optimal interest rate rules asset prices and credit frictions we study optimal taylor type interest rate rules in an economy with credit market imperfections our analysis builds on the agency cost framework of carlstrom and fuerst 1997 agency costs net worth and business fluctuations a computable general equilibrium analysis american economic review 87 893 910 which we extend in two directions first we embed monopolistic competition and sticky prices second we modify the stochastic structure of the model in order to generate a countercyclical premium on external finance this is achieved by linking the mean distribution of investment opportunities faced by entrepreneurs to aggregate total factor productivity we model monetary policy in terms of simple welfare maximizing interest rate rules we find that monetary policy should respond to increases in asset prices by lowering interest rates however when monetary policy responds strongly to inflation the marginal welfare gain of responding to asset prices vanishes within the class of linear interest rate rules that we analyze a strong anti inflationary stance always attains the highest level of welfare

the solution to the tullock rent seeking game when r 2 mixed strategy equilibria and mean dissipation rates in tullock s rent seeking model the probability a player wins the game depends on expenditures raised to the power r we show that a symmetric mixed strategy nash equilibrium exists when r 2 and that overdissipation of rents does not arise in any nash equilibrium we derive a tight lower bound on the level of rent dissipation that arises in a symmetric equilibrium when the strategy space is discrete and show that full rent dissipation occurs when the strategy space is continuous our results are shown to be consistent with recent experimental evidence on the dissipation of rents

the tragedy of the commons in a violent world earlier research has shown that the tragedy of the commons may be resolved by folk theorems for dynamic games in this article we graft on a standard natural resource exploitation game the possibility to appropriate the resource through violent means because conflict emerges endogenously as resources get depleted the threat supporting the cooperative outcome is no longer subgame perfect and thus credible the unique equilibrium is such that players exploit noncooperatively the resource when it is abundant and they revert to conflict when it becomes scarce the players utility is shown to be lower even if conflict wastes no resources

an equilibrium conflict model of land tenure in hunter gatherer societies i apply features of the economics of conflict and spatial competition in developing a model of the emergence of land ownership in hunter gatherer societies tenure regimes are the result of interactions between those seeking to defend claims to land and those seeking to infringe on those claims the model highlights the dependence of land ownership on ecological parameters such as resource density and predictability and allows for situational ownership in which the nature of ownership changes as realized ecological conditions change the paper concludes with a comparative assessment of tenure across a representative sample of hunter gatherer peoples

the ir relevance of real wage rigidity in the new keynesian model with search frictions we explore the role of real wage dynamics in a new keynesian business cycle model with search and matching frictions in the labor market both job creation and destruction are endogenous we show that the model generates counterfactual inflation and labor market dynamics in particular it fails to generate a beveridge curve vacancies and unemployment are positively correlated introducing real wage rigidity leads to a negative correlation and increases the magnitude of labor market flows to more realistic values however inflation dynamics are only weakly affected by real wage rigidity this is because of the presence of labor market frictions which generate long run employment relationships the measure of real marginal cost that is relevant for inflation dynamics via the phillips curve contains a dynamic component that does not necessarily move with real wages

natural resources curse or blessing are natural resources a curse or a blessing the empirical evidence suggests that either outcome is possible this paper surveys a variety of hypotheses and supporting evidence for why some countries benefit and others lose from the presence of natural resources these include that a resource bonanza induces appreciation of the real exchange rate deindustrialization and bad growth prospects and that these adverse effects are more severe in volatile countries with bad institutions and lack of rule of law corruption presidential democracies and underdeveloped financial systems another hypothesis is that a resource boom reinforces rent grabbing and civil conflict especially if institutions are bad induces corruption especially in nondemocratic countries and keeps in place bad policies finally resource rich developing economies seem unable to successfully convert their depleting exhaustible resources into other productive assets the survey also offers some welfare based fiscal rules for harnessing resource windfalls in developed and developing economies

new keynesian models durable goods and collateral constraints abstract econometric evidence suggests that in response to monetary policy shocks durable and non durable spending co move positively and durable spending exhibits a much larger sensitivity to the shocks a standard two sector new keynesian model with perfect financial markets is at odds with these facts the introduction of a borrowing constraint where durables play the role of collateral assets helps in reconciling the model with the empirical evidence

