convergence to the law of one price without trade barriers or currency fluctuations using a panel of 51 prices from 48 cities in the united states we provide an upper bound estimate of the rate of convergence to purchasing power parity we find convergence rates substantially higher than typically found in cross country data we investigate some potentially serious biases induced by i i d measurement errors in the data and find our estimates to be robust to these potential biases we also present evidence that convergence occurs faster for larger price differences finally we find that rates of convergence are slower for cities farther apart however our estimates suggest that distance alone can only account for a small portion of the much slower convergence rates across national borders

securitization of taxes implicit in payg pensions to preserve solvency a pay as you go payg pension system needs to adjust contribution rates and pension promises over time currently it is not possible to hedge in the financial market against politically determined uncertainty as regards these parameters i consider a policy reform whereby property rights are established on the implicit lifetime tax levied by payg finance and are assigned to the pension institution these property rights are well defined if the reform also features rule based allocation of aggregate risk in the form of defined contribution or defined benefit schemes i show that a payg pension system may indeed be instantly restructured so as to minimize political risk and allow financial market diversification of risk a side benefit is securitization of human capital flows which are not traded in existing financial markets the new securities if traded in appropriately competitive financial markets are complementary to the notional account reforms of the 1990s however fiscal instability can increase if securitization is implemented in the absence of initial solvency and credible adoption of rule based methods to allocate aggregate risk salvador valdes prieto

the case for gdp indexed bonds gds indexed bonds this paper seeks to revive the case for countries to insure against economic growth slowdowns by issuing bonds indexed to the rate of growth of gdp we show that gdp indexed bonds could provide substantial benefits in reducing the likelihood of default crises and allowing countries to avoid pro cyclical fiscal policies we simulate the effects of gdp indexed bonds under different assumptions about fiscal policy reaction functions and their output effects and find that they could substantially reduce the likelihood of debt gdp paths becoming explosive the insurance premium would likely be small because cross country comovement of gdp growth rates is low and cross country gdp growth risk is thus largely diversifiable for an investor holding a portfolio of gdp indexed bonds potential obstacles to the emergence of a market for these bonds include the verifiability of gdp data the trade off between insurance and moral hazard and the need for liquidity theory and past experience suggest that financial innovation often requires official intervention and its timing and form are difficult to predict we discuss institutional fixes and suggest an approach for attempting to start up a market eduardo borensztein and paolo mauro

implementation in differential information economies abstract we consider the problem of implementation of social choice correspondences in differential information economies we provide necessary conditions for implementation and slightly stronger conditions which are sufficient to guarantee implementation

the evolution of price dispersion in china s passenger car markets this research identified the rising price dispersion of passenger cars in chinese cities during the period from 2004 to 2006 the sources of the price differentials were then further explored the theoretical and empirical analyses suggest that the income effect as reflected by income differentials across chinese cities and the competition effect as reflected by car supply differentials across chinese cities largely account for regional automobile price differentials across china

a ricardian equivalence theorem on the taxation of pension funds abstract we compare the three main alternative ways of taxing pension funds of the defined contribution variety specifically the alternatives considered are equal yield taxes on contributions earnings and benefits analogous to the ricardian equivalence theorem the contributor s after tax benefit will be the same in each case

self fulfilling mechanisms and rational expectations we introduce a class of communication equilibria which we call self fulfilling mechanisms and show that they provide a game theoretic foundation to rational expectations equilibria letebe an exchange economy with differential information we associate a strategic market game e withe we prove that the allocations achieved through a self fulfilling mechanism in e coincide with the rational expectations equilibrium allocations ine in order to understand how self fulfilment can be realized in a dynamic framework we investigate the relationship between self fulfilling mechanisms in e and nash equilibria of thet stage repeated game t e journal of economic literatureclassification numbers d82 c72

