Country size and the voluntary provision of international public goods

Standard studies on voluntary contributions to an international public good treat national economies as if they were single agents. This masks the fact that nations are comprised of populations of citizens, whose collective benefits a national government takes account of when deciding on the amount of the contributions. This paper constructs a model which explicitly allows for the effect of population differences and explores their consequences. We can then present the so-called exploitation of the great by the small by Olson and Zeckhauser [Olson, M., Zeckhauser, R., 1966. An economic theory of alliances. Review of Economics and Statistics 48 (1966) 266–279] and explore how residents of larger countries fare relative to those in smaller countries. We also elaborate on the effects of changing populations and show that growing into a large country is not necessarily beneficial for the country's residents.     

Leading-by-example and signaling in voluntary contribution games: an experimental study

We report experimental results on the effect of leadership in a voluntary contribution game. Consistent with recent theories we find that leading-by-example increases contributions and earnings in an environment where a leader has private information about the returns from contributing (Hermalin in Am Econ Rev 88:1188–1206, 1998; Vesterlund in J Public Econ 87:627–657, 2003). In contrast the ability to lead-by-example has no effect on total contributions and earnings when such returns are commonly known. In our environment the success of leadership therefore appears to be driven by signaling rather than by nonpecuniary factors such as reciprocity. This paper was started while the authors were visiting the Harvard Business School during the fall of 2000. We are grateful for their hospitality and financial support. Vesterlund acknowledges support from the National Science Foundation and Potters from the Royal Netherlands’ Academy of Arts and Sciences. We thank Henrik Orzen for assistance in conducting the experiment. We also thank David Cooper and an anonymous referee who helped us improve the paper. Finally we thank Chris Anderson, Jim Andreoni, John Duffy, Simon Gaechter, Ernan Haruvy, Muriel Niederle, Jack Ochs, Elke Renner, Al Roth, participants at ESA-meetings (Barcelona, 2001), the Leadership and Social Interactions Workshop (Lyon, 2003), SITE (Stanford, 2004) and seminar participants at Alabama, CMU, Duke, Keele, Maryland, Nottingham, NYU, Pittsburgh, OSU, and York for valuable comments.     

The nonlinear dynamic relationship of exchange rates: Parametric and nonparametric causality testing

The present study investigates the linear and nonlinear causal linkages among six currencies denoted relative to United States dollar (USD), namely Euro (EUR), Great Britain Pound (GBP), Japanese Yen (JPY), Swiss Frank (CHF), Australian Dollar (AUD) and Canadian Dollar (CAD). The data spans two periods between 3/20/1991 and 3/20/2007. We apply a new nonparametric test for Granger non-causality by Diks and Panchenko [Diks, C., Panchenko, V., 2005. A note on the Hiemstra–Jones test for Granger noncausality. Studies in Nonlinear Dynamics and Econometrics 9 (art. 4); Diks, C., Panchenko, V., 2006. A new statistic and practical guidelines for nonparametric Granger causality testing. Journal of Economic Dynamics & Control 30, 1647–1669] and the linear Granger test on the return time series. To detect strictly nonlinear causality, we examine the pairwise VAR-filtered residuals as well as in a six-variate formulation. We find remaining significant bi- and uni-directional causal nonlinear relationships in the series. Finally, we investigate causality after controlling for conditional heteroskedasticity using a GARCH–BEKK model. Whilst the nonparametric test statistics are smaller in some cases, significant nonlinear causal linkages persisted even after GARCH filtering during both periods. This indicates that currency returns may exhibit asymmetries and statistically significant higher-order moments.     

Trade,growth and income redistribution: A case study of India

The concern of this exercise is with the effectiveness of trade policies and their assessment in achieving economic growth and income equality. A link between growth and equality is provided through employment. If there is substantial increase in employment, the inequality of income distribution is likely to be reduced. Thus, trade by bringing about higher levels of production and employment may reduce income inequality. We have applied a closed input-output model to the Indian data to estimate the interrelationships between trade, growth and income redistribution. It has been found that employment opportunities could be raised substantially through redistribution as well as through export promotion in developing countries such as India, if capital and foreign exchange constraints are not binding. Import substitution, however, does not turn out to be as effective a strategy to achieve these goals.     

