efficient and durable decision rules with incomplete information we compare six concepts of efficiency for economies with incomplete information depending on the stage at which individuals welfare is evaluated and on whether incentive constraints are recognized an example is shown in which an incentive efficient decision rule may be unanimously rejected by the individuals in the economy we define durable decision rules which can resist such unanimous rejection and show that efficient durable decision rules exist

expectations about voter choices a comment the only essential differences in the examples analyzed above are in the assumptions that are used to derive or directly specify the choice behavior that the candidates expect from any given voter conditional on his utility function when the central behavioral assumption from the traditional models was used the equilibrium was a median outcome a conclusion directly analogous to what happens in the corresponding unidimensional traditional voting models when the central behavioral assumptions from the probabilistic voting model developed in coughlin and nitzan 1981 were used the equilibrium was at the maximum of the expected log utility function a conclusion directly analogous to what happens in the model in coughlin and nitzan 1981 indeed it was only when the corresponding assumptions from ledyard 1984 were used i e the particular assumptions that ledyard used to derive the choice behavior that the candidates expect from any given voter conditional on his utility function that the conclusions were substantially different from the conclusions derived from earlier models this reflects the important role these assumptions play in making ledyard s conclusions about candidate strategies substantially different from earlier results in the literature on spatial models of elections

tipping points in macroeconomic agent based models abstract the aim of this work is to explore the possible types of phenomena that simple macroeconomic agent based models abms can reproduce we propose a methodology inspired by statistical physics that characterizes a model through its phase diagram in the space of parameters our first motivation is to understand the large macro economic fluctuations observed in the mark i abm devised by delli gatti and collaborators in this regard our major finding is the generic existence of a phase transition between a good economy where unemployment is low and a bad economy where unemployment is high we then introduce a simpler framework that allows us to show that this transition is robust against many modifications of the model and is generically induced by an asymmetry between the rate of hiring and the rate of firing of the firms the unemployment level remains small until a tipping point beyond which the economy suddenly collapses if the parameters are such that the system is close to this transition any small fluctuation is amplified as the system jumps between the two equilibria we have explored several natural extensions of the model one is to introduce a bankruptcy threshold limiting the firms maximum level of debt to sales ratio this leads to a rich phase diagram with in particular a region where acute endogenous crises occur during which the unemployment rate shoots up before the economy can recover we also introduce simple wage policies this leads to inflation in the good phase or deflation in the bad phase but leaves the overall phase diagram of the model essentially unchanged we have also explored the effect of simple monetary policies that attempt to contain rising unemployment and defang crises we end the paper with general comments on the usefulness of abms to model macroeconomic phenomena in particular in view of the time needed to reach a steady state that raises the issue of ergodicity in these models

whom can we trust to run the fed theoretical support for the founders views abstract the federal reserve has been called a bizarre policymaking structure this paper documents and formalizes a historical argument that the fed s structure was a response to public conflict over inflation s redistributive powers the paper shows that in the face of conflict over redistributive inflation policy by majority can lead to policy that is worse even for the majority than obvious alternatives in balancing the interests for and against surprise inflation the fed s structure can lead to a better outcome

optimal seigniorage and financial liberalization abstract this paper analyzes the effect of financial integration for countries relying on the taxation of their domestic financial system a two country model with overlapping generations and explicit financial intermediation is used goverments derive revenues from seigniorage and set optimally but non cooperatively the rate of inflation and the level of required reserves on bank deposits a financial liberalizations leads to lower reserve ratios higher inflation rates and larger stocks of government debt when the liberalization is anticipated governments may temporarily increase the reserve ratios before the liberalization occurs jel f30 e60

fiscal spending the terms of trade and real interest rates this paper investigates the international movements in real interest rates and investment spending in response to a temporary fiscal expansion in one country it is shown that fiscal expansion may lead investment spending to be negatively correlated across countries this is because real interest rates relevant for investment purposes may move asymmetrically between countries in response to an expansion in fiscal spending the crucial factors which determine whether or not this occurs are a a transfer criterion which depends upon the spending propensities of the government relative to those of private consumers and b the intertemporal elasticity of substitution in consumption

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

policymakers horizon and the sustainability of international cooperation abstract this paper examines the impact of policymakers horizon on the sustainability of international cooperation we describe a prisoners dilemma game between two infinitely lived countries run by policymakers we show that re election incentives can act as a discipline device making it easier to sustain cooperation between policymakers with finite but potentially renewable mandates than between infinitely lived policymakers we also show that when voting suffers from a recency bias policymakers may have incentives to collude to get re elected and term limits may help international cooperation

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

the terms of trade and the international coordination of fiscal policy this paper develops an example of a noncooperative game between fiscal authorities in two countries the key strategic link between countries is the terms of trade an equilibrium without cooperation is characterized by excessive tax rates and public spending levels in each country the outcome is analogous to the nash equilibrium of the static optimal tarif game in trade theory but in this model there is also a dynamic distortion caused by noncooperative behaviour this dynamic distortion depresses capital accumulation and reduces the equilibrium capital stock in each country numerical examples suggest a significant welfare benefit of cooperation

collateral constraints in a monetary economy this paper reviews the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations we do this by introducing money in the heterogeneous agent real economy of kiyotaki and moore 1997 money enters in a cash in advance constraint and money supply is managed via open market operations we find that a monetary shock generates persistent movements in aggregate output the amplitude of which depends upon whether or not debt contracts are indexed if only nominal contracts are traded money shocks can trigger large output fluctuations in this case a money expansion triggers a boom whereas money contractions generate recessions in contrast if contracts are indexed then amplification is not only smaller it can also generate the reverse results when the possibility of default and renegotiation is considered the model can generate asymmetric business cycles with recessions milder than booms finally monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation jel e32 e43 e44 e52

credibility and policy convergence in a two party system with rational voters the traditional approach to modeling political parties behavior based upon the contribution of anthony downs 1957 assumes that the parties unique objective is to win elections thus they maximize their popularity the crucial implication of this assumption for a two party system is that if the two parties have the same information about voters preferences full convergence of policies results from electoral competition this is the crucial implication of the median voter theorem more generally it may be argued that different parties are motivated differently because they represent different constituencies parties may not care only about winning elections per se but also about the quality of the policies resulting from an election in this case the candidates of the two parties view winning an election not only as a goal per se but also as a means of implementing a better policy for their respective constituencies this paper shows that electoral competitions imply dynamic inconsistency if the voters are modeled as rational and forwardlooking agents and parties do not care exclusively about being elected but also about which policy to implement once elected the dynamic inconsistency arises as follows the parties have an incentive to announce convergent platforms to increase their chances of election however if the elected party is not committed to its electoral platform it has an incentive to follow its most preferred policy rather than the policy announced in its platform if voters are rational they account for this incentive thus in general in a one shot electoral game the only timeconsistent equilibrium is one in which no convergence is possible the two parties follow their most preferred policies and the voters rationally expect this outcome full convergence of parties platforms results only as a limiting case when the parties are completely indifferent with respect to the quality of the policies resulting from the election thus these results differ from the existing literature on ideologically motivated politicians for instance donald wittman 1977 1983 randall calvert 1985 which implicitly assumes the possibility of binding commitments to electoral platforms complete or partial policy convergence can be the outcome of political competition if the interaction between the parties and the voters is modeled as an infinitely repeated game in fact if the candidates have concave objective functions the welfare maximizing policy rule implies a complete convergence of parties policies however this cooperative and agreed upon policy may or may not be sustainable as a subgame perfect equilibrium depending on parameter values in particular it depends on the discount rates of the two parties the degree of polarization of their preferences and the relative popu graduate school of industrial administration carnegie mellon university pittsburgh pa 15213 and national bureau of economic research cambridge ma 02138 this paper is based upon a chapter of my unpublished doctoral dissertation at harvard university i am greatly indebted to jeffrey sachs for directing my attention toward these issues and for many conversations i also wish to thank andrew abel dilip abreu olivier blanchard ramon caminal andrew caplin alex cukierman morris fiorina benjamin friedman herschel grossman howard rosenthal and the referees for very useful comments the responsibilitv af anv n mtnkieis af calrirp nfnlv mine the result of policy convergence in a two party system is more general than the median voter theorem for discussions of convergence results not at the median see john ledyard 1984 peter coughlin 1984 coughlin and shmuel nitzan 1981 melvin hinich 1977 for earlier work on spatial competition see richard mckelvey 1975 hinich ledyard and peter ordeshook 1972 1973 and the references quoted therein the present paper focuses on the result of convergence rather than on the median voter theorem per se

cross border externalities and cooperation among representative democracies abstract this paper analyzes the provision of public goods with cross border externalities by representative democracies the level of provision of each country is decided by a policy maker elected by majority rule at the country level we compare the case in which policy makers set their policies noncooperatively with the case in which they set their policies through coasian cooperation cooperation induces policy makers to internalize cross border externalities but it also induces strategic voters to elect a policy maker who cares less about the public good to reduce their public good contribution the former effect increases public good provision while the latter reduces it we show that once voters incentives are taken into account whether cooperation is beneficial depends neither on voters preferences nor on the magnitude of spillovers nor on the size bargaining power or efficiency of each country instead it depends only on the curvature of the demand for the public good cooperation increases decreases public good provision when the demand function is more less convex than the unit elastic demand function hence the desirability of international cooperation depends mostly on the type of public good considered

domestic politics and the international coordination of fiscal policies abstract this paper investigates the desirability of international fiscal policy coordination in the presence of a domestic political distortion the domestic distortion results from the inability of the current policymaker to enter into a binding agreement with future policymakers about the composition of public spending this distortion generates a bias towards budget deficits international coordination can exacerbate the deficit bias and thus reduce social welfare at home and abroad the reason is that international coordination reduces the cost of running budget deficits and thus enhances the adverse effects of the domestic political distortion

the terms of trade and the current account the harberger laursen metzler effect the paper examines the effect of terms of trade changes on a small country s spending and current account assuming optimizing behavior in an intertemporal framework with perfect international capital mobility a temporary future terms of trade deterioration implies a deterioration improvement of the trade balance whereas a permanent terms of trade deterioration has an ambiguous effect depending on the rate of time preference nominal and real variables are considered via exact price indexes two periods and an infinite horizon are examined

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

e pluribus unum macroeconomic modelling for multi agent economies from the macroeconomist s viewpoint agent based modelling has an obvious drawback it makes impossible to think in aggregate terms the modeller in fact can reconstruct aggregate variables only from the bottom up by summing the levels of a myriad of individual variables we propose a modelling strategy which reduces the dimensionality of an agent based framework by replacing the actual distribution with the first and higher moments of the distribution itself we put this strategy at work in a macroeconomic and agent based model m abm of the financial accelerator in which firms heterogeneous degrees of financial robustness affect investment in a greenwald stiglitz setting

linear aggregation in cointegrated systems abstract in this paper the problem of aggregation of integrated time series variables is contrasted with the case of aggregation of stationary variables in the integrated case it is seen that a cointegration condition is sufficient for aggregation bias to vanish asymptotically no analogous condition is available in the stationary and ergodic case thus tests for aggregation bias originally designed for stationary data can be misleading when applied to integrated data this may account for overrejection of the null hypothesis of no aggregation bias when the null is true

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

income and wealth heterogeneity in the macroeconomy how do movements in the distribution of income and wealth affect the macroeconomy we analyze this question using a calibrated version of the stochastic growth model with partially uninsurable idiosyncratic risk and movements in aggregate productivity our main finding is that in the stationary stochastic equilibrium the behavior of the macroeconomic aggregates can be almost perfectly described using only the mean of the wealth distribution this result is robust to substantial changes in both parameter values and model specification our benchmark model whose only difference from the representative agent framework is the existence of uninsurable idiosyncratic risk displays far less cross sectional dispersion and skewness in wealth than u s data however an extension that relies on a small amount of heterogeneity in thrift does succeed in replicating the key features of the wealth data furthermore this extension features aggregate time series that depart significantly from permanent income behavior

testing for aggregation bias in linear models this paper discusses alternative methods of testing for aggregation bias and proposes direct tests of the discrepancy of the macroparameters from the average of the corresponding microparameters and derives tests of aggregation bias in the general case where the parameters of interest may possibly be nonlinear functions of the microparameters the paper also develops a durbin hausman type misspecification test of the disaggregate model these tests are then applied to disaggregate and aggregate specifications of employment functions for the u k economy disaggregated by forty industries copyright 1990 by royal economic society

intergenerational policies public debt and economic growth a politico economic analysis abstract this study presents a two period overlapping generations model with endogenous growth in each period the government representing young and old generations provides a public good financed by labor income taxation and public debt issuance and the government s policies are determined by probabilistic voting increased political power of the old lowers economic growth a debt ceiling rule is considered to resolve the negative growth effect but it creates a trade off between generations in terms of welfare

monetary policy and risk taking abstract we assess the effects of monetary policy on bank risk to verify the existence of a risk taking channel monetary expansions inducing banks to assume more risk we first present var evidence confirming that this channel exists and is particularly significant on the bank funding side then to rationalize this evidence we build a macroeconomic model where banks subject to runs endogenously choose their funding structure deposits vs capital and risk level a monetary expansion increases bank leverage and risk in turn higher bank risk in steady state increases asset price volatility and reduces equilibrium output

political influence and the dynamic consistency of policy garfinkel department of economics university of fornia 3151 social science plaza irvine ca 92697 lee artment of economics university of california 3151 soscience plaza irvine ca 92697 and international monfund 700 19th street nw washington dc 20431 we k without implicating avinash dixit amihai glazer chel grossman luisa lambertini stergios skaperdas an ymous referee and seminar participants at the university alifornia los angeles california state universityerton and the 1998 winter meetings of the econometociety for helpful comments on previous drafts of this r which had been circulated under the title political ipline and the dynamic consistency of policy the s expressed in this paper are those of the authors and ld not be attributed to the international monetary fund see torsten persson and guido tabellini 1990 for a ul survey of this literature

econometric analysis of aggregation in the context of linear prediction models this paper deals with the problem of aggregation where the focus of the analysis is whether to predict aggregate variables using macro or micro equations the grunfeldgriliches prediction criterion for choosing between aggregate and disaggregate equations is generalized to allow for contemporaneous covariances between the disturbances of micro equations and the possibility of different parametric restrictions on the equations of the disaggregate model a new test is proposed of the hypothesis of perfect aggregation which tests the validity of aggregation either through coefficient equality or through the stability over time of the composition of the regressors across the micro units the tools developed in the paper are then applied to employment demand functions for the uk economy disaggregated by 40 industries firstly a set of unrestricted log linear dynamic specifications are estimated for the disaggregate equations and then linear parameter restrictions are imposed as appropriate corresponding unrestricted and restricted aggregate equations are estimated two different levels of aggregation are considered aggregation over the 23 manufacturing industries and aggregation over all 40 industries of the economy in both cases the hypothesis of perfect aggregation is firmly rejected for the manufacturing industries the prediction criterion marginally favors the aggregate equation but over all industries the disaggregated equations are strongly preferred

real interest rates home goods and optimal external borrowing the paper investigates the optimal time path of consumption and external borrowing in the dependent economy model the small country faces given world prices and a given world real interest rate the presence of a home goods sector implies that the relevant real interest rate appropriate to consumption decisions depends on the rate of change of the real price of home goods the paper shows how transitory disturbances in output or in the world real interest rate affect the time profile of consumption and the trade balance in particular it is shown that the presence of a home goods sector dampens the consumption effects of changes in the world interest rate

international macroeconomic policy coordination when policymakers do not agree on the true model the authors relax the assumption of the literature on international coordination that policymakers know the true model t wo countries will still be able to agree on a cooperative policy pack age that each believes will improve the objective function relative t o the nash noncooperative solution however the bargaining solution may move the target variables in the wrong direction these points ar e illustrated with monetary and fiscal multipliers taken from simulat ions of ten leading econometric models out of 1 000 possible combina tions of models that could represent u s beliefs non u s beliefs and the true model monetary coordination improves u s welfare in on ly 546 cases copyright 1988 by american economic association

interpreting long run equilibrium solutions in conventional macro models a comment c m kelly 1985 claims that long run solutions from econometric models may be seriously misleading when expectations variables are erroneou sly replaced by observed outcomes it is shown that his results deriv e uniquely from an invalid exogeneity assumption all inferences are therefore potentially invalid illustrated by a case where the long r un is correct while the short run is biased using an encompassing fr amework error variance rankings and related tests distinguishing exp ectational from conditional models are derived for stationary cases for nonstationary integrated series the long run will be correctly e stimated when the data are cointegrated whereas the short run remain s biased copyright 1988 by royal economic society

savings commodity market rationing and the real rate of interest in china abstract the theoretical nature of risk premiums in foreign currency futures markets is derived and studied empirically estimation problems encountered in using futures data are discussed since forward rates and futures prices have been found to be approximately equal and because risk in daily risk premiums in the futures market unbiasedness of daily futures prices as predictors of the following day s futures price is rejected for all currencies reconciliation of daily and monthyl data requires positive serial correlation in daily risk premiums

the costs of bankruptcy chapter 7 liquidation versus chapter 11 reorganization our paper explores a comprehensive sample of small and large corporate bankruptcies in arizona and new york from 1995 to 2001 bankruptcy costs are very heterogeneous and sensitive to the measurement method used we find that chapter 7 liquidations appear to be no faster or cheaper in terms of direct expense than chapter 11 reorganizations however chapter 11 seems to preserve assets better thereby allowing creditors to recover relatively more our paper also provides a large number of further empirical regularities our paper analyzes the largest sample of corporate bankruptcies to date we research approximately 300 cases from the arizona and new york federal bankruptcy courts from 1995 to 2001 these cases consist of 1 both publicly traded and privately held corporations and 2 both chapter 7 liquidations and chapter 11 reorganizations this sample is practically the entire population of unique corporate bankruptcies in these courts our paper s primary objective is to measure how the two available bankruptcy procedures differ especially but not only in terms of cost we explore four variables namely the change in the estate s value during bankruptcy a measure of indirect costs the time spent in bankruptcy another and more common measure of indirect costs the expenses submitted to and approved by the bankruptcy court a measure of direct costs and the recovery rates for creditors and apr violations our most important findings are that chapter 7 liquidations are not cheaper than chapter 11 reorganizations particularly after we control for endogenous self selection of firms into bankruptcy procedure bankruptcy professionals attorneys accountants trustees regularly end up with most of the post bankruptcy firm s value in chapter 7 arturo bris is at imd yale school of management and ecgi ivo welch is at brown uni