Environmental policy and convexity of climate change damage functions: an experiment with New Keynesian DSGE model

International Economics and Economic Policy - The paper seeks out to investigate how varying degree of convexity of climate change damage function affect economic output and the dynamic response of...     

Credit policy,real exchange rate volatility and moral hazard

We extend the well-developed theoretical literature on unconventional credit policy from a closed economy to a small open economy. Consistent with the literature, we find that credit policy has positive effects on output and consumption by raising investment demand. In terms of expanding output, it is more effective to extend government credit to banks than to the goods-producing sector because for each unit of credit supplied to banks, banks - through leverage - can supply greater than one unit of intermediation to firms. We find the welfare implications are ambiguous and depend on the type of policy chosen. A policy of providing funds to goods-producing firms tends to be welfare-improving because it dampens the responses of all variables after a negative shock, including the real exchange rate. However, providing government assistance to the banking sector may be a costly policy because it encourages greater risk-taking on part of banks, leading to higher bank leverage. All else equal, this increases the volatility of the economy, raising the variances of consumption and of the real exchange rate, which is welfare-deteriorating. We interpret this as indicative of the problem of moral hazard associated with a policy of providing support to failing banks.     

Modelling the volatility of commodities prices using a stochastic volatility model with random level shifts

We use the approach of Qu and Perron (Econom J 16(3):309–339, 2013) for the modeling and inference of volatility of a set of commodity prices in the presence of random level shifts of unknown timing, magnitude and frequency. Our approach contributes to the study of commodities in several aspects. First, we test for the presence of a genuine long-memory process in the volatility of commodities. Second, we determine that the random level shifts are certainly the main source of variation in the commodity price volatility. Finally, we estimate the volatility and its components as latent variables, thereby making it possible to evaluate their level of correlation with macroeconomic variables in small open economies such as Latin-American countries where the dependence on commodity price volatility is high. We use six commodity series: agriculture, livestock, gold, oil, industrial metals and a general commodity index. All series cover the period from January 1983 until December 2013 in daily frequency. The results show that although the occurrence of a level shift is rare, (about once every 1.5 or 1.8 years), this component clearly contributes most to the variation in the volatility. Furthermore, isolating the level shift component from the overall volatility indicates a strong relationship of this component with a set of business cycle indicators of several Latin American countries.     

Credibility and monetary policy in a model with growth

We examine the implications for monetary policy design of includinglearning-by-doing effects in a macroeconomic model. We showthat an inflation bias arises because monetary surprises maybe exploited to maximise potential output by temporarily raisingthe rate of human capital accumulation. Our model also providesan alternative explanation for the empirical evidence linkinginflation and growth, where the causal link goes from slow growthto high inflation. Unlike traditional credibility models, aninflationary bias can persist even when the authorities do notwish to offset labour market distortions through monetary surpriseswhich undercut the median voter's income.     

International market interdependence and learning-by-doing in a risky world

International Market Interdependence and Learning-by-Doing in a Risky World. — This paper explores the role of international financial markets for the dynamic evolution of comparative advantage in a small economy. In a world where learning-by-doing alters labor’s productivity over time, the current allocation of labor across industries determines the future productivity of labor in each industry and future comparative advantage. The presence of technological uncertainty that is imperfectly correlated across two industries affects the current labor allocation and, thus, future industry-specific labor productivity. The introduction of international financial markets to this stochastic environment influences current resource allocations, future labor productivity, and consequently, the future path of comparative advantage.     

Tax policy in a matching model with training

This paper develops a model of search on the labour market withtraining. We explore how the combination of an average job taxand a marginal wage tax can be used to alleviate inefficienciesin job matching and, at the same time, raise a positive revenuewith minimal distortions in search and training. We find that(i) a wage tax is less distortionary to raise revenue than isa job tax if training is not distorted initially; (ii) thisconclusion may reverse in the presence of training distortions;(iii) marginal wage taxes are less distortionary in economieswhere bargaining parties can commit to the wage profile.     

