Does Precommitment Raise Growth? The Dynamics of Growth and Fiscal Policy

We develop an endogenous growth model driven by externalities from both private and public capital. The government levies distortionary taxation to finance a publicly provided consumption good and public infrastructure. Firms face adjustment costs. We compare the optimal and time-consistent policies in a linear-quadratic approximation of the model. Although the time-consistent equilibrium is sub-optimal in terms of ex-ante intertemporal welfare, it yields higher long-run growth and welfare, through an accumulation of assets by the state and a cut in government consumption.     

Probability models and robust policy rules

We consider Sims's (2008) argument that robust policy making requires that policy models be treated as “probability models”. In a welfare-based setting, we estimate by Bayesian methods a number of variants of a New Keynesian macroeconomic model and use both the model odds and posterior densities to design robust interest rate rules consisting of an inflation-forecast-based rule and a wage-targeting one. Each are shown to have distinct robustness qualities and distinct implications for the probability-models approach. To ensure feasible policy, we further impose that rules are stable, determinate and lower-bound compatible. Our results have important implications for the design, evaluation and analysis of the probability models approach to robust monetary policy making.     

Partial information and volatility in a two-bloc world

This paper examines the effects of partial information on volatility and on the design of simple feedback rules in a rational expectations context. Previous studies have investigated these effects using small analytical models. Here we employ an empirical two-bloc model derived from the OECD Interlink model. The main conclusions are that when current asset prices are observed, but GDP is observed with a delay, then the effect on volatility is small, compared to the full information case. Likewise the choice of simple feedback rules is little affected, although a non-optimal use of information in their design may lead to a deterioration in performance.     

Strategic procurement, openness and market structure

We examine strategic procurement behaviour by governments and its effect on market structure in sectors, such as defence and pharmaceuticals, where the government is the dominant consumer. In a world economy with trade between producer countries, and between producers and non-producers, we use a modified Dixit–Stiglitz utility function with an independent taste for variety. There is free entry and exit by firms, but by anticipating their participation constraint governments can indirectly choose the number of domestic firms and their size through its choice of procurement price. Unlike the standard model with no independent taste for variety and no external sector of non-producer countries, there are incentives for subsidies, openness impacts on industrial structure and procurement coordination between producer countries affects firm numbers.     

Phases of imitation and innovation in a North-South endogenous growth model

A North-South endogenous growth model is developed to examinethree phases of Southern development: imitation of Northernproducts, imitation and innovation, and innovation only. Weshow that the three phases exist as possible equilibria whichdepend on knowledge spillovers and the ease of imitation. Applyingthe model to analyse the impact of R&D subsidies, thereare some clear policy implications: (I) the welfare effectsof subsidies in both blocs depend crucially on the Southernphase; (ii) there are circumstances where the global benefitsfrom subsidies to the South are so substantial as to be Pareto-improvingeven when fully financed by the North.