Inflation, government transfers, and optimal central bank independence

The problem of monetary policy delegation is formulated as a two-stage non-cooperative game between the government and the central bank. The solution to this policy game determines the optimal combination of central bank conservatism and independence. The results show that the optimal institutional design always requires some degree of central bank independence and that there is substitutability between central bank independence and conservatism. The results also show that partial central bank independence can be optimal and that there are circumstances under which it is optimal for the government to appoint a liberal central banker.     

The dynamics of entrepreneurship: hysteresis, business cycles and government policy

This article estimates two unobserved components models to explore the macrodynamics of entrepreneurship in Spain and the USA. We ask whether entrepreneurship exhibits hysteresis, defined as a macrodynamic structure in which the cyclical component of entrepreneurship has persistent effects on the natural rate of entrepreneurship. We find evidence of hysteresis in Spain, but not the USA, while in Spain business cycle output variations significantly affect future rates of entrepreneurship. The article discusses implications of the findings for the design of entrepreneurship policies.     

A healthier start: The effect of conditional cash transfers on neonatal and infant mortality in rural Mexico

Conditional cash transfer programs seek to break the intergenerational transmission of poverty by building the human capital of poor children. Despite their popularity throughout the developing world, relatively little is known about their effect on children's health outcomes. This paper evaluates the impact of the Mexican conditional cash transfer program, Progresa, on two important health outcomes: infant and neonatal mortality. It exploits the phasing-in of Progresa over time throughout rural Mexico to identify the impact of the program. The paper shows that Progresa led to a large 17% decline in rural infant mortality among the treated, but did not reduce neonatal mortality on average. The benefit-cost ratio is between 1.3 and 3.6. Tests for heterogeneity show larger declines for some groups including those municipalities whose pre-program levels of mortality were above the median, and those that prior to the program had higher illiteracy rates, and less access to electricity.     

The international effects of government spending composition

This paper incorporates a distinction between spending for government employment and spending for non-wage government consumption in a ‘new open economy macroeconomics’ model. Our results show that a permanent reduction in public employment in one country increases relative private consumption and appreciates the domestic exchange rate. We also compare announced reductions in domestic government employment and consumption, showing that these two policies have the same qualitative effects. When the reduction in public employment is used to finance increased government non-wage spending, the analytical results of the model are ambiguous, but a numerical analysis shows that relative consumption increases for a reasonable parameterization.     

The persistent effects of a change in government consumption

Firms desire to hold inventories because of uncertainty about aggregate demand. Other markets are clear and expectations are rational. An increase in government consumption will, under certain conditions, have a persistent positive effect on output.     

The effects of fiscal consolidations on the composition of government spending

ABSTRACT

In response to increasing debt paths, governments often implement fiscal consolidation programs. This paper studies the impact of these programs on the composition of government spending. System-GMM estimations performed on a sample of 53 developed and emerging countries over 1980–2011 reveal that fiscal consolidations significantly reduce the government investment-to-consumption ratio, i.e. a composition effect. Robust to a wide set of tests, including when using the narrative approach to identify fiscal consolidations, this significantly stronger contraction of government investment with respect to government consumption is at work particularly when debt is high and in the low phase of the economic cycle. Therefore, in such contexts, fiscal consolidations aimed at short-run stabilization may hurt the economy in the long-run through their detrimental effect on public investment, calling for a reflection upon how they could be re-designed to allow avoiding such undesirable consequences.     

The effects of government spending shocks on consumption under optimal stabilization

Economic theory has yet to come up with a general guidance regarding the dynamic effects and welfare implications of shocks to public spending. With the aim to provide a theoretical benchmark, we analyse if a rise in private consumption following an exogenous rise in government spending is a feature of the economy under optimal stabilization in a standard New Keynesian setting augmented for the presence of liquidity-constrained agents and non-separable preferences. Our results provide little evidence in support of a crowding-in effect under ‘timelessly optimal’ policy.     

Basic goods,the effects of commodity transfers and the international economic order

A two good, two region and three income group macro model is constructed to explore possible effects of aid on distribution of welfare. One region, the North, has two income groups characterized by different endowments and proportions of consumption of the basic and the luxury goods. We study policies that result in transfers of goods from the high income group of the North to the South. In one case, the transfer is of luxury or investment goods; under the conditions, it is shown to produce a change in relative prices that induces an increase in the welfare of the North and decreases the welfare of the South, even under conditions of (Walrasian) stability of the markets. In a second case, the high income group in the North transfers, instead, basic goods to the South. It is shown that under the conditions an increase in welfare of the South can only occur at the expense of a decrease in welfare of the low income group in the North. Therefore, in general, aid in the form of commodity transfers cannot be relied upon to equalize overall welfare: under the conditions there is necessarily a trade-off between more North-South equality and greater equality within the North. When aid is endorsed to pursue NIEO objectives, a close examination of international and domestic markets seems in order, so as to avoid the conditions studied here. The formation of (international) coalitions among the different groups is also discussed.     

