Stabilization policy and indeterminacy in a small open economy

This paper studies the (de)stabilizing effects of income tax rules in a two-sector small open economy with production externalities. The paper shows that in the model with positive sector-specific externalities in the investment sector and negative sector-specific externalities in the consumption sector (or positive aggregate investment externalities), a regressive income tax rule can stabilize such an economy against indeterminacy, whereas a progressive income tax rule can increase the tendency for indeterminacy to occur. This paper also studies two variants that consider an imperfect world bond market and an endogenous labor supply, respectively, and shows that the qualitative results stated above remain valid. Moreover, increasing the level of sector-specific investment externalities can decrease (increase) the minimal level of tax progressivity required for indeterminacy if the investment externalities are below (above) a certain critical value and if the negative externalities in the consumption sector are taken as given.     

外部性与重工业优先发展

In the framework of a dynamic general equilibrium model, this paper studies how vertical externalities affect the development of heavy industry in a developing economy. The model is comprised of an intermediate and a consumer product sector. The production of both types of goods has pecuniary externalities as they are featured by increasing return to scale. However, the production of an intermediate product has an additional advantage to have externalities through its technological linkage with the production of consumer goods. This is related to the nature of the roundabout production of consumer goods: a larger number of intermediate products lead to higher productivity in the production of consumer goods than do more inputs of a fixed number of intermediate products. Therefore, private investment in the intermediate sector is below the social optimal level. Government subsidies can restore the economy to the social optimum, but they become less needed as the consumer sector grows larger and the advantage of the intermediate good sector diminishes. __________ Translated from Nankai Jingji Yanjiu 南开经济研究 (Nankai Economic Studies), 2007, (2): 3–19     

Too much of a good thing: Endogenous business cycles generated by bounded technological progress

Following Jones and Williams [Jones, C.I., Williams, J., 2000. Too much of a good thing? The economics of investment in R&D. Journal of Economic Growth vol. 5 (no. 1), 65–85], we assume that R&D is simultaneously subject to positive and to negative external effects (e.g., the non-rival nature of technology conflicts with congestion externalities). This observation allows to conceive an economy where two R&D sectors evolve without departing significantly from each other in terms of their productive results (society tends to penalize imbalances in technical progress, making negative external effects to appear associated to a sector when this outstands relatively to the other sector; the second sector, in turn, will be subject to positive externalities that reflect a catching up effect). The proposed framework, when associated to a growth setup, is able to replicate the existence of endogenous fluctuations and, therefore, it intends to be a contribution to the literature on endogenous business cycles.     

Computers And Growth

The purpose of this paper is to describe the impact of investment in computers on the growth of the U.S. economy. The economic literature on computers is relatively rich in information on the decline in computer prices and the growth of computer investment. Constant quality price indices for computers have been included in the U.S. National Income and Product Accounts (NIPA) since 1986. These indices employ state of the art methodology to capture the rapid evolution of computer technology.

While the annual inflation rate for overall investment has been 3.66 percent for the period 1958 to 1992, computer prices have declined by 19.13 percent per year! Similarly, overall investment grew at 3.82 percent, while investment in computers increased at an astounding 44.34 percent! These familiar facts describe growth in the output of computers. The objective of this paper is to complete the picture by analyzing the growth of computer services as inputs.

In a pioneering paper Bresnahan (1986) has focused on pecuniary externalities arising from the rapid decline in computer prices. Griliches (1992, 1994) has emphasized the distinction between pecuniary and nonpecuniary externalities in the impact of computer investment on growth. This paper is limited to pecuniary externalities or the impact of reductions in computer prices on the substitution of computer services for other inputs. As Griliches (1992) points out, this is an essential first step in identifying nonpecuniary externalities or ‘spill-overs’ through the impact of a decline in computer prices on productivity growth. ^{* *}Brynjolfsson (1993) has proveded a detailed survey of studies of nonpecuniary externalities or ‘spill overs’. Recent studies include those of Brynjolfsson and Hitt (1994a, 1994b) and Lichtenberg (1993).

