Natural Resources and Internal Conflict

We present a model of conflict in which each group decides to claim the country’s income and invest in arms or to accept a group neutral allocation of income and not invest in arms. Apart from the usual cooperative or conflictual societies, their strategic choice can result in hierarchically stratified societies in which one group is dominant. We show how the presence and exploitation of certain types of resources matters for the occurrence of conflict or social hierarchical stratification and for the possible effects of trust manipulation. In particular we find that, first, robust (encompassing point and lootable) resource rich economies tend to be conflictual, plantation economies hierarchically stratified and diversified economies cooperative. Second, foreign intervention, aimed at changing the balance of power in the case of conflict, is most effective in robust and diffuse resource rich economies. Third, trust manipulation (as a means to counter conflict) is most effective in subsistence and diffuse resource rich economies. Throughout the article, we cite ample case study and econometric evidence to support our model.     

Job creation and job destruction in the presence of informal markets

In developing economies, the fraction of informal workers can be as high as 70% of total employment. For economies with significant informal sectors, business cycle fluctuations and labor market policy interventions can have important effects not only on the unemployment rate, but also on the allocation of workers across regulated and unregulated jobs. In this paper, using worker flows data from Brazil, we build, calibrate, and simulate a two-sector search and matching labor market model, in which firms have the choice of hiring workers formally or informally. We show that our model can explain well the main cyclical patterns that lead to those cyclical reallocations. We also show how the effect of government interventions in the labor market depend on the magnitude of the reallocation of labor across regulated and unregulated sectors. For our calibration, policies that decrease the cost of formal jobs, or increase the cost of informality, raise the share of formal employment while reducing unemployment.     

Dynamics analysis and chaos control of a duopoly game with heterogeneous players and output limiter

In actual economies, players sometimes would offer an upper limiter to their output due to capacity constraints, financial constraints and cautious response to uncertainty in the world, or offer a lower limiter to their output due to economies of scale or break-even consideration. In this paper, we discuss a dynamic duopoly game with heterogeneous players by assuming that one of them imposes an upper limiter on output, and the other one imposes a lower limiter. We analyze how the limiter affects the dynamics of output and the performance of players, and explore the number of the equilibrium points and the distribution of conditioned equilibrium points of the model. We then discuss the stable region of conditioned equilibrium. The theoretical results and numerical experiments show that adding appropriate limiter can make the system more robust, and even get rid of its chaos. The numerical results show that chaotic output dynamics can be beneficial to one firm but harmful to the other, and can also be harmful to both of them, and also show that adding appropriate limiter can improve the performance of the player.     

Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective

To estimate how monetary policy works in small open economies, we build a dynamic stochastic general equilibrium model that incorporates the basic features of these economies. We conclude that the monetary policy in a group of small open economies (including Australia, Chile, Colombia, Peru, and New Zealand) is rather similar to that observed in closed economies. Our results also indicate, however, that there are strong differences due to the shocks from the international financial markets (mainly risk premium shocks). These differences explain most of the variability of the real exchange rate, which has important reallocation effects in the short run. Our results are consistent with an old idea from the Mundell–Fleming model: namely, a real depreciation to confront a risk premium shock is expansive or procyclical, in contradiction to the predictions of the balance sheet effect, the J curve effect, and the introduction of working capital into RBC models. In line with this last result, we have strong evidence that only in one of the five countries analyzed in this study does not intervene the real exchange rate, the case of New Zealand.     

Countercyclical capital rules for small open economies

The growing literature on macroprudential regulation focuses on how a combination of monetary and macroprudential policies can boost macroeconomic and financial stability. We contribute to this literature by developing a DSGE model that assesses the effectiveness of countercyclical capital regulation in small open economies, in monetary unions or with exchange rate pegs, where policymakers do not have full control over traditional stabilisation instruments such as nominal interest and exchange rates. In such economies, macroprudential policy could potentially play an even more relevant role in mitigating the adverse effects of macro-financial feedback loops. To validate the model’s ability to replicate the stylised facts of financial crises, we calibrate using data for the Irish economy, the scene of a recent housing crash. Our results demonstrate that the pro-active use of countercyclical capital regulation – in the form of Basel III-type rules – can help attenuate boom-bust cycles driven by over-optimistic expectations. We also find that more aggressive action by regulators during the release phase can bolster the economy’s ability to absorb a negative shock.     

How should emerging economies float their currencies?

