Optimal monetary policy and economic growth

A question at the center of many analyses of optimal monetary policy is, why do central banks never implement the Friedman rule? To the list of answers to this question, we add neoclassical production (specifically, the Tobin effect) as one possible explanation. To that end, we study an overlapping generations economy with capital where limited communication and stochastic relocation create an endogenous transactions role for fiat money. We assume a production function with a knowledge externality (Romer style) that nests economies with endogenous growth (AK form) and those with no long-run growth (the Diamond model). The Tobin effect is shown to be always operative. Under CRRA preferences, a mild degree of social increasing returns is sufficient (but not necessary) for some positive inflation to dominate zero inflation and for the Friedman rule to be sub-optimal, irrespective of the degree of risk aversion.     

Endogenicity of economic growth models

In his celebrated 1956 article, “A Contribution to the Theory of Economic Growth,” Solow calibrated the stylized facts of economic growth observed in the Western developed countries and summed up by Kaldor. Solow reconciled steady-state rate of growth of per capita output with constant capital/output and capital/labor ratios by introducing labor augmenting technological progress and measuring physical labor time in efficiency units. A series of articles have appeared since the mid-1980s, which have substantially extended the neoclassical model of growth theory presented by Solow. Most of these are entitled endogenous in juxtaposition to Solow's model, which is considered and often labeled exogenous. The purpose of this article is to show that this dichotomy is not worthwhile by arguing that the way technological progress enters in Solow's model plays a crucial role. Moreover, the designation of a model need not depend on the way it employs just one element among others.     

Optimal transmission switching: economic efficiency and market implications

Traditionally, transmission assets for bulk power flow in the electric grid have been modeled as fixed assets in the short run, except during times of forced outages or maintenance. This traditional view does not permit reconfiguration of the transmission grid by the system operators to improve system performance and economic efficiency. The current push to create a smarter grid has brought to the forefront the possibility of co-optimizing generation along with the network topology by incorporating the control of transmission assets within the economic dispatch formulations. Unfortunately, even though such co-optimization improves the social welfare, it may be incompatible with prevailing market design practices since it can create winners and losers among market participants and it has unpredictable distributional consequences in the energy market and in the financial transmission rights (FTR) market. In this paper, we first provide an overview of recent research on optimal transmission switching, which demonstrates the substantial economic benefit that is possible even while satisfying standard N−1 reliability requirements. We then discuss various market implications resulting from co-optimizing the network topology with generation and we examine how transmission switching may affect locational Marginal Prices (LMPs), i.e., energy prices, and revenue adequacy in the FTR market when FTR settlements are financed by congestion revenues.     

A note on the triple difference in economic models

This article shows when a triple difference strategy using an imperfect control category improves on the double difference strategy for estimating an average treatment effect. For example, a product is treated in one place and not another leading to a double difference strategy. When does comparison with an untreated product in triple difference strategy improve accuracy?     

On some criteria for the formulation and testing of economic growth models

This paper presents a methodology for the formulation and testing of economic growth models. The model selected includes two production sectors with physical and human capital accumulation. These capital stocks are associated with spillover effects in the production of the physical good and in the accumulation of both factors.     

Market structure and competitive equilibrium in dynamic economic models

Recently theorists have analyzed economies which potentially contain both finite and infinite horizon overlapping generations, using “Arrow-Debreu” (complete) markets. Typically, applied models assume recursive spot and contingent securities markets, implying a different equilibrium concept. Indeed, if infinite horizon agents are present recursive equilibria cannot exist without some side conditions on debt. With the right side conditions, we show that every recursive market equilibrium allocation is a complete market equilibrium allocation and vice versa. This bridges a gap between theory and applications, and extends existing equivalence results on market structure.     

Scale effects in Schumpeterian models of economic growth

Early models of Schumpeterian growth incorporate scale effects predicting that large economies grow faster than small economies, and that population growth causes accelerating per capita income growth. An absence of clear empirical evidence for these scale effects has led some researchers to question the foundations underlying the Schumpeterian approach to growth. This paper reviews empirical evidence on the relationship between scale and growth, and recent attempts to construct Schumpeterian growth models without scale effects.     

Optimal policy rules and regime switching in disequilibrium models

This paper emphasizes the need to search for globally optimal policy levels (for public production, say) in fix-price disequilibrium analysis. Regime-specific rules are inadequate. They ignore the fact that moving a policy towards its optimal level may move the economy from its initial disequilibrium regime to a different regime where the rule no longer applies.     

The instantaneous speed of adjustment assumption and stability of economic models

Summary In order to simplify stability analysis of an economic model one can assume that one of the model variables moves infinitely fast towards equilibrium, given the values of the other slower variables. We present conditions such that stability of the simplified model implies, or is implied by, stability of the original model. The conditions make use of the concept of a negative dominant diagonal. As an example, we analyse the (local) stability of a Walrasian general equilibrium model.Useful comments on an earlier version of this paper by an anonymous referee are gratefully acknowledged.     

