international transfers the relative price of non traded goods and the current account this paper considers the role of the relative price of non traded goods and the current account in the adjustment of a small open economy to the receipt of an international transfer the paper shows that the economy s macroeconomic adjustment to the transfer depends upon the relative capital intensities of the traded and non traded sectors of the economy as well as on the duration of the transfer the paper provides a new interpretation of france s current account surplus in the 1870s that accompanied the payment of reparations to germany following the franco prussian war and of germany s trade deficit in the 1920s that accompanied reparations payments associated with the first world war

who do we tip and why an empirical investigation an important question about social norms is whether they are created to increase welfare this is addressed by examining the characteristics of tipped and non tipped occupations tipping prevalence is negatively correlated with worker s income and consumer s monitoring ability and positively with consumer s income and closeness between the worker and the consumer the results refute a common belief that tipping exists to improve economic efficiency by lowering monitoring costs tipping however is more prevalent when consumers feel empathy and compassion for workers and want to show gratitude for good service suggesting that tipping might increase welfare if welfare includes psychological utility

nontraded goods oil price increases and the current account abstract an intertemporal maximizing model is used to examine the current account response to oil price increases the analysis shows that the introduction of a nontraded goods sector influences the current account response whether the current account worsens or improves depends crucially on relative production technologies in the traded and nontraded goods sectors

debt overhang credit rationing and investment abstract this paper evaluates the effect of foreign debt on investment in a heavily indebted country using numerical simulations of a simple rational expectations growth model two particular effects are distinguished first the effect due to debt overhang of past accumulated debts and second the effect of credit rationing or inability to obtain new financing the results from the simulations indicate that credit rationing may be a powerful disincentive to investment this suggests that in order to maximize the impact on productive investment debt reduction plans need to be accompanied by additional foreign lending

investment the current account and the relative price of non traded goods in a small open economy abstract this paper incorporates traded and non traded investment expenditure into an infinite horizon setting with optimizing economic agents extending previous research that has incorporated traded and non traded investment into a two period setting the paper analyzes the dynamic adjustment of the relative price of non traded output the market price of capital and the current account following exogenous shocks to the system the exogenous shocks considered by the paper include permanent transitory and anticipated changes in an income tax and an investment subsidy as well as changes in the level of government purchases of traded and non traded output

how successfully do we measure capital flight the empirical evidence from five developing countries economists have proposed several different techniques for measuring capital flight each technique differs significantly in its definition of what constitutes capital flight principally on the limits to normal capital flows how to capitalise investment income and the inclusion of long term capital flight consequently estimates of the determinants and remedies for capital flight have been very mixed given that capital flight is not observable it is important to examine the information content and consistency between the different measures this article uses three different techniques over five countries to make that comparison and finds a limited amount of information in each measure but no obvious agreement between them econometric techniques which have been designed for measuring the hidden economy of oecd countries is likely to offer a better way of measuring capital flight

structural adjustment and the construction sector abstract this paper adds a construction sector to a dynamic dependent economy model equipped with consumer tradeables and non tradeables sectors the model is used to study the response of the production structure relative prices and the trade balance to a favorable terms of trade shock under the benchmark assumptions of perfect intersectoral factor mobility a perfect international capital market and no adjustment costs for realistic relative capital intensities the model predicts a boom in the construction and consumer non tradeables sectors a contraction of the tradeables sector and no relative price changes the implications of relaxing those benchmark assumptions are discussed separately

anticipated foreign military threat arms accumulation and the current account in a small open economy this paper examines the effects of an anticipated foreign military threat on consumption the home weapons stock and net foreign asset position in a small open economy if the utility function is separable between butter and guns the economy decreases both butter and guns when the news arrives accumulates foreign assets prior to the foreign threat realization and increases guns as the foreign threat realizes if the utility function is nonseparable between butter and guns the economy may have two dynamic responses the first is similar to the separable case except that consumption exhibits a discrete jump when the foreign threat realizes the second is that the economy increases both butter and guns on impact decumulates foreign assets prior to the foreign threat implementation but either increases or decreases guns as the foreign threat realizes

fiscal deficits and relative prices in a growing world economy abstract this paper studies the transmission of fiscal disturbances between countries and the effect of those disturbances on worldwide capital intensity in a context of growth the model developed to address these issues allows for the production of both nontradable and relatively capital intensive tradable goods a central finding is that factor markets can be a major channel for the communication of fiscal policy shocks to world interest rates to private saving decisions and ultimately to global asset supplies and their distribution among countries particular predictions of the model illustrate how changes in public debt ratios and shifts in government spending patterns affect resource allocation and the welfare of various generations both at home and abroad