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

oligarchy democracy inequality and growth abstract this paper analyses the dynamics of inequality democratization and economic development in a political economy model of growth where education is both the engine of growth and a determinant of political participation in a context with imperfect capital markets we investigate the incentives for an educated oligarchy to subsidize the poor s education and to initiate a democratic transition we characterize the equilibrium patterns of political institutions income distribution and growth as a function of the initial income and inequalities in particular we identify circumstances under which the elite promotes the endogenous emergence of a middle class for purely political economy reasons a simple linear infinite horizon framework is then presented in this setting we discuss the importance of historical dependence for long run social stratification and redistribution

the political economy of resource driven growth abstract in recent decades resource poor countries have out performed resource abundant ones a stylised facts model of competitive industrialisation describes the long run development of a resource poor country with a political state that is developmental only minor change is required to adapt the model to trace the development trajectory of a resource abundant country with a similar political state however most resource abundant countries engender a political state that is factional or predatory and distorts the economy in the pursuit of rents a staple trap model describes the development trajectory under these conditions the model predicts a growth collapse from which recovery is protracted especially for small economies that lack a niche trade link with a large economy

an empirical analysis of a regional dutch disease the case of canada while there has been extensive research on the dutch disease dd very little attention if any has been devoted to the regional mechanisms through which it may manifest itself this is the first empirical attempt to research a regional dd by looking at the local and spatial impacts of resource windfalls across canadian provinces and territories we construct a new panel dataset to examine separately the key dd channels namely the spending effect and the resource movement effect our analysis reveals that the standard dd mechanisms are also relevant at the regional level specifically we find that a resource windfalls are associated with higher inflation and a labour capital shift from to non primary tradable sectors b resource windfalls in neighbouring regions are associated with a capital labour shift from to non primary tradable sectors in the source region c the spatial dd explains 51 20 of the adverse effects of resource windfalls in neighbouring regions on region specific non mineral international exports in the source region and does not significantly affect domestic ones

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

why do some resource abundant countries succeed while others do not on average resource abundant countries have experienced lower growth over the last four decades than their resource poor counterparts but the most interesting aspect of the paradox of plenty is not the average effect of natural resources but its variation for every nigeria or venezuela there is a norway or a botswana why do natural resources induce prosperity in some countries but stagnation in others this paper gives an overview of the dimensions along which resource abundant winners and losers differ in light of this it then discusses different theory models of the resource curse with a particular emphasis on recent developments

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

contesting resources rent seeking conflict and the natural resource curse a growing empirical literature links natural resource abundance and pointiness to impeded economic growth and civil strife we develop rent seeking and conflict models that capture the most salient features of contests for resource rents and show how both resource abundance and geographical clustering can be associated with intense contests and sub optimal economic performance however we also show that these relationships are not necessarily monotonous pointiness can trigger more intense contests but can also facilitate the coordination on peaceful outcomes finally we show that contesting resources through violent conflict may yield superior outcomes from an economy wide perspective than contests through rent seeking

resource intensity institutions and development summary we examine the relationship between resource abundance and several indicators of human welfare consistent with the existing literature on the relationship between resource abundance and economic growth we find that given an initial income level resource intensive countries tend to suffer lower levels of human development while we find only weak support for a direct link between resources and welfare there is an indirect link that operates through institutional quality there are also significant differences in the effects that resources have on different measures of institutional quality these results imply that the resource curse is a more encompassing phenomenon than previously considered and that key differences exist between the effects of different resource types on various aspects of governance and human welfare 2005 elsevier ltd all rights reserved

anarchy and its breakdown anarchy defined as a system in which participants can seize and defend resources without regulation from above is not chaos but rather a spontaneous order however anarchy is fragile and may dissolve either into formless amorphy or into a more organized system such as hierarchy under anarchy each contestant balances between productive exploitation of the current resource base and fighting to acquire or defend resources anarchy is sustainable only when there are strongly diminishing returns to fighting effort the decisiveness parameter is sufficiently low and incomes exceed the viability minimum these considerations explain many features of animal and human conflict

