the interest rate management and sterilization hypotheses for the uk under fixed exchange rates this study uses the vector autoregressive var technique and granger s definition of causality to examine the interest rate management and sterilization hypotheses of uk for the period 1955 i to 1974 iv our findings show that neither the long term government bond yield nor long term treasury bill rate of uk can be considered as a policy determined variable since each is subject to feedback from uk and us monetary and income variables in regard to the sterilization hypothesis our results indicate that the uk domestic credit is an exogenous variable with respect to uk foreign reserves and interest rates this result supports the implication of the monetary approach to the balance of payments that there was no sterilization in the uk during the fixed exchange rate period

fiscal deepening versus financial underdevelopment which accounts for the payments problems this paper records an attempt to establish a reasonably stable relationship between the domestic government budget deficit and the balance of payments using both monetarist and keynesian formulations a large sample of countries is classified in three groups on the basis of an index measuring the level of indebtedness and pooled time series regression analysis is carried out to substantiate the fiscal deepening hypothesis according to this hypothesis the largest impact of the deficit on external balance occurs in debt ridden countries regardless of the state of financial development because the deficit can better substitute for the domestic credit component of the monetary base in such cases

re examination of uniform commodity taxes under a non linear income tax system and its implication for production efficiency abstract this paper shows that the result of uniform commodity tax under nonlinear income taxation by atkinson and stiglitz 1976 no longer holds if the production side of an economy is taken into the consideration in particular imposing a non uniform commodity tax can pareto improve welfare even under nonlinear income taxation in addition the paper shows that if the government uses a nonlinear income tax system for income redistribution then the introduction of distortions in the public sector can pareto improve welfare contrary to the results in diamond and mirrlees 1971

evaluating the net gains from the cfa franc zone membership a different perspective abstract this paper deals with the membership gains derived by the cfa franc zone member countries after briefly discussing the current institutional framework of the franc zone rules we use the partial pooled reserves methodology developed by dodsworth to compute the net gains derived from cfa franc countries actual data of the operations account were used for the first time for the computation the net membership gains were calculated for both the western african monetary union umoa and the central african cfa franc zone we conclude that when the opportunity costs of maintaining the operations account at the french treasury are taken into consideration especially the interest rate costs and the exchange rate risks the evidence shows that overall there are more net losers than gainers in the cfa franc zone with the 65 reserves pooling for the study period 1975 1988

a generalization of the endogenous grid method abstract this paper extends carroll s 2005 the method of endogenous gridpoints for solving dynamic stochastic optimization problems national bureau of economic research technical working paper 309 endogenous grid method to perform value function iteration in models with more than one control variable we propose to mix the endogenous grid method with standard value function iteration to achieve higher efficiency we illustrate the method using the stochastic neoclassical growth model with and without labor leisure choice we report important gains in efficiency that make value function iteration an attractive computational method in terms of both computing time and accuracy

taxing capital not a bad idea after all we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic uninsurable income shocks and permanent productivity difierences of households the optimal capital income tax rate is signiflcantly positive at 36 percent the optimal progressive labor income tax is roughly a at tax of 23 percent with a deduction of 7 200 relative to average household income of 42 000 the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system jel e62 h21 h24

booming sector economic activity in paraguay 1973 86 a case of dutch disease the primary purpose of this study is to investigate the applicability of the dutch disease model as a means of explaining the changing sectoral composition of output for paraguay in the period 1973 86 the consequences of booming sector activity for 1 the distribution of income as it affects wages and 2 the in stability of export earnings for paraguay are examined the dutch disease model predicts that the consequences of booming activity will include a contraction of non booming sector activity as well as a real appreciation of the exchange rate these outcomes are tested in several single and multiple equation estimable models for the case of paraguay

exchange rates inflation and the sterilization problem germany 1975 1981 when the goals of internal and external macroeconomic equilibrium are in conflict sterilized intervention in the foreign exchange market may provide an independent policy instrument through which the central bank can resolve its dilemma in the short run this paper is concerned with the west german bundesbank s use of sterilization during the recent years of exchange rate flexibility the paper asks whether the bundesbank pursued sterilization during the years 1995 1981 and whether sterilized foreign exchange intervention exerts a significant influence on the exchange rate in the german case estimation of a stylized bundesbank reaction function suggests an affirmative answer to the first of these questions to assess the efficacy of sterilized intervention a structural portfolio balance model of german asset markets and prices is estimated dynamic perfect foresight simulations of the empirical model are used to ascertain whether imperfect substitutability between foreign and domestic bonds is sufficient to allow the bundesbank to attain independent internal and external goals over the short run of about a month the model s verdict is that the bundesbank has little if any power to influence the exchange rate over that time span without altering current or expected future money market conditions this abstract was borrowed from another version of this item

exchange market pressure in paraguay 1963 88 monetary disequilibrium versus global and regional dependency the relevance of the monetary approach to exchange market pressure for paraguay s small open economy is compared to that of two competing keynesian structural approaches which emphasize respectively global and regional dependency effects estimation results for the three models including formal comparisons using nonnested hypothesis tests and forecast accuracy staistics suggest that the explanatory power of the monetary model is dominated by that of the regional dependency model with the global dependency model having an intermediate degree of applicability this result is intuitive given the extreme dependency of the paraguayan economy on argentina and brazil