mexico stabilization debt and growth mexico rudiger dornbusch mexico today is at a crossroads as the de la madrid presidency which has been dominated by the debt crisis comes to an end a number of major policy difficulties remain inflation is still a problem and the continuation of stagnation in a country where the population grows by 3 a year is clearly unsustainable the outlook for inflation is dependent on the government s ability to keep its budget under control the stabilization programme has been quite successful in this respect but the cost in terms of foregone growth is staggering the issue here is how to collect the disinflation benefits of policy restraint analysing the peculiar process of rapid inflation both in mexico and elsewhere the author calls for an incomes policy as for growth it is closely linked to the external situation mexico which triggered the debt crisis in 1982 has made remarkable progress in achieving a non interest current account surplus yet its external debt remains huge and requires a continuation of net transfers abroad the experience though is that debt service comes at the expense of productive investment and growth the author proposes to escape from the unacceptable choice between debt service and growth by adopting what he calls interest rescheduling a debt equity swap applied to interest payments rather than to the principal

a note on short term intersectoral factor immobility abstract the dynamic trade literature has identified two important aspects of the adjustment process to real shocks contributed to short term intersectoral factor immobilities real income rises over time as the production factors reallocate while the presence of nontradeable goods leads to a dynamic relative price effect while these effects are usually studied separately in the literature this paper presents a simple multi period model with optimizing agents in which both effects operate simultaneously as an illustration of the model the current account response to a favorable endowment shock is studied the two effects have an opposite impact on the direction of the current account response the relationship between model parameters and the response to the shock is studied

energy and resource allocation a dynamic model of the dutch disease it is well known that a domestic resource discovery gives rise to wealth effects that cause a squeeze of the tradeable good sector of an open economy the decline of the manufacturing sector following an energy discovery has been termed the dutch disease and has been investigated in many recent studies our model extends the principally static analyses to date by allowing for 1 short run capital specificity and long run capital mobility 2 international capital flows and 3 far sighted intertemporal optimizing behaviour by households and firms the model is solved by numerical simulation

monetary policy exchange rates and investment in a keynesian economy abstract this paper embeds in an otherwise conventional macroeconomic model the assumption of rational investment decisions in a world in which investment goods can be imported expansionary monetary policy will lead to a reduction in domestic investment if i the share of imports in total investment expenditure is high enough and ii keynesian nominal price rigidities vanish slowly enough expansionary fiscal policy tends to crowd in domestic investment

optimal capital accumulation and the allocation of investment between traded and nontraded sectors in oil producing countries how should oil exporting countries allocate revenues from the production of oil over capital accumulation and consumption how should investment be allocated over traded and nontraded sectors most oil exporting countries are confronted with the problem of maintaining or developing a nonoil traded goods sector because higher oil revenues lead to a high real exchange rate thereby pulling resources into the nontraded sector the so called dutch disease the optimal savings response and investment allocation to temporary and permanent increases in oil revenues are derived in this paper

using regional variation in wages to measure the effects of the federal minimum wage the imposition of a national minimum wage standard provides a natural experiment in which the treatment effect varies across states depending on the fraction of workers initially earning less than the new minimum the author exploits this fact to evaluate the effect of the april 1990 increase in the federal minimum wage on teenagers wages employment and school enrollment comparisons of grouped and individual state data confirm that the rise in the minimum wage increased teenagers wages there is no evidence of corresponding losses in teenage employment or changes in teenage school enrollment

reducing binge drinking the effect of a ban on late night off premise alcohol sales on alcohol related hospital stays in germany abstract excessive alcohol consumption among young people is a major public health concern on march 1 2010 the german state of baden wurttemberg banned the sale of alcoholic beverages between 10 pm and 5 am at off premise outlets e g gas stations kiosks supermarkets we use rich monthly administrative data from a 70 random sample of all hospitalizations during the years 2007 2011 in germany in order to evaluate the short term impact of this policy on alcohol related hospitalizations applying difference in differences methods we find that the policy change reduces alcohol related hospitalizations among adolescents and young adults by about 7 there is also evidence of a decrease in the number of hospitalizations due to violent assault as a result of the ban

employment effects of minimum and subminimum wages panel data on state minimum wage laws using panel data on state minimum wage laws and economic conditions for the years 1973 89 the authors reevaluate existing evidence on the effects of a minimum wage on employment their estimates indicate that a 10 increase in the minimum wage causes a decline of 1 2 in employment among teenagers and a decline of 1 5 2 in employment for young adults similar to the ranges suggested by earlier time series studies the authors also find evidence that youth subminimum wage provisions enacted by state legislatures moderate the disemployment effects of minimum wages on teenagers