price index convergence among united states cities we study the dynamics of price indices for major u s cities using panel econometric methods and find that relative price levels among cities mean revert at an exceptionally slow rate in a panel of 19 cities from 1918 to 1995 we estimate the half life of convergence to be approximately nine years the surprisingly slow rate of convergence can be explained by a combination of the presence of transportation costs differential speeds of adjustment to small and large shocks and the inclusion of nontraded goods prices in the overall price index do price indices in major u s cities share a common trend and if so how quickly do they revert to that trend following a local shock to the price index to answer this question we study the dynamics of consumer price indices for 19 major u s cities over the period from 1918 to 1995 the panel time series methods we employ are now commonly used for studying real output growth rates and levels of real exchange rates across countries we estimate that price index divergences across u s cities are temporary but surprisingly persistent with a half life of nearly nine years our research has two primary motivations first we hope to gain a better understanding of the sources of persistence in the deviations from purchasing power parity ppp found in studies of national price indices and exchange rate data second and more importantly we see the european monetary union as having many similarities to the united states and believe that studying the behavior of prices across u s cities will help us in understanding the likely nature of inflation convergence in the euro area the european central bank s stated inflation objective is a year on year change in the harmonized index of consumer prices hicp of not more than 2 but how large might we expect regional deviations from this euro area wide average to be and how long are they likely to persist the lack of data prevents us from answering this question directly using european prices under monetary union instead we look to the united states a mature common currency area of similar regional diversity size and industrial development

population age structure intergenerational transfer and wealth a new approach with applications to the united states this paper focuses upon intergenerational transfers overlapping generation models generational accounting and life cycle saving while assuming golden rule steady states and stable age profiles of transfers and economic activity using 1987 us data synthetic cohort methods were employed to explore how resource allocation over the life cycle generates real wealth and transfer wealth through the family public sector and financial markets while data problems assumption violations and accounting framework shortcomings would not permit firm conclusions transfer wealth in the us nonetheless seems to be about 2 3 greater than real wealth social security wealth medicare wealth and government debt are the main positive forms of wealth and together have greater value than real wealth transfer wealth must therefore displace holdings of physical capital and lead to lower labor productivity and higher interest rates

intergenerational risk sharing and risk taking of a pension fund abstract by using their financial reserves efficiently pension funds can smooth shocks on their asset returns and can thus facilitate intergenerational risk sharing in addition to the primary benefit of improved time diversification this form of risk allocation affords the additional benefit of allowing these funds to take better advantage of the equity premium which also favors the consumers in this paper our aim is twofold first we characterize the socially efficient policy rules of a collective pension plan in terms of portfolio management capital payments to retirees and dividend payments to shareholders we examine both the first best rules and the second best rules where in the latter case the fund is constrained by a solvency constraint and by a guaranteed minimum return to workers contributions second we measure the social surplus of the system compared to a situation in which each generation would save and invest in isolation for its own retirement we estimate that the certainty equivalent return of the pension saving scheme goes from 3 23 per year to 3 76 when intergenerational risk sharing is introduced one of the main results of the paper is that better intergenerational risk sharing does not reduce the risk born by each generation rather it increases the expected return to the workers contributions

market power and information revelation in dynamic trading we study a strategic model of dynamic trading where agents are asymmetrically informed over common value sources of uncertainty there is a continuum of buyers and a finite number n of sellers all buyers are uninformed while at least one seller is privately informed about the true state of the world when n 1 full information revelation never occurs in equilibrium and the only information transmission happens in the first period with n 1 the outcome depends both on the structure of the sellers information and even more importantly on the intensity of competition allowed by the existing trading rules when there is intense competition absence of clienteles information is fully and immediately revealed to the buyers in every equilibrium for n large enough regardless of the number of informed sellers on the other hand for trading arrangements characterized by less intense forms of competition presence of clienteles for any n we always have equilibria where information is never fully revealed moreover in that case when only one seller is informed for many parameter configurations there are no equilibria with full information revelation even for large n jel c72 c78 d82 d83

