Fungibility and the flypaper effect of project aid: Micro-evidence for Vietnam

While most economists assume that aid is fungible, most aid donors behave as if it is not. Recipient government responses to development project aid are studied in the context of a specific World Bank-financed project. We estimate the impact of a rural road rehabilitation project in Vietnam on the kilometers of roads actually rehabilitated and built. Using local-level survey data collected for this purpose, we test whether the evidence supports the standard economic argument that there will be little or no impact on rural roads rehabilitated, given fungibility. Instead of full fungibility, we find evidence for a “flypaper effect”. Although impacts on rehabilitated road kilometers were less than intended, more roads were built in project areas. Our results suggest that there was fungibility within the sector, but that aid largely stuck to that sector.     

The politics of special purpose trust funds

Over the last decades, bilateral donors of foreign aid have increased their use of special purpose trust funds to provide earmarked aid to multilateral organizations. This paper investigates the incentives and consequences underlying this recent shift toward country‐ or theme‐specific funding and away from bilateral and multilateral aid. We propose a game‐theoretic model with multiple principals and a multilateral agent to study how the interaction between donor preferences, voter concerns in the donor country, the voting rules at the multilateral organization, and the presence of special purpose trust funds influences aid allocation. We show that multilateral organizations with majority rules are more likely to receive discretion and thus voluntary core contributions than those with unanimity requirements and that the possibility of earmarking multilateral aid decreases donors’ contributions to the multilateral's discretionary core budget and the amount of bilateral aid. In contrast to much of the literature dealing with issues of delegation and bi‐ and multilateral aid, our model suggests non‐monotonic effects of preference heterogeneity on the choice of aid channel for some parameter combinations when contributions to special purpose trust funds are an option.     

Aid,institutions and economic growth in sub‐Saharan Africa: Heterogeneous donors and heterogeneous responses

This study contributes to the aid‐effectiveness debate using panel data from 43 sub‐Saharan African countries over the period 1980–2013. Its novelty lies in assessing the intermediary role of institutions and the importance of recipient and donor heterogeneity. The long‐run growth effect of (aggregate) aid from “traditional” donors is robustly non‐positive, and the indirect effect is negative. Disaggregation reveals donor heterogeneity. Chinese aid outperforms aggregate aid from traditional donors with respect to growth; however, it has a negative institutional effect. Recipient heterogeneity is largely a short‐run phenomenon, with only a few countries showing some deviations from shared long‐run parameter sets. Comparing donor behavior suggests that the future of aid would benefit more from focusing on quality – particularly, specialization and donor alignment.     

IMMIGRATION UNEMPLOYMENT RELATIONSHIP: THE EVIDENCE FROM CANADA*

This paper examines the relationship between unemployment and immigration in Canada. The bi‐directional causality test finds no evidence of a significant effect of Canadian immigration on unemployment. Cointegration tests indicate that there is no observed increase in aggregate unemployment due to immigration in the long run. The results from the causality test based on the vector error correction model confirm that, in the short run, past unemployment does cause (less) immigration but not vice versa. There is also a long‐run positive relationship among per‐capita GDP, immigration rate and real wages. The results indicate that, in the short‐run, more immigration is possibly associated with attractive Canadian immigration policies, and in the long‐run, as the labour market adjusts, Canadian‐born workers are likely to benefit from increased migration.     

Aid, Economic Reform, and Public Sector Fiscal Behavior in Developing Countries

This paper looks at interactions between foreign development aid, economic reform, and public sector fiscal behavior. It proposes a model of the public sector fiscal response to aid inflows, which allows for changes in structural relationships due to an exogenously imposed program of economic reform. This model is applied to 1960–99 time series data for the Philippines, which embarked on an IMF- and World Bank-funded structural adjustment program in 1980. Estimates of structural and reduced-form equations paint a dismal picture of the effectiveness of foreign aid to, and the structural adjustment program in, the Philippines so far as fiscal impacts are concerned. Both bilateral and multilateral aid inflows, and the presence of an economic reform program, are associated with decreases in public fixed capital expenditure, decreases in taxation and other recurrent revenue, and decreases in public sector saving. Multilateral aid also appears to be highly fungible.     

Analysing the effects of fiscal policy shocks in the South African economy

This paper is the first one to analyse the effect of aggregate government spending and taxes on output for South Africa using three types of a calibrated DSGE model and more data driven models such as a structural vector error correction model (SVECM) and a time-varying parameter VAR (TVP-VAR) to capture possible asymmetries and time variation of fiscal impulses. The impulse responses indicate first, that increases in government expenditure have a positive impact, albeit (at times) less than unity, on GDP in the short run; second, over the long run, the impact of government expenditure on GDP is insignificant; and third, increases in taxes decrease GDP over the short run, while having negligible effects over longer horizons.     

