From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules

Under numerical fiscal rules, such as those underpinning EMU,governments have strong temptations to use accounting tricksto meet the fiscal constraints. Given these political incentives,fiscal variables that in the past were regarded as a mere residualacquire a strategic role. This is the case of the so-calledstock-flow adjustment (SFA) which reconciles deficit and debtdevelopments. We develop a simple theoretical model where deficitsand two distinct SFA components (one that could be used to reducethe deficit figures and the other to impact debt figures instead)are determined as a result of a constrained optimisation byfiscal authorities. Econometric evidence provides results consistentwith the model findings. The SFA component related to the purposeto hide deficits rises with the recorded deficit, while thesales of financial assets designed to keep the debt under controlrise with both debt and deficit. When deficits are in excessof the 3 percent limit, accounting gimmicks become more sensitiveto the size of deficits. The SGP per se does not appear to increasethe extent to which higher deficits trigger more accountinggimmicks. However, the SGP seems associated with a more intenseuse of accounting gimmicks irrespective of the level of deficit.Such accounting practices have greatly contributed to the lossof credibility of Economic and Monetary Union's fiscal rules.If properly implemented, the reformed Pact, which stresses durableadjustment and long-run sustainability, should help curb suchperverse incentives. (JEL codes: E61, H62, H87)     

A Theoretical Perspective on Multilateral Agreements on Investment*

Why do we observe some developing countries objecting to the prospect of a Multilateral Agreement on Investment (MAI), even though they have been keen to liberalize investment in preferential agreements in recent years? In this paper, we analyze the issue of MAI implementation and assess the welfare consequences of such kind of agreements. In our model, participation to MAI involves a tradeoff between less rent extraction from multinational firms (MNEs) and more abundant FDI inflows. At equilibrium, either all countries enter MAI, or all countries stay out, or only some of them enter. Coordination problems may induce multiple equilibria: the three types of equilibria may coexist. So, the implementation of MAI may depend not only on structural factors but also on the general “political climate.” When all countries join MAI, world welfare is maximized because this minimizes the hold‐up problem faced by MNEs and stimulates investment. However, in an asymmetric world, welfare gains are not guaranteed for all countries.     

Ambiguity of measured WTP for quality improvements when quantity is unconstrained: a note

This paper addresses the issue of how to estimate by contingentvaluation methods the maximum price consumers are willing topay when a new quality is available for a market good for whichquantity adjustments are possible. We argue that current practice,which typically does not specify a quantity when asking consumersthe price they are willing to pay for a new quality product,fails to identify prospective consumers' behaviour when theyare free to adjust the quantity purchased. Theoretical modelsare discussed for assessing the maximum price consumers arewilling to pay in these cases, and econometric approaches toaddress these situations are discussed.     

The Adoption of ICT among SMEs: Evidence from an Italian Survey

In this paper, we carry out an econometric analysis on the adoption and effective use of Information and Communication Technologies (ICTs) among a sample of Italian SMEs. An important result is that, in order to understand the main factors that drive SMEs to the adoption of ICTs, it is useful to divide the available technologies according to a taxonomy based on their typical function. Along with general-use ICTs (e-mail and Internet access), we identify two groups of technologies (labelled production-integrating and market-oriented ICTs) the use of which is associated with different firm characteristics. In both cases, however, the availability of highly educated workers turns out to be a key factor. Policy implications are also discussed.     

Innovation and finance: a stock flow consistent analysis of great surges of development

The present work aims at contributing to the recent stream of literature which attempts to link the Neo-Schumpeterian/Evolutionary and the Post-Keynesian theory. The paper adopts the Post-Keynesian Stock Flow Consistent modeling approach to analyze the process of development triggered by the emergence of a new-innovative productive sector into the economic system. The model depicts a multi-sectorial economy composed of consumption and capital goods industries, a banking sector and two households sectors: capitalists and wage earners. Furthermore, it provides an explicit representation of the stock market. In line with the Schumpeterian tradition, our work highlights the cyclical nature of the development process and stresses the relevance of the finance-innovation nexus, analyzing the feed-back effects between the real and financial sides of the economic system. In this way we aim at setting the basis of a comprehensive and coherent framework to study the relationship between technological change, demand and finance along the structural change process triggered by technological innovation.     

Pro-poor trade policy in Sub-Saharan Africa

This paper examines the presence of a pro-poor bias in the existing structure of protection of six Sub-Saharan African (SSA) countries, Burkina Faso, Cameroon, Côte d'Ivoire, Ethiopia, Gambia, and Madagascar. We build on a simple agricultural household production model and we propose an extension to include adjustments in labor income. Our approach, which can be implemented without repeated cross-sections of household level data, suits well the data constraints in SSA. It also allows us to capture the heterogeneity in trade protection at the tariff line level. The pro-poor bias indicators suggest that SSA's trade policies tend to be biased in favor of poor households, as these policies redistribute income from rich to poor households. This is because protection increases the agricultural prices of goods that are sold by African households and this effect dominates both the impacts of higher consumption prices and the strong Stolper–Samuelson effects that benefit skilled over unskilled workers.     

Intra-regional trade and business cycles in Southeast Asia

Conclusion In this note we considered the relationship between trade integration and the cross-country correlation of business cycle activity in southeast Asia. We found a positive and significant relationship between the degree of bilateral trade intensity and the cross-country bilateral correlation of business activity over the period 1986–1996, a period when trade integration was proceeding rapidly. Thus, the Frankel and Rose (1997) finding that more trade integration between industrialized countries tends to result in more highly synchronized business cycles, appears to be robust to a sample of countries which have diverse income levels and economic structures and are likely to have less bilateral intraindustry trade.     

Competition Effects of Supermarket Services

This article investigates the competition effects of supermarket services using fluid milk as a case study. A simultaneous equation model for services and price competition is estimated with scanner data from fifteen supermarket chains using two alternative measures of services, namely store size and principal components of in-store services. Empirical results show that increasing services results in economies of scope, greater supermarket chain-level demand, lower price elasticity of demand, and enhanced market power, leading to higher milk prices and quantity sold. We conclude that, as result of service competition, supermarkets differentiate themselves from competitors and successfully attract less price-sensitive consumers.