current account dynamics and expected future budget deficits some international evidence abstract this paper addresses the question of whether current account deficits are linked to expected future budget deficits we use an optimizing general equilibrium model to show the theoretical relationship between the two deficits we then estimate the econometric equation based on the forward looking expectations model for oecd countries thus extending earlier research based on more conventional analysis from the empirical investigation evidence is obtained that strongly supports the view that current account deficits have been associated with expected future budget deficits during the 1970 1997 period

real estate agents in ghana a suitable case for regulation obeng odoom f real estate agents in ghana a suitable case for regulation regional studies this paper uses a qualitative approach to examine whether regulation would improve the effectiveness of the ghanaian estate agency market interviews with landlords estate agents clients and officials of the rent control department suggest that 1 most so called problems with unlicensed agents are actually landlord related problems 2 there is a camaraderie relationship between unlicensed agents and their clients which effectively provides a licence against fraud and 3 regulation would exacerbate unemployment and increase agency fees for these reasons regulation in general may not be in the public interest alternative ways of improving effectiveness in the ghanaian estate agency market are recommended obeng odoom f les agents immobiliers au ghana est ce qu il y a de bonnes raisons pour les reguler regional studies cet article emploie une facon qualitative afin d examiner si oui ou non la re

liberalization of capital movements and of the domestic financial system this paper analyzes the dynamic impact of a joint liberalization of capital movements and of the domestic financial sector both a simultaneous and a sequential liberalization are examined in an overlapping generations model with a q theory of investment a liberalization generally leads to an initial period of capital inflows followed by capital outflows it also increases investment and causes an overshooting in share prices furthermore the interest rate level before a liberalization will usually not indicate the direction of net capital flows copyright 1992 by the london school of economics and political science

habits costly investment and current account dynamics abstract we analyze the current account dynamics for a small country model with habit forming consumers and costly investment the model has several empirical and policy implications i it is consistent with stylized facts regarding the effects of productivity shocks and increases in fiscal spending and regarding the savings investment co movement ii the long run effect of a temporary shock on net foreign assets is often opposite to that of a permanent shock iii under strong habit persistence the welfare dynamics are sluggish so that a beneficial tax financed fiscal policy may have a harmful hangover effect on welfare

interpreting comovements in the trade balance and the terms of trade abstract i examine the relation between the trade balance and the terms of trade in a two country dynamic stochastic exchange economy with complete markets along an equilibrium path for this economy the relation is governed by the substitutability between foreign and domestic goods i find in contrast to non stochastic analyses of the harberger laursen metzler effect that a positive association does not require persistent shocks or non constant rates of time preference this contrast highlights the role played by the structure of asset markets complete and otherwise in generating equilibrium comovements

a simple model of sectoral adjustment despite the significance of limited labour mobility across sectors few attempts have been made to produce dynamic models of sectoral adjustment which are consistent with perfect foresight and yet flexible enough to allow for a variety of dynamic experiments this paper proposes a simple perfect foresight model of two sector economies in which aggregate sectoral movement of labour takes place through the process of demographic change the model is tractable enough that one can easily examine the effects of intertemporally complicated relative price shocks both exogenous and endogenous under a variety of assumptions on technology

theory based measurement of the saving investment correlation with an application to norway i introduction the findings of feldstein and horioka 19c 0 have led to numerous theoretical and empirical papers on the close correlation between domestic saving and domestic investment and its supposed implications for international capital mobility feldstein and horioka 1980 317 state that with perfect world capital mobility there should be no relation between domestic saving and domestic investment saving in each country responds to the worldwide opportunities for investment while investment in that country is financed by the worldwide pool of capital however in a cross country regression using period averaged saving and investment figures for sixteen oecd countries they obtain a significant coefficient close to unity and conclude that capital is rather immobile this result constitutes the feldstein horicka puzzle as it contradicts the widely held perception that capital is highly mobile across countries subsequent empirical work confirmed the close correlation though its implication for the degree of capital mobility is a moot point see tesar 1991 this paper contributes to the understanding of the puzzle on both theoretical and empirical counts first we present a theory based econometric specification for estimating saving investment correlations second we discuss the possible usefulness of the estimates for detecting capital mobility third we provide empirical results for the interesting case of norway we argue that feldstein and horioka s basic idea that the saving investment correlation contains information about international capital mobility is correct but that the interpretation of the estimated correlation value must be altered substantially in view of the results derived from modern macroeconomic models our research is motivated by the observation that various regression equations have been used to measure the saving investment correlation but that none of them has a firm theoretical foundation this in turn raises questions about the interpretation and comparability of the existing empirical results we propose an econometric specification that is founded in intertemporal general equilibrium models in which agents optimize under intertemporal budget constraints we show that time series studies have estimated misspecified equations and that cross section studies are seriously flawed because they neglect dynamics as a result the puzzle may turn out to be an artifact caused by measurement errors however the significance of reliable measurement of saving investment correlations goes beyond solving the feldstein horioka puzzle because they represent stylized facts open economy models should explain norway serves as a suitable example to cement our methodological arguments with empirical evidence thanks to its system of capital controls which were phased out during the 1970s and 1980s the oil discoveries and its small size we demonstrate that the failure to take structural breaks into account seriously distorts the picture making a strong case for careful diagnostic testing our main empirical result is that the feldstein horioka puzzle does not exist for norway the paper proceeds as follows in section ii we briefly summarize the state of the discussion regarding feldstein and horioka s findings in section iii we derive our specification from the theory compare it to the previous specifications and discuss how to make inferences about capital mobility in section iv we sketch major developments in the post war norwegian economy notably the abolition of capital controls and the emergence of the important oil sector section v presents the empirical results section vi summarizes and concludes ii the feldstein horioka puzzle many authors have confirmed feldstein and horioka s result of a high and stable correlation of saving and investment for oecd countries both in cross country studies and in time series studies

