fiscal consequences of budget baselines abstract governments have two main choices for a budgetary baseline procedure the dollars spent the year before or the level of services that those dollars bought which is labelled a current services baseline this paper analyzes the effects of different baselines on fiscal policy first by developing a conceptual framework and then by examining american state data to compare government spending patterns under alternative baseline rules controlling for a host of institutional economic and demographic factors we estimate that a current services baseline rule raises the annual growth rate in state spending by half a percentage point

does direct democracy reduce public debt evidence from swiss municipalities although some countries have managed toobtain balanced budgets or even budgetsurpluses in recent times public debts ofmany oecd countries remain at high levels since structural reforms of public spendinghave only infrequently taken place in mostcountries fiscal pressure will increaseagain in the future due to society s ageingand the accompanying increases in socialtransfer spending constitutionalrestrictions on debt levels and legal rulesof the budgetary process such as a strongrole of the minister of finance aresupposed to be helping against the debtbias inherent in political decision makingprocedures in addition to such top downbudgetary procedures this paperinvestigates the impact of referendumapproval of budget deficits by the voterson the level of public debt in a crosssection of the 134 largest swissmunicipalities in 1990

is probability theory relevant for uncertainty a post keynesian perspective stable url http links jstor org sici sici 0895 3309 28199124 295 3a1 3c129 3aiptrfu 3e2 0 co 3b2 gthe journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgsun feb 17 13 40 22 2008

is the japanese economy in a liquidity trap abstract a random coefficient estimation procedure is used to estimate the time profile of the interest rate elasticity of japanese money demand contrary to the prediction of the liquidity trap hypothesis the absolute value of the elasticity is found to decline at lower levels of interest rates

theoretical analysis regarding a zero lower bound on nominal interest rates this paper explores several issues concerning a possible zero lower bound zlb including its theoretical rationale the magnitude of effects of low sustained inflation on real interest rates the validity of analyzing monetary policy in models with no monetary variables and the dynamic stabilizing properties of taylor rules in a zlb context the most important argument however is that if the short nominal rate is immobilized at zero there nevertheless exists a route for monetary stabilization policy to be effective via the foreign exchange market its quantitative importance is examined in a calibrated optimizing open economy model

tests for parameter instability in regressions with i 1 processes this article derives the large sample distributions of lagrange multiplier lm tests for parameter instability against several alternatives of interest in the context of cointegrated regression models the fully modified estimator of phillips and hansen is extended to cover general models with stochastic and deterministic trends the test statistics considered include the supf test of quandt as well as the lm tests of nyblom and of nabeya and tanaka it is found that the asymptotic distributions depend on the nature of the regressor processes that is if the regressors are stochastic or deterministic trends the distributions are noticeably different from the distributions when the data are weakly dependent it is also found that the lack of cointegration is a special case of the alternative hypothesis considered an unstable intercept so the tests proposed here may also be viewed as a test of the null of cointegration against the alternative of no cointegration the tests are applied to three data se

on perfect foresight models of a stochastic world long run analysis is often based on perfect foresight equilibrium relationships arbitrarily augmented to incorporate stochastic shocks this paper examines whether perfect foresight models admit interpretations as limits of stochastic economies and reflect long run behavior and policy effects it provides a novel interpretation of such models specifies consistency criteria for long run analysis and proposes metrics for model convergence analytical and calibration exercises are conducted to show that convergence to perfect foresight need not occur and even when it occurs it does not ensure that relationships between long run averages or low frequency components are captured by perfect foresight models copyright 1994 by royal economic society

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

renovatio monetae when gesell taxes worked gesell taxes on money have recently received attention as a way of alleviating the zero lower bound on interest rates less known is that such taxes generated seigniorage in medieval europe for around two centuries when a gesell tax was levied current coins ceased to be legal and had to be exchanged into new coins for a fee using a cash in advance model we analyze under what conditions agents exchange coins and the tax generates revenues a low exchange fee high punishments for using old coins and a long time period between re mintings induce people to use new coins

the monetary approach to the exchange rate in this paper the monetary approach to the exchange rate is re examined for three key currencies using data for the recent experience with flexible exchange rates two important findings are reported in the paper first it is demonstrated using a multivariate cointegration technique that an unrestricted monetary model is a valid framework for analysing the long run exchange rate second we find inter alia that the proportionality of the exchange rate to relative money supplies is valid for the german mark

shared atm networks and banking competition abstract in this paper we study the incentives of banks to share their automatic teller machines atms when they are competitors in the market for deposits we construct a stylized model of banking competition which emphasises the distinctive features of atm compatibility we find that in equilibrium either a strict subset of banks share their atms or total incompatibility prevails we also derive the implications for atm compatibility of withdrawal fees interchange bank fees entry and depositor switching costs finally we investigate the normative implications of our model and draw some policy conclusions

