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Compensation and Firm Performance

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  • Ronald G. Ehrenberg
  • George T. Milkovich

Abstract

This paper uses stochastic simulation and my U.S. econometric model to examine the optimal choice of monetary policy instruments. Are the variances, covariances, and parameters in the model such as to favor one instrument over the other, in particular the interest rate over the money supply? The results show that the interest rate and the money supply are about equally good as policy instruments in terms of minimizing the variance of real GNP. The variances of some of the components of GNP are, however, much larger when the money supply is the policy instrument, as is the variance of the change in stock prices. Therefore, if one's loss function is expanded beyond simply the variance of real GNP to variances of other variables, the interest rate policy does better. The results thus provide some support for what seems to be the Fed's current choice of using the interest rate as its primary instrument. Stochastic simulation is also used to estimate how much of the variance of real GNP is due to the error terms in the demand for money equations. The results show that the contribution is not very great even when the money supply is the policy instrument.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2145.

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Date of creation: Jan 1987
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Publication status: published as Ehrenberg R.G. and G.T. Milkovich."Compensation and Firm Performance," Human Resources and the Performance of Firms, eds. M. Kleiner et al. Madison, Wisconsin: Industrial Relations Research Association, (1987).
Handle: RePEc:nbr:nberwo:2145

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Cited by:
  1. Harry J. Holzer, 1989. "Wages, Employer Costs, and Employee Performance in the Firm," NBER Working Papers 2830, National Bureau of Economic Research, Inc.
  2. George Kominis & Clive R. Emmanuel, 2005. "Exploring the reward preferences for middle level managers," Qualitative Research in Accounting & Management, Emerald Group Publishing, vol. 2(1), pages 54-76, April.
  3. John M. Abowd & Francis Kramarz & David N. Margolis, 1994. "High Wage Workers and High Wage Firms," NBER Working Papers 4917, National Bureau of Economic Research, Inc.
  4. Brunello, Giorgio & Graziano, Clara & Parigi, Bruno, 2001. "Executive compensation and firm performance in Italy," International Journal of Industrial Organization, Elsevier, vol. 19(1-2), pages 133-161, January.
  5. Jones, Derek C. & Kato, Takao, 1996. "The determinants of chief executive compensation in transitional economies: Evidence from Bulgaria," Labour Economics, Elsevier, vol. 3(3), pages 319-336, October.
  6. John M. Abowd, 1989. "Does Performance-Based Managerial Compensation Affect Subsequent Corporate Performance?," NBER Working Papers 3149, National Bureau of Economic Research, Inc.
  7. Erica L. Groshen, 1988. "Why do wages vary among employers?," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 19-38.

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