Marginal Tax Rate Uncertainty and Wage Indexation

Frequent changes in American tax laws over the last 30 years have led to uncertainty regarding the marginal tax rate on labour income. Using a multisector framework, this paper considers the implications of the tax rate uncertainty for wage flexibility. The Fiscal Authority sets the marginal wage tax rate, and is assumed to be the leader in a Stackelberg game. Wage setters in this game determine the degree of optimal indexation and are assumed to be followers. Increases in tax rate uncertainty lead to greater nominal wage flexibility, and a decrease in optimal progressivity. Additionally, indexation to nominal shocks is complete even if the product market is monopolistically competitive.     

Cost Uncertainty and Unilateral Abatement

Unilateral abatement is sometimes advocated in order to set a good example that will make other countries follow. The aim of this paper is to investigate whether existence of correlated cost uncertainty provides an incentive for a country to undertake unilateral abatement. The theoretical model is driven by two main mechanisms; first, a learning effect, as the follower country might reduce its risk premium as it can observe the cost level in the leader country. Second, there is the public good effect, i.e., the marginal benefit of abatement declines when abatement is a public good and other countries contribute to pollution reductions. Results shows that unilateral abatement would be efficient in reducing uncertainty about the unit costs of abatement if a country with low cost uncertainty would undertake abatement first, while a country with initially high cost uncertainty would follow. However, countries may prefer to act simultaneously because of the larger uncertainties that are inherent in a sequential game.      

Joint implementation under asymmetric information and strategic behavior

Joint Implementation (JI) under the Framework Convention on Climate Change means that countries could partly offset their national abatement commitments by investing in CO₂ abatement projects abroad. JI is introduced as a mechanism for achieving a certain global abatement target less costly by separating the commitments from the implementation of measures. This paper studies the design of a JI contract when the investor has incomplete information about the foreign firm which carries out the JI project (the host). Asymmetric information leads to a decrease in the potential cost savings from JI. Furthermore, private information held by the potential host firm could give the firm a significant positive utility of participating in JI projects. The possibility of being a host for a JI project in the future can prevent potential host firms from investing in profitable abatement projects today. The paper analyzes the impact on emissions of CO₂ of strategic behavior among potential hosts for JI projects.     

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.     

Partial inflation indexation and long-run inflation targeting in a growing economy: A comparison of Calvo and Rotemberg pricing models

The observed 2% long run inflation target in most developed industrial nations is in variance with the zero or negative optimal inflation rates predicted by prominent monetary theories. Using a calibrated simple New-Keynesian model with endogenous growth and nominal rigidity, we compare two price setting environments of Calvo (1983) and Rotemberg (1982). In our growth model, the steady state welfare maximizing inflation takes into account the growth effect as well as the price distortionary effects of inflation. The long-run welfare maximizing trend inflation could be positive in economies with nominal rigidity in the form of partial inflation indexation and price stickiness. A higher degree of inflation indexation lowers the steady state price distortion in the Calvo model and steady state price adjustment cost in Rotemberg model and raises the long run optimal inflation. Since the productive inefficiency caused by partial inflation indexation is higher in Calvo economy compared to Rotemberg, the long run optimal trend inflation is higher in Rotemberg than in Calvo. In both models, a two percent long run inflation target is attainable for a reasonable degree of inflation indexation.     

