Monetary transmission mechanism in Turkey under free float using a small-scale macroeconomic model

This study analyzes the monetary transmission mechanism in the Turkish economy following the switch to free float under informal inflation targeting scheme in the aftermath of the February 2001 crisis. A small-scale macroeconomic model is simulated using equations for output gap, exchange rate, sub-items of inflation, short-term policy rate, government borrowing rate, “Embi+ Turkey” and inflation expectations. The preliminary results indicate that, despite some slight departures, both static and dynamic simulations capture the dynamics of the fundamental economic variables. The results also show that at a time of weak domestic demand, output gap has been seemingly less significant in determining inflation. Furthermore, risk premium as measured by “Embi+ Turkey” has a high explanatory power in shaping government borrowing rate and exchange rate. Finally, forward-looking component of inflation has been effective in determining non-administered prices.     

Money, endogenous fertility and economic growth

This paper analyzes the issue of money superneutrality through an intertemporal optimizing model of capital accumulation with endogenous fertility, i.e. endogenous population growth. Two elements of this setup invalidate money superneutrality: (i) a demand for fertility that depends on real money balances, and (ii) an inverse relation between capital–labor ratio and population growth. Higher monetary growth increases fertility, since it reduces its opportunity cost, and hence diminishes capital intensity, and per capita output. This reverse Tobin effect is matched by an increase in aggregate capital and output growth rates. In this framework, the optimal monetary growth rule is a “distorted Friedman rule”.     

Government spending, capital accumulation and the optimal policy rule: The role of public service capital

In this paper, we modify the Djajić [Djajić, S., 1987. “Government Spending and the Optimal Rates of Consumption and Capital Accumulation,” Canadian Journal of Economics 20, 544–554.] model in such a way that government consumption expenditure provides utility to households via the total stock of government services rather than the government consumption flow alone. By using such a framework, we show that the optimality condition for the public service capital stock is the marginal rate of substitution between public service capital and consumption that equals the intertemporal marginal rate of transformation between the two goods. In addition, we show that the relationship between private consumption and public service capital in a household's utility plays an important role in determining the transitional behavior of relevant variables. We also examine the second-best government consumption expenditure policy. By contrast, in the standard flow specification, e.g., Turnovsky and Brock [Turnovsky, S.J. and Brock, W.A., 1980. “Time Consistency and Optimal Government Policies in Perfect Foresight Equilibrium,” Journal of Public Economics 13, 183–212.], Ihori [Ihori, T., 1990. “Government Spending and Private Consumption,” Canadian Journal of Economics 23, 60–69.], and Turnovsky and Fisher [Turnovsky, S.J. and Fisher, W.H., 1995. “The Composition of Government Expenditure and its Consequences for Macroeconomic Performance,” Journal of Economic Dynamics and Control 19, 747–786.], the second-best government consumption expenditure is decided on the basis that the marginal utility of consumption is equal to the discounted sum of the marginal utility of the government's flow spending.     

Rational expectations and the demand for money: A nonparametric approach

This paper tests the U.S. demand for money for evidence of the effect of rational expectations of the income and interest rate variables that enter as arguments into that function. The data employed are simple-sum and Divisia aggregates, and the nonparametric tests are of the identification and information orthogonality of the various monetary measures. The Akaike Criterion is used to distinguish among the alternative specifications. While non-rationality is the typical result, Divisia aggregates appear to be more “rational” than simple sum. There is evidence of mean-reversion in interest rates as well.     

The inflationary bias of real uncertainty and the harmonic Fisher equation

Summary. We argue that real uncertainty itself causes long-run nominal inflation. Consider an infinite horizon cash-in-advance economy with a representative agent and real uncertainty, modeled by independent, identically distributed endowments. Suppose the central bank fixes the nominal rate of interest. We show that the equilibrium long-run rate of inflation is strictly higher, on almost every path of endowment realizations, than it would be if the endowments were constant.Indeed, we present an explicit formula for the long-run rate of inflation, based on the famous Fisher equation. The Fisher equation says the short-run rate of inflation should equal the nominal rate of interest less the real rate of interest. The long-run Fisher equation for our stochastic economy is similar, but with the rate of inflation replaced by the harmonic mean of the growth rate of money.Received: 25 February 2005, Revised: 26 May 2005, JEL Classification Numbers: C7, C73, D81, E41, E58.An earlier version of this paper “Inflationary Bias in a Simple Stochastic Economy,” as a 2001 Cowles Foundation Discussion Paper No. 1333.     

Health and infrastructure in a model of endogenous growth

This paper studies the optimal allocation of government spending between infrastructure and health (which affects labor productivity as well as household utility) in an endogenous growth framework. A key feature of the model is that infrastructure affects not only the production of goods but also the supply of health services. The rate of time preference is also endogenously related to health outcomes. The first part considers the case where health enters as a flow in production and utility, whereas the second focuses on a “stock” approach. Growth- and welfare-maximizing rules for income taxation and the allocation of public spending are derived.     

