Role Of Economic Theory Research Articles

Modern Macroeconomics in Practice: How Theory Is Shaping Policy

Over the last three decades, macroeconomic theory and the practice of macroeconomics by economists have changed significantly—for the better. Macroeconomics is now firmly grounded in the principles of economic theory. We focus on the role of economic theory in shaping policy. Over the last several decades, the United States and other countries have undertaken a variety of policy changes that are precisely what macroeconomic theory of the last 30 years suggests. The evidence that theoretical advances have had a significant effect on the practice of policy is often hard to see for policymakers and advisers involved in the hurly-burly of day-to-day policymaking, but easy to see if one steps back and takes a longer-term perspective. Examples of the effects of theory on the practice of policy include increased central bank independence; adoption of inflation targeting and other rules to guide monetary policy; increased reliance on consumption and labor taxes instead of capital income taxes; and increased awareness of the costs of policies that distort labor markets.

ECONOMIC THEORY AND POLICY: SOME THOUGHTS

This paper discusses the role of economic theory in economic policy formulation and some of the limitations on the policy applications of economic theory. The author offers some thoughts on the areas where economic theory and policy advice are currently making their biggest contribution today and where they might better do so.

Reassessing the fundamentals and beyond: Ronald Coase, the transaction cost and resource‐based theories of the firm and the institutional structure of production

AbstractIn this paper, three points are argued. The first is that Ronald Coase, best known as the forefather of transaction cost theory, foresaw many of the critical questions that proponents of the resource‐based view are concerned with today. The second is that resource‐based theory plays a potentially much more critical role in economic theory and in explaining the institutional structure of production than even many resource‐based scholars recognize. The last point is that a more complete understanding of the organization of economic activity requires a greater sensitivity to the interdependence of production and exchange relations. The arguments presented in this paper highlight important, but relatively ignored, elements in Coase's work that inform strategy research. More importantly, this paper makes the case for a triangular alignment between the triumvirate of governance structure, transaction, and resource attributes and demonstrates how the identity and strategy of a particular firm influences how its resources interact with the transaction and how the firm chooses to govern it. The general argument is then applied to the context of interfirm collaborative relations, where the key focus is broadened from just cost to also include skills/knowledge and the interdependence between cost and skills with respect to firm boundaries, both in terms of choice and nature. Such a broadening of focus enables us to additionally examine the transacting process as a productive endeavor, which underpins the co‐evolution of the competencies of partner firms. Copyright © 2002 John Wiley & Sons, Ltd.

The Role of Economic Theory in Regional Advocacy

Regionalism is now being explored by a wide variety of communities. One of the most hotly debated assertions of the 1990s was that regional unity, however defined, leads to higher levels of economic growth. Yet despite this faith in the power of regionalism, the beneficial economic effects of regional planning remain elusive. This review presents and integrates three bodies of literature related to the proposed link between metropolitan unity, as expressed through planning, and economic outcomes.

Life history consequences of fixed costs of reproduction

The distinction between fixed and variable factors of production and their corresponding costs has long played a fundamental role in economic theory. However, in analyses of life history evolution a distinction between fixed and variable costs of reproduction has not been made. In this paper, I discuss these concepts and analyze some effects of fixed costs of reproduction on reproductive decisions. While some fitness functions do not allow fixed costs of reproduction to affect optimal reproductive effort, others do. Increasing fixed costs reduces total fitness and increases the level of investment required to obtain a reproductive profit. Increased fixed costs may also narrow the parameter space of reproductive effort for positive profit. These results are discussed in the perspectives of age at maturity and the evolution of semelparity.

ECONOMIC THEORY AND NEW ECONOMETRIC APPROACHES

This paper attempts to evaluate the relationship between economic theory and new econometric approaches. By focusing upon methodologies of recent econometric approaches, I discuss the criticisms of these approaches and role of economic theory in new econometric methodology. Furthermore, new econometric methodology is approached through the perspective of Popperian philosophy of science.