Fiscal policy and potential output in a model with rational expectations

Zusammenfassung Fiskalpolitik und Produktionspotential in einem Modell der rationalen Erwartungen. — Der Autor entwickelt ein Modell der rationalen Erwartungen für Produktion und Inflation, in dem Arbeit und importierte Energie substitutive Produktionsfaktoren sind. Sowohl die potentielle als auch die zyklische Produktion werden endogen erkl?rt durch monet?re, fiskalische und externe Impulse. Zus?tzlich zu früheren Analysen wird gezeigt, wie erwartete fiskalische und externe Impulse das Produktionspotential über verschiedene Kan?le auf der Angebotsseite beeinflussen. Die empirischen Ergebnisse für Deutschland weisen auf den Vorrang des Produktionspotentials bei der Erkl?rung der tats?chlichen Produktion hin, wobei das Produktionspotential vorwiegend durch die Wirkungen erwarteter fiskalpolitischer Impulse auf Arbeitsnachfrage und -angebot bestimmt wird. Die Inflation wird haupts?chlich durch erwartete fiskalische und externe Impulse beeinflu?t, die auf das Arbeitsangebot und die Energienachfrage einwirken.

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Résumé La politique fiscale et la production potentielle dans un modèle aux anticipations rationnelles. — En utilisant la main d’œuvre et l’énergie importée comme des facteurs de production substitutables, on développe un modèle aux anticipations rationnelles pour expliquer la production et l’inflation. On explique toutes les deux, la production potentielle et cyclique, endogènement en considérant les impulsions monétaires, fiscaux et externes. En plus aux analyses antérieurs il est montré comment les impulsions fiscaux et externes anticipées influencent la production potentielle via des chemins différents de la part de l’offre, Les résultats empiriques concernant l’Allemagne indiquent une dominance de la production potentielle en expliquant la production réelle qui est déterminée surtout par les impulsions de la politique fiscale attendue via l’offre et la demande de la main d’œuvre. L’inflation est influencée d’une manière décisive par les impulsions fiscaux et externes qui touchent l’offre de la main d’œuvre et la demande d’énergie.

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Resumen Política fiscal y producto potencial en un modelo con expectativas rationales. — Se desarrolla un modelo de expectativas rationales para el producto real y la inflatión, con trabajo y energia importada como factores de productión substitutivos. Ambos, el producto potencial y el cíclico, son explicados endógenamente por impulsos monetarios, fiscales y externos. Adicionalmente a lo presentado en análisis previos, se muestra cómo los impulsos fiscales y externos esperados influencian el producto potencial através de distintos canales de oferta. Los resultados empíricos para Alemania indican la importancia del producto potencial para explicar el producto real, el cual es determinado por impulsos de política fiscal esperados, canalizados através de la oferta y la demanda de trabajo. La inflatión es influenciada ante todo por impulsos fiscales y externos esperados que afectan a la oferta de trabajo y a la demanda de energia.

     

Exchange rate volatility and agricultural trade under policy reforms in South Africa

Decades of government intervention have helped develop the South African agriculture sector to its present state. Policy reforms have included trade and exchange rate policies to increase the country's international competitiveness, reduce poverty and promote economic growth. These reforms are facilitating the growth in agricultural trade and South Africa's reintegration into the global economy. Annual agricultural exports and imports have increased. This paper uses annual data and a vector error-correction model to investigate the supply and demand relationships for agricultural trade flows in South Africa during the past four decades. The results show that prices, real exchange rates, domestic production capacity and real incomes have significant impacts on the country's agricultural trade. In particular, exchange rate volatility has negative impacts. This cannot be viewed solely as an exogenous source of macroeconomic instability in South Africa, as domestic policies play a crucial role in influencing the movement of exchange rates.     