developing countries and the gains from regionalism links between trade and farm policy reforms in mexico we use a multi country computable general equilibrium cge model with agricultural policy details to simulate the effects of north american free trade agreement nafta we find that mexico gains from nafta only when it also removes domestic distortions in agriculture in that case agriculture can generate allocative efficiency gains large enough to offset the terms of trade losses that arise because mexico has higher initial tariffs than its nafta partners when an rta forces a developing country to reform its domestic distortions that are linked to trade restrictions it becomes a building block toward multilateralism

are preferential trading arrangements trade liberalizing or protectionist preferential trade arrangements and especially free trade agreements have mushroomed in importance in the 1990s this has revived research on the effects of these arrangements both on the welfare of the member countries and those excluded and on the momentum for further liberalization of the open multilateral trading system this paper reviews the analyses and evidence to date as to these effects showing that analytically anything can happen and that to date there has been insufficient experience to draw conclusions from empirical evidence

a recursive formulation for repeated agency with history dependence abstract we present general recursive methods to handle environments where privately observed variables are linked over time we show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions journal of economic literature classification numbers d30 d31 d80 d82

the demand for international reserves and monetary equilibrium some evidence from developing countries traditionally two alternative explanations have been offered for the behavior of international reserves through time on the one hand the literature on the demand for international reserves postulates that reserves movements respond to discrepancies between desired and actual reserves onthe other hand according to the monetary approach to the balance of payments changes in international reserves will be related to excess demands or excess supplies for money the purpose of this paper is to empirically integrate these two basic explanations for international reserves movements this is done by estimating a dynamic equation that explicitly allows reserves movements to reflect the monetary authority s excess demand for international reserves and the public s excess demand for money the results obtained using a sample of 23 developing countries that maintained a fixed exchange rate during period 1965 1972 confirm the hypothesis that reserves movements respond both to monetary factors and to differences between actual and desired reserves these results indicate that the exclusion of monetary considerations from the dynamic analysis of international reserves will yield biased coefficients this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

sources of lifetime inequality is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime we answer this question within a model that features idiosyncratic shocks to human capital estimated directly from data as well as heterogeneity in ability to learn initial human capital and initial wealth we find that as of age 23 differences in initial conditions account for more of the variation in lifetime earnings lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime jel d31 d91 j24 j31 to what degree is lifetime inequality due to differences across people established early in life as opposed to differences in luck experienced over the working lifetime among the individual differences established early in life which ones are the most important a convincing answer to these questions is of fundamental importance first and most simply an answer serves to contrast the potential importance of the myriad policies directed at modifying or at providing insurance for initial conditions e g public education against those directed at shocks over the working lifetime e g unemployment insurance second a discussion of lifetime inequality cannot go too far before discussing which specific type of initial condition is the most critical for determining how one fares in life third a useful framework for answering these questions should also be central in the analysis of a wide range of policies considered in macroeconomics public finance and labor economics we view lifetime inequality through the lens of a risky human capital model agents differ in terms of three initial conditions initial human capital learning ability and financial wealth initial human capital can be viewed as controlling the intercept of an agent s mean earnings profile whereas learning ability acts to rotate

redistribution and social insurance we study optimal redistribution and insurance in a life cycle economy with private idiosyncratic shocks we characterize pareto optima show the forces determining optimal labor distortions and derive closed form expressions for their limiting behavior the labor distortions for high productivity shocks are determined by the labor elasticity and the higher moments of the shock process the labor distortions for low productivity shocks are determined by the autocorrelation of the shock process redistributive objectives and past distortions in a model calibrated using newly available estimates of idiosyncratic shocks the labor distortions are u shaped and the savings distortions generally increase in current earnings jel d82 d91 h21 h23 i38 j22 j24

dutch disease economics and the colombian export boom abstract dutch disease models predict a primary export boom may result in deindustrialization due to an appreciating real exchange rate this paper examines the effects on the colombian economy of large increases in foreign exchange earnings from coffee and illegal drug exports as predicted by dutch disease models the relative price of nontraded goods rose and the real exchange rate appreciated once the boom was over both were slow to return to previous levels nontraded sectors are shown to have increased their growth rates during the boom years while traded goods experienced slower growth non coffee exports also grew more slowly econometric estimation shows that the real exchange rate was sensitive to the price of coffee and fiscal expansion that sectoral production adjusts to the exchange rate and level of absorption as predicted and that non coffee exports respond to changes in the real exchange rate and foreign demand the paper concludes with a discussion of economic policy in response to the export boom

external disturbances and the independence of monetary policy under the crawling peg in colombia abstract this study examines the impact of external economic disturbances and the independence of monetary policy in colombia a five equation econometric model is estimated the results indicate that external occurrences have had a significant impact on colombian prices and output contrary to the assumptions of the monetary approach to the balance of payments a substantial portion of foreign reserve flows were sterilized and the short run balance of payments offset to domestic credit expansion was less than complete

fiscal deficits output growth and inflation targets in ghana abstract inflation appears to be the macro problem for which no antidote has been found under the economic recovery programme it is possible that either a wrong diagnosis has been made of the problem or that certain factors within the economy are preventing inflation from staying within target levels using an error correction model ecm the paper estimates an inflation equation for ghana the convenience of this model is in the fact that all the data series exhibit an autoregressive scheme of order one that is they are i 1 series in such an instance the granger engle theorem shows that the ecm provides the most efficient model further the ecm unveils some of the short run dynamics which are missing in other estimation techniques the results of the econometric regression show that inflation in ghana either in the long run or short run is influenced more by output volatility than by monetary factors an examination is made of the consistency of fiscal deficit the hypothesis is that an unsustainable fiscal policy would make government miss some macroeconomic targets it is shown that in 1985 and 1989 fiscal policy was consistent inflation was well within target in 1985 for 1986 1988 the government did not maintain consistent fiscal deficits and inflation in those years was well above targets it is recommended that to control inflation in ghana more attention should be paid to supply factors further government should pursue consistent fiscal policies