Social choice and resource allocation: a topological perspective

This volume brings together a collection of papers in an area which has evolved rapidly in recent years. This is the area of continuous or topological approaches to the study of social choice, and the analysis of what have come to be known as “Chichilnisky rules”. Initiated by Chichilnisky in a paper in Advances in Mathematics in 1980 [14], the field has quickly evolved from a separate and distinct area of social choice to one which is integrated into the mainstreams of both social choice and the general equilibrium approach to markets, and which in turn has come to integrate and bridge these previously disparate areas, revealing deep and unexpected connections between them. Many of the papers in this volume were first presented either at a conference on “Ethics, Economics and Business” held at Columbia Business School in March 1993, or at a workshop on “Geometry, Topology and Markets” held at the Fields Institute for Mathematical Sciences in July 1994. These two meetings were important in catalyzing the growth of this area. My aim in this introduction is to place the papers in this volume in the context of the development of the area in general, and then to give some personal reflections and observations on the growth of this area, its future, and its role in economic theory. Three of the sections of this introduction, “Topological Social Choice”, “Incentives”, “Infinite Populations”, match the three sections into which the papers that follow have been organized. Section 2 of this introduction, on “Social Choice and Resource Allocation”, surveys recent results on the relationship between social choice theory and resource allocation theory, a field covered in more detail in Chichilnisky’s paper [18] in Sect. 1.

The Role of Economic Theory in Modelling The Long Run

This argues for a closer link between the modelling of the long-run relations in applied economics and the intertemporal equilibrium notion from economic theory.(This abstract was borrowed from another version of this item.)

The Role of Economic Theory

The Role of Economic Theory

Subjectivism, indeterminacy and the structure of economic analysis

Subjectivists tend to reject the use of mechanistic laws in the explanation of human behaviour. There is a widespread belief, even in Austrian circles, that this rejection has destructive implications for all theory. The aim of this paper is to show that this belief is mistaken and that deterministic laws of behaviour need not play an essential role in economic theory. Behaviour can still be analysed and understood without using such laws. In addition, economics is not only about the explanation of behaviour, but also about the identification of which behaviour, by whom, is responsible for certain economic phenomena. The relevant methodology for these kinds of analyses is worked out and topical controversies in subjectivist economics, such as the role of the economics of knowledge, the possibility for dynamic theory and the relation between subjectivism and Keynes's method, are addressed.

Some fine-tuning for dominant diagonal matrices

play an important role in economic theory because of their two special properties. First, all their eigenvalues have positive real part, a fact which plays a key role in the stability analysis of general equilibria and in the study of gross substitutability. Second, the inverse of such a matrix is a non-negative matrix, so that whenever the vector b has only positive entries, the solution x of the system

In search of the meaning of entrepreneurship

This paper is an attempt to build a bridge between the popular and the academic usage of the terms entrepreneur and entrepreneurship, and to identify the raw materials needed to construct an interpretive framework capable of illuminating the nature of entrepreneurship and its role in economic theory. We review briefly the contributions made to this topic by Cantillon, Schumpeter, Schultz and Kirzner. We advance a ‘synthetic’ definition of the entrepreneur as someone who specializes in taking responsibility for and making judgemental decisions that affect the location, the form, and the use of goods, resources, or institutions. We then conclude with some observations on the basic choice confronting economics regarding the place of entrepreneurship in economic analysis.

