Introduction to the symposium: The discipline of applied general equilibrium

Summary The use of general equilibrium models in applied research imposes a discipline in which model structures can easily be compared and contrasted and model results can be interpreted using a well understood and rigorously developed theoretical framework. These features allow researchers to compare results across modeling efforts and to build on the experience of others in deriving results and formulating questions. This paper first presents a brief critical history of applied general equilibrium analysis. It then summarizes the contributions of eight other papers in this issue.We are grateful to Gary Hansen, Ellen McGrattan, and Richard Rogerson for helpful discussions of this paper. We also want to thank the members of the Applied Theory Workshop at the University of Minnesota, who helped referee and edit the papers in this issue: Fernando Alvarez, Raphael Bergoeing, Betsy Caucutt, Ricardo Cavalcanti, Antonia Diaz, Ron Edwards, Andres Erosa, Terry Fitzgerald, Ron Gecan, Doug Gollin, Karine Moe, François Ortalo-Magne, and Marcelo Veracierto. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System.     

No strings attached!

Many governors want to convert medicaid to a block grant and do away with the myriad federal rules that have vastly expanded the program's reach in recent years. Congress may oblige them. But groups that fought for the rules aren't going to sit still.     

Effects of presubscription and other attributes on long-distance carrier choice

This article describes how Japanese residential customers choose among long-distance carriers. Based upon a 1993 survey, the model indicates that the time required to register customers, whether extra digits are required to use a carrier, and whether a carrier can provide both local and long-distance calls, as well as the carrier's brand identity are significant service attributes that affect competitive outcomes. The effects of these services differences are quantified. Simulations are used to illustrate the competitive impacts of reducing service differences among carriers.     

Fiscal Settings and the Steady State Growth Path*

This paper outlines how deficit-neutral fiscal settings, via their impact on the growth/distribution equation, can play a positive role in minimizing deviant macroeconomic performance. The conventional Solow-Swan model of economic growth assigns no role to the standard instruments of fiscal policy in influencing the equilibrium growth path. In the model presented here, government fiscal policy–in the form of tax and transfer rates–is shown to have real effects on the long-term growth path of the unionized macroeconomy, even when the budget is permanently balanced and policy is fully announced.     

A Jump-diffusion Model for Exchange Rates in a Target Zone

We propose a simple jump-diffusion model for an exchange rate target zone. The model captures most stylized facts from the existing target zone models while remaining analytically tractable. The model is based on a modified two-limit version of the C OX , I NGERSOLL and R OSS (1985) model. In the model the exchange rate is kept within the band because the variance decreases as the exchange rate approaches the upper or lower limits of the band. We also consider an extension of the model with parity adjustments, which are modeled as Poisson jumps. Estimation of the model is by GMM based on conditional moments. We derive prices of currency options in our model, assuming that realignment jump risk is idiosyncratic. Throughout, we apply the theory to EMS exchange rate data. We show that, after the EMS crisis of 1993, currencies remain in an implicit target zone which is narrower than the officially announced target zones.     

Roles of Public Capital in Pakistan's Economy: Productivity, Investment and Growth Analysis

This study analyzes the role of public capital in Pakistan's economy, tracing the relationship between productivity of public capital and economic growth. We estimate a production function, with public capital as an inputs. The results indicate that the productivity (output elasticity) of aggregate as well as different components of public capital are sufficiently high. We also analyze substitutability and complementarity between public and private capital by estimating investment functions, revealing that public capital has worked as a substitute for private investment. The net effect of public capital on the national economy is analyzed by estimating reduced forms, with the result that public capital has a positive net effect on national product. The growth analysis shows that the contribution of public capital is declining over time.