capital goods imports the real exchange rate and the current account conventional aggregate models of open economies typically rule out trade in capital goods but capital goods account for a major share of the world trade in 1990 they represented more than 40 percent of u s merchandise exports and more than 30 percent of its imports in the same year capital goods imports represented an average of roughly 30 of total imports for 82 industrial and developing countries and almost 9 percent of their gdp this report shows that the presence of imported capital goods greatly changes the short and long run effects of macoreconomic policies and external shocks on key macroeconomic variables using a rational expectations aggregate model with intertemporally optimizing agents and with trade in both consumption and capital goods it finds that the long run equilibrium of the economy displays a negative relationship between the real exchange rate and real output that is a real appreciation is associated with an increase in long run output and the capital stock with investment subject to adjustment costs the response to unanticipated permanent disturbances involves a changing real exchange rate and a non zero current account the author analyzes the macroeconomic consequences of changes in fiscal policy and of transfers of wealth from abroad he show that both have well defined long run effects on the capital stock and real output fiscal expansion in particular may have a long run crowding in effect on investment by constrast the impact of disturbances on the current account is ambiguous the author shows that it depends critically on the degree of intertemporal substitutability in both consumption and investment with the latter measured by the magnitude of investment adjustment costs

the effect of the tipped minimum wage on employees in the u s restaurant industry according to federal law in 2013 employers can take a credit of up to 5 12 for tips received by workers in satisfying the minimum wage requirement of 7 25 this article uses interstate variation in laws regarding tip credits and minimum wages to identify the effects of reducing or eliminating the tip credit on employment hours and earnings in the u s restaurant industry using data from the quarterly census of employment and wages and the current population survey we find that a reduction in the tip credit increases weekly earnings but reduces employment in the full service restaurant industry and for tipped workers the results are robust to controls for spatial heterogeneity in employment trends and are supported by a series of falsification tests

mexico s investment collapse debt or oil abstract this paper tests three explanations for mexico s investment collapse in the early 1980s the oil price decline the termination of capital inflows and debt overhang uncertainty effects using previously ignored investment data on private sector industries the data consistently point to the importance of the rise in the relative price of investment goods driven in large part by falling world oil prices but the data also allow a role for the termination of capital inflows however after controlling for these effects the paper finds little evidence for debt overhang effects heightened uncertainty or other commonly cited explanations in the literature jel f34

incentives and service quality in the restaurant industry the tipping service puzzle tipping is a significant economic activity tips in the us food industry alone amount to about 42 billion annually that was claimed to improve service quality and increase economic efficiency because it gives incentives to provide excellent service and therefore allows to avoid costly monitoring of workers the article suggests that this common wisdom might be wrong a simple model shows formally that tips can improve service only if they are sensitive enough to service quality empirical evidence suggests that tips are hardly affected by service quality nevertheless rankings of service quality by customers are very high the co existence of these two findings is denoted the tipping service puzzle and several possible explanations for it are offered

the real exchange rate the capital stock and fiscal policy abstract this paper studies the joint determination of aggregate supply the real exchange rate and the current account in response to changes in government spending in a model where there is no uncertainty in the aggregate but where individuals are uncertain about their lives duration international capital mobility fixes the steady state capital stock and aggregate supply in a small country whereas in a large country the steady state capital stock is endogenous an increase in government spending is more likely to generate a real exchange rate depreciation in a small country since the loss of wealth associated with cumulated current account deficits does not increase rest of the world spending in the case of a large country current account deficits are wealth transfers to the rest of the world and increase foreign spending thus the normal long run response is an increase in the relative price of domestic output

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

sectoral adjustment costs and real exchange rate dynamics in a two sector dependent economy abstract this paper develops a two sector model in which intersectoral capital movements involve adjustment costs expressed as capital lost in the transformation process these costs have important consequences for the dynamics of capital accumulation and particularly for real exchange rate dynamics persistent deviations of the real exchange rate from its equilibrium are derived and for plausible values of the adjustment cost parameters are consistent with the observed degree of real exchange rate persistence for low adjustment costs the dynamics are qualitatively similar to those of the standard heckscher ohlin technology for high adjustment costs the model converges to the specific factors model thus our framework includes these two standard models as polar extremes

current account dynamics and the terms of trade harberger laursen metzler two generations later this is a study of the current account dynamics resulting from the savings and investment dynamics in a small open economy which is subject to exogenous changes in its terms of trade and in world interest rates anticipated and unanticipated as well as temporary and permanent terms of trade changes have very different effects there is however a general tendency towards cycles in both savings and investment which gives rise to cycles in the current account it is shown that the classic harberger laursen metzler effect on saving of a terms of trade deterioration can have any sign for plausible parameter values both for temporary and permanent disturbances