Reflections on Econometric Methodology*

General issues about the methodology of empirical econometric research are discussed. It is argued that the most successful paradigms for applied work are the ones that have a capacity to survive and to evolve into more useful forms as these are needed Paradigms that embrace progressive modelling principles, such as those espoused by David Hendry, seem most amenable to this criterion. It is also argued that econometric theory has a large role to ploy in helping us to understand the strengths and the weaknesses of a methodology and to codify what its prescriptions entail. The time‐series methodology of David Hendry is considered in some detail. It is shown that the Hendry methodology comes remarkably close to achieving an optimal inference procedure for long‐run structural relationships even though it is conducted on a single‐equation basis. The findings indicate that the methodology may be unproved further to achieve results that are equivalent to optimal estimation.Detailed responses are provided to the panel discussions on econometric methodology by Dennis Aigner, Clive Granger, Edward Learner and Hashem Pesaran that were presented at the 1988 Australasian Meetings of the Econometric Society in Canberra Some personal reflections are offered on the many issues that arise from this panel discussion, including the merits of Bayesian and classical approaches, asymptotic theory, experimental and non‐experimental data, model evaluation, diagnostic testing sharp prior hypotheses, the use of graphics, and the role of economic theory in empirical modelling.

Why was there never a ‘Keynesian Revolution’ in economic policy?

This paper argues that the notion of a ‘Keynesian revolution’ in economic policy in twentieth-century Britain as commonly presented in the literature is misleading. The conception of such a revolution is dependent on implausible notions of how economic policy is made, above all on an exaggeration of the role of economic theory. It is contended that such a stress on the theory allegedly adhered to by policy makers is complicit with some common socialist arguments on the role of ‘ideology’ in policy making, and that this leads to an inadequate analysis of the constraints facing socialist economic policy.

Farmer Education and Farm Efficiency: A Survey

Development strategies increasingly emphasize agricultural development, employment, and equity; it is therefore important to examine the role of education in light of these new emphases. The purpose of this paper is to synthesize the conclusions of a number of studies of the effect of a farmer's educational level and exposure to extension services on his productivity. Eighteen studies conducted in low-income countries provided 37 sets of farm data that allow a statistical estimation of the effect of education. The overall conclusion of this paper is that farm productivity increases as a result of a farmer's completing at least 4 additional years of elementary education rather than none. Also, the effects of education were much more likely to be positive in modernizing agricultural environments than in traditional ones.

A Multivariate Model of the Term Structure*

THE TERM STRUCTURE OF interest rates has a very important role in economic theory. On the macroeconomic level the term structure serves as a key transmission link between the monetary and real sectors. On the microeconomic level the term structure not only serves as a tool for bond pricing, but the term structure also has an important role in the valuation of most financial claims. The concept of an equilibrium term structure under uncertainty was introduced by Merton [41] in 1973. Since then, Brennan and Schwartz [4, 5], Vasicek [51], Cox, Ingersoll, and Ross [11, 12], Richard [46], Long [33], and Dothan [16] have made important contributions to the theory of the term structure and equilibrium bond pricing. At this time, closed solutions for the equilibrium term structure have been derived in several special, but important, cases where the term structure is generated from univariate or bivariate stochastic processes such as the elastic random walk, geometric random walk, and square root process. However, it is arguable that the term structure of interest rates is embedded in a large macroeconomic system. Hence, it is arguable that there are generally many economic factors which are related to the term structure. The primary objective of this paper is to develop a multivariate model of the term structure that can accommodate an arbitrary number of economic relationships. The model is of a general form and can be linked with many alternative macroeconomic systems. The major assumptions of the model to be developed are that the set of stochastic factors related to the term structure follow a joint elastic random walk, that the instantaneous riskless rate can be represented as a linear combination of the same factors, and that the market prices of risk (corresponding to the different factors) are, at most, time dependent. The resulting model of the term structure can be expressed in a form that is consistent with traditional notions of the term structure. Even with multiple factors, the term structure can always be expressed in a form characterized by expectations of future short-term rates plus a liquidity premium. We will restrict our attention to the pricing of default-free, purediscount bonds. While this special case is of interest in its own right, a model for pricing the default-free, pure-discount bond also plays an important role in pricing default-free coupon bonds, risky pure-discount bonds, and, as Cox, Ingersoll, and Ross show, the valuation of most financial claims [12].

The Role of Economic Theory in Supporting Counterfactual Arguments

The Role of Economic Theory in Supporting Counterfactual Arguments