Growth and welfare effects of monetary policy with endogenous fertility

This paper investigates the economic growth and social welfare implications of monetary policy in an endogenous growth model with endogenous fertility. We show that, in the money-in-the-utility-function framework, endogenous fertility governs the validity of money superneutrality, the transitional dynamics of an anticipated monetary policy, and the optimal monetary policy. Along a balanced growth path, monetary growth increases fertility and reduces the economic growth rate if consumption and real balances are complements or are independent. However, monetary expansion may decrease fertility and increase economic growth if consumption and real balances are substitutes. Generally speaking, the superneutrality of money does not hold in the presence of endogenous fertility. More importantly, with endogenous fertility, the Friedman (1969) rule is no longer a welfare-maximizing monetary policy. We also show that an anticipated inflation induces the transitional dynamics of fertility and the economic growth rate even though the intertemporal elasticity of substitution equals unity. This differs from the conventional notion in the existing literature.     

Patent Policy in an Endogenous Growth Model

We investigate how the patent policy affects economic growth and social welfare based on an endogenous growth model with R&D activities. We show that the patent length that maximizes the social welfare is finite. Moreover, by introducing compulsory licensing, we also show that the patent length that maximizes the social welfare is not infinite even if the royalty rate can be controlled. Received June 29, 2001; revised version received February 5, 2002 Published online: February 17, 2003 We wish to thank two anonymous referees for their constructive comments. We also thank Akira Yakita for his helpful comments.     

Fiscal policy,growth, income distribution and sociopolitical instability

This paper identifies the fiscal instruments that governments can use to promote economic growth when sociopolitical instability (SPI) is present. We show that fiscal policy that takes into account income distribution and SPI transforms a neoclassical growth model into one with both endogenous growth and a poverty trap. Under these circumstances, the growth rate of the economy depends upon SPI, fiscal policy and income distribution. The baseline level of SPI determines an economy's ability to grow. If SPI is high, the economy remains in a poverty trap even if fiscal policy instruments are set appropriately.     

Human capital formation and public debt: growth and welfare effects of three different deficit policies

We analyze an endogenous growth model public educational spending. We show that the balanced budget policy and the policy with a slight deficit yield higher growth than a debt policy where public debt grows at the same rate as GDP, unless the government is a creditor. As concerns welfare, it can be demonstrated that a strong deficit policy yields lower welfare than a balanced budget and a slight deficit policy, unless initial debt ratios are low and the intertemporal elasticity of substitution is high. Finally, there may exist an inverted U-shaped relation between welfare and deficit-financed educational spending.     

Fiscal and monetary effects on environmental quality,growth, and welfare

This paper examines the effect of fiscal and monetary policies on economic growth, inflation, environmental quality, and welfare. To this end, the horizontal-R&D growth model is extended to include pollution generated in the intermediate-goods production, and the demand for money through cash-in-advance (CIA) constraints on intermediate-goods production and R&D investment. Fiscal policy embodied in the taxation of pollution decreases output, profits, inflation, and wages in the intermediate-goods sector, reallocating labor to R&D that is the engine of economic growth. As it reduces pollution, it increases welfare if there are strong preferences for a clean environment. In turn, since the inflation rate is an increasing function of the nominal interest rate, the effects of changes in this monetary policy variable extend to the effects of changes in the inflation rate. An increase in the nominal interest rate penalizes employment, wages and output in the R&D sector relatively more if the respective CIA constraint is more demanding and thus economic growth decreases. As it also reduces pollution since decreases intermediate-goods production, it increases welfare if the preferences for a clean environment are strong enough.     

Optimal disaster-preventive expenditure in a dynamic and stochastic model

The purpose of this study is to present an analytical framework for publicly optimal disaster-preventive expenditure. We examine the optimal policy combination of tax rate, disaster-preventive expenditure, and productive government expenditure in a neoclassical growth model, in which natural disasters occur stochastically and partially destroy existing capital. Based on this model, we can decompose the welfare effect of raising preventive expenditure into three effects: the damage reduction, crowding out, and precautionary effects. By identifying these marginal benefits and costs, we obtain the policy conditions that maximize household welfare. Furthermore, we show that optimal prevention is increasing in disaster probability, and by using a numerical example, we show that there is an inverse U-shaped relationship between the expected growth rate and disaster probability.     

A model of insurance markets with incomplete information

The paper investigates how a competitive market would allocate insurance policies if firms were not able to determine the riskiness of individual consumers. It is demonstrated that if all firms have static expectations with regard to the policy offers of other firms, no stationary equilibrium may exist. A second equilibrium concept is then introduced which incorporates a different expectation rule. Each firm assumes that any policy will be immediately withdrawn which becomes unprofitable after that firm makes its own policy offer. This equilibrium is shown to exist and some of its welfare properties are investigated.     

