Decreasing marginal impatience destabilizes multi-country economies

Despite the empirical evidence that consumers' degree of impatience decreases with wealth, the implication of decreasing marginal impatience (DMI) for general equilibrium dynamics has been insufficiently analyzed. By deriving the stability condition of multi-country equilibrium, we show that DMI is hardly compatible with stability. If there are two or more DMI countries, wealth distribution is necessarily unstable and hence inequality is inevitably divergent. In the presence of a DMI country, the number of interdependent countries should be small enough for stability. To integrate capital markets, participant countries must thus arrange jointly certain stabilizing international schemes.     

Redistribution and persistent exploitation in an accumulation economy with decreasing marginal impatience

Abstract

A variant of John Roemer’s accumulation economy is studied in which agents have identical payoff functions characterized by decreasing marginal impatience (DMI), such that time discount rates are decreasing in individual wealth levels. The implications of DMI for the existence and persistence of positive rates of profit and exploitation in the presence of capital accumulation, as well as for the dynamic redistribution of wealth, are derived. It is demonstrated that with DMI, differential ownership of productive assets is sufficient to ensure ongoing capital scarcity, and thus persistently positive rates of return and exploitation, as well as eventual redistribution of productive assets to the wealthiest agents.     

Increasing marginal impatience and intertemporal substitution

For infinite-horizon models with recursive preferences the condition known as increasing marginal impatience is often adopted, but the condition is not fully understood in the literature. This paper shows that increasing marginal impatience is equivalent to the intuitive property that the substitutability between the consumption levels in two different periods is a decreasing function of the distance between the periods.     

Decreasing impatience and the magnitude effect jointly contradict exponential discounting

The experimental literature on time preference finds that the manner in which subjects discount money (as opposed to utility) exhibits properties known as Decreasing Impatience and the Magnitude Effect. While these findings are often referred to as anomalies for the Exponential Discounting model, several authors have demonstrated that each of these qualitative findings can be explained by the curvature of utility and thus are not anomalies. We prove that, under basic regularity conditions, the two findings jointly imply the existence of Preference Reversals, and thus jointly contradict the Exponential Discounting model.     

The trade balance and the terms of trade in a two-country two-sector OLG economy

We consider a two-country, two-sector OLG model. It is shown that the trade balance and the relative price of exports are always positively related when exports are labor intensive regardless of the elasticity of intertemporal substitution in consumption. A large response of savings to future prices becomes a sufficient condition for an inverse relation between these variables only if exports are capital intensive. In this case, a rise in the terms of trade can be followed by a trade balance decline if consumption goods are capital intensive and the income effect implied on savings is negative and large.     

On patterns of dynamic interdependence in a two-country world under flexible exchange rates

A two-country general equilibrium model of the world, where the interest-rate parity and the purchasing power parity conditions hold, is used to demonstrate how the two economies become interdependent through expectational mechanisms, and the government budgets being not in balance.     

Indeterminacy in a dynamic two-country model

The purpose of this paper is to show that indeterminacy can arise in a simple competitive two-country dynamic model of international trade, free of externalities, imperfect competition, and government intervention. This seemingly surprising result is based on an assumption that there is no international credit market. As will be shown later, the assumption implies that dynamic equilibrium paths of our two-country, therefore heterogeneous consumer, model are not generally Pareto-optimal.The paper is dedicated to Professor Mukul Majumdar on the occasion of his 60th birthday with great respect. We thank Takashi Kamihigashi, Tapan Mitra and Makoto Yano for their useful comments on the earlier version of this paper.     

Capital income taxation in a growing world economy

This paper deals with dynamic adjustment in large economies to changes in the rate of capital income taxation or in the rate of investment tax credit in one country. The framework applied in the paper is a continuous-time, overlapping generations model with two countries. It features population growth and debt non-neutrality. We address impact and steady state effects of capital income tax and investment subsidy changes in the home country on consumption per capita, the capital intensity, and the per capita net foreign asset position in both countries. We also briefly consider individual welfare consequences of these policies.     

A note on the marginal tax rate in a finite economy

The marginal tax rate is shown to be non-negative in Guesnerie and Seade's model of nonlinear pricing in a finite economy under assumptions that are as mild as those customarily adopted in nonlinear tax models with a one-dimensional continuum population.     

Average marginal tax rates in the UK economy

Using a known methodology, this paper calculates the average tax rate (ATR) and three different average marginal tax rate (AMTR) measures for the UK. The three different AMTR measures are greater than the ATR in the same year because of the progressive tax system in the UK. Barro's AMTR measure weighted by total income is greater than Barro's AMTR measure weighted by number of returns because of the unequal distribution of income, and Barro's AMTR measure weighted by total income exceeds Seater's AMTR measure because total income before tax in Seater's AMTR measure is greater than total income after tax in Barro's AMTR measure.     

