communication networks in markets abstract this paper proposes and tests experimentally a dynamic model of bargaining to analyze decentralized markets where buyers and sellers obtain information about past deals through their social network there is a unique equilibrium in which every individual obtains the same outcome independent of their network position and this outcome depends on the peripheral least connected individuals in the network the main testable predictions are that networks with high density and or low variability in the number of connections across individuals allow their members to obtain a better deal these predictions are tested in a lab experiment through 4 treatments that vary the network that subjects are assigned to the results of the experiment lend support to the theoretical predictions subjects converge to an outcome that is independent of their network position and they fare better if they are assigned to a network that is dense and or has low variability in number of connections across members

stylized facts and regime changes are prices procyclical we investigate empirically the stability of the correlation between output growth and inflation using a technique that allows for changes in regime we look at recent quarterly data for the g4 and at historical data for the u s and u k we find evidence of changes both in means and variances in both sources of data in the quarterly data we find that the covariance between output growth and inflation is typically negative in the historical data we find as suggested in previous studies that inflation was procyclical especially in the inter war years but has been countercyclical in the post war period

tax smoothing with stochastic interest rates a reassessment of clinton s fiscal legacy the return to sound fiscal policy after the high budget deficits of the 1980s and early 1990s has been hailed by many as the clinton administration s most important achievement we evaluate post war u s fiscal policy using a generalized tax smoothing model that allows for stochastic interest rates and growth rates we show that contrary to conventional wisdom the evolution of the u s debt gdp ratio during the 1980s was remarkably consistent with the tax smoothing paradigm in fact a more substantial departure occurred during the late 1990s when the debt gdp ratio fell more rapidly than predicted by optimal tax smoothing

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

debt maturity without commitment i analyze how lack of commitment afiects the maturity structure of sovereign debt governments balance beneflts of default induced redistribution and costs due to income losses in the wake of a default their choice of short versus longterm debt afiects default and rollover decisions by subsequent policy makers the equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that re ect the price impact of these decisions the model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high output low or a cross default more likely these predictions are consistent with empirical evidence

managing the maturity structure of government debt abstract it is known that a government can implement the optimal complete market ramsey allocations by issuing non contingent bonds of different maturities the implied optimal maturity structure is time and state invariant i e it is not actively managed i construct a model where the ramsey allocations can be implemented with active management of the maturity structure in a numerical example that reflects the time series properties of the british government s expenditure during the 18th century its historic pattern of maturity management is replicated

optimal fiscal policy rules in a monetary union this paper investigates the importance of fiscal policy in providing macroeconomic stabilization in a monetary union we use a microfounded new keynesian model of a monetary union which incorporates persistence in inflation and non ricardian consumers and derive optimal simple rules for fiscal authorities we find that fiscal policy can play an important role in reacting to inflation output and the terms of trade but that not much is lost if national fiscal policy is restricted to react on the one hand to national differences in inflation and on the other hand to either national differences in output or changes in the terms of trade however welfare is reduced if national fiscal policy responds only to output ignoring inflation

bond ladders and optimal portfolios we analyze complex bond portfolios within the framework of a dynamic general equilibrium asset pricing model equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets instead portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies the welfare loss of these simple investment strategies when compared to the equilibrium portfolio converges to zero as the length of the bond ladder increases this article therefore provides a rationale for naming bond ladders as a popular bond investment strategy

on the international dimension of fiscal policy this paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non state contingent debt the main finding of the paper is that once the open economy aspect of the policy problem is considered it is not optimal to smooth taxes following idiosyncratic shocks even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium the presence of a terms of trade externality lead to movements in the tax rate also in contrast with the closed economy the introduction of sticky prices can reduce the optimal volatility of taxes

altruistic versus egoistic behavior in a public good game this paper analyzes an evolutionary version of the public good game in which boundedly rational agents can use imitation and best reply decision rules several possibilities for both decision rules to be present in the population are considered i show that altruistic behavior might survive if switching between the decision rules occurs less often than the probabilities of errors in choosing a strategy and if local neighborhoods are not too small or too large

government debt management the long and the short of it standard optimal debt management dm models prescribe a dominant role for long bonds and advocate against issuing short bonds they require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue r r new ones these features of dm are inconsistent with u s data we introduce incomplete markets via small transaction costs which serves to make optimal dm more closely resemble the data r r are negligible short bond issuance substantial and persistent and short and long bonds positively co vary intuitively long bonds help smooth taxes over states and short bonds over time solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions

an evolutionary model of bargaining abstract individuals from two populations of bargainers are randomly matched to play the nash demand game they make their demands by choosing best replies based on an incomplete knowledge of the precedents and occasionally they choose randomly there is no common knowledge over the long run typically one division will be observed almost all of the time this stochastically stable division is close to the nash solution when all agents in the same population are alike when the populations are heterogeneous a generalization of the nash solution results if there is some mixing between the two populations the stable division is fifty fifty journal of economic literature classification number c78

short and long interest rate targets can both short and long term interest rates be targeted independently can the target of the term structure help solve the problem of multiplicity of equilibria that occurs when only the short rate is targeted both questions are addressed and the answer is yes to both

a prospect theory nash bargaining solution and its stochastic stability abstract we consider the long run outcomes of bargaining games when players obey prospect theory we extend the evolutionary bargaining model of young 1993 to a two stage nash demand game two players simultaneously choose whether to exercise an outside option in the first stage and play the nash demand game in the second stage which will be reached only if neither player exercises the outside option we address the influence on the stochastically stable division of reference dependent preferences where the reference point is the value of the outside option we show that the division consistently differs from the nash bargaining solution under expected utility theory inspired by this we propose a prospect theory nash bargaining solution which coincides with the stochastically stable division

optimal inflation persistence ramsey taxation with capital and habits ramsey models of fiscal and monetary policy featuring time separable preferences and a fixed supply of capital predict highly volatile inflation with no serial correlation in this paper we show that an otherwise standard ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation the result depends on increases in either the ability to smooth consumption or the preference for doing so the effect operates through the fisher relationship a smoother profile of consumption implies a more persistent real interest rate which in turn implies persistent optimal inflation our work complements a recent strand of the ramsey literature based on models with nominal rigidities in these latter models inflation volatility is lower than in the baseline model but continues to exhibit little persistence we quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

stochastic stability under logit choice in coalitional bargaining problems abstract this study examines a dynamic process of n person coalitional bargaining problems we investigate the evolution of social conventions by embedding a coalitional bargaining setting in a dynamic process in each period a group of players may make some coalitional move that is forming a new team or negotiating the division of a surplus players revise their coalitions and surplus divisions over time in the presence of stochastic noise which leads players to make a suboptimal decision under a logit specification of choice probabilities we find that the stability of a core allocation decreases in the wealth of the richest player furthermore stochastically stable allocations are core allocations that minimize the wealth of the richest player

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

increasing public debt and the role of central bank independence for debt maturities abstract governments are interested in lengthening debt maturity to reduce fiscal refinancing and default risks on the other hand investors may worry that highly indebted governments will inflate away their debts when it is long term based on a new panel dataset spanning from 1990 2016 for 28 oecd countries the paper finds that governments prolong the average debt maturity if debt ratios increase interestingly the marginal effect of the debt ratio on average maturity is higher for countries with an independent central bank than for countries with a more politically dependent one there are two possible explanations for this effect of central bank independence first an independent central bank reduces the inflation risk premium that longer maturities otherwise would have second governments with independent central banks are unable to use monetary policy for inflating and reducing fiscal and interest rate shock burdens again this calls for longer maturities to reduce the relevant risks

fiscal policy and inflation in a monetary union this paper studies optimal scal policies in a small open economy within a mon etary union the government has access to nominal non state contingent debt and distortionary labour taxes to nance exogenous spending price levels dier across countries due to consumption home bias thus scal policy in uences in ation and the terms of trade prices are exible we show that unlike in a country with an inde pendent monetary policy some variability in labour taxes is optimal this is true even when the terms of trade externality is shut down while scal policy aims at smooth ing production distortions with nominal public debt there is an incentive to use taxes to in ate in bad times when debt levels are high reminiscent of chari et al s 1991 optimal monetary policy result

tax smoothing in a business cycle model with capital skill complementarity this paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt capital skill complementarity and endogenous skill acquisition under technology and public expenditure shocks we find that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition as well as when the relative skill supply is exogenously determined we further find that the government finds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long run and the standard deviation of this wedge over the business cycle this is achieved by subsidising skill creation and taxing both types of labour income

