Trade uncertainty and specialization. Social versus private planning

Summary A small trading economy which produces and trades an arbitrary, but finite, number of goods and faces given terms of trade in combination with an uncertain volume of trade is studied. An exogenous probability of trade disruption forces both public and private decision-makers to specialize to a lesser extent in accordance with their comparative advantage. A unique optimal point of production exists for each probability of trade disruption. A private competitive economy will not produce at this point: it produces too much of the good with a comparative advantage.Notation C ² class of twice continuously differentiable functions - C _i consumption of goodi - f free-trade utility function - g autarky utility function - p international relative price of goody - p _d domestic relative price of goody - Q solution set of - U utility function - U marginal utility of goodi - U _x marginal utilities of lastn goods - x goodx - x ^* autarky production of goodx - x free-trade production of goodx - x _pr private production of goodx - x ₀ optimal production of goodx - x _m maximal production of goodx - y goody - Y income function - private economy equilibrium function - difference function - production possibility function - _x derivative of - probability that free trade occurs - indirect utility function - solution function to optimality problem - c consumption vector - p relative price vector - x goods vector - t transpose - R ₊ ⁿ n-dimensional positive orthant This article communicates the opinion of the author. The views expressed herein are not necessarily shared by his employer.Comments by Willem Buiter, Casper de Vries and participants at the Buiter Workshop Series at the University of Groningen (May 1989) were very useful.     

The perspective of the SDR's position in monetary reserves on the robustness of optimal portfolio results

Summary To gain an empirical impression of the SDR's attractiveness as a reserve asset, an amended mean-variance analysis is applied to official reserves. The main amendments bear upon the choice of the numeraire and the rejection of both the capital market line and the effective yield's positive marginal utility-frequently assumed in empirical analysis. Comparison of the outcome with that recently obtained by Ben-Bassat shows a large sensitivity of optimal portfolio results for slight differences in assumptions. A second, substantial kind of sensitivity of an asset's position in a portfolio appears to ensue from the influence of other competing functions of reserves.The authors are Professor and Assistant Professor of International Economics, University of Amsterdam, The Netherlands. The research of the second author was financially supported by the Netherlands organization for the advancement of pure research (Z.W.O.), no. 46-108. This research is part of the project Exchange-rate and monetary policy in international dependence. The paper was presented earlier at the conference Research in international finance, Jouyen-Josas, France (June 19 and 20, 1986). Computational assistance by Jeannette Capel, Reiner Gratama, and Martin O. Nijkamp and comments by an anonymous referee are gratefully acknowledged.     

Environmental Protection by One or Both Trading Partners in a Heckscher-Ohlin-Samuelson Model

In this Heckscher-Ohlin-Samuelson model, production of a pollutive good damages production of another good within the same country. Unilateral and bilateral shifts from laissez faire to Pigouvian policy are numerically simulated for cases of low emissions and a high volume of trade, high emissions and a high volume of trade, and finally, high emissions and a low volume of trade. A country can be worse off when it becomes Pigouvian and it can be worse off when its trading partner becomes Pigouvian. Nevertheless, a simple game theory version of the model suggests a race to the top, in which all countries become Pigouvian.     

Fiscal policy and direct crowding-out in a small open economy

This paper analyses the welfare effects of fiscal policy in a small open economy, where private and government consumption are substitutes in terms of private utility. The main findings are as follows: fiscal policy raises output, bringing it closer to its efficient level, but is not welfare-improving even though government spending directly affects private utility. The main reason for this is that the introduction of useful government spending implies a larger crowding-out effect on private consumption, when compared with the ‘pure waste’ case. Utility decreases since one unit of government consumption yields less utility than one unit of private consumption. In any case, the marginal rate of substitution between private and government consumption is a key parameter in governing the welfare effects of fiscal policy.

Money and banking in a mature Walrasian economy

All financial transactions in the original Walrasian economy, as written in the édition définitive of the éléments, occur in the markets for short-term money services (the short-term bond market) and commodity E (the equity market). However, introduction of the long-term bond and the deposit markets requires only minor surgery to the original and they are now supplied, inspiring the name mature Walrasian economy. Transactions in numeraire then entail all institutions of the banking system and provide completely for money and credit. Into this economy the condition of inconvertibility, a discretionary numeraire with reserve requirements, and a central bank are introduced and clarified. Finally, multiple monetary subsystems in the same global economy are recognized and reconciled, thus establishing a global economy with a single numeraire commodity.     

