures of the degree of competition among states

Assessing the Predictive Power of Labor-Market Indicators of Inflation

This paper examines two different measures of wages as predicators of prices in a vector error-correction framework using quarterly data for the U.S. for the period from 1947.Q1 through 2008.Q1. Based on cointegration and a series of exogeneity tests, it is found that: 1) there is a stable, long-run relationship between the Consumer Price Index (CPI) and the Personal Consumption Expenditure Deflator (PCED) on the one hand and unit labor costs (ULC) and average earnings per unit of output (AHE) on the other; 2) ULC is weakly exogenous for both price indices while the two price indices are weakly exogenous for AHE; 3) ULC is strongly exogenous for CPI but not for AHE; 4) ULC is super exogenous for CPI. Taken together, these findings lead to the conclusion that ULC is a reliable indicator of price inflation but productivity-adjusted hourly earnings is not. Thus monetary policymakers are justified in using information about the behavior of ULC in formulating policy actions for achieving the goal of price stability.Unit Labor Cost; Cointegration; Vector Error Correction; Exogeneity

Tax Rates and Tax Evasion: Evidence from California Amnesty Data

The effect of marginal tax rates on income tax evasion is examined using data from the California Tax Amnesty Program, which provided amnesty for people who had not filed returns, had filed inaccurate returns, or were delinquent in paying their tax liabilities. People under criminal investigation were not eligible. After correcting for the selectivity bias, it was found that tax evaders respond to higher marginal tax rates by increasing their evasion activity. The results also confirm the theoretical prediction that people with higher levels of income tend to evade more. The absolute and relative sizes of income and tax rate changes depend on the scope of the evasion measure used. In particular, the absolute effects of income and tax rate changes are larger for the income-based measures of evasion, while the relative effects are larger for the tax-based measure of evasion. Finally, the results suggest that evasion generally is inelastic with respect to changes in both true income and marginal tax rates but that tax rate inelasticities are consistently larger than income elasticities

Openness, Growth, and Development: Evidence from a Panel of Developing Countries

This paper examines the interaction between openness, growth, and development using a panel of forty-seven developing countries and five-year averages for the period, 1965-1990. Its primary objective is to determine whether there is a direct link between the level of development and openness, while controlling for the indirect effect of openness through its impact on economic growth. Using a two-equation simultaneous-equations model of development and growth and three alternative measures of openness, our findings suggest that openness has a positive influence on both economic growth and human development. We also find that while economic growth makes a positive contribution to development, the converse is not true in that the more developed a nation the slower its growth rate