fiscal sustainability in a new keynesian model recent work on optimal monetary and fiscal policy in new keynesian models suggests that it is optimal to allow steady state debt to follow a random walk in this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking we show that governments are tempted given inflationary expectations to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service we demonstrate that this temptation is only eliminated if following shocks the new steady state debt is equal to the original efficient debt level even though there is no explicit debt target in the government s objective function analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock we also show that the welfare consequences of introducing debt are negligible for precommitment policies but can be significant for discretionary policy finally we assess the credibility of commitment policy by considering a quasi commitment policy which allows for different probabilities of reneging on past promises

does evolution solve the hold up problem abstract the paper examines the theoretical foundations of the hold up problem at the first stage one agent decides on the level of a relationship specific investment there is no contract so at the second stage the agent must bargain with a trading partner over the surplus that the investment has generated we show that the conventional underinvestment result hinges crucially both on the assumed bargaining game and on the choice of equilibrium concept in particular we prove the following two results i if bargaining proceeds according to the nash demand game any investment level is subgame perfect but only a particular efficient outcome is stochastically stable ii if bargaining proceeds according to the ultimatum game with the trading partner as proposer only the minimal investment level is subgame perfect but any investment level is stochastically stable journal of economic literature classification numbers l14 c78

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

clever agents in young s evolutionary bargaining model in the models of young 1993 econometrica61 57 84 1993 j econ theory59 145 168 boundedly rational individuals are recurrently matched to play a game and they play myopic best replies to the recent history of play it could therefore be an advantage to instead play a myopic best reply to the myopic best reply something boundedly rational players might conceivably also do we investigate this possibility in the context of young s j econ theory59 145 168 bargaining model it turns out that cleverness in this respect indeed does have an advantage in some cases however if all individuals are equally informed about past play in a statistical sense then the nash bargaining solution remains the unique long run outcome when the mutation rate goes to zero journal of economic literature classification numbers c70 c78

analyzing economic market interactions as conflicts new concepts to assess market based policy instruments complementing market based policy instruments with conflict analysis approaches provides a wider understanding of market situations and allows to identify minimal requirements regarding needs power and conflict dynamics if these are not met a market cannot be successfully introduced or a liberalization process implemented conflict analysis offers a language better suited to the concerns of people negatively affected by new markets applying this language helps to counterbalance the predominance of economic concepts this fosters mutual understanding and enhances the prospect for successful implementation of market based policies we illustrate the potential of conflict analysis with examples from water privatization and labeling

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

optimal fiscal and monetary policy equivalence results in this article we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy we consider standard monetary economies that differ in the price setting restrictions imposed on the firms we show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness in this sense environments with different price setting restrictions are equivalent

fiscal insurance and debt management in oecd economies assuming the role of debt management is to provide hedging against fiscal shocks we consider i what indicators can be used to assess the performance of debt management ii how well historical debt management policies have performed iii how performance is affected by variations in debt issuance using oecd data between 1970 and 2000 we propose performance indicators for debt management which we evaluate using monte carlo analysis those based on the relative persistence of debt perform best there is only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns

asset backed contracts and sovereign risk abstract a fundamental problem with sovereign default is the lack of a legal enforcement mechanism since the 1920s there have been an ongoing set of initiatives undertaken by the league of nations and the unctad to set international laws on borrowing and lending standards all of which have failed to address the unenforceability problem this paper proposes to use asset backed contracts where the usufruct of the asset transfers to the asset holder unlike conventional sovereign borrowing there are international laws governing asset backed contracts which allow the international assets of a country to be seized this paper exemplifies on the idea that asset backed contracts which are also widely practiced in islamic finance can provide a solution to unenforceable sovereign debt contracts the paper focuses specifically on argentina which has defaulted twice in 13 years if argentina had utilized asset backed contracts prior to its 2001 debt default it would have gained from the following advantages higher debt to gdp ratios larger welfare gains lower probability of default and thus lower borrowing costs

conflict leads to cooperation in demand bargaining abstract we consider a multilateral nash demand game in which short sighted players come to the bargaining table with requests for both coalition partners and the potentially generated resource we prove that the resulting process converges with probability one to a state in which all players agree on a strictly self enforcing division of resources i e a strict core allocation highlighting group dynamics we show how the myopic actions of players may lead to the break up of groups in the short run but can ultimately bring about a situation from which a strictly self enforcing allocation can be reached