The dynamic unsubstitutability of sterilization operations and neutral-intervention operations under dual exchange rates

The purpose of this paper is to examine whether neutral-intervention operations are a substitute for sterilization operations under the dual-exchange regime from the viewpoint of dynamic adjustment. It is found that both operations will generate quite different behavior throughout the adjustment process, although they are substitutable from the viewpoint of insulating money supply from the status of the current account. In addition, we also found that if the monetary authorities either intervene in the financial foreign exchange market or undertake sterilization operations in the open market, the dual-exchange regime will lose its insulation function to external financial disturbances.     

Global capital markets,direct taxation and the redistribution of income

Standard fiscal theory suggests that taxation should be heaviest on the least mobile factors of production – for both efficiency and revenue reasons. A shift in tax burdens from capital to labour as economies become globally integrated is thus justified. This theoretical tradition (founded by Ramsay and continued by Mirrlees and Lucas) assumes by construction that profit taxes reduce investment and growth; and while sensitive to inter-generational equity, sidesteps the issue of income distribution within generations. In contrast, starting from Keynes’ critique of these assumptions and building on modern endogenous growth models, it can be shown that profit taxation is not necessarily injurious to productive investment. In practice, moreover, the effect of globalisation has not been to reduce tax rates on capital, but rather to erode the tax base itself (i.e. ‘tax evasion’). Improved information exchange between tax authorities, which is now being driven by fiscal insolvency in developed countries, would allow tax incidence to be shifted so as to improve income distribution within OECD countries. Such cooperation could also permit the replacement of the current discretionary system of fiscal transfers from rich to poor countries (‘development aid’) by equitable sharing of global capital tax revenue.     

Existence,uniqueness, and stability of equilibrium in an OLG economy

Summary. This paper presents sufficient conditions for the existence of a unique and globally stable steady state equilibrium for OLG economies with production. The conditions impose separate requirements on the utility and production functions. Moreover, the conditions do not require assumptions concerning the third order derivatives of the production and utility functions.Received: 12 August 2002, Revised: 7 January 2003, JEL Classification Numbers: D50, D91, E13, O41.I would like to thank Nick Baigent, Laurie Conway, Karl Farmer, Christian Gehrke, and Hideo Konishi for helpful comments. I am grateful to an anonymous referee for his or her comments.     

Currency restrictions,government transaction policies and currency exchange

Summary. We study how currency restrictions and government transaction policies affect the values of fiat currencies in a two country, divisible good, search model. We show that these policies can generate equilibria where both currencies circulate as medium of exchange and where currency exchange occurs between citizens of different countries. Restrictions on the internal use of foreign currency can cause the domestic currency to be relatively more valuable to domestic agents while taxes on domestic currency create an incentive for home agents to hold foreign currency. We demonstrate that some policies increase prices and lower welfare while others do the reverse. Received: September 5, 2001; revised version: March 1, 2002     

New hope for the voluntary contributions mechanism: The effects of context

This research examines how three common contextual factors can affect contributions in the linear voluntary contributions mechanism (VCM). Using business student subjects and a low marginal per capita rate of return, the results show that contributions in the last of ten rounds range from 18% for the traditional VCM with no initial cheap talk, no voting, and a status quo of not giving to 94% in a VCM with initial cheap talk, voting, and a status quo of giving. The results demonstrate that context can make the VCM produce sustained efficiencies similar to incentive-compatible public-good mechanisms.     

