Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies

In this paper we reconsider the trade-off between rules and discretion in fiscal policy in the presence of politically motivated fiscal deficits. We present a model of political bias in the budget process appropriately developed to allow for tax-smoothing-motivated deficits as well as for the consideration of deficit biases in open economies. We find that endowing politically-biased governments with the ability to respond to economic shocks with deficit finance will not exacerbate the existing biases. In an open economy, the ability to borrow abroad will significantly increase the deficit. However, restrictions to public foreign borrowing will not reduce the political bias as long as the private sector has access to international capital markets at the same terms as the government.     

Price Stability in Open Economies

This paper studies the theoretical conditions under which price stability is the optimal policy in a two-country open-economy model with imperfect competition and price stickiness. Special conditions on the levels of country-specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied. These restrictions apply to both cooperative and non-cooperative settings. Importantly, we show that cooperative and non-cooperative solutions do not coincide despite market completeness and producer currency pricing. We study the conditions under which quadratic approximations of single countries' welfare can be correctly evaluated by relying only on log-linear approximations of the equilibrium conditions.     

The Rise, Fall and Sustainability of Capital-Resource Economies

In debates about green accounting it is sometimes argued that a positive value of aggregate investments indicates that an economy is developing sustainably. Asheim (1994) and Pezzey (1994) have shown that this is wrong, using a version of the well-known Dasgupta–Heal economy (with one capital and one non-renewable resource stock) as a counterexample. Asheim's proof referred to the unproved assumptions that in such an economy a higher rate of time preference induces higher initial consumption and vice versa, and that optimal consumption is initially rising and then falling. Here we show that these assumptions do hold true under certain circumstances, thereby also proving some of Dasgupta and Heal's other conjectures about sustainability.     

Environmental Policy in Open Economies and Monopolistic Competition

This paper analyses the implications of international trade for non-cooperative environmental policy in the case of local production externalities. A particular focus is on the potential effects of regulations on the variety of goods and the resulting international spillover caused by trade. A tougher domestic standard negatively affects the utility of the households abroad, since such a policy reduces their variety of imports (due to fewer domestic product inventions) or their consumption of each imported brand (due to higher import prices). Ignoring the negative spillover, non-cooperative governments implement inefficiently strict standards in equilibrium. In contrast to this clear-cut inefficiency result, the impact of international trade on the state of the environment is ambiguous.     

Inflation in Open Economies with Complete Markets

This paper uses an overlapping generations model to analyze monetary policy in a two-country model with asymmetric shocks. Agents insure against risk through the exchange of a complete set of real securities. Each central bank is able to commit to the contingent monetary policy rule that maximizes domestic welfare. In an attempt to improve their country’s terms of trade of securities, central banks choose to commit to costly inflation in favorable states of nature. In equilibrium the effects on the terms of trade wash out, leaving both countries worse off. Countries facing asymmetric shocks may therefore gain from monetary cooperation.     

Strategic Voting for Noncooperative Environmental Policies in Open Economies

In this paper, we construct a political-economy model of strategic environmental policymaking with different degrees of product differentiation and different market structures, and examine how strategic voting decisions are affected by the choice of environmental policy instruments (tax or standard). We show that in a Cournot market structure, voters elect tax-setting policymakers who are more green than themselves when product differentiation and/or environmental externalities are more prominent. In a Bertrand market structure, they elect more green tax-setting policymakers than themselves. On the other hand, they elect standard-setting policymakers who are less green than themselves. The results confirm the advantage of the overall use of emission tax over that of emission standard regarding the welfare effect of strategic voting.     

Alternative Monetary Policy Rules for Small Open Economies

This paper examines the relative merits of alternative monetary policy rules for a small open economy. Rules considered target: the exchange rate, price level, nominal income, or a monetary aggregate. The standard framework employed in previous comparisons of these rules fails to take account of important features of small open economies. In particular, the standard framework fails to consider the effects on aggregate supply of exchange rate adjustments resulting from adherence to policy rules. Incorporating these effects is shown to weaken the case for targeting nominal income and, more generally, to complicate the ranking of policy rules.     

Optimal Environmental Policy Differentials in Open Economies under Emissions Constraints

Is there a case for preferential treatment of the exposed sector in an economy when compliance to an aggregate emissions constraint induced by an international environmental agreement is mandatory? This question is being debated in many countries in the context of the implementation of the Kyoto Protocol. We address the issue in a general equilibrium framework and theoretically cover several market structures, including perfect competition, the large country case and oligopoly. We identify the conditions under which preferential treatment of the exposed sector is not warranted from the point of view of maximizing social welfare. In addition, we demonstrate that in the case of oligopoly, instituting a more stringent environmental policy on the exposed sector might be profit-enhancing for this sector. This finding lends theoretical support to a specific interpretation of the Porter hypothesis.     

