Market failure vs. system failure as a rationale for economic policy? A critique from an evolutionary perspective

This paper reconsiders the explanation of economic policy from an evolutionary economics perspective. It contrasts the neoclassical equilibrium notions of market and government failure with the dominant evolutionary neo-Schumpeterian and Austrian-Hayekian perceptions. Based on this comparison, the paper criticizes the fact that neoclassical reasoning still prevails in non-equilibrium evolutionary economics when economic policy issues are examined. This is more than surprising, since proponents of evolutionary economics usually view their approach as incompatible with its neoclassical counterpart. In addition, it is shown that this “fallacy of failure thinking” even finds its continuation in the alternative concept of “system failure” with which some evolutionary economists try to explain and legitimate policy interventions in local, regional or national innovation systems. The paper argues that in order to prevent the otherwise fruitful and more realistic evolutionary approach from undermining its own criticism of neoclassical economics and to create a consistent as well as objective evolutionary policy framework, it is necessary to eliminate the equilibrium spirit. Finally, the paper delivers an alternative evolutionary explanation of economic policy which is able to overcome the theory-immanent contradiction of the hitherto evolutionary view on this subject.     

Is the transport system becoming ubiquitous? Socio-technical roadmapping as a tool for integrating the development of transport policies and intelligent transport systems and services in Finland

This paper examines the main development characteristics within the transport system as we are approaching the ubiquitous phase of the information society. Particularly the challenges in designing transport policies on a rapidly evolving technological frontier are emphasised. The theoretical background of the paper stems from policy assessment as well as futures studies, especially from technology roadmapping. The paper presents a socio-technical roadmapping method as a tool to integrate the technology developments better with societal developments and transport policy design. The method is tested with a Finnish case study, which provides three thematic, complementary roadmaps of the potential transport system technology services of the future. The roadmaps illustrate what kind of technologies, services, actors and related policy relevant knowledge is needed in satisfying the demands of transport policy development in the future's ubiquitous society. The case study reveals several changes in the transport system: pluralised number of actor roles and actor networks in the system, emergence of a new kind of business and service layer because of the new dynamic inter-linkages between the actors, and further, possibility to capture the service layer with the concept of “technology service”. The changes require also re-conceptualisation of knowledge production to support transport policies. In conclusion, the socio-technical roadmapping holds great potentials as a tool for aligning technology development with transport policy development.     

Has monetary policy really become less effective in the euro area? A note

This paper applies a time-varying VAR model with stochastic volatility to the euro area. In contrast to the literature, we find that (i) monetary policy has not become less effective and that (ii) the expansionary policy that is currently pursued would not have resulted in a less severe recession in 2009.     

Is aid for trade effective? A panel quantile regression approach

This paper investigates whether Aid for Trade (AfT) leads to greater exports in recipient countries. Using panel quantile regression and two strategies to address endogeneity (AfT lagged by two periods and dynamic OLS), our results suggest that total AfT disbursements promote the export of goods and services mainly for the lower quantiles (0.1, 0.25, 0.50) of the conditional distribution of exports. Hence, countries that export less in volume are those benefitting most from AfT. This effect is mainly driven by the impact on exports of goods rather than on that of services. We also investigate which types of AfT are effective when endogeneity is controlled for. The main results show that whereas aid to improve trade policy and regulation is associated with higher exports for all quantiles, aid used to build infrastructure is found to affect exports at only the lowest tails of the distribution (0.10–0.35) and aid to build productive capacity is generally more effective for the lower quantiles of the export distribution (0.10–0.50). In contrast, aid disbursed for general budget support (an untargeted type of aid) is not associated with greater export levels. This finding holds irrespective of the quantile.     

Are school counselors an effective education input?

We exploit within-school variation in counselors and find that one additional counselor reduces student misbehavior and increases boys’ academic achievement by over one percentile point. These effects compare favorably with those of increased teacher quality and smaller class sizes.     

The time-varying policy neutral rate in real-time: A predictor for future inflation?

This paper examines the time-varying policy neutral interest rate in real-time for the Czech Republic in 2001:1–2006:09, estimating various specifications of simple Taylor-type monetary policy rules. For this reason, we apply a structural time-varying parameter model with endogenous regressors. The results indicate that the policy neutral rate gradually decreased over the sample period to levels comparable to those in the euro area. Next, we propose a measure of the monetary policy stance based on the difference between the actual interest rate and the estimated policy neutral rate and find it a useful predictor of the level as well as the change of the future inflation rate.     