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

financial and legal constraints to growth does firm size matter using a unique firm level survey database covering 54 countries we investigate the effect of financial legal and corruption problems on firms growth rates whether these factors constrain growth depends on firm size it is consistently the smallest firms that are most constrained financial and institutional development weakens the constraining effects of financial legal and corruption obstacles and it is again the small firms that benefit the most there is only a weak relation between firms perception of the quality of the courts in their country and firm growth we also provide evidence that the corruption of bank officials constrains firm growth

trade wars and trade talks when governments meet in the international arena their actions reflect the political situations at home previous studies of trade relations have focused on governments that are immune from political pressures and that act as benevolent servants of the public interest here we introduce domestic politics into the analysis of international economic relations we study the interactions between national leaders who are concerned both with providing a high standard of living to the general electorate and collecting campaign contributions from special interest groups our analysis sheds light on the determinants of the structure of protection in non cooperative and cooperative policy equilibria

history lessons institutions factor endowments and paths of development in the new world the explanations offered for the contrasting records of long run growth and development among the societies of north and south america most often focus on institutions the traditional explanations for the sources of these differences in institutions typically highlight the significance of national heritage or religion we in contrast argue that a hemispheric perspective across the wide range of colonies established in the new world by the europeans suggests that although there were many influences factor endowments or initial conditions had profound and enduring effects on the long run paths of institutional and economic development followed by the respective economies

natural resources rent seeking and welfare abstract a new and very simple mechanism to explain why natural resource abundance may lower income and welfare is developed in a model with rent seeking a greater amount of natural resources increases the number of entrepreneurs engaged in rent seeking and reduces the number of entrepreneurs running productive firms with a demand externality it is shown that the drop in income as a result of this is higher than the increase in income from the natural resource more natural resources thus lead to lower welfare

unconventional fiscal policy at the zero bound when the zero lower bound on nominal interest rates binds monetary policy cannot provide appropriate stimulus we show that in the standard new keynesian model tax policy can deliver such stimulus at no cost and in a time consistent manner there is no need to use inecient policies such as

institutions and the resource curse countries rich in natural resources constitute both growth losers and growth winners we claim that the main reason for these diverging experiences is differences in the quality of institutions more natural resources push aggregate income down when institutions are grabber friendly while more resources raise income when institutions are producer friendly we test this theory building on sachs and warner s influential works on the resource curse our main hypothesis that institutions are decisive for the resource curse is confirmed our results contrast the claims of sachs and warner that institutions do not play a role

tax smoothing in frictional labor markets we re examine the optimality of tax smoothing from the point of view of frictional labor markets our central result is that whether or not this cornerstone optimal scal policy pre

it s the rents stupid the political economy of the resource curse a number of studies suggest that natural resources can have a negative impact on the developing prospects of countries empirical results suggest that political economy models of patronage and rent seeking are central to understanding why such a resource curse arises in other words the resource curse is created by certain resource rents leading to dysfunctional behaviour this article introduces the term impartiality enhancing institutions to structure policy debates by distinguishing conditions under which negative effects of resources can be mitigated moreover it is argued that viewing institutions as an equilibrium outcome has implications for the analysis of institutional change policy initiatives that do not promote the impartiality of institutions nor attend to the underlying interests and incentives keeping a bad institutional equilibrium in place will not help lift the resource curse

