some macroeconomic implications of alternative compensation systems a basic theme of this paper is the idea that some structural reform of employee compensation arrangements is necessary to make reasonable price stability compatible with reasonably full employment in this view even the best designed macroeconomic policies are much too aggregative to get at the heart of the stagflation problem the ultimate solution involves going inside the workings of a modern capitalist economy and correcting the underlying structural flaw directly on the level of the individual firm stagflation represents an especially intractable policy dilemma for macroeconomics without a decisive tendency of the economic system to remain near full employment there is a strong prima facie case for fighting recessions by exogenously stimulating aggregate demand but the usual keynesian expansionary policies tend to impart an inflationary inertia that is difficult to choke off and of course the basic strategy for fighting inflation is to cool down the economy by restrictive monetary and fiscal policy thereby increasing unemployment and closing the viscous circle because the practical macroeconomic policies for dealing with unemployment and inflation are so diametrically opposed stagflation is a pervasive structural problem when for whatever reason there is basically an unfavourable short run tradeoff between unemployment and inflation economic policy tends to vacillate between expansion of demand to fight unemployment and restriction of demand to fight inflation polarising the electorate and distracting society from dealing effectively with its underlying real economic problems even the difficulty of attaining external balance in foreign accounts is largely a spillover into the international payments arena of an inability to achieve an acceptable internal balance between full employment and price stability this paper takes what might be called a comparative systems approach to the problem of stagflation at the heart of modern industrial capitalism is an incredibly complicated system of overlapping monopolistic competitors 2 a starting point for the paper is the realisation that the coordination difficulty which can cause some systems to suffer involuntary unemployment is not inherent in laissez faire private enterprise per se it is closely tied to one particular property of a conventional wage payment system namely compensation of each firm s employees is stuck to an outside numeraire whether money or a cost of

imperfect competition and the keynesian cross abstract this paper presents a simple general equilibrium model in which the only non walrasian feature is imperfect competition in the goods market the model is shown to exhibit various keynesian characteristics in particular as competition in the goods market becomes less perfect the fiscal policy multipliers approach the values implied by the textbook keynesian cross

producer s dilemma experiments abstract embedding profit motivated producers in a simple macroeconomic model creates a system where expansion by one producer is unprofitable but coordinated expansions are profitable in this system any level of aggregate demand is a potential equilibrium the ruling equilibrium is determined by expectations rather than close the model with behavioral assumptions behavioral observations are made of subjects in this incentive environment

limited rationality and strategic interaction the impact of the strategic environment on nominal inertia much evidence suggests that people are heterogeneous with regard to their abilities to make rational forward looking decisions this raises the question as to when the rational types are decisive for aggregate outcomes and when the boundedly rational types shape aggregate results we examine this question in the context of a long standing and important economic problem the adjustment of nominal prices after an anticipated monetary shock our experiments suggest that two types of bounded rationality money illusion and anchoring are important behavioral forces behind nominal inertia however depending on the strategic environment bounded rationality has vastly different effects on aggregate price adjustment if agents actions are strategic substitutes adjustment to the new equilibrium is extremely quick whereas under strategic complementarity adjustment is both very slow and associated with relatively large real effects this adjustment difference is driven by price expectations which are very flexible and forward looking under substitutability but adaptive and sticky under complementarity moreover subjects expectations are also considerably more rational under substitutability

on monopolistic competition and involuntary unemployment in a simple temporary general equilibrium model it is shown that if the number of firms is small imperfect price competition in the markets for goods may be responsible for the existence of unemployment at any given positive wage in our examples involving two firms facing their true demand curves total monopolistic labor demand remains bounded as the wage rate goes to zero and unemployment prevails for a sufficiently large inelastic labor supply in the competitive case total labor demand would go to infinity and intersect labor supply at a positive wage

hazards of the market the continuity and dissolution of interorganizational market relationships the authors propose a theory of the market as an intertemporal process that integrates multiple theoretical perspectives using event history methods thery analyze the dissolution of interorganizational market ties between advertising agencies and their clients as a function of three forces competition power and institutional forces the informal rules of exchange institutionalized in the emergence phase of the advertising services market include exclusivity sole source and loyalty infrequent switching they find that most exchange relationships between advertising agencies and their clients are indeed exclusive and most last for several years but competition power and institutional forces support or undermine these rules most institutional forces reduce the risk of dissolution of agency client ties powerful advertising agencies mobilize resources to increase tie stability but powerful clients mobilize resources to increase or decrease stability competition is the weakest market force but it has a consistent and substantial effect on tie dissolution competition always increases the risk of dissolution they conclude that the market is institutionalized as imperfectly repeated patterns of exchange because competition and changing norms about the duration of market ties destabilize market relationships