Endogenous timing and income inequality in the voluntary provision of public goods: Theory and experiment

This study theoretically and experimentally investigates the effects of income inequality on donors' decisions regarding timing choices and contributions to public goods when contribution timing is endogenously chosen by contributors. To this end, we use the conventional voluntary provision models of Warr (1983) and Bergstrom, Blume and Varian (1986), with Cobb–Douglas preferences augmented with a two-stage game of Hamilton and Slutsky (1990). The following results were obtained and experimentally confirmed. First, when the distribution of income is extremely unequal, donors are indifferent between the simultaneous and sequential moves in the contribution game. Second, as income inequality is decreased, the simultaneous-move contribution game is likely to emerge because every donor prefers to act as a leader. Nevertheless, a higher-income donor may also prefer to act as a follower without specific social preferences and uncertainty regarding the quality of public goods. Third, most theoretical predictions regarding timing decisions are supported in our laboratory experiment, provided that the participants had enough time to learn the consequences of their timing choices.     

Drivers of the real effective exchange rates in high and upper‐middle income countries

This paper revisits the nexus between real effective exchange rate (REER) and total factor productivity (TFP) by controlling for trade openness, financial development and natural resources rents. We use a sample of 60 high‐income and upper‐middle income countries over the period 1995–2015 and employ the GMM estimation framework. Our results advance the empirical knowledge on the drivers of REER by providing robust evidence that the impact of TFP is not uniform across different country clusters. We find that in high‐income countries, increasing productivity causes the REER to depreciate hence becoming more trade competitive while the opposite is true for upper‐middle income countries. Furthermore, financial development and natural resources rents have no meaningful impact in the case of upper‐middle income countries but retain a significant effect in high‐income countries. Trade openness plays a key role in explaining the variation in REER in both country clusters.     

Lifetime income and public pension: An analysis of the effect on redistribution using a two-period analysis

This paper examines the redistributive effect of public pension programs in the framework of a two-period analysis. Private saving is also considered for comparison purposes as an alternative to public pension for assuring consumption during retirement. An emphasis is placed on investigating the effect of the various formulae for the determination of both the benefit level and the contribution, with the additional purpose of examining the effect of a maximum limit. The Japanese pension systems are evaluated on the basis of the above model framework in comparison with the British system.     

Incorporating daily market uncertainty data into a conventional short-run dynamic model: the case of the black-market exchange rate in Iran

The effect of market uncertainty on a country’s currency, while widely recognized, is either omitted from mainstream models or addressed using low-frequency series, which are typically subject to aggregation bias and substantial lags. In this article, we propose a new mixed-data sampling (MIDAS) modelling framework that enables us to incorporate the asymmetric daily effects of market uncertainty in a conventional monthly error correction model. We achieve this by proxying market uncertainty via the value of a ‘safe haven’ asset (gold) that investors reallocate towards in the face of heightened market risk. We apply the model to the Iranian black-market exchange rate, using a mix of the daily price of gold (28 June 2010–19 August 2018) and monthly data (July 2010-July 2018) on relative prices. Our results indicate that purchasing power parity (PPP) holds despite the recent unprecedented depreciations in the Iranian currency arising from several rounds of international sanctions. We also find that increased uncertainty can lead to instantaneous and substantial depreciations, whereas stabilization back towards the PPP path is much more sluggish.     

Error correction modelling and dynamic specifications as a conduit to outperforming the random walk in exchange rate forecasting

The proposition that dynamic exchange rate models can outperform the random walk in out-of-sample forecasting, in the sense that they produce lower mean square errors, is examined and disputed. By using several dynamic versions of three macroeconomic exchange rate models, it is demonstrated that dynamic specifications outperform the corresponding static models but improvement in the forecasting power may not be sufficient for the dynamic models to perform better than the random walk. The results are explained by suggesting that any dynamic specification or transformation of the static model leads to the introduction of a lagged dependent variable, which in effect is a random walk component. The analysis leads to the conclusion that it is implausible to aim at beating the random walk by augmenting a static model with a random walk component.     