coffee export booms and monetary disequilibrium some evidence for colombia the theoretical models that analyse the monetary consequences of export booms show that under a regime of fixed exchange rates they affect not only the demand for money via real income but also the money supply via foreign exchange accumulation within this theoretical framework this study proposes an empirical approach to determine whether the coffee booms of the second half of the 1970s and mid 1980s led to excess money supply in the colombian economy the findings provide evidence in favour of a direct association between coffee export booms and excess money supply implying that external disturbances jeopardize the ability of the economic authorities to carry out successful monetary policy

the economic effects of windfall gains in export earnings 1975 1978 abstract this paper reviews the effects of recent dramatic increases in beverage prices 1975 1978 on a sample of countries that are highly dependent on these commodities in most countries the increase in producer prices was restricted allowing substantial sums to accrue to the central government and the commodity organizations the countercyclical impact of fiscal policy was often limited by the rise in development spending this policy stance and the lack of monetary restraint contributed to a substantial rise in imports consequently in many of the sample countries the external reserve position in 1978 was little better than before the windfall gain

how well does the u s social insurance system provide social insurance we analyze the insurance provided by the u s social security and income tax system within a model in which agents receive idiosyncratic wage rate shocks that are privately observed we consider two reforms a piecemeal reform that optimally chooses the social security benefit function and a radical reform that eliminates the entire social insurance system and replaces it with an optimal tax on lifetime earnings the radical reform outperforms the piecemeal reform and achieves nearly all of the maximum possible welfare gain when wages differ permanently over the lifetime when wage shocks match properties in u s data the piecemeal reform outperforms the radical reform

the impacts of exchange rate volatility on vegetable trade flows trade flows of commodities are generally affected by the principles of comparative advantage in a free trade however trade flows might be enhanced or distorted not only by various government interventions but also by exchange rate fluctuations among others this study applies a commodity specific gravity model to selected vegetable trade flows among organization for economic co operation and development oecd countries to determine the effects of exchange rate uncertainty on the trade flows using the data from 1996 to 2002 the results show that while the exchange rate uncertainty significantly reduces trade in the majority of commodity flows there is evidence that both short and long term volatility have positive effect on trade flows of specific commodities this study also tests the regional preferential trade agreements such as the north american free trade agreement nafta the asia pacific economic cooperation apec and the eu and their different effects on commodities

insurance and taxation over the life cycle we consider a dynamic mirrlees economy in a life cycle context and study the optimal insurance arrangement individual productivity evolves as a markov process and is private information we use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results our main contribution is a formula describing the dynamics for the labour income tax rate when productivity is an ar 1 our formula resembles an ar 1 with a trend where i the auto regressive coefficient equals that of productivity ii the trend term equals the covariance productivity with consumption growth divided by the frisch elasticity of labour and iii the innovations in the tax rate are the negative of consumption growth the last property implies a form of short run regressivity our simulations illustrate these results and deliver some novel insights the average labour tax rises from 0 to 37 over 40 years whereas the average tax on savings falls from 12 to 0 at retirement we compare the second best solution to simple history independent tax systems calibrated to mimic these average tax rates we find that age dependent taxes capture a sizable fraction of the welfare gains in this way our theoretical results provide insights into simple tax systems copyright 2013 oxford university press

technical change wage inequality and taxes this paper considers the normative implications of technical change for tax policy design a task to talent assignment model of the labor market is embedded into an optimal tax problem technical change modifies equilibrium wage growth across talents and the substitutability of talents across tasks the overall optimal policy response is to reduce marginal income taxes on low to middle incomes while raising those on middle to high incomes the reform favors those in the middle of the income distribution reducing their average taxes while lowering transfers to those at the bottom jel d31 h21 h23 h24 j31 o33

the balance of payments offset to monetary policy monetarist portfolio balance and keynesian estimates for mexico and venezuela three balance of payments equations are specified and estimated for mexico and venezuela while a large offset is found for venezuela there is no evidence of a significant offset for mexico in the 1970s however it is shown that from 1951 to 1970 the offset was close to minus one suggesting there was structural change in the 1970s the estimated offset for venezuela in the keynesian equation is smaller than that in the monetarist equation supporting arguments that the latter is biased toward minus one however the long run offset is minus one in accord ance with both approaches copyright 1986 by ohio state university press

on the distributional effects of reducing capital taxes this article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes we compare a representative agent economy to an economy in which households face idiosyncratic uninsurable income risk the income process is consistent with empirical estimates and implies a realistic wealth distribution we find that capital tax cuts imply large welfare gains in the representative agent economy however when households are heterogeneous substantial redistribution during transition means that only a minority will support capital tax cuts whereas most households can expect large welfare losses

taxing tourism and subsidizing non tourism a welfare enhancing solution to dutch disease abstract using a combined analysis of a general equilibrium and a partial equilibrium this study models the impacts of a combined policy tool based on taxing tourism and subsidizing non tourism in a tourism dependent destination the results suggest that such a policy tool while widely discussed in economics literature may not be suitable for a tourism destination as it might have adverse effects on local welfare