In two important papers Stephen D. Oliner (1993, 1994) has introduced a model of computer technology that greatly facilitates the measurement of computer services as inputs. In this paper we estimate computer stocks and flows of computer services for all forms of computer investment included in NIPA. We construct estimates of computer services parallel to NIPA data on computer investment by combining these data with information on computer inventories. For example, the International Data Corporation (IDC) Census of Computer Processors includes an annual inventory of processors in the U.S.

In Section 1 we present data on investment in computers and constant quality price indices from NIPA. These data incorporate important innovations in modeling computer technology stemming from a joint study by IBM and the Bureau of Economic Analysis (BEA) completed in 1985. This study utilized a ‘hedonic’ methodology for constructing an econometric model of computer prices that accurately reflects rapid changes in computer technology. This methodology generates an index of computer prices that holds the quality of computers constant.

In Section 2 we present the model of computer services originated by Oliner (1993,1994). This differs in important respects from the model of capital services used in the previous studies of U.S. economic growth surveyed by Jorgenson (1989,1990). The model employed in previous studies is based on the decline in productive capacity with the chronological age of a capital good. Oliner assumes that computers maintain their productive capacity until they are retired. Decline in productive capacity occurs only through removal of used computers from the inventory through retirement.

In Section 3 we construct estimates of stocks of computers that incorporate IDC data on computer inventories and derive the implied flow of computer services. While output of computer investments has grown very rapidly, the input of computer services has grown even faster. The price of these services has declined at 23.22 percent per year over the period 1958 to 1992, while the input of these services has grown at 52.82 percent! This is prima facie evidence of an important role for computer price declines as a source of pecuniary externalities.

In Section 4 we combine computer services with the services of other types of capital to produce a measure of capital input into the U.S. economy. We link this with labor input to obtain the contributions of both inputs to U.S. economic growth, arriving at the growth of productivity as a residual. We find that the contribution of computer services to input into the U.S. economy is far more important than the contribution of computer investments to output. This is a significant step toward resolution of the Solow paradox: ‘We see computers everywhere except in the productivity statistics. ^{* *}Robert M. Solow, quoted by Brynjolfsson (1993). Declines in computer prices generate very sizable pecuniary externalities through the substitution of computer services for other inputs. By contrast Solow focuses on nonpecuniary externalities that would appear as productivity growth.

In Section 5 we conclude that information on inventories of computers is critical in quantifying the role of computer services as inputs. The constant quality price indices for computers incorporated into NIPA are also essential. A price index for computers that reflects only general trends in inflation would result in a highly distorted perspective on the growth of GDP and capital services, especially during the past decade. To capture the contribution of all forms of investment to U.S. economic growth, similar price indices should be included in NIPA for capital goods with rapidly evolving technologies, as proposed by Gordon (1990).

The long term goal should be a unified system of income. product, and wealth accounts, like that proposed by Laurits Christensen and Jorgenson (1973) and Jorgenson (1980). This incorporates capital stocks, capital services, and their prices. Achieving this goal will necessitate much greater elaboration of the accounting system described in Section 3. These accounts would incorporate data on prices and quantities of investment, stocks of assets, and capital services for all forms of capital employed in the U.S. economy.     

Microfinance spillovers: A model of competition in informal credit markets with an application to Indian villages

Despite widespread interest in the development of microfinance, spillover effects on the non-using population and redistributive issues remain largely unexplored. I study a competition game between microfinance institutions (MFIs) offering joint-liability loans and moneylenders offering individual loans in presence of adverse selection. I show that one unintended consequence of the entry of a microfinance sector in local credit markets can be to trigger an increase in the equilibrium informal interest rate, because MFIs tend to attract a disproportionately-safe share of the borrower pool away from incumbent moneylenders. The existence of such composition externality depends crucially on the size of the microfinance sector and the risk composition of the borrower pool. The model predicts a non-linearly increasing relationship between informal interest rates and MFIs' capacity in relatively safe credit markets, and no relationship in risky villages. I show evidence supporting these predictions, using a first-hand panel database that records all credit transactions over 8 years for a sample of about 1000 households living in Indian villages with extensive space and time variation in the size of their microfinance sector.     

