A comparative dynamic analysis of a growth model under alternate policy regimes

Comparative dynamic analysis is conducted on a growth model with variable price levels and wage rates. A perturbation technique is used to compare the economy's time paths near a balanced growth path in response to alternate policy regimes. Various dynamic policy multipliers are calculated in response to some of the alternate policy regimes such as the balanced-budget fiscal regime, the constant price regime, the full-employment regime, etc., to examine their dynamic implications on the economy's behavior. Temporary deviations in the fiscal variables are found to leave no permanent effects under all but one of the regimes examined.     

Modeling structural change using early Soviet data

This paper describes a multi-sector, multi-period, economy-wide model constructed by applying linear programming techniques to an input-output system. The model is designed to provide a flexible, cost-effective tool for testing the impact of alternative development policies on consumption levels, capital stocks, output growth rates, and rate of technological change. Early Soviet data are used to show how the model can generate a problem-free expansion path as a reference. The model and reference solution are then used to decompose historical experience, measuring the intersectoral and intertemporal impact of major historical events on the economy's performance.     

Dynamic stability in a model of dual exchange rates

The dynamic stability of a small open economy operating under a regime of dual exchange rates is shown to depend on residents' net foreign asset position. This result is in contrast to the economy's dynamic behavior under unified fixed-rate and flexible-rate regimes where stability is unrelated to net foreign asset position.     

Deterministic randomness in a model of finance and growth

Following the literature on growth, cycles and financial development, this paper develops an economic growth model in which the source of endogenous business cycles relates to the allocation of credit between productive investment and consumption. An important role is given to consumer sentiment, because this determines the demand of households for credit; in particular, optimistic beliefs about the economy’s macro performance divert financial resources from investment in favor of consumption. The dynamic analysis indicates that Neimark–Sacker and flip bifurcations eventually separate stable and unstable manifolds and, as a result, a region of nonlinear motion is generated: cycles of various periodicities and chaotic motion characterize the behavior of the long run time paths of accumulated wealth, output and consumption.     

A policy rule for ‘Say's Law’ in a theory of temporary equilibrium

In a theory of temporary macroeconomic equilibrium this paper considers whether there is a simple nondiscretionary rule of monetary management under which the free play of market forces will always equate aggregate money demand to the sum of expected money incomes, whatever the latter may be, so that aggregate demand ceases to be a determinant of the economy's behavior. The rule proposed is that the Central Bank should let the commercial banks determine their cash reserves by trading negotiable securities with it at current prices. The conditions for the rule's success are given and are supported by theoretical considerations.     

Stationary equilibrium transition rules for an overlapping generations model with uncertainty

An overlapping generations model incorporating random production shocks is studied. Households have finite life spans. Futures markets are incomplete. Agents have full information in one case, and receive only a limited signal in another. In both instances the existence of a time-autonomous transition rule is proved such that if all agents forecast using it, the economy's actual growth will bear the predictions out. The rule corresponds to a steady state for a non-stochastic model. With limited information, it is seen to depend on all past signals. Several approximation theorems which may facilitate future applications are presented.     

Coordinating macroeconomic policy in a simple AK growth model

Modern theories of government finance stress the importance of an economy’s fiscal deficits in determining the course of monetary policy. Modern growth theory stresses the role of monetary factors in economic growth. This paper explores how these two are interrelated, using a simple AK growth model, one with money, reserve requirements, and government debt. We provide a comprehensive look at the coordination of macroeconomic policy and its effects on long-run growth under three alternative coordinating arrangements. We uncover some unconventional results regarding the relationship between growth and a number of policy variables; these rest squarely on the constraint of the coordination process.     

Populist policies in the transition to democracy

This paper develops a political economy model that provides an explanation as for why ruling elites in oligarchic societies may rely on income redistribution to the poor (the masses) in order to prevent them from attempting a revolution. We refer to this kind of redistribution as populist redistribution because, first it does not increase the poor's productive capacity (human capital), and second it seeks to “buy” political support (peace) to perpetuate the elite's control of political power. We examine the conditions under which ruling elites choose to deter the poor (by means of military repression and/or populist redistribution), to engage in a dispute with the poor for the control of political power, or, alternatively, to extend democracy. According to the results of the model populist redistribution (or military repression), if any, increases with initial wealth inequality and with the amount of redistribution that the poor can undertake under democracy, and decreases with the relative importance of a human capital externality in production. The model explains why in some cases the use of an apparently inefficient policy of populist redistribution turns out to be optimal for both groups (the ruling elite and the poor class) when the alternative is the use of military repression or default to conflict.     