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

monetary policy and inflation under the crawling peg some evidence from vars for colombia abstract this paper investigates the effects of monetary policy under the crawling peg in colombia utilizing granger causality tests variance decompositions and impulse response functions from vars several alternative lag selection criteria are used to specify the lag structures of the vars variations in domestic credit appear to affect the balance of payments but not the exchange rate in colombia suggesting that the crawling peg has functioned more like a fixed than a flexible exchange rate the size of the balance of payments offset is relatively large but the models differ on its size domestic credit appears to have a weak effect on national output neither domestic credit nor the exchange rate play much of a role in explaining variation in inflation in colombia inflation appears to be primarily inertial and the result of demand shocks the results are consistent with the recent difficulties encountered in maintaining monetary targets in colombia and the persistence of inflation under contractionary monetary policy

impacts of free trade agreements on agricultural trade creation and trade diversion this paper evaluates agricultural trade creation and diversion effects of the most important free trade agreements ftas trade creation and diversion effects are estimated using a poisson pseudo maximum likelihood ppml estimator with various fixed effects to deal with heteroskedasticity and zero trade observations the analysis finds that ppml estimation is preferred to ols and the estimated impacts of ftas are different if zero trade observations are considered the asean china preferential trade agreement eu 15 eu 25 and southern african development community agreements have generated large increases in agricultural trade among their members

on the consequences of eliminating capital tax differentials in the united states structure and equipment capital are eectively taxed at dierent rates recently president obama joined the group of policy makers and economists who propose to eliminate these dierentials this paper analyzes the consequences of such a reform using an incomplete markets model with equipment skill complementarity we nd that the reform increases average welfare by 0 1 importantly we nd that the reform does not involve the usual eciency vs equality trade o it improves both jel classication e62 h21

capital taxation quantitative explorations of the inverse euler equation economies with private information provide a rationale for capital taxation in this paper we ask what the welfare gains from following this prescription are we develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets we find that general equilibrium forces are important and greatly reduce the welfare gains once these effects are taken into account the gains are relatively small in our benchmark calibration these results do not imply that dynamic aspects of social insurance design are unimportant but they do suggest that capital taxation may play a modest role

trade liberalisation the peso and mexico s commodity trade flows with the united states abstract we assess the effects of real peso devaluations as well as the effects of gatt and nafta on mexico s in payments and out payments with the united states for 102 industries we find that relatively few trade flows are sensitive to changes in the real exchange rate probably due to production sharing and intra industry trade but devaluations affect mexican imports more than exports trade liberalisation has had a larger impact particularly on imports of intermediate goods and exports of certain manufactures many affected export industries are ones that have previously been shown to have economies of scale

short run independence of monetary policy under a pegged exchange rates system an econometric approach abstract in this paper we focus on the loss of independence of monetary policy due to the substitutability of domestic and foreign assets and estimate it for seven main industrial countries under a bretton woods period for that we develop a structural model of the economy which includes the behavior of the monetary authorities and we consider three different estimates of independence of monetary policy we find that when exchange rate expectations variables are left out of the equations then the three estimates widely diverge which emphasizes the error we can make if we just consider one type of estimate on the other hand when these variables are introduced in the model the three estimates indicate that a large amount of independence exists

causality analysis and multivariate autoregressive modelling with an application to supermarket sales analysis abstract this paper describes a modelling methodology for multivariate stochastic processes the concept of multiple causality is discussed and a procedure to detect multiple causality is suggested the data of a major canadian supermarket is analyzed and a multivariate autoregressive model for this supermarket is constructed and estimated several empirical findings are reported

the short run relation between growth and inflation in latin america reply sebastian edwards uses a new unexpected money variable based on the addition of the contemporaneous fiscal deficit to my autoregressive money growth equations to argue that 1 in brazil and chile there is no significant relationship between unexpected money growth and output growth 2 unexpected money growth has different estimated effects on output in colombia peru and mexico and these effects substantially exceed those estimated in brazil and chile and 3 thus my 10 percent rule for the effect of unexpected money growth on output growth does not hold in addition edwards incorporates the terms of trade in his output equations and finds they are important in the case of chile and mexico finally edwards takes issue with my use of lagged inflation to explain output edwards and i use somewhat different data not only in terms of sources but also edwards often uses m2 rather than ml in reporting his best results however edwards and my basic results are broadly similar compare his table 1 and my original tables 1 and 4 this is encouraging and in general makes it seem not worth quibbling over the differences in data however there is one difference which affects the results that i will discuss later the inclusion of the fiscal deficit in the money growth equation is a key difference in our work as i pointed out in my earlier article fiscal and monetary policy often are closely related in latin america thus it is not surprising that edwards finds the deficit divided by lagged money is a significant factor in explaining money growth however the point is not to explain money growth but to estimate a relationship which the public could have been using to predict how much money and thus nominal aggregate demand has grown since the last observation on the money stock 2 it strains credulity to assume that in latin america the budget deficit could be used by the public to estimate money growth contemporaneously data on the cash deficit usually are available publicly only with a long lag moreover many alternative versions of a deficit involving creative accounting methods are reported for example for many years in colombia the reported deficit which is available with about a one quarter lag treated both the unspent portion of the budget and the accounting profits from the revaluation of the local currency value of exchange reserves as income procedures which caused great confusion inside as well as outside the government despite such problems the cash deficit still might be useful as a monetary growth predictor for example it may be correlated with some other easily available contemporaneous indicator of money growth however its usefulness can best be judged from a comparison of the results when the deficit is used only as the money growth predictor to determine unexpected money a constrained equation with those obtained when it is used as an additional independent variable an unconstrained equation a test robert barro has suggested in another context world bank the views and interpretations expressed in this article are my own and should not be attributed to the world bank its affiliated organizations or to any individual acting in their behalf edwards also uses the seemingly unrelated regression technique to take into account possible interrelationships in the error terms across countries judging from the reported t statistics this procedure did not improve the fits greatly 2surprisingly the deficit is not significant in explaining domestic credit in mexico this result and the estimated negative relationship between edwards domestic credit series and output suggest a problem in the domestic credit variable