optimal monetary policy with the cost channel in the standard new keynesian framework an optimizing policy maker does not face a trade off between stabilizing the inflation rate and stabilizing the gap between actual output and output under flexible prices an ad hoc exogenous cost push shock is typically added to the inflation equation to generate a meaningful policy problem in this paper we show that a cost push shock arises endogenously when a cost channel for monetary policy is introduced into the new keynesian model a cost channel is present when firms marginal cost depends directly on the nominal rate of interest besides providing empirical evidence for a cost channel we explore its implications for optimal monetary policy we show that its presence alters the optimal policy problem in important ways for example both the output gap and inflation are allowed to fluctuate in response to productivity and demand shocks under optimal monetary policy

the optimal inflation rate in new keynesian models should central banks raise their inflation targets in light of the zero lower bound we study the effects of positive steady state inflation in new keynesian models subject to the zero bound on interest rates we derive the utility based welfare loss function taking into account the effects of positive steady state inflation and solve for the optimal level of inflation in the model for plausible calibrations with costly but infrequent episodes at the zero lower bound the optimal inflation rate is low typically less than two percent even after considering a variety of extensions including optimal stabilization policy price indexation endogenous and statedependent price stickiness capital formation model uncertainty and downward nominal wage rigidities on the normative side price level targeting delivers large welfare gains and a very low optimal inflation rate consistent with price stability these results suggest that raising the inflation target is too blunt an instrument to efficiently reduce the severe costs of zero bound episodes

natural resource extraction and civil conflict abstract based on evidence linking natural resources to civil conflict this paper studies two armed groups fighting to control a resource and possibly a second prize labor is used in the agricultural resource extraction and conflict sectors and the groups also buy a capital input to conflict subject to the constraint that capital spending cannot exceed resource earnings i find that exogenous shocks can have different effects on conflict intensity depending on whether the credit constraint binds in particular international policies to ban natural resource exports from conflict zones e g blood diamonds raise agricultural productivity or limit the import of weapons will limit conflict intensity if the credit constraint binds however if the credit constraint does not bind then the first two policies promote conflict and so could even the third policy the results therefore suggest some caution in international policymaking

optimal long run inflation with occasionally binding financial constraints abstract this paper studies the optimal long run inflation rate in a simple new keynesian model with occasionally binding collateral constraints that intermediate good firms face on hiring labor the paper finds that the optimal long run annual inflation rate is around 1 5 if the economy is hit by a total factor productivity tfp shock and nearly 2 5 if the economy is subject to a markup shock the shadow value of the collateral constraint is akin to an endogenous cost push shock differently from usual cost push shocks however this shock is asymmetric as it takes non negative values only since the mean of this asymmetric endogenous cost push shock is positive inflation is also positive on average in addition a binding collateral constraint resembles a time varying tax on labor which the monetary authority can smooth by setting a positive inflation rate more generally the basic result is related to standard ramsey theory in that optimal policy smoothes distortions over time

the effects of lower reserve requirements on money market volatility in late 1990 the federal reserve eliminated reserve requirements on nonpersonal time deposits and required reserves fell by about 10 billion an almost 20 percent reduction in early 1992 reserve requirements against transaction accounts were lowered from 12 percent to 10 percent releasing an additional 3 5 billion of required reserves 1 these reductions by lowering total reserve balances potentially could increase reserve market volatility impeding the implementation of monetary policy and possibly spilling over into other markets this paper examines the effects of reserve requirements on market volatility and on the central bank s ability to achieve shortrun policy objectives although a number of earlier studies have examined the effects of reserve requirements on the effectiveness of monetary policy our approach differs in two important respects first we focus on the ability to achieve short run objectives second we provide empirical estimates of the likely effects of lower reserve requirements the central bank cannot directly achieve its long run objectives of output and price stability so it uses policy rules to set shortand intermediate run targets for certain economic variables such as interest rates or monetary aggregates consistent with its long term goals 2 the central bank cannot however perfectly control shortor intermediate run targets so it also relies on a set of operational rules operational rules are used to set instruments such as reserve requirements the discount rate and openmarket operations in order to achieve the shorter run targets previous studies such as ira kaminow 1977 jeremy siegel 1981 ernst baltensperger 1982 richard t froyen and kenneth j kopecky 1983 and brian r horrigan 1988 focused exclusively on longer term objectives of monetary policy in contrast we focus on the shortterm goals of monetary policy in addition we provide empirical estimates of the impact that changes in reserve requirements are likely to have on volatility in the money market previous studies were largely theoretical and therefore could only show that the impact of a change in policy depended on various unknown parameters of a particular model