Dynamic behavior of a simple neoclassical model with wealth and capital unequal

The paper analyzes the standard one-good neoclassical dynamic model in which wages to consumer-workers are paid in IOU's issued by producers. The wealth of consumers consists of their accumulated IOU's and the model differs from the traditional one in that it is not assumed that consumers' wealth is exactly equal to the value of the capital stock. The dynamic behavior of this model turns out to be quite different from the traditional one, the main result being that, in the absence of “excessive savings” by consumers, the golden rule will always be the unique stable steady state.     

A short-term analytical model of the Singapore economy

The rapid economic transformation of the ‘newly industrializing countries’ has aroused considerable interest in their economic structure and functioning. This paper contributes to the discussion by seeking to anatomise the Singapore economy. The economy's dynamism is reflected by the fact that, although our model is a short-term one, capital investment, both foreign and domestic, plays a central role in it. The model is also characterized by a novel specification of the export function, the inclusion of non-traded goods and of a sectorally segmented labor market, and a fairly comprehensive treatment of the financial system. The general equilibrium response of the model to various parameter shifts is investigated, and the factors responsible for the economy's rapid development thereby elucidated.     

Trade,structure and linkages in Costa Rica: An input-output approach

Input-output tables for Costa Rica are used first to assess the country's trade performance; it is argued that trade with the rest of Central America has produced a Costa Rican comparative advantage in consumer durables. The paper then uses the input–output tables to examine the economy's structure, which is shown to be block triangular. Finally, measures of linkages are derived from the tables and a critique of the growth-inducing linkage mechanism is presented.     

Public consumption composition in a growing economy

This paper explores the role of the composition of public consumption within a three sector R&D growth model. A competitive industry supplies a homogeneous good and a monopolistic sector manufactures a composite commodity differentiated in many varieties, whose size can be increased through investment in R&D. We investigate the effects of changes in the level and in the composition of public consumption on the steady state and on the economy’s transitional dynamics. By varying the aggregate composition of demand, the government can effectively move resources away from the traditional industry to foster innovation. Welfare effects are also evaluated. We show that the composition of government consumption affects the entire time path of utility.     

Poverty Traps, Indeterminacy, and the Wealth Distribution

We consider a one-sector growth model in continuous time with a production externality and endogenous labor supply. There is a continuum of households who have identical preferences but differ with respect to their initial wealth. We show that there exist economies such that an indeterminate steady state exists for some wealth distribution but not for others. A second result is that a redistribution of wealth may drive the economy from a steady state with strictly positive output to a poverty trap in which output converges asymptotically to zero. These results indicate that differences in the wealth distribution may be responsible for drastic differences in the long-run standard of living. Journal of Economic Literature Classification Numbers: D31, D50, O41.     

The macroeconomics of unbalanced growth and the expanding public sector: Some simple tests of a model of government growth

A now classic model of public sector growth is Baumol's (1967) ‘Macroeconomics of Unbalanced Growth’. That model implies that one cause of public sector expenditure growth is a low or zero rate of productivity growth in the public sector relative to the private sector. Previous studies have tested, and partially confirmed, the Baumol hypothesis by computing productivity indices for various public sector activities. In this paper I attempt to test that model in a more direct manner. The unbalanced growth model is used to predict growth rates of per capita government expenditures, government's share of GNP and the pattern of government expenditure growth. These predictions are compared with observed growth rates of aggregate government expenditures. The model predicts the growth rate aggregate government expenditures, the growth rate of government's share of GNP, and the pattern of government expenditure growth reasonably well, and the data tend to support the Baumol model.     

Money,net wealth,and the real-balance effect

This paper deals with two important questions in monetary economics: Is competely produced resource-using bank money part of society's net wealth? Is such money part of the base relevant for the operation of the real-balance effect? We argue that the answer to the first question depends critically on the nature of the asset and not on the market structure of the industry. In particular, we argue that perfect competition in the banking industry is a necessary but not sufficient condition for excluding bank money from society's net wealth. Furthermore, we argue that resource-using bank money is part of the base relevant for the operation of the real-balance effect, regardless of whether or not it is part of society's net wealth.     