The Role of State Fiscal Policy in State Economic Growth

Do state policy makers have the ability to affect a state's rate of economic growth? This article examines one possible source of growth and per capita output level disparities by studying the role that state taxation and public expenditure decisions play in fostering economic development. Using pooled annual U.S. state‐level data from 1972 to 1998, a fixed‐effects model is employed to examine the effects of changing tax rates on both state per capita output levels and growth rates. The results indicate that higher tax rates negatively influence short‐run state economic growth, which lowers state output levels. However, long‐run growth is unaffected by changes in state tax rates, even after adjusting for the effects of initial per capita output levels, state expenditures, and aid from the federal government. Nor do changes in state public spending rates and federal aid permanently alter state growth rates, implying that state fiscal policies have only transitory effects on state growth. (JEL H71, O40, R11)     

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.     

Donor Strategy under the Fungibility of Foreign Aid

We develop a political–economic model of aid fungibility: a part of aid is diverted away from its intended target by lobby groups. The size of this diversion – the degree of aid fungibility – is determined endogenously by the recipient government. The donor can affect the equilibrium degree of fungibility by choosing both the size of aid and the timing of its decision. We derive a condition under which the donor's reaction to fungibility is to reduce the amount of aid. Under this condition, if the donor acts as a follower, both the donor and the target group are better off.     

A dynamic macroeconomic model with monopolistic behavior in the labor market

Is the monopolistic behavior of a wage setting labor union compatible, in the long and in the short run, with price stability and full employment? What is the effect, if any, of economic policies? The answers are strongly affected by the prevailing technology and by the union's objective function. With limited short run production possibilities, a short run trade-off may exist between full employment and maximum expected real wage revenues. In the long run, however, when expectations are fully adjusted, this trade-off disappears. Therefore, a labor union consistently pursuing maximum short run expected real wage revenues may not maximize long run effective real wage revenues. Price stability is granted in the long run, provided inflation is not induced by public policy. The only instrument a pure consuming government has to fight long unemployment is to reduce its share of aggregate demand.     

China's Growing Government Debt in a Computable Overlapping Generations Model

This paper simulates the effects of China's growing government debt in a computable equilibrium model of overlapping generations. Our model assumes that the government increases debt to finance its spending in the short run, and then increases taxes or cuts spending to keep the debt–GDP ratio constant. The spending‐driven government debt increases public capital and output in the short run, but decreases private investment, total capital stock, output, and net exports in the long run, and makes the future generations worse off. Among various means of debt control, a decrease in government spending seems to be the least harmful to private investment, capital stock, and output while an increase in capital taxation is most detrimental.     

Aggregate Fluctuations and International Migration

In this paper, we study the role of short‐run factors such as business cycles or changes in employment rates in explaining international migration flows. First, we derive a model of optimal migration choice predicting that short‐run economic fluctuations trigger migration flows on top of the impact exerted by long‐run factors. Second, we empirically test the magnitude of the effect of these short‐run factors on migration flows. Our results indicate that both aggregate fluctuations and employment rates affect migration flows. Third, we provide evidence that the Schengen Agreement and the euro significantly increased the international mobility of workers between the member countries.uuuü     

OUTPUT–EMPLOYMENT RELATIONSHIP ACROSS SECTORS: A LONG‐ VERSUS SHORT‐RUN PERSPECTIVE

This paper investigates the nature of the output–employment relationship by using the Turkish quarterly data for the period 1988–2008. Even if we fail to find a long‐run relationship between aggregate output and total employment, there are long‐run relationships for the aggregate output with non‐agricultural employment and sectoral employment levels for seven of nine sectors that we consider. However, a further investigation for the output and employment relationship within a short‐run perspective does not reveal statistically significant relationships for either total employment or non‐agriculture employment, or eight of the nine sectors that we consider. Although there are various long‐run relationships between output and employment, the short‐run links between demand and employment are weak. The various implications of this for the economy and the labour market are discussed. As a result, maintaining high levels of output in the long‐run creating demand is essential for employment generation.     

The response of aggregate demand to income,money supply,and price level

The response elasticities of (nominal) aggregate demand to the price level and to other nominal variables (e.g., money supply) are both positive but smaller than one. Aggregate demand is less/as responsive to real income than/as to the price level in the short/long run. Real aggregate demand is less/as responsive to real income than/as nominal aggregate demand is to the price level in the short/long run. Some uses of these results are indicated.     