brokerage pricing under competition abstract this paper reexamines the popular assumption that real estate commissions are fixed over time it shows how the competitively determined commission rate responds to changes in the housing market and broker cost conditions one testable implication is that competition promotes counter cyclical changes in the commission rate the empirical analysis of commission rate determinants using data covering an entire urban housing market through its downturn and expansion phases reveals the counter cyclical movement in commission rates predicted by the competitive model

lobbying as legislative subsidy professional lobbyists are among the most experienced knowledgeable and strategic actors one can find in the everyday practice of politics nonetheless their behavioral patterns often appear anomalous when viewed in the light of existing theories we revisit these anomalies in search of an alternative theory we model lobbying not as exchange vote buying or persuasion informative signaling but as a form of legislative subsidy a matching grant of policy information political intelligence and legislative labor to the enterprises of strategically selected legislators the proximate political objective of this strategy is not to change legislators minds but to assist natural allies in achieving their own coincident objectives the theory is simple in form realistic in its principal assumptions and counterintuitive in its main implications empirically the model renders otherwise anomalous regularities comprehensible and predictable in a later section we briefly bring preferences back in examining the important but relatively uncommon conditions under which preference centered lobbying should occur

investment tax credit in an open economy abstract this paper contrasts the effects of a permanent and temporary investment tax credit itc in an open economy in both cases an itc will initially stimulate investment while reducing employment and output and generating a current account deficit if the itc is permanent the accumulation of capital leads to a higher equilibrium capital stock higher employment and output and a reduction in the economy s stock of net credit if the itc is temporary after its removal the economy eventually moves to a new steady state equilibrium having a lower permanent capital stock and employment together with a higher stock of net credit

what lobbying ethics and what for the case of french lobbying consulting firms conversely to the united states lobbying consulting in france is a relatively recent activity and is perceived negatively by a majority of the population influencing public decision making is certainly a sensitive occupation at both managerial and societal levels this is why ethics applied to business can play a central role while establishing the practice of lobbying in france this paper examines the issues and the practices of ethics in lobbying consulting the field for this exploratory study is a lobbying consultancy firm based in france our research is developed through a 3 month participant observation and complemented with secondary data on the lobbying profession in france the results of this research are developed along two lines 1 the practice of ethics in lobbying consultancy firms reveals its limits as well as a framework worth developing the players and the represented client topics are potential dangers for ethical lobbying firms this intervention research has nevertheless allowed us to observe the emergence of an effective regulation approach the ethics of exemplarity as potentially illustrated by a representative actor of the french lobbying consulting profession 2 the stakes of ethics are both internal and external to lobbying consulting professionals in france internally ethics act as a structuring element enabling this profession to establish itself with practices and deontological codes externally it clarifies the relationship between lobbying consultants and their major stakeholders including customers government and the civil society

rent seeking behaviour and its economic costs in urban land transactions in accra ghana the existing body of knowledge attributes to informal land transactions in sub saharan african cities observed problems in city neighbourhoods substantial resources often backed by donor agencies are therefore being spent in revamping bureaux and governmental bodies in a bid to solve the problems this paper examines the economic impacts of this aspect of market intervention employing insights from rent seeking theory it estimates costs brought to bear on agents by government agencies involvement in the urban land market of accra ghana the sum of these wasteful diversions of resources is found to explain a great deal of the haphazard developments that have come to characterise many neighbourhoods in the city market led regulation emerges as the needed focus of future land policy and management strategy towards this the paper calls for the removal of existing unwarranted market interventions and the reorganisation of responsible bureaux in ways that would induce them to operate efficiently

income effect wealth effect and the terms of trade with finite horizons the two sector model is incorporated into blanchard s olg framework the total effect of a terms of trade deterioration on aggregate savings is decomposed into an income effect and a wealth effect the income effect comes about because a terms of trade deterioration changes the value of the gdp its sign depends on the value of the rate of time preference relative to the interest rate the wealth effect comes about because financial wealth is insurable and so income from capital is discounted at a lower rate than labor income its sign depends on the relative factor intensities of the goods

the current account in the macroeconomic adjustment process macroeconomic adjustments to changes in the economic environment are to a large extent conditioned by the intertemporal choices of economic agents when agents face an intertemporal budget constraint a decision to alter current indebtedness implies changes in future consumption possibilities and will be based on expectations of the entire future path of key variables and not only current variables a formal model to show how today s current account is a function of both current and future economic variables is presented the determination of the current account under classical assumptions of market clearing and continuous full employment is emphasized