a general framework for predicting returns from multiple currency investments abstract this paper examines the ability of several popular forecasting models to predict future returns on financial assets denominated in the five major reserve currencies the paper generalizes the autoregressive conditional heteroskedasticity arch model by relaxing some of the underlying restrictive assumptions forming what we call extended arch models the paper uses this generalization as well as general versions of the random coefficient rc model in order to predict the rates of return out of sample predictions based on these models are generated and compared with those of a random walk process and a univariate arch model the main implication of the results is that while direct arch estimation can improve on forecasts made on the basis of a random walk model even better forecasts can be made by generalizing the arch process by allowing the coefficients to be time varying thus the paper provides an empirical implementation of recent work that suggests a method for computing optimal multiple currency mean variance portfolios

time inconsistency and fiscal policy empirical analysis of u s states 1969 89 abstract we offer an extensive and robust test of the time inconsistency theory of fiscal politics we employ data of u s states from 1969 to 1989 and the results of our tests indicate the variables such as legislative stability and executive term limits have strongly predictable impacts on the volatility of various measures of fiscal policy

what s in a name tony lawson on neoclassical economics and heterodox economics in this article i respond to tony lawson s what is this school called neoclassical economics lawson s paper is provocative because it reformulates neoclassical economics based on veblen s original intent as a mismatch created by recognising the value of an evolutionary approach to the economy whilst remaining over reliant on elements of a taxonomic approach for lawson many heterodox economists may be neoclassical under this description i argue that there is clearly a case to be heard but that the reformulation of the neoclassical raises a number of issues there are issues concerning the specific critique of the current usage of the term neoclassical regarding genealogy and meaning there are specific issues regarding the further development of the new old veblen definition of the neoclassical how clear is the definition in a practical context as a way to identify a neoclassical group based on the commitments of the critique and the definition what does it mean to be more realistic and what is the strategic value of such a provocation for heterodoxy i argue that the combination of these are reasons for more consideration of issues of social ontology not less insofar as the terms of the argument are incomplete and this invites both lawson and those he is criticising to progress the argument particularly on method

credible commitments and investment does opportunistic ability or incentive matter the more likely it is that the sovereign will alter property rights for his or her own benefit the lower the expected returns from investment and the lower in turn the incentive to invest north and weingast 1989 p 803 i introduction since at least hobbes social scientists have identified external agents as necessary for sustaining efficient outcomes in political economies 1 when such agents are absent efficient collective order is arguably impossible because individuals cannot by themselves coordinate actions to address common dilemmas external agents are thought to resolve this impossibility by credibly threatening to inflict punishments where members of a closed system have no incentive to punish themselves social scientists frequently characterize external agents as supplying incentive aligning services in return for a share of associated efficiency gains this remuneration scheme however provides agents with an incentive to not only create efficiency gains but to opportunistically manipulate the sharing of those gains moreover unless an agent can credibly commit against acting on this incentive potential subjects to its authority have reduced motivation to enter the game hence although external agents can make efficiency enhancing actions incentive compatible i e align individual incentives with group objectives credible commitments against opportunism are necessary for egoistic individuals to subject themselves to an agent s authority i evaluate the potential for two types of institutions to facilitate such commitments the first produces checks on the ability for political agents to act opportunistically to see how such an institution might work suppose that a polity formally diffuses authority among say an executive and legislature given this separation of powers political agents must act collectively to opportunistically expropriate their constituents product if the cost for a nonsingleton set of agents to act exceeds that for an individual then polities that diffuse authority e g establish veto players increase the cost for political agents to play opportunistic actions this increase in turn facilitates credible commitments against opportunism and encourages productive economic activity 2 the second type of institution shapes the planning horizons of external agents so that even egoistic agents have an incentive to build reputations as nonopportunistic types for example political agents who can complete only the term they are serving have relatively little incentive ceteris paribus to build or maintain reputations as nonopportunistic types besley and case 1995 formalize this conjecture to argue that with asymmetric information about politicians types or some imperfect information about the state of the world the reelection mechanism can raise effort or otherwise induce less opportunistic behavior besley and case 1995 p 769 emphasis added 3 interpreted in this light formal restrictions on planning horizons e g binding term limits diminish the capacity for political agents to credibly commit against opportunism and in turn the incentive for economic actors to engage in productive activity to evaluate the empirical relevance of these hypotheses i examine the association between investment and institutions that check the ability or incentive for political agents to play opportunistic actions 4 egoistic individuals allocate resources to investment if they can recognize a sufficient return hence not only are property rights over an investment s product important so is the stability of those rights stability in turn can be stronger when institutions increase the cost of political opportunism if i forgoing benefits from reputation building and ii expending resources to coordinate opportunistic actions are costs of opportunistically altering property rights then investment should exhibit a positive association with institutions that increase such costs

