Fiscal policy,long-run stability and aggregate supply

The model developed in this paper incorporates aggregate supply and hence the price level into existing dynamic IS-LM models of flow and stock equilibrium. Whereas the long-run equilibrium position in these models is stable and fiscal policy works regardless of empirical magnitudes when budget deficits are financed by printing money, the introduction of aggregate supply into these models is shown to render the stability of long-run equilibrium and hence the effectiveness of fiscal policy under money financing, open to empirical question.     

Nature, Power and Growth

This essay reviews the relationship between natural–resource abundance and economic growth around the world, and presents some new results. The principal reasons why resource–based production can inhibit economic growth over long periods are traced to the Dutch disease, neglect of education, rent seeking, and economic policy failures. Across a large number of countries in the period from 1965 to 1998, the share of the primary sector in the labour force is shown to be inversely related to exports, domestic and foreign investment, and education, and directly related to external debt, import protection, corruption, and income inequality. The cross–sectional data show, moreover, that the share of the primary sector in the labour force is inversely related to per capita growth across countries. None of this lies in the nature of things, however. What seems to matter for economic growth is not the abundance of natural resources per se, but rather the quality of their management, and of economic management and institutions in general.     

Does devaluation improve the current account?

This paper incorporates the link between devaluation, foreign interest payments, and the current account into a fairly general macroeconomic model in which exchange rate changes influence aggregate demand through exports, imports, and expenditure as well as aggregate supply via the cost of imported factors of production. On the basis of available statistical estimates of the behavioral and structural parameters of the model, an attempt is made to assess the empirical importance of this link, among others, in a group of highly indebted industrial and developing countries. By and large, the empirical results indicate that high foreign debt and interest payments tend to reduce the short- to medium-run effect of devaluation on national income, especially in the LDCs, but make little difference to its generally positive effect on the current account.     

Does inflation matter for growth?

The interaction between inflation and economic growth is studied within a simple model incorporating money and finance into an optimal growth framework with constant returns to capital. The model includes the potential impact of inflation on growth, via (a) saving and real interest rates, (b) velocity and financial development, (c) the government budget deficit through the inflation tax and tax erosion, and (d) efficiency in production through the wedge between the returns to real and financial capital. The hypothesized effect of inflation on long-run growth through these channels is estimated by applying the random-effects panel model to two sets of unbalanced panel data side by side, from the Penn World Tables and from the World Bank, covering 170 countries from 1960 to 1992. The cross-country links between inflation and growth are economically and statistically significant and robust. Specifically, the results show that inflation in excess of 10–20 percent per year is generally detrimental to growth.     

Growing apart? A tale of two republics: Estonia and Georgia

We compare and contrast the economic growth performance of Estonia and Georgia from the collapse of the Soviet Union in 1991 until 2006 and beyond in an attempt to understand better the extent to which the growth differential between the two countries can be traced to increased efficiency in the use of capital and other resources (intensive growth) as opposed to brute accumulation of capital (extensive growth). On the basis of a simple growth accounting exercise, we infer that advances in education at all levels, good governance, and institutional reforms have played a more significant role in raising economic output and efficiency in Estonia than in Georgia which remains marred by various problems related to weak governance in the public and private spheres.     

Natural Resources and Economic Growth: The Role of Investment

Is it possible that excessive reliance on natural resources affects saving and investment in a way that retards economic growth? – and thus, in the long run, the level of output per capita. This paper reviews the literature, explores the data and compares and contrasts the explanatory power and interplay of natural resources and civil liberties, our proxy for institutional variables currently under scrutiny in the literature. We propose that natural resource dependence may be viewed as an exogenous factor that impedes economic growth and investment as well as institutions, even if we stress that natural resource abundance may be good for growth.     

Education, Social Equality and Economic Growth: A View of the Landscape

Education has been one of the key determinants of economic growtharound the world since 1965. In this paper, we discuss threedifferent measures of education, and consider their relationshipto the distribution of income as measured by the Gini coefficientas well as to economic growth across countries. The three measuresare: (a) gross secondary-school enrolment, (b) public expenditureon education relative to national income and (c) expected yearsof schooling for girls. We show that all three measures of educationare directly related to income equality across countries. Ina sample of 87 countries at all income levels, we also findthat more and better education appears to encourage economicgrowth directly as well as indirectly through increased socialequality and cohesion. Our regression results survive the introductionof regional dummy variables for Africa, Asia and Central andSouth America. We argue that the empirical relationship betweeneducation, on the one hand, and growth and equality, on theother hand, can help account for the positive correlation betweenthe two latter variables that has been documented in the literature.(JEL 128, O15, O40)     

Competing wage claims,cost inflation,and capacity utilization

This paper develops a theory of competing wage claims and cost inflation, and attempts to integrate this theory into the core of modern macroeconomic analysis. Specifically, the paper proposes an explanation for wage inertia and wage interdependence based on an application of duopoly theory to labor unions, and incorporates this microeconomic theory of labor union behavior into a macroeconomic general equilibrium model with goods, money, and bonds as well as two kinds of labor. Special emphasis is placed on the interplay between demand and cost factors in the inflation process and on the implications of wage competition among labor unions for the relationship between inflation and unemployment in the short and long run.