on exchange rate stabilization abstract this paper extends calvo s 1986 and obstfeld s 1985 analyses of stabilization policies through predetermined exchange rates in a few directions the graphic and analytical techniques used here make it possible to perform a variety of policy experiments under a general utility function and in the presence of a consumer durable good or under time nonseparable preferences it also shows that the dynamic process of exchange rate stabilization exhibits hysteresis effects that is the steady state behavior of the economy depends on the initial condition and a temporary stabilization policy has a permanent effect on the economy

habits and durability in consumption and the dynamics of the current account abstract a model in which consumption exhibits durability and habits develop over the flow of services provided by them is used to study current account dynamics durability leads to adjacent substitutability in consumption while habits are assumed to lead to adjacent complementarity the adjustment of the current account may be non monotonic if habit effects are dominant in the short run and durability effects in the long run then after a terms of trade deterioration we will have a current account deficit followed by a surplus the j curve in the opposite case a surplus will be followed by a deficit 1998 elsevier science b v

terms of trade shock and the current account in a monetary economy over the period 1973 81 the terms of trade of non oil developing countries deteriorated at about 2 per cent per annum this was accompanied by an increase in current account deficits in excess of 3 per cent above what they had been in the previous decade see khan and knight 1983 for a discussion these authors find the terms of trade shocks the major cause of the deficits this has led to a renewal of interest in the effects of changes in terms of trade for a small open economy the conventional wisdom first put forward by laursen and metzler 1950 and harberger 1950 emphasized the fact that a terms of trade worsening lowered real income which in turn lowered savings and worsened the current account the laursen metzler effect the recent reappraisal was initiated by obstfeld 1982 he showed in an infinite horizon optimizing framework with perfect capital mobilizing that if the discount rate was a function of the level of utility surpluses and not deficits accompany an unanticipated and permanent terms of trade worsening the long run level of the discount rate is tied down by the given world rate of interest this in turn fixes the long run level of utility the terms of trade shock tends to lower the level of utility and agents save to offset this across steady states there is only a substitution effect on the other hand if the discount rate is fixed and equal to the world interest rate then the economy adjusts to the terms of trade shock by immediately lowering real expenditure by the same amount as the decline in real income so that the current account is always balanced svensson and razin 1983 showed that in a two period framework this does not necessarily happen for the infinite horizon case they showed that if preferences were separable over time and the discount rate was increasing in instantaneous utility then obstfeld s results were indeed obtained in a two period overlapping generations model the results could be modified owing to the fact that human wealth and non human wealth are not perfect substitutes and a terms of trade shock affects these differently see matsuyama 1988 for a discussion but it is still true that an unanticipated permanent terms of trade shock has a one shot effect on the current account unless some ad hoc costs of adjustment are introduced see e g persson and svensson 1985 and matsuyama 1988 the uncertain lifetime model see e g frenkel and razin 1988 and matsuyama 1987 generates non trivial

aggregate spending and the terms of trade is there a laursen metzler effect this paper investigates the spending and current account effects of terms of trade shifts in a model where households maximize utility over an infinite planning period in the framework developed here an economy specialized in production must experience a fall in aggregate spending and a current surplus as a result of an unanticipated permanent worsening in its terms of trade the paper s model thus provides a setting in which the current account deficit predicted by laursen and metzier harberger and others fails to materialize

current accounts in the long run and the intertemporal approach a panel data investigation this paper is a theory based study of the long run determinants of the current account ca for many oecd economies after the second world war there has been more long run variation in the ca data than is emphasised by a permanent income version of the intertemporal approach that is based on consumption smoothing and that allows only transitory ca imbalances a theoretical model of the ca is developed based on the broader variant of the intertemporal approach that stresses the long term component of the ca we find that some key theoretical predictions hold while others fail validating the approach but also pointing to its limitations

imported input price and the current account in an optimizing model without capital mobility abstract this paper analyses the effect of an oil price increase in an economy which cannot borrow in the international capital markets current account surpluses and deficits are matched by reserve changes at the central bank it is shown in an optimizing setup that an unanticipated oil price increase worsens the current account and lowers the real interest rate contrary to models which assume perfect capital markets

residential investment and the current account abstract residential investment is an important driving force in the current account this paper first builds the model to show that residential investment for the empirically relevant case where demand for housing services has nonzero income elasticity is fundamentally different from nonresidential investment owing to this income effect the dynamics of housing are subject to the additional integral constraint as well as the standard stock adjustment and euler equations the model is used to examine the effects of changes in government purchases on the tradeable good housing subsidies and productivity shocks on the current account

managing the risks of corporate political donations a utilitarian perspective this paper applies a utilitarian analysis to corporate political donations unlike the more common rights based analyses it is argued that the optimal policy is the one that best satisfies society s rational preferences concerning donor influence adequate financing donor pressure and the cost of maintaining and enforcing the democratic system this analysis suggests that a ban is best if it would be generally observed and sufficient financing from other sources is available otherwise a donation cap is a better option further lobbyists should be banned from donating small gifts and drafting bills for candidates the impact of disclosure and other risk management mechanisms are also considered