Durable Goods,Time Preference and The Dynamics of the Current Account

A small open economy model with an endogenous time preference is used to study the current account dynamics when consumption exhibits durability. There is a unique level of instantaneous utility and stock of durables that must be maintained in the steady state. A terms of trade deterioration requires a net asset accumulation and a fall in consumption expenditures along the adjustment path. Nevertheless, the fall in consumption expenditures leads to a fall in the stock of durables, which has to be corrected somewhere along the adjustment path, and which may lead to a non-monotonic adjustment of the current account (J-curve).

The market as a commons: Is catching customers like catching fish?

Summary This note is a critique of an article by P. Copes published in the February 1984 issue ofDe Economist. Copes argues that an open access market must be regarded as a common property resource. By analogy to the economics of the fishery, he derives the proposition that free access to any market results in excess capacity because competitive entry dissipates what he calls the market rent. Copes claims that his results hold for the limiting case of perfect competition. Our critique explains why the analogy between a perfectly competitive market and a open access fishery is invalid.     

On the specification of an investment function

Summary In this paper the process of investment planning is followed step by step. It is assumed that the objective of the planning is to maximize the present value of net receipts. Two alternative assumptions (perfect and imperfect competition), concerning the market where the output is sold, are analyzed. One result is the optimal (desired) quantity of capital on hand plus on order, from which investment demand (i.e. the orders to be placed) is derived. This demand is compared with available internal funds, where a positive difference between the two is supposed to be bridged only partially by external financing. The extent to which this occurs depends on the amount to be bridged. Then actual investment demand appears to be a convex linear combination of investment demand not restricted by funds available and of internal funds. The weights of the components, however, are not constants. An outline is given of the relation of the above approach to the traditional approach of maximizing profits by equalizing the marginal efficiency of investment and the marginal cost of funds. This is done by considering a two-period model in which costs of funds are explicitly introduced.The author thanks Professor W. H. Somermeyer for criticizing a previous draft of this paper.     

Kalecki and Marx on effective demand

Conclusion Whereas Marx and Kalecki shared a broad vision of the capitalist system, the convergence of their theories occurred mainly on the ground of effective demand.Marx furnished Kalecki with the idea that deficiencies in aggregate demand are rooted in the normal workings of the capitalist system, but he did so without providing any theoretical demonstration of this proposition. Kalecki was confident, however, that he had solved Marx's unresolved problems by proving that the equations that determine the level of total output are contained in the scheme of extended reproduction.Whether Marx would have considered Kalecki's solution appropriate for the system inCapital is quite another matter. As explained above, Kalecki shifted the emphasis from the production of surplus value to the realization of surplus value and from the conditions of exploitation to the conditions of the market. It is a change that Marx would have had difficulties in accepting. Indeed, it was precisely his reluctance to follow this route that steered Marx away from an attempt at solving the problem of effective demand; a problem he skirted when he was in the process of formulating his schemes of reproduction.If one adds Kalecki's interest in market prices and his distaste for the labor theory of value, it would be difficult to avoid the conclusion that Kalecki was neither a faithful disciple of Marx nor a single-minded articulator of his economic theories. It has been argued that this was precisely Kalecki's strength [Robinson, 1979, p. 253]: With the light that Sraffa has thrown on the theory of value and Kalecki on the process of realization of the surplus, we can develop a complete system, not ofneo-Marxism but ofintelligible Marxism.An earlier version of this paper was presented at the Twenty-Sixth Atlantic Economic Society Conference, October 6–9, 1988, Philadelphia, Pennsylvania.     

Does tighter environmental policy lead to a comparative advantage in less polluting goods?

A two-factor model is developed to analyze the effects of environmentalpolicy on patterns of comparative advantage. A pollution taxaffects goods' prices via: (1) the tax burdens on each good,which depend on their respective polluting tendencies; and (2)changes in factor returns due to increased abatement activity.The good intensive in the factor whose returns have risen willtend to face a price increase, ceteris paribus. The net outcomedepends on both effects. A higher tax will not always raise(lower) the autarky price of the more (less) polluting good.Therefore a country with the higher (lower) tax does not alwayshave a comparative advantage in the less (more) polluting good.     