Beyond Kyoto, plan B: A climate policy master plan based on transparent metrics

Many scholars analyze the Kyoto–Copenhagen process, and offer corrective suggestions for identified flaws in the present design. Based on various proposals in the literature, this article adopts a global master-plan perspective, leaving executive architecture to sovereign participants. Transparent, flexible and fair top-down rules must synchronize the numerous bottom-up initiatives while addressing the diversity of national circumstances in the drastic transformation of the world's energy economies.Plan B refutes absolute emission reduction targets on old or speculative baselines. It criticizes global tax and permit trade instruments for being ineffective, inefficient and unfair when uniformly applied on a tremendous differentiated world. Plan B is built on three annually observed variables measuring percentage progress against rolling baselines (the variables' values in the previous year): the ratio of net climate tax revenues to GDP, the commercial energy intensity of GDP, and the carbon intensity of commercial energy use. The three variables together indicate countries' progress affecting emissions per person, a metric that must converge to lower bands when climate change is addressed seriously. Long-term scenarios of global convergence “funnels” serve as guidance to frame near-term actions rich and poor countries individually propose to take. The global regime is common for all countries, and is ranked by GDP per person to determine whether a nation is a donor or a beneficiary in a Global Climate Transfer Fund. Fund payments and drawing rights depend on that ranking but also on the performances of the countries in realizing committed progress. The transparent mechanisms of the design and of the fund persuasively invite countries to participate in a fair, self-enforcing agreement.     

Beyond Kyoto,plan B: A climate policy master plan based on transparent metrics

Many scholars analyze the Kyoto–Copenhagen process, and offer corrective suggestions for identified flaws in the present design. Based on various proposals in the literature, this article adopts a global master-plan perspective, leaving executive architecture to sovereign participants. Transparent, flexible and fair top-down rules must synchronize the numerous bottom-up initiatives while addressing the diversity of national circumstances in the drastic transformation of the world's energy economies.Plan B refutes absolute emission reduction targets on old or speculative baselines. It criticizes global tax and permit trade instruments for being ineffective, inefficient and unfair when uniformly applied on a tremendous differentiated world. Plan B is built on three annually observed variables measuring percentage progress against rolling baselines (the variables' values in the previous year): the ratio of net climate tax revenues to GDP, the commercial energy intensity of GDP, and the carbon intensity of commercial energy use. The three variables together indicate countries' progress affecting emissions per person, a metric that must converge to lower bands when climate change is addressed seriously. Long-term scenarios of global convergence “funnels” serve as guidance to frame near-term actions rich and poor countries individually propose to take. The global regime is common for all countries, and is ranked by GDP per person to determine whether a nation is a donor or a beneficiary in a Global Climate Transfer Fund. Fund payments and drawing rights depend on that ranking but also on the performances of the countries in realizing committed progress. The transparent mechanisms of the design and of the fund persuasively invite countries to participate in a fair, self-enforcing agreement.     

A Strategic Analysis of Eutrophication Abatement in the Baltic Sea

Cooperation between the littoral countries of the Baltic Sea to mitigate eutrophication has proven difficult in the past. In this study, we explore the countries’ incentives to free-ride on agreements, find stable coalitions where free-riding is deterred, and propose alternative ways of designing stable agreements that would reduce eutrophication in the sea. We conclude that strong free-riding incentives for some countries preclude the socially optimal solution in the absence of an enforcing authority. A stable agreement can, however, be formed with some loss in efficiency. The research shows that a treaty with modest abatement targets between all the littoral countries would be more efficient than a coalition between fewer countries but with more ambitious targets. We compare the two international institutions involved in the protection of the Baltic Sea—the intergovernmental Helsinki Commission and the partly supranational European Union—and show that the European Union would not benefit from enforcing an agreement among its member states on the Baltic without Russia being involved in the conservation efforts. Our results suggest that efficient abatement and full participation could be achieved by using the power the European Union has to enforce such an agreement among its members and, simultaneously, negotiating with Russia within the Helsinki Commission.     

International treaties on trade and global pollution

The paper shows that global pollution need not rise under free trade in goods and/or emissions even in the complete absence of income effects. Differences in environmental concerns across the countries lead to differences in the pollution intensity of production and, thus, generate the possibility of increasing world output and income without increasing the world pollution by shifting the production of the polluting good from the country with higher pollution intensity of production to the country with lower one. We show that free trade in goods and/or emissions can induce precisely such a shifting of production with the country with greater environmental concern exporting the polluting good. The paper also demonstrates the possibility of a first-best international treaty on global pollution in which each country or group of countries is better-off.     