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

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

the impact of terms of trade shocks on a small open economy a stochastic analysis abstract the impact of a change in the terms of trade on the economic performance of a small economy is analyzed both the effects of unanticipated shocks and changes in the mean and variance of the probability distributions generating these disturbances are discussed in all cases the key element determining the adjustment is the effect on the rate of growth of real wealth to which in equilibrium all other real quantities are directly tied conditions for the harberger laursen metzler effect to hold are considered the impact of these changes on economic welfare as measured by expected discounted utility of the representative agent is also addressed jel f41 f43

eliminating interest taxation and tariffs the underpinnings for recent canadian policy blanchard s 1985 formulation of the overlapping generations model and the so cial welfare function advocated by calvo and obstfeld 1988 are used to analyse interest taxation and tariffs in a small open economy when the revenue lost from the elimination of these taxes is replaced by raising the tax on labour as in recent canadian experience a low social discount rate is required for the model to support lower interest income taxes while a high discount rate is needed to support the elimination of tariffs we illustrate the empirical importance of this simultaneous need for both a high and a low discount rate eliminer l imposition des revenus d interet et les droits de douane les soubassements de la politique canadienne re cente les auteurs utilisent la formulation blanchard du modele des generations qui se chevauchent et la fonction de bien etre social de calvo et obstfeld pour analyser les effets de l imposition des revenus d interet et des droits de douane dans une petite economie ouverte quand la perte de revenus attribuable a l elimination de ces taxes est comblee par un imp6t sur le travail comme ce fut le cas au canada il faut postuler un taux d escompte social bas pour qu on puisse endosser une politique de reduction de l imposition des revenus d interet alors qu il faut postuler un taux d escompte social eleve pour endosser une politique de reduction des droits de douane les auteurs montrent l importance empirique de cette necessite d avoir un taux d escompte a la fois bas et haut

climate policy under factor mobility a differentiated case for capital taxation abstract in a general equilibrium model with two periods and a finite fossil resource i analyze the non cooperative climate policies of symmetric countries that are in competition for mobile factors of production capital and fossil energy the paper shows that countries that want to slow down climate change but are also concerned about tax revenues from mobile tax bases have a rationale to supplement environmental taxes on fossil fuels with source based capital taxes or subsidies more specifically countries find it beneficial to subsidize capital in period one and tax it in period two the first period subsidy on capital facilitates a higher environmental tax by counteracting its adverse effects and increases national and global welfare in equilibrium by contrast the capital tax in period two induces inter and intratemporal distortions that lead to lower welfare the rate of resource extraction is inefficiently high in equilibrium no matter which tax portfolio is at the governments disposal furthermore unintended green paradox effects of demand side policies are shown to arise even in general equilibrium with factor mobility finally factor mobility does not necessarily lead to a higher rate of extraction and lower welfare compared to autarky

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

an ethical approach to lobbying activities of businesses in the united states this paper presents an ethical approach to the use of lobbying within the context of the relationships among u s organizations their lobbyists and government officials after providing a brief history of modern day lobbying activities lobbying is defined and described focusing on its role as a strategic marketing tool then ethical frameworks for understanding the impact of these practices on various external constituencies are delineated with an emphasis on the communitarian movement advanced by etzioni consistent with the call for informed advocacy by laczniak 1993 the paper closes with an examination of the ethics of specific lobbying activities

the association between trading recommendations and broker analysts earnings forecasts this study examines analyst forecast errors within the context of stock recommendations we predict positive forecast error i e optimism for buy recommendations and negative forecast error i e pessimism for sell recommendations we offer two explanations for this prediction 1 the unconscious tendency to process information in a manner that supports one s goal which we refer to as the objectivity illusion hypothesis and 2 the economic incentive to boost trade which we refer to as the trade boosting hypothesis the pattern of analyst forecast bias we predict i e optimism for buys and pessimism for sells is opposite in direction to that predicted by the management relations hypothesis a commonly cited hypothesis for analyst forecast bias we find broker analyst earnings forecast errors are significantly optimistic for buy recommendations and significantly pessimistic for sell

the harberger laursen metzler effect under capital market imperfections abstract this paper re examines the effects of a permanent terms of trade change on a dynamic small open economy facing an imperfect world capital market as studied in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 which assumes that the economy faces a downward sloping bond curve the novelty of the present paper is that a saddle path stable steady state comes into existence under the assumption that households subjective discount rate is a decreasing function of instantaneous utility the harberger laursen metzler hlm effect is shown to hold unambiguously i e an unanticipated permanent terms of trade deterioration leads to an increase in aggregate expenditure and a current account deficit this result is in stark contrast to those obtained in obstfeld 1982 aggregate spending and the terms of trade is there a laursen metzler effect quarterly journal of economics 97 251 270 and many other studies in the literature

