STRATEGIC EQUILIBRIA IN A MODEL OF ECONOMIC GROWTH WITH INPUT INTERDEPENDENCE

Two countries face a strategic interdependence in producing intermediate goods. Producing these intermediate goods requires both domestic capital and another imported intermediate good. Individually, both economies determine a balanced growth path by taking into account this interdependence in different grades of awareness. By allowing for strategic interactions in the analysis, we adapted a two‐agent dynamic setting and find an interior Markov perfect equilibrium as well as an open‐loop equilibrium reflecting these different degrees of reaction. We find that main results resemble each other but growth rates will be higher when strategies are dynamically updated.     

International monetary policy coordination under asymmetric shocks

This paper analyzes whether international monetary policy coordination is the best response to economic interdependence. The paper develops a macroeconomic model in which countries show different preferences regarding objectives when faced with asymmetric disturbances and analyzes in strategic terms how monetary policy can deal with real, monetary, and supply-side shocks. It further shows how the desirability of monetary policy coordination depends on the presence of asymmetric shocks and also on the nature of disturbances, the channel of transmission, and the asymmetry of preferences. Finally, the paper derives the conditions under which monetary policy coordination proves to be desirable.     

Optimal fiscal policy in a dynamic multicountry world with public services

The authors construct a dynamic one‐good multicountry growth model with productive government spending and perfect capital mobility to study fiscal interdependence among countries. In the case of a source‐based tax, it is found that there is no strategic interaction and that the equilibrium spending/tax mix coincides with the optimal one. In the case of a residence‐based tax system, however, there is strategic interaction across countries and, under noncooperation, countries tend to spend and tax over and above the optimal Pigouvian level.     

Free Entry, Quasi-Free Trade, and Strategic Export Policy

This paper analyzes governments' choices between strategic export subsidies and free trade as a commitment when firms are free to enter or exit in response to these choices. Entry and exit is treated as a discrete process. Within the context of a four-stage game, two types of equilibria emerge: a quasi-free-trade equilibrium in which one of the two governments commits to free trade, while the other has a Nash equilibrium subsidy that is zero and bilateral export subsidies. Concerning welfare effects, if fixed costs are large enough, both countries achieve a welfare gain relative to free trade.     

Union objectives and indexation externalities in a monopolistically competitive economy

This paper extends the literature on indexation externalities by analyzing equilibrium and efficient indexation in a unionized economy characterized by a monopolistically competitive goods market. The assumption that union objectives relate to both employment and the real wage implies that union indexation decisions are associated with a negative externality and, as a consequence, the equilibrium degree of indexation is inefficiently high. This feature is characteristic of both passive and activist policy environments.     

Money illusion and coordination failure

Economists long considered money illusion to be largely irrelevant. Here we show, however, that money illusion has powerful effects on equilibrium selection. If we represent payoffs in nominal terms, choices converge to the Pareto inferior equilibrium; however, if we lift the veil of money by representing payoffs in real terms, the Pareto efficient equilibrium is selected. We also show that strategic uncertainty about the other players' behavior is key for the equilibrium selection effects of money illusion: even though money illusion vanishes over time if subjects are given learning opportunities in the context of an individual optimization problem, powerful and persistent effects of money illusion are found when strategic uncertainty prevails.     

Strategic sophistication of individuals and teams. Experimental evidence

Many important decisions require strategic sophistication. We examine experimentally whether teams act more strategically than individuals. We let individuals and teams make choices in simple games, and also elicit first- and second-order beliefs. We find that teams play the Nash equilibrium strategy significantly more often, and their choices are more often a best response to stated first order beliefs. Distributional preferences make equilibrium play less likely. Using a mixture model, the estimated probability to play strategically is 62% for teams, but only 40% for individuals. A model of noisy introspection reveals that teams differ from individuals in higher order beliefs.     