On optimal wage indexation when shocks are real

This note studies the optimal degree of wage indexation in the presence of real shocks. Contrary to what is indicated in the literature, it is demonstrated that the optimal degree of indexation is not limited to (0;1) but may take any value in (-∞;∞).     

Physical and Economic Consequences of Sea-Level Rise: A Coupled GIS and CGE Analysis Under Uncertainties

This paper develops a modelling framework that links GEMINI-E3, a multi-regional, multi-sectoral computable general equilibrium model with a cost-benefit analysis approach at local level using geographical information system tools to assess the physical and economic consequences of sea-level rise (SLR) in the twenty first century. A set of future scenarios is developed spanning the uncertainties related to global warming, the parameters of semi-empirical SLR estimates, and coastal developments (cropland, urban areas and population). The importance of incorporating uncertainties regarding coastal development is highlighted. The simulation results suggest that the potential development of future coastal areas is a greater source of uncertainty than the parameters of SLR itself in terms of the economic consequences of SLR. At global level, the economic impact of SLR could be significant when loss of productive land along with loss of capital and forced displacement of populations are considered. Furthermore, highly urbanised and densely populated coastal areas of South East Asia, Australia and New Zealand are likely to suffer significantly if no protective measures are taken. Hence, it is suggested that coastal areas needs to be protected to ameliorate the overall welfare cost across various regions.     

Crunch Time: A Policy to Avoid the 'Announcement Effect' when Terminating a Subsidy

Abstract. If the government announces the termination of a subsidy paid for an irreversible investment under uncertainty, investors might decide to realize their investment so as to obtain the subsidy. These investors might have postponed an investment if future payment were assured. Depending on the degree of uncertainty and the time preference, the termination of the subsidy might cost the government more in toto than granting the subsidy on a continuing basis. A better strategy would be to reduce the subsidy in parts rather than to terminate the subsidy in its entirety.     

Implications of Economic Interdependence for Endogenous Wage Indexation Decisions

This paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices. If stochastic disturbances are common across countries, interdependence has no effect on equilibrium indexation choices in identical countries. However, if disturbances are country specific, numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy. We also show that indexation choices may be either strategic complements or strategic substitutes, but that strategic complementarity becomes more likely as the degree of interdependence rises.     

PoJjcy and the Australian Economy, 1977

At the end of the first quarter of 1977 the available economic indicators, while as usual far from univocal, still give cause for serious concern about the health and direction of the Australian economy. With no significant expansionary factors operating in the economy in 1977 other than the revival in the mining industry and in some aspects of business investment, and the various arms of economic policy being set almost entirely in a restrictive stance, aggregate output would appear to be either flat or declining modestly at the present time. On the basis of a continuation of present policies we would anticipate growth in real non-farm GDP of only 2 to 3 per cent in both 1976–77 and 1977–78, with unemployment continuing to increase until well into 1978. Given the stimulus to inflation arising from the 1976 devaluation and from the wage effects of the Medibank changes, the rate of increase in the consumer price index would seem likely to be 14 to 15 per cent in 1977, even if a partial wage indexation policy could be sustained and whether or not a one quarter wage/price deferment comes into effect. But government pressure on the Arbitration Commission for a reduction in real wages has placed the wage indexation system in jeopardy, and there is now considerable uncertainty about the methods of wage fixation which will obtain in 1977–78. This article surveys some aspects of recent developments and considers some policy options available to the government.     

Irreversible abatement investment under cost uncertainties: tradable emission permits and emissions charges

A major concern with tradable emission permits is that stochastic permit prices may reduce a firm’s incentive to invest in abatement capital or technologies relative to other policies such as a fixed emissions charge. However, under efficient permit trading, the permit price uncertainty is caused by abatement cost uncertainties which affect investment under both permit and charge policies. We develop a rational expectations general equilibrium model of permit trading and irreversible abatement investment to show how cost uncertainties affect investment under permits. We compare the resulting investment incentive with that under charges. After controlling for the assumption that random shocks affect the abatement cost linearly, we find that firms’ investment incentive decreases in cost uncertainties, but more so under emissions charges than under permits. Therefore, tradable permits in fact may help maintain firms’ investment incentive under uncertainty.     