Fiscal policy,government debt,and economic growth in the Kaleckian model of growth and distribution

This article presents the Kaleckian model of growth and distribution that sets a budget deficit ratio as an indicator of fiscal policy and examines the short- and long-run effects of an increase in budget deficits and a rise in income tax rates on the economy. The key short-run outcomes are as follows. First, expanded budget deficits have a positive effect on the rate of capacity utilization. Second, the tax rate for wage income does not affect the rate of capacity utilization, whereas the tax rate for capital income has a favorable impact on it. This result implies that raising the tax rate for capital income can be an important policy instrument for stimulating the economy. Third, we find that the economy exhibits a wage-led aggregate demand in the short run. The main long-run results are as follows. First, the effect of expanded budget deficits on the growth rate is ambiguous, since a higher debt burden negatively influences the rate of capacity utilization and hence economic growth, despite the increase in demand caused by government borrowing. A higher budget deficit ratio thus raises the growth rate only if a certain condition is satisfied. Second, the tax rate for capital income has a positive impact on the growth rate. Third, the economy shows a wage-led growth in the long run.     

Pollution effects on preferences: A unified approach

In this paper, we introduce a unified Ramsey model where pollution has an impact on preferences and affects both consumption demand and labor supply. Pollution comes from production activities and is viewed as a stock variable with a strong inertia. A government is introduced and levies a proportional tax on production to finance depollution expenditure. We find two interesting results when pollution raises the consumption demand (compensation effect). First, in the long run, a higher green‐tax rate increases the pollution level at the steady state (green paradox) when pollution raises the labor supply (disenchantment effect). Second, in the short run, local indeterminacy can arise through a Hopf bifurcation when pollution lowers the labor supply (leisure effect) even if pollution has a strong inertia.     

Price behaviour in European countries: testing the law of one price in the short– and long–run at various levels of aggregation

The objectives of this paper are to test the relaltive version of the law of one price in the short and the long run at various levels of aggregation for traded goods. The use of an error-correction model is made to test the validity of the hypothesis in the short run with a built-in tendency to one price in the long run. Using unit value trade data at the aggregate, 2-digit and 3-digit levels of the Standard International Trade Classification, the law of one price is generally rejected in the short run, although a long-run proportional relatlionship between prices of fairy homogeneous products are used the hypothesis is rejected both in the short and long run. This suggests that non-price changes which are likely to be incorporated in unit values are probably gradual and affect EEC countries in a similar manner. Price changes, however, are somewhat erratic and hence with unitvalue data, the law of one price in the long run is not contradicted, while it is refuted at the disaggregate level when price data are used.     

Taxation, Bequests, and Short and Long Run Timber Supplies: An Overlapping Generations Problem

This paper uses an overlapping generations model with one-sided altruism to study the effects of several forest taxes that target bequests and affect timber supply. Unlike previous work, we investigate bequests and timber supply in both the short and long run when bequests are costly (e.g., taxed). The landowner's problem is examined in the short run, while the government's problem is examined in the long run assuming the existence of a steady state. We also consider taxes targeting harvests, growth, savings and bequests. Several new results are established concerning the interactions of taxes that might be used by a government to alter short and long run forest capital stocks: (i) the presence of a forest bequest tax affects the neutrality of harvest tax in both the short and long run, (ii) in the long run the bequest tax decreases bequests and timber supplies. When the bequest tax is not present, the capital income tax is neutral with respect to bequest and timber supply, while the harvest tax is neutral only if forest productivity is also not taxed. Finally, (iii) in the short run, the substitution and total effects of taxes in landowner decisions generally depend on the presence of the bequest tax. The results have implications for Pigouvian tax design and second best tax choice.     

Cyclical Multiplier and Zero Low Bound Effects of Government Expenditure on Economic Growth: Evidence for Greece

This study explores the impact of government expenditure multipliers on economic growth utilising an Autoregressive Distributed Lag (ARDL) approach. We provide evidence on the short‐term dynamics as well as the long‐run expenditure multiplier effects on economic growth for the Greek economy over the period 1960–2014. We find that the size of the multiplier does not differ substantially over the phases of the business cycle. Our results also indicate that irrespective of the scale of inflation, government expenditure positively affects economic growth, whilst inconclusive evidence is obtained in the case of exceptionally low interest rates.     

The Financial Stability of Notional Account Pensions

A number of European countries are reforming their pension benefit formulas by adopting 'notional' accounts. These accounts are used to determine individual benefits, but pay-as-you-go financing is retained. This paper addresses the belief that by choosing adjustment rules cleverly, notional accounts can provide automatic financial equilibrium in the short run. If this were true, it would be a valuable advantage in terms of insulating the government budget from demographic pressures, while insulating the pension budget from fiscal pressures. It is shown that notional account benefit formulas cannot provide automatic financial equilibrium in the short run. The paper also suggests that if indexing rules are chosen in a particular way, and shocks revert rapidly to a mean, the pension institution may achieve financial stability in the long run. However, long-run stability is unlikely to be valuable because political interference occurs in the short run.