German Monetary Union: An historical counterfactual analysis

This paper views German Monetary Union as a sequence of large asymmetric shocks to the European economies. As such it can be analysed with a large, new-Keynesian macro-econometric model of the relevant economies such as NiGEM. The ‘news’ in the sequence of shocks is assessed by analysing contemporary, NiGEM based, forecasts, and important events are then ‘peeled-off’ in reverse order. The resulting counterfactual history analyses the effects of the collapse of the Soviet economy on the EC and Scandinavian economies, and it is argued that the recession in countries such as Finland was not primarily caused by trade effects. The costs of support programmes for East Germany are then removed, creating a negative fiscal shock. Finally the paper analyses the overall effects of the set of shocks. In each part of the counterfactual history, individuals from forward looking expectations and the authorities operate fiscal solvency rules and target monetary aggregates.     

Agglomeration, innovation and international research mobility

This paper discusses a model of the New Economic Geography, in which the seminal core-periphery model of Krugman [Krugman, P., 1991, Increasing returns and economic geography, Journal of Political Economy 99, 483–499.] is extended by endogenous research activities. Beyond the common ‘anonymous’ consideration of R&D expenditures within fixed costs, this model introduces in an analytically tractable approach vertical product differentiation in combination with a de-integrated R&D sector. In the context of international factor mobility, the destabilizing effects of a mobile scientific workforce are analyzed. Based upon a simple welfare analysis, a consideration of R&D promoting policy instruments and their spatial implications, this paper makes a contribution to the brain-drain debate.     

The knowledge production of ‘R’ and ‘D’

Many studies investigate the relationship between R&D and patents applying knowledge production functions. Using aggregated R&D may underestimate the productivity of ‘R’, as mainly ‘R’ but not ‘D’ leads to patents. Disaggregating ‘R’ and ‘D’ shows a significant premium of ‘R’ towards patenting.     

Designing tax policy in federalist economies: An overview

The emerging economic federations of the European Union, Russia, and South Africa, along with the established federations in Australia, Canada, and the United States, confront the task of designing the institutions for federal fiscal policy. This paper reviews the literature on the design of tax policy in federalist economies. We conclude that taxation by lower level governments can lead to significant economic inefficiencies and inequities. The usual ‘assignment’ view of federalis recommends central government policies — for example, resident-based taxation or grants-in-aid — to correct these failures. These recommendations assume that the central government will act as a benevolent social planner. The ‘political economy’ view of federalism suggests that this assumption is in error and that additional federalist institutions must be considered. Alternative legislative structures and constitutional rules are considered.     

Developments in the throughput-income relationship: theoretical and empirical observations

It has been suggested that the relationship between income and the associated environmental pressure in terms of derived materials inputs and pollution levels may take an inverted-U shape, indicating a ‘delinking’ of environmental pressure from economic growth in relation to rising per capita incomes. The likelihood of such a relationship being persistent is discussed in the context of a simple macro model of industrial metabolism, and the possibility of ‘relinking’ clearly emerges. Data on specific indicators of environmental pressure (i.e., the throughput of materials, energy and the volume of transport) in 19 countries have been used to investigate patterns of delinking. The results suggest that delinking may not be persistent; already some advanced economies may be entering a new period of relinking. The relationships between environmental pressure and welfare in the medium long term may be N-shaped rather than inverted-U-shaped.     

Some empirical evidence on the ‘discouraged worker’ effect

This note produces empirical evidence on the existence of a significant ‘discouraged worker’ effect in US data–namely, on the tendency for groups of secondary workers to move in and out of the labor force with the business cycle, looking for jobs when these are available, while giving up job search during recessions — by focusing on the behavior of the ‘not in the labor force’ series, as well as of two of its segments (‘going to school’, and ‘keeping house’), at the business-cycle frequencies. Both in the aggregate, and for a number of age–sex groups, the series display a clear counter-cyclical pattern, thus lending support to the discouraged worker notion.     

Limited asset markets participation, monetary policy and (inverted) aggregate demand logic

This paper incorporates limited asset markets participation in dynamic general equilibrium and develops a simple analytical framework for monetary policy analysis. Aggregate dynamics and stability properties of an otherwise standard business cycle model depend nonlinearly on the degree of asset market participation. While ‘moderate’ participation rates strengthen the role of monetary policy, low enough participation causes an inversion of results dictated by conventional wisdom. The slope of the ‘IS’ curve changes sign, the ‘Taylor principle’ is inverted, optimal welfare-maximizing discretionary monetary policy requires a passive policy rule and the effects and propagation of shocks are changed. However, a targeting rule implementing optimal policy under commitment delivers equilibrium determinacy regardless of the degree of asset market participation. Our results may justify Fed's behavior during the ‘Great Inflation’ period.     

Growth and employment differentials under alternative wage-setting institutions and integrated capital markets

This paper compares the effects of different labor market institutions on economic growth and employment. In the general equilibrium model here presented, a mechanism causing persistence (on-the-job training) interacts with the strategic complementary between investors’ decisions on capital accumulation and workers’ decisions on labor-market participation. Within this framework (i) structurally and institutionally similar economies preserve forever their differences in output and employment levels, (ii) the steady-state growth rate is higher in an economy with competitive wage determination than in an unionized economy, (iii) this growth differential enlarges when the product and the capital markets of these two economies are integrated.     

Vertical trading and uneven development

The phenomenon of vertical trading, in which the center exports a good involving a high degree of processing which leads to economy-wide learning and the periphery exports a good which does not generate such effects, is formalized in a simple dynamic model of trade. It is shown that the periphery can ‘lose’ from such trade relations. Conditions under which this can occur are shown to involve parameters of the learning functions, and the ‘sizes’ of the two countries.     

Do China and oil exporters influence major currency configurations?