segmented trends and non stationary time series since the influential work of charles r nelson and charles plosser 1982 many empirical studies have concluded that macroeconomic time series are difference stationary this paper proposes the segmented trend model as an alternative in which the series is the sum of a nonstationary trend and a stationary cycle and where the trend shows infrequent shifts the paper proposes tests between the difference stationary and segmented trends models and applies these to the data of nelson and plosser in general the results indicate that prices are difference stationary but quantities follow segmented trend processes copyright 1989 by royal economic society

james tobin an appreciation of his contribution to economics jim tobin who died on march 11 2002 at the age of 84 was one of giants of economics of the second half of the twentieth century and the greatest macroeconomist of his generation tobin s influence on macroeconomic theory is so pervasive so much part of our professional acquis that many younger economists often are not even aware that it is his ideas they are elaborating testing criticising refuting or re inventing in this appreciation i consider tobin s scholarly contributions made over a period of more than 50 years tobin received the 1981 nobel memorial prize for his analysis of financial markets and their relations to expenditure decisions employment production and prices i consider his contributions to mean variance portfolio demand and asset pricing theory especially the portfolio separation theorem pitfalls in financial model building portfolio balance and flow of funds models and the credit channel the life cycle model and social security econometric methodology including the tobit estimator and his pioneering work using both time series and cross sectional data to estimate food demand functions economic growth tobin s q the tobin tax the monetary and fiscal policy effectiveness debate first with milton friedman and then with the new classical macroeconomics and real business cycle schools and tobin s approach to methodological questions including microfoundations and aggregation

predetermined wages and prices and the impact of expansionary government policy this paper characterizes the monetary equilibria of an economy with commodity and labour contracts if government policy is not too variable there may exist an equilibrium with predetermined wages and prices in this equilibrium observed changes in the money supply to finance government purchases have persistent real effects the paper also provides theoretical support for an inverse relationship between the degree of indexation in contracts and the persistence of policy effects

monopolistic competition risk aversion and equilibrium recessions this paper considers a model with monopolistic competition and multiple equilibria rankable by output employment and the pareto criterion while papers in the literature assume a linear production technology and derive a continuum of equilibria we assume a standard diminishing returns production function and find a finite set of equilibria our new feature is the assumption that firms behave in a risk averse manner a low level equilibrium is sustainable because firms at the low profits level associated with the equilibrium become extremely cautious in their employment decisions

collective learning effective demand loss of work and loss of direction the growing regional divide within the uk mackay r r and davies r collective learning effective demand loss of work and loss of direction the growing regional divide within the uk regional studies the local economy relies on a division of labour that develops highly specialized skills in searching for an understanding of the growing work gap within the united kingdom emphasis is placed on recessions that connect to loss and redundancy of physical and human capital high levels of regional unemployment following deindustrialization convert into high levels of regional non work in later years the loss of an economic base leaves a gap in the community and economy that people struggle to bridge market forces work strongly against certain groups in society including those at some disadvantage in the labour market mackay r r and davies r

complementary credit networks and macroeconomic stability switzerland s wirtschaftsring abstract the swiss wirtschaftsring economic circle credit network founded in 1934 provides residual spending power that is highly counter cyclical individuals are cash short in a recession and economize by greater use of wir credits a money in the production function mipf specification implies that transactions in wir form a stabilizing balance that makes up for the lack of ordinary currency thus unlike the ordinary money wir money is negatively correlated with gdp in the short run this implication is confirmed by empirical estimates such credit networks play a stabilizing role that should be considered in monetary policy

comment on b t mccallum new classical macroeconomics a sympathetic account i like mccallum s survey and its general theme that there is substantially more interaction and agreement in macroeconomics than is often made to be in my comments i want to take the argument one step further and argue that recent research developments suggest an interesting convergence between what robert hall has called the freshwater economists those who live in the midwest near the lakes and the saltwater economists those who live on the east and west coasts like hall i prefer not to use the words neo new keynesian or classical and their many associated semantic traps if i am right this convergence will lead to a substantial change in the field in the years to come three related themes are emerging as central to macroeconomics to the joint understanding of fluctuations and growth they are externalities increasing returns and imperfect competition these themes are hardly new and one cannot help feel that history of thought repeats itself 2 what is new however is both a wide consensus that they are important and substantial analytical progress in clarifying their relation to macroeconomic phenomena i shall start by describing recent developments on both the saltwater and the freshwater sides and how they are converging i limit myself to recent developments and using the excuse that this is a comment rather than yet another survey i shall not attempt to give an exhaustive bibliography