Estimation of the probability of labor force participation of the AFDC population-at-risk

Summary In summary, the functional form makes quite a difference. An investigator should be quite wary of making generalizations based on any single specification or estimation technique. However, the above results have shown in striking fashion the superiority of MLE of the sigmoid specifications over the OLS estimation of the linear probability specification. Although the logistic or urban specification require iterative solution, this is no barrier on a modern digital computer, with appropriate special algorithms. A further advantage of the MLE is the asymptotic normality of the estimates of _i which permits large sample interval estimation, and the iteration method of scoring employed yields directly an estimate of the standard deviation of each normally distributed _i . Also standard tests of significance are now applicable.Perhaps most importantly, the sigmoid specifications are consistent with a probability interpretation since the estimates lie inside the unit interval, and the sigmoid shape is consistent with the assumed unimodal distribution of the participation decision.In conclusion, results reported in previous investigations of the probability of labor force participation or labor force participation rate which have relied on the least squares estimation of a linear probability specification are likely to be unreliable as to he magnitude of the response attributed to changes in explanatory variables.     

The numeraire commodity in a mature walrasian economy

The central argument of this paper is that current general equilibrium output in a mature Walrasian economy is enhanced by the optimal selection of components of a multi-commodity numeraire, according to the decisions of borrowers and lenders. The commodity evaluation which emerges from transactions is accomplished by requiring money in circulation to be conventionally representative of the numeraire. Banking assets other than real monetary reserves are nominal. Since the latter are claims on real assets held elsewhere in the economy, initial numeraire reserves may include a part of the real collateral underlying bankers' long-term portfolios. This multi-commodity numeraire, which then constitutes the real reserves of the monetary system, is welfare optimal.     

The golden rule of accumulation and the open economy

Summary This paper examines the factors which determine the volume of consumption per capita in a small open economy in the long run. The analysis is based on a neoclassical model. It is proved that-in general — Phelps' golden rule of accumulation does not hold for an open economy. This conclusion follows from the decline in the terms of trade, which is generated in an open economy by an increase in the share of investment. The influence of labour supply and world expenditure on the consumption per capita also depend heavily on the induced change in the terms of trade. The analytical results of the model are illustrated by means of a few numerical examples.This paper is written within the framework of the research program Possibilities and Limitations of National and International Economic Policy, code K.H.T. XIII-85-44.     

The Future of International Liquidity and the Role of China

This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. In an unstable and financially integrated world, governments＇ precautionary demand for reserve assets is likely to increase. But the world then risks a third crisis of the global reserve system, another re-run of the Triffin paradox, with an ever-growing emerging-world insurance demand loaded onto a small group of ever more strained net debt suppliers. Two ways to avoid this outcome would entail either expanding the supply of credible reserve liquidity to include some large emerging-market providers, or finding ways to manage emerging-market risks so as to moderate the perceived need for insurance, and China would have to loom large in both solutions. This paper analyzes the consequences of the internationalization of the Chinese renminbi for the global monetary system and its possible ascension to reserve currency status. It argues that if the process proves feasible, despite the difficult hurdles along the way, the results of internationalization would be constructive, both for China and the rest of the world. In today＇s global monetary system, the emergence of the renminbi （along with other developed- and emerging-market currencies） as a potential reserve currency would expand and diversify the supply of reserve assets, enabling central banks to maintain large buffers against financial shocks while allowing the United States to avoid issuing, as now, a large and growing bulk of the world＇s safe and liquid claims, and thus bearing the burden of an ever-expanding, and ultimately questionable, debt to the rest of the world.     

Asset stocks and flows in macroeconomic theory: Resolving the ambiguities in the general IS-LM model

Summary In this paper we have critically examined the macroeconomic model developed by Benavie as a generalization of the beginning-of-period model of Tobin and of Patinkin's end-of-period approach. We have focused our attention on the ambiguous effects on income of government spending changes and tax changes that result from this model. Our conclusions are twofold. First, with respect to the effects of government spending on equilibrium income, we find that, if the demand function for money is decreasing in the interest rate, then the effect of government spending onY is unambiguously positive for any value of. The ambiguity discovered by Benavie is a result of his implicit assumption that money has the characteristics of a Giffen good. Second, in the case of the tax ambiguity, we find the source of the problem to be in the particular formulation of Benavie's asset demand functions. Benavie specifies his asset demand functions in such a way that tax changes impinge directly on these demands. If both stock and flow demands depend upon gross income and not taxes, then there isno ambiguity with respect to tax changes regardless of the value of. However, if both stock and flow demands depend upon disposable income, and hence taxes, the effect of tax changes on equilibrium income becomes ambiguous, but again independently of the value of.     

An Exploration of Asset Returns in a Production Economy with Relative Habits

This paper explores asset returns in a production economy with habit forming households. We show that a model with capital adjustment costs and relative habits is consistent with salient financial facts, such as the equity premium, the market price of risk, and the riskfree interest rate. These predictions are not at odds with good business cycle predictions. In the model, economy investment is strongly procyclical and more volatile than output, which in turn is more volatile than consumption. Moreover, consumption growth is positively autocorrelated and negatively (positively) correlated with future (past) stock returns.

