THE CLOSED-LOOP EFFECTS OF MARKET INTEGRATION IN A DYNAMIC DUOPOLY

This paper develops a dynamic game model of reciprocal dumping to reconsider welfare effects of market integration, i.e. reductions in transport costs. We show that welfare under trade is unambiguously less than welfare under autarky for any level of transport costs, which is impossible in static models where trade is profitable if the transport cost is low enough. This is because the negative effect through closed-loop property of feedback strategies dominates the positive effects.     

Dynamic Voluntary Provision of Public Goods: A Generalization

In this note we examine if the proposition offered by Fershtman and Nitzan (1991) and Wirl (1996) in the context of a dynamic voluntary provision model with a linear production function can be generalized to a more general CES formulation. By comparing the steady-state stocks of a public good in open-loop and feedback Nash equilibria with that under the cooperative solution, we demonstrate that their ranking among the steady-state stocks is indeed preserved under the CES framework.     

Tax Principles and Tariff‐Tax Reforms under International Oligopoly

In a two‐country duopoly model, this paper compares destination‐ and origin‐based commodity taxes adjusted to tariff reductions so that the world price and foreign welfare remain unaltered. We first find that this tariff‐tax reform reduces domestic welfare under the destination principle while the opposite holds under the origin principle. Then, it is shown that this ranking is reversed if exports are taxed. In short, which is preferable between destination and origin taxes depends on the tax principle and which between imports and exports are taxed.     

ASIAN FINANCIAL LINKAGE: MACRO‐FINANCE DISSONANCE

How are Asian financial markets interlinked and how are they linked to markets in developed countries? What is the main driver of fluctuations in Asian financial markets as well as real economic activity? To answer these questions, we estimate the spillover index proposed by Diebold and Yilmaz and gauge the degree of interaction in both financial markets and real economic activity among Asian economies. We first show that the degree of the international spillover in stock markets is uniform, irrespective of the groups of countries concerned, such as the G3 and ASEAN4. This suggests the importance of global common shocks in stock markets. We then discuss the macro‐finance dissonance. In stock and bond markets, the United States has been the main driver of fluctuations. However, China has emerged as an important source of fluctuations in real economic activity.     

Indeterminacy and Forecastability

Recent studies document the deteriorating performance of forecasting models during the Great Moderation, which conversely implies that forecastability was higher in the preceding era when the economy was unexpectedly volatile. We explain this phenomenon in the context of equilibrium indeterminacy in dynamic stochastic general equilibrium (DSGE) models. We first analytically show that a model under indeterminacy exhibits richer dynamics that can improve forecastability. Then, using a sticky‐price DSGE model, we numerically demonstrate that indeterminacy arising from passive monetary policy generates persistent dynamics that lead to superior forecastability. We also point out the possibility that forecastability under indeterminacy deteriorates when the degree of uncertainty about sunspot fluctuations is large.     

WHEN ARE VOLUNTARY EXPORT RESTRAINTS VOLUNTARY? A DIFFERENTIAL GAME APPROACH

We revisit voluntariness of voluntary export restraints (VERs) in a differential game model of duopoly with sticky prices. We show that a VER set at the free trade level has no effect on equilibrium under open‐loop strategies while the same policy results in a smaller profit for the exporting firm, i.e. it is involuntary under a non‐linear feedback strategy. Moreover, we prove an extended proposition of Dockner and Haug (1991 ) on voluntariness of VERs under a linear feedback strategy.     

Can News Be a Major Source of Aggregate Fluctuations? A Bayesian DSGE Approach

We examine whether the news shocks, as explored in Beaudry and Portier (2004) , can be a major source of aggregate fluctuations. For this purpose, we extend a standard dynamic stochastic general equilibrium model of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003, 2007) by allowing news shocks on the total factor productivity (TFP), and estimate the model using Bayesian methods. Estimation results on the U.S. and Japanese economies suggest that (i) news shocks play a relatively more important role in the United States than in Japan, (ii) a news shock with a longer forecast horizon has larger effects on nominal variables, and (iii) the overall effect of the TFP on hours worked becomes ambiguous in the presence of news shocks.