Real wages, employment and macroeconomic policy in a structuralist model for South Africa

It is now commonplace to argue that in South Africa, like manydeveloping countries, higher wages will lower employment. Thispaper shows that it is difficult to extricate the relationshipbetween wages, employment and output from the macropolicy environment.Dynamic computable general equilibrium simulations show thatthe employment effects of nominal wage increases depends oninduced monetary and fiscal policy when there is monetary 'policydominance'. While wage-led growth is inefficient, increasingthe wages of unskilled workers can improve the distributionof income, when the induced changes are neutralised.     

Returns to scale,imperfect competition and aggregate demand and trade policy effects in a two-country model

This paper constructs a simple general equilibrium two-country model with flexible exchange rates, specialization in production, and oligopolistic firms. The model is simulated in order to investigate how returns to scale and imperfect competition influence the process through which the aggregate demand and trade policy effects are transmitted internationally. The possibility that aggregate demand and trade policies enacted by one country can have beggar my neighbor effects on the other country cannot be excluded.     

Fiscal policy in an optimizing model with finite lives and endogenous labour supply

Summary In this paper the impact of balanced budget, money-financed and bond-financed fiscal policy is analyzed, in the short run as well as in the long run. The analysis is based on an optimizing model of a closed economy that displays perfect foresight of agents and sticky wages and prices. Consumers have finite planning horizons modeled according to the Blanchard-Yaari framework. Labour supply is endogenized by including leisure in the utility function. Labour scarcity is also allowed for. The results are illustrated by numerical simulation experiments.List of symbols A financial wealth - B stock of bonds - c actual consumption - c _d demand for consumption goods - c _s supply of consumption goods - D dividend - E equity - F government budget deficit - g government expenditures - H human wealth - i actual investment (excluding installation costs) - i _d demand for investment goods (excluding installation costs) - j actual investment - j _d demand for investment goods - j _s supply of investment goods - k capital stock - l actual employment - l _d notional demand for labour - l _k Keynesian demand for labour - l _s supply of labour - M money stock - P _l nominal wage - P _y price - q Tobin'sq - R nominal interest rate - T lump-sum tax - u instantaneous utility - U lifetime utility - W total wealth - y actual production - y _d demand for goods - y _l labour constrained supply of goods - y _s notional supply of goods     

Income inequality,volatility, and mobility risk in China and the US

A unified index of income inequality, volatility, and mobility risk is presented, and measurements based on US and Chinese panel data calculated. China is found to have higher-income volatility than the US in recent data, so that long-run inequality is comparable in the two countries, and short-run inequality overstates long-run inequality more in China than in the US. In both countries volatility and income inequality are increasing over time.     

Rational expectations,disequilibrium quantities,and policy effectiveness in a non-market-clearing framework

Zusammenfassung Rationale Erwartungen, Ungleichgewichtsmengen und die Wirksamkeit der Wirtschaftspolitik in einem System ohne R?umung des Marktes. — Dieser Aufsatz liefert die mikro?konomischen Grundlagen für ein makro?konomisches Modell, in dem alle Wirtschaftssubjekte rationale Erwartungen hegen, wobei aber die Kosten für das Abtasten des Preises, der den Markt r?umt, im Vergleich zum potentiellen Nutzen so hoch sind, da\ es sich nicht lohnt, diesen Preisfmdungsproze\ bis zu Ende zu gehen. Die vorliegende Analyse vergleicht die Spezifizierung des Outputs in der reduzierten Form des Modells, in dem der Markt nicht ger?umt wird, mit denen, die sich direkt aus einem Modell mit Marktr?umung ergeben. Unser Modell entspricht vollst?ndig der Vorstellung, da\ die Geldbeh?rden nur dadurch die gesamtwirtschaftliche Produktion beeinflussen k?nnen, da\ sie systematische Abweichungen zwischen den tats?chlichen und den erwarteten Preisen hervorrufen. Diese Untersuchung zeigt, da\ die These von Lucas-Sargent über die Ohnmacht einer systematischen Geldpolitik gegenüber alternativen Spezifizierungen robuster ist, als allgemein vermutet wird. Unser Modell l?\t es zu, da\ die Produktion von Lucas’ Angebotsregel infolge eines Verhaltens abweicht, das nicht zu einer Marktr?umung führt, was über die Unwichtigkeit sofortiger Preisanpassungen hinausgeht.