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

some macroeconomic effects of nationalizing private sector foreign debt abstract in the recent debt crisis years many governments have adopted foreign debts of their domestic private sectors this paper uses a simple small open economy version of blanchard s 1985 overlapping generations model to demonstrate that such a policy encourages the accumulation of national foreign debt and can contribute to higher inflation because individuals have finite lives they fail to fully internalize the government s intertemporal budget constraint current generations therefore regard the debt relief as an increase in wealth they raise consumption which causes current account deficits future generations have to lower consumption to service the additional debt the debt service takes the form of a higher inflation tax if the government tries to stabilize exchange rates while nationalizing debt both the debt and inflation problems are exacerbated

international transmission of monetary and fiscal policy abstract this paper analyzes the effects of monetary and fiscal expansion on the multiple economies in a dornbusch model and a yaari blanchard model unlike previous literature the paper incorporates union and explicitly solves the n country models the effects of monetary and fiscal expansion outside the union are quite similar to the previous results based on the two country models however the effects of expansion inside the union induce a different dynamic path after the policy changes furthermore the number of union members changes the fluctuations of various endogenous variables

tariffs and the current account the role of initial distortions from an initial position of laissez faire temporary tariffs have been shown to improve the current account however if tariffs are initially positive as in many actual economies temporary tariffs will magnify an existing distortion and therefore lower real income during protectionist periods optimizing agents may wish to smooth the path of consumption relative to income by foreign borrowing if the intertemporal elasticity of substitution is sufficiently low temporary tariffs may actually worsen the current account

weakly nonseparable preferences and distortionary taxes in a small open economy this paper examines the dynamic effects of distortionary taxes in a small open economy the employed utility function implies both endogenous rates of time preference and a tractable form of weak nonseparability between consumption and leisure weak nonseparability induces novel long run welfare and wealth effects of taxes and generates very different current account movements endogenous rates of time preference facilitate the examination of a tax on international borrowing and lending copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

accumulation and growth in a two country model a simulation approach abstract this paper analyzes saving and capital accumulation in a two good growth model of two market economies in which economic agents optimize with perfect foresight the goal is to present a model in which short run dynamics and the steady state are soundly integrated we stress the importance of asset markets as the linkage that transmits disturbances both internationally and intertemporally while many components of the model described below can be found in the literature on optimal consumption investment and international growth models we provide a consistent synthesis our framework permits the analysis of structural adjustment in the global economy and the dynamic effects of a wide range of public policies

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

self selection and analyst coverage this paper examines the relation between analysts information about a stock s future prospects and their decisions to issue investment recommendations and earnings forecasts for that stock and the implications of this relation for the observed distribution of recommendations and earnings forecast errors articles in the financial press have long argued that analysts are reluctant to issue unfavorable investment information perhaps because they fear jeopardizing potential investment banking

estimating saving investment correlations evidence for oecd countries based on an error correction model abstract saving investment correlations are important stylized facts in open economy macroeconomics and indicators of capital mobility they are best estimated by an error correction model ecm because an ecm is consistent with intertemporal general equilibrium models the ecm is a synthesis of previous approaches applying the ecm to the oecd countries we find that in general saving and investment are cointegrated the ecm is more powerful in detecting cointegration than the two step engle granger procedure estimates of the saving investment correlation are robust with respect to overdifferencing we find evidence of a large country effect and an increase in capital mobility within the oecd area

current account dynamics in a finite horizon model abstract this paper examines the response of the current account in a small open economy to a permanent change in the price of imported intermediate goods to do so it extends blanchard s 1985 open economy model to incorporate the capital stock with adjustment costs a la hayashi 1982 a price increase in imported intermediate goods can be viewed as a combination of transfer payments abroad and capital taxation the former effect leads to a current account deficit and the latter leads to a current account surplus the overall effect depends on the relative magnitude of these effects

the saving investment correlation puzzle is still a puzzle abstract a number of simulation studies claim to have solved the feldstein horioka puzzle by demonstrating that a high time series correlation between saving and investment naturally arises from business cycle shocks this paper uses panel data of saving and investment controlled for business cycle shocks to empirically test the significance of cyclical shocks productivity fiscal and the terms of trade shocks in explaining a high saving investment correlation the estimation results reveal that conventional aggregate shocks only partially explain the high saving investment correlation moreover country differences in the size of the gnp and the non traded sector do not significantly affect the saving investment correlation the saving investment correlation puzzle remains a puzzle after all

foreign exchange liberalization and the viability of a fixed exchange regime abstract this paper investigates the effect of liberalization of capital account transactions on the viability of a fixed exchange regime using a finite time horizon model a la blanchard the paper demonstrates a case where removal of restrictions on capital outflows alone can cause a balance of payments crisis in the absence of any other external shocks the increased burden of debt service as well as the dynamics of the economy after liberalization are identified as potential sources of reserve outflow the paper also discusses the dynamics of the economy when liberalization is expected to force the central bank to give up exchange rate pegging

spill over effects of supply side changes in a two country economy with capital accumulation abstract using a two country dynamic optimization model with capital accumulation we explore the effect of such supply side changes as a rise in productivity and a reduction in the corporate tax rate on the equilibrium path and the welfare of two countries the welfare effect consists of a tax distortion term and a wealth term those supply side changes in the creditor country increase its welfare but unambiguously decrease the debtor country s welfare as capital moves from the debtor country to the creditor country