economic impacts of el nino southern oscillation evidence from the colombian coffee market el nino southern oscillation enso is a naturally occurring phenomenon that affects weather around the world past enso episodes have had severe impacts on the economy of colombia we study the influence of enso on colombian coffee production exports and price our structural econometric specification is consistent with an economic model of the market for colombian coffee which in the short run is characterized by a downward sloping demand curve and by a vertical supply curve we show that el nino i e positive shocks to enso is beneficial for colombian production and exports and decreases the real price of colombian coffee on the contrary la nina i e negative shocks to enso depresses colombian coffee production and exports and increases price however the overall impact of enso shocks is small both in the short run and in the long run shocks to international demand for colombian coffee are more relevant than supply side shocks in colombia in explaining the dynamics of the price of colombian coffee our results suggest that a given coffee price shock can have beneficial detrimental or negligible effects on the colombian economy depending on its underlying cause as a consequence policy responses to coffee price shocks should be designed by looking at the causes of the shocks

natural resource dependence a macroeconometric model for the united arab emirates this study constructs a macroeconometric model to analyse the problems of regions that exhibit dependence on nonrenewable resources e g oil the role of the oil sector in the uae and the extent to which it subsidizes the rest of the economy is evaluated the macroeconometric model constructed consists of four sectors has 25 equations and is evaluated and calibrated employing dynamic simulation techniques counter factual and policy experiments are carried out and the instruments targets approach is used to analyse the impact of the oil sector the article highlights the continued dependence of the uae economy on oil and the urgency to diversify the economy and securing more nonhydrocarbon sources of revenue

an examination of the objectives of monetary policy in four developing economies abstract this paper presents a model of monetary policy in developing economies which is estimated for mexico korea india and zambia the model is designed to identify both the goals and patterns of policy in these economies the results demonstrate that the authorities in these economies respond to foreign reserve flows partially sterilizing their impact in three countries they also respond to domestic variables accomodating seasonal variation and growth or price changes

autoregressive modelling and money income causality detection abstract a step wise procedure based on granger s concept of causality and abaike s final prediction error criterion is suggested as a practical means to identify the order of lags of each variable in a multivariate autoregressive process the model seems useful because it can serve as a reduced form formulation to avoid imposing often spurious or false restrictions of the model it also provides a reasonably powerful test of causality the idea is applied to u s postwar money and income data it is found that between m1 and gnp a bivariate feedback model fits the data best between m2 and gnp a one way causal model from money to income performs better diagnostic checks applied to our model seem to indicate the adequacy of our approach

electricity as a traded good abstract electric power has traditionally been classified as a non traded good produced and consumed within the country of origin more recently electricity has been traded across national borders and in certain cases viz bhutan has been the dominant export in other situations it is used to repay debts owed to neighboring countries this paper investigates the role of electricity as the primary export analyzes its valuation and then goes on to evaluate the impact on the terms of trade we conclude that in the medium term the electric power exporting economy would be better off developing its manufacturing sector to diversify its exposure and to protect its trade interests the case of bhutanese hydro electricity exports to india is studied and the change in trade advantage with every increase in power tariff is ascertained it is found that a 1 26 annual increase in non food consumer prices is correlated with a 1 increase in electricity export tariff while the causality from electric power tariff to indian manufactures prices is not established statistically a change in manufactures prices feeding back into consumer prices in bhutan is statistically significant suggestions are offered for bhutan to reduce dependence on indian imports and to diversify its export market exposure

trade and payments regime and the balance of payments in ghana abstract by 1982 the ghanaian economy was in the doldrums facing a severe foreign exchange constraint this state of the economy was attributed partly to the trade and exchange rate policies which had created distorsions and disincentives against exporting in particular and production in general since 1983 ghana has for the second time embarked on a trade and payments liberalization program this study examines the effect of the changing trade and payments regime on the balance of payments of ghana it provides some answers as to why the first liberalization episode was not sustained it also contrasts the experience of controlled and liberalized trade regime episodes the paper concludes by providing some lessons from the ghanaian experience

the impact of nafta on the united states we describe the main economic arguments posed for and against the north american free trade agreement nafta during the u s policy debate to evaluate these arguments we analyze recent trade data and survey post nafta studies we find that both the u s and mexico benefit from nafta with much larger relative benefits for mexico nafta also has had little effect on the u s labor market these results confirm the consensus opinion of economists at the time of the debate finally studies find that trade creation greatly exceeds trade diversion in the region under nafta especially in intermediate goods