Working Women: A Study of Women in Paid Jobs

First, Veblen's distinction between industrial and pecuniary employments with special regard to speculation is introduced. Second, investment banking as a prime example for pecuniary activities is presented. Third, a dominant fundamentalist, market efficiency and a heterodox speculation paradigm of financial markets are distinguished. Fourth, ten proposals for financial market reform (e.g., decentralization) are proposed. Finally, it is asked why these reforms, which should support a productive-serviceable function of finance, will not be realized. This is due to a capturing of the public sector and the prevailing scientific and ideological habits of thought.     

The “Dark Side” of Deregulation: How Competition Affects the Size of the Shadow Economy

This paper builds a theory that explains the dramatic expansion of the underground economy in the late 1990s by the sharp increase in market competition worldwide. I model an oligopoly game where firms first decide on entry and sector, and then compete in price. Operating in the underground sector reduces variable costs, but comes at the risk of being detected and fined. As competition intensifies (i.e., as consumers become more and more price‐sensitive), underground firms attract more demand, thus stealing business and profits from official firms. As a consequence, more firms enter the underground economy. A lenient policy toward the underground economy may increase welfare when markups are high, but will be welfare‐detrimental when markups are low.     

Which way does water flow? An econometric analysis of the global price integration of water stocks

Around US$600 billion of investment is desperately needed to address forecasted huge shortages in water supply globally. A number of worldwide investors – so-called water funds – have started to take up this challenge. For these global water investors, knowledge about the extent of integration between the water sectors of financial markets is highly important. According to international portfolio diversification theory, the less (more) integrated markets are, the more (less) benefits there are from international diversification. In this study, we investigate the extent and manner of interdependence among the US, European and Asian water sector of the equity markets based on Vector Autoregression (VAR), Granger causality and impulse response analyses. We find that world water stock market prices are indeed significantly interdependent although this interdependence varies across time periods. Each market quickly responds to shocks from each other and completes its response within 3 days. Hence, for water investors, international diversification that is undertaken just within the water sector will not be beneficial. The result also implies that there is the risk of crossmarket contagion – that is, price volatility spill over across water sectors of different financial markets, and therefore, water authorities in one market should take cognisance of events in other markets.     

Resource Rights and Markets in a General Equilibrium Model of Production

Rights to a free resource lead to distributional deadweight losses in partial equilibrium. The present paper examines related distortions in a general equilibrium model of production with output prices constant for the small open economy. The free resource can result in lower output than a market with weak substitution in the other sector. The free resource also leads to a convex production frontier implying a price increase lowers output in the sector. Regarding policy, an import tariff, export subsidy, or price support would lower sector output. These general equilibrium distortions increase the incentives to favor resource markets over rights.     

Persistent Inequality

When human capital accumulation generates pecuniary externalities across professions, and capital markets are imperfect, persistent inequality in utility and consumption is inevitable in any steady state. This is true irrespective of the degree of divisibility in investments. However, divisibility (or fineness of occupational structure) has implications for both the multiplicity and Pareto-efficiency of steady states. Indivisibilities generate a continuum of inefficient and efficient steady states with varying per capita income. On the other hand, perfect divisibility typically implies the existence of a unique steady state distribution which is Pareto-efficient.     