another look at long run money demand abstract this paper investigates the long run demand for m1 in the postwar united states previous studies based on data ending in the late 1980s are inconclusive about the parameters of postwar money demand this paper obtains precise estimates of these parameters by extending the data through 1996 the income elasticity of money demand is approximately 0 5 and the interest semi elasticity is approximately 0 05 these parameters are significantly smaller in absolute value than the corresponding parameters for the prewar period a caveat is that the analysis assumes there is no trend in money demand resulting from technological change

the politics of infrastructure a number of recent studies attempt to measure the productivity of public capital some estimates indicate that government investments are a potential well spring for economic progress while others indicate that public infrastructure has a negligible effect on private sector output this article investigates political institutions and processes underlying the decisions for public infrastructure spending we apply the framework of strategic models of fiscal policy and develop an empirical model to analyze the substantial differences in public capital across american states institutions such as term limits citizen initiative and budgeting procedures were significant determinants of state public capital stocks and the flow of new public investments during the 1980s the results further suggest that political conditions such as legislative stability and voter volatility are systematically related to infrastructure differences across states

bibliography of robert m solow s publications 1950 1987 1952 6 an econometric model of interindustry flows with k j arrow and r shephard abstract econometrica july 1952 7 on the structure of linear models econometrica january 1952 8 review of w e deming some theory of sampling review of econometrics and statistics may 1952 9 review of r dorfman application of linear programming to the theory of the firm journal of american statistical association june 1952 10 review of t c koopmans ed activity analysis of production and allocation journal of american statistical association june 1952 11 review of r roy ed cahiers dii seminaire deconometrie no 1 journal of american statisticalassociation december 1952

the political economy of fiscal policy an experimental study on the strategic use of deficits field data on the strategic use of deficits to limit thebudgetary scope of future governments are inconclusive aboutthe effects of political polarization or a government sre election probability on fiscal policy therefore wedesigned a controlled experiment to examine the strategic useof deficits using a within subjects design we find thatdeficits rise with a higher degree of polarization and a lowerreelection probability however in a between subjects designneither polarization nor reelection probabilities have asystematic effect we discuss the implications of ourexperimental results for empirical tests of the strategic useof deficits with field data

resource windfalls and public debt a political economy perspective abstract can natural resource windfalls increase public debt in democracies adopting a political economy perspective we show that the answer is in the affirmative resource windfalls increase both the government s income and wealth the former mitigates the need to borrow whereas the latter encourages further borrowing as it improves its terms implying an ambiguous pure effect of resource windfalls on debt re election considerations shorten political time horizons and give rise to political myopia we show that higher political myopia induced by more stringent institutional re election restrictions magnifies the wealth effect turning positive the effect of resource windfalls on debt we test the model s predictions using a panel of u s states over the period 1963 2007 our identification strategy rests on constitutionally entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re election prospects and geographically based cross state differences in natural endowments our baseline estimates indicate that a resource windfall of 1 induces an increase of approximately 20 in the public debt of states with more stringent re election restrictions

global policy at the zero lower bound in a large scale dsge model abstract this paper analyses whether fiscal policies can alleviate the effects of a global recession that drives interest rates to the zero lower bound additionally we study the benefits of international coordination the analysis is carried out using a dynamic general equilibrium model of the global economy eagle model we consider that the fiscal shocks are temporary and that fiscal policy retains full credibility at all times in this setup we find significant non linearities in a zero lower bound situation that amplify the effects of fiscal shocks compared to the non zero lower bound case international coordination is helpful but does not play a major role in the results

applying methodological pluralism to wildlife and the economy abstract methodological pluralism is important when we study complex systems we aim to show that methodological pluralism yields additional insight by applying it to a specific question how are the economy and wildlife related in developed and developing countries we identify three possible ingredients of methodological pluralism 1 using both qualitative and quantitative information 2 tapping the potential of history to illuminate slow moving variables and 3 explicitly synthesizing either individually or in groups by thinking about the corresponding system we illustrate with examples

the effectiveness of japanese foreign exchange interventions during 1991 2001 abstract this paper empirically analyzes the effectiveness of japanese intervention policies on the yen us dollar exchange rate over the past decade using actual intervention data this paper suggests that japanese interventions were effective in affecting exchange rate movements when such operations were coordinated with the fed furthermore intervention operations were always associated with an increase in exchange rate volatility

term limits causes and consequences this paper consults multiple literatures to specify andevaluate the economic rationales for term limitation particularly on congress i first consider theories that aroseto explain among related issues why individual states mightunilaterally self impose term limits on their own delegationsto congress next i consider two main lines of argument foruniversal limits both of which begin with the empiricalphenomenon of high and rising congressional tenure first supporters of term limits argue that higher tenure biaseslegislatures toward inefficiency big government highspending second higher tenure creates inefficient anti competitive conditions in the legislative election market term limitation would remedy these inefficiencies by virtue ofdecreasing average tenure these claims are then evaluated inlight of the evidence amassed in the literature based on theliterature reviewed this paper finds that while term limitswill reduce average tenure there is no evidence to suggestthat term limits will affect the underlying causes of theseinefficiencies further research on a more general reform which would strike deeper at these underlying causes isimplied