after the big bang obstacles to the emergence of the rule of law in post communist societies when russia launched mass privatization it was widely believed that it would create a powerful constituency for the rule of law that didn t happen we present a dynamic equilibrium model of the political demand for the rule of law and show that beneficiaries of mass privatization may fail to demand the rule of law even if it is the pareto efficient rule of the game the reason is that uncertainty about the legal regime can lead to asset stripping and stripping can give agents an interest in prolonging the absence of the rule of law this abstract was borrowed from another version of this item

the law of one price intranational evidence for canada this study investigates the behaviour of intranational prices for 45 specific consumer goods across 25 canadian cities it finds positive roles for distance and provincial borders in intercity price disparities while sizable the provincial border effect is an order of magnitude smaller than the estimates for the canada u s border a majority of the intercity relative price series are stationary around small mean values indicating that long run price differences are close to zero the intercity prices converge at rates considerably faster than the consensus estimates for international prices in fact half lives for intercity price deviations average well under a year jel classification f15 f31 la loi d un seul prix resultats intra nationaux pour le canada ce memoire examine le comportement des prix intra nationaux de 45 biens de consommation specifiques dans 25 villes canadiennes il semble que la distance et les frontieres inter provinciales ont un impact sur les differentiels de prix entre villes meme si l impact des frontieres inter provinciales est important il est beaucoupplus petit que l impact de la frontiere canada u s une majorite des series de prix relatifs entre villes sont stationnaires autour de petites valeurs moyennes ce qui suggere que les differences de prix a long terme s approchent de zero il est clair que les prix entre villes convergent a des taux considerablement plus rapides que ce qu on observe au niveau international en fait les deviations de prix entre villes ont une esperance de vie qui en moyenne est de moins d un an

the future of pensions in europe rescuing unfunded pensions suitably amended unfunded schemes remain a good idea unfunded state pension schemes are projected to become financially unsustainable this is usually attributed to demographic trends yet trends in unemployment and in female labour force participation are quantitatively as important improvements in either or both might be sufficient to rescue existing state schemes especially if combined with an end to the practice of allowing even after retirement the value of a pension to rise with national earnings rather than prices attempts at piecemeal reform are important because nothing in economic theory suggests a switch to the alternative fully funded pensions is desirable not only would such a transition be costly and therefore politically difficult it also neglects the fact that it makes sense to diversify the retirement portfolio holding claims both on labour productivity and on capital assets one can even view pensions as part of a more sophisticated system of intergenerational transfers through which workers finance their earlier education and subsequent retirement michele boldrin juan j dolado juan f jimeno and franco peracchi

intergenerational risk sharing abstract in this paper we examine government debt and tax transfer policies that can be improve the allocation of risk between generations markets cannot allocate risk efficiently between two generations whenever the two generations are not both alive prior to the occurence of a stochastic event this implies that government policies transferring risk between generations have the potential to create first order welfare improvements our model provides a non keynesian justification for the debt finance of wars and recessions as well as an added rationale for social security type tax transfer schemes which aid unlucky generations e g the depression generation at the expense of luckier generations

the politics of intergenerational redistribution this paper studies the political economic equilibrium of a two period model with overlapping generations in each period the policy is chosen under majority rule by the generations currently alive the paper identifies a politically viable set of values for public debt any amount of debt within this set is fully repaid in equilibrium even without commitments by issuing debt within this set the first generation redistributes revenue in its favor and away from the second generation the paper characterizes the determinants of the equilibrium intergenerational redistribution and identifies a difference between debt and social security as instruments of redistribution

private information in large economies this paper examines the effect of private information in large economies we show that in a model with stochastic information structures the restrictions imposed on allocations by the presence of private information disappear in large economies we also show that for a large class of direct mechanisms the incentive for any agent to falsely report private information goes to zero as the number of agents becomes large these results provide an informational smallness analog to existing quantity smallness limiting results in the literature

