progressive taxation and income inequality in dynamic competitive equilibrium abstract this paper establishes the existence of a non degenerate distribution of income in a simple dynamic economy when agents who are heterogeneous in their rates of impatience face a progressive tax system in this dynamic setting income inequality can vary positively with the degree of tax progressivity moreover the inherent heterogeneity in agents behavior can explain why measures of inequality such as the standard deviation of income or atkinson s gini tend to be dynamically much more sluggish than aggregate measures such as total income finally the adjustment in the degree of inequality resulting from an exogenous change in tax policy may take some time before becoming effective this result also arises from agents asymmetric responses to policy changes

optimal growth with many consumers abstract a method is described for constructing all pareto optimal allocations for a dynamic economy with many heterogeneous consumers under certainty in which both the technology and consumer preferences are recursive but preferences need not be additively separable over time optimal perfect foresight competitive equilibrium allocations are obtained through the study of a dynamic program for an economy with one consumption good sufficient conditions are given for the existence of a unique interior stationary distribution of consumption and wealth for a two person exchange economy sufficient conditions are given for the global asymptotic stability of the unique interior stationary point

real exchange rates and relative prices an empirical investigation abstract this paper uncovers a striking empirical regularity the consumer price of a good relative to a different good within a country tends to be much less variable than the price of that good relative to a similar good in another country this fact seems to hold for all goods except very simple homogeneous products models of real exchange rates are likely to have predictions regarding this relation so this fact may provide a useful gauge for discriminating among models

rent extraction with a type by type scheme an instrument to incorporate sustainable development into the cdm although the cdm is supposed to assist developing countries in achieving sustainable development sustainable development is not incorporated into the market aspect of the cdm by participating in the cdm developing countries may end up losing all cheap emissions reduction possibilities while obtaining little sustainability benefits this paper proposes rent extraction with a type by type scheme as an instrument to incorporate sustainable development into the cdm the rent extraction with a type by type scheme makes it possible for the cdm host country government to discourage the low cost projects that have little sustainability benefits and to extract more rent from the projects that are developed the main challenge of implementing this instrument is the uncertainty of the opportunity cost but the host country government can adjust the scheme for the uncertainty to achieve its goal therefore the type by type scheme will better assist the host country in achieving sustainable development than a single rate scheme

can progressive taxation account for cross country variation in labor supply abstract the difference between average hours worked in the us and average hours worked in continental european countries has been increasing since the early 1970s to explain this phenomenon this paper develops an endogenous growth model with two key properties agents are heterogeneous in their rates of time preference and labor skills and the model incorporates progressive income taxes the model is calibrated to us and german data for the periods 1971 1974 and 1986 1989 our findings suggest that the degree of progressivity is a major factor in explaining the patterns of the us and german labor supply over time predictions of the model also match the distributional trends in both countries during this time period

an estimation of the swiss hydropower rent the electricity generation in switzerland is mostly based on hydropower 58 and nuclear power 38 the exploitation of water in the hydropower sector can generate significant economic rent one possibility to capture this rent is through royalties or fees this system has been used in switzerland since many decades however the actual water fee system is not flexible and does not take into consideration different production costs between the type and location of hydropower plants furthermore storage plants can sell electricity to a higher price than run of river plants a flexible system is needed in a liberalized electricity market to take into account these different production situations and the fact that prices may vary considerably over time the main goal of this paper is to calculate the potential economic rent that could be generated in the swiss hydropower sector under a future liberalized market based on the results of the paper it can be concluded that the introduction of a flexible fee system could improve the competitiveness of the hydropower sector and promote an energy system based on renewable energy sources

economic growth and inequality the role of public investment the relationship between growth and inequality is complex after discussing some general background issues motivated by extensive empirical evidence this paper focuses on public investment as a key determinant of the relationship two alternative frameworks each offering sharply contrasting perspectives are presented the first employs the representative consumer theory of distribution where agent heterogeneity originates with wealth endowments it yields an equilibrium in which aggregate dynamics drives distributional dynamics in the second agent heterogeneity arises from idiosyncratic productivity shocks and generates an equilibrium in which distributional dynamics drive growth the impact of government investment on growth and inequality are shown to contrast sharply in the two approaches thus illustrating the complexity of the growth inequality relationship