International tax arbitrage, tax evasion and interest parity conditions

Using a finite-horizon general equilibrium model with uncertainty and money, we characterize situations where tax arbitrage opportunities may arise for international portfolio investors in an economy with heterogeneous capital income taxation when there is some scope to evade taxes on foreign capital income. We derive tax-modified uncovered interest parity conditions and forward rates similar to the no-tax ones, but augmented by tax-induced “risk-premium” terms; covered interest parity conditions remain unaffected by the introduction of capital income taxes, a consequence of our approach of bounding tax-based arbitrage without restricting arbitrage per se.     

A note on the speculative demand for money

In the General Theory, Keynes argued that expectations about future bond prices tend to be “sticky”. A rise in bond prices causes more investors to “join the bear brigade” and so increases the aggregate demand for money. Since Tobin's classic article on liquidity preference, this explanation of the downward sloping demand for money curve has largely disappeared from the literature. This note introduces sticky expectations into the Tobin framework. It shows that the existence of such stickiness does not necessarily cause the demand for money to be more elastic because investors have expectations about the variance of future bond prices as well as about their mean. A sufficient condition for a more elastic demand for money under sticky expectations is that the Pratt-Arrow coefficient of relative risk aversion be either constant or decreasing in wealth.     

Management contribution and the allocation of time in a labor-managed firm

The problem of time allocation in a labor-managed firm is considered under a technology specification in which the role of management in the production process is different from that of “ordinary” members. Two allocation schemes are discussed, the egalitarian and the Nash equilibrium. It is shown that in the model discussed the Nash solution brings about an output level that is lower than the Pareto-optimal output level. If the manager seeks employment opportunities outside the cooperative that reflect his success as manager, he increases his time input so that the output of the cooperative and the “ordinary” members' utility levels increase.     

Institutions and economic development: How strong is the relation?

This paper investigates the relationship between institutions and economic development (output per worker). As in Hall and Jones (1999), we find that a 1% improvement in institutions (as we measure them) generates on average a 5% increase in output per worker. However, this relationship is not linear and the data have important heterogeneity. Countries with the same value of institutions have different levels of income per worker. We ask whether the “returns to institutions” are the same across countries conditional on the level of institutions. Using quantile regression methods, we show that for countries at the top of the conditional distribution of international incomes, the “returns to institutions” are lower (around 3.8%,) than for countries at the bottom of this distribution (around 6.2%). We show that this result is robust for different model specifications and definitions of institutions. We also provide evidence that, conditional on the level of institutional development, the distribution of output per worker tends to become less disperse as countries improve their institutional framework. In other words, having better institutions is essential in order to close the output-per-worker gap across countries. Finally, we provide the rationale behind the results through a modified version of a Neoclassical Growth Model with time varying wedges, representing policy distortions and institutions.We thank Lee Alston, Roger Koenker, and Stephen L. Parente for helpful discussion, Werner Baer for useful comments, and Chad Jones for facilitating access to the data set. We are also indebted to an anonymous referee and an associate editor for important suggestions that improved the final paper. The analysis, opinions and findings expressed herein represent the views of the authors, they are not necessarily those of the Banco de Portugal. Any remaining errors are our responsibility.First version received: May 2001/Final version received: August 2003     

Keynes' theory of money and his attack on the classical model

This paper centers on Keynes' theory of money and his attack on the classical model. Keynes criticized the self-correcting model of the British orthodoxy along two separate lines. In the first, in which Keynes' theory of money was crucial, he took the institutional variables as given and examined the functional relationships. Keynes' burden was to undermine what he termed the "classical dichotomy," where money was a veil, playing no role in determining output and employment. Two key features of the orthodox model were loanable funds and quantity theories, and Keynes' theory of money emerged from the rejection of these theories. The key to his attack on the classical dichotomy was the speculative demand for money, which he presented as an indirect, unstable function of the interest rate. Hence, Keynes linked money demand to the interest rate. The interest rate was thus determined by monetary variables rather than real factors, contrary to British orthodox opinion. Keynes then demonstrated that intended investment and saving need not be equal at a full employment equilibrium.A previous version of this paper was presented at the Fiftieth International Atlantic Economic Conference, October 15–18, 2000, Charleston, South Carolina. The authors are grateful to participants for their helpful suggestions. The authors are responsible for any remaining errors.     

The optimal neglect of inflation: An alternative interpretation of UK monetary policy during the “Great Moderation”

This paper argues that UK monetary policymakers did not respond to the inflation rate during most of the “Great Moderation” that ran from the early 1990s to the mid-2000s. We derive a generalisation of the New Keynesian Phillips curve in which inflation is a non-linear function of the output gap and show that the optimal response of the policy rule to inflation depends on the slope of the Phillips curve; if this is flat, manipulation of aggregate demand through monetary policy does not affect inflation and so policymakers cannot affect inflation. We estimate the monetary policy rules implied by a variety of alternative Phillips curves; our preferred model is based on a Phillips curve that is flat when output is close to equilibrium. We find that policy rates do not respond to inflation when the output gap is small, a situation that characterised most of the “Great Moderation” period.     