This paper analyses the impact of the shift away from a US dollar focus of systemically important emerging market economies (EMEs) on configurations between the US dollar, the euro and the yen. Given the difficulty that fixed or managed US dollar exchange rate regimes remain pervasive and reserve compositions mostly kept secret, the identification strategy of the paper is to analyse the market impact on major currency pairs of official statements made by EME policy-makers about their exchange rate regime and reserve composition. Developing a novel database for 18 EMEs, we find that such statements not only have a statistically but also an economically significant impact on the euro, and to a lesser extent the yen against the US dollar. The findings suggest that communication hinting at a weakening of EMEs’ US dollar focus contributed substantially to the appreciation of the euro against the US dollar in recent years. Interestingly, EME policy-makers appear to have become more cautious in their communication more recently. Overall, the results underscore the growing systemic importance of EMEs for global exchange rate configurations.     

The allocation of volatile aid and economic growth: Theory and evidence

We analyse, both theoretically and empirically, the growth effects associated with two components of volatile foreign financial assistance: ‘directly productive’ (or ‘tied’) aid and ‘pure’ aid. We find that scenarios in which aid can hurt the recipient's growth rate emerge only in cases where foreign aid is volatile. As a result, we conclude that it is only in conjunction with the presence of aid variability that aid allocation determines whether foreign aid hurts or promotes long-run growth.     

Professor Bauer on development : A review article

Bauer's views on vicious circles, the ‘widening’ gap between rich and poor countries, central planning, foreign aid and the appeal of Marxism in less developed countries are summarised. There is a discussion and summary of an appropriate analysis of the issues raised by Bauer. Attention is concentrated on the evidence related to a ‘widening’ gap, the potential failures of the price mechanism and the effects of foreign aid. It is suggested that Bauer's analysis is superficial, even though this may also be true of some he criticises, and that the case for aid remains strong.     

What’s spurious, what’s real? Measuring the productivity impacts of ICT at the firm-level

In order to assess the productivity effects of information and communication technologies (ICT), regressions based on cross–sectional firm–level data may yield unreliable results for the commonly employed production function framework. In this paper, various estimation biases and econometric strategies to overcome their sources are discussed. The effects are illustrated on the basis of a representative set of panel data for German service firms covering the period 1994 to 1999. The application of a suited SYS–GMM estimator yields evidence for significant productivity effects of ICT. However, these are substantially smaller than those suggested by cross–section estimates.I would like to thank Irene Bertschek, François Laisney, Georg Licht, Werner Smolny, Kevin Stiroh, Elke Wolf, Thomas Zwick and two anonymous referees for their helpful comments and the MIP–team for providing me with the data. This paper was written as part of the research project ‘‘Productivity and Spillover Effects from ICT as a General Purpose Technology’’ commissioned by the Landesstiftung Baden–Württemberg foundation.Final version received: September 2002/Final version accepted: April 2004     

Constitutions and the resource curse

Utilizing the fact that natural resources are randomly distributed among countries, we investigate how public income shocks have different long run economic effects dependent on constitutional arrangements. We find that (i) the so-called ‘resource curse’ is present in democratic presidential countries—but not in democratic parliamentary countries, (ii) being parliamentary or presidential matters more for the growth effects of natural resources than being democratic or autocratic, and (iii) natural resources are more likely to reduce growth when proportional electoral systems are in place than when the electoral systems are majoritarian. The two first effects appear very robust, the last effect less so.     

Closure in risk debates: Pre-assessment of Finnish forest biotechnology

The aim of this paper is to contribute to a more systematic and integrative pre-assessment of risk. The paper argues that although there are many insights into ‘pre-assessment’ within the field of risk studies, it suffers from a lack of robust methodological tools and approaches. A problem with the neglect of such approaches is that factors that set the stage for further steps in the risk-handling chain can remain in a state of implicit assumptions, impose biased interpretation of relevant risk issues and mislead the consideration of active intervention options. The suggestion of this article is that ‘social arena analysis,’ combined with the identification of ‘closure mechanisms,’ can provide a practical and theoretically anchored tool for the pre-assessment of risk. The value of this approach is demonstrated through the analysis of a debate on the future and risks of Finnish forest biotechnology, and in a final discussion on policy options emerging from the analysis.     

Residence-and source-based taxation of capital income in an overlapping generations model

By using an intertemporal equilibrium model with overlapping generations, this paper explores how residence-and source-based taxes on capital income affect the external current account in small open economies. These taxes influence the saving-investment balance not only through their incentive effects on rates of return but also through their impact on the intergenerational distribution of resources. This paper, in its examination of these effects — both intertemporal substitution and intergenerational distribution — identifies the net effect of the various impacts.The author would like to thank Dieter Bös and an anonymous referee for helpful comments on an earlier draft.     

TRAFFIC MANAGEMENT IN WHOLESALE INTERNATIONAL ROAMING: TOWARDS A MORE EFFICIENT MARKET?*

Despite a general trend of lower charges for mobile calls, in Europe, prices for international roaming calls have remained at levels that are surprisingly high. The apparent reluctance of mobile network operators to lower roaming tariff is generating many antitrust concerns. This paper presents in a two‐country two‐firm framework the functioning of the current system governing wholesale international roaming agreements based on interoperator tariffs. The focus is on the role of traffic management; thanks to the emergence of traffic direction techniques, mobile network operators are allowed to select the roaming partner. We show that, unless these techniques do not allow for perfect control on traffic flows, traffic management does not improve the market's efficiency. In line with the regulatory mechanism recently adopted by the European Commission, we show that a simple price cap mechanism may restore partial efficiency in the wholesale market. We also show that although cross‐border cooperation at the wholesale level is Pareto efficient, it will not emerge as an equilibrium of a two‐sided matching game.