hedging and financial fragility in fixed exchange rate regimes currency crises that coincide with banking crises tend to share at least three elements first banks have a currency mismatch between their assets and liabilities second banks do not completely hedge the associated exchange rate risk third there are implicit government guarantees to banks and their foreign creditors this paper argues that the first two features arise from banks optimal response to government guarantees we show that guarantees completely eliminate banks incentives to hedge the risk of a devaluation our model also articulates one reason why governments might be tempted to provide guarantees to bank creditors guarantees lower the domestic interest rate and lead to a boom in economic activity but this boom comes at the cost of a more fragile banking system in the event of a devaluation banks renege on foreign debts and declare bankruptcy

a characterization of ramsey equilibrium abstract consider a perfect foresight equilibrium model with a single capital good a borrowing constraint and many infinitely lived households with fixed but different discount factors the steady state capital stock is held by the most patient household quart j econ 95 1980 375 382 econ j 38 1928 543 559 an example shows the total capital can exhibit an equilibrium cycle in contrast to the stability property of the one household case in the example only the most patient household saves and his income deceases in capital we give a condition implying income is increasing in capital and use it to show any equilibrium converges to the steady state

the monetary compensation mechanism an alternative to the clean development mechanism abstract one of the key challenges in resolving global warming problem is how to induce developing countries to reduce emissions the cdm was proposed in the kyoto protocol as a means of obtaining the cooperation of developing countries in controlling greenhouse gases but it has some intrinsic problems and has generated considerable controversy this paper presents an alternative mechanism the monetary compensation mechanism mcm i study the characteristics of this mechanism with a dynamic principal agent model by solving the model numerically i obtain the optimal solution for a scenario based on 1990 data the monetary compensation rate under the mcm is comparable to the price of cers in the cdm but the mcm has several advantages over the cdm

dualism and macroeconomic volatility this paper develops a simple macroeconomic model that shows that combining capital market imperfections together with unequal access to investment opportunities across individuals can generate endogenous and permanent euctuations in aggregate gdp investment and interest rates reducing inequality of access may be a necessary condition for macroeconomic stabilization moreover countercyclical escal policies have a role to play in our model savings are underutilized in slumps because of the limited debt capacity of potential investors therefore the government should issue public debt during recessions in order to absorb those idle savings and enance investment subsidies or tax cuts for investors the most important single fact about saving and investment activities is that in our industrial society they are generally done by different people and for different reasons for years there might tend to be too little investment leading to deeation losses excess capacity and unemployment for other years there might tend to be too much investment leading to periods of chronic ineation unless prudent and proper public policies in the escal and monetary eelds are followed paul a samuelson economics 8th edition 1970 pp 196 198

ramsey equilibrium in a two sector model with heterogeneous households abstract we prove an existence theorem for a stationary perfect foresight equilibrium under borrowing constraints in a two sector model with infinitely lived heterogeneous agents the most patient agent holds all the capital in this solution we also show that if the capital goods sector is capital intensive and capital income is increasing in the aggregate capital stock then the aggregate capital stock eventually is monotonic and converges to the steady state stock if the consumption goods sector is more capital intensive and capital income is increasing in aggregate capital we prove convergence to the steady state under more restrictive conditions periodic equilibria are shown to exist under weaker hypotheses journal of economic literature classification numbers d52 d90 e13

global financial instability framework events issues two of the key questions facing policymakers today are how to reduce the risk of global financial instability and how to cope with it when it occurs this paper starts by defining financial instability and then showing how it harms economic activity it then uses this framework to describe what happened during the recent financial crises in mexico and east asia the paper ends by raising several key policy issues not coincidentally these issues are addressed in the remaining papers in the symposium

informational contagion of bank runs in a third generation crisis model abstract this paper highlights the international spread of bank runs in a third generation model of financial crises through an informational channel banks short term liabilities include loans granted by foreign creditors who have imperfect information about the liquidation costs of banks assets a bank panic in a country induces lenders to downgrade early liquidation yields in other countries and thus to require higher interest rates to enable their banks to roll over their maturing debt those banks become therefore more prone to self fulfilling depositors runs the paper then studies the effect on contagion of increased transparency and bailouts

currency crises and monetary policy in an economy with credit constraints this paper presents a simple model of currency crises which is driven by the interplay between the credit constraints of private domestic firms and the existence of nominal price rigidities the possibility of multiple equilibria including a currency crisis equilibrium with low output and a depreciated domestic currency results from the following mechanism if nominal prices are sticky a currency depreciation leads to an increase in the foreign currency debt repayment obligations of firms and thus to a fall in their profits this reduces firms borrowing capacity and therefore investment and output in a credit constrained economy which in turn reduces the demand for the domestic currency and leads to a depreciation we examine the impact of various shocks including productivity fiscal or expectational shocks we then analyze the optimal monetary policy to prevent or solve currency crises we also argue that currency crises can occur both under fixed and flexible exchange rate regimes as the primary source of crises is the deteriorating balance sheet of private firms