on the relevance of exchange rate regimes for stabilization policy this paper assesses the relevance of the exchange rate regime for stabilization policy using both fiscal and monetary policy we conclude that the exchange rate regime is irrelevant this is the case independently of the severity of price rigidities independently of asymmetries across countries in shocks and transmission mechanisms the only relevant conditions are on the mobility of labor and financial assets the results can be summarized with the claim that every currency area is an optimal currency area however with labor mobility or tradable state contingent assets additional policy instruments would be required to establish the irrelevance result

self fulfilling debt crises a quantitative analysis this paper investigates the role of self fulfilling expectations in sovereign bond markets we consider a model of sovereign borrowing featuring endogenous debt maturity risk averse lenders and self fulfilling crises a la cole and kehoe 2000 in this environment interest rate spreads are driven by both fundamental and nonfundamental risk these two sources of risk have contrasting implications for the maturity structure of debt chosen by the government therefore they can be indirectly inferred by tracking the evolution of debt maturity we fit the model to italian data and find that nonfundamental risk played a limited role during the 2008 2012 crisis

bond market clienteles the yield curve and the optimal maturity structure of government debt we propose a clientele based model of the yield curve and optimal maturity structure of government debt clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy an optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing if agents are more risk averse than log then an increase in the long horizon clientele raises the price and optimal supply of long term bonds but while a welfare maximizing government caters to clienteles it does not accommodate fully their demand and limits issuance of long term bonds to a level where these earn negative expected excess returns

optimal time consistent government debt maturity this paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt as the literature has established if the government can perfectly commit to fiscal policy it fully insulates the economy against government spending shocks by purchasing short term assets and issuing long term debt these positions are quantitatively very large relative to gdp and do not need to be actively managed by the government our main result is that these conclusions are not robust when lack of commitment is introduced under lack of commitment large and tilted debt positions are very expensive to finance ex ante since they ex post exacerbate the government s problem stemming from a lack of commitment in contrast a flat maturity structure minimizes the cost entailed by a lack of commitment though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions we show that the optimal time consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility thus under lack of commitment the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols

fiscal policy and debt management with incomplete markets a ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets we develop a method that uses second order approximations of ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion the asymptotic mean of the planner s portfolio minimizes a measure of fiscal risk we obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit aggregate consumption and returns on traded securities for u s data we find that the optimal target debt level is negative but close to zero the invariant distribution of debt is very dispersed and mean reversion is slow

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

clever agents in adaptive learning abstract saez marti and weibull j econom theory 86 1999 268 investigate the consequences of letting some agents play a myopic best reply to the myopic best reply in young s j econom theory 59 1993 145 bargaining model which is how they introduce cleverness of players i analyze such clever agents in general finite two player games and show young s individual strategy and social structure princeton university press princeton nj 1998 prediction to be robust adaptive learning with clever agents does select the same minimal curb set as in the absence of clever agents if their population share is less than one however the long run strategy distribution in such a curb set may vary with the share of clever agents

capital taxation and ownership when markets are incomplete this paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets the model features a representative agent economy with linear taxes on labor and capital i first allow the government to trade only a real risk free bond optimal policy has the following features labor taxes fluctuate very little capital taxes are volatile and feature a positive negative spike after a negative positive shock to the government budget and capital taxes average to roughly zero across periods i then consider the implications of allowing the government to trade capital

does competition destroy ethical behavior explanations of unethical behavior often neglect the role of competition as opposed to greed in assuring its spread using the examples of child labor corruption excessive executive pay corporate earnings manipulation and commercial activities by universities this paper clarifies the role of competition in promoting censured conduct when unethical behavior cuts costs competition drives down prices and entrepreneurs incomes and thereby reduces their willingness to pay for ethical conduct nonetheless i suggest that competition might be good for ethical behavior in the long run because it promotes growth and raises incomes higher incomes raise the willingness to pay for ethical behavior but may also change what people believe to be ethical for the better this abstract was borrowed from another version of this item

sovereign default and maturity choice abstract this study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve first sovereign debt duration and maturity generally exceed one year and co move positively with the business cycle second sovereign yield spread curves are usually non linear and upward sloped and may become non monotonic and inverted during a period of high credit market stress such as a default episode finally output volatility impatience risk aversion and especially sudden stops are key determinants of maturity both in our model and in the data

stochastic adaptation in finite games played by heterogeneous populations we analyze stochastic adaptation in finite n player games played by heterogeneous populations containing best repliers better repliers and imitators individuals select strategies by applying a