The effects of government intervention on the market for corporate terrorism insurance

Nine OECD countries presently have national terrorism insurance programs based on some type of public–private risk sharing. While such arrangements have helped provide the necessary insurance capacity in the post-September 11, 2001 era, little is known about the effect of such governmental intervention on terrorism insurance markets. This paper focuses on the United States, where the Terrorism Risk Insurance Act of 2002 (TRIA) provides insurers with no cost federal reinsurance up to an industry-wide loss of $100 billion. We present an empirical analysis to compare how insurers' diversification behavior varies between property coverage (no governmental intervention) and terrorism coverage (with government intervention). We find evidence that insurers in the U.S. are much less diversified for terrorism coverage than they are for property lines of coverage. We interpret these findings as tentative evidence for moral hazard caused by the governmental intervention under TRIA.     

Consumption externalities and the effects of international income transfers on the global environment

In this paper, we extend the standard model of private provision of public goods by including consumption externalities to characterize a situation in which economic activities pollute the environment. We consider a case in which there are an industrial country which can afford to invest in the environment and a developing country which cannot. Then, we show that international income transfers in both directions can improve the global environmental quality as well as the welfare of each country. We also show that the results have important implications for policies such as official development assistance or the assignment of tradable emission permits.     

The effects of partisan alignment on the allocation of intergovernmental transfers. Differences-in-differences estimates for Spain

In this paper we test the hypothesis that municipalities aligned with upper-tier grantor governments (i.e., controlled by the same party) will receive more grants than those that are unaligned. We use a rich Spanish database, which provides information on grants received by nearly 900 municipalities during the period 1993-2003 from three different upper-tier governments (i.e., Central, Regional and Upper-local). Since three elections were held at each tier during this period, we have enough within-municipality variation in partisan alignment to provide differences-in-differences estimates of the effects of alignment on the amount of grants coming from each source. Moreover, the fact that a municipality may simultaneously receive grants from aligned and unaligned grantors allows us to use a triple-differences estimator, which consists of estimating the effects of changing alignment status on the change in grants coming from the aligned grantors relative to the change in grants coming from the unaligned ones. The results suggest that partisan alignment has a sizeable positive effect on the amount of grants received by municipalities. For example, with majority governments at the two layers, aligned municipalities receive over 40% more grants than unaligned ones.     

Growth and welfare effects of stabilizing innovation cycles

We consider a simple model of innovation where equilibrium cycles may arise and show that, whenever actual capital accumulation falls below its balanced growth path, subsidizing innovators by taxing consumers has stabilizing effects, promotes sustained growth and increases welfare. Further, if the steady state is unstable under laissez faire, the introduction of the subsidy can make the steady state stable. Such a policy has beneficial effects as it fosters output growth along the transitional adjustment path, and increases the welfare of current and future generations.     

The economic effects of restrictions on government budget deficits: imperfect private credit markets

Summary. The present paper is an extension of Ghiglino and Shell [7] to the case of imperfect consumer credit markets. We show that with constraints on individual credit and only anonymous (i.e., non-personalized) lump-sum taxes, strong (or “global”) irrelevance of government budget deficits is not possible, and weak (or “local”) irrelevance can hold only in very special situations. This is in sharp contrast to the result for perfect credit markets. With credit constraints and anonymous consumption taxes, weak irrelevance holds if the number of tax instruments is sufficiently large and at least one consumer's credit constraint is not binding. This is an extension of the result for perfect credit markets. Received: August 28, 2001; revised version: March 25, 2002 RID="*" ID="*" We thank Todd Keister, Bruce Smith, and two referees for helpful comments. Correspondence to: C. Ghiglino     

The effects of local government investment on economic growth and employment: evidence from transitional China

Based on the panel data of 28 provinces in the year of 1987-2001,this paper examines the effects of the local government investment on economic growth and employment.The empirical result shows that the local government investment plays a significant positive role in economic growth and emplovment.However,while the proportion of local government investment to GDP had a remarkable rise after 1998.the elasticity of local government investment on economic growth declined,which shows that there is a hig room for raising the efficiency of local government mvestment.Moreover,the empirical examination shows that although local government investment had positive effect on employment,the elasticity had a decrease after 1994 when the tax-sharing system reform was put into practice.This shows that the positive role of local government investment on emplovment is also limited.This paper argues that the role of local governments as investors must be weakened,and local governments of different levels should lessen direct economic intervention and concentrate on public regulation.     

Electoral accountability and tax mimicking: the effects of electoral margins, coalition government, and ideology

This paper investigates the relation between tax mimicking and electoral accountability against the background of data on Spain. The results confirm the presence of tax-mimicking behaviour and indicate a relation between tax mimicking and electoral accountability. Tax rates are found to be higher and the reaction to neighbours' tax rates lower when the electoral margin is high and when left-wing parties control government. Coalition governments do not tax heavily and mimic more than single party majority governments.     

Incentive effects of benevolent intervention: The case of government loan guarantees

There has been a substantial recent growth in government loan guarantees to ailing firms in the United States. This paper investigates the potential incentive effects of this practice. Using the simplest available two-period model, it is shown that when firms know that loan guarantees may be forthcoming, they may be induced to adopt riskier investments and take on more leverage. These perverse incentive effects imply that the actual loan-guarantees-related contingent liability of the government could be much larger than suspected. Our policy recommendation is that the government either abandon the practice altogether or set up a federal agency that sells loan guarantees to all firms at prices that depend on the riskiness of the firm's assets and its leverage.