the tragedy of the commons in a fishery when relative performance matters this paper presents a simple model of a common access fishery where fishermen care about relative performance as well as absolute profits our model captures the idea that status which depends on relative performance in a community influences a person s well being in our main specification relative performance depends on the absolute difference in after tax profits we show that overharvesting resulting from the tragedy of the commons problem is exacerbated by the desire for higher relative performance leading to a smaller steady state fish stock and smaller steady state profit for all the fishermen we also consider alternative specifications where status depends on the absolute difference in harvests or relative difference in profits or where there is heterogeneity in the degree to which status matters or allowing for the possibility of extinction in all these specifications status further reduces the steady state fish stock we examine taxes and an individual quota as policy alternatives and find support for using the direct quantity method to implement the socially efficient stock level

introduction to a general equilibrium approach to economic growth abstract endogenous growth theory has had some success in explaining the observed data related to the process of economic growth however the results of the models in this literature are typically very sensitive to their micro economic structure it is therefore important to understand how the growth process behaves under more general specifications of such features as the number of commodities the number and preferences of consumers the factors of production and the financial and information structures in other words valuable insights can be gained by integrating growth theory into the framework of general equilibrium theory the summary of the papers in this volume focuses on seven issues that are crucial to this integration and highlights the contributions of the papers to the resolution of these issues journal of economic literature classification numbers c61 d50 d90 f43 o30 o41

time preference and the distributions of wealth and income this paper presents a dynamic competitive equilibrium model in which heterogeneity in time preferences alone can generate the observed patterns of wealth and income inequality in the united states this model generalizes the standard deterministic neoclassical growth model by introducing i a direct preference for wealth by the consumers and ii human capital formation the rst feature prevents the wealth distribution from collapsing into a degenerate distribution the second feature generates a strong positive correlation between earnings and wealth across agents a calibrated version of this model is able to replicate the wealth and income distributions of the united states

household heterogeneity and the transmission of foreign shocks abstract we study the role of heterogeneity in the transmission of foreign shocks we build a heterogeneous agent new keynesian small open model economy hanksome that experiences a current account reversal households portfolio composition and the extent of foreign currency borrowing are key determinants of the magnitude of the contraction in consumption associated with a sudden stop in capital inflows the contraction is more severe when households are leveraged and owe debt in foreign currency in this setting the revaluation of foreign debt causes a larger contraction in aggregate consumption when debt and leverage are concentrated among poorer households closing the output gap via an exchange rate devaluation may therefore be detrimental to household welfare due to the heterogeneous impact of the foreign debt revaluation our hanksome framework can rationalize the observed fear of floating in emerging market economies even in the absence of contractionary devaluations

asset prices and twin crises abstract emerging market crises have been characterized by two key features i banking crises generally precede currency crises and ii asset prices decline in advance of currency crises this paper argues that asset prices provide a key link between banking and currency crises it is shown that a prospective currency crisis due to an unanticipated increase in the public debt triggers an asset price decline banks exposure to asset prices in turn deteriorates their balance sheets and precipitates a banking crisis under the assumption of government bailout of banks it is shown that the twin crises are self fulfilling and their time line follows i and ii described above the timing of currency crisis is decreasing in the ratio of government s bailout to banks loss of capital

long run implications for developing countries of joint implementation of greenhouse gas mitigation joint implementation ji calls for cooperation between industrialized and developing countries in the mitigation of greenhouse gas ghg emissions however a major concern of potential host countries is that if they utilize their low cost options for ji now they will be left with only high cost options in the future thereby penalizing them at a time when they may be obligated to mitigate ghgs themselves this paper formalizes this hypothesis by utilizing an optimal control framework analogous to the hotelling model of non renewable resource extraction the results are that cumulative abatement effects can impose costs on the future but that they can be offset by technological change market power or compensation

wealth distribution and aggregate time preference markov perfect equilibria in a ramsey economy abstract we study markov perfect nash equilibria mpne of a ramsey cass koopmans economy in which households are aware of their influence on prices the ramsey conjecture fails to hold such that households other than the most patient one own positive wealth in the steady state this confirms results that have been derived in the same model using an open loop equilibrium concept in contrast to the competitive and the open loop equilibrium the steady state of the mpne depends on the utility functions of the households since the mpne cannot be determined analytically a high order least squares projection method is employed