Does conditionality work? A test for an innovative US aid scheme

Performance-based aid has been proposed as an alternative to the failed traditional approach whereby donors make aid conditional on the reform promises of recipient countries. However, hardly any empirical evidence exists on whether ex post rewards are effective in inducing reforms. We attempt to fill this gap by investigating whether the Millennium Challenge Corporation (MCC) was successful in promoting better control of corruption. We employ a difference-in-difference-in-differences (DDD) approach, considering different ways of defining the treatment group as well as different time periods during which incentive effects could have materialized. We find evidence of strong anticipation effects immediately after the announcement of the MCC, while increasing uncertainty about the timing and amount of MCC aid appears to have weakened the incentive to fight corruption over time.     

Does welfare policy affect residential choices? An empirical investigation accounting for policy endogeneity

This paper studies how changes in welfare policy affect welfare recipients' residential choices. Although several empirical studies have stressed that welfare policy may affect residential choices of welfare recipients, few studies have simultaneously taken into account that residential choices of welfare recipients are also likely to affect welfare policy. This paper utilizes a policy reform to address this policy endogeneity. The results show that welfare policy exerts a substantial effect on residential choices of welfare recipients.     

When did unsystematic monetary policy have an effect on inflation?

An important stylized fact to emerge from VAR estimates is that exogenous monetary policy shocks (also labelled unsystematic monetary policy) have a delayed, persistent, hump-shaped effect on inflation. I argue that this empirical pattern is fragile. In particular, it disappears when one examines periods without large shifts in the level of inflation (such as 1984–2005). An important consequence is that the hump-shaped VAR estimated response of inflation is not appropriate to fit stylized models of the response of inflation around a stable steady state inflation level.     

Do fiscal rules constrain fiscal policy? A meta-regression-analysis

We implement a meta-regression-analysis for the budgetary impact of numerical fiscal rules based on 30 studies published in the last decade. The existing empirical evidence points to a constraining effect of rules on fiscal aggregates. However, this seemingly optimistic message is strongly weakened as our analysis points to a bias if the potential endogeneity of fiscal rules is not explicitly taken into account. Furthermore, our analysis provides evidence for the presence of a publication bias. Both sources of bias reduce the statistical precision of obtained effects below usual levels of statistical significance. In addition, we offer suggestive evidence for the effect size based on a small coherent sub-sample and provide recommendations for future research on the budgetary impact of fiscal rules.     

Is an unfunded social security system good or bad for growth? A theoretical analysis of social security systems financed by VAT

This study investigates how unfunded public pensions financed by value added tax (VAT), as discussed in Japan, affect economic growth and whether payroll tax (PT) or VAT is the more growth‐friendly tax structure for financing public pensions. We examine these issues using overlapping generations models with parental altruism and find that a public pension system financed by VAT may increase economic growth when bequests are operative. By contrast, when bequests are inoperative, public pensions hinder growth unless agents are sufficiently patient. Finally, public pensions financed by VAT are more growth‐friendly than those financed by PT.     

When does financial integration matter for fiscal policy in a currency union? A welfare-based approach

We use a two-country new open economy macroeconomics model describing a currency union with imperfect financial integration. We assume that household preferences are biased towards the goods produced within the country. We use this setup to show how the degree of financial integration and the home bias affect the welfare efficiency of fiscal policy. This is particularly important for the implications of a fiscal policy launched by a member of the euro zone where the home bias is in a decreasing trend due to higher goods market integration and where there are explicit efforts to enhance financial integration. The results show in particular how the effects of an increasing financial integration on the impact of a fiscal policy can be mitigated or amplified by a decreasing home-product bias. Moreover, under certain conditions, the degree of financial integration has no effect on the welfare efficiency of fiscal policy despite its non-negligible effects on the components of welfare.     

Does the Linder effect hold for differentiated agri-food and beverage product trade?

Using a generalized gravity equation, this study tests for the Linder effect in differentiated agri-food product trade, i.e. as the demand structures of two countries become more similar, their trade intensity increases. Two proxies of demand structure, the Balassa index and the absolute value of the difference in per capita Gross Domestic Products (GDPs) of trading partners, are used to capture the Linder effect. In addition, two measures of bilateral trade, the Grubel and Lloyd (GL) index, and the value of bilateral trade are used as the dependent variable. This study investigates the role of the Linder effect in explaining the trade of 37 differentiated agri-food and beverage products categorized into eight product groups: cereals, fresh fish, frozen fish, vegetables, fresh fruit, processed fruit, tea and coffee and alcoholic beverages. The data covers trade across 52 developed and developing countries from 1990 to 2000. The type of proxy used for the Linder effect and the way in which bilateral trade is measured influence the outcome of the statistical tests for the Linder effect. The Linder effect for cereals, frozen fish, vegetables, processed fruits and tea and coffee, using the value of trade as the dependent variable, is often accepted, but it is generally rejected when the GL index is used as the measure of trade intensity. In brief, the results do not provide strong support for the Linder effect in the trade of differentiated agri-food products.     