Floating exchange rates seem to be gaining ground in Latin America, East Asia and the transition economies. The recent crises left many economies with no alternative but to float. Others have moved toward floating, searching for greater flexibility and insulation from external shocks. The question for most emerging market economies, then, is no longer to float or not to float, but how to float. Four issues arise in this regard. The first is how to float and have low inflation. The second is whether floating provides as much insulation as conventional theory predicts, especially in the presence of dollarized liabilities. Which leads to the third point: the relationship between the stability of the exchange rate and that of the financial system. The fourth is how to conduct monetary policy under a float, and the role of inflation targeting. We consider each of these points in turn, and conclude that a workable model of how to float seems to be emerging from the so‐far successful experience of countries like Chile and Brazil. It involves the adoption of an inflation target as the main anchor for monetary policy, coupled with a monetary policy reaction function that — aside from reacting to the output gap and other determinants of the inflation rate — reacts also partially to movements in the nominal exchange rate. JEL classification: F3, F4, E4, E5     

非均衡最优规划模型解的经济政策意义

本文根据非均衡理论的最优规划模型 ,探讨了在凯恩斯失业均衡和抑制性通货膨胀均衡下 ,几个主要的经济变量P、W、G、T、M、A对于家庭消费C和产出Y (或就业L)的影响。主要的结论是 :在凯恩斯失业状态下 ,刺激消费的同时 ,积累仍不可忽视 ;计划经济国家长期过分注重积累的传统经济政策思想是不合理的 ;平衡或盈余的财政政策是计划经济国家的明智之举 ;计划经济国家长期实行低工资水平的政策是错误的     

UNEMPLOYMENT AND THE PRODUCTIVITY SLOWDOWN: AN EFFCIENCY WAGE PERSPECTIVE

Many OECD economies suffered a productivity slowdown beginning in the early 1970s. However, the increase in unemployment that followed this slowdown was more pronounced in European economies relative to the USA. In this paper we present an efficiency wage model, which enables us to identify two basic channels through which the productivity slowdown can affect workers' effort incentives. Predictions of the model are consistent with the different trends in unemployment across countries over this period in the face of a similar slowdown in productivity. We also demonstrate how the link between growth and unemployment depends upon labour market institutions in such a way that we can reconcile the mixed empirical results observed in the literature.     

How store format choices and market structure affect agglomeration economies and competition among chain stores in the US supermarket industry

This article studies how store format choices and market concentration affect agglomeration economies and competition among chain stores. Using data on supermarket chains in Arizona, Georgia and Illinois, we decompose a store’s sales into parts stemming from local market conditions, such as demographics, and parts stemming from competition measures, which can be of its own chain’s stores or of other chains’ stores. Our results show that local market conditions are still a key factor in generating store sales. In more concentrated markets of Georgia and Illinois, a supermarket chain suffers from business-stealing among its own stores – agglomeration economies not sufficient to offset competition among its stores – but ironically tolerates the presence of other chains’ stores. Can a retail chain favourably tip the balance of agglomeration economies and competition? We find the answer by looking at the two big corporations in Arizona – Bashas Markets Inc. and Kroger Co. – which own two and three store formats, respectively, catering to distinct consumer segments, and thus promoting agglomeration economies while minimizing competition among their own stores.     

US Credit Crisis and Spillovers to Asia

We review key highlights of the global credit crisis. We then consider how financial turmoil in the largest advanced economies might be transmitted to East Asia. The focus is on foreign trade links, international capital flows, currency market pressures and mismatches, financial sector fragilities, and countercyclical monetary and fiscal policy actions. We introduce a set of vulnerability indicators and explore whether an ordinal ranking of East Asian economies according to these vulnerability indicators seems to be related to the cross-country differences in estimated slowdowns of economic growth during the crisis. Finally, we discuss how Asian economies might encourage the adoption of a stronger regulatory and supervisory framework in the USA and whether some Asian economies and the USA might pursue a more “balanced” growth strategy after the crisis.     

Government policy and the probability of coordination failures

This paper introduces an approach to the study of optimal government policy in economies characterized by a coordination problem and multiple equilibria. Such models are often criticized as not being useful for policy analysis because they fail to assign a unique prediction to each possible policy choice. We employ a selection mechanism that assigns, ex ante, a probability to each equilibrium indicating how likely it is to obtain. We show how such a mechanism can be derived as the natural result of an adaptive learning process. This approach leads to a well-defined optimal policy problem, and has important implications for the conduct of government policy. We illustrate these implications using a simple model of technology adoption under network externalities.     

Comparing the costs and benefits of diversification by regulated firms

Previous work on the diversification of regulated firms has focused exclusively on either the costs of cross-subsidy or on the welfare gains resulting from economies of scope. Using theory and numerical simulations, we identify conditions under which gains from economies of scope and increased competition tend to outweigh the costs of cross-subsidization. We use a perfect competition model of the unregulated market to examine tradeoffs under economies of scope. Effects of increased competition are assessed using Cournot models with linear and constant elasticity demands. Diversification tradeoffs depend upon magnitudes of variables that regulators should be able to estimate or otherwise judge.     

