ECONOMIC PROSPECTS AND POLICY

Patrick Foley agrees with Tim Congdon on the unimportance of the current account and with Patrick Minford on the economy's medium-term growth prospects.     

POLITICAL PROCESS AND THE FORMATION OF ECONOMIC POLICY

Institutional economics has some useful things to say about government policy-forming processes. It focuses attention on the structural components of government institutions which shape the direction of policy formation and its delivery. In this article, the author discusses how institutional models of government decision-making may be adapted to parliamentary systems of government. This approach has some merit because it rescues analysis of government processes from models based on the US constitutional system.     

ADVERTISING'S ELUSIVE ECONOMIC RATIONALE: PUBLIC POLICY AND TAXATION

Advertising and its effects have been debated for well over a century. In the last few decades a generally sceptical view of the benefits of advertising has been overturned by a series of academic advances in economics that detail a variety of ways in which advertising may affect the economy and society. This academic work has however been paralleled by a growing popular and political opposition to advertising and its social effects. In this paper, the positive economic case for advertising is challenged by an assessment of the main channels of its influence and by a review of the associated empirical findings on its economic and wider impact. A policy response of limiting the tax deductibility of business advertising is explored.     

CO‐INTEGRATING VAR MODELS AND ECONOMIC POLICY

This paper surveys some relevant contributions to the economic literature on co‐integrating vector autoregressive (VAR) models [vector error correction mechanisms (VECMs)], emphasizing their usefulness for economic policy. It further discusses some theoretical aspects that are necessary for a complete understanding of their potential. The theoretical introduction of the co‐integrating VAR model is followed by an illustration of its applications to monetary policy, fiscal policy and exchanges rates as well as in establishing the effects of structural bilateral shocks between countries (the so‐called global VAR, or GVAR, models). Special attention is paid to the VECM capacities of being used in conjunction with dynamic stochastic general equilibrium models and of jointly specifying the short‐ and long‐run dynamics, thus representing the steady‐state of economic systems (by means of the co‐integration relations) and the short‐run dynamics around it.     

THE MAKING OF ECONOMIC POLICY

Books reviewed in this article:
Rosalind Levacic (1987) Economic Policy-Making: Its Theory and Practice.
Paul Whiteley (1986) Political Control of the Macro-Economy.
Douglas A. Hibbs Jr. (1987) The Political Economy of Industrial Democracies.
Wyn Grant with Jane Sargent (1987) Business and Politics in Britain.
Michael Moran (1986) The Politics of Banking     

TRADE POLICY AND PROTECTIONISM IN ARGENTINA

Protectionism can take many different forms. In some cases, strong export performance can mislead observers assessing the trade policy of a country. Such is the case with regard to Argentina, where the strong showing in exports is not the result of a strategy of export‐led economic growth, but rather reflects a complex strategy of government intervention and isolation from international markets in general.     

THE ECONOMETRIC ANALYSIS OF ECONOMIC POLICY

The application of econometric analysis to the process of economic policy formulation is considered. A framework is provided by the theory of reduction, specifically reductions where key information losses would invalidate policy. Consequently, model evaluation; the role of econometric models; forecasting; exogeneity; causality; constancy and invariance; unobservables; seasonality; and data integrability are considered, together with specific policy issues where econometrics can clarify the problems.     

LABORATORY EXPERIMENTS FOR ECONOMIC POLICY MAKING

Abstract In this paper, we assess the scope and the specific contribution of laboratory experiments for economic policy making. We review experiments which have addressed a specific problem, institution, mechanism design or tool relevant in economic policy. We have two research questions. What type of policy questions can be addressed in the laboratory? And what is the specific value added of economic experiments for policy making. The survey contains experiments on competition policy, auctions, regulated markets, and emission permits.     

STABILISATION POLICY,RATIONAL EXPECTATIONS AND PRICE‐LEVEL VERSUS INFLATION TARGETING: A SURVEY

We survey literature comparing inflation targeting (IT) and price‐level targeting (PT) as macroeconomic stabilisation policies. Our focus is on New Keynesian models and areas that have seen significant developments since Ambler's (2009, Price‐level targeting and stabilisation policy: a survey. Journal of Economic Surveys 23(5): 974–997) survey: optimal monetary policy; the zero lower bound; financial frictions and transition costs of adopting a PT regime. Ambler's conclusion that PT improves social welfare in New Keynesian models is fairly robust, but we note an interesting split in the literature: PT consistently outperforms IT in models where policymakers commit to simple Taylor‐type rules, but results in favour of PT when policymakers minimise loss functions are overturned with small deviations from the baseline model. Since the beneficial effects of PT appear to hang on the joint assumption that agents are rational and the economy New Keynesian, we discuss survey and experimental evidence on rational expectations and the applied macro literature on the empirical performance of New Keynesian models. Overall, the evidence is not clear‐cut, but we note that New Keynesian models can pass formal statistical tests against macro data and that models with rational expectations outperform those with behavioural expectations (i.e. heuristics) in direct statistical tests. We therefore argue that policymakers should continue to pay attention to PT.     