the empirical measurement of rent seeking costs this survey focuses on the efforts carried out mainly by public choice scholars to measure the social cost of rent seeking the concept introduced by gordon tullock in 1967 and coined by anne krueger in 1974 is well known and accepted by the profession but its empirical measurement has fallen behind with respect to its theoretical formulation an often criticized lack in the literature although there are good general surveys none has specifically focused on reviewing the empirical efforts made to measure the phenomenon the purpose of this paper is to provide such a survey it could be said that the rent seeking concept has been fully integrated into economic jargon it is commonly used when some agent seeks to obtain an artificial transfer usually from government and covers all the actions efforts or expenses that the agent has to carry out to obtain the prize the key issue however is the possible social waste that arises in these situations the empirical efforts to measure such waste constitute the main purpose of this survey the concept of rent seeking was introduced by tullock 1967 although the term was first coined by krueger 1974 in a paper not related to the former in a recent paper tullock himself wrote of the history of the concept and the intellectual context within which it arose tullock 2003 starting with the pioneering work by harberger 1954 several studies were conducted during the 1950s in which the calculation of the social cost of monopolies and tariffs always gave the result of very modest figures the first response to these results was made by leibenstein 1966 and his x efficiency which refers to a hypothetical loss in efficiency due to the absence of competition shortly after leibenstein s paper appeared tullock argued that the deadweight costs of monopoly and tariffs understate the true social cost because the expenditures made to capture related rents have to be included so rectangles as well as harberger s triangles have to be included in the calculations let us see this argument once more figure 1 depicts the iconic tullock graphic analysis of rent seeking it represents the demand schedule d for a monopolized good where pm is the monopoly

the informational role of bond analysts this study uses a large sample of sell side bond analysts reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities first we document that the distribution of bond analysts buy hold and sell recommendations is skewed positively but less so than the distribution of equity analysts recommendations the positive skewness in bond analysts recommendations is greater for

are rents fully dissipated students of rent seeking have erred in focusing their attention exclusively on the analysis of competitions for exogenously specified transfers when redistributive policies are treated as endogenous choices it is clear that there are both incentives and opportunities for policymakers to design them in ways that prevent the wasteful dissipation of a large proportion of the intended transfers an analytical framework that treats policy design in this way is capable of explaining a variety of common attributes of redistributive policies that are apparent anomalies under the traditional approach to rent seeking furthermore we predict and find supporting evidence that authoritarian regimes tend to be associated with higher ratios of government revenue to total income than do democracies we attribute this tendency to the substantially greater potential for dissipative competition for revenues under democracy than under dictatorship finally available estimates of lobbying expenditures and rents transferred under the recent federal crude oil controls contradict the hypothesis that rents are fully or almost fully disspated through political competition

habit persistence and the harberger laursen metzler effect in an infinite horizon model abstract the habit persistence model of ryder and heal is used to examine the harberger laursen metzler h l m effect our results are in contrast to the general view in the literature that the stability requirements preclude the h l m effect in an infinite horizon model we show that if the marginal utility of real consumption is strongly increasing in the habitual standard of living then the h l m effect holds and a terms of trade deterioration reduces savings however if the marginal utility of real consumption is not sufficiently strongly increasing or is decreasing in the habitual standard then the h l m effect is overturned

are windfalls a curse abstract a puzzling feature of temporary terms of trade booms is that some countries have responded to such windfalls by running current account deficits furthermore those countries that ran current account deficits failed to attain greater post boom growth rates indicating the deficits were consumed or invested in low quality projects the point we make is that the structure of the fiscal process is critical in determining outcomes if fiscal control is unitary then the consumption smoothing effect is operative and representative agent models of the current account have predictive power however if control is divided among several fiscal claimants a voracity effect appears which counteracts the consumption smoothing effect leading to a deterioration of the current account in response to a positive temporary shock we model the interaction among fiscal claimants as a dynamic game and show that in equilibrium aggregate appropriation increases more than the windfall itself this results in a deterioration of the current account we also show that all the windfall is dissipated with the country experiencing no increase in welfare 1998 elsevier science b v

tariffs and sectoral adjustments in an open economy abstract this paper analyzes the impact of a tariff on sectoral adjustments in an economy which produces two traded consumption goods one of which is exported and one nontraded investment good the importance of sectoral capital intensities is emphasized in particular the qualitative dynamic adjustment depends upon the relative capital intensities of the import competing consumption good sector and the nontraded investment good sector sectoral labor allocation effects are analyzed and the long run effect on aggregate capital accumulation is shown to depend upon the relative capital intensities of the import and export sectors temporary as well as permanent tariffs are discussed

an optimizing analysis of the effects of world interest disturbances on the open economy term structure of interest rates abstract this paper studies the effects of world interest rate disturbances on the real domestic term structure of interest rates an intertemporal optimizing representative agent framework with variable employment and endogenous terms of trade is developed the economy faces an external borrowing constraint the adjustment of the short and long term rates as well as the discount bond yield curve is distinguished with the long rate and the yield curve derived recursively from the short both permanent and temporary world interest shocks are considered a notable result is that the yield curve exhibits relative maxima and minima for temporary disturbances