self fulfilling mechanisms in bayesian games abstract amechanismfor a bayesian gamegis a mapping from the set of states of nature to the set of players actions isself fulfillingif players are truthful at the communication stage and given the information revealed by no player can gain in unilaterally deviating from the action prescribed by the mechanism we investigate the properties of self fulfilling mechanisms and we show in particular that they correspond to inert solutions of the infinitely repeated game generated byg we also discuss applications to market games regulation and r d games journal of economic literatureclassification numbers d82 c72

rational expectations information acquisition and competitive bidding most rational expectations market equilibrium models are not models of price formation and naive mechanisms leading to such equilibria can be severely manipulable in this paper a bidding model is developed which has the market like features that bidders act as price takers and that prices convey information higher equilibrium prices convey more favorable information about the quality of the objects being sold than do lower prices bidders can benefit from trading only if they have a transactions motive or if they have access to inside information apart from exceptional cases prices are not fully revealing a two stage model is developed in which bidders may acquire information at a cost before bidding and for which the equilibrium price is fully revealing resolving a well known paradox

compiling the actuarial balance for pay as you go pension systems is it better to use the hidden asset or the contribution asset the aim of this article is twofold to establish the connection between the contribution asset ca and the hidden asset ha and to determine whether using either of them to compile the actuarial balance ab sheet in the pay as you go payg pension system will provide a reliable solvency indicator with these aims in mind we develop a model based on those first put forward by settergren and mikula 2005 and boado penas et al 2008 to obtain the analytical properties of the ca and to confirm its soundness as a measure of the assets of a payg scheme our model also enables us to explore whether and to what extent the ha can be considered a second alternative measure of the assets for payg schemes the main theoretical finding is that despite their very different natures the ha and the ca may nearly coincide at the limit when the interest rate of the financial market approaches the growth of the covered wage bill from above but the ha supplies a solvency indicator which is not always consiste

the evolution of price dispersion in the european car market car prices in europe are characterized by large and persistent differences across countries the purpose of this paper is to document and explain this price dispersion using a panel data set extending from 1980 to 1993 we first demonstrate two main facts concerning car prices in europe i the existence of significant differences in quality adjusted prices across countries with italy and the u k systematically representing the most expensive markets 2 substantial year to year volatility that is to a large extent accounted for by exchange rate fluctuations and the incomplete response of local currency prices to these fluctuations these facts are analysed within the framework of a multiproduct oligopoly model with product differentiation the model identifies three potential sources for the international price differences price elasticities generating differences in markups costs and import quota constraints local currency price stability can be attributed either to the presence of a local component in marginal costs or to markup adjustment that is correlated with exchange rate volatility the latter requires that the perceived elasticity of demand is increasing in price we find that the primary reason for the higher prices in italy is the existence of a strong bias for domestic brancs that generates high markups for the domestic firm fiat in the u k higher prices are mainly attributed to better equipped cars and or differences in the dealer discount practices the import quota constraints are found to have a significant impact on japanese car prices in italy france and the u k with respect to local currency price stability a large percentage of the documented price inertia can be attributed to local costs and a smaller fraction to markup adjustment that is indicative of price discrimination based on these results we conjecture that the emu will substantially reduce the year to year volatility observed in the car price data but without further measures to increase european integration it will not completely eliminate existing cross country price differences

jointly determined saving and fertility behaviour theory and estimates for germany italy uk and usa abstract the comparative statics predictions of models of the joint determination of household saving and fertility are derived under various hypotheses self interest altruism of parents towards children altruism of children towards parents etc and compared with those of models which determine saving under the assumption of exogenous fertility country specific saving and fertility equations are then estimated using time series data for germany italy uk and usa for each of the countries considered the estimates are consistent with the hypothesis that saving and fertility are jointly determined by self interested parents and reject the alternative hypotheses the data also show that a self financing expansion of social security discourages fertility and generally raises household saving