EMPLOYMENT OF OLDER WORKERS IN POLAND: ISSUES AND POLICY IMPLICATIONS1

The aim of this paper is to discuss barriers to the employment of older workers in Poland, where, due to various structural weaknesses and institutional arrangements, this problem has taken on a particularly acute seriousness. After analysing the causes of inactivity amongst older workers, the paper concludes by making policy recommendations.     

MONETARY POLICY AND ECONOMIC IMBALANCES: AN ETHNOGRAPHIC EXAMINATION OF CENTRAL BANK RITUALS

We apply the ethnographic tools of economic anthropology to analyse a particular ritual performed by the high priest of the Arbee sub‐tribe in the South Pacific island group of Aotearoa. (In other island groups, this high priest is sometimes known as the Governor of the Reserve Bank of New Zealand.) The ritual is considered by many within Aotearoa to be the cause of The Imbalance in The Economy. We analyse this claim and show that it has similarities (and equal validity) to claims of other cargo cults within the South‐West Pacific region.     

ECONOMIC INCENTIVES AND HOSPITALIZATION IN GERMANY

The dramatically rising health expenditures have become a matter of prime concern. Using a rich panel dataset this paper contributes to this debate by investigating factors determining the demand for hospitalization in Germany. While most previous studies have found a significant impact of social insurance on the demand for hospital trips, the empirical results presented here cast doubts on the role of those economic incentives. There are also important differences in the hospitalization behaviour of men and women, and between the full sample and those with chronic conditions, which have been neglected by the literature. © 1997 John Wiley & Sons, Ltd.     

ECONOMIC SANCTIONS: FAILED FOREIGN POLICY TOOL AND A COST TO AMERICAN BUSINESS

In recent years the US government has increased its use of economic sanctions in order to punish countries, organisations and individuals. This form of foreign policy has become an increasing burden on US business and adversely affects US competitiveness and perceived reliability in the global marketplace. In addition, economic sanctions are generally ineffective in producing the desired changes and often harm the people they were intended to help. This paper argues that economic sanctions are an increasing menace to US business, represent an ineffective tool of foreign policy, and do not meet generally accepted ethical standards.     

ECONOMIC IMPLICATIONS OF POLICY RESTRICTIONS ON WATER WITHDRAWALS FROM SURFACE AND UNDERGROUND SOURCES

The appropriation of water for economic activities is limited by regional surface and underground endowments, and symptoms of environmentally unsustainable withdrawals are already visible in many regions of the world. In this paper we investigate the economic implications of water policy imposing source- and region-specific restrictions on water withdrawals taking the Mexican economy as a case study. We use an inter-regional input–output model of Mexico's hydro-economic regions to allocate production subject to the availability of water and other factors of production. Water sustainability requires a reduction of 7.5?km³/yr of groundwater withdrawals, which is compensated by an increase of 3.4?km³/yr of surface water, an expansion onto an additional 1.4 million hectares of rainfed land, and modifications in subnational patterns of food trade. This framework for evaluating scenarios describing sustainability-oriented water policies is readily applicable to other regions.     

STOCK‐FLOW INTERACTIONS,DISEQUILIBRIUM MACROECONOMICS AND THE ROLE OF ECONOMIC POLICY

This paper presents the ‘KMGT’ (Keynes–Metzler–Goodwin–Tobin) portfolio model and studies its stability properties. The approach to macrodynamic modelling taken here extends the KMG model of Chiarella and Flaschel (2000) , focusing in particular on the incorporation of financial markets and policy issues. The original KMG model considered three asset markets (equities, bonds and money) but depicted them in a rudimentary way so that they had little influence on the real side of the model. The only financial market influencing the real side of the economy was the money market (via an LM curve theory of interest). Here Tobin's portfolio choice theory models the demand for each asset in such a way that the total amount of assets that households want to hold equals their net wealth, which is a stock constraint attached to portfolio choice. There is also a flow constraint, that the net amount of assets accumulated (liabilities issued) by one sector must equal its net savings (expenditures). The Tobinian macroeconomic portfolio approach characterizes the potential for financial market instability, focusing on the interconnectedness of all three markets. The paper goes on to study the potential for labour market and fiscal policies to stabilize unstable macroeconomies.     

USING A CGE MODEL TO IDENTIFY THE POLICY TRADE-OFF BETWEEN UNEMPLOYMENT AND INFLATION. THE EFFICIENT PHILLIPS CURVE

This paper provides a new reading of a classical economic relation: the short-run Phillips curve. Our point is that, when dealing with inflation and unemployment, policy-making can be understood as a multicriteria decision-making problem. Hence, we use so-called multiobjective programming in connection with a computable general equilibrium (CGE) model to determine the combinations of policy instruments that provide efficient combinations of inflation and unemployment. This approach results in an alternative version of the Phillips curve labelled as efficient Phillips curve. Our aim is to present an application of CGE models to a new area of research that can be especially useful when addressing policy exercises with real data. We apply our methodological proposal within a particular regional economy, Andalusia, in the south of Spain. This tool can give some keys for policy advice and policy implementation in the fight against unemployment and inflation.