the resource curse what have we learned from two decades of intensive research introduction to the special issue there has been increasing interest in the so called resource curse that is the tendency of resource rich countries to underperform in several development outcomes this has generated a mountain of often contradictory evidence leaving many floundering in the flood of information this special issue compiles eight papers from some of the most prominent contributors to this literature combining original research with critical reflection on the current stock of knowledge the studies collectively emphasise the complexities and conditionalities of the curse its presence intensity is largely context specific depending on the type of resources socio political institutions and linkages with the rest of the economy

optimal monetary policy in a model with agency costs this paper integrates a fully explicit model of agency costs into an otherwise standard dynamic new keynesian model in a particularly transparent way a principal result is the characterization of agency costs as endogenous markup shocks in an output gap version of the phillips curve the model s utility based welfare criterion is derived explicitly and includes a measure of credit market tightness that we interpret as a risk premium the paper also fully characterizes optimal monetary policy and provides conditions under which zero inflation is the optimal policy finally optimal policy can be expressed as an inflation targeting criterion that depending upon parameter values can be either forward or backward looking

optimal monetary policy and downward nominal wage rigidity in frictional labor markets empirical evidence suggests that nominal wages in the u s are downwardly rigid this paper studies the optimal long run inflation rate in a labor search and matching framework under the presence of downward nominal wage rigidity dnwr in this environment optimal monetary policy targets a positive inflation rate the annual long run inflation rate for the u s is around 2 percent positive inflation greases the wheels of the labor market by facilitating real wage adjustments and hence it eases job creation and prevents excessive increase in unemployment following recessionary shocks these findings are related to standard ramsey theory of wedge smoothing by following a positive inflation policy under sticky prices the monetary authority manages to reduce the volatility and the size of the intertemporal distortion significantly the intertemporal wedge is completely smoothed when prices are fully flexible since the optimal long run inflation rate predicted by this study is considerably higher than in otherwise neoclassical labor markets the nature of the labor market in which dnwr is studied can be relevant for policy recommendations

borrowing constraints collateral fluctuations and the labor market abstract this paper studies the effects of changes in collateral requirements on the cyclical properties of unemployment and job creation i develop a general equilibrium model in which labor market frictions prevent the costless adjustment of employment financial frictions arise from an imperfect enforcement contract an environment in which borrowing limits are linked to the firm s physical capital stock can quantitatively account for the sluggish response of labor market variables to productivity shocks i find that fluctuations in those variables are mainly driven by changes in financial conditions the model can explain 75 of the variation in job creation observed in the data and it can also account for the persistent reduction in both output and leverage that follows a contraction in credit availability

a comparison of rent seeking models and economic models of conflict this paper provides a comparative analysis of the basic rent seeking model and a simple economic model of conflict each model is concerned with a game in which players invest resources in pursuit of a prize the purpose of the analysis is to elucidate structural differences between the two models and to analyse the consequent behavioral differences and equilibrium outcomes in the two cases a key finding is that where such comparisons are possible the conflict model tends to involve greater relative expenditure on wealth redistribution activities than does the rent seeking model