Information Exchange and Transnational Environmental Problems

This paper analyzes information exchange in a model of transnational pollution control in which countries use private information in independently determining their domestic environmental policies. We show that countries may not always have an incentive to exchange their private information. However, for a sufficiently high degree of predictability of domestic environmental policy processes, the expected welfare from sharing information is greater than the expected welfare from keeping it private. The minimum degree of policy predictability for which information sharing occurs increases with the level of environmental risk. Intuitively, information exchange can help mitigate the perception of global uncertainty (both political and scientific) that surrounds transnational environmental problems and potentially improve welfare if policymaking processes are sufficiently aligned with evidence-based approaches (predictable).     

Growth and welfare effects of stabilizing innovation cycles

We consider a simple model of innovation where equilibrium cycles may arise and show that, whenever actual capital accumulation falls below its balanced growth path, subsidizing innovators by taxing consumers has stabilizing effects, promotes sustained growth and increases welfare. Further, if the steady state is unstable under laissez faire, the introduction of the subsidy can make the steady state stable. Such a policy has beneficial effects as it fosters output growth along the transitional adjustment path, and increases the welfare of current and future generations.     

Present bias and the inefficiency of the centralized economy: The role of the elasticity of intertemporal substitution

We analyze an endogenous growth model considering agents with an isoelastic utility. Preferences are characterized by a utility affected by a negative externality, and a level of impatience which decays with the time distance from the present. Agents who cannot commit the actions of their future selves, play a game against them. The stationary equilibrium of this game defines a balanced growth path with a slower growth when played by subsequent central planners than when played by decision makers in the market economy. First, we prove that the fast growing market economy implies higher welfare if the negative externality is small, while the centralized economy is welfare improving above a given threshold for the externality (obtained for a specific family of non-constant discount functions). Secondly, we observe that this threshold increases with the elasticity of intertemporal substitution in consumption. Therefore, the greater this elasticity the more likely it is that the externality lies below this threshold, where policy interventions would not be adequate. Finally, as one would expect, the range of values of the externality for which the market equilibrium provides higher welfare widens the more different from constant discounting time preferences are, due either to a wider range of variation for the instantaneous discount rates or because these decay more slowly.     

Growth,intergenerational welfare,and environmental policies in an overlapping generations economy

This paper examines the effects of the environmental tax on long‐run growth and intergenerational welfare in a discrete‐time overlapping generations (OLG ) model. We highlight that the role regarding how the environmental tax revenues are distributed between the young or old generations has important implications for the growth and welfare effects. Our results indicate that raising the environmental tax can exert different effects on the environmental utility of the existing young and old generations, implying an intergenerational welfare conflict of the environmental policy. However, if tax revenues are distributed appropriately, our numerical simulation shows that it is possible for a higher environmental tax to improve the welfare of all generations.     

Human capital use,innovation, patent protection,and economic growth in multiple regions

We provide the first theoretical analysis of the effects of human capital use, innovative activity, and patent protection, on economic growth in a model with many regions. In each region, consumers have constant relative risk-aversion preferences, there is no human capital growth, and there are three kinds of manufacturing activities involving the production of blueprints for inputs (machines), the inputs themselves, and a single final consumption good. Our analysis generates four results. For any given region, we first describe the balanced growth path (BGP) equilibrium and show that the BGP growth rate depends negatively on the rate at which patents expire. Second, we characterize the transitional dynamics in our model. Third, we determine the value of the patent expiry rate that maximizes the equilibrium growth rate of a region. Finally, we show that a policy of offering perpetual patent protection does not necessarily maximize social welfare in a region.     

Optimal Thin Capitalisation Rule in a Simple Endogenous Growth Model with Tax Havens

In this paper we study the optimal thin capitalisation rules by developing a simple dynamic general‐equilibrium growth model incorporating tax havens. It is found that a stricter thin capitalisation rule will reduce the incentive to invest, and is therefore harmful to growth. This effect is ignored in previous static studies on the welfare analysis of tax havens. Accordingly, when taking the growth effect into consideration, reducing the utilisation of tax havens has ambiguous effects on social welfare. We also show that a looser thin capitalisation rule could be favourable for the policymakers if (i) the production technology is high; (ii) the existing income tax rate is high; (iii) the rate of time preference is low; or (iv) the weight factor of public consumption in utility is small.     

The driving forces of the level and the growth rate of real per capita income in Indonesia

We investigate the driving forces behind the level and the growth rate in real per capita Gross Domestic Product (GDP) in Indonesia. The ultimate reasons and the proximate causes underlying Indonesia's economic growth since the mid-1960s are still unclear. In the literature there have been at least three ways of investigating the driving forces of economic growth in Indonesia, namely: growth accounting system, regression and causality. The difference and improvement in this article is that we employed a two-step bounds testing approach to cointegration, which has not been done before; it uses the endogenous growth model to consider 12 policy variables and two external factors that potentially affect per capita income, this number is more than that has been done before. The empirical results that we obtained using this two-step bounds testing approach help us draw policy implications that if or when implemented would be expected to increase the growth of real per capita income, as well as the welfare of the people of Indonesia. Economic growth in Indonesia is largely driven by government policy, so the ability to increase Indonesia's economic growth rate, in the long run, will largely depend on the implementation of appropriate government policies.     