stackelberg rent seeking in this paper i present a formal analysis of rent seeking games in which the players do not move simultaneously i consider rent seeking situations where the players are risk neutral and may value the prize differently the subgame perfect equilibrium outcome in this stackelberg game provides several surprising and interesting results i extend the problem to deal with cases of in complete information concerning the value a player has for the politically contestable rent

evaluating rent seeking losses do the welfare gains of lobbyists count the purpose of this paper is to help reduce the confusion that some readers of the rent seeking literature have about the scope of rent seeking losses in conversations with economists only casually familiar with the literature one often hears the question don t the welfare gains of lobbyists count in other words aren t rent seeking losses actually the gains of lobbyists and thus simply the result of miscounting the benefits the answer to that question is simply no but to my knowledge no one has demonstrated the logic of this fundamental point a secondary purpose of the paper is to clarify the extent of rent seeking losses associated with monopolizing activities this paper demonstrates the tullock rectangle understates the extent of rent seeking losses in circumstances where alternative uses of resources are productive in the sense that positive net benefits could have been generated to simplify suppose that a firm or group of firms spends c dollars in order to raise prices above competitive levels say by having an entry barrier of one sort or another enacted by the local legislature the result will be a higher market price and a harberger dead weight loss triangle of the usual sort this result is depicted in figure 1 as the shaded triangle above po immediately to the left of the demand curve the maximum amount that would be mono

capital movements intersectoral resource shifts and the trade balance abstract in this paper i consider the interactions between the internal structure of the economy and its external balance in an intertemporal set up with perfect foresight a simple pattern emerges current account deficits are associated with depreciating real exchange rates the incorporation of real investments and government spendings change this pattern in a systematic way depending on factor intensities the composition of government spending and its timing

capital income taxation in a growing open economy abstract the paper studies the dynamic macroeconomic effects of various forms of capital income taxation in a model of a small open economy with perfect mobility of financial capital and intertemporal optimization on the part of households and firms one of the noteworthy results is that the introduction of a low corporate income tax will not affect consumption in the long run but will simply lead to a replacement of shares by foreign financial assets in household portfolios it is also found that an anticipated investment tax credit can have and that an anticipated dividend tax will have contractionary effects on investment before they are introduced moreover it is shown that while an unanticipated dividend tax is neutral with respect to investment it will have real effects on consumption and net foreign assets in a growing economy

a model of trade in exhaustible resources what distinguishes exhaustible resources from most other goods is not only their non renewable nature but also a combination of two other important characteristics related to their economic functions in their role as an input resources serve as an esseptial factor in the production of final goods moreover because their usefulness remains intact until they are consumed in the process of production they may also serve as a store of value in the absence of other types of marketable assets this latter characteristic enables the owner of the resource to achieve through optimal resource management his desired time profile of consumption corresponding to these two economic functions are two possible motives for international trade in exhaustible resources first in connection with their role as a productive input trade in resources promotes efficiency in the allocation of factors of production throughout the world economy on the basis of this motive for trade countries with a relatively high per capita endowment of the resource should be expected to export the resource in exchange for final goods second in connection with their asset function trade in resources may be viewed as a means of achieving efficiency in the intertemporal allocation of consumption goods among countries economies with a relatively high rate of time preference desire a relatively high ratio of current to future consumption accordingly impatient countries might be expected to import consumption goods in exchange for the resource in the present and export consumption goods in the future the interaction between these two motives for trade is examined in the present paper within a simple two period two country model traded objects are assumed to be an exhaustible resource and a single consumption good although the possibility of trade in consumption loans is also considered later in the paper the consumption good is produced in both countries with the aid of labor and the resource because the latter has the dual role of being a productive input as well as a store of value in the model international trade is viewed both as a means of reallocating the world s endowment of the resource so as to ensure

oil prices welfare and the trade balance the paper examines welfare effects and the trade balance response to changes in the world oil prices and interest rates for a small oil importing economy the trade balance is mainly seen as the difference between saving and investment and these are derived from intertemporal optimization it is shown that the welfare effects consist of static terms of trade effects intertemporal terms of trade effects and employment effects the trade balance deteriorates for temporary oil price increases whereas its response is ambiguous for permanent oil price increases for a fall in the world interest rate the trade balance deteriorates if the economy is a net borrower

current account determination with traded capital goods abstract a model of real current account determination in a small open economy with many final goods sectors and traded capital goods is presented the model emphasizes the ambiguity of investment response and encourages sector specific empirical methods

capital income taxation and the current account in a small open economy abstract this paper analyzes the effects of capital income taxation on the current account noting the difference between two international tax rules the residence principle and the source principle an increase in the residence tax rate reduces foreign asset holdings in the long run and creates a current account deficit on the other hand an increase in the source tax rate increases long run foreign asset holdings because the king fullerton 1984 effective tax rate responds positively to the increase in both taxes it does not predict the effects of taxation on the direction of international capital investments