transformative technology and institutional transformation coevolution of biotechnology venture firms and the institutional framework in japan abstract japan is developing a national strategy for biotechnology which it sees as a transformative technology of strategic importance significant institutional transformation has occurred including changes to the legal structure of universities partly in an effort to enhance technology transfer these and other institutional changes are proving conducive to entrepreneurship and have developed alongside an increase in the number of biotechnology venture firms this paper presents an overview of these institutional transformations in the light of recent deregulation and legislative changes it posits that the emergence of bioventure firms the increase in their number and arguably their changing nature are manifestations of the coevolution of organizations with changes to the institutional framework finally it gives examples of several bioventures based on interviews conducted with the founders and chief scientists in japan and reveals some of the salient characteristics of these firms

overcoming the zero bound on nominal interest rates with negative interest on currency gesell s solution an economy is in a liquidity trap when monetary policy cannot influence either real or nominal variables of interest a necessary condition for this is that the short nominal interest rate is constrained by its lower bound typically zero the paper considers two small analytical models one old keynesian the other new keynesian possessing equilibria where not only the short nominal interest rate but nominal interest rates at all maturities can be stuck at their zero lower bound when the authorities remove the zero nominal interest rate floor by adopting an augmented monetary rule that systematically keeps the nominal interest rate on base money including currency at or below the nominal interest rate on non monetary instruments the lower bound equilibria are eliminated thus allowing an economic system to avoid the trap or to escape from it this rule will involve paying negative interest on currency that is imposing a carry tax on currency an idea first promoted by gesell the administration costs associated with a currency carry tax must be set against the benefits of potentially lower shoe leather costs and lower menu costs which are made possible by the its introduction there are also output gap avoidance benefits from eliminating the zero lower bound trap

comments on arrow and on lucas such a number of interesting and provocative things are put forward in lucas and in arrow in this issue that i would like to be able to dissect them in detail for example lucas states that the problem of controlling inflation has been successfully solved in a scientific sense p s405 i am tempted to explore the limits of the set of problems that might be said to be scientifically solved in the lucas sense but i fear that this would take up a good deal of space arrow deplores the use of homogeneity assumptions as a device for adding content to otherwise inconclusive economic theories but presumably he does not believe that the sonnenschien mantel debreu theorem is the ultimate conclusion regarding the useful content of the propositions of general equilibrium theory some restrictions of intermediate strength are presumably called for and i would like to make the case that strong empirical generalizations about the nature of human actors such as those describing the biological requirements for survival are available and relevant in this connection this too would take some space to develop in detail though not as much as the first subject given the constraints i must choose a focus i will focus on what i take to be the main message that lucas has put forward regarding the relationship between adaptive behavior and the rationality assumptions employed in standard economic theory this message is recognizable as the intellectual descendant of similar discussions by friedman and machlup in the 1940s and 1950s and the ideas involved remain extremely influential in the discipline today i will present and comment on my own statement of this position which i following blaug 1980 will call the classic defense of the rationality as

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

does legislative turnover adversely affect state expenditure policy evidence from indian state elections the effect of legislative turnover on the size and composition of government expenditures in indian states over the 1980 2000 period is examined the paper finds that excessive turnover in indian state elections results in inefficient government expenditure policy first the higher the turnover the larger the government size second excessive turnover affects the allocative efficiency of government expenditures by skewing the composition of government spending toward pure consumption and away from more productive investment expenditures third the effect of turnover on fiscal policy is not linear public consumption expenditure is convex in turnover while public investment expenditure is concave in turnover

the zero interest rate bound and the role of the exchange rate for monetary policy in japan in this paper we study the role of the exchange rate in conducting monetary policy in an economy with near zero nominal interest rates as experienced in japan since the mid 1990s our analysis is based on an estimated model of japan the united states and the euro area with rational expectations and nominal rigidities first we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in japan in terms of stabilizing output and inflation then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap finally we investigate the international consequences of these proposals

land tenure and property rights theory and implications for development policy this article explores the nature of property rights systems their evolution and their effect on resource allocation it is argued that certain institutional arrangements for land rights have evolved in order to reduce uncertainty and increase efficiency in credit as well as in land markets of particular relevance to developing countries the article emphasizes the contribution of public sector infrastructure to effective land rights systems an appendix to the article presents a formal model analyzing the effects of security of land rights on land prices the intensity of cultivation and the use of credit empirical evidence from thailand supports several of the propositions derived from the model

a behavioral explanation for nominal wage rigidity during the great depression nominal wages in manufacturing were left unchanged by the large decline in nominal demand that marked the first two years of the great depression this rigidity in nominal wages is explained using the tools of the behavioral theory of the firm the emphasis is on the reasons firms changed their decision rules linking fluctuations in final sales to changes in nominal wages

effects of term limits on fiscal performance evidence from democratic nations political reputation models feature forward looking rational voters who re elect incumbents based on their estimate of an incumbent s ability level fiscal policy is one of the ways an incumbent establishes a reputation and thereby signals this ability level to voters the reputation building framework implies that term limits should affect fiscal performance a term limited incumbent places less value on reputation building than an incumbent eligible for re election does we examine differences in fiscal performance in democratic countries under alternative executive term limit regimes our results generally agree with the prior findings of besley and case 1995a who analyzed gubernatorial term limits in the american states we provide new evidence that the fiscal effects of term limits differ under a two term rule versus a single term rule