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Résumé Anticipations rationnelles, quantités des déséquilibres et l’efficacité de la politique dans le cadre des marchés sans clearing. — Dans cet article l’auteur établit les bases microéconomiques d’un modèle macroéconomique dans lequel tous les agents forment leurs anticipations rationnellement, mais dans lequel les processus de tatonnement pour trouver chaque prix d’équilibre avec le clearing du marché sont trop co?teux au sens de leurs bénéfices potentiels pour être poursuivis à la fin. Cette analyse compare directement la spécification de production en forme réduite de ce modèle de marché sans clearing avec celles qui sont dérivées d’un modèle analogue de marché avec clearing. Notre modèle est totalement compatible avec l’idée que les autorités monétaires peuvent influencer la production réelle agrégée seulement en causant des divergences systématiques entre les prix actuels et attendus. L’analyse démontre que la proposition de Lucas-Sargent regardant l’impotence d’une politique monétaire systématique est plus robuste vis-à-vis les spécifications alternatives qu’on suppose généralement. Notre modèle permet que la production peut dévier du règle d’offre de Lucas à cause d’un comportement qui ne conduit pas au clearing du marché, dépassant l’insignifiance des ajustements de prix immédiats.

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Resumen Expectativas racionales, magnitudes de desequilibrio y efectividad de política en un marco de esclarecimiento extramercado. — En este artículo se construyen las microbases de un modelo macroeconómico en el que todos los agentes forman expectativas racionalmente, pero en el que procesos de tientas para encontrar cada precio de transparencia de mercado son demasiado costosos en términos de poder alcanzar plenamente sus beneficios potenciales. El análisis présente compara directamente la especificación de producción de forma reducida de este modelo de esclarecimiento extra-mercado con aquellas obtenidas de un modelo de esclarecimiento de mercado directamente análogo. Nuestro modelo es completamente consistente con la idea que las autoridades monetarias solamente pueden afectar la producción agregada real causando discrepancias sistemáticas entre precios reales y esperados. Este análisis muestra, que la proposición de Lucas-Sargent acerca de la impotencia de la política monetaria sistemática es más robusta con respecto a especificaciones alternativas que lo que se presume generalmente. Nuestro modelo permite que la producción se desvíe de la regla de oferta de Lucas debido a un comportamiento de esclarecimiento extra-mercado que va más allá de la falta de importancia de ajustes de precios instantáneos.

     

Time inconsistency in a model with lags, persistence, and overlapping wage contracts

The two strands in the literature of monetary analysis, namelythat there are long lags of monetary policy and the adverseeffects of time inconsistency, have not previously been, butneed to be, integrated. To achieve such an objective, in thispaper we present a model of a Central Bank game with the realisticfeatures of both lags and persistence effects naturally imbeddedin overlapping wage contracts. In our more realistic model,the inflationary bias is much smaller, inflation is less volatile,and the optimal adjustment of monetary instrument needs to besmoother than previously assessed.     

Exogenous changes and policy reforms,labor migration,and welfare in a Keynesian economy

This paper examines the potential interaction between international labor migration, exogenous changes or policy reforms, and pre-existing distortions, such as generalized excess supply due to price-wage rigidities. Within this Keynesian income-expenditure context, it is suggested that (i) when international labor migration exists, the traditional Keynesian conclusions regarding the welfare effects of exogenous distortions, i.e., increase in exports need to be modified, and (ii) in the presence of price-wage rigidities, regardless of whether or not labor is internationally mobile, a policy reforming the country's tariff-subsidy structure may not be welfare improving.     