least squares learning and the stability of equilibria with externalities this paper studies the stability of competitive equilibria in a model of aggregate employment when the representative agent uses a least squares forecasting procedure it is shown that the pareto inferior low employment steady state is always unstable under least squares learning even if it is stable under perfect foresight the high employment steady state is stable under learning if and only if it is saddle point stable under perfect foresight this weakens multiple equilibrium theories of coordination failure that purport to explain persistently high unemployment the pareto superior high employment steady state will be the focal point of individual forecasting

corporate debt overhang and macroeconomic expectations one way in which corporate financial structure affects macroeconomic performance is by creating debt overhang debt overhang occurs when existing debt deters new investment because the benefits from new investment will go to the existing creditors not to the new investors if the economy is booming debt overhang will not bind because the returns to investing are high if the economy is stagnant debt overhang will bind because the returns to investing are low as a result high levels of debt can create multiple expectational equilibria in which animal spirits determine economy activity copyright 1995 by american economic association

hysteresis in unemployment unemployment has risen sharply in a number of countries and it appears to be becoming more persistent the experience of the 1970s and 1980s showed that adverse unemployment shocks could have long lasting effects with very serious economic and social consequences a key mechanism producing these adverse consequences was hysteresis in unemployment whereby temporary rises in unemployment generated by supply and or demand shocks had permanent or at least very persistent effects clearly it is important to understand how hysteresis mechanisms might operate in order to avoid such adverse outcomes on the other hand experience during the subsequent two decades showed that under more favourable macroeconomic conditions it is possible to observe good hysteresis effects now is a very appropriate time to re visit the issue of hysteresis in unemployment in order to avoid the errors of the 1970s and 1980s and if possible to get hysteresis effects working in a positive direction copyright 2011 oxford university press

monopolistic competition and the effects of aggregate demand how important is monopolistic competition to an understanding of the effects of aggregate demand on output we ask the question at three levels can monopolistic competition by itself explain why aggregate demand movements affect output can it together with other imperfections generate effects of aggregate demand in a way that perfect competition cannot if so can it give an accurate account of the response of the economy to aggregate demand movements the answers are no yes and yes

costs prices and profitablity in uk manufacturing the 1984 input output tables make it possible to estimate directly the cost structure of any industrial sector the results of this calculation are presented for the non food manufacturing sector for the period 1970 87 this cost estimate is found to be part of a co integrating set with output prices in contrast to the specification implied by a cobb douglas production function the other elements of the equilibrium vector are an index of capacity utilization positively related to the mark up and the variance of inflation proxying inflation uncertainty which is negatively related import prices have an indirect effect on the mark up via demand

fiscal policy multipliers the role of monopolistic competition scale economies and intertemporal substitution in labour supply a dynamic macroeconomic model of monopolistic competition is developed for the closed economy forward looking consumers demand differentiated goods supply labour and save part of their income in the form of shares producers manufacture the differentiated goods by using labour and capital we study the short run transition and long run effects of fiscal policy comparisons with the new classical case of perfect competition are made simple expressions far multipliers are derived the sensitivity of the multipliers for diversity preference and ethier productivity effects intratemporal and intertemporal substitution effects and markup effects under free and restricted entry are also studied

imperfect competition and the suboptimality of rational expectations abstract this paper investigates whether nonrational expectations can lead to outcomes which other things being equal pareto dominate rational expectations outcomes in order to carry out this investigation we construct an intertemporal micro based macroeconomic model with the two following strong points a it accommodates both rational and non rational expectations b both prices and quantities are determined by optimizing agents in particular prices are determined by explicit price setters using objective demand curves in this model the first theorem of welfare holds so that the walrasian equilibrium with rational expectations cannot be pareto dominated this conclusion is extremely fragile however and we show that as soon as some degree of imperfect competition is present rational expectations are suboptimal in the sense that they are dominated by irrational expectations

theoretical foundations for sticky wages abstract the paper compares three different types of theoretical explanation of sticky wages they are implicit contracts efficiency wage models and insider outsider models it then reconsiders keynes rationale for sticky wages which focuses on relative wage issues finally the paper considers possible directions for future research

