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Volume 17, Number 1, Winter 2003
Symposium: Consumer Price Index
The Consumer Price Index: Conceptual Issues and Practical Suggestions by Charles L. Schultze
A National Academy of Sciences Panel recently made a number of recommendations to the BLS for improving the Consumer Price Index, while also suggesting some cautions to be observed when considering the adoption of new concepts and techniques. This paper discusses the Panel’s analyses in four areas: Should a cost-of-living index be the measurement objective of the CPI? Should the index attempt to capture the effect on living costs from changes in “environmental” conditions? How can hedonic techniques be best applied for measuring quality changes? Should the BLS attempt to measure the consumer surpluses accompanying the introduction of new goods?
Sources of Bias and Solutions to Bias in the Consumer Price Index by Jerry Hausman
Four sources of bias in the Consumer Prices Index (CPI) have been identified. The most discussed is substitution bias, which creates a second order bias in the CPI. Three other changes besides prices changes create first order effects on a correctly measured cost of living index (COLI). I explain in this paper that a “pure price” based approach of surveying prices to estimate a COLI cannot succeed in solving the 3 problems of first order bias. I discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques.
Toward a Cost-of-Living Index: Progress and Prospects by Katherine G. Abraham
Symposium: Financial Market Efficiency
The Efficient Market Hypothesis and Its Critics by Burton G. Malkiel
Revolutions often spawn counterrevolutions and the efficient market hypothesis in finance is no exception. The intellectual dominance of the efficient-market revolution has more been challenged by economists who stress psychological and behavorial elements of stock-price determination and by econometricians who argue that stock returns are, to a considerable extent, predictable. This survey examines the attacks on the efficient market hypothesis and the relationship between predictability and efficiency. I conclude that our stock markets are more efficient and less predictable than many recent academic papers would have us believe.
From Efficient Markets Theory to Behavioral Finance by Robert J. Shiller
The efficient markets theory reached the height of its dominance in academic circles around the 1970s. Faith in this theory was eroded by a succession of discoveries of anomalies, many in the 1980s, and of evidence of excess volatility of returns. Finance literature in this decade and after suggests a more nuanced view of the value of the efficient markets theory, and, starting in the 1990s, a blossoming of research on behavioral finance. Some important developments since 1990 include feedback theories, models of the interaction of smart money with ordinary investors, and evidence on obstacles to smart money.
Articles
Why is There so Little Money in U.S. Politics? by Stephen Ansolabehere, John M. de Figueiredo and James M. Snyder Jr.
Durable Goods Theory for Real World Markets by Michael Waldman
The early 1970s witnessed three major advances in durable-goods theory – Swan (1970, 1971) and Sieper and Swan (1973) on optimal durability, Coase (1972) on time inconsistency, and Akerlof (1970) on adverse selection. This paper surveys durable goods theory starting with these three contributions, where much of the focus is on recent literature and on models that explain real-world phenomena. In addition to the ideas found in the contributions of Swan, Coase, and Akerlof, topics covered include why producers sometimes practice “planned obsolescence,” the role of adverse selection in new-car leasing, and reasons for aftermarket monopolization.
Beyond Incentive Pay: Insiders' Estimates of the Value of Complementary Human Resource Management Practices by Casey Ichniowski and Kathryn Shaw
Do human resource management (HRM) practices, such as incentive pay, teamwork, training, and careful screening practices, raise productivity, and if so, under what conditions does productivity rise? Recently, this question has been a central focus in organizational and personnel economics. We emphasize the value of a new research approach – an approach we label “insider econometrics”—that is aimed going deep inside businesses to obtain data and insights into the ways in which HRM practices affect specific production processes. We conclude that sets of complementary HRM practices appear to raise performance, but that some firms, such as those that make complex products or those that are starting up brand new facilities, benefit more from these practices.
An Interview with Edmond Malinvaud by Alan B. Krueger
This article contains an interview with Edmond Malinvaud. Professor Malinvaud describes the origins of his interest in economics, teachers who had a major influence on his development as an economist, his visit to the Cowles Commission in 1950, the substance of his research, and the contributions he made as a policy maker. Among the interesting tidbits in the interview is that Professor Malinvaud's popular textbooks in microeconomic theory, macroeconomics and econometrics were a direct outgrowth of courses he taught at INSEE. “I am not good at speaking,” he said, “when not constrained by a written text.”
Retrospectives: Whatever Happened to the Cambridge Capital Theory Controversies? by Avi J. Cohen and G.C. Harcourt
We argue that the Cambridge capital theory controversies of the 1950s to 1970s were the latest in a series of still-unresolved controversies over three deep issues: explaining and justifying the return to capital; Joan Robinson's complaint that, due to path dependence, equilibrium is not an outcome of an economic process and therefore an inadequate tool for analyzing accumulation and growth; and the role of ideology and vision in fuelling controversy when results of simple models are not robust. We predict these important and relevant issues, latent in endogenous growth and real business cycle theories, will erupt in future controversy.
Features
Recommendations for Further Reading
Comments: B. D. McCullough and H. D. Vinod, A. Buse, Dean Baker, and Helene Jorgensen
Notes