Monetary policy, central bank objectives, and social welfare with strategic wage setting

The paper examines the implications of strategic wage-settingbehaviour by an inflation-averse monopoly union for the appropriatespecification of central bank objectives. Our principal findingsare as follows. First, the optimal setting of the parametersof the central bank's objective function differ in a significantway according to the relative timing of monetary policy andwage determination. Second, the ability of the central bankto precommit to a particular setting of monetary policy doesnot confer any welfare benefits. Third, we find little supportin this context for the notion that placing monetary policyin the hands of a conservative central bank will improve socialwelfare.     

Growth,resource extraction and production in a small open economy

Summary and Conclusions This paper analyzed the optimal growth of a resource exporting economy in the framework of a Ramsey-type model. Two versions of the same model are used. In the first version (where the aggregate production function uses the conventional inputs, namely labor and capital) it was shown that along the optimal paths the resource would be exhausted in finite time and that the economy approaches asymptotically the modified golden rule capital intensity, well known from one-sector growth theory. Subsequently the impact of the changes in resource prices on the rate of extraction are investigated by considering an exponentially rising price.In the second version of the model, the resource extracted is divided between domestic production (the aggregate output of the economy is produced by means of labor, capital and the resource input) and export. Under this assumption, it is demonstrated that when the relative price of the resource is constant and given exogenously, the opening of trade (i.e., resource exports) depends on the relative magnitudes of the marginal product of the resource and its price. Furthermore the paper showed that even if trade opens, resource extraction for export will come to an end in finite time. After the economy stops exporting the resource, its optimal growth will be determined simultaneously by the elasticity of substitution between capital and the resource input and the dynamic behavior of the marginal product of the resource input, as explained in detail by Dasgupta and Heal [1974]. Finally, when the resource price has an exponential trend, resource extraction will continue both for domestic production and export purposes.     

Law, Finance, and Growth during Transition: a Survey

This paper surveys the literature on law, finance, and growth and assesses its relevance to transition economies. It describes the contribution, as well as the limitations of the legal view literature with regard to our understanding of the causality between financial development and economic growth. The legal view demonstrates that, through its impact on the financial system, an effective legal system indirectly promotes economic development. However, the particularities of the transition process – notably the existence of soft budget constraints – are such that the methodology and the results of the legal view cannot be applied to transition economies without provisos.     

Agricultural planning,pricing policy and co-operatives in Vietnam

In the competition between national government and local co-operatives, a central contradiction in socialist rural development, the price system, market control and terms of trade are crucially related to the relative power and capacity of the central government to control ratios of accumulation and consumption. In Vietnam there is a dynamic interaction between government and agricultural producers over pricing policy and paradoxically, it is the co-operative, primarily viewed by the state as a means of providing cheap food, which has strengthened the collective bargaining position of agricultural producers. The government has had to introduce material incentives to expand agricultural production beyond subsistence levels and bow to pressure to alter the previous accumulation/consumption ratios in favour of consumption.     

Industrial policy in Detroit: The search for a new regional development model in the home of Fordism

This article reports on the efforts of State government in Michigan in the 1980s to develop interventionist regenerative economic policies for the ageing industrial district of Detroit. This is a region which is almost synonymous with a whole production and consumption system, Fordism, now deemed by many theorists to be in decline (eg Albrechts and Swyngedouw 1989, Harvey 1989, Murray 1989). Federalism in the United States permits regional economic experiment and debate going beyond the US notion of free market privatism which has inspired many policy ideas in Britain in the 1980s (Barnekov et al, 1989). The article reports on a policy practice experiment in Michigan which was inspired by developing theories of “flexible specialization”. While short lived, the initiative has lessons for possible future regional industrial policy and the work of economic and physical planners in Britain.