Bilateral Tax Treaties and GDP Comovement

Using a 30‐year panel of quarterly gross domestic product (GDP) fluctuations from of a broad set of countries, we demonstrate that the signing of a bilateral tax treaty increases the comovement of treaty partners' business cycles by half a standard deviation. This effect of fiscal policy is as large as the effect of trade linkages on comovement and stronger than the effects of several other common financial and investment linkages. We also show that bilateral tax treaties increase comovement in shocks to nations' GDP trends, demonstrating the permanent effects of coordination on fiscal policy rules. We estimate trend and business cycle components of nations' output series using an unobserved‐components model in order to measure comovement between countries and then estimate the impact of tax treaties using generalized estimating equations.     

On the frequency of wage indexation

This paper analyzes the optimal frequency of wage indexation. It demonstrates that a change in the expected value of money does not affect the optimal frequency, but that an increase in the riskiness of the value of money leads to an increase in the optimal frequency. An increase in the worker's risk aversion also leads to an increase in the optimal frequency, while an increase in the cost of indexation leads to a decrease in the optimal frequency.     

The incidence and intensity of wage indexation: an empirical analysis

Variables suggested by theoretical studies of indexation are considered with a view to examining their utility in the context of the decision to index (incidence) and the desired degree of indexation when escalator clauses are put into effect (intensity). The Tobit model, which can address both of these issues, suggests that most of the effects of explanatory variables on the regressand occur by modifying the incidence of indexation, not its intensity. However, the Tobit model is itself rejected in favour of separate Probit and Truncated Regression investigations of incidence and intensity, respectively. The results obtained indicate that the standard list of explanatory variables, which one thinks of in the context of the theoretical literature as dealing primarily with intensity, perform well in explaining incidence but very poorly in accounting for the non-limit observations. The latter are influenced by bargaining power proxies such as the unemployment rate and union density; a very clear trade-off between indexed and non-contingent wage adjustment can also be discerned. These results call for more theoretical attention to the distinction between indexation incidence and its intensity.     

Optimal versus adequate level of international reserves: evidence for Turkey

The determination of international reserve balance for emerging economies is part of the efforts to strengthen the immunity of these economies to crises. However, there is still evidence on crises even for the countries with large foreign reserves. It has usually been experienced that the countries with greatest need for reserves economize more than others on their holdings since they might underestimate the cost of crisis. In this study, the official international reserves of Turkey are tested against optimality and adequacy. During 1988–2002, the actual reserves fell short of both the optimal and the adequate levels. They are only optimal when the expected cumulative contraction is about 5.2% of real GDP under crisis. However, early evidence from emerging economies and Turkey show that crises hit more heavily. Hence, it is found that the current financial structure in Turkey such as the absence of capital controls and a highly dollarized banking system necessitates more foreign reserves for preventing any future economic and/or financial shocks.     

Climate policy vs. agricultural productivity shocks in a dynamic computable general equilibrium (CGE) modeling framework: The case of a developing economy

The main objective of this paper is to compare the cost of climate policy consistent with the 2 °C global warming target (Paris Agreement target) with the cost of climate change induced agricultural productivity shocks, using a recursive dynamic CGE model for India. The social cost of carbon, in terms of loss in agriculture sector, is estimated to be about 2 percent of GDP, at zero rate of discount, under conservative forecasts of fall in agricultural productivity. In comparison, the cost of climate policy consistent with the Paris Agreement target of 2 °C is about 1 percent of GDP. Thus, there is a strong case for the adoption of ambitious climate policy in India, provided other countries also adhere to the same. Besides, revenues generated from the carbon tax and emission allowance could be a means to support the development and adoption of new energy and agricultural technologies, to increase social sector expenditure and to reduce abatement costs.