Constant Consumption Paths In Open Economies With Exhaustible Resources

We examine the effects of international trade on the paths of investment which maintain consumption constant over time in each country, each of which produces an essential exhaustible resource such as oil. For countries identical except for the sizes of their oil stocks, the investing of own oil rents in machine capital will not result in constant consumption in each country. Adjusted rent-investment strategies are developed which do yield constant consumption in each country. We also report results on the link in each country between its consumption levels and aggregate current wealth.     

Pollution Control in Open Economies: Implications of Within-period Interactions for Dynamic Game Equilibrium

This paper examines a two-country, dynamic game model of pollution control in the presence of economic interactions between countries within a period, as well as the environmental interaction between periods (i.e., a change in the stock of global pollution). These economic interactions emerge because of changes in the terms of trade of polluting goods or the market share of domestic polluting industries. It is shown that if within-period externalities exist, a noncooperative equilibrium may result in a smaller stock of global pollution in the steady state than does international cooperation. Moreover, the properties of equilibrium paths depend on the direction and size of such externalities. In addition, trigger strategy equilibria that achieve the outcome of the collusive solution are examined.     

The Real Exchange Rate in Small, Open, Developed Economies: Evidence from Cointegration Analysis

We examine the effects of the terms of trade and the expected real interest rate differential on the real exchange rate in small, open, developed economies. We employ cointegration analysis to search for long-term linkages. We find that while both the terms of trade and the expected real interest rate differentials affect the real exchange rate in the long run, the role of the terms of trade generally proves more consistent. The speed of adjustment for the expected real interest rate differential in the error-correction model, however, is quantitatively larger than it is for the terms of trade.     

Law and Finance in Transition Economies

This paper offers the first comprehensive analysis of legal change in the protection of shareholder and creditor rights in transition economies and its impact on the propensity of firms to raise external finance. Following La Porta et al. (1998), the paper constructs an expanded set of legal indices to capture a range of potential conflicts between different stakeholders of the firm. It supplements the analysis of the law on the books with an analysis of the effectiveness of legal institutions. Our main finding is that the effectiveness of legal institutions has a much stronger impact on external finance than does the law on the books, despite legal change that has substantially improved shareholder and creditor rights. This finding supports the proposition that legal transplants and extensive legal reforms are not sufficient for the evolution of effective legal and market institutions.     

论农村创意经济及其实现路径

理论进展和世界各国的实践表明,经济的发展主要依靠而且会越来越依靠创意的支撑,创意经济已经成为经济发展的一种高级形态。理论和国内外经验表明,创意经济也是农村经济发展的理想形态。但在创意生产方面,传统模式具有较大局限性。在对此进行论证的基础上,本文提出了我国农村发展创意经济的实现路径,即强化外部知识参与,实现农村与城市之间、农民与外部知识供给者之间的协同创新。     

Liquidity Constraints and Investment in Transition Economies

We use Bulgarian firm-level data to investigate the impact of liquidity constraints on investment performance. Internal funds are an important determinant of investment in most industrialized countries. We test whether internal funds are important for firm investment during the current transition process in Bulgaria. We use a simple accelerator model of investment to test whether liquidity constraints are relevant in the case of Bulgaria. Our estimations are based on data for the period 1993–95, prior to the Bulgarian financial crisis in 1996–97. It turns out that Bulgarian firms are liquidity constrained, and that firms' size and financial structure help to distinguish between firms that are more and less liquidity constrained. In our view, liquidity constraints can be given a different interpretation in the case of transition economies as compared to Western economies. A more in depth analysis of the data reveals that liquidity constraints, and consequently the access to external funds for Bulgarian firm investment, are to be seen against the background of soft-budget constraints and the failure of the financial system to enforce an efficient allocation of funds. In our view, the lack of liquidity constraints may actually be seen as a sign of financial weakness in the case of Bulgaria.     

MeasuringIncome and Measuring Sustainability

We examine what interpretation can be given to inclusive income , understood to be consumption plus the value of the net increase in all relevant capital stocks. We introduce the concept of instantaneously constant value income , defined as the maximum amount the economy can consume at a moment of time and keep the expected present value of utility of current and future generations constant. We argue that this income concept captures some of the concerns underlying sustainability. Our main result is that inclusive income equals instantaneously constant value income . We show that this result holds in a very general setting and, in particular, carries over to models incorporating technological progress when such progress can be captured by augmented stocks of knowledge. An important implication of our main result is that it provides a very simple method for deriving inclusive income, which does not involve any linearization of the Hamiltonian.