Input Intensity: A Missing Link between Production,Trade Patterns,and Environmental Standards

Trade and production implications of a change in environmental policy using the 2 × 2 Heckscher–Ohlin framework are identified. For otherwise identical economies a difference of environmental policy standards generates two effects: the “effective‐endowment effect” where the abatement activity uses up some resources of the economy leaving less for the production of the final goods and the “factor‐price effect” where changes in the abatement requirement affects factor prices that in turn affect production. The direction and relative strengths of these two effects determine whether production and trade patterns are consistent with or opposite to the pollution haven expectation.     

Endogenous skill heterogeneity and inflation

This paper examines the implications of ex ante skill heterogeneity for long run inflation. We develop a dynamic general equilibrium model in which there are two types of labor (skilled and unskilled), two types of capital (human and physical), and money is introduced via a cash in advance constraint on consumption purchases. Skill heterogeneity is characterized in terms of (i) a parameter governing the ease with which the two types of labor can be substituted for each other in production; and (ii) the “productivity” of human capital in the production of skill. The model includes the accumulation of human capital which in turn creates skill heterogeneity among workers through an efficiency wage mechanism. Numerical experiments indicate that there is a range of parameter estimates in which the Friedman Rule may not be optimal. Furthermore, our quantitative experiments also indicate that there is a range of parameter values in which a greater degree of skill heterogeneity may be associated with a greater preference for inflation. Empirically, we also find that the inflation and heterogeneity correlation is positive.     

A note on the underestimation and overestimation in stochastic input-output models

Here we show that (i) the Leontief inverse (I – A)^-1 is underestimated when the elements of A, the fixed coefficient input–output matrix, are biproportionally stochastic, and (ii) the output vector in a non-linear input–output system is overestimated when the final demand vector is stochastic.     

Bilateral war in a multilateral world: carrots and sticks for conflict resolution

Abstract.  This paper constructs a three-country, specific-factor, trade-theoretic model in which two of the countries are in conflict and where war effort is determined endogenously in a Nash equilibrium. The third country does not take part in the war, but trades with the warring countries. In the framework, we examine, inter alia, how war and welfare are affected by globalization and by two instruments available to the third country – one carrot and one stick. Our overall conclusion is that the third parties do have the incentives for, and can play an effective role in, conflict resolution. JEL classification: F02, F11, H56, H77     

Rational expectations and the short-run Phillips curves

The purpose of the present paper is to study certain derivable implications of the rational expectations hypothesis (REH) in the context of a simultaneous wage-price model of the U.S. economy and to subject the REH to statistical tests. The empirical evidence indicates that implementation of the REH in the context of these models does wipe out the conventional short-run Phillips curves, and the assumption that public expectations of future rates of inflation are true conditional mathematical expectations based on all available information is indeed borne out quite well against its alternatives.     

Modelling multi‐period inflation uncertainty using a panel of density forecasts

This paper examines the determinants of inflation forecast uncertainty using a panel of density forecasts from the Survey of Professional Forecasters (SPF). Based on a dynamic heterogeneous panel data model, we find that the persistence in forecast uncertainty is much less than what the aggregate time series data would suggest. In addition, the strong link between past forecast errors and current forecast uncertainty, as often noted in the ARCH literature, is largely lost in a multi‐period context with varying forecast horizons. We propose a novel way of estimating ‘news’ and its variance using the Kullback‐Leibler information, and show that the latter is an important determinant of forecast uncertainty. Our evidence suggests a strong relationship of forecast uncertainty with level of inflation, but not with forecaster discord or with the volatility of a number of other macroeconomic indicators. Copyright © 2006 John Wiley & Sons, Ltd.     

Correcting Trade Distortions in a Small Open Economy

This paper considers the second-best strategy of correcting a wide variety of trade distortions in a small open economy with perfect competition in all markets. Using the tools of duality, we obtain some general properties of the structure and the levels of the optimal taxlsubsidy rates. The paper also analyzes the welfare effects of unilateral piecemeal trade policy reforms when some of the quota distortions—imposed by the foreign countries—are unalterable. It is shown that the merits of unilateral trade policy reforms that are emphasized in the literature crucially depend on the absence of unalterable foreign imposed quotas.     

Food for education versus school quality: a comparison of policy options to reduce child labour

Abstract.  In a model in which credit markets play a crucial role, we examine two policy options for reducing child labour, 'food for education' and 'investment in education quality,' With an imperfectly elastic supply of credit, an increase in food subsidy is more effective in reducing child labour than an 'income‐equivalent' increase in expenditures in education quality. The effectiveness of the latter policy improves, and the optimal share of resources devoted to this policy increases, at the expense of food subsidies, as the supply of credit becomes more elastic. JEL classification: H52, O10     

R&D Subsidies Under Asymmetric Duopoly: A Note

This paper analyses the question of optimum R&D subsidies in the context of a two-stage asymmetric Cournot duopoly model with endogenous R&D. For the special case of symmetric duopoly, whether the firms should be subsidized or taxed in their R&D activities crucially depends on the concavity/convexity property of the demand function. It is also shown that a firm with some initial cost advantage should be subsidized in its R&D activities and a firm without should be taxed. In this way, we obtain policy implications that cast doubts on the universal applicability of competition policies.
JEL Classification Numbers: L13, L52, H25.