损失规避与经济波动的福利成本研究

目前经济波动的福利成本研究均建立在基于消费的效用函数基础上，而引入收入波动后我们发现：收入波动导致的福利成本才是更为重要的因素。本文定义的偏好具有损失规避的特点，在比较温和的参数设定下，考虑了收入波动后得到的福利成本指标A在1．4％--13．4％之间，比此前各种技术方法得到的A值提高了1—2个数量级。采用中国转型期以来的统计数据，消除短期波动的福利效果等同于将消费的长期增长率再提高约0．25个百分点，这表明如能进一步稳定经济的运行，仍会带来可观的福利提升。     

Optimal time-consistent fiscal policy under endogenous growth with elastic labor supply

We explore the implications of incorporating an elastic labor supply in an endogenous growth economy when characterizing the time-consistent Markov policy. We consider two policy instruments: an income tax rate and the split of government spending between consumption and production services. The Markov-perfect policy implies a higher income tax rate and a larger proportion of government spending allocated to consumption than those chosen under a commitment constraint on the part of the government. As a consequence, economic growth is slightly lower under the Markov-perfect policy than under the Ramsey policy. Under the Markov and Ramsey optimal policies, a higher weight of leisure in households' preferences leads to a lower optimal income tax rate and a lower proportion of public resources devoted to consumption. We also show that the policy bias that would arise when imposing a Markov policy designed ignoring the presence of leisure in the utility function would lead to a significant welfare loss.     

Fiscal policy reforms in general equilibrium: The case of Greece

This paper quantifies the macroeconomic and welfare implications of (i) changes in the tax-spending mix and (ii) debt consolidation policies. The setup is a neoclassical growth model augmented with a relatively rich public sector. The model is calibrated to the Greek economy. The results suggest that, if the goal of fiscal policy is to stimulate the economy and increase welfare by changing the tax mix, then it should decrease the tax rate on labour income and increase the consumption tax rate. While higher public investment spending is good for the economy, it is lower public consumption spending that is found to be expansionary. The results also suggest that both tax- and expenditure-based debt consolidation policies lead to worse economic activity in the short run, but they have strong beneficial effects in the medium and long run when the consolidation period finishes.     

On the concept of optimum population

The economic welfare of a community is affected by policies that determine both the rate of capital accumulation and the rate of growth of population. The optimum size of population at any point is time will depend on the size of the existing capital stock and the optimum rate of savings will depend on the existing number of people. Consequently, in this sense, a population policy cannot be developed without a concurrent savings policy. The criterion of optimality that will be used is the ma ximization of the total discounted welfare of all generations from now to infinity. The problem will be to select that rate of savings and that size of population at every moment which will achieve this maximum welfare if, in fact, a maximum exists. An inquiry is made into the existence of an optimum policy under various circumstances. An attempt is made to evaluate the consequences of various ethical beliefs.     

Incentive effects of paying demand response in wholesale electricity markets

Recently issued U.S. Federal Energy Regulatory Commission regulations require comparable treatment of demand reduction and generation in the wholesale electric market so that they are compensated at the same market clearing price. The new regulations measure demand reduction as a reduction from a “customer baseline,” a historically based estimate of the expected consumption. In this paper, we study the incentive effects on the efficiency of the demand response regulation using a static equilibrium model and a dynamic extension of the model. Our analysis provides three main results. Firstly, our analysis shows that the demand reduction payment will induce consumers to (1) inflate the customer baseline by increasing consumption above the already excessive level during normal peak periods and (2) exaggerate demand reduction by decreasing consumption beyond the efficient level during a demand response event. This result persists when applied to alternative baseline designs in a dynamic model. Secondly, we study alternative policy remedies to restore the efficiency of demand response regulation and introduce a new approach to define the customer baseline as a fixed proportion of an aggregate baseline. In particular, the aggregate baseline approach can significantly weaken or eliminate the incentive to inflate the baseline. Finally, we illustrate that if the baseline inflation problem is solved and demand and supply functions are linear, the current policy can produce a net social welfare gain. However, the welfare improvement requires that demand reduction be paid only when the wholesale price is at least twice the fixed retail rate. This argues that the policy should include a sufficiently high threshold price below which demand response is not dispatched.     

INTERNATIONAL FACTOR MOBILITY,NONTRADED GOODS AND TARIFF REFORM*

Within models of traded and nontraded goods, that ignore international factor mobility, the literature on tariff reform has established sufficient conditions under which a policy that reduces (increases) the highest (lowest) tariff to the level of the second highest (lowest) rate, or a policy that moves proportionally all tariffs to a given number improves welfare. The present paper generalizes previous studies by introducing perfect international capital mobility. It demonstrates that if all goods are normal in consumption and the nontraded good markets are locally Walras stable, then a reform policy that reduces (increases) the highest (lowest) tariff to the level of the next highest (lowest) rate improves welfare if (i) the good with the highest (lowest) tariff rate is a net substitute to all other traded goods, and (ii) the nontraded goods are net substitutes to all other goods. Second, a policy reform that moves all tariffs to a given number is always welfare improving.