income effects of adjustment to a terms of trade disturbance and the demand for adjustment finance abstract this paper shows that when economic adjustment is costly and therefore takes place gradually it is optimal to seek external finance in response to permanent as well as transitory shocks while at the same time adjusting to the disturbance sluggish adjustment also creates an asymmetric relationship between permanent changes in the terms of trade and optimal foreign borrowing that is while a permanent deterioration in the terms of trade generates a demand for foreign loans so would an improvement the paper presents suggestive evidence that the effects may be empirically significant though they arise from effects that are technically second order of magnitude

mexican investment after the tequila crisis basic economics confidence effects or market imperfections abstract this study provides an empirical investigation of the determinants of the growth of investment in mexico especially after the tequila crisis the paper uses the generalized method of moments estimator to determine if investment can be explained with a standard investment function the model predicts well the recovery of investment the tradable sector has an accelerator effect that exceeds that of the non tradable sector domestic real interest rates and real exchange rate volatility are also significant results support the hypothesis of a confidence effect during the 1982 1983 crisis but not during the tequila crisis there is also evidence of credit rationing

deterioration of the terms of trade and capital accumulation a reexamination of the laursen metzler effect abstract this paper analyzes the effect of both a permanent and a temporary deterioration in the terms of trade on a small open economy the model based on intertemporal optimization emphasizes the labor leisure choice and the role of capital accumulation the transitional dynamics is shown to depend upon the long run response of the capital stock to the terms of trade shock this consists of a negative substitution effect together with a positive income effect whether or not the laursen metzler effect holds depends upon whether the income effect dominates the substitution effect

terms of trade shocks and optimal investment another look at the laursen metzler effect conventional analyses of the effect of terms of trade shocks provide a misleading view of their impact on investment and the current account because capital goods imports are excluded from the analytical framework the author argues that such an exclusion is both arbitrary and unrealistic the author reexamines the consequences of permanent and transitory changes in terms of trade in a rational expectations model of a small open economy with intertemporally optimizing agents and with trade in both consumption and capital goods in this framework the responses to a permanent terms of trade improvement in unambiguous the long run capital stock and thus investment must rise and the current account must deteriorate exactly the opposite of the laursen metzler effect a transitory improvement in the terms of trade raises saving but has an uncertain effect on investment so the impact on the current account is generally ambiguous and is shown to depend on three factors the import contents on consumption and investment the duration of the windfall and the degree of intertemporal substitutability in both consumption and investment

did the debt crisis cause the investment crisis there is now a large literature that attributes the investment decline in heavily indebted countries to the effects of the international debt crisis which began in 1982 however these countries also faced falling export prices and high world real interest rates in the early 1980s and these shocks could have directly caused investment to decline one way to test for debt effects is to see whether equations without any debt related information can nevertheless forecast the investment declines that these countries experienced this paper shows that such equations can forecast investment in many indebted countries and thus casts doubt on many debt related explanations for the investment declines

sovereign debt repurchases no cure for overhang troubled debtor countries do not gain by repurchasing external bank debt at market discount even if a buyback would stimulate investment by relieving debt overhang the reason is that buybacks allow creditors to reap more than 100 percent of any efficiency gains that might result from increased investment we show that open market buybacks provide a benchmark for evaluating more complex negotiated buyback deals by comparing any given deal with a hypothetical market buyback of the same size one can derive upper and lower bounds on the gain to the country we apply our model to the 1990 mexican debt deal

population ageing and pension reform in a small open economy with non traded goods in this paper we study the implications of population ageing in an economy with a sizeable non traded goods sector to this effect a highly stylized micro founded macro model is constructed in which the age structure of the population plays a non trivial role the model distinguishes separate birth and death probabilities thus allowing for net population change allows for age dependent labour productivity thus mimicing life cycle saving and includes a rudimentary pension system thus allowing for intergenerational redistribution the model is used to analytically study demographic and pension shocks

profits markups and entry fiscal policy in an open economy in this paper we develop a general model of an imperfectly competitive small open economy there is a traded and non traded sector whose outputs are combined in order to produce a single final good that can be either consumed or invested we make general assumptions about preferences and technology and analyze the impact of fiscal policy on the economy we find that the fiscal multiplier is between zero and one and provide sufficient conditions for it to be increasing in the degree of imperfect competition we also are able to compare the multiplier under free entry and with a fixed number of firms and welfare a simple graphical representation of the model is developed

combat exposure cigarette consumption and substance use this study estimates the relationship between combat exposure and several risky health behaviors cigarette consumption binge drinking and drug use we find that the u s active duty military personnel deployed to combat zones with enemy firefight are more likely to subsequently smoke cigarettes consume alcohol and use illicit drugs than their counterparts deployed to noncombat operations our results suggest that the mental health effects of combat can explain up to two thirds of the estimated association between combat exposure and risky health behaviors jel h56 i12