enhanced debt management solving the eurozone crisis by linking debt management with fiscal and monetary policy abstract unconventional approaches to suit unusual circumstances have become acceptable in monetary policy a formerly highly conservative discipline in this paper it is argued that unconventional approaches should also be considered in sovereign debt management in order to contribute to resolving the eurozone sovereign debt crisis first the troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard imf post crisis lending the main difference and shortcoming is the unsustainable character of the eurozone approach due to the omission of demand stimulation components to address this and other shortcomings the features of an ideal alternative funding tool are identified it would solve the funding problems of affected sovereigns help stabilise the banking system but most of all stimulate domestic demand and hence end the vicious downward spiral it is found that this funding method can be implemented as part of enhanced public debt management by each nation s debt management office

on the need for fiscal constraints in a monetary union the desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to following its policies if it can commit then debt constraints can only impose costs if it cannot commit then fiscal policy has a free rider problem and debt constraints may be desirable this type of free rider problem is new and arises only because of a time inconsistency problem

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

fiscal hedging with nominal assets abstract we analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes nominal rigidities nominal debt of various maturities and short selling constraints optimal policy prescribes the almost exclusive use of long term debt such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods

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

debt and deficit fluctuations and the structure of bond markets we analyse the implications of optimal taxation for the stochastic behaviour of debt we show that when a government pursues an optimal fiscal policy under complete markets the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase by contrast under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit data for us government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness

optimal fiscal and monetary policy with sticky prices in this paper i consider the role of state contingent inflation as a fiscal shock absorber in an economy with nominal rigidities i study the ramsey equilibrium in a monetary model with distortionary taxation nominal non state contingent debt and sticky prices with sticky prices the ramsey planner must balance the shock absorbing benefits of state contingent inflation against the associated resource misallocation costs for government spending processes resembling post war experience introducing sticky prices generates striking departures in optimal policy from the case with flexible prices for even small degrees of price rigidity optimal policy displays very little volatility in inflation tax rates display greater volatility compared to the model with flexible prices with sticky prices tax rates and real government debt exhibit behavior similar to a random walk for government spending processes resembling periods of intermittent war and peace optimal policy displays extreme inflation volatility even when the degree of price rigidity is large as the variability in government spending increases smoothing tax distortions across states of nature becomes increasingly important and the shock absorber role of inflation is accentuated

interest costs and the optimal maturity structure of government debt the government faces a trade off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio the article solves for optimal policies in an incomplete markets model where the government uses two debt instruments long term and short term non contingent nominal bonds in this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long term debt the resulting welfare gains are close to what the government could achieve with complete markets significant welfare gains are possible even in the presence of leverage constraints

fiscal policy and regional inflation in a currency union abstract substantial attention has been devoted to inflation differentials within the european monetary union including suggestions that inflation differentials are a policy issue for national governments this paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy in a two region general equilibrium model with traded and nontraded goods lowering the labor income tax rate in response to positive inflation differentials succeeds in compressing inflation differentials such policies can lead to higher volatility of domestic inflation while leaving the volatility of real output roughly unchanged regional fiscal policies also have spill over effects on the volatility of union wide and foreign inflation in our model

in search of a theory of debt management the complete market approach to government debt management argues that a portfolio of non contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits however this approach recommends huge fluctuations in positions enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications these extreme volatile and unstable features are undesirable for two reasons firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model secondly for even miniscule transaction costs governments prefer a balanced budget rather than the large positions complete markets recommends the complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness e g transaction costs liquidity effects robustness etc and which need to be explicitly incorporated into the portfolio problem

sovereign debt maturity structure under asymmetric information abstract this paper studies the optimal choice of sovereign debt maturity when investors are unaware of the government s willingness to repay under a pooling equilibrium there is a wedge between the borrower s true default risk and the default risk priced in debt and its size differs with the maturity of debt safe borrowers tilt their debt maturity towards short term relative to the optimal choice under perfect information since long term debt pools more default risk that is not inherent to them risky borrowers mimic their behavior of safe borrowers to preclude the market from identifying their type in times of financial distress spreads increase and the default risk wedge of long term debt relative to short term debt increases which makes borrowers shorten their debt maturity data on bond issuances for a panel of countries show that consistent with the model maturities co vary negatively with spreads and that this co movement is stronger in those situations in which informational asymmetries are larger