Credit risk and sustainable debt: a model and estimations of why the Euro is stable in the long-run

Sustainable debt has become the key issue in rating of private as well as sovereign debtors. The problem of how to estimate sustainable debt has also been at the center of the debate over the Asian 1997–1998 financial crisis. If the external value of the currency depends on the external debt of a country, it is necessary to estimate the creditworthiness of the country. This paper studies credit risk and sustainable debt in the context of a dynamic model. For a dynamic growth model with an additional equation for the evolution of debt, we demonstrate of how to compute sustainable debt and creditworthiness. The model is estimated by employing time series data for the core countries of the Euro-area. The computations show that the Euro-area has large external assets. Using time series methods, the sustainability of external debt (assets) is estimated for those core countries of the Euro-area. Those estimations show that the Euro will be a stable currency in the long-run.     

The Austrian School of Economics: A view from London

The Review of Austrian Economics - This paper explores the intellectual context of the Department of Economics at the London School of Economics and Political Science (LSE) during the 1930s. We...     

The Zilcha criterion for dynamic inefficiency

Summary. This paper reexamines the condition (1 + n), which Zilcha (1991) presents as a necessary and sufficient condition for dynamic inefficiency of stationary allocations in overlapping generation models with stochastic production. We show that this condition is necessary but not sufficient for a stationary allocation to be dynamically inefficient by Zilchas definition. We also show that there is a narrow but widely studied class of specifications in which the Zilcha test is both necessary and sufficient for dynamic inefficiency of stationary competitive equilibrium allocations. Outside this class, however, counterexamples can be constructed relatively easily.Received: 30 September 2002, Revised: 13 August 2004, JEL Classification Numbers: D51, D90, E13, E22. Correspondence to: Steven RussellWe thank Jon Burke, Subir Chakrabarti, Itzhak Zilcha and an anonymous referee for helpful conversations and/or comments.     

Revealed preference and differentiable demand

Summary. We prove that, for finitely many demand observations, the Strong Axiom of Revealed Preference tests not only the existence of a strictly concave, strictly monotone and continuous utility generator, but also one that generates an infinitely differentiable demand function. Our results extend those of previous related results (Matzkin and Richter, 1991; Chiappori and Rochet, 1987), yielding differentiable demand functions but without requiring differentiable utility functions.Received: 1 November 2001, Revised: 5 February 2004, JEL Classification Numbers: D11, D12. Correspondence to: Kam-Chau WongThis is a much revised version of Lee and Wong (2001). We are grateful to the Referee for valuable suggestions. We also thank Professor Marcel K. Richter for his comments.     

The New Comparative Political Economy

With the collapse of communism in the late 1980s the field of comparative political economy has undergone major revision. Socialism is no longer considered the viable alternative to capitalism it once was. We now recognize that the choice is between alternative institutional arrangements of capitalism. Progress in the field of comparative political economy is achieved by examining how different legal, political and social institutions shape economic behavior and impact economic performance. In this paper we survey the new learning in comparative political economy and suggest how this learning should redirect our attention in economic development.JEL classification: B53, O10, O20, P0     

Economic progress and skill obsolescence with network effects

Summary. We construct an OLG model with network effects to examine skill obsolescence when individuals can choose technological vintages. In the absence of transfer payments, some regions of the parameter space have unique stationary equilibria, others have unique cyclical equilibria, and others have multiple stationary equilibria. All equilibria are Pareto efficient. However, rat race equilibria can exist in which all agents currently alive prefer a slower rate of progress than occurs in equilibrium. When contemporaneous transfers are allowed, equilibria are unique everywhere, but a cycle still exists, and a rat race can still arise in equilibrium. Allowing intertemporal transfers (debt) ensures that all equilibria are stationary. In the relevant parameter range, the introduction of debt can eliminate cycles and increase the long-run growth rate. No rat race equilibria exist when debt is allowed.Received: 3 January 2002, Revised: 3 June 2004, JEL Classification Numbers: 041, J24, O33. Correspondence to: Ian P. KingEarly versions of this paper were presented at the West Coast Macro Workshop, the Mid-West Macro Meetings, the Canadian Macroeconomics Study Group Meetings, and the Society for Economic Dynamics Meetings. We would like to thank V. V. Chari, Merwan Engineer, Don Ferguson, John Hillas, John Knowles, Dan Peled, Dan Usher, Linda Welling and Julian Wright for helpful comments. We are especially grateful to an anonymous referee for some very useful and substantive comments.     

Household Electricity Demand, Revisited

Recent efforts to restructure electricity markets have renewed interest in assessing how consumers respond to price changes. This paper develops a model for evaluating the effects of alternative tariff designs on electricity use. The model concurrently addresses several interrelated difficulties posed by nonlinear pricing, heterogeneity in consumer price sensitivity, and consumption aggregation over appliances and time. We estimate the model using extensive data for a representative sample of 1300 California households. The results imply a strikingly skewed distribution of household electricity price elasticities in the population, with a small fraction of households accounting for most aggregate demand response. We then estimate the aggregate and distributional consequences of recent tariff structure changes in California, the consumption effects of which have been the subject of considerable debate.     

Evidence on corruption as an incentive for foreign direct investment

This paper assesses the relationship between corruption and inward foreign direct investment (FDI). Previous research has presumed that corruption directly enters the cost function of multinationals, suggesting a negative relationship between corruption and FDI. For a sample of 73 developed and less developed countries and the time period 1995–1999, we find a clear positive relationship between corruption and FDI. Corruption is thus a stimulus for FDI.     

Rational expectations for large CGE models: A practical algorithm and a policy application

We describe a simple iterative method for solving large dynamic CGE models under rational expectations. Details are given for Australia's MONASH model but the approach applies to a wide range of CGE models. The method is automated in the RunMONASH Windows software, putting CGE modelling under rational expectations within the reach of non-specialist modellers. We provide an illustrative application in which MONASH results under rational expectations are compared with results under static expectations. The application and supporting software can be downloaded. Results from the application are interpreted in terms of elementary economic mechanisms.