the macroeconomic consequences of remittances abstract this paper analyzes the dynamic absorption of remittances at the macroeconomic level contrasting two possible effects on economic activity depending on whether these accrue to hand to mouth wage earners or credit constrained entrepreneurs using an open economy dsge model with heterogeneous households we show that the effects of remittances are inherently contractionary if they accrue to the first group and expansionary when they accrue to the second group calibrating the model to the philippines using both aggregate data as well as micro evidence from the family income and expenditure survey fies we show that accounting for both binding credit constraints and the internal distribution of remittances improves the model s fit to the data welfare gains result when the distribution of remittances is skewed towards entrepreneurs

factor intensities and factor substitution in general equilibrium abstract this article examines how factor intensity rankings between industries and the economy wide asymmetry in the degree of factor substitution combine to influence the manner in which changes in relative commodity prices affect the factoral distribution of income the reciprocal influence of factor endowment changes on the composition of outputs is also discussed the analysis is undertaken in a general three factor two commodity framework the minimal sized model that allows both influences to affect factor prices and admits of the possibility of complementarity between factors factors which are good substitutes find their returns behave somewhat similarly when commodity prices change while factors which are complements experience strongly asymmetrical fortunes a crucial role is played by a comparison of the share of the middle factor in each sector

the growth and welfare consequences of differential tariffs this paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time particular attention is devoted to the welfare aspects highlighting the cost of the intertemporal distortions produced by protective trade policies several specific welfare propositions are obtained first tariff protection is shown to create short run benefits but long run costs in welfare second the second best policy for the two tariffs is characterized finally several propositions summarizing the implications of our analysis for tariff reform are derived

welfare gains from international risksharing abstract this paper uses consumption data to compute yet unexploited welfare gains that can be achieved through risksharing among twenty oecd countries there is both aggregate national consumption risk and nondiversifiable individual specific risk countries engage in an optimal risksharing arrangement to pool risk associated with the aggregate consumption endowment streams welfare gains are associated with reduced consumption variability and with the international pricing of the consumption streams of individual countries the paper considers the standard vnm time additive preferences as well as nonexpected utility and habit formation preferences large unexploited gains are found under all sets of preferences leading to an international risksharing puzzle

demand changes and real exchange rate dynamics in a finite horizon model with sectoral adjustment costs author affiliation hung ju chen department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail hjc ntu edu tw corresponding author chen min hsu department of economics national taiwan university 21 hsu chow road taipei 100 taiwan e mail chenmin ntu edu tw acknowledgment we would like to acknowledge the financial support provided by the program for globalization studies at the institute for advanced studies in humanities national taiwan university grant 95r0064 ah03 03 we wish to express our sincere appreciation for helpful comments and suggestions provided by two anonymous referees the editor of the journal joshua aizenman been lon chen ming chia li tsunao okumura and elias sanidas as well as participants at the 2007 annual conference of the asia pacific economic association and the 2007 conference of korea and the world economy we also thank ke shaw lian for his assistance any errors within the work are our responsibility 1 introductionalthough the traditional macroeconomic models tend to explain economic fluctuations by focusing solely on supply shocks given that equilibrium is determined by both demand and supply it would seem obvious that changes in demand may also have important effects in terms of their contribution to economic oscillations changes in demand can easily occur particularly for those small open economies for example small open economies can be easily disturbed by external shocks such as terms of trade shocks through international trade 1 another example is the reduction in the mortality rate as a result of higher health investment both public and private and better healthcare during the economic development 2 for export orientated growth economies in particular such as those of hong kong and taiwan changes in either the terms of trade or the mortality rate can significantly influence economic performance impacting the real exchange rate investment output savings and the current account the phenomenon that life expectancy is steadily lengthening for most developing countries has led to the emergence of a growing number of studies on the impact of population aging 3 since an increase in life expectancy will change the expectation of lifetime utility it will directly affect households inter temporal decisions with regard to consumption and savings however previous studies tend to analyze the impact of mortality decline in a closed economy or in a small open economy with exogenous and constant factor prices 4in order to study the impact of mortality rate changes on the economic performance in an open economy we use the overlapping generations model with uncertain lifetime developed by yaari 1965 and blanchard 1985 to examine household savings behavior within this model agents live with a finite lifetime such that different types of agents simultaneously live in the economy 5 furthermore we extend the blanchard type model to a three good open economy composed of exportable importable and non traded goods to allow us to consider the dynamics of the real exchange rate when demand changes capital production and accumulation are also incorporated into the framework to facilitate an examination of the investment behavior of firms we assume that the economy uses both capital and labor to produce exportable goods and non traded goods while importable goods are imported from abroad capital is produced by the non traded sector and installation costs are incurred when capital is transported to the exportable sector 6 as indicated by morshed and turnovsky 2004 the inclusion of the sectoral adjustment costs of capital can generate persistent deviations from the long run equilibrium by the real exchange rate in response to demand changes 7 because the real exchange rate is playing a dual role of a non traded goods price and a capital price we are able to study the impact of population aging and terms of trade shocks on international capital flows in a small open economy with endogenous factor prices

