On Income Velocity of Money,Precautionary Money Demand and Growth

A stochastic growth model with money introduced via a cash-in-advance constraint is used to analyze the behavior of the income velocity of real monetary balances and money demand. Agents can purchase consumption goods only using government issued money. The cash-in-advance constraint may become nonbinding because of the uncertainty about the realization of the state of the economy. We find that the precautionary money demand may introduce significant changes into the volatility of the income velocity if it happens almost always. Its presence can also alter the relationship between the average growth rate of money supply and the average growth rate of the economy.     

The Transmission of Sustained Growth through the Terms of Trade in an Endogenous Growth Model

This paper develops a two‐country model of endogenous growth and international trade in intermediate goods. In autarky just one of the economies enjoys sustained growth. The trade situation may be characterized by complete specialization of both countries, or by incomplete specialization of the growing economy. In either case, trade transmits perpetual growth to the stagnant economy because of the permanent improvements in its terms of trade. The existence of a non‐reproducible factor in the growing economy is crucial to ensure propagation of growth. Moreover, under incomplete specialization countries converge in per capita income. This result relies on two assumptions. First, there must be a large enough share of world income to pay for the input in which the stagnant economy has comparative advantage. Second, all technologies producing intermediate goods should be equally intensive in the non‐reproducible factor.     

Efficiency Wages and Nominal Income Targeting in an Open Economy

Abstract. This paper considers the choice between nominal income and money supply targeting in an open economy with efficiency wages. The results show that, when real unemployment benefits are rigid, both nominal income and money supply targeting have the same stabilizing performance. On the contrary, if nominal unemployment benefits are rigid, then we come to a conclusion that either in the face of goods demand shocks or aggregate supply shocks, a sufficient condition for nominal income targeting to be preferable is that the income elasticity of money demand be less than unity.     

The determinants of international reserves in the small open economy: The case of Honduras

The strong monetary approach to the balance of payments suggests that for a small open economy with a fixed exchange rate, international-reserve losses are due to money-supply growth in excess of growth in money demand, where money demand is assumed to be a stable function of exogenously given income and world prices. This paper tests the applicability of the strong monetary approach to Honduras during the period 1960–1983. Although the strong monetary approach provides a statistical explanation of reserve movements during this period, insights into the underlying causes of reserve changes can be obtained through recognition of the importance of the income terms of trade in determining both real income and domestic-credit growth in the small open economy.     

Growth, Trade, and Government Policies of a Small Open Economy

Utilizing a linear endogenous growth model, the paper provides an economic rationale for two empirical findings: the positive correlation between export growth and income growth, and the association of rapid structural changes with fast income growth. In the benchmark case, the small open economy converges eventually to a balanced growth path along which exports and total output grow at the same constant rate as consumption. Government policies affect the pattern of specialization and trade since they change the autarky or foreign relative price. Only taxation on the capital goods sector can affect asymptotic growth rates.     

The aggregate elasticity of factor substitution with middle products

The elasticity of substitution between factors in production relates the change in the ratio of factors used in a production process to a given change in the factor price ratio. An aggregate concept of such an elasticity relates a change in overall factor endowments to the resulting change in factor prices. For a closed economy the behavior of consumers is an important part of such an aggregate elasticity, since endowment changes can bring about changes in commodity prices and resulting adjustments to factor prices. For a small open economy, commodity prices in typical models are exogenous. In the model with middle products, all final consumer goods are non-traded, so that local consumer behavior can affect factor prices. The aggregate elasticity of substitution is shown to be an average of production elasticities and demand elasticity even for a small open economy.     

Structural Change and Economic Growth

This paper presents a model in which a country's measured average propensity to save endogenously rises when its economy industrializes. The model has agricultural and manufacturing sectors. Only agriculture uses land. If at early dates income per capita is low, agricultural consumption is important, land is valuable, and capital gains on land may constitute most wealth accumulation, leaving the country's NIPA APS low. If exogenous technological progress raises incomes over time, Engel's law shifts demand to manufactured goods. Then land's portfolio importance relative to reproducible capital diminishes and the national income and products account saving rate can rise.     

The efficiency of government promotion of inbound tourism: The case of Australia

This paper examines the effect of tax-funded promotion of inbound tourism on domestic welfare in an open economy setting with increasing returns in the tourism industry. As inbound tourism is a way of extending the market and getting more demand to realize the implication of increasing returns, promotion can help overcome the underproduction of tourism goods. However, taxation leads to a decline in domestic residents' consumption of tourism and non-tourism goods and reduces the competitiveness of the non-tourism industry in the host country. An important result obtained is that government promotion of inbound tourism will not improve welfare unless the degree of increasing returns in the tourism industry is high enough and the national income of the foreign country multiplied by the parameter of marketing effectiveness is larger than the national income of the home country. This finding is supported by a simulation with the case of Australia.     