Government industrial policy for a healthy world economy

The Japanese concept of “industrial policy” is the subject of this presentation. The central role of the Ministry of International Trade and Industry in the formulation of industrial policy for Japan over the past 35 years is reviewed. Several strategic phases are identified: 1945–1952, reconstruction of the economy; 1952–1960, comparative advantage strategy in capital-intensive industries; 1960–1973, transition to an open economy; 1973 to present, positive support policy for promising industries, e.g., subsidies for high-tech sectors and adjustive policy for declining industries (e.g., disposing of excess capacity in the textile sector). The advantages of National industrial policies for the world economy are indicated.     

Monetary disinflation in a simple two-country model

A two-country model with sluggish goods and labour markets, efficient financial markets, flexible exchange rates and perfect capital mobility is considered. The rational expectations dynamics are considerably simplified when the effects of real interest rates on investment are small. It can then be shown that simultaneous monetary disinflation has no real effects, whilst independent disinflation leads to output losses at home and gains abroad.     

The prospects for the social economy in a changing world

Even if the 'social economy' has traditionally been marginalized and a subordinated form of production within capitalist societies, the economic, social, territorial and environmental problems of the present times have tended to make it a strategic instrument. This is not only because of its qualities as an economic and management instrument, but also because it is an expression of a dynamic and creative civil society. The aim of this paper is to show the potential of the social economy, the way it has been encapsulated during the postwar period and the conditions that now favour its full development. In the face of new challenges, the efficiency criterion, hitherto used to assess alternative forms of production, is shown to be insufficient. Some complementary criteria are proposed that fit in better with the new path society must follow if fundamental values have to be satisfied. Starting from these criteria and relating them to management in fields of growing social importance, a new insight into the advantages of the social economy over the market and public sectors can be obtained. Stimulated by such challenges, and connected to the new social movements, a new social economy is emerging with significant potential and a strategic role in managing society. But this development is not without serious problems, and objective and subjective conditions need first to be fulfilled.     

Terrorism and the world economy

It has been argued that terrorism should not have a large effect on economic activity, because terrorist attacks destroy only a small fraction of the stock of capital of a country (see, e.g., Becker, G., Murphy, K., 2001. Prosperity will rise out of the ashes. Wall Street Journal October 29, 2001). In contrast, empirical estimates of the consequences of terrorism typically suggest large effects on economic outcomes (see, e.g., Abadie, A., Gardeazabal, J., 2003. The economic cost of conflict: A case study of the Basque country. American Economic Review 93, 113-132). The main theme of this article is that mobility of productive capital in an open economy may account for much of the difference between the direct and the equilibrium impact of terrorism. We use a simple economic model to show that terrorism may have a large impact on the allocation of productive capital across countries, even if it represents a small fraction of the overall economic risk. The model emphasizes that, in addition to increasing uncertainty, terrorism reduces the expected return to investment. As a result, changes in the intensity of terrorism may cause large movements of capital across countries if the world economy is sufficiently open, so international investors are able to diversify other types of country risks. Using a unique data set on terrorism and other country risks, we find that, in accordance with the predictions of the model, higher levels of terrorist risks are associated with lower levels of net foreign direct investment positions, even after controlling for other types of country risks. On average, a standard deviation increase in the terrorist risk is associated with a fall in the net foreign direct investment position of about 5% of GDP. The magnitude of the estimated effect is large, which suggests that the “open-economy channel” impact of terrorism may be substantial.     

Endogenous inequality and fluctuations in a two-country model

We study a two-country version of Matsuyama's [K. Matsuyama, Financial market globalization, symmetry-breaking, and endogenous inequality of nations, Econometrica 72 (2004) 853-884] world economy model. As in Matsuyama's model, symmetry-breaking can be observed, and symmetry-breaking generates endogenously determined levels of inequality. In addition, we show that when the countries differ in population size, their interaction through credit markets may lead to persistent endogenous fluctuations.     

世界经济一体化的特点

随着世界市场的扩大以及国际分工的深入,世界经济呈现出高度的一体化趋势.本文将从知识经济,区域经济一体化和跨国公司等几个方面来分析世界经济一体化的特点.     

Exchange rate instability in a two-country portfolio balance model

This paper considers the question of Walrasian stability in the context of a two-country model in which gross substitutability is assumed and negative net foreign asset positions are ruled out. It demonstrates that these assumptions neither guarantee stability nor guarantee that an increase in the factors deemed destabilizing (stabilizing) in the literature will not in fact turn out to be stabilizing (destabilizing). However, it derives a condition which guarantees stability, pointing out that this condition is more plausible than certain “smallness” assumptions which have performed a similar function in portfolio balance models.     

Monetary policy of a small open economy in the world production chain

In the world production chain there is a small economy that outsources production to its upstream, sells intermediate goods to its downstream and consumes imported final goods. It is shown that in responding to shocks from demand for intermediate goods, from the wage rate in the upstream and from the currency exchange rate between the upstream and downstream countries, the monetary policy of the small country is insignificant in the sense that any attempt of changing its monetary stance to raise national welfare will be offset by the movements of exchange rates.