Heterogeneous beliefs and learning in forward looking economic models*

We study a class of forward looking economic models with heterogeneous agents in a bounded rationality setting. The agents employ the same recursive learning rule to update beliefs but are characterized by different memory parameters. The peculiarity of the learning mechanism is that the learning rate is not vanishing in the limit. Differently from what is obtained in the case of a vanishing learning step, i.e., the stability conditions in the heterogeneous agents case are those of the representative agent model, we show that heterogeneity matters for the expectational stability of a stationary perfect foresight equilibrium and that the stability parameter restrictions with heterogeneous agents are stronger than in the case of homogeneous agents.     

Making economic sense of brain models: a survey and interpretation of the literature

Neuroeconomics draws attention to motive forces that are ignored in the standard framework of economic theory. The present paper develops a conceptual approach that, similar to Pennings et al. (Journal of Bioeconomics 7: 113–127, 2005), tackles the issues at the systemic level by analyzing and modeling the brain processes that decide on behavior. It takes as the basic unit of analysis potential stimulus-response actions which—when selected—become actual behavior. The objective of these potential stimulus-response actions is to increase utility. At any moment of time, several of these potential actions compete with each other for the privilege of becoming actual behavior. This competition can be modeled on the basis of economic principles. The behavior that materializes may cover the range from the rational to the foolish, depending on which of the potential responses gathers the greatest emotional strength. The emotional strength of a potential response, in turn, is determined by the individual’s past experience and her capacity for rational action. Given that the objective is always to increase utility, it can normally be expected that the more or less rational dominates the foolish, but this need not always be the case. Which potential actions become behavior in a concrete instance is decided by a mechanism implemented by the basal ganglia, a structure in the brain serving as the action selection mechanism. The insights provided by this approach afford coherent explanations of behaviors that are not readily explicable by the standard approach of economic theory.      

Differences and similarities between ecological and economic models for biodiversity conservation

In this paper we investigate an important obstacle which substantially complicates co-operation between ecologists and economists but which has received little attention so far: differences between the modelling approaches in economics and ecology. To understand these differences, 60 models addressing issues relevant to biodiversity conservation have been selected randomly from eight international economic and ecological journals. The models have been compared according to a number of criteria including the models' level of generality; the mathematical techniques employed for formulation and solution of the models; the level of complexity and the way time, space and uncertainty are taken into account. The economic models sampled are formulated and analysed analytically, tend to be relatively simple and are mostly used to investigate general questions. Furthermore, they often ignore space, dynamics and uncertainty. Although some ecological models have similar properties, there is also a substantial number of another type of ecological models that are relatively complex and analysed by simulation. These models tend to be rather specific and often explicitly consider dynamics, space and uncertainty. The integrated ecological-economic models are observed to lie “in the middle” between ecological and economic models. An unexpected result is that they are not more complex than ecological and economic models (as one could have expected from a simple “merger” of models from both disciplines), but have an intermediate complexity.     

两岸经济合作:机制与模式探讨

两岸经贸关系经过二十多年的发展,在实践中逐步形成多种初级的经济合作机制与合作模式.但这些机制与模式主要是由市场与利益杠杆作用自发形成的,非两岸官方(政府)积极主导与合作建立的.本文主要是对二十多年来两岸经贸关系发展的合作机制与模式进行总结与归纳,同时对未来两岸经济整合模式进行简要评估.     

Use of mathematical models in automotive transportation policy analysis: A case study

Mathematical models are used widely in automotive transportation policy analysis. The limitations, benefits, and uses of a case-study model, the Sweeney Passenger Car Gasoline Demand Model, were examined. It was found that because of users' lack of awareness of the model's characteristics, the model has sometimes been misused, although the misuse appears to have had no major negative policy impact. However, the model use has had some impact on major automotive/energy policy decisions of the 1970s. Involvement by the model author in applications of the model contributed to effective use of the model in the policy process.     

Stability, global dynamics and Markov equilibrium in models of endogenous economic growth

This paper studies the local and global dynamics of two-sector models of endogenous growth with economy-wide external effects and taxes on capital and labor. The local analysis classifies the parameter space depending on the number of stationary solutions and local stability of equilibria. The global analysis shows that if taxes are within certain bounds and the size of the external effects on the average level of human capital is smaller than the share of physical capital, the equilibrium path is monotone and therefore a continuous Markov equilibrium can be constructed.     

Optimal macroeconomic policies in a financial and economic crisis: a case study for Slovenia

In this paper, we study different and, in particular, “optimal” reactions of fiscal (and to some extent monetary) policies to the financial and economic crisis of 2007–2009 in Slovenia, a small open economy that is part of the Economic and Monetary Union (EMU). Using an econometric model of the Slovenian economy, we simulate the effects of the global crisis under the assumption of no-policy reactions, i.e. assuming that macroeconomic policies are conducted without attempting to deal with the effects of the crisis. Next, we study the possibilities of fiscal policy reducing or even annihilating the effects of the crisis. We also investigate the optimal reaction of fiscal policies based on the assumption that Slovenian policy-makers behave as though they were optimizing an objective function. We show that optimal policies call for only a very modestly active countercyclical role of fiscal policies. There are strong trade-offs between countercyclical fiscal policies and the requirements of fiscal solvency.