business cycle synchronization and regional integration a case study for central america deeper trade integration between central america and the united states as envisaged under the central american free trade agreement is likely to lead to closer links between central american and u s business cycles this article assesses the degree of business cycle synchronization between central america and the united states relevant not only for a better understanding of the influence of important trading partners on the business cycle fluctuations in the domestic economy but for evaluating the costs and benefits of macroeconomic coordination if business cycles are similar and shocks are common coordination of macroeconomic policies can become desirable with a common currency as the ultimate form of policy coordination but if shocks are predominately country specific resulting in little business cycle synchronization independent monetary and fiscal policies are generally seen as important in helping an economy adjust to a new equilibrium clearly if business cycles are affected predominately by country specific shocks and are likely to continue to be so intensified macroeconomic coordination as part of regional integration might do more harm than good

price and monetary convergence in currency unions the franc and rand zones abstract theory suggests that a currency union will impose significant macroeconomic disciplines on its members the law of one price for example should lead to convergence of price levels at least for what may be regarded as tradeable goods likewise arbitrage would imply convergence of interest rates this paper looks at the two main surviving currency unions the franc and rand zones in africa to see whether and to what extent these generally accepted propositions find confirmation in the data each of the african currency unions has a dominant or core member france in the case of the franc zone and the republic of south africa rsa in the case of the rand zone our focus is on the small members in the periphery and for them there is the additional presumption that inflation and interest rates will be imported from the core despite some rather wide short run divergences and although convergence is slow we find that in the long run consumer price inflation is largely determined in the core the limited evidence available suggests that uncontrolled interest rates also converge to core country levels jel f31

economic adjustment and exchange rates in developing countries in spite of the attention paid exchange rates in recent economic debates on developing countries relatively few studies have systematically analyzed in detail the various ramifications of exchange rate policy in these countries in this new volume from the national bureau of economic research leading economists use rigorous models to tackle various exchange rate issues while also illuminating policy implications that emerge from their analyses the volume divided into four main sections addresses the role of exchange rates in stabilization programs and the adjustment process the importance of exchange rate policy during liberalization reform in developing countries exchange rate problems relevant and unique to developing countries illustrated by case studies and the problems defining measuring and identifying determinants of real exchange rates authors of individual papers examine the relation between commercial policies and exchange rates the role of exchange rate policy in stabilization programs the effectiveness of devaluations as a policy tool and the interaction between exchange rate terms of trade an capital flow this research will not only prove crucial to our understanding of the role of exchange rates in developing countries but will clearly set the standard for future work in the field

the timing of monetary and price changes and the international transmission of inflation this paper presents a theoretical and empirical investigation into timing relationships between variables within and across industrialized countries the main empirical results of our analysis are 1 domestic monetary expansion appears to lead inflation in the sense that money granger causes prices without feedback contradicting an implication of the monetary approach to the balance of payments 2 hardly any significant timing relationship exists between domestic and foreign rates of inflation during the fixed exchange rate period providing no evidence for a generalized law of one price 3 some sterilization of official reserve inflows was successfully performed by the non reserve central banks except for canada 4 u s interest rates granger cause foreign rates providing evidence of some international transmission via asset markets

machines buildings and optimal dynamic taxes abstract the effective taxes on capital returns differ depending on capital type in the u s tax code this paper uncovers a novel reason for the optimality of differential capital taxation we set up a model with two types of capital equipments and structures and equipment skill complementarity under a plausible assumption we show that it is optimal to tax equipments at a higher rate than structures in a calibrated model the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state the welfare gains of optimal differential capital taxation can be as high as 0 4 of lifetime consumption

the short run dynamics of prices and the balance of payments the purpose of this study is to analyze theoretically and empirically the short run behavior of prices and the balance of payments in a small open economy with a fixed exchange rate following the presentation of the theoretical framework the experience of mexico during 1950 73 is analyzed the model is based on what is known as the monetary approach to the balance of payments this approach as is frequently presented deals with long run equilibrium situations when all relative prices are fixed this long run equilibrium view was applied to test empirically the theory for several countries 2 using the assumption that there are no serious barriers to the international movement of capital and that all goods are traded 3 these assumptions imply that goods and capital markets are perfectly arbitraged and therefore that price levels and interest rates in all the countries always move together

can an oil discovery lead to a recession a comment on eastwood and venables in a recent paper in this journal eastwood and venables ev present an analysis of the macroeconomic consequence of an oil discovery in an open economy model which assumes perfect international capital mobility rational exchange rate expectations and sluggish adjustment of domestic goods prices in this note the authors attempt to reconcile this apparent contradiction in the literature in particular the authors show that ev s results hinge crucially on their failure to allow for a direct impact of higher oil wealth on money demand even when all the oil revenue accrues to the government this should raise private sector wealth through the anticipated reduction in future tax liabilities in any case the authors find it difficult to conceive a situation in which an oil discovery will raise spending but leave money demand permanently unaffected the purpose of this note is to show the important implications of this observation for the effects of an oil discovery when appropriate monetary accommodation does not take place