distributional dynamics in a neoclassical growth model the role of elastic labor supply we examine the evolution of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment and where the labor supply is endogenous the assumption that the utility function is homogeneous implies that the macroeconomic equilibrium is independent of the distribution of wealth and allows us to characterize fully income and wealth dynamics we find that although the dynamics of the distribution of wealth are similar under fixed and flexible labor those of the income distribution are not in response to a structural change income inequality may move in opposite ways depending on whether or not the labor supply is fixed

uncertainty and currency crises evidence from survey data this paper studies empirically how uncertainty aects speculation in the foreign ex change markets we use the dispersion of survey forecasts of key macroeconomic variables to measure uncertainty about fundamentals we nd that uncertainty has a non monotone eect on exchange rate pressures namely uncertainty heightens speculative pressures when expected fundamentals are good and eases them when they are bad we prove that this prediction arises from a broad class of currency crisis theories ranging from rst generation to global game models we also show that the proposed empirical strategy remains valid in the presence of forecasters with strategic objectives and use a novel set of instrumental variables to address potential endogeneity bias

how does capital control spur economic growth this paper provides a conceptual and empirical framework for evaluating the effect of capital controls on long term economic growth in a small open economy which relies on successful investment projects to provide capital goods taking out short term loans has two contradictory impacts i it reduces the interest costs of financing investment projects and ii it also leads to larger asset losses in the scenario of short term debt run in this work we hypothesise that private financing decisions made by domestic investors are distorted towards excessive risk taking leading to ineffective capital formation thus capital control policies particularly regulations on short term loans can be socially beneficial as they alter the debt composition promote capital formation and achieve a higher output level using a panel data set covering 77 countries from 1995 to 2009 we employ a system generalised method of moments gmm estimator to sequentially test three hypotheses and find strong empirical evidence that supports our theory

a corporate balance sheet approach to currency crises this paper presents a general equilibrium currency crisis model of the third generation in which the possibility of currency crises is driven by the interplay between private firms credit constraints and nominal price rigidities despite our emphasis on microfoundations the model remains sufficiently simple that the policy analysis can be conducted graphically the analysis hinges on four main features i ex post deviations from purchasing power parity ii credit constraints a la bernanke gertler iii foreign currency borrowing by domestic firms iv a competitive banking sector lending to firms and holding reserves and a monetary policy conducted either through open market operations or short term lending facilities we derive sufficient conditions for the existence of a sunspot equilibrium with currency crises we show that an interest rate increase intended to support the currency in a crisis may not be effective but that a relaxation of short term lending facilities can make this policy effective by attenuating the rise in interest rates relevant to firms

international and domestic collateral constraints in a model of emerging market crises abstract we build a model of emerging markets crises which features two types of collateral constraints firms in a domestic economy have limited borrowing capacity from international investors they also have limited borrowing capacity with respect to each other we study how the presence and changes in these collateral constraints affect financial and real variables a binding international constraint in the aggregate leads to a sharp rise in interest rates and fire sales of domestic assets while limited domestic collateral can lead to wasted international collateral these two collateral constraints can interact in important ways the first is disintermediation a fire sale of domestic assets causes banks to fail in their function of reallocating resources across the economy leading to wasted international collateral the second is a dynamic effect we show that firms in an economy with limited domestic collateral and a binding international collateral constraint will not adequately precaution against adverse shocks increasing the severity of these shocks

does exchange rate stability increase trade and welfare we develop a simple general equilibrium framework to study the effect of the exchange rate system on trade and welfare an important feature of the model is deviations from purchasing power parity caused by rigid price setting in buyers currency we find the following first exchange rate stability is not necessarily associated with more trade in a simple benchmark model with separable preferences and only monetary shocks trade is unaffected by the exchange rate system consistent with most evidence second both trade and welfare can be higher under either exchange rate system depending on preferences and on the monetary policy rules followed under each system finally in general there is no one to one relationship between the levels of trade and welfare across exchange rate systems

transaction costs institutional rigidities and the size of the clean development mechanism transaction costs and institutional rigidities will reduce the attractiveness of the kyoto protocol flexibility mechanisms compared to domestic greenhouse gas abatement options the clean development mechanism cdm in particular is likely to entail considerable costs of baseline development project registration verification and certification the activities implemented jointly pilot phase and the prototype carbon fund programme give indications about these costs there is evidence that projects with high implementation costs have high transaction costs as well moreover cdm projects have to be approved by host country institutions and so far only a small share of host countries has been able to set up these institutions several of the larger host countries intend to only approve projects if the market price is above a certain threshold some governments will also levy fees to finance costs of approval bodies we assess these issues using a quantitative model of the kyoto protocol permit market we conclude that while changes in demand from annex b countries remain the crucial factor the size of the cdm will depend to a significant degree on transaction costs and institutional barriers in host countries