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

overcoming the zero bound on interest rate policy the paper proposes three options for overcoming the zero bound on interest rate policy a carry tax on money open market operations in long bonds and monetary transfers a variable carry tax on electronic bank reserves could enable a central bank to target negative nominal interest rates a carry tax could be imposed on currency to create more leeway to make interest rates negative quantitative policy monetary transfers and open market purchases of long bonds could stimulate the economy by creating liquidity broadly defined a central bank needs more fiscal support than usual from the treasury to pursue quantitative policy at the interest rate floor

the perils of taylor rules abstract since john taylor s 1993 carnegie rochester conf ser publ policy39 195 214 seminal paper a large literature has argued that active interest rate feedback rules that is rules that respond to increases in inflation with a more than one for one increase in the nominal interest rate are stabilizing in this paper we argue that once the zero bound on nominal interest rates is taken into account active interest rate feedback rules can easily lead to unexpected consequences specifically we show that even if the steady state at which monetary policy is active is locally the unique equilibrium typically there exist an infinite number of equilibrium trajectories originating arbitrarily close to that steady state that converge to a liquidity trap that is a steady state in which the nominal interest rate is near zero and inflation is possibly negative journal of economic literature classification numbers e52 e31 e63

economic history and economics i have in the back of my mind a picture of the sort of discipline economics ought to be or at least the sort of discipline i wish it were if economics were practiced in that way there would be nothing problematical about its reciprocal relationship with economic history it would be pretty clear what it is that economic theory offers to economic history and what economic history offers to economic theory i will try to describe what i mean below for better or worse however economics has gone down a different path not the one i have in mind one consequence not the most important one but the one that matters for this discussion is that economic theory learns nothing from economic history and economic history is as much corrupted as enriched by economic theory i will come to that too later on you will notice that i am using strong language i am prepared to admit right away that i may be dead wrong in my judgements but there is no point in pussyfooting bluntness may lead to an interesting discussion after all no one would remember the old german historical school if it were not for the famous methodenstreit actually no one remembers them anyway there must be a lesson in that to get right down to it i suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail there are many partially overlapping reasons for believing this but since that is not the topic under discussion today i do not have to lay them out in an orderly way i hope the following hodgepodge will convey what i mean a modern economy is a very complicated system since we cannot conduct controlled experiments on its smaller parts or even observe them in isolation the classical hardscience devices for discriminating between competing hypotheses are closed to us the main alternative device is the statistical analysis of historical time series but then another difficulty arises the competing hypotheses are themselves complex and subtle we know before we start that all of them or at least many of them are capable of fitting the data in a gross sort of way then in order to make more refined distinctions we need long time series observed under stationary conditions unfortunately however economics is a social science it is subject to damon runyon s law that nothing between human beings is more than three to one to express the point more formally much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity moreover all narrowly economic activity is embedded in a web of social institutions customs beliefs and attitudes concrete outcomes are indubitably affected by these background factors some of which change slowly and gradually others erratically as soon as time series get long enough to offer hope of discriminating among complex hypotheses the likelihood that they remain stationary dwindles away and the noise level gets correspondingly high under these circumstances a little cleverness and persistence can get you almost any result you want i think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief indeed some of fortune s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices if i am anywhere near right about this the interests of scientific economics would be better served by a more modest approach there is enough for us to do without pretending to a degree of completeness and department of economics massachusetts institute of technology cambridge ma 02139

how to be an ecological economist abstract to answer the question how to be an ecological economist we must start by defining the field of ecological economics mainstream economics altogether lacks the concepts required to deal adequately with nature justice and time it was the absence of these three concepts in this otherwise great social science that led to the establishment of ecological economics the interest in nature justice and time is its defining characteristic the main thesis of this paper is that our field is a fragile institution and that the professional existence of an ecological economist is no less fragile however this very fragility also represents freedom scope for free thinking conceptualising and research nevertheless to be able to really use and in turn enjoy the full scope of this freedom an ecological economist needs certain specific characteristics in particular what is termed in the german philosophical tradition urteilskraft and in english power of judgement a description of these characteristics is developed in this paper providing an answer to the question how to be an ecological economist