Naar De Meetbaarheid Van Een Rechtvaardige Verdeling

Summary The author proposes a method to arrive at a cardinal theory of utility or welfare (considered identical) by the introduction into the utility function of (1) variables, (2) parameters and (3) coefficients. Parameters characterize measured differences between individuals relevant to the problem considered; variables indicate either choices open to individuals (job, income) or exogenous circumstances (a salary scale or a tax scale). The ethical postulate introduced is the equality of each coefficient among different individuals, offered as an interpretation of the fundamental equality of men. Once the utility function has been defined and tested, justice in distribution is defined as equality of the values of that function for all individuals considered. A numerical illustration is added in which years of schooling and degree of independence are used as parameters to characterize twenty social groups and the just as distinct from the actual income distribution is calculated for the Netherlands around 1965.It affords the Board of Editors great pleasure to publish this paper by one of their members. This gives the Board the opportunity, also on behalf of the readers ofDe Economist, to congratulate Professor Tinbergen most cordially upon his 70th birthday, which he celebrated on 12th April, 1973.     

The monetary history of Rome

Abstract

The internationally-renowned Swedish historian, Professor Sture Bolin, has devoted himself, ever since his youth, to the problems of monetary history and to the study of coinage as a historical source. His doctoral thesis on the finds of Roman coins in independent Germany ¹ Fynden av romerska mynt i det fria Germanien. appeared in 1926; it was an important work which, by using numismatic source material, contributed considerably to the understanding of the relations between the Roman Empire and the Germans. After the publication of this work he continued to study the functions of money in Antiquity and the Middle Ages, and this research resulted in the publication, between 1939 and 1957, of a number of important papers. During the same period he worked steadily on a major work designed to provide a synthesis of the problems relating to the state and its currency from Antiquity to the Middle Ages. The first volume of this work, State and Currency in the Roman Empire to 300 A.D. ² Almqvist & Wiksell, Stockholm, 1958, p. 357, 45 Sw. Kr. , has now been published. The book is the product of a lifelong study of a central theme of economic history, and it unquestionably justifies the great efforts expended on it. It is a work of genius, epoch-making in its field, throwing completely new light upon Roman monetary history, and marking a culminating point in this branch of study.     

On the Relative Optimality of Environmental Policy Instruments: An Application of the Work of Alberto Alesina

We study the issue of optimality of policies devoted to environmental goals, building upon the recent and interesting work by Alesina and Passarelli (2010) and extending their analysis to the more general framework set up by Weitzman (The Review of Economic Studies 41: 477-491, 1974). We illustrate instruments that governments have at their disposal to reduce polluting emissions, and we point out the economic implications that may arise from the overlapping regulation through both instruments in the European context. We review the literature on political determination of environmental regulation. On the basis of existing literature, we show that political factors are more important than economic ones in explaining why particular instruments are implemented for certain problems (Hepburn et al. Climate Policy 6: 137–160, 2006). We recognize Alesina’s contribution which states that environmental policy, and the decision to adopt one tool instead of another, is subject to a complex political process. Governments are subject to pressure from politicians, households, and firms because their decisions imply winners and losers. Then, we focus in detail on the work by Alesina and Passarelli (2010) who consider which policy tool and at what level would be chosen by majority voting to reduce polluting emissions; they find out that even if a tax is in general superior to quantity based mechanisms (quotas and tradable permits), the majority may strategically choose a quantity mode in order to charge the minority a larger share of the cost for polluting emissions reduction. We extend Alesina’s analysis, focusing on the optimality of price-based mechanisms, since it is not always the case that price instruments are more efficient than quantity instruments. To this aim, we explicitly make use of Weitzman results (The Review of Economic Studies 41: 477–491, 1974), which suggest that if costs are highly nonlinear compared to benefits, then price-type regulation is more efficient, while if costs are close to linear, then quantity-type regulation is more efficient. We cast Alesina’s analysis in the European context, analyzing potential voting outcomes, assuming that EU countries can be arranged according to different criteria. We find that depending on the empirical distribution of voting countries, Alesina’s voting procedure leads to interesting different outcomes.     

Book briefs

Food policy: Integrating supply, distribution and consumption, EDI series in economic development, John Hopkins University Press, Baltimore and London, 1987

Food poverty and consumption patterns in Kenya, International Labour Office, Geneva, 1986