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

the macroeconomic implications of rising wage inequality in the united states in recent decades american workers have faced a rising college premium a narrowing gender gap and increasing wage volatility this paper explores the quantitative and welfare implications of these changes the framework is an incomplete markets life cycle model in which individuals choose education intrafamily time allocation and savings given the observed history of the u s wage structure the model replicates key trends in cross sectional inequality in hours worked earnings and consumption recent cohorts enjoy welfare gains on average as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household

diversification of macroeconomic risk and international integration of capital markets the case of mexico this article tests the arbitrage pricing theory in the context of the unstable macroeconomic years in mexico 1977 87 using information on returns on assets available to domestic investors primarily stocks traded at the local stock exchange an attempt is made to ascertain the extent to which these assets have offered premia for a set of proposed sources of risk the pervasive factors that play an important role in asset pricing in mexico are unexpected inflation unexpected money growth innovations in the standard poor s 500 price series and innovations in the dollar oil price a residual market factor is obtained using the mcelroy and burmeister model given that these risks get premia over and above the riskless rate expected rates of return in mexico have been higher during the years of erratic macroeconomic conditions mexico is not considered to be well integrated with the international capital markets because local sources of risk such as inflation are not priced in the united states whereas international sources of uncertainty such as oil price shocks are priced locally but not in the united states capital markets are becoming increasingly important in developing countries because of the international debt problem it seems unlikely that semi industrial nations will be able to raise substantial amounts of funds in the international financial markets the development and growth of modern domestic capital markets will allow these economies to tap additional savings and to improve the allocation of scarce funds organized and liquid capital markets are a vital factor in promoting overall development they provide a means of allocating capital to alternative private and public projects and they furnish essential information for evaluating investment undertakings ross 1978 black 1988

coffee money and inflation in colombia abstract the purpose of this paper is to analyse the relationship between coffee money inflation and international competitiveness in colombia the basic hypothesis being investigated is that higher lower prices of coffee will tend to result through the accumulation of international reserves in higher lower inflation in turn this higher inflation will generate for a given rate of devaluation of the nominal exchange rate a reduction of the real exchange rate with the consequent loss of competitiveness in the non coffee tradable goods sector a dutch disease type of model is developed to discuss analytically the relationship between coffee prices money creation and competitiveness in the short and long run empirical results for 1952 1980 are presented these results support the hypothesis that there has been a positive relationship between the price of coffee money creation and inflation in colombia

the short run impact of fluctuating primary commodity prices on three developing economies columbia ivory coast and kenya abstract computable general equilibrium models are used to study the short run impact of fluctuating primary commodity prices on the economies of columbia ivory coast and kenya the results indicate that these economies are destabilized by primary commodity price fluctuations unless governments act to hold real domestic absorption constant to achieve this however would require foreign exchange reserves in excess of the level normally available to these governments for the purpose of stabilizing domestic economic activity

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

the development trinity how regional integration impacts growth inequality and poverty developing countries today have become more active participants in regional trade agreements this raises questions about how the benefits of integration are distributed and the extent to which lower income countries are able to capture development gains historically such impacts have been difficult to identify with precision this paper seeks to address this gap by empirically analysing the impact of regional integration on development particularly the effects on growth and welfare using both bilateral and regional integration measures we show that the ability to capture gains from integration varies across developing country regional groups with developing asia benefiting on par with developed countries the findings in the paper indicate that trade and trade policy play an important role in reducing inequality and poverty in developing countries it also shows that regionalism can function as a channel to make multilateralism a more adept way of addressing national challenges

responding to the coffee crisis what can we learn from price dynamics an econometric model of coffee price dynamics is specified and estimated to capture the evolution of coffee prices at the farm wholesale and retail levels it investigates the historical influence of the international coffee agreement ica through its effects on yield and planting decisions in the short run the ica caused brazilian farm prices to become disconnected from international prices the ica helped coffee producers to better incorporate current world price information into planting decisions this created a price cycle that did not exist in non ica periods the low coffee prices experienced since the disintegration of the ica are consistent with low supply response to price information asymmetric price transmission at the retail level helped roasters and retailers benefit from upstream price interventions our results urge caution when considering future coffee price interventions

the nafta preference and us mexico trade aggregate level analysis this paper focuses on the us tariff preference afforded to mexico relative to non nafta trading partners and evaluates the trade effects of nafta in a manner consistent with the idea behind a preferential trading agreement the estimation technique exploits the time varying dimension of the tariff preference over 1989 to 2001 this is important because the tariff preference for mexico into the united states market existed prior to nafta further the nafta preference was phased in over time we find that a higher us tariff preference for mexico corresponds to increased us import demand for mexican goods and that a higher mexican tariff preference for the united states corresponds to increased mexican demand for us exports interestingly import demand was more responsive to changes in the tariff preference once nafta was in place than it was on average

external shocks and adjustment in a mineral dependent economy a short run model for zambia abstract standard dutch disease analyses would suggest that mineral price declines reverse the effects of mineral booms in particular that the real depreciation caused by the fall in export prices helps revive the traded sectors notably manufacturing zambia s experience however shows that the sectoral impacts of external shocks are much more complex to investigate the tradeoffs inherent in economic adjustment policies including those currently advocated by the international monetary fund imf we use a multisector general equilibrium model the study shows that policies even those directed at a specific sector have indirect but not necessarily benign effects on the rest of the country