explaining u s federal deficits 1889 1998 i introduction seater 1993 attempted to provide a common basis for assessing empirical studies of the effects of deficit spending he concluded that evidence of the existence of appreciable effects of u s deficits on macroeconomic variables is questionable in other words the data do not allow for a confident rejection of ricardian equivalence in a world with no macroeconomic effects from deficit spending full information and no distinctions between political and economic markets fluctuations in deficits merely reflect government financing considerations of secondary importance in contrast to this view of the world deficits and surpluses are treated as an important topic in everyday affairs and discourse politicians talk about deficits and surpluses regularly when calling for higher or lower taxes more or less spending revisions in social security funding and other changes in public policy economists and political analysts continue to debate why deficits became a regular feature of federal fiscal management from the late 1960s into the 1990s these debates have spurred divergent theories and conjectures leading to different empirical hypotheses and variables of interest moreover existing empirical studies of the subject have utilized diverse econometric techniques and specifications as a result the competing hypotheses concerning deficit spending have not been tested against one another in a systematic fashion in this article our principal aim is to analyze the different explanations of u s federal deficits jointly estimating competing hypotheses about deficit fluctuations in a generalized reduced form empirical model to achieve this goal we collected and utilized a time series of data running from 1889 to 1998 the apparent paradox between the seemingly innocuous effects of deficits and the political preoccupation with them may owe its existence to one or more reasons limited and noisy information among voters differences between economic and political markets inaccuracy in the measured macroeconomic effects of deficits or other reasons we do not attempt an explanation of why deficits which seemingly exhibit no or small real effects ricardian equivalence could lead politicians and voters to treat deficits as if the ricardian hypothesis were rejected instead we treat explanations of deficits that stem from ricardian premises as one of several hypotheses to be tested ii competing hypotheses we first describe the leading explanations of deficit spending organizing them around common theoretical principles 1 tax smoothing the explanation of deficits which follows directly from a ricardian equivalence theory is the tax smoothing theory developed by barro 1979 2 if deficits generate no real macroeconomic effects and the influences of political institutions and politicians are ignored then optimal public financing considerations govern the use of deficit spending simply put fiscal authorities raise revenue to meet spending needs through income taxation but both spending and income the tax base are subject to uncertain and temporary movements minimization of the deadweight costs of raising a given amount of revenue requires keeping tax rates steady in the face of purely temporary changes in income or spending this is accomplished by running deficits when income is temporarily low or spending is temporarily high and running surpluses in the opposite case imposing a binding no ponzi game npg constraint leads to similar long term behavior of deficits as implied by optimal finance models the npg condition requires that the present value of taxes must equal the present value of spending plus the initial value of debt spending and revenue must share a long term common trend so that primary deficits will be stationary over a long time series deficits and surpluses will offset each other

why do so few hold stocks the authors investigate why 75 percent of u s households do not hold stocks despite the equity premium and predictions of expected utility models the question is relevant for privatization asset pricing and tax progressivity issues they show that risk aversion per se heterogeneity of beliefs habit persistence time nonseparability and quantity constraints on borrowing do not account for the phenomenon a wedge between borrowing and lending rates and minimum investment requirements are plausible but empirically weak factors more promising explanations are inertia and departures from expected utility maximization there is also qualified support for nondiversifiable income risk as a contributing factor copyright 1995 by royal economic society

escaping from a liquidity trap and deflation the foolproof way and others existing proposals to escape from a liquidity trap and deflation including my foolproof way are discussed in the light of the optimal way to escape the optimal way involves three elements 1 an explicit central bank commitment to a higher future price level 2 a concrete action that demonstrates the central bank s commitment induces expectations of a higher future price level and jump starts the economy and 3 an exit strategy that specifies when and how to get back to normal a currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations furthermore an intentional currency depreciation and a crawling peg as in the foolproof way can implement the optimal way and in particular induce the desired expectations of a higher future price level i conclude that the foolproof way is likely to work well for japan which is in a liquidity trap now as well as for the euro area and the united states in case either would fall into a liquidity trap in the future

the euthanasia of the rentier a way toward a steady state economy abstract a positive interest rate has many impacts on ecology one of them is the pushing of economic growth in the present economy accumulation of capital is an end in itself according to the golden rule of accumulation the extension rate of the capital stock is equal to the interest rate however in the present economic conditions the interest rate is always significantly higher than zero due to the liquidity premium of money keynes in this context old proposals such as the free money approach of silvio gesell could provide interesting solutions gesell wanted to neutralize the liquidity premium by putting artificial carrying costs on money by increasing the stock of capital assets without being interrupted by economic crises the interest and profitability level should be reduced down to zero because in this situation every marginal saving and marginal investment would cause a negative interest or profitability rate they would be stopped though keynes was very excited by the proposals of gesell he criticized the fact that gesell did not see many of the further obstacles however these obstacles could be overcome by means of further institutional reforms

monetary policy and economic fluctuations in a sticky price model abstract this paper examines a simple monetary optimizing model with sticky prices two types of monetary policy rules are considered constant money growth rules and interest rate feedback taylor type rules in the case of constant money growth rules we show the existence of limit cycles through the hopf bifurcation theorem on the other hand in the case of the interest rate feedback rules we show that active monetary policy leads to the determinacy of equilibrium path while passive monetary policy induces economic fluctuations

the political economy of fiscal deficits and government production abstract this paper studies how disagreement over which goods government should provide affects resource allocation in the public sector an incumbent combines pre determined capital with labor to produce different goods in the current period and accumulates physical and financial capital for future production capital labor complementarity determines how anticipated political turnover shapes governments choice between saving in physical capital or financial assets turnover tends to render the stock of physical capital for public production too low and inefficiently combined with labor the main cost of political turnover is production inefficiency in the public sector not a suboptimal savings level

a technical definition of uncertainty and the long run non neutrality of money ever since knight s 1921 seminal work some economists have drawn a distinction between uncertainty and risk in order to demonstrate that this difference has important implications for understanding the operations of an entrepreneurial economy lawson 1985 is the latest to discuss the need for the analysis of societal interaction 1 in an economic world where uncertainty as opposed to mathematical risk is a pervasive fact of life p 909 lawson correctly associates the concept of uncertainty with the situation where there is no basis whatever upon which to form any calculable probability uncertainty in this account arises when the probability relation is numerically indeterminate and non comparable to other probability relations 1985 p 914

computing optimal multi currency mean variance portfolios abstract the paper provides an exact and computable solution to the general quadratic mean variance problem with exchange rate and return uncertainties multiple currencies are considered with multiple investments in each currency the classical mean variance formulation is augmented with currency risk the overall risk is hence the multiplicative effect of return risks within a currency and the currency risk currency risk may be interpreted in terms of though not restricted to past forecast errors we provide a framework within a general structure for return and exchange rate forecasts and risks we show that the quadratic mean variance structure is maintained and provide solutions to computational questions in the evaluation of the optimal portfolio by extending conventional analysis we arrive at a surprisingly simple solution which may be a useful addition to the arsenal of finance techniques

an empirical investigation of the strategic use of debt the paper examines the accumulation of debt by swedish local governments i find that right wing governments accumulate more debt when facing a higher probability of defeat whereas the opposite occurs for left wing governments these effects are sizable a right wing government increases its level of debt by 15 percent whereas a left wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office the results are consistent with the predictions from a strategic debt model developed by persson and svensson

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

empirical analysis of the exchange rate channel in japan abstract this paper analyzes the significance of the exchange rate channel one of the transmission mechanisms of monetary policy it is important to evaluate this channel for japan because yen depreciation has been proposed as a policy to move the economy out of a liquidity trap our results suggest that in the past monetary expansion resulted in yen depreciation in the long and short run however there is no evidence to support the view that yen depreciation facilitated economic growth therefore we conclude that use of the exchange rate as a mechanism to boost the real economy was in our sample period at least premature

new developments in monetary economics two ghosts two eccentricities a fallacy a mirage and a mythos monetary theory and policy are part of intertemporal public finance the two ghosts are the liquidity trap and the real balance effect the eccentricities are negative nominal interest rates and the helicopter drop of money the fallacy is the fiscal theory of the price level a logically inconsistent theory of the link between the government s intertemporal budget constraint and the general price level the mirage is the prediction that financial deregulation and technical change in the payments and settlements technology will cause monetary policy to lose its capacity to influence even nominal economic variables mythos refers to the independent central bank

monetary policy financial stability and the zero lower bound abstract much has happened in the world of central banking in the past decade in this paper i focus on three issues associated with the zero lower bound zlb on short term nominal interest rates and the nexus between monetary policy and financial stability 1 whether we are moving toward a permanently lower long run equilibrium real interest rate 2 what steps can be taken to mitigate the constraints imposed by the zlb and 3 whether and how financial stability considerations should be incorporated in the conduct of monetary policy these important topics deserve the attention of both academic and government professionals

charles k rowley william f shughart ii and robert d tollison eds the economics of budget deficits the international library of critical writings in economics 153 ed by mark blaug cheltenham u k and northampton ma u s a edward elgar 2002 2 vols 1 112 pages usd 370 00 gbp 245 00 cloth

legislative turnover fiscal policy and economic growth evidence from u s state legislatures an examination of how increased turnover among legislators in the fifty u s states affects fiscal policy and economic growth finds that it makes legislators short sighted turnover increases the size of government by increasing the shares of both total spending and taxes in income in particular turnover increases capital expenditure and income taxes both of which may cause long run distortions in the economy further increased turnover by resulting in inefficient fiscal policy reduces long term economic growth

predicting the institutional effects of term limits in this paper we develop a model to predict the seniority turnover and transition consequences of term limit reforms for any institution with a regularized procedure for rotating membership with this model we can predict the number of members who will be serving in their last term at any given time once an institution reaches a stable state under term limit reforms for example our results show that for the u s senate current term limit proposals will result in a substantial increase in the number of lame duck members and a significant reduction in average seniority we make no claims as to the public policy effects of term limit proposals however our model can be used to design a proposal that will maximize any benefits or minimize any public policy effects found to be associated with term limit reforms

the optimal cash balance proposition maurice allais priority maurice allais well deserved nobel prize fortuitously brought to our attention an injustice inadvertently done him to which we were unknowing accessories for years the literature has ascribed to us the parentage of the transactions cost model of optimal cash balances with its notorious square rootformula derivedfrom inventory theory recently we found that its essence is contained in allais 1947 economie et interet pp 238 41 as jacob viner used to say no matter to what source the origin of an economic proposition is ascribed someone is sure to come up with an earlier one in any event here is a translation of the pertinent passages allais describes the model in footnotes 11 and 12 to the following text pp 238 41

alternative approaches to analyzing economic data this paper compares two approaches to the analysis of economic data the exclusively econometric approach recommended by hendry and ericsson and the more eclectic approach that we employed in our books monetary history and monetary trends it concludes that the article by hendry and ericsson is mislabeled their article is not in any relevant sense an evaluation of our empirical model of u k money demand rather it uses one equation from our book as a peg on which to hang an exposition of sophisticated econometric techniques insofar as their empirical findings do bear on ours they simply confirm some of our principal results and contradict none jel 036 212

the political economy of fiscal deficits a survey this paper surveys recent literature both theoretical and empirical regarding political explanations for fiscal deficits political economy suggests conflicts of interest may lie behind the emergence of deficits 1 opportunistic politicians generate deficits to win elections even in conflict with general welfare 2 conflicts of interests between politicians partisan preferences create incentives for at least some incumbents to run deficits and 3 conflicts of interest between different social groups or regions generate tensions in the allocation of government resources leading to overspending this paper reviews these different strands of the literature it also covers contributions that highlight the crucial role of budget institutions in determining the extent to which the political motivations to generate deficits are indeed translated into poor fiscal outcomes promising avenues for future research are highlighted

the time varying performance of the long run demand for money in the united states george s tavlas this article investigates the issues of the stability and predictability and interestsensitivity of money demand over 1870 1997 two different estimation methodologies are used random coefficient rc modeling and vector error correction vec modeling the former procedure allows the profiles of the coefficients to be traced over time and relaxes several restrictions routinely imposed in applied work the results indicate that different estimation methodologies using different data periods and frequencies yield estimates of some of the coefficients of the long run demand for money that fall within a fairly narrow range the results also suggest that specification errors have had an important influence on the time profile of the interest elasticity of money demand and that there is a tendency for the interest elasticity to decline in absolute value as interest rates decline jel c20 e47 i introduction this article reinvestigates the issues of the stability predictability and interestsensitivity of the long run demand for money in the united states 1 the model used is closely based on that used by friedman and schwartz 1982 the data are also those of friedman and schwartz extended by bordo et al 1997 and us to include more recent observations while the data frequency is annual rather than averaged over business cycle phases as used by friedman and schwartz 2 two very different methodologies are used to examine the issue of money demand behavior vector error correction vec modeling and random coefficient rc modeling the former approach is aimed at addressing problems of spurious correlation produced by integrated variables and dynamic misspecification due to inadequate lag structures and attempts to integrate short run dynamics with departures from long run equilibrium relationships the underlying philosophy of this approach is the general to specific methodology popularized by hend ry and his associates e g hendry and ericsson 1991 ericsson et al 1998 the rc approach developed by swamy and tinsley 1980 swamy and tavlas 1992 1995 2000 and christou et al 1996 1998 is aimed at dealing with four major specification problems discussed in section ii that often arise in econometric estimation we use it to shed light on such issues as the stability and predictability of money demand and whether the demand for money was more interest sensitive during the 1930s great depression than in other periods and indeed whether a liquidity trap existed in the 1930s the remainder of this article is divided into three sections section ii discusses the basic money demand specification the data and the vec and rc estimation procedures section iii presents the estimation results both the vec and rc models are estimated using annual data covering 1870 1989 and postsample forecasts are generated over 1990 1997 the models are then reestimated over earlier periods to test how well they forecast in a variety of circumstances including the great depression years for as goldfeld 1992 623 put it in his survey of the money demand literature ultimately of course such models need to stand the forward test of time that is they need to continue to hold outside the period of estimation 3 an aim of the article is to inquire whether two different empirical methodologies can provide a stable long run demand for money function that can perform well in prediction if so this should provide some reassurance about the empirical properties of that function section iv concl udes ii the model data and estimation procedures a basic friedman schwartz specification friedman and schwartz 1982 posited the following money demand function 1 ln m sub t alpha sub 0 alpha sub 1 r sub t alpha sub 2 ln y sub t alpha sub 3 g sub yt u sub t where m