How relevant are nominal contracting schemes for monetary policy?

Due to the scarcity of pertinent evidence, there is currently no general agreement on how to introduce nominal rigidities into monetary macroeconomic models. We examine the role of alternative assumptions about the wage and price setting mechanisms for the assessment of the welfare costs of nominal rigidities and the performance of alternative monetary policy rules in an otherwise standard New Keynesian general equilibrium model. We find that the choice of a particular price and wage setting scheme matters quantitatively for the welfare costs of nominal rigidities. However, the ranking of the welfare costs associated with alternative wage and price setting schemes is robust to changes in the monetary policy rule, and the ranking of the welfare costs associated with alternative monetary policy rules is robust to changes in the wage and price setting scheme. The difference between sticky nominal contracts and sticky information matters more than the difference in the age distribution of prices wages and information implied by alternative price and wage setting schemes.     

Is there an innovation effect on current account? A case for European countries

The aim of this article is to find out whether there is an innovation effect on the current account, and if there is one then to determine its significance. The study is carried out for the current accounts of European countries. Innovation is tested together with some other factors as control variables in order to estimate and compare its role in the determination process of the current account. The results indicate that innovation has quite a significant influence on the current accounts of European countries, and the form of the relationship between innovation and current account is non-linear. Moreover, the impact of innovation is stronger for countries at higher levels of innovation, but the growth rate of its average marginal effect diminishes through its increasing levels.     

Solving RE models with discontinuous policy rules – an application to minimum wage setting in Germany

The legal regulations require the minimum wage in Germany to be adjusted biennially which gives rise to a policy discontinuity. From the perspective of rational expectations models, such policy features render standard local approximation techniques infeasible. The article presents a stylized model in which negotiated wages and corporate profits are the outcome of an optimization problem, while changes to the minimum wage are modelled by a discontinuous policy rule. Using the simple example of minimum wage setting in Germany, the article illustrates how such models can be solved using the method of undetermined coefficients and presents selected simulation results.     

Boosting confidence: Is there a role for fiscal policy?

This paper investigates the widely held view that expansionary fiscal policy can boost consumer and business confidence, which will stimulate private spending and sustain economic activity. We find evidence in favor of this conjecture, i.e., cuts in direct taxes generate a positive effect on consumer and business confidence, while the same applies in cases of higher non-wage government consumption. However, higher government wage bills and government investment reduce confidence, with the effect being more pronounced when the Debt to GDP ratio is high, possibly because they entail a permanent increase in the size of the public sector, which would have to be financed by higher future taxes.     

Would letting people vote for multiple candidates yield policy moderation?

We investigate whether letting people vote for multiple candidates would yield policy moderation. We do so in a setting that takes three key features of elections into account, namely, strategic voting, endogenous candidacy and policy motivation on the part of the candidates. We consider two classes of voting rules. One class consists of the voting rules where each voter casts several equally-weighed votes for the different candidates. The other class consists of the voting rules where each voter rank-orders the candidates. We identify conditions under which these voting rules yield policy moderation. We also show that these voting rules may yield policy extremism instead of policy moderation if one (or several) of the conditions is not satisfied! Finally, we find that amongst these voting rules the extent of policy moderation is maximal under the Borda Count if we consider only equilibria where all candidates are serious contenders. However, this result does not carry over to spoiler equilibria, where Approval Voting can yield more moderate policy outcomes than the Borda Count.     

Is there a role for caste and religion in food security policy? A look at rural India

This paper finds that factors such as caste and religion influence food security at the regional level. Thus defining affirmative action within food security programs may be necessary as the current practice of designing food security programs around the poverty line is shown to deliver limited results. In this regard, another lack of consideration is region-specific analysis within the rural areas which shows varied influence, thereby cautioning against a ‘one size fits all’ general policy of the central government. Evidence also shows that socio-economic factors and social assistance programs had different impacts on calorie gap depending on one's nutritional status. This nonlinear relationship has been neglected in most studies on food security and thus raises doubt on past assessment and policy implications.