dynamic analysis in the viner model of mercantilism abstract this paper models the central theme of mercantilism in jacob viner s interpretation power vs plenty in a framework of modern theory of international finance it is shown that in the viner model of mercantilism a nation with strong mercantilist sentiment ends up with large foreign asset accumulation and high consumption in the long run an import tariff leads to more foreign asset holding and more total consumption furthermore in the viner model the harberger laursen metzler effect exists unambiguously a permanent terms of trade deterioration causes a current account deficit in the short run

current accounts in debtor and creditor countries the authors reexamine a classic question in international economics what is the current account response to a transitory income shock such as a temporary improvement in the terms of trade a transfer from abroad or unusually high production to answer this question they construct a world equilibrium model in which productivity varies across countries and international borrowing and lending take place to exploit good investment opportunities despite its conventional ingredients the model generates the novel prediction that favorable income shocks lead to current account deficits in debtor countries and current account surpluses in creditor countries evidence from thirteen oecd countries broadly supports this theoretical prediction

crowding out in open economies results from a simulation study it has recently been shown that industrialized countries in the 1970s and 1980s are characterized by a high correlation between national saving and investment this regularly is considered puzzling in the context of highly integrated international capital markets in this paper the author shows that both the failure of real interest parity and productivity changes are each sufficient to generate a high positive correlation between national saving and investment these results indicate that it is easier than previously thought to reproduce a high correlation between saving and investment in models with perfect capital mobility

ethics and lobbying the case of real estate brokerage members of licensed occupations benefit from legal standards that limit entry into their professions is it ethical for these professionals to give political support to these standards i examined the case of real estate brokers and found that their educational requirements raise average commissions by one quarter of a percentage point costing consumers 5 4 billion per year without improving the quality of brokerage services the case raises interesting ethical issues which are difficult to resolve

improving analysts negative earnings forecasts in contrast to positive earnings forecasts the negative earnings forecasts of security analysts are grossly optimistic we adjusted negative earnings forecasts downward by varying amounts and evaluated forecast performance according to 1 forecast accuracy relative to the consensus 2 the frequency of being closer to actual earnings than the consensus and 3 the frequency with which adjusted forecasts underestimate actual earnings thereby jeopardizing the analyst s relations with corporate managers relative forecast accuracy and the probability of beating the consensus are improved without an inordinate increase in the probability of underestimating earnings by adjusting negative forecasts downward by a small amount

retracted relationship incentives and the optimistic pessimistic pattern in analysts forecasts we examine whether analysts incentives to maintain good relationships with management contribute to the optimistic pessimistic within period time trend in analysts forecasts in our experiments 81 experienced sell side analysts from two brokerage firms predict earnings based on historical information and management guidance analysts forecasts exhibit an optimistic pessimistic pattern across the two timing conditions early and late in the quarter and the effect is significantly stronger when the analysts have a good relationship with management than when their only incentive is to be accurate debriefing results indicate that analysts are aware of this pattern of forecasts and believe that this benefits their future relationships with management and with brokerage clients the analysts most frequently cite favored conference call participation and information access when describing benefits from maintaining good relationships with management our results suggest the following the optimistic pessimistic pattern in forecasts is in part a conscious response to relationship incentives information access is perceived to be a major benefit of management relationships and recent regulatory changes may have lessened but have not eliminated this conflict of interest source

terms of trade factor intensities and the current account in a life cycle model this paper examines the effects of terms of trade changes on the external adjustment of a small open economy where each consumer has a life cycle saving function the supply side of the economy is given by the standard two sector model with two primary factors labour and capital it is shown that when both commodities are produced a terms of trade deterioration leads to a current account deficit surplus if the export import sector is more labour intensive

current account effects of a devaluation in an optimizing model with capital accumulation abstract this article explores the consequences of a devaluation in the context of a real optimizing model of a small open economy what provides for real effects of the devaluation is the existence of nominal wage stickiness during a contract period we show that if this contract period is relatively short the devaluation is bound to improve the current account on impact whereas this will deteriorate in the case of a long contract period and the more so the smaller are adjustment costs in investment in addition we study the consequences for the terms of trade and for the stocks of foreign assets and of capital

capital controls and international trade finance abstract this paper studies the effects of prohibiting individuals from holding foreign assets but of allowing firms to trade in foreign assets only up to what is needed to finance export and import activities although firms can perform arbitrage between domestic and foreign financial markets the distortions in asset markets are not fully arbitraged away but instead are transmitted to domestic goods markets the dynamics and steady state responses to a variety of shocks are crucially affected by capital controls even in the presence of capital controls the volatility of domestic interest rates can be substantial

efficient rents 2 free entry and efficient rent seeking in the competition for a monopoly right in which the number of bidders is fixed tullock and others have found the value of the resources spent in the aggregate to capture the transfer to be sometimes less than and sometimes greater than the value of the monopoly we think this approach to be incomplete since it leaves unanswered the question of what determines the number of individuals who will vie for the right to be the monopolist it is unsatisfactory to imagine for example that the franchisor sets the number of contestants one could then foresee that rent seeking would arise to influence the permissible number of bidders and this merely moves the rent seeking dissipation question one step back