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

how to make the clean development mechanism sustainable the potential of rent extraction the clean development mechanism cdm should foster sustainable development and greenhouse gas emission reductions the design of the cdm and first experience suggest that it may not achieve these goals developing countries hosting cdm projects may lose cheap emission reduction possibilities for their own future use and sustainable development and technology transfer may not take place on the other hand the cdm has the potential to generate considerable rents if permit prices are high or costs low to account for equity and distributional issues a deliberate decision on how to distribute these rents could be taken and the potential failure of the cdm in meeting its goals calls for some further regulation i suggest to combine these two issues and to extract the rents by a profit tax ideally the tax revenues could contribute to national sustainable development strategies to offset external costs imposed by cdm projects and to extract part of the resource rent they may generate the international character of the cdm could offer a frame for internationally coordinated tax design this would hedge against a potential race to the bottom

the economic crisis of the 1990s in finland finland s depression a tale of bad luck and bad policies in the 1990s finland underwent a deep depression as its gdp dropped about 14 and unemployment rose from 3 to almost 20 this is a story of bad luck and bad policies bad luck took the form of external shocks the collapse of trade with the former soviet union in 1991 but also sharp cycles in the oecd area however bad luck is far from being the whole story in the absence of bad policies finland would have experienced a recession not a depression bad policies included a poorly designed financial regulation and mistaken reactions to the onset of the crisis of particular interest is the role of financial factors in triggering the crisis and aggravating the effects of bad policies not only were consumption and investment spending hurt by the credit crunch but there is evidence that the private sector s indebtedness has increased structural unemployment which explains why the recovery is proceeding with few job creations a number of general lessons emerge they concern the deregulation of financial markets the policy reaction to massive capital inflows and the role of employment policies seppo honkapohja and erkki koskela

extracting the resource rent from the cdm projects can the chinese government do better the revenue generated from a cdm project in china will be shared by the government and the project owner and is also subject to the corporate income tax this paper studies the impacts of the revenue sharing policy and income tax on the cdm market the economic model presented in this paper shows that higher cost cdm projects will be more affected by the cdm policies than lower cost projects in addition the majority of cers will be generated from lower cost projects this kind of distribution of cers across different types of cdm projects which is in line with the current picture of the cdm market in china is not consistent with the goal of sustainable development a simulation shows that a type by type tax fee scheme would be more effective in assisting sustainable development than the current cdm policies the study also suggests the government use negative tax fee with the type by type scheme to subsidize the cdm projects that generate large sustainability benefits but would otherwise not be developed due to high costs if all of the revenue from the cdm is recycled it is estimated that cers generation will increase by 98 28 mtc mainly from the cdm projects that have substantial sustainability benefits for the host country

on the long run distribution of capital in the ramsey model abstract we study issues related to the long run distribution of wealth in two variants of ramsey s model of optimal capital accumulation first we show that in the case where a government levies a progressive income tax there exist infinitely many stationary equilibria in which all households own positive capital stocks moreover it is demonstrated that non stationary equilibria can exhibit complicated dynamics then we discuss the case where households exercise market power on the capital market and we show that this may also lead to equilibria in which all households own positive amounts of capital journal of economic literature classification numbers e62 o41

foreign currency debt and the global financial architecture abstract this paper discusses some problems posed by foreign currency debt for emerging economies in the context of the ongoing debate on the reform of the global financial architecture we present a model in which the currency composition of corporate debt is endogenous and discuss the optimality of measures aimed at coping with the risks posed by foreign currency debt while removing these risks is not necessarily efficient in the presence of moral hazard some forms of public intervention such as a tax on foreign currency debt or international bailouts may be optimal

a positive theory of foreign currency debt abstract this paper makes a case for foreign currency debt as a hedging device in an open economy subject to stochastic shocks to output a government can reduce uncertainty in wealth and in consumption by issuing foreign or domestic currency debt if unexpected domestic and foreign inflation are negatively correlated with domestic output foreign currency debt is desirable in comparison to domestic currency debt if growth rates of output of both countries are closely related and if domestic inflation is relatively uncertain it has an additional advantage if domestic debt creates time consistency problems