Tax revenues, fiscal corruption and “shame” costs

In this paper we explore tax revenues in a regime of widespread fiscal corruption in a static framework. We prove that the relationship between the tax rate and tax revenues depends on the relevance of the “shame effect” of being detected in a corrupt transaction. In countries with a “low shame” effect, tax revenues grow as the tax rate increases. Moreover, there is a critical tax rate where the growth rate of tax revenues begins to reduce. In countries with a high “shame effect” tax revenues increase up to a threshold value and then decrease.     

Money, expectations, and interest rates

This paper employs a model of nominal interest rate determination in a framework of rational expectations of inflation. Hypotheses are developed with respect to relative impacts of predictable and unpredictable changes in money supply. These hypotheses are tested using quarterly Italian data from 1966–1975. The nominal monetary base is the measure of money employed and one private and two government bond rates measure nominal interest rates. The results are insensitive to variations in estimation procedure and specification of adjustment processes (and even predictive functions for the monetary base). The rational expectations formulation is well supported in every case.     

A Fisher-Brown proposition for speculative bubbles

A Fisher-Brown Proposition, that speculative bubbles occur as a result of a low interest rate, is proven in a general “sunspots” equilibrium framework.     

Anonymous yes–no voting with abstention and multiple levels of approval

Symmetric (3,2) simple games serve as models for anonymous voting systems in which each voter may vote “yes,” abstain, or vote “no,” the outcome is “yes” or “no,” and all voters play interchangeable roles. The extension to symmetric (j,2) simple games, in which each voter chooses from among j ordered levels of approval, also models some natural decision rules, such as pass–fail grading systems. Each such game is determined by the set of (anonymous) minimal winning profiles. This makes it possible to count the possible systems, and the counts suggest some interesting patterns. In the (3,2) case, the approach yields a version of May's Theorem, classifying all possible anonymous voting rules with abstention in terms of quota functions. In contrast to the situation for ordinary simple games these results reveal that the class of simple games with 3 or more levels of approval remains large and varied, even after the imposition of symmetry.     

Global slack and domestic inflation rates: A structural investigation for G-7 countries

Recent papers have argued that one implication of globalization is that domestic inflation rates may have now become more a function of “global”, rather than domestic, economic conditions, as postulated by closed-economy Phillips curves.This paper aims to assess the empirical importance of global output in determining domestic inflation rates by estimating a structural model for a sample of G-7 economies. The model can capture the potential effects of global output fluctuations on both the aggregate supply and the aggregate demand relations in the economy and it is estimated using full-information Bayesian methods.The empirical results reveal a significant effect of global output on aggregate demand in most countries. Through this channel, global economic conditions can indirectly affect inflation. The results, instead, do not seem to provide evidence in favor of altering domestic Phillips curves to include global slack as an additional driving variable for inflation.     

The economics of shortage and problems of reform in Chinese industry

This paper employs the economics of shortage framework to examine post-Mao reforms in Chinese state-owned industry. Performance has been disappointing because reforms through 1985 failed to fundamentally alter economic agent behavior. The “soft” budget constraints at the enterprise and local government levels continue to generate “quantity” and “expansion” drives. The resultant inflationary pressures have necessitated administrative interventions and thwarted reform progress. The Maoist legacy of active participation by local governments in economic management is high-lighted as a major obstacle to the elimination of paternalism in state-enterprise relations.     

Critical Success Factors for Business Reengineering and Corporate Performance: The Case of Korean Corporations

This article briefly reviews the literature on business reengineering (BR), analyzes critical success factors (CSFs) for BR, develops a BR-CSFs model, empirically tests the model on Korean firms, and investigates the impact of BR on corporate performance in Korea. Many Korean firms are attempting to transform from Japanese- to American-style business management. As part of this process, BR has gained substantial critical mass as the first widely accepted American-born management methodology accepted in Korea. While Western-based BR methodologies provide general procedures and techniques the CSFs listed in this research focus on the key factors that Korean firms generally confront. In the present research, 20 CSFs, taken from a literature review were divided into four categories: strategic, organizational, methodological, and technological/educational. A survey was developed to assess the firm-specific importance and development of each of these CSFs. Survey responses from 162 Korean corporations indicate a positive association between the designated CSFs and corporate performance. Korean BR team leaders and CEOs/COOS rate “strategic” and “methodological” CSFs as most important while “organizational” and “technological/educational” CSFs are considered less important, a rank ordering challenged by the authors.     

Stabilizations, crises and the “exit” problem – A theoretical model

Exchange-rate-based stabilizations, even if successful, usually lack credibility initially. This is reflected in high (ex post) real interest rates and some degree of real exchange rate appreciation. Empirical observation suggests that wage inflation declines smoothly over time whilst interest rates are volatile. Our model captures these features and provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilization; the potential advantages of a heterodox approach; when to delay a stabilization attempt; and the optimal date for “exit” to a floating exchange rate.