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

money income and causality in the united kingdom an empirical reexamination since the reduced form econometric exercises of friedman and meiselman 2 considerable research has been undertaken to determine the nature of the relationship running from money to income as well as the importance of reverse causation from income to money using an empirically testable defintion of causality proposed by granger 4 sims 7 developed an econometric technique to test for unidirectional causality in a two variable system in an application to u s nominal gnp and money data from 1949 iii to 1968 iv he reported that the main empirical finding is that the hypothesis that causality is unidirectional from money to income agrees with the postwar u s data whereas the hypothesis that causality is unidirectional from income to money is rejected 7 p 540 to examine the generality of sims s results williams goodhart and gowland 8 w g g undertook a similar study using u k data from 1958 i to 1971 iii a period when the bretton woods fixed exchange rate system prevailed they found that neither the causal relationship from money to income nor reverse causality from

the international liquidity explosion and worldwide inflation the evidence from sterilization coefficient estimates abstract many commentators have pointed to the huge us payments deficits and international liquidity explosion of the early 1980s as the major cause of the concomitant rapid rates of monetary expansion abroad and subsequent acceleration of worldwide inflation this international monetarist interpretation rests however on the assumption of only limited sterilization of reserve inflows by foreign monetary authorities this paper uses the major econometric estimates of sterilization coefficients to calculate the implied contributions of the reserve increases of this period to foreign monetary expansion these suggest that the reserve increases did in fact make a non trivial contribution to global monetary expansion but that for most countries they were not the dominant cause

foreign debt accumulation financial and fiscal effects and monetary policy reactions in developing countries abstract this paper analyzes the effects of the current account of government and government guaranteed foreign debt on the one hand and net foreign liabilities or the cumulated current account deficit on the other hand in a sample of 26 developing countries while the cumulated current account deficit generates stabilizing forces pissibly through financial and wealth effects large amounts of government and government guaranteed debt produce destabilizing effects by stimulating capital flight i also find that monetary policy reactions are stabilizing in the case of the cumulated current account deficit but desstabilizing in the case of a build up of government and government guaranteed foreign debt jel f32 f34

long run implications of investment specific technological change an attempt is made to disentangle its effects from the more traditional hicksneutral form of technological progress the balanced growth path for the model is characterized and calibrated to u s national income and product account nipa data the quantitative analysis suggests that investment specific technological change accounts for the major part of growth jel e13 030 041 047

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

is africa different abstract africa s macroeconomic response to external shocks was significantly differrent from that of other developing countries during 1976 1986 nonparametric tests that correct for differing initial conditions indicate significantly lower economic growth in african economies average inflation was also significantly lower while current account deficits were larger economic policies in african countries are characterized by significantly larger budget deficits and government current expenditure as a share of gross domestic product and by greater inward orientation african economies in the cfa franc zones are distinguished by relatively lower inflation budget deficits and less reduction in investment gnp ratios

optimal fiscal policy with redistribution i study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks unlike representative agent ramsey models workers are heterogenous and lump sum taxation is not ruled out i consider two tax scenarios a linear taxation with a lump sum intercept and b nonlinear mirrleesian taxation when taxes are linear i derive a partial equivalence result with ramsey settings that provides a reinterpretation of such analyses i find conditions for perfect tax smoothing oflabor income taxes and zero capital taxation implications that contrast with ramsey are derived for public debt management for the nature of the time inconsistency problem and for the viability of replicating complete markets without state contingent bonds shifts in the distribution of skills provide a novel source for variations in tax rates for the nonlinear tax scenario i show that taxation based on income averages is optimal

risky human capital and deferred capital income taxation abstract we study the structure of optimal wedges and capital taxes in a dynamic mirrlees economy with endogenous distribution of skills human capital is a private stochastic state variable that drives the skill process of each individual building on the findings of the labor literature we construct a tractable life cycle model of human capital evolution with risky investment and stochastic depreciation in this setting we demonstrate the optimality of a a human capital premium i e an excess return on human capital relative to physical capital b a large intertemporal wedge early in the life cycle and c a non zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life cycle the main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital the average marginal tax rate on physical capital held in every period is zero in present value however expected capital tax payments do not equal zero in every period necessarily agents face negative expected capital tax payments early in the life cycle and positive expected capital tax payments late in the life cycle

inflation and monetary policy in selected west and central african countries abstract this paper studies the conduct and performance of monetary policy in five west and central african countries cameroon cote d ivoire gabon ghana and nigeria the first three are members of the cfa zone and maintain a fixed peg vis a vis the french franc the other two have recently opted for a more flexible exchange rate regime no general conclusion can be drawn on the monetary policy exchange rate policy nexus estimates of the offset coefficient are significantly different from negative one but var estimation results on the ability of the monetary authority to pursue an independent inflation target are mixed the monetary authorities of ghana and nigeria sterilize the accumulation of net foreign assets to a limited degree no such evidence exists for cfa zone members

the inflationary effects of stochastic resource revenues in resource rich economies with less well developed financial markets this article develops a simple dynamic stochastic general equilibrium dsge model to illustrate how economies that face restrictions in their ability to alter both government spending and taxation in the short run and cannot borrow easily perhaps because of incomplete internal capital markets can find external fluctuations in resource revenues producing unexpected variations in their internal money supply and ultimately in their inflation rate the main channels for these effects run through the government budget and through the country s balance of payments position the model is calibrated to illustrate the case of iran

economic growth in africa abstract this paper draws on the recent endogenous growth methodology to study the factors behind differences in per capita growth rates across africa the results indicate that various economic factors including initial conditions investment population growth trade orientation inflation financial development and the growth of the government sector contribute significantly to economic growth in addition to economic variables we find the degree of political freedom to be a significant contributor to economic growth finally we find some evidence that economic growth by the members of the cfa franc zone has not fared well in comparison to other african countries

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic