foreign exchange intervention and inflation targeting the role of credibility abstract we develop a small open economy model where the central bank operates under a flexible inflation targeting regime i e monetary policy is aimed at stabilizing output and inflation in this theoretical framework we analyze to what extent foreign exchange intervention fxi can contribute to the central bank goals for different degrees of credibility we find two key results first in a baseline scenario where the central bank is perfectly credible fxi can improve macroeconomic outcomes by successfully stabilizing both output and inflation in response to foreign disturbances second when central bank lacks credibility fxi policies entail a trade off by reducing output volatility at the expense of inducing higher inflation volatility in this scenario fxi policies prevent the central bank from achieving the goal of price stability these results suggest that fxi is more likely to support an inflation targeting regime when the credibility of the central bank is high

the fragile politics of addiction suppose the optimizing consumer only has local information then what obviously there will be a random element of consumption the link between the frequency distribution of consumption by person and preference surface is worked out under convex preferences there will be a unimodal distribution and conversely a local optimizing theory of addictive behavior is developed from nonconvex preferences the resulting bimodal distribution of consumption implies a nonrobust outcome for median voter politics such a local optimizing model of addiction is compared with globally optimizing models of addiction

wage rigidities and jobless recoveries abstract real wage rigidities cause jobless recoveries suppose that a one time shock reduces the capital stock below trend if wages are flexible they decline and employment increases at the moment of the shock before both revert back to normal levels as the economy grows back to trend if wages are completely rigid and the labor market is otherwise frictionless the shock causes a proportional and permanent decline in employment capital output consumption and investment relative to trend in a search model with rigid wages the shock causes a persistent but not permanent decline in these economic outcomes a jobless recovery

capital budgets borrowing rules and state capital spending abstract this paper compares the level and composition of government spending in u s states that maintain separate budgets for capital and operating expenditures with that in states that employ unified budgets it also investigates the effects of pay as you go financing rules for capital projects the empirical findings suggest that states with separate capital budgets spend more on public capital projects than comparable states with unified budgets there is no evidence that the presence or absence of a capital budget affects the level of non capital spending pay as you go requirements for financing capital projects are associated with lower levels of both capital and non capital spending

government policy and the firm s capital structure abstract the purpose of this paper is to examine the effects of commonly observed forms of government intervention on the firm s capital structure we show that since market claims against the firm are always properly priced the firm is forced to take market claimants interests into account on the other hand since government claims are usually not adjusted for risk the firm can take advantage of the government it does so by choosing strategies that extract maximum value minimum cost from these policies in particular the firm uses its capital capital structure to maximize the value of the policy thus leading to a determinate capital strucure

economic development institutional change and the political economy of agricultural protection an econometric study of belgium since the 19th century this empirical study uses 100 years of annual data on 11 agricultural commodities from belgium to measure the impact of structural changes coinciding with economic development and changes in political institutions on agricultural protection the analysis shows that changes in agricultural protection are caused by a combination of factors governments have increased protection and support to farmers when world market prices for their commodities fell and vice versa offsetting market effects on producer incomes other economic determinants were the share of the commodities in total consumer expenditures negative effect and in total output of the economy positive effect with belgium a small economy there was no impact of the trade position changes in political institutions have affected agricultural protection democratic reforms which induced a significant shift in the political balance towards agricultural interests such as the introduction of the one man one vote system led to an increase in agricultural protection the integration of belgian agricultural policies in the common agricultural policy in 1968 coincided with an increase in protection ceteris paribus both institutional factors related to changes in access to and information about the decision making at the eu level and structural changes in the agricultural and food economy may explain this effect

evaluating an estimated new keynesian small open economy model abstract this paper estimates and tests a new keynesian small open economy model in the tradition of christiano et al 2005 nominal rigidities and the dynamic effects of a shock to monetary policy journal of political economy 113 1 1 45 and smets and wouters 2003 an estimated stochastic dynamic general equilibrium model of the euro area journal of the european economic association 1 5 1123 1175 using bayesian estimation techniques on swedish data to account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank s instrument rule a key equation in the model the uncovered interest rate parity uip condition is well known to be rejected empirically therefore we explore the consequences of modifying the uip condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate the results show that the modification increases the persistence in the real exchange rate and that this model has an empirical advantage compared with the standard uip specification

entrepreneurship social mobility and income redistribution in south india development economists have been preoccupied with the problem of increasing the size of the gnp pie to the relative neglect of its distribution despite the recent disenchantment with the viewpoint that all classes share in the benefits of industrial growth empirical data on the distribution of income business opportunity and economic power are in short supply many of the studies on entrepreneurship and economic development when they are not apologetics for ruthless capitalist exploitation as paul baran suggests extol the achievements of the capitalist entrepreneur without examining class origins and monopoly advantage joseph schumpeter sees entrepreneurs irrespective of class origin as heroic figures with the dream and will to found a private kingdom to conquer adversity to achieve success for its own sake and to experience the joy of creation for gustav papanek 1967 the private entrepreneur who is frugal diligent far sighted remarkably able and willing to take political risks is in large part responsible for the success of pakistan in achieving rapid industrialization

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

water works the economic impact of water infrastructure abstract billions of hours are spent each year on water collection in developing countries this paper explores whether improvements in water technologies which decrease household distance to drinking water source and the time intensity of home production enable changes in household time allocation and thereby productivity gains in kyrgyzstan adults reallocate time to leisure and labor on the household farm average yearly household cereals production increased significantly results imply a rate of return to labor equaling 0 11 hour approximately half the hourly farm wage absent evidence of improved adult health results suggest that productivity gains were realized primarily through increased farm labor

two targets two instruments monetary and exchange rate policies in emerging market economies abstract this paper examines the case for using two instruments the policy interest rate and sterilized foreign exchange market intervention in emerging market countries seeking to stabilize inflation and output while attenuating disequilibrium currency movements we estimate policy reaction functions for central banks documenting that indeed both instruments tend to be deployed we show that whether discretionary monetary policy or inflation targeting is preferable depends on the volatility of shocks relative to the central bank s time inconsistency problem the use of fx intervention as a second instrument improves welfare under both regimes but more so under inflation targeting overall a regime of two way sterilized intervention cum inflation targeting can result in better outcomes in the presence of imperfect capital mobility asset substitutability yielding similar gains to a discretionary policy while still delivering the inflation target

pricing and regulating affect environmental ethics effluent charges and tradeable permits are economically efficient but rarely used a new explanation for this discrepancy is offered pricing may crowd out environmental ethics in the pricing and via spillovers also in non pricing sectors pricing may therefore increase pollution providing a reason why decision makers tend to reject environmental pricing five propositions showing the conditions for counterproductive effects are advanced they are consistent with available empirical evidence regulation by setting standards and subsidies damage environmental ethics less than pricing because pollution is condoned damaging environmental ethics may prevent political action in favor of the environment

a theory of rational addiction we develop a theory of rational addiction in which rationality means a consistent plan to maximize utility over time strong addiction to a good requires a big effect of past consumption of the good on current consumption such powerful complementarities cause some steady states to be unstable they are an important part of our analysis because even small deviations from the consumption at an unstable steady state can lead to large cumulative rises over time in addictive consumption or to rapid falls in consumption to abstention our theory also implies that cold turkey is used to end strong addictions that addicts often go on binges that addicts respond more to permanent than to temporary changes in prices of addictive goods and that anxiety and tensions can precipitate an addiction

voting and paying for public goods an application of the theory of the core abstract let any coalition with a majority of all voters have the power to choose the quantities of public goods under rule i a majority coalition bears a cost of its decision that is proportional to its size under rule ii it must bear the whole cost of its decision thus rule i imposes costs on minorities although they have no power to choose the quantities of public goods while rule ii allows goods to have some attributes of semiprivate goods it is shown that a nonempty core under rule i implies a nonempty core under rule ii but not conversely necessary and sufficient conditions in terms of the properties of the von neumann morgenstern characteristic function are given

lemon technologies and adoption measurement theory and evidence from agricultural markets in uganda to reduce poverty and food insecurity in africa requires raising productivity in agriculture systematic use of fertilizer and hybrid seed is a pathway to increased productivity but adoption of these technologies remains low we investigate whether the quality of agricultural inputs can help explain low take up testing modern products purchased in local markets we find that 30 of nutrient is missing in fertilizer and hybrid maize seed is estimated to contain less than 50 authentic seeds we document that such low quality results in low average returns if authentic technologies replaced these low quality products however average returns are high to rationalize the findings we calibrate a learning model using data from our agricultural trials because agricultural yields are noisy farmers ability to learn about quality is limited and this can help explain the low quality equilibrium we observe but also why the market has not fully collapsed

the bias in favor of pro tariff lobbies abstract we show that the probability of success of the pro tariff lobby defined as a decreasing function of the ratio of consumer loss to producer gain rent generated by the tariff rises with the tariff under very general conditions this appears as an exception to becker s view that less distortionary measures tend to be adopted over their more distortionary counterparts we then provide a micro foundation for our probability definition using the imperfectly discriminating lobbying framework

rent seeking market structure and growth we study the role of productive and unproductive entrepreneurship in economic growth in a setting where firms compete in both economic and political markets specifically firms compete for market share through cost reducing technological innovation and they vie for influence over government transfer policy through rent seeking activities we find that rent seeking affects growth in two ways it allows firms to ignore economic competition leading to less innovation and it alters the number of firms that are supported in equilibrium the former effect is negative while the latter is ambiguous we show how these effects depend on various characteristics of economic and political markets

the economics of special interest politics the case of the tariff this paper investigates the interaction of politicians and special interest lobbies the goal is to model the equilibrium levels of redistributive policies such as taxes subsidies tariffs and regulatory decisions the model is applied throughout to the setting of tariffs by contributing to political campaigns special interest lobbies generate economic returns higher tariffs generate revenue for import competing industries through higher product prices higher milk support prices raise dairy farm income and so forth the lobby invests to maximize these net economic returns in evaluating their chances of election politicians weigh the favorable effects of special interest money against the unfavorable association with the lobby and the social cost of the redistributive policy section i explores the lobby s problem it describes a formalization of mancur olson s discussion of the voluntary provision of public goods and optimal contributions by lobbies to political campaigns section ii describes determination of the equilibrium tariff positions of each politician in a political campaign

how high are rates of return to fertilizer evidence from field experiments in kenya the idea that peasant farmers are rational profit maximizers has been a staple of development economics since theodore schultz 1964 it has also been influential in shaping policy for example agricultural experts have stressed the importance of fertilizer use in raising agricultural yields pointing to impressive results on experimental farms and to huge differences in agricultural productivity across countries with different levels of fertilizer use robert evenson and douglas gollin 2003 historically many countries subsidized fertilizer in response but economists have been skeptical of claims that farmers are leaving money on the table noting that fertilizer may not have the same returns on real world farms as on experimental farms that returns to fertilizer may be low for many farmers even if they are high on average tavneet suri 2007 that fertilizer may require complementary inputs or may be risky many countries have withdrawn or scaled back fertilizer psychology and development theory and experimental evidence

nudging farmers to use fertilizer theory and experimental evidence from kenya we model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias such farmers may procrastinate post poning fertilizer purchases until later periods when they may be too impatient to purchase fertilizer consistent with the model many farmers in western kenya fail to take advantage of apparently profit able fertilizer investments but they do invest in response to small time limited discounts on the cost of acquiring fertilizer free deliv ery just after harvest calibration suggests that this policy can yield higher welfare than either laissez faire policies or heavy subsidies

explaining price policy bias in agriculture the calculus of support maximizing politicians a model is developed to explain observed patterns of policy intervention in agriculture we analyze the interaction between political support seeking politicians and supportsupplying citizens society consists of a rural and urban group we determine the effects on transfers of relative group size disparities in income endowments between groups and the deadweight loss of redistribution the framework advanced is an alternative to that of the interest group model and is used to explain for example why the export sectors in developing countries are taxed more and why the united kingdom is less adamant for higher price supports than germany

profitability of fertilizer experimental evidence from female rice farmers in mali abstract we conducted an experiment providing fertilizer grants to female rice farmers in mali we found that women who received fertilizer used both more fertilizer and more complementary inputs s

a theory of competition among pressure groups for political influence this paper presents a theory of competition among pressure groups for political influence political equilibrium depends on the efficiency of each group in producing pressure the effect of additional pressure on their influence the number of persons in different groups and the deadweight cost of taxes and subsidies an increase in deadweight costs discourages pressure by subsidized groups and encourages pressure by taxpayers this analysis unifies the view that governments correct market failures with the view that they favor the politically powerful both are produced by the competition for political favors

technological innovations downside risk and the modernization of agriculture we use a randomized experiment in india to show that improved technology enhances agricultural productivity by crowding in modern inputs and cultivation practices specifically we show that a new rice variety that reduces downside risk by providing flood tolerance has positive effects on adoption of a more labor intensive planting method area cultivated fertilizer usage and credit utilization we find that a large share of the expected gains from the technology comes from crowding in of other investments therefore improved technologies that reduce risk by protecting production in bad years have the potential to increase agricultural productivity in normal years

studying the role of political competition in the evolution of government size over long horizons here we argue for the use of cointegration and error correction analysis to combine economic factors that are nonstationary with political factors that are stationary into an empirical model of the evolution of public policy over long periods the approach is applied to disentangle the contributions of economics and politics to the evolution of public expenditure by the government of canada over 130 years political competition emerges as the primary political factor affecting government size

following the leader the relevance of the fed funds rate for inflation targeting countries abstract in a new keynesian model for a small open economy we derive a cpi inflation based taylor rule that implements the flexible price allocation we conclude that in this rule the natural rate of interest should be linked to the foreign interest rate and to domestic productivity shocks this rule ensures that the cpi real rate moves in order to induce movements in consumption that are coherent with the flexible price allocation the empirical evidence shows that inflation targeting central banks respond to movements in the fed funds rate besides reacting to expected cpi inflation and to the domestic output gap this is true for developed and emerging economies furthermore we find that in emerging countries the response to foreign variables is not different from zero as suggested by theory when domestic inflation rather than cpi inflation is introduced in the policy rule

agricultural decisions after relaxing credit and risk constraints the investment decisions of small scale farmers in developing countries are conditioned by their financial environment binding credit market constraints and incomplete insurance can limit investment in activities with high expected profits we conducted several experiments in northern ghana in which farmers were randomly assigned to receive cash grants grants of or opportunities to purchase rainfall index insurance or a combination of the two demand for index insurance is strong and insurance leads to significantly larger agricultural investment and riskier production choices in agriculture the binding constraint to farmer investment is uninsured risk when provided with insurance against the primary catastrophic risk they face farmers are able to find resources to increase expenditure on their farms demand for insurance in subsequent years is strongly increasing with the farmer s own receipt of insurance payouts with the receipt of payouts by others in the farmer s social network and with recent poor rain in the village both investment patterns and the demand for index insurance are consistent with the presence of important basis risk associated with the index insurance imperfect trust that promised

continued existence of cows disproves central tenets of capitalism we examine the returns from owning cows and buffaloes in rural india with labor valued at market wages households earn large negative median returns from holding cows and buffaloes at 304 and 75 respectively making the stark assumption of labor valued at zero median returns are then 5 for cows and 10 for buffaloes with 52 and 46 of households earning negative returns for cows and buffaloes respectively why do households continue to invest in livestock if economic returns are negative or are these estimates wrong we discuss potential explanations including labor market failures for why livestock investments may persist

decomposition of gender differentials in agricultural productivity in ethiopia this paper employs decomposition methods to analyze differences in agricultural productivity between male and female land managers in ethiopia it employs data from the 2011 2012 ethiopian rural socioeconomic survey an overall 23 4 percent gender differential in agricultural productivity is estimated at the mean in favor of male land managers of which 10 1 percentage points are explained by differences in land manager characteristics land attributes and unequal access to resources the endowment effect the remaining 13 4 percentage points are explained by unequal returns to productive components but cannot be easily tied to specific covariates these results are mainly driven by non married female managers mainly single and divorced married female managers do not display such disadvantages further analysis along the productivity distribution reveals that gender differentials are more pronounced at mid levels of productivity and that the share of the gender gap explained by the endowment effect declines as productivity increases detailed decomposition of estimates at selected points of the agricultural productivity distribution provides valuable information for policy intervention purposes

the political economy of farmland ownership regulations and land prices one of the most ubiquitous forms of agricultural regulation is a restriction on farmland ownership one canadian example of a farmland ownership restriction is the saskatchewan farm security act fsa passed in 1974 the purpose of this article is to explain using a political economy framework why the fsa was implemented and to estimate the effect of the fsa on saskatchewan farmland values a present value pv model is used to estimate the relationship between land values rents and the regulation the hausman endogeneity test reveals that the regulation variable is endogenous with the land price the sign of the regulation variable is negative which fits with the theory i e the more stringent the regulation the lower the land value we estimate that the regulation lowered saskatchewan farmland prices by an average of 4 to 34 us acre depending on whether ordinary least squares ols or two stage least squares tsls is employed in the estimation over the period of 1974 2001