A four-sector macroeconometric model for Greece and the evaluation of the community support framework 1994–1999

This paper describes a macroeconometric model for Greece and its use for the evaluation of the effects that investment inflows from European Union in the form of the Community Support Framework (CSF) might have on the economy. The model consists of four sectors of economic activity, namely those of traded and non-traded goods, the public and agricultural sectors, and includes a detailed system of price formation, wage setting and public finances. The model is subjected to a number of stylised shocks in domestic and international variables, so that the dynamic properties and multipliers can be analysed. The evaluation of likely CSF effects is conducted by first constructing a benchmark forecast until 2010 and then assess the impact of CSF actions. CSF flows cause both a rise in total demand and in domestic supply through positive supply-side externalities and the evaluation distinguishes between a very low and a full degree of utilising the plausible opportunities. The universal conclusion is that, in the absence of externalities, CSF actions produce only a temporary rise in activity and employment. After the period of inflows expires, the economy will return to the course that would have been the case without the funds. However, if externalities are assumed to operate even at a moderate scale, the picture changes starkly: output, productivity, employment and the exporting capacity of the country improve significantly.     

Macroeconomic Effects of Asset‐Price Shocks in a Globalized Financial Market

In this paper, I study a model in which shocks to asset prices affect the real sector of the economy through a credit channel. As financial markets become internationally integrated, the economy becomes less vulnerable to domestic asset‐price shocks, but more vulnerable to foreign asset‐price shocks. To the extent that monetary policy stabilization is feasible and desirable, the globalization of financial markets shifts the focus of monetary policy from domestic asset prices to worldwide asset prices.     

Liquidity risk and financial competition: Implications for asset prices and monetary policy

This paper studies the implications of banking competition for capital markets and monetary policy. In particular, I develop a two-sector monetary growth model in which a group of agents is exposed to liquidity shocks and money is essential. Banks insure depositors against such risk and invest in the economy's assets. In this setting, I compare an economy with a perfectly competitive banking sector to an economy with a fully concentrated financial sector. Unlike previous work, banks can have market power in both deposits and capital markets. Compared to a perfectly competitive financial sector, I demonstrate that a monopolistic banking system can have substantial adverse consequences on capital formation, assets prices, and the degree of risk sharing. Furthermore, multiple steady-states can emerge and the economy becomes subject to poverty traps. More importantly, market power in financial markets may overturn the Tobin effect present under a perfectly competitive financial sector. This necessarily happens in economies with high degrees of liquidity risk and low levels of capital formation.     

年轻高管与企业股价崩盘风险：来自“代理冲突观”的证据*

在企业纷纷实施高管年轻化战略的背景下，本文从股价崩盘风险的视角分析和检验了年轻高管风险偏好的经济后果及其作用机理。本文基于“个体认知观”和“代理冲突观”展开理论推演，采用中国沪深A股非金融上市公司的数据，检验发现，年轻高管会显著加剧企业未来的股价崩盘风险，且这种影响主要存在于民营企业，在国有企业并不显著。进一步针对具体作用机制的检验发现，年轻高管在投资决策中选择了更多能迅速提升个人收益的风险性投资项目，但在不能迅速提升个人收益的风险性投资项目上与年长高管没有显著差异。同时，年轻高管对股价崩盘风险的加剧效应仅仅存在于高管在上市公司领取薪酬的样本企业，且更高的独立董事比例能显著抑制年轻高管的股价崩盘风险加剧效应。这表明，年轻高管个体认知层面的风险偏好被其追求个人私利最大化的代理冲突所扭曲，进而为年轻高管风险偏好的“代理冲突观”提供了实证证据。     

Risk externalities in a payments oligopoly

I discuss the role to be played by central banks in payment systems by way of an oligopoly model of a payments market where firms exert negative risk externalities upon each other. A central bank participating actively in this market is modelled as benign in two ways: exerting less externalities than other banks and maximizing welfare rather than profit. Because other banks react strategically to the central bank’s presence due to its low externalities, there is a risk that it backfires, with these other banks’ taking more risky positions than if the central bank were not there. The proper role of the central bank may actually be to stay out.     