An equilibrium model of a second economy market in a centrally planned economy

We study a CPE in which an identical good is sold on the official market (OM) and a “second economy” market (SEM ). Planners set parameters. Managers divide inputs between markets to maximize expected utility of wealth. Consumers are expected utility maximizers who purchase the good on the OM or SEM. On the OM, excess demand exists at the non-Walrasian price; delivery date is stochastic. The SEM offers immediate availability. Our solution concept involves the rational expectations of managers, the consistency of consumers' decisions, and a market-clearing SEM. We solve for SEM price and supply and investigate various comparative statics.     

Production subsidies and redistribution

Who gains from stimulating output? We explore a dynamic model with production subsidies where the population is heterogeneous in one dimension: wealth. There are two channels through which production subsidies redistribute resources across the population. First, poorer agents gain from a rise in wages, since—to the extent there is an operative wealth effect in labor supply—they work harder. Second, because a current output boost will raise consumption today relative to the future, thus lowering real interest rates, poor agents gain in relative terms since their income is based less on interest income. We examine optimal redistribution from the perspective of an arbitrary consumer in the population. We show that, if this consumer has commitment at time zero to set all present and future subsidy rates, and for a class of preferences that admits aggregation in wealth, then output stimulation, and hence redistribution, will only occur at time zero; after that, subsidies are zero. A byproduct of our analysis of this environment is a median-voter theorem: with direct voting over subsidy sequences at time zero, the sequence preferred by the median-wealth consumer is the unique outcome. We also study lack of commitment, since interest-rate manipulation is associated with time inconsistency. We analyze this case formally by looking at the Markov-perfect (time-consistent) equilibrium in a game between successive identical decision makers (e.g., the median agent). Here, subsidies persist—they are constant over time—and are more distortionary than under commitment. Moreover, whereas under commitment asset inequality changes initially—in favor of the consumer who decides on policy—it does not under lack of commitment.     

Development and distribution: A critique of the cross-country U-hypothesis

This paper questions the validity of a modern paradigm, viz., the U-Hypothesis. It argues that notwithstanding contrary claims, the recent cross-country econometric studies by Ahluwalia and others have little in common from a methodological point of view with Kuznets' earlier intertemporal national studies. Ahluwalia's cross-country U-Curve is found to be based on defective statistics and questionable methodological premises. In specific, the estimation of one U-Curve from observations on both LDCs and DCs is criticised. A sample restricted to the LDC group considerably weakens support for the U-Hypothesis. Further, even marginal variations in the data set lead to the virtual disappearance of Ahluwalia's empirical relationship. The paper concludes that the cross-country U-Hypothesis is more of a hindrance than an aid to our comprehension of the relationship between economic growth and income distribution.     

Wealth inequality,democracy and economic freedom

Using a novel panel data set from the Credit Suisse on the top wealth shares for 46 sample countries spanning 2000–2014, this paper empirically investigates to what extent wealth inequality influences economic freedom and whether this relationship is affected by the level of democracy. Economic freedom is measured by the Fraser Institute's economic freedom summary index as well as its five major sub-indices, such as government size, property rights, access to sound money, freedom to trade, and regulations. Wealth inequality is measured by the top wealth shares. Trade union density is used as an instrument for wealth inequality. Empirical results suggest that the rising wealth inequality significantly hampers overall economic freedom, property rights protection, freedom to trade, soundness of money and regulatory environment. Furthermore, this negative effect of wealth inequality is reinforced at a lower level of democracy. These findings are robust to alternative measures of wealth inequality, economic freedom, treatment for endogeneity, and model specification.     

Income Distribution and Demand-Induced Innovations

We introduce non-homothetic preferences into an innovation-based growth model and study how income and wealth inequality affect economic growth. We identify a (positive) price effect—where increasing inequality allows innovators to charge higher prices and (negative) market-size effects—with higher inequality implying smaller markets for new goods and/or a slower transition of new goods into mass markets. It turns out that price effects dominate market-size effects. We also show that a redistribution from the poor to the rich may be Pareto improving for low levels of inequality.