ADAPTING TO NORTH-SOUTH TRADE:A GENERAL EQUILIBRIUM APPROACH TO POLICY OPTIONS

This paper develops a general equilibrium model of North-Southtrade with different wage setting regimes and a non-tradeablessector. Simulations confirm that substantial gains from tradeopenness can be accompanied by a significant deterioration inthe position of unskilled Northern workers. Increasing labourmarket flexibility will not correct this problem and protectionistmeasures, such as enforcing labour standards on the South, willreduce global income. Less conventional labour market policies,such as employment subsidies for unskilled workers, offer amore effective response, and one, moreover, which benefits workersin both the North and South.     

Schools and Location: Tiebout,Alonso, and Governmental Finance Policy

Many discussions of school finance policy fail to consider how households respond to policies that change the attractiveness of different residential locations. We develop a general equilibrium model that incorporates workplace choice, residential choice, and political choice of tax and expenditure levels. Importantly, we consider multiple workplaces, a fundamental feature of today's metropolitan landscape. This basic model permits investigating how accessibility and public goods interact in a metropolitan area. The model is used to analyze two conventional policy initiatives: school district consolidation and district power equalization. The surprising conclusion is that school quality and welfare can fall for all families when these restrictions on choice are introduced.     

On Cointegration and Exchange Rate Dynamics

Baillie and Bollerslev (1989) have recently argued that nominal dollar spot exchange rates are cointegrated. Here we examine an immediate implication of their finding, namely, that cointegration implies an error-correction representation yielding forecasts superior to those from a martingale benchmark, in light of a large earlier literature highlighting the predictive superiority of the martingale. In an out-of-sample forecasting exercise, we find the martingale model to be superior. We then perform a battery of improved cointegration tests and find that the evidence for cointegration is much less strong than previously thought, a result consistent with the outcome of the forecasting exercise.