Von neumann facets and the dynamic stability of perfect foresight equilibrium paths in neo-classical trade models

I am grateful to two anonymous referees for useful comments on an earlier version of this paper.     

Redistributive taxation in a simple perfect foresight model

We investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation. First, even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages. Second, under any convergent redistributive tax policy which maximizes a Paretian social objective, the capital income tax will converge to zero, independent of the factor supply elasticities. These results are independent of workers' holdings of capital.     

Forecasting UK international trade: A general equilibrium approach

Monthly retail unit sales of clothes washers and dryers in eastern Washington state were regressed on average employment during the current and preceding two months, the average advertised price of these appliances relative to the Consumer Price Index, the expected change in consumer stocks of such applicances for each year on the basis of a hypothetical rate of accumulation, and the unit volume of newspaper advertising in order to determine the viablity of alternative models for analysing and forecasting monthly sales in a localized retail market during the periods of growth, maturity, and decline in market demand.

Employment and advertising, the two most useful variables in the functions tested, were able to account for 70–75 per cent of the monthly sales variance for automatic washers and dryers. Employment elasticity coefficients, though not linearly related to income elasticity coefficients for these products, appear to be a useful measure of purchasing power for localized demand and forecasting functions. The average advertising elasticity for the products studied was 0.095, which was approximately equal to advertising expenditures as a ratio of the gross margin of furniture and house furnishings corporations and kitchen appliance departments of department stores for the period studied, in keeping with the Rasmussen hypothesis. Correction of the models for the presence of autocorrelation altered the explanatory power of some of the variables substantially and resulted in regression coefficients for some variables that were more nearly consistent with theoretical expectations.     

Time consistency and optimal government policies in perfect foresight equilibrium

This paper develops a framework for determining optimal monetary and fiscal policies in perfect foresight equilibrium. Such equilibria have the property that all underlying demand and supply functions are derived from optimizing behavior, expectations are realized, and all markets clear. The time consistency of optimal policies derived under such circumstances is analyzed for a variety of alternative optimal policy problems. The general conclusion is that time consistency will prevail with respect to the optimization of any single policy instrument which does not appear explicitly in the indirect utility functions; otherwise time inconsistency will result. Monetary instruments are generally examples of the former, and fiscal instruments examples of the latter.     

Inequalities and fluctuations in a dynamic general equilibrium model

   Summary. In the present paper a tractable two-sector neo-classical growth model with heterogeneous agents is considered. The local dynamic properties of the equilibrium path are analyzed in relation with the underlying characteristics of the economy. In particular, the existence of fluctuations is related to the degree of heterogeneity in labor and in capital endowments. When applied to international trade theory, the analysis shows that free trade may distabilize a world economy that is originally stable under the regime of autarky. Received: December 28, 1998; revised version: October 29, 1999     

A simple dynamic general equilibrium model

We analyse a single sector economy with H > 1 infinitely-lived agents that operate in a continuous-time framework. Utility functions are recursive but not additive. Both efficient and perfect foresight competitive equilibrium allocations are considered. The existence and stability of such allocations are investigated locally, i.e., in a neighbourhood of steady-state allocations. The model is shown to be useful for explaining the distribution of wealth and consumption across agents, and for analysing the way in which wealth redistribution can affect the dynamics of aggregate economic variables.     

Inflation aversion and macroeconomic policy in a perfect foresight monetary model

This paper reexamines monetary non-superneutrality and the optimality of the optimum quantity of money in the money-in-utility Sidrauski model with endogenous fluctuations of the time preference by introducing inflation aversion. It is shown that the long-run superneutrality of the standard Sidrauski model does not hold, and Friedman's optimum quantity of money is not optimal.     

Optimal labor income taxation in a two-sector dynamic general equilibrium model

This paper presents a new approach to the two-sector optimal taxation problem. We derive the optimal labor income tax rate which depends on factor intensity across sectors. It is the labor intensity that determines the initial wage rate, and therefore the optimal labor tax rate. We show that an increase in the initial relative price of consumption goods decreases the optimal tax rate on labor income in the case that the consumption goods sector is capital-intensive while it increases the optimal tax rate on labor income in the case that the investment goods sector is capital-intensive.     

Pollution effects of free trade areas: Simulations from a general equilibrium model

Abstract

A two-factors, two-goods, three-countries general equilibrium model is developed to assess the effects of a Free Trade Area (FTA) on pollution emissions. It also makes it possible to compare the effects of a discriminating commercial policy with alternative–non discriminating–policies, such as full trade liberalization or non-discriminating protection. A theoretical model is first developed in order to take into account country-differences in factor endowment, environmental regulation, pollution abatement technology, marginal disutilities of pollution, as well as terms of trade effects. This model is subsequently calibrated and computed in accordance with empirical evidence. The main conclusion shows that the move from protection to FTA reduces world pollution emissions. A second result indicates that, in case of full trade liberalization, world pollution is further reduced.     

Potential economic reforms in North Korea: a dynamic general equilibrium model

We use a dynamic general equilibrium model to examine hypothetical market reforms in North Korea. We model partial reform, in which producers choose capital allocations across sectors, with the government still fixing total capital. We also consider two full market reform scenarios. In one, public infrastructure investment remains unchanged, while, in the other, it increases substantially. In all scenarios, we assume a closed economy and a constant military size. Our simulations show little hope for the North Korean economy without boosting infrastructure. Although all of the reforms raise consumption, only significant increases in infrastructure investment bring positive economic growth.     

