(De-)Stabilizing two-country macroeconomic interactions in an estimated model of the U.S. and the Euro Area

In this paper a semi-structural macroeconomic model based on gradually adjusting wages and prices and hybrid, cross-over inflation expectation formation is analyzed and estimated with aggregate data of the U.S. and the Euro Area. Besides comparing, among other things, the determinants of the wage- and price inflation dynamics in both economies, the role of different macroeconomic transmission channels for the stability of the two-country system is investigated.     

Equity and efficiency as components of a social welfare function

An income distribution-based abbreviated social welfare function is an increasing function of equity and efficiency. When inequality is of relative type, we characterize variants of the Atkinson–Kolm–Sen and the Shorrocks abbreviated welfare functions, where the variation results from the existence of a corresponding trade-off parameter, and in each case if the parameter becomes one the two forms coincide. When the value of the parameter increases, equity gains more weight in the equity–efficiency trade-off. For absolute inequality, we characterize the Blackorby–Donaldson–Kolm welfare function. Some implications of the lexicographic-type equity used in the paper are also considered.     

Book Reviews

Ian Chalmers and Vedi R. Hadiz (eds) (1997), The Politics of Economic Development in Indonesia, Routledge, London, pp. xxx + 269. A$155.00.

Geoff Forrester (ed.) (1999), Post-Soeharto Indonesia: Renewal or Chaos? Institute of Southeast Asian Studies, Singapore, and KITLV Press, Leiden, pp. 373. Cloth: S$49.90/US$32.90; paper: S$29.95/US$19.95/A$29.95.

Corden, Max (1999), The Asian Crisis: Is There a Way Out?, Institute of Southeast Asian Studies, Singapore, pp. 82. S$19.90/US$12.90.

Karl D. Jackson (ed.) (1999), Asian Contagion: The Causes and Consequences of a Financial Crisis, Westview Press, Boulder CO, pp. xvi + 312. Cloth: US$75.00; Paper: US$30.00.

H.W. Arndt and Hal Hill (1999), Southeast Asia's Economic Crisis: Origins, Lessons and the Way Forward, Institute of Southeast Asian Studies, Singapore, pp. 192. Cloth: S$66.90/US$44.90; paper: S$28.00/US$17.90/A$29.95.

Manuel F. Montes (1998), The Currency Crisis in Southeast Asia: Update, Institute of Southeast Asian Studies, Singapore, pp. xl + 62. Cloth: S$36.00 /US$24.00; paper: S$25.90/US$17.90.     

Geographic information system concepts for land management

A Geographical Information System (GIS) has recently been developed for the assessment of the agricultural potential of the Southern African Development Community (SADC) region. The main value of this GIS is the integration of agricultural resource information from the SADC countries in order to support regional planning. The development of GIS technology makes it possible to compile, store, retrieve, analyse and display vast quantities of spatial data on, inter alia, the climate, topography, soils and infrastructure of the region. This article aims to give background information on the nature and general application of a GIS. Attention is given to the capabilities of a GIS, the spatial questions that drive analyses, basic database requirements, analytical and operational functions, as well as the applications of a GIS in land reform. More detail on the spatial agricultural resource data captured and its use by means of the SADC GIS will be described in a later article.     

Instability of Equilibria in Experimental Markets: Upward-Sloping Demands,Externalities, and Fad-Like Incentives

The objective of the paper is to study markets in which the value of the activity to any one person increases with the level with which the activity is undertaken by others. The general interpretation could be fads, mimicking behavior, or some sort of belief formation process in which the beliefs or expectations of agents about some underlying state of nature are influenced by the buying behavior of other agents. The result is to create a market that can be modeled as having an upward-sloping market demand curve. The questions posed are (i) in the fad-like environment, does the classical concept of equilibrium (as an equating of market demand and market supply) accurately predict market behavior; (ii) can both stable and unstable equilibria be observed; and (iii) which of the two classical concepts of stability best describes the conditions under which instability is observed? Under the conditions of a fad-like demand side externality in a market organized by the multiple unit double auction (MUDA), market equilibration occurs at a point where demand equals supply. The disequilibrium behavior follows the dynamics of the Marshallian model of dynamics, as opposed to the Walrasian model. These results confirm and extend the major findings of Plott and George who studied a similar environment with a downward-sloping supply.     

Time-Varying Response of Monetary Policy to Macroeconomic Conditions

We reject the hypothesis that the Federal Reserve's response to the macroeconomy over the period of 1953-1994 can be accurately represented with a fixed-parameter discrete choice model. Thus, we model the Fed's time-varying response with a nonlinear Kalman filter. The estimated time paths of the reaction function coefficients suggest that the Fed has responded countercyclically to movements in the price level except for the middle 1970s when it accommodated inflation. The Fed has generally responded countercyclically to unemployment and output during recessions. However, it has not maintained a countercyclical policy during nonrecessionary times until the 1980s.     

Survey of Recent Developments

Amid global economic uncertainty and tumbling world oil prices, Indonesia's economy faces pressure on its external balance and a continued growth slowdown. The government of President Joko Widodo (widely known as Jokowi) has set an agenda of reform, including simpler, faster investment licensing, historic cuts to fuel subsidies to generate fiscal savings, and increased spending on infrastructure. On the political side, Jokowi has had to deal with several political issues coming not only from parties in opposition but also from parties supporting his government, including during the formation of the new cabinet. We examine the consequences so far of the government's policy initiatives and of the policymaking process. While some initiatives have been implemented with success, some seem to have been launched without enough preparation, consultation, or empirical evidence, and many have been poorly communicated. Although inflation accelerated after the November fuel-price rise, efforts have been made to contain inflationary expectations and to mitigate the effects on poverty through social-assistance programs. The government took steps to cushion the impending impacts of higher fuel prices on vulnerable households by giving cash handouts of Rp 200,000 per month to 15.5 million disadvantaged families who receive the lowest level of welfare, and by promoting publicly funded education and health care. The partial removal of gasoline subsidies and the introduction of a fixed-subsidy policy for diesel in the revised 2015 budget reduce uncertainty about the fiscal position, although increases in government spending in infrastructure development were announced at the same time. The revised budget for 2015 increases spending on infrastructure development by 63% from the 2014 budget, mostly on projects to improve connectivity on land and at sea—such as the development of toll roads, railways, and ports—and to increase the performance of the agricultural sector. However, the recent drop in international oil prices forced the government to increase its target for tax revenue by 30% on last year's target, raising concerns about the effect of falling oil prices on the economy. Trade and investment policy reform is important in unlocking Indonesia's growth potential and improving the country's current external balance. Jokowi's administration, however, has been sending mixed signals about its position towards more open policies. The country has yet to recommence several trade negotiations that were postponed in 2014 and is still struggling to meet its commitments under the ASEAN Economic Community. Although improvement in investment procedures and licensing is currently underway, Indonesia needs to adopt a more positive attitude if it is to attract more investment.     

Local Intergovernmental Competition and the Law of 1/n

This article proposes an empirical framework based on a synthesis of the seminal “Law of 1/n” and “Leviathan” theories, which models the relationship between government spending and the number of jurisdictions in a federal system as determined by the interplay of the costs related to centralized government (which fall as the number of jurisdictions increases) and the costs of distributive politics (which rise as the number of jurisdictions increases). Using a panel of U.S. state and local government spending data, empirical tests based on this combined framework show that the effect of intergovernmental competition predicted by the Leviathan model is partially offset by the Law of 1/n. This result helps explain the inconsistent findings in the previous empirical literature.