Unique and multiple equilibria in a macroeconomic model with environmental quality: An analysis of local stability

This paper develops and analyzes an economic growth model which incorporates environmental quality into the production and utility functions. We solve our model for the balanced growth path and find that a unique low growth equilibrium is attained when environmental quality is given less weight in the utility function. Multiple equilibria exist if environment quality is given greater weight in the utility function. We also perform local stability analysis of our model. We conclude that an economy in which the environmental quality is given relatively less importance by the agents will be caught in low growth, high consumption poverty traps as is the case for many developing countries while other economies can potentially reach a relatively low consumption, high growth steady state if they place greater weight on environmental quality. Finally we look at how the gap between low and high growth equilibria shrinks when individuals place greater weight on environmental quality and how governmental policies can promote growth when societies give less weight to the environment.     

Interethnic relations,informal trading networks,and social integration: imitation,habits, and social evolution

The ethnically homogeneous middleman groups (EHMGs), which are informal trading networks, are ubiquitous in less-developed economies where the legal infrastructure for contract enforcement is not well developed. This paper develops a formal model of social interaction among members of the EHMG as well as in more general situations in a multi-ethnic or multi-cultural society consisting of identifiable ethnic or linguistic groups. Behavioral patterns are transmitted between generations and altered via imitation in social contacts. The model demonstrates how different discriminatory behavioral patterns can evolve and persist over time. One result is that the trust between such groups can increase due to a higher frequency of inter-group contacts. In concluding the paper, we speculate about how the model can be expanded to include changes in legal structures, especially contract law. This could lead to an increase in the trust between the different groups.     

Distance measures between free trade and autarky for the world economy

We develop a methodology to determine numerically how globalized the world economy is. We present a global general equilibrium model capturing major OECD economies and a residual rest of world for which alternative metrics of distance between observed, free trade and autarky equilibria can be developed. We use data for 2000 and report a number of distance measures between the 2000 observed trade restricted equilibrium and both free trade and autarky equilibria noting the absence of prior literature on metrics of distance between equilibria. The measures are used to determine the degree to which the world economy is globalized.     

International Technology Diffusion: Theory and Measurement

We model the invention of new technologies and their diffusion across countries. In our model all countries grow at the same steady-state rate, with each country's productivity ranking determined by how rapidly it adopts ideas. Research effort is determined by how much ideas earn at home and abroad. Patents affect the return to ideas. We relate the decision to patent an invention internationally to the cost of patenting in a country and to the expected value of patent protection in that country. We can thus infer the direction and magnitude of the international diffusion of technology from data on international patenting, productivity, and research. We fit the model to data from the five leading research economies. A rough summary of our findings is that the world lies about two-thirds of the way from an extreme of technological autarky to an extreme of free trade in ideas. Research performed abroad is about two-thirds as potent as domestic research. Together the United States and Japan drive at least two-thirds of the growth in each of the countries in our sample.     

A generalized panel data switching regression model

This paper considers a generalized panel data model of polychotomous and/or sequential switching which can also accommodate the dependence between unobserved effects and covariates in the model. We showcase our model using an empirical illustration in which we estimate scope economies for the publicly owned electric utilities in the US during the period from 2001 to 2003.     

Sustainable fiscal strategies under changing demographics

This paper develops an overlapping generations model to evaluate, first, the steady state growth-maximizing level of public debt around which an economy needs to stabilise; second, how the optimal level of public debt varies as a function of key population parameters; third, how fiscal rules designed to stabilise the economy around that debt level need to vary with the population parameters; and, fourth, how well the model performs as a reasonable and plausible representation of the advanced economies that face fiscal strain and deteriorating demographics. The main conclusion is: despite diminished fiscal space and flexibility due to deteriorating population parameters, a relatively benign steady state is feasible and available under mild fiscal restraints. The bigger problem will be how to get there without financial or fiscal breakdowns along the way. We offer some political economy perspectives on how best to manage that risk.     

Interest rate volatility and macroeconomic dynamics: Heterogeneity matters

We examine the relation between real interest rate volatility and aggregate fluctuations for a diverse sample of countries. Compiling a new dataset including emerging and advanced countries, the substantial variation in our data yields novel results: (a) stochastic volatility outperforms Markov‐switching in representing interest rates, (b) some advanced economies can be more volatile than emerging markets, and (c) creditors take on more debt following volatility shocks. We show how an equilibrium business cycle model with uncertainty shocks can generate these facts. Sample heterogeneity produces significant parameter differences, playing an important role in distinguishing the effects of volatility shocks.     

Fiscal Federalism and Electoral Accountability

We evaluate how governance uncertainty—exemplified by turnout uncertainty—affects the trade‐off between internalization of externalities and political accountability in the design of the fiscal state. We show that centralization only weakens political accountability in the presence of negative externalities. Unlike positive externalities, negative externalities allow federal politicians to extract higher rents. This yields two new insights. First, decentralization can only Pareto dominate centralization in economies with negative externalities. Second, centralization may not be Pareto efficient in economies with positive externalities despite the fact that policy can be tailored to regional taste differences and centralization internalizes the positive externality.