what can we learn from the implementation of monetary and macroprudential policies a systematic literature review the emergence of macroprudential policies implemented by central banks as a means of promoting financial stability has raised many questions regarding the interaction between monetary and macroprudential policies given the limited number of studies available this paper sheds light on this issue by providing a critical and systematic review of the literature to this end we divide the theoretical and empirical studies into two broad channels of borrowers consisting of the cost of funds and the collateral constraint and financial intermediaries consisting of risk taking and payment systems in spite of the existing ambiguity surrounding coordination issues between monetary and macroprudential policies it is argued that monetary policy alone is not sufficient to maintain macroeconomic and financial stability hence macroprudential policies are needed to supplement monetary in addition we find that the role of the exchange rate is critical in the implementation of monetary and macroprudential policies in emerging markets while volatile capital flows pose another challenge in so far as how the arrangement of monetary and macroprudential policies varies across countries key theoretical and policy implications have been identified

swords or plowshares a theory of the security of claims to property this paper develops a general equilibrium model of the allocation of resources among appropriative and productive activities the model emphasizes the distinction between offensive weapons which are the instruments of predation and fortifications which provide defense against predation the analysis of this model shows how the equilibrium security of claims to property is determined the analysis focuses on the possibility of a nonaggressive equilibrium in which no resources are allocated to offensive weapons and claims to property are fully secure we also analyze the complex relation between economic welfare and the security of claims to property we find for example that a relatively poor agent could be better off in an equilibrium with less secure claims to property

natural resources and the tradeoff between authoritarianism and development abstract why do african and middle eastern countries seem cursed by an abundance of natural resources yet usa australia and norway seem blessed a growing literature has argued that the benevolence or malignance of natural resources depends upon the quality of institutions this paper offers a new explanation based on associational freedom and its interaction with the political system the model predicts that natural resources have an adverse impact on economic performance and transition to democracy in authoritarian regimes but not in democracies it also predicts that repression of associational freedom will be increasing in natural resources in authoritarian regimes i test the model s predictions using fixed effects regressions on an international panel from 1975 to 2000 and find support

robustness of the estimates of the hybrid new keynesian phillips curve abstract gali and gertler 1999 inflation dynamics a structural econometric approach journal of monetary eonomics 44 2 195 222 developed a hybrid variant of the new keynesian phillips curve that relates inflation to real marginal cost expected future inflation and lagged inflation gmm estimates of the model suggest that forward looking behavior is dominant the coefficient on expected future inflation substantially exceeds the coefficient on lagged inflation while the latter differs significantly from zero it is quantitatively modest several authors have suggested that our results are the product of specification bias or suspect estimation methods here we show that these claims are incorrect and that our results are robust to a variety of estimation procedures including gmm estimation of the closed form and nonlinear instrumental variables also as we discuss many others have obtained very similar results to ours using a systems approach including fiml techniques hence the conclusions of gg and others regarding the importance of forward looking behavior remain robust

banking competition collateral constraints and optimal monetary policy we analyze optimal monetary policy in a model with two distinct financial frictions monopolistically competitive banks that charge endogenous lending spreads and collateral constraints we show that welfare maximization is equivalent to stabilization of four goals inflation output gap the consumption gap between borrowers and savers and a housing gap that measures the distortion in the distribution of the collateralizable asset between both groups collateral constraints create a trade off between stabilization goals following both productivity and financial shocks and relative to strict inflation targeting the optimal policy implies sharper movements in the policy rate aimed primarily at reducing fluctuations in asset prices and hence in borrowers net worth the policy trade offs become amplified as banking competition increases due to the fall in lending spreads and the resulting increase in borrowers leverage

natural resources and economic growth the role of investment is it possible that excessive reliance on natural resources affects saving and investment in a way that retards economic growth and thus in the long run the level of output per capita this paper reviews the literature explores the data and compares and contrasts the explanatory power and interplay of natural resources and civil liberties our proxy for institutional variables currently under scrutiny in the literature we propose that natural resource dependence may be viewed as an exogenous factor that impedes economic growth and investment as well as institutions even if we stress that natural resource abundance may be good for growth