dynamic effects of permanent and temporary tax policies in a q model of investment abstract this paper incorporates the tax policy analysis of hall and jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment this framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy it is shown that contrary to the conventional intertemporal substitution argument a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit the role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated

productivity shocks non traded goods and optimal capital accumulation this paper considers the interaction of saving and investment in determining the current account for a small open economy subjected to productivity shocks by emphasizing the distinction between traded and non traded goods the analysis highlights the crucial role of the real exchange rate in macroeconomic adjustment our results demonstrate the importance of intertemporal substitution for determining the response of investment to anticipated productivity disturbances we also show how the correlation of movements in saving and investment following an anticipated disturbance depends critically on relative sectoral factor intensities

the effect of the minimum wage on the fast food industry using a longitudinal survey of fast food restaurants in texas the authors examine the impact of recent increases in the federal minimum wage on a low wage labor market less than 5 of fast food restaurants were using the new youth subminimum wage in july august 1991 even though the vast majority paid a starting wage below the new hourly minimum wage immediately before it became effective although some restaurants increased wages beyond the level needed to comply with higher minimum wages in both 1990 and 1991 those federal minimum wage increases greatly compressed the distribution of starting wages in the texas fast food industry two findings at variance with conventional predictions are that 1 employment increased more in those firms likely to have been most affected by the 1991 minimum wage increase than in other firms and 2 price changes were unrelated to mandated wage changes

structural adjustment to a terms of trade disturbance the role of relative prices abstract this paper investigates the impact of a terms of trade disturbance on a small economy which responds gradually to changes in relative prices the key intertemporal link is as in dornbusch 1983 between the price of nontraded goods the real interest rate savings and the current account if the traded and nontraded goods are bad substitutes in consumption then an improvement in the terms of trade leads to a transitory current account surplus and conversely international capital mobility reduces the impact of a terms of trade disturbance on relative prices and also reduces the speed with which the economy adjusts to the disturbance

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

foreign debt instability an analysis of national saving and domestic investment responses to foreign debt accumulation in 28 developing countries abstract i specify and estimate a foreign debt model that exploits the balance of payments identity current account national saving domestic investment foreign debt can affect both saving and investment behavior in this model if an increase in foreigndebt reduces investment by more than it reduces saving or raises investment by less than it raises saving the current account will eventually be brought into a steady state equilibrium with a sustainable ratio of foreign debt to gnp in such case the debt crisis is more illusory than real for the country sample analyzed here however the buildup of government and government guaranteed foreign debt appears to have produced perverse private sector responses an increase in this type of foreign debt reduces saving by more than it reduces investment hence the current account deficit worsens over time as such foreign debt accumulates dynamic simulations identify only government policy that it raises national saving as an effective way of improving the current account the consequent real depreciation in the exchange rate may increase exporrts and reduce imports sufficiently to cause a current account surplus surprisingly export promotion policies alone seem unlikely to produce any substantial improvement in the current account

minimum wages and tipped servers tips allow restaurants to pay servers lower wages as more servers are hired each serves fewer meals and earns less in tips as a result restaurants must pay a higher wage this gives them monopsony power over wages over some range a higher minimum wage should increase employment empirically we found the full reverse c monopsony pattern of employment for restaurants with employment first going up and then down as the minimum wage is increased

short run marginal medical costs from booze and butts evidence from the states this article uses a panel data set of u s states over the 1980 to 2007 period to estimate the demands for medical care cigarettes and beer the estimation process generates own price income and cross price elasticities for all three goods implied per capita beer and cigarette consumption elasticities of per capita health care expenditures suggested by our baseline estimates are 0 83 and 0 14 respectively these results are robust to a number of specification tests simulations suggest that yearly marginal medical costs amount to approximately 12 per bottle and 27 cents per cigarette in the short run in 2012 dollars these results are likely to be driven by the much larger corresponding increases in the consumption of binge drinkers and heavy smokers

