DISCOUNT RATE FOR PUBLIC INVESTMENT IN A MONETARY DISEQUILIBRIUM ECONOMY*

In this paper, we explore the social rate of discount for public investment in a monetary overlapping generations model which allows for market disequilibria arising from price and wage rigidities. Financing public investment with a lump-sum tax on the younger generation, borrowing and money supply, the government maximizes the sum of generational utilities discounted by a social rate of time preference. For the social welfare optimum, it is required to take the boundary-maintaining policy by making demand for output equal to supply. In a stationary state, we show that (i) the social rate of discount on the Keynesian-repressed inflation boundary should be the weighted average of the social rate of time preference and the market rate of interest, the weights depending on the amount of private investment crowded out by public investment, and (ii) on the Keynesian-classical boundary it should be a modified version of the weighted average rule, containing an extra term which represents the marginal opportunity cost of public investment through its impact on labour employment.     

Credit Rationing,Income Exaggeration,and Adverse Selection in the Mortgage Market

We examine the role of borrower concerns about future credit availability in mitigating the effects of adverse selection and income misrepresentation in the mortgage market. We show that the majority of additional risk associated with “low‐doc” mortgages originated prior to the Great Recession was due to adverse selection on the part of borrowers who could verify income but chose not to. We provide novel evidence that these borrowers were more likely to inflate or exaggerate their income. Our analysis suggests that recent regulatory changes that have essentially eliminated the low‐doc loan product would result in credit rationing against self‐employed borrowers.     

PRICING,CAPACITY, AND CONSTRUCTION BOUNDARY OF A CONGESTIBLE HIGHWAY WITH AN ELASTIC DEMAND: SOCIAL OPTIMUM,SECOND BEST,PRIVATIZATION, AND VERTICAL DISINTEGRATION*

This paper uses a spatial model to analyse first‐ and second‐best policies, impacts of privatization and vertical disintegration of a congestible highway with elastic demand. The paper also uses simulation methods to analyse the welfare cost of a uniform‐toll constraint. Results show, inter alia, that the social optimum requires the marginal cost of highway extension to be equal to the net consumer benefit at the boundary, while in the second‐best case the aggregate user cost must be measured in terms of the shadow price. In turn, a profit‐maximizing firm equates the marginal extension cost to the markup revenue at the boundary.     

OPTIMAL INCOME TAXATION,DYNAMIC EFFICIENCY,AND THE SOCIAL COST OF PUBLIC EXPENDITURE*

An interest income tax and a publicly provided private good are introduced into the Hamada overlapping-generations model consisting of heterogeneous individuals where the government can use a wage-income tax, an identical lump-sum transfer, and the public debt. Two interesting problems are studied: (a) what relation exists between the optimal interest rate and the population-growth rate and (b) how dynamic efficiency affects the optimal-decision rules of taxes and the publicly provided good. We show that (i) if the government can (not) tax the interest income, then the optimal interest rate is (not) equal to the population-growth rate, (ii) without the availability of the interest tax the difference between these two rates is mainly caused by the income-distribution effect of the public debt and (iii) the dynamic efficiency effects on the optimal rules of the wage tax and the publicly provided good depend on not only such a difference but also the average substitute-complement relations among leisure, the second-period consumption and the publicly provided good.     

Monitoring and Forecasting Currency Crises

Can we improve forecasts of currency crises by using a large number of predictors? Which predictors should we use? This paper evaluates the performance of traditional leading indicators and a new Diffusion Index (DI) method as Early Warning Systems to monitor the risk and forecast the likelihood of the recent currency crises in East Asia. We find that the DI performs quite well in real time. For most countries, the forecasted probabilities of a crisis increase substantially around the actual time of the crisis. The economic variables that help in forecasting future crises are output growth, interest rates and money growth.     

Heterogeneous Consumers and Fiscal Policy Shocks

This paper studies empirical facts regarding the effects of unexpected changes in aggregate macroeconomic fiscal policies on consumers that differ depending on individual characteristics. We use data from the Consumption Expenditure Survey to estimate individual‐level responses and multipliers for government spending. We find that unexpected fiscal shocks have substantially different effects on consumers depending on their income and age levels: the wealthiest individuals tend to behave according to predictions of standard Real Business Cycle (RBC) models, whereas the poorest ones behave according to standard IS–LM (non‐Ricardian) models, most likely due to credit constraints. Furthermore, government spending policy shocks tend to decrease consumption inequality.     

WELFARE GAINS AND LOSSES IN SUNSPOT EQUILIBRIA*

We study a standard two period exchange economy with one nominal asset. As is well known, there is a continuum of sunspot equilibria around each efficient equilibrium. A sunspot equilibrium is inefficient but some households may gain in sunspot equilibria relative to the efficient equilibrium. We show that a household's equilibrium utility level is either locally maximized or locally minimized at the efficient equilibrium, and derive a condition which identifies whether or not a household's utility is locally minimized or maximized.     

HOW DO JAPANESE HEALTH INSURANCE SOCIETIES FINANCE THEIR CONTRIBUTIONS TO THE HEALTH SERVICE SYSTEMS FOR THE ELDERLY?*

We examine how Japanese health insurance societies finance (or distribute) the costs (or cost savings) from an increase (or decrease) in contributions to the Health Service Systems for the Elderly. Three ways are possible: (i) adjusting the premiums of the employee or employer; (ii) providing an optional benefit; and (iii) adjusting reserves by the change in contribution. We find that more than six‐sevenths of the changes are associated with changes in reserves, followed by premiums, and finally optional benefits. The increase in the premium mostly shifted to employees, while employees enjoyed a nearly 60% decrease in total premium.     

INCOMPLETE INFORMATION GAMES WITH MULTIPLE PRIORS*

We present a model of incomplete information games, where each player is endowed with a set of priors. Upon arrival of private information, it is assumed that each player “updates” his set of priors to a set of posterior beliefs, and then evaluates his actions by the most pessimistic posterior beliefs. So each player's preferences may exhibit aversion to ambiguity or uncertainty. We define a couple of equilibrium concepts, establish existence results for them, and demonstrate by examples how players’ views on uncertainty about the environment affect the strategic outcomes.