lessons for an aging society the political sustainability of social security systems what is the future of social systems in oecd countries in our view the answer belongs to the realm of politics we evaluate how political constraints shape the social security system in six countries france germany italy spain the uk and the us under population aging two main aspects of the aging process are relevant to the analysis first the increase in the dependency ratio the ratio of retirees of workers reduces the average profitability of the unfunded social security system thereby inducing the agents to reduce the size of the system by substituting their claims towards future pensions with more private savings second an aging electorate leads to larger systems since it increases the relevance of pension spending on the policy makers agenda the overall assessment from our simulations is that the political aspect dominates in all countries albeit with some differences spain the fastest aging country faces the largest increase in the social security contribution rate when labor market considerations are introduced the political effect still dominates but it is less sizeable country specific characteristics not accounted for in our simulations such as the degree of redistribution in the pension system and the existence of family ties in the society may also matter our simulations deliver a strong policy implication an increase in the effective retirement age always decreases the size of the system chosen by the voters while often increasing its generosity finally delegation of pension policy to the ec may reduce political accountability and hence help to reform the systems

the financial stability of notional account pensions a number of european countries are reforming their pension benefit formulas by adopting notional accounts these accounts are used to determine individual benefits but pay as you go financing is retained this paper addresses the belief that by choosing adjustment rules cleverly notional accounts can provide automatic financial equilibrium in the short run if this were true it would be a valuable advantage in terms of insulating the government budget from demographic pressures while insulating the pension budget from fiscal pressures it is shown that notional account benefit formulas cannot provide automatic financial equilibrium in the short run the paper also suggests that if indexing rules are chosen in a particular way and shocks revert rapidly to a mean the pension institution may achieve financial stability in the long run however long run stability is unlikely to be valuable because political interference occurs in the short run

a panel project on purchasing power parity mean reversion within and between countries abstract previous time series studies have shown evidence of mean reversion in real exchange rates deviations from purchasing power parity ppp appear to have half lives of approximately four years however the long samples required for statistical significance are unavailable for most currencies and are potentially inappropriate because of regime changes in this study we re examine deviations from ppp using a panel of 150 countries and 45 annual post wwii observations our panel shows strong evidence of mean reversion that is similar to that from long time series ppp deviations are eroded at a rate of approximately 15 annually i e their half life is around four years such findings can be masked in time series data but are relatively easy to find in cross sections

a battle of informed traders and the market game foundations for rational expectations equilibrium abstract potential manipulation of prices and convergence to rational expectations equilibrium is studied in a game without noise traders informed players with initially long and short positions bulls and bears seek to manipulate consumer expectations in opposite directions in equilibrium period 1 prices reveal the state so manipulation is unsuccessful bears and uninformed consumers sell up to their short sale limits in period 1 bulls buy in period 1 but receive arbitrage losses when the number of bulls and bears approaches infinity the equilibrium converges to the ree without short sale constraints there is a non revealing equilibrium but no revealing equilibrium

comment on s valdes prieto the financial stability of notional account pensions in an important contribution to this journal valdes prieto 2000 has shown that the recently popular concept of notional accounts cannot guarantee short run financial stability of pay as you go financed public pension schemes in the sense of automatic budget equality for any given time path of the contribution rate in result 2 p 406 he states that notional accounts do not provide automatic financial balance in the short run when the credited notional interest rate is the growth rate of contribution revenue except for the steady state growth case in the proof he uses a table p 408 table 1 in which the maximum value of the ratio of expenditures to revenues of the pension plan is calculated for the case of a rising growth rate of contribution revenue this maximum ratio is always above 1 the author explains his finding as follows when the growth rate of contribution revenue is used as the notional interest rate which is credited to the stock of notional capital of those members reaching age 65 the rise in expenditure is greater than the rise in revenue generating a deficit ibid the following simple example confirms result 2 but shows that the ratio of expenditures to revenues behaves in the opposite way to that asserted by valdes prieto a rise in the growth rate of revenues leads to a temporary surplus of the plan whereas a fall in the growth rate implies a temporary deficit the example is based on a discrete time 3 olg model in which individuals work the first two periods of their three period life earning 1 dollar each and the contribution rate 0 is fixed at 20 percent contributions are credited to the notional account in the period in which they are paid and earn an interest equal to the growth rate of contribution revenue which is credited to the account at the beginning of the next period at the beginning of the third period the account balance is paid out as a one shot retirement benefit in panel a of table 1 it is assumed that there are 100 workers in each of the cohorts entering the labor market in period t 2 and that this number