The Behavior of Nontradable-Goods Prices In Europe: Evidence and Interpretation*

This paper examines the evolution of the relative price between tradable and nontradable goods in a group of European countries. A model of an open economy is used to analyze different factors that can account for an increase in the relative price of nontradable goods. These factors are (a) faster technological progress in the tradable goods sector, (b) demand shifts toward nontradable goods, and (c) real wage pressures. the relevance of these factors is analyzed empirically for France, Germany, Italy, Spain, and the United Kingdom.     

On the Transmission Mechanism of Monetary Constraints to the Real Side of the Economy

Contrary to the predictions of the theory underlying international finance, inflows of capital triggered by financial liberalisation have neither equalised real interest rates nor increased income growth in many emerging economies. We explain this puzzle by developing a model that combines the balance‐of‐payments constraint approach to economic growth with a less stringent version of the real interest rate parity hypothesis. The model’s foundations are based on robust empirical findings or well‐established macroeconomic models. We show that a perverse combination of income elasticities of demand for imports and exports generates slow income growth and high real interest rates. As domestic income grows and imports rise faster than exports, the real exchange rate is expected to depreciate in order to clear the balance of payments (or the foreign exchange rate market). An incipient capital outflow arises and interest rates increase. Faster adjustment in capital rather than in the goods market therefore generates a higher real interest rate differential between the domestic small open‐economy and the rest of the world. The long run analysis shows that a constant degree of risk aversion implies a positive equilibrium real interest rate differential that affects economic growth. A permanent increase in default risk driven by persistent current account imbalances thus impacts on long run growth. The model’s results are illustrated with evidence from the three major Latin America economies: Argentina, Brazil and Mexico.     

Imperfect Competition and Growth with Entrepreneurial Risk

Abstract. This paper analyzes an overlapping generations endogenous growth model of occupational choice under risk in a two-sector economy with intermediate and final goods. Agents choose between business ownership in the monopolistically competitive intermediate goods industry or employment as a worker in this sector. Firm-specific profits are stochastic. Occupational choice under risk endogenizes the number of firms and products in the intermediate goods industry. The analysis shows that economic performance and growth both depend on the entrepreneurship rate and are inefficiently low compared with an economy with perfect markets for pooling risks. Monopolistic competition partly offsets the negative income effects from a too low level of entrepreneurial risk-taking.     

Microeconomic modeling of parallel markets: The case of agricultural goods in the USSR

In a centrally planned economy, non-market-clearing prices fixed by the state cannot be used directly to estimate consumer behavior models. This paper represents an attempt to overcome this problem by utilizing prices in a parallel “free” market. An equilibrium model incorporating parallel markets is discussed and a demand curve arising from this model is estimated using data for the markets for meat and milk in the USSR. the price and income elasticities of demand for these goods are found to be significantly higher than those estimated for the United States.     

Social articulation as a condition for equitable growth

A formal model is developed to establish the structural conditions that result in growth being progressive or regressive on the personal distribution of income. These conditions include (1) intersectoral investment priorities between wage goods and luxuries, and (2) the state of the levels and distribution of incomes which determines the social origin of demand for different sectors of the economy. The particular combinations of investment and income structures that result in equalizing (social articulation) or unequalizing growth (social disarticulation) are derived. We show empirically that the structural conditions that allowed rapid but unequalizing growth in Brazil between 1968 and 1977 were those of social disarticulation.     

Quality of Imports Relative to Exports,and the Transmission of Sustained Growth through the Terms of Trade

Abstract

This paper shows that an economy can import sustained growth, in spite of not possessing mechanisms to absorb foreign knowledge. To do that, it develops a two-country model of exogenous growth with investment-specific technological change. In autarky, one country sustainably grows while the other economy remains stagnant. In the trade situation, the quality-adjusted terms of trade become increasingly favourable to the second economy, which results in the transmission of growth. The continuous improvement in the quality of imported capital goods relative to exported consumption goods is the reason why this occurs. Moreover, this mechanism leads to convergence in per capita income if trade involves incomplete specialisation.     