employment effects of two northwest minimum wage initiatives i introduction the impact of a minimum wage on employment has long been of interest to economists such as stigler 1946 because it provides a relatively direct test of a conventional theoretical prediction that a binding increase in the minimum wage should reduce employment among low skilled workers although this theoretical prediction has not gone unchallenged as in lester 1946 early empirical work summarized in brown gilroy and kohen 1983 confirmed theoretical predictions using aggregate time series data for young workers which indicated that a minimum wage has a small negative employment effect by 1990 there was general consensus in the profession that minimum wage laws reduced employment among teenage and low wage workers albeit by a small amount ehrenberg 1995 and others have argued that subsequent empirical evidence provides less confidence in both the conventional view that the minimum wage lowers teenage or low skilled employment and that neoclassical theory can account for the relationship between them for example card and krueger 1995 show in a 30 study meta analysis that past time series results are sensitive to the specification and suggest that when appropriately specified the minimum wage has had no significant effects on employment over the last 25 yr alternatively neumark and wascher 1998 find negative employment effects of the minimum wage consistent with structural change using time series data and specifications that do not suffer from the biases present in earlier work cross sectional studies as in currie and fallick 1996 burkhauser couch and wittenburg 2000 and neumark and wascher 2001 also find mixed evidence of employment effects on low wage workers due to the minimum wage thus traditional empirical assessments of the minimum wage yield mixed evidence on the employment impact of the minimum wage the natural experiment methodology was introduced as an alternative to the cross sectional and time series approaches and exploits both the time series wage variation before and after the treatment of a minimum wage increase and the cross sectional wage variation between the treatment state and a control state that did not experience a change in the minimum wage for example card and krueger 1994 analyzed employment growth in 410 fast food restaurants in new jersey and pennsylvania before and after the 1992 minimum wage increase in new jersey from 4 25 to 5 05 they find no evidence linking the increase in the minimum wage to reduced employment in fast food restaurants both when comparing new jersey with pennsylvania and when comparing impacted versus nonimpacted restaurants in new jersey neumark and wascher 2000 reexamine the impact of the 1992 new jersey minimum wage increase using payroll data for hours worked by fast food employees and bureau of labor statistics bls eating and drinking employment data and find that the minimum wage significantly reduced employment in new jersey versus pennsylvania thus even studies that apply similar natural experiment techniques and data for a given minimum wage treatment as in katz and krueger 1992 deere murphy and welch 1995 kim and taylor 1995 and card and krueger 2000 can yield different conclusions regarding its employment effect our empirical analysis exploits a unique natural experiment initiated by oregon and washington voter initiatives that raised the minimum wage over three successive years 1997 1999 in oregon and 1999 2001 in washington by approximately 37 in both states following prior work we focus on the eating and drinking industry sic 58 which is a low wage industry that has been extensively studied in prior work due to an expectation of a binding minimum wage bls wage data available between 1997 and 2001 indicate that the successive minimum wage increases become increasingly binding for most but not all eating and drinking jobs at the lower end of the wage distribution

financing vs forgiving a debt overhang abstract this paper examines the tradeoffs facing creditors of a country whose debt is large enough that the country cannot attract voluntary new lending if the country is unable to meet its debt service requirements out of current income the creditors have two choices they can finance the country lending at an expected loss in the hope that the country will eventually be able to repay its debt after all or they can forgive reducing the debt level to one that the country can repay the post 1983 debt strategy of the imf and the us has relied on financing but many current calls for debt reform call for forgiveness instead the paper shows that the choice between financing and forgiveness represents a tradeoff financing gives the creditors an option value if the country turns out to do relatively well creditors will not have written down their claims unnecessarily however the burden of debt distorts the country s incentives since the benefits of good performance go largely to creditors rather than itself the paper also shows that the tradeoff itself can be improved if both financing and forgiveness are made contingent on states of nature that the country cannot affect such as oil prices world interest rates etc

adjustment and structural change under supply shocks the resource boom effect and the input price effect of raw material price changes are analyzed within a two period two sector plus resource industry open economy framework diagrammatic exposition is used to study the dutch disease and in particular the distinction between the short term wealth effects causing a real appreciation and a movement of variable factors from tradeable to nontradeable industries and the long run effects on total investment its sectoral allocation and its finance by foreign borrowing the framework further enables analysis of the different allocational effects of temporary versus permanent raw material price increases when the two sectors differ in material use the effects of changes in the world interest rate on factor allocation and foreign borrowing and the allocational effects of government intervention in the case of temporary real wage rigidity are also discussed

do people tip because of psychological or strategic motivations an empirical analysis of restaurant tipping one of the most interesting and central questions about tipping is why people tip the two major potential reasons are strategic behaviour aimed to ensure good future service and social psychological motivations data on tipping behaviour suggests that there is no positive effect of patronage frequency on the sensitivity of tips to service quality this implies that people tip only because of social and psychological motivations and not because of strategic reasons and future service considerations

fiscal policy and the real exchange rate abstract this paper reconsiders some conventional notions about fiscal policy under flexible exchange rates using an extended version of the dornbusch overshooting model the extension allows for a long run link between output and the real exchange rate unanticipated permanent fiscal policy affects both current and long run output while the long run effect is always in the expected direction it is possible that the current effect is perverse both fiscal and monetary policy must cause either nominal exchange rate overshooting or perverse domestic interest rate effects the results suggest that real shocks are a potential source of high exchange rate variability