Tax incidence in a model with perfect foresight of agents and rationing in markets

This paper examines the incidence of several taxes in a macroeconomic model. Producers and consumers optimize with perfect foresight. Price inertia leads to rationing in the market for goods and for labour. In the long run the system tends towards Walrasian equilibrium. Meanwhile there may be Keynesian Unemployment, Classical Unemployment or Repressed Inflation, with possible switches of regimes. Balanced budget policies are analysed by working through numerical examples.     

Capital taxation in a dynamic general equilibrium setting

The familiar two-factor, two-commodity incidence model is extended to a dynamic setting in which the supply of capital is variable and the government can use money or bonds to balance its budget in addition to neutral lump sum taxation. The dynamic incidence effects of a sectoral tax on capital are qualitatively similar to the static incidence effects when the government balances its budget with neutral taxes, but are qualitatively different when the government uses money or bonds. In this case, while capital bears the burden of the tax in the short run, it is able to shift it in the long run.     

Dynamic aspects in a temporary equilibrium of international trade with quantity rationing

The dynamics of a small open economy are analyzed in a context where economic agents have uncertain expectations about future market dates such as prices and wages or quantity constraints. The dynamic adjustment process is shown to be a stable one, and conditions are discussed under which exogeneous shocks will alter the asymptotic equilibrium of the economy. The economic system in general does not approach the long-run equilibrium monotonically, i.e. the adjustment process has a cyclical pattern.     

Time-inconsistent preferences in a general equilibrium model

This paper introduces time-inconsistent preferences in a multicommodity general equilibrium framework with incomplete markets. The standard concept of competitive equilibrium is extended in order to allow for changes in intertemporal preferences. Depending on whether or not agents recognize that their intertemporal preferences change, agents are called sophisticated or naïve. This paper presents competitive equilibrium notions for economies with naïve agents and economies with sophisticated agents and provides assumptions under which both types of equilibria exist. Surprisingly, the set of naïve equilibria in societies populated by time-consistent households is not allocationally equivalent to the set of competitive equilibria. For sophisticated equilibria, the equivalence holds. Time-inconsistency also raises conceptual issues about the appropriate concept of efficiency. Choices have to be made concerning the incorporation of future preferences and the appropriate instruments to create Pareto improvements. For both naïve and sophisticated societies, we present four possible efficiency concepts. Suitable conditions are specified for which both naïve and sophisticated equilibria satisfy appropriate efficiency concepts.     

Endogenous innovation under New Keynesian dynamic stochastic general equilibrium model

This paper constructs an endogenous growth model using the framework of New Keynesian dynamic stochastic general equilibrium models. We incorporate the Schumpeterian approach that generates seemingly sticky prices and reinterpret the Calvo mechanism from the perspective of Bertrand competition and successful entrepreneurs. Our results demonstrate that both positive productivity shocks and endogenous innovation have a negative effect on subsequent endogenous innovation. These self-destructive effects of endogenous innovation might account for the IT productivity paradox and productivity slowdown seen in advanced countries. Furthermore, it is shown that there are both neutral and non-neutral properties of monetary policy shocks. They are neutral in terms of the growth effect, but non-neutral in terms of the level effect. In particular, expansionist monetary policies are desirable to facilitate endogenous innovation.     

Foreign direct investment subsidy in a dynamic stochastic general equilibrium model with heterogeneous firms

This study analyzes the macroeconomic impacts of subsidies to attract multinational corporations when firms are determining whether to enter or how to serve foreign markets. We show that a small FDI subsidy scheme induces consumption gains and delivers short‐term welfare improvement for the FDI host country if firms differ in productivity. However, the subsidy generates a new problem and results in the wealth reallocation effect, leading to welfare deterioration for the host country in the long run. Moreover, we find that a subsidy program induces a welfare improvement for the host country if it is offered to all domestic producers instead of foreign producers only in the host country.     

Introduction to dynamic general equilibrium

This introduces the symposium on dynamic general equilibrium.     

Foreign direct investment and international trade in a continuum Ricardian trade model

We develop a continuum Ricardian trade model to capture both North–South trade and technology transfer via foreign direct investment (FDI) by multinational enterprises (MNEs). We show that there is a unique range of products produced in the South by MNEs. In the case of an infinitely elastic supply of expatriates, if the ability of Southern workers in absorbing Northern technology increases, then (a) the range of MNE production increases, (b) Northern workers's welfare and Southern workers' welfare change in opposite directions, and (c) the world aggregate welfare increases under certain conditions. We explore issues such as North–South wage gaps, FDI policies and the product cycle. We also derive results under a general supply of expatriates.     

Uncertainty and the theory of international trade in long-run equilibrium

We consider a country with two factors and two industries, each of which faces technical and price uncertainty. Entrepreneurs choose outputs in order to maximize the expected utility of profits. They also draw factor payments and purchase consumption goods after the uncertainty isresolved. They enter and exit from an industry according to whether participation there increases their expected utility. Within this model, the validity of the propositions of neoclassical trade theory depends on how the entrepreneurs' entry decisions are affected by parameter changes via their roles as risk bearers, consumers and factor owners.