Import prices,income, and inequality

We compare three theoretical explanations for the positive empirical relationship between importer income per capita and traded goods prices. A first explanation is that consumers with higher incomes demand higher quality goods with higher prices. A second explanation is that wealthier people exhibit an increased willingness to pay for necessary goods as more goods enter the consumption set in a hierarchic demand system, and can thus be charged higher markups. A third explanation is that consumers with higher incomes are more finicky regarding their preferred variety in an ideal variety framework and can thus be charged higher markups. We discriminate between these three theories by focusing on the effect of income inequality on trade prices. Based on a large dataset with bilateral HS6 level data on 1260 final goods categories from more than 100 countries between 2000 and 2004, we find a highly significant negative effect of income inequality on unit values. This contradicts both the demand for quality and finickyness theories, while providing support for the increased willingness to pay theory linked to hierarchic demand. These findings on income inequality do not falsify the quality expansion model and the ideal variety model per se. However, the results do argue for place of importance of hierarchic demand.     

Export demand elasticities and productivity as determinants of growth: estimates for Mauritius

In this article, we combine the export led and import led growth hypotheses in a growth model in which the importation of foreign capital goods and the demand elasticities of own export products explain the growth opportunities and the technical progress of developing countries. This model, based on imported capital goods, uses Mauritius’ data on capital investment, employment, export partners’ growth and terms of trade to estimate price and income elasticities of export demand, total factor productivity growth and economies of scale. These elasticities are then used to assess how the growth in export partners’ income is converted into domestic growth. The implications of the presence of low or high export demand elasticities are discussed by relating them to various strands of trade and growth literature. Based on the results of this estimation, we also calculate steady state growth rates, engine and handmaiden effects of growth as well as the dynamic steady state gains from trade for this latecomer export economy. The implications of steady state results are also discussed in the light of the Mauritian employment and growth perspectives.     

Trade Policy in the Presence of Economies of Scale and Product Variety*

It is well known that laissez faire may not be the ‘first-best’ policy in a closed economy where economies of scale are present. Corden has shown that this conclusion can carry over into an open economy, though under his assumption that imported goods are perfect substitutes for home-produced goods, interference with international trade could not raise real income. We have shown that where there are economies of scale, and imported goods are not identical to the home produced goods, interference with trade could raise real national income, though such a form of intervention would not normally be optimal. Further, it could even be desirable to support home production of more than one ‘variety’. Measurements of ‘costs of protection’ that aggregate several varieties into one may mislead not only regarding the size of the cost but even regarding its sign.     

A note on small income effects

This note provides an alternative sufficient condition for the small income effect result that is first shown by Vives [Small income effects: a Marshallian theory of consumer surplus and downward sloping demand, Rev. Econ. Stud. 54(1) (1987) 87-103]. The condition is stated by ordinal terms only, whereas Vives assumes cardinal properties of utility representation. Second, as its application, we provide a sufficient condition for the preference being asymptotically quasi-linear, in a two good economy where the second good is a composition of a large number of goods.     

Monetary policy under flexible exchange rates: When is expansion contractionary?

This paper studies whether the observed instability in the effects of monetary policy could be due to the way in which the behavior functions have been specified in an open economy context. Accordingly, special emphasis is on the specification of the behavior functions to correspond to their foundations in closedeconomy macrotheory. The demand for real money balances, in terms of the expenditure basket of goods, is specified as a function of income in terms of the same basket. Imports are specified as a function of expenditures, being functionally part of expenditures. The supply of labor is specified as a function of the expenditure price.It is shown that the exchange rate overshoots but output declines, to eventually rise above its original level in response to monetary expansion in the real wage model. In the money wage model, output and the exchange rate overshoot their steady-state levels if the expansion eventually leads to an increase in nominal wealth. If it leads to a decrease, both variables undershoot. However, if interest payments on foreign securities are not small relative to the trade balance, many of the effects are reversed. Thus the overshooting result is far from robust even in a standard model with an exogenous money supply.     

China??s growth model and structural unbalance in the open economy

The Chinese economy has been significantly affected by the global financial crisis. Moreover, a rapid decline in growth rate can be mainly attributed to the expenditure structural unbalance, which takes root in its uneven national income distribution. Furthermore, the uneven national income distribution is the result of the extensive pattern of China’s economic growth in the open economy. The extensive pattern is characterized by labor-intensive export-led growth model. The need for high growth rate and fiscal revenue maximization forces local governments to compete against each other to get FDI by undervaluing production factors, resulting in the extensive pattern of growth. From an institutional point of view, uneven social power between government and public, central government and local governments, capital owners and labor force, and so on, can be viewed as the main reason for the extensive pattern of growth and uneven national income distribution. Low wage, which has been the main factor for the comparative advantage, now turns out to be barriers to boosting domestic demand. The technology lag in the manufacturing industry also has a significant negative impact on improving labor productivity and increasing per capita income. Hence, to deal with the recession, not only quantitative easing, but also structural adjustments are needed.