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

the relation between firm growth and q with multiple capital goods theory and evidence from panel data on japanese firms we derive from a model of investment with multiple capital goods a one to one relation between the growth rate of the capital aggregate and the stock market based q we estimate the growth q relation using a panel of japanese manufacturing firms taking into account the endogeneity of q identification is achieved by combining the theoretical structure of the q model and an assumed serial correlation structure of the technology shock which is the error term in the growth q equation for early years of our sample cash flow has significant explanatory power over and above q the significance of cash flow disappears for more recent years for the heavy industry when japanese capital markets was liberalized the estimated q coefficient implies that the adjustment cost is less than a half of gross profits net of the adjustment cost

alcohol availability and crime lessons from liberalized weekend sales restrictions in february 2000 the swedish state monopoly alcohol retail company launched a largescale experiment in which all stores in selected counties were allowed to keep open onsaturdays we assess the ef

do tips increase workers income this paper constructs a model of service providers who compete in service and labor markets simultaneously to analyze the effects of tipping on hourly wages and total tip inclusive hourly worker compensation an increase in the tipping rate reduces hourly wages total worker compensation increases at different rates depending on the market structure market coverage and employment level with the exception of price taking competitive service providers where the tip inclusive hourly income declines with the tipping rate the paper develops an index of effective tipping that measures the net percentage change in total hourly worker compensation associated with each tipping rate this paper was accepted by john list behavioral economics

macroeconomic adjustment under alternative lending arrangements abstract this paper investigates macroeconomic adjustment for a small open economy under alternative lending arrangements the arrangements considered all have the common feature of a link between international lending rates and measures of creditworthiness by employing an intertemporal maximizing model of a small open economy the paper analyzes adjustment paths for the stock of international debt the real exchange rate and consumption in response to economic shocks the paper finds that arrangements linking interest rates on lending to the outstanding stock of debt are consistent with a stable adjustment trajectory whereas arrangements linking interest rates to performance on the trade balance are likely to be unstable

fiscal policy and foreign debt abstract this paper shows that an expansionary fiscal policy may have the consequence of either increasing or decreasing the level of foreign debt in the context of a two sector small economy that produces traded and nontraded goods the long run effect of a fiscal expansion depends on a measure of the relative capital intensity of the two productive sectors in addition to the composition of private and public spending the short run effect of a transitory fiscal expansion is critically influenced by the extent to which investment reacts to current and prospective profits

endogenizing labor leisure choice investment and the relative price of non traded goods abstract in a dutch disease model we endogenize the capital stock and labor leisure choice offering more flexibility on the supply side than previous studies which endogenize the capital stock only our conclusions differ significantly from earlier models in that even when the non traded goods sector is capital intensive the capital stock in the new steady state does not necessarily increase

external asymmetries in the euro area and the role of foreign direct investment soon after the introduction of the common currency a divide emerged between two groups in the euro area one comprised of the north european countries achieving external surpluses and the other of the south european countries with large external deficits this paper shows that different patterns of foreign direct investment fdi inflows across the euro area countries contributed to this divergence our theoretical framework shows that if the economy is relatively capital intensive in the production of traded non traded output fdi will be channeled in greater proportions to the traded non traded sector thus improving deteriorating the trade balance focusing on ten euro area countries over the period 1980 2009 we establish a positive negative long run effect of fdi inflows on the trade balance in the north south in the north the positive effect stems from the traded sector fdi inflows that were significantly higher in comparison to the south both before and after the emu in contrast in the south the increased fdi inflows in the post emu era were dominated by investments in the non traded sector when industry level data are employed a positive negative long run effect of manufacturing non manufacturing fdi inflows on the trade balance in the north south is further established

analysis of a two sector model of endogenous growth with capital income taxation this paper addresses a two sector model of endogenous growth in which one sector produces final goods and the other produces new human capital both sectors employ human as well as physical capital under constant returns to scale technologies unlike existing studies of this type of model that have mostly concentrated on steady state analysis or on numerical simulations of calibrated models this paper presents an analytical argument concerning the dynamic behavior of the growth path and the effects of capital income taxation in and out of the steady growth equilibrium it is demonstrated that the dynamic behavior of the economy and some policy effects depend heavily upon the magnitude of factor intensity used in each production sector copyright 1996 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association