ECONOMIC
DISTURBANCES AND
EQUILIBRIUM IN AN
INTEGRATED GLOBAL
ECONOMY
INVESTMENT INSIGHTS
AND POLICY ANALYSIS
Vic tor A. Canto
Andy Wiese
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Preface
The writing of this book is the culmination of a long
journey that began in the south side of Chicago several
decades ago. In retrospect, attending the University of
Chicago was a great professional decision. There was no
better place to be if you were an economist than Hyde
Park during the early 1970’s. The stars were properly
aligned. The economics department and business school
were full of luminaries, not only with future Nobel Prize
winners but also many professors who, even though they
did not win a Nobel Prize, were or would later become
giants in their feld. The economics and fnance work-
shops were amazing. Anybody who was somebody in
the profession either presented at the workshops or at
least tried to do so. I feel fortunate to have been there. It
was an amazing time.
The University of Chicago Economics department
played a major role in shaping the way I view the world
and interpret unfolding and past events. Although
many people deserve credit, a few had a disproportion-
ate infuence in my economic education. Early on, one
of the professors teaching the introductory price theory
sequence made an incredible impression on me. It was
none other than Gary Becker. From time to time I re-read
his textbook, Becker (1971). It still amazes me how bril-
liant and insightful he was.
After the Becker price theory sequence, I began to fo-
cus on preparing for the core exams. As I had not ma-
jored in economics, I decided I needed to shore up my
international economics. I fgured that an MBA course
on the subject would be what I needed to be reason-
ably prepared for the core. It was a decision that led me
to meet Arthur Laffer, with whom I would develop a
friendship that lasted many years. Laffer’s lectures in-
troduced me to the general equilibrium framework used
in international economics. It piqued my interest on the
subject and I followed up with Harry G. Johnson’s lec-
tures. Harry G’s lectures helped me become an expert on
the two-sector model.
The international economics sequence turned out to
be a good and important decision for my professional
career. I was introduced to the teachings of Robert Mun-
dell, which helped me to further expand my economics
portfolio in a systematic and coherent way. But that was
not enough. My interest in policy led me to Al Harberg-
er’s lectures on public fnance, project evaluation, and
economic development. Alito, as we affectionately called
him, embodied all of the characteristics that I value in an
economist: great intellect combined with an ability to ap-
ply his insights and knowledge to real life problems faced
by different economies. Two of his published papers had
a great deal of infuence in my career path. One was
The
Incidence of the Corporation Income Tax
(1962). That opened
my eyes to the fact that a tax on one factor of production
could have a devastating impact on a completely differ-
ent factor. The other paper had to do with Alito’s famous
welfare triangles (1964). The article illustrated what
H. Gregg Lewis called a practical general equilibrium
analysis. Alito’s so-called “reaction coeffcients” were
nothing more than reduced form coeffcients of the gen-
eral equilibrium’s response to the changes in distortions.
One insightful point made in this paper was that all the
properties of the traditional demand and supply curves
applied to this general equilibrium -derived demand and
supply curves. The Harberger approach opened my eyes
to the possibility of a practical general equilibrium anal-
ysis, going well beyond the ability of analyzing the im-
pact of tax rates and other policy shocks to an economy’s
equilibrium conditions. Alito had the biggest impact on
my economic profession. I am really proud to be one of
his boys, as his wife Anita fondly called us.
During my time in Hyde Park, the Effcient Market
Hypothesis (EMH) was all the rage, so I decided to take
Gene Fama’s course to fnd out what it was all about.
While exciting and interesting, the fnance literature cre-
ated a bit of a problem for me. Most of the presentations
assumed that the individual investor was a price taker
and that meant to me a partial equilibrium analysis, not
a general equilibrium one. The second problem was that
the fnance literature did not provide a simple way in
which one could link the effects of policy changes to
some of the coeffcients, as traditional economic analy-
sis does. In part, that was due to the fact that EMH in
its strong form assumed that all the relevant information
is included in the asset prices. Therefore EMH was not
amenable to establishing a relationship or link between
the policy variables and the reduced form coeffcients.
Robert Barro’s teachings and the Rational Expectations
Hypothesis (REH) literature solved that problem. It
showed me that one could develop a structural model,
decompose the policy variables into their expected and。