information aggregation in a large multi stage market game abstract a three stage market game mechanism is devised that is simple actions are quantities and outcomes are determined by arithmetic operations that do not depend on details of the economy and achieves efficiency in a two divisible good pure exchange setting with potential information aggregation after an entry stage agents make offers which are provisional for all but a small randomly selected group then those offers are announced and everyone else makes new offers with payoffs determined by a shapley shubik market game for a finite and large number of players there exists an almost ex post efficient equilibrium conditions for uniqueness are also provided

the purchasing power parity debate originally propounded by the 16th century scholars of the university of salamanca the concept of purchasing power parity ppp was revived in the interwar period in the context of the debate concerning the appropriate level at which to re establish international exchange rate parities broadly accepted as a long run equilibrium condition in the post war period it first was advocated as a short run equilibrium by many international economists in the first few years following the breakdown of the bretton woods system in the early 1970s and then increasingly came under attack on both theoretical and empirical grounds from the late 1970s to the mid 1990s accordingly over the last three decades a large literature has built up that examines how much the data deviated from theory and the fruits of this research have provided a deeper understanding of how well ppp applies in both the short run and the long run since the mid 1990s larger datasets and nonlinear econometric methods in particular have improved estimation as deviations narrowed between real exchange rates and ppp so did the gap narrow between theory and data and some degree of confidence in long run ppp began to emerge again in this respect the idea of long run ppp now enjoys perhaps its strongest support in more than 30 years a distinct reversion in economic thought

implementation of walrasian expectations equilibria in an exchange economy with differentially informed traders non exclusivity of information nei is the condition that each trader s private information be perfectly predictable by an outside observer who has observed the private information of all other traders nei is one of a set of conditions which taken together are sufficient for the implementability of fully revealing expectations equilibria here we show that this condition is in fact necessary for the weak implementation of a much broader class of walrasian equilibria herein called expectations equilibria

on bayesian implementable allocations this paper identifies several social choice correspondences which are and are not fully implementable in economic environments when agents are incompletely informed about the environment we show that in contrast to results in the case of complete information neither efficient allocations nor core allocations define implementable social choice correspondences we also identify conditions under which the rational expectations equilibrium correspondence is implementable we extend the concepts of fair allocations and lindahl allocations to economies with incomplete information and show that envy free allocations and lindahl allocations are implementable under some conditions while fair allocations are not

a portfolio approach to the optimal funding of pensions abstract fully funded pension systems are advocated for their higher rate of return but this return is typically risky using a simple mean variance model we find that mixed funded unfunded systems are desirable in this setting because they enable risk diversification

quality based price discrimination and tax incidence the market for gasoline and diesel cars in europe the existing tax policies toward gasoline and diesel cars in european countries provide a unique opportunity to analyze quality based price discrimination and the implied tax incidence in my econometric framework consumers choose the type of engine based on their annual mileage prices are set by the manufacturers the relative pricing of gasoline and diesel cars appears to be consistent with monopolistic price discrimination effectively segmenting low mileage from high mileage consumers on average about 75 to 90 of the price differentials between gasoline and diesel cars can be explained by markup differences i draw implications for the effectiveness and the revenue effects of tax policy

the law of one price evidence from the transitional economy of china abstract this paper applies the recently developed econometric methods of panel unit root tests and nonlinear mean reversion to investigate price convergence in china the largest transitional economy in the world we find that prices did converge to the law of one price in china for an overwhelming majority of goods and services based on a large panel data set the finding sheds light on the extent of the market economy in china and casts doubt on young s proposition that the economic reform has led to the fragmentation of chinese domestic markets