年轻高管与企业股价崩盘风险：来自“代理冲突观”的证据*

在企业纷纷实施高管年轻化战略的背景下，本文从股价崩盘风险的视角分析和检验了年轻高管风险偏好的经济后果及其作用机理。本文基于“个体认知观”和“代理冲突观”展开理论推演，采用中国沪深A股非金融上市公司的数据，检验发现，年轻高管会显著加剧企业未来的股价崩盘风险，且这种影响主要存在于民营企业，在国有企业并不显著。进一步针对具体作用机制的检验发现，年轻高管在投资决策中选择了更多能迅速提升个人收益的风险性投资项目，但在不能迅速提升个人收益的风险性投资项目上与年长高管没有显著差异。同时，年轻高管对股价崩盘风险的加剧效应仅仅存在于高管在上市公司领取薪酬的样本企业，且更高的独立董事比例能显著抑制年轻高管的股价崩盘风险加剧效应。这表明，年轻高管个体认知层面的风险偏好被其追求个人私利最大化的代理冲突所扭曲，进而为年轻高管风险偏好的“代理冲突观”提供了实证证据。     

Too Much Monitoring, Not Enough Performance Pay

This paper endogenises the internal organisation of competitive firms in a simple general equilibrium framework. The options are monitored teams, unmonitored teams motivated by collective performance pay, and self-employment. The choice of incentive scheme depends on market price and also affects price through its influence on output. As more people opt for self employment, pecuniary externalities increase the pressure on the rest to follow suit and Pareto rankable multiple equilibria arise. The conditions for a competitive equilibrium to be constrained efficient are restrictive and everyone may gain from policies limiting monitoring and self employment and from the imposition of entry taxes.     

The cost of capital,asset prices,and the effects of monetary policy

The primary objective of this paper is to study the interaction between monetary policy, asset prices, and the cost of capital. In particular, we explore this issue in a setting where individuals face idiosyncratic risk. Incomplete information also provides a transactions role for money so that monetary policy can be studied. In contrast to standard monetary growth models which focus on the transmission of monetary policy to the demand for capital goods, we incorporate a separate capital goods sector so that the supply response to monetary policy is taken into account. Consequently, in contrast to the standard monetary growth model, monetary policy plays an important role in investment activity through the relative price of capital goods. Moreover, different sources of productivity can affect the degree of risk sharing. Although the optimal money growth rate falls in response to an increase in productivity in either sector of the economy, monetary policy should react more aggressively to the level of productivity in the capital sector.     

Modeling services liberalization: The case of Kenya

This paper employs a 55 sector small open economy computable general equilibrium model of the Kenyan economy to assess the impact of the liberalization of regulatory barriers against foreign and domestic business service providers in Kenya. The model incorporates foreign direct investment in business services and productivity effects in imperfectly competitive goods and services markets endogenously, through a Dixit–Stiglitz framework. The ad valorem equivalent of barriers to foreign direct investment have been estimated based on detailed questionnaires completed by specialists in Kenya. We estimate very substantial gains to Kenya from regulatory liberalization in business services, and additional gains from uniform tariffs. The estimated gains increase to 50% of consumption in the long run steady state model, where the impact on the accumulation of capital from an improvement in the productivity of capital is taken into account. Decomposition exercises reveal that the largest gains to Kenya will derive from liberalization of costly regulatory barriers that are non-discriminatory in their impacts between Kenyan and multinational service providers.     

Surviving Asymmetry in Capital Flows and the Business Cycles: The Role of Prudential Capital Controls

Past literature of different strands has pointed to a potential asymmetry: while portfolio capital inflows are largely irrelevant to the economy, capital outflows can cause recession. In a model with a convex investment and portfolio balance adjustment cost, and endogenous credit‐in‐advance constraint, we find that investment is determined solely by opportunity cost of physical capital unrelated to portfolio capital inflows when the constraint is slack. However, once credit availability is tightened up by capital outflows, the negative liquidity constraint dominates the opportunity‐cost factor, causing an economic downturn. Financial fragility against capital outflows is an outcome of pecuniary externalities, which, however, can be moderated by prudential capital controls. Even when exchange rates float freely, capital controls ease the macro‐stabilizing burden of monetary policy, as they help shield the economy from financial instability. Prudential tax on foreign debt is most preferred, and works the best when the exchange rate float is managed.