Optimal intensity targets for greenhouse gas emissions trading under uncertainty

Uncertainty is an obstacle for commitments under cap and trade schemes for emission permits. We assess how well intensity targets, where each country’s permit allocation is indexed to its future realized GDP, can cope with uncertainties in international greenhouse emissions trading. We present some empirical foundations for intensity targets and derive a simple rule for the optimal degree of indexation to GDP. Using an 18-region simulation model of a cooperative, global cap-and-trade treaty in 2020 under multiple uncertainties and endogenous commitments, we show that optimal intensity targets could reduce the cost of uncertainty and achieve significant increases in global abatement. The optimal degree of indexation to GDP would vary greatly between countries, including super-indexation in some advanced countries, and partial indexation for most developing countries. Standard intensity targets (with one-to-one indexation) would also improve the overall outcome, but to a lesser degree and not in all individual cases. Although target indexation is no magic wand for a future global climate treaty, gains from reduced cost uncertainty and the potential for more stringent environmental commitments could justify the increased complexity and other potential downsides of intensity targets.      

Fiscal limits in developing countries: A DSGE Approach

This paper studies fiscal limits in developing countries using a dynamic stochastic general equilibrium (DSGE) approach. Distributions of fiscal limits, which measure a government’s capacity to service its debt, are simulated based on macroeconomic uncertainty and fiscal policy. The analysis shows that expected future revenue plays an important role in explaining the low fiscal limits of developing countries, relative to those of developed countries. Large devaluation of real exchange rates can significantly reduce a government’s capacity to service its debt and lower the fiscal limits. Temporary disturbances, therefore, can shift the distribution of fiscal limits and suddenly change perceptions about fiscal sustainability.     

UNIVERSAL ACCESS,PARALLEL TRADE AND INCENTIVES TO INNOVATE

Governments often subsidize poorer groups in society to ensure their access to new drugs. We analyse the optimal income‐based price subsidies in a strategic environment. We show that universal access is less likely to arise when price arbitrage prevents international price discrimination. When this is not the case, under some income ranges, bilateral universal coverage can be supported by equilibrium subsidies together with bilateral partial provision. In such a case, international health policy coordination becomes relevant. We also show that asymmetric universal access to medicines across countries can arise, even when countries are ex ante symmetric, when international price discrimination is possible and governments cannot design subsidies proportional to either income or quality.     

Wage indexation and the monetary policy regime

We estimate a New Keynesian wage Phillips curve for a panel of 24 OECD countries and allow the degree of wage indexation to past inflation to vary according to structural characteristics. We find that the degree of wage indexation is significantly lower for countries with an inflation target. However, this effect vanishes when we control for the degree of goods market competition. By contrast, more goods market competition is consistently associated with lower wage indexation. This robust finding puts into question whether embedding a constant degree of wage indexation in standard DSGE models is truly structural.     

Privatization and the Political Economy of Strategic Trade Policy

This article considers the interdependence between international financial markets, privatization, and strategic trade policies. We describe an economy where portfolio allocations are chosen by risk-averse agents who rationally forecast future trade policies. Assuming a government responsive to the policy preferences of voters, we show that ownership structure affects trade policy through the incentives for lobbying by private agents. Portfolios and trade policy are thus jointly determined in political-economic equilibrium. Privatization of state-owned industry exerts an important influence over the trade policies chosen by domestic and foreign governments by expanding the scope for individual diversification.     

Globalization and labor market outcomes: Wage bargaining, search frictions, and firm heterogeneity

We introduce search unemployment into Melitz's trade model. Firms' monopoly power on product markets leads to strategic wage bargaining. Solving for the symmetric equilibrium we show that the selection effect of trade influences labor market outcomes. Trade liberalization lowers unemployment and raises real wages as long as it improves average productivity. We show that this condition is likely to be met by a reduction in variable trade costs or by entry of new trading countries. Calibrating the model shows that the long-run impact of trade openness on the rate of unemployment is negative and quantitatively significant.     