Withholding taxes or information exchange: the taxation of international interest flows

This paper considers withholding taxes and information exchange as alternative means to tax international interest income. For each regime, we consider the maximum level of taxation of foreign-source income that can be sustained as the equilibrium of a repeated game. The best regime is the one that brings the level of taxation in the repeated game closest to the cooperative level of interest taxation. Sustainable levels of taxation in either regime depend on the importance of bank profits and on the marginal cost of public funds, among other things. Simulations with the model illustrate the choice between withholding taxes and information exchange. An explicit possibility is the emergence of a mixed regime, with one country imposing a withholding tax and the other country providing information. The basic model is extended to allow for size differences between the two countries and to incorporate a third, outside country.     

Growth and income inequality: a canonical model

Summary. We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this framework, the growth rate and the distribution of income are jointly determined. The key equilibrating variable is the equilibrium labor supply. It determines the rate of return to capital, which in turn affects both the rate of capital accumulation and the distribution of income across agents. We then examine the impact of various structural shocks on growth and distribution. We find that faster growth is associated with a more unequal, contemporaneous distribution of income, consistent with recent empirical findings.Received: 7 October 2004, Revised: 18 February 2005, JEL Classification Numbers: O17, O40.Cecilia García-Peñalosa: Correspondence toGarcía-Peñalosa would like to acknowledge the financial support received from the Institut d’Economie Publique (IDEP), Marseille. Turnovsky’s research was supported in part by the Castor endowment at the University of Washington. The paper has benefited from seminar presentations at the University of California, Riverside, and the University of Kansas, as well as from the comments of an anonymous referee.     

Testing exchange rate efficiency: the case of euro–dollar

This paper tests the semi‐strong efficiency of the euro–dollar currency market by introducing a simple heuristic test, based on the ‘general‐to‐specific’ methodology and meant to include as two specific sub‐cases the ‘efficient market hypothesis’ (EMH) in the currency market as well as alternative theories implying a time dependent process of propagation of information. According to the results of our nested test, the ‘efficient market hypothesis’ in the euro–dollar currency market is rejected.     

The stability threshold and two facets of polarization

In this paper we introduce the stability threshold that quantifies the minimal returns to size sufficient to prevent credible secession threats by regions of the country. Severity of internal tension has been linked to degree of polarization of citizens’ preferences and characteristics. We show that the increasing degree of polarization does not, in general, raise the stability threshold, even though this hypothesis holds in some asymptotic sense. We also examine the question of the number of smaller countries to be created if the unity of the large country is not sustainable, and investigate the link between this number and the degree of the country polarization. JEL Classification Numbers H20, D70, D73     

Market efficiency broadcasted live: ECB code words and euro exchange rates

This paper examines the impact of the European Central Bank (ECB) monetary policy on euro exchange rate returns using an event study with intraday data for five currencies (the euro exchange rate versus the US dollar, the British pound, the Canadian dollar, the Swiss franc, and the Japanese yen). I construct two indicators of news about monetary policy stemming separately from policy decisions and the press conference. Estimation results show that the surprise component of communication has highly statistically significant effects on exchange rates, whereas the response of euro exchange rates to the unanticipated change in the policy rate is more muted. I also estimate the financial market impact on euro exchange rates of US, European and German macroeconomic news, and I show that the impact of the ECB press conference is economically important. The process of fully incorporating the ECB news shock takes about 1 h, and thus this result suggests that the whole press conference (both the Introductory Statement and the Q&A part) provides valuable information to market participants.     

Monetary policy, macroeconomic adjustment and currency speculation under floating exchange rates: the case of Bulgaria

This paper deals with the Bulgarian experience with exchange rate policy and the related macroeconomic adjustment in the transition period. It is argued that in the context of the Bulgarian macroeconomic environment, the exchange rate regime and the exchange rate policy (or the lack of such) did play a crucial role in determining the patterns of macroeconomic adjustment in this period. A simple general equilibrium model is suggested that provides some insights into the stylized performance of an economy under certain assumptions, similar to those characterizing the transitional state of the Bulgarian economy. Finally, some aspects of Bulgarian macroeconomic performance in recent years are analysed on the basis of the available empirical information and using the framework of the theoretical model. The paper concludes with the policy lessons of this experience.