a simple macroeconomic model with monopolistic firms this paper presents a simple macroeconomic model in which firms outputs are imperfect substitutes and explores the macroeconomic implications of monopolistic competition the model is classical in some respects but keynesian in others multiple or unstable equilibria are not unlikely permanent price controls will in principle be desirable since they allow a permanent and efficient increase in aggregate output small costs of price adjustment may induce large deviations of output from the natural rate fiscal policy will generally affect aggregate output but the sign and magnitude of the government expenditure multiplier cannot be determined a priori

local food prices and international price transmission world food prices spiked in the periods 2007 8 and 2010 11 the impact of these spikes in world food prices on local food prices and thus on local consumers is determined by the food price pass through pass through is defined as the extent to which changes in world food prices lead to changes in local food prices we examine the determinants of variation in food price pass through from global to local consumer prices in a global sample of 147 countries using fao data on world food prices and ilo data on food prices for consumers while market integration matters our study finds that income per capita is the dominant factor explaining cross country variation in pass through of food prices we estimate an elasticity of about 0 3 of pass through with respect to income per capita this means far greater price transmission of food price shocks at the commodity level to final consumers in low income countries than in high income countries the implication is that future swings in world food prices will in particular jeopardize food security in poor countries trade policy measures of market integration also affect the pass through significantly whereas infrastructure and geography measures play no significant role

sectoral balance in development a survey abstract this paper surveys the literature on sectoral balance to see how sectoral imbalances can retard economic development it examines definitions of sectors and balance provides background facts theories and planning tools reviews the debate on balanced growth and surveys two sector models of agriculture industry consumption investment and luxury basics interaction the open economy and the role of service nonmarket and unproductive sectors it argues that the examination of important development issues requires multisectoral analysis incorporating the insights of several of these models and that alternative models with different structural characteristics deserve attention

increasing returns and the foundations of unemployment theory current approaches to macroeconomic theory divide roughly into two basic schools of thought one approach typically associated with rational expectations views the economy as basically at or near walrasian market clearing equilibrium in which case it becomes very difficult to explain away convincingly the undeniable persistence at times of involuntary unemployment another approach views the underemployed economy as being in a state of temporary fixed price disequilibrium in which case aside from having to repress suspicions that the essence of effective demand failure might not have to do with prices fixed at wrong values there is a lot of rationalising to be done about why profitable adjustments are so slow this paper argues that something like an internally consistent theory of steady state involuntary unemployment is possible and even plausible the cornerstone of this third approach is increasing returns to scale which blocks unemployed agents from breaking out of a low level equilibrium trap unless there is overall coordination or stimulation a simple model is presented which contains the basic ideas

macroeconomic issues for latin america abstract recent macroeconomic issues in latin america are reviewed with an emphasis on theory topics covered include multiple equilibria from hysteresis or increasing returns exchange rate management and the output and asset market effects of devaluation speculation interest rate management and financial reform government behavior income distribution and growth inertial inflation and heterodox policy shocks and disequilibrium theories

implementing the share economy in a recent series of papers and books weitzman 11 12 13 has put forward a new policy prescription for the macroeconomy in weitzman s view significant improvements in the performance of the macroeconomy can be achieved by altering key structural relationships specifically the wage contract between workers and firms weitzman labels this approach the share economy because workers wages are no longer contracted for in nominal terms but vary with an index of the firm s performance usually profits that is the workers share in the firm s success or failure the point of weitzman s work is not that participation increases worker s motivation or productivity in weitzman s view share contract wage agreements create a pool of latent excess demand for labor within firms firms then behave in the labor markets as buyers who would expand employment at the going wage if they could this contrasts with the more familiar case where firms are willing to expand employment only if the wage is reduced weitzman s claims for economies implementing share contracts are impressive lower natural unemployment rates less susceptibility to layoffs caused by macroeconomic shocks and reduced inflation in weitzman s world firms are monopolistic competitors operating under increasing returns to scale it is these two features that lead to wage and price inflexibility and therefore to potential unemployment 10 weitzman makes his case for the share economy by examining a transition economy where conversion from a wage system to an equivalent profit sharing system yields the same pay 13 945 even in this case where total payments to workers are identical weitzman shows that the share economy expands output and employment while lowering price 13 945 although conversion to a share economy may seem desirable from a macroeconomic view

economics of development and the development of economics the purpose of this paper is to restore some historical perspective by highlighting the many contributions of development economics to the rest of economics we will point out to the younger generations how some of the glittering ideas they currently play with originally came from that now neglected field and how in some cases they have rediscovered with great fanfare insights that were well known in the development literature familiarity with which would have enriched their own work