International oligopoly,barriers to outsourcing and domestic employment

In this paper we analyze the impact of barriers to outsourcing on domestic employment in an oligopolistic context. We show that although an outsourcing tax makes domestic labour cheaper, its employment effect is ambiguous due to strategic considerations. Analyzing international policy interdependence, we also show that, although a unilateral tax (subsidy) by a country must raise its domestic employment, this may be counterproductive in a Nash policy equilibrium. Finally, both a credit crisis and increased product differentiation tend to worsen the employment effects of an outsourcing tax. Our central findings are robust to both Bertrand and Cournot modes of competition.     

Better-reply dynamics and global convergence to Nash equilibrium in aggregative games

We consider n-person games with quasi-concave payoffs that depend on a player's own action and the sum of all players' actions. We show that a discrete-time, stochastic process in which players move towards better replies—the better-reply dynamics—converges globally to a Nash equilibrium if actions are either strategic substitutes or strategic complements for all players around each Nash equilibrium that is asymptotically stable under a deterministic, adjusted best-reply dynamics. We present an example of a 2-person game with a unique equilibrium where the derivatives of the best-reply functions have different signs and the better-reply dynamics does not converge.     

Tax Rate Harmonization,Renegotiation, and Asymmetric Tax Competition for Profits with Repeated Interaction

This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim‐trigger strategies. Allowing for renegotiation in the tax harmonization process requires more patient tax authorities to implement tax harmonization as a weakly renegotiation‐proof equilibrium. In this case, we find somewhat paradoxical situations where higher costs of profit shifting make tax harmonization less sustainable.     

NOMINAL WAGE INDEXATION,QUASI‐EQUILIBRIA AND REAL WAGE DYNAMICS

In contrast to the traditional static approach to indexation, this paper analyses the dynamic consequences for real wages of the mechanism that links nominal wages to inflation. Revisiting a contribution by Dehez and Fitoussi on macroeconomic fluctuations , I analyse a monetary overlapping generations small open economy in which full indexation is interpreted as the occurrence of a dynamic ‘quasi‐equilibrium’. In the suggested framework, the nominal wage is linked to the inflation rate by a specific indexation formula whose shape relies on unions' bargaining positions. Assuming a constant peg for the real interest rate and the superneutrality of money, I show that the economy has a unique long‐run quasi‐equilibrium allocation whose stability depends only on the behaviour of the monetary authority. Moreover, I show how the operating of a ‘wage‐aspiration effect’ might lead to the persistence of involuntary unemployment.     

Opacity in bargaining over public good provision

We consider ultimatum bargaining over the provision of a public good. Offer-maker and responder can delegate their decisions to agents whose actual decision rules are opaque. We show that the responder will benefit from strategic opacity, even with bilateral delegation. The incomplete information created by strategic opacity choices does not lead to inefficient negotiation failure in equilibrium. Inefficiencies arise from an inefficient provision level. While an agreement will always be reached, the public good provision will fall short of the socially desirable level. Compared with unilateral delegation, bilateral delegation is never worse from a welfare perspective.     

International R&D Collaboration and Strategic Trade Policy

We study an international trade model with symmetric countries and symmetric firms, with countries making strategic trade policies, anticipating the decisions of firms on R&D collaboration at the subsequent stage. In general we should observe a conflict between the equilibrium outcome and the efficient one. We find that an asymmetric outcome where one country unilaterally liberalizes trade while the other does not is likely to occur. We also find that while banning international R&D collaboration may help to reach free trade equilibrium in certain situations, it provides little assistance in reaching the outcome that maximizes global welfare.     

Dynamic Externalities and Policy Coordination

The paper introduces trade into dynamic models with externalities and capital accumulation, and evaluates the efficiency of the Cournot–Nash equilibrium. It considers mixed economies characterized by a blend of strategic and nonstrategic sectors. Also, there are two sources of interdependence: the existence of production externalities and the endogenous determination of market prices. It is shown that policy coordination is not needed when preferences are the same. In this case, the production externalities are internalized, so that an inefficient solution becomes the efficient integrated world equilibrium due to trade.