resolving new keynesian anomalies with wealth in the utility function at the zero lower bound the new keynesian model predicts that output and inflation collapse to implausibly low levels and that government spending and forward guidance have implausibly large effects to resolve these anomalies we introduce wealth into the utility function the justification is that wealth is a marker of social status and people value status since people partly save to accrue social status the euler equation is modified as a result when the marginal utility of wealth is sufficiently large the dynamical system representing the zero lower bound equilibrium transforms from a saddle to a source which resolves all the anomalies

non agricultural earnings in peri urban areas of tanzania evidence from household survey data abstract this study draws on purposive survey data of approximately 600 households in peri urban tanzania to describe the degree and nature of non farm diversification in these settings with the exception of relatively dynamic cities such as dar es salaam and arusha overall non farm incomes shares are not unambiguously higher than in rural areas as a whole non farm income shares rise sharply and monotonically with quintiles defined in terms of per capita food consumption in that sense the sector appears to offer an important route out of poverty the evidence suggests that education and access to infrastructure are important determinants of non farm incomes in peri urban areas women appear to be poorly placed vis a vis the non farm sector even after controlling for education age and other characteristics kinship and tribal affinities and time devoted to communal activities appear to deter entrepreneurial activity and non farm employment but trust in officials and public servants and strong heterogeneous village associations are important in stimulating non farm activity

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

a reinterpretation of chapter 17 of keynes s general theory effective demand shortage under dynamic optimization this article is an attempt to formalize chapter 17 of keynes s general theory using a continuous dynamic optimization model with perfect foresight i present two subjective interest rates the time preference rate and the liquidity premium that respectively govern the consumption saving and portfolio decisions under optimal household behavior they are equalized to the market rate of interest in the monetary economy described by keynes however the equality can be inconsistent with the condition of market equilibrium in which case persistent stagnation occurs a new analytic method based on dynamic optimization is proposed as an alternative to is lm analysis

monetary policy with interest on reserves abstract i analyze monetary policy with interest on reserves and a large balance sheet i show that conventional theories do not determine inflation in this regime so i base the analysis on the fiscal theory of the price level i find that monetary policy can peg the nominal rate and determine expected inflation with sticky prices monetary policy can also affect real interest rates and output though higher interest rates raise output and then inflation the conventional sign requires a coordinated fiscal monetary policy contraction i show how conventional new keynesian models also imply strong monetary fiscal policy coordination to obtain the usual signs i address theoretical controversies a concluding section places our current regime in a broader historical context and opines on how optimal fiscal and monetary policy will evolve in the new regime

labor migration and earnings differences the case of rural china this article presents empirical evidence supporting the hypothesis that the decision of chinese rural people to migrate is affected by noneconomic forces using the 1820 rural household survey from sichuan province migration behavior and earnings are analyzed logistic probability models show that the decision to migrate is driven largely by the availability of rural non farm employment opportunities however if jobs are available in the province even at lower wages rural people will choose to stay rather than to migrate the major deterrent to migration is the lack of safety during transportation and in destination cities as well as forced separation from families moreover rural migrants are denied the legal right to reside permanently in cities furthermore findings reveal that although labor productivity in migrant activities is higher than it is in local non farm sectors the economic cost of migration in china is so high as to significantly limit reallocation one implication of this study is that without artificial barriers to labor migration the number of migratory workers would be higher since the important objective of the chinese government is to control rural to urban migration it is likely that restrictive migration policies will continue however putting aside the issue of social justice the economic efficiency loss under the chinese system should not be ignored

count on the growth pole strategy for regional economic growth spread backwash effects in greater central china ke s and feser e count on the growth pole strategy for regional economic growth spread backwash effects in greater central china regional studies this paper investigates spread backwash effects associated with non agricultural gross domestic product and employment growth across 922 cities and counties in central china between 2000 and 2005 simultaneous equation estimates find mixed spread backwash effects from prefecture and higher level cities to comparable or lower level cities and counties spread effects of gross domestic product and employment growths are also indicated between county level cities however county level cities exerted backwash effects on rural counties the paper discusses the implications of these findings in relation to the construction of urban economic growth zones in central china as an important strategy of central rise ke s et feser e devrait on compter sur la strategie de poles de croissance afin d assurer la croissance economique regionale les effets de repartition

agglomeration spillovers and wage and housing cost gradients across the urban hierarchy abstract the tyranny of distance in terms of its effect on median earnings and housing costs is examined for rural and urban u s counties first we develop a series of distance metrics for an area s remoteness from multiple tiers of the urban hierarchy second we consider geographical access of buyers and sellers through market potential measures typical of those used in empirical studies of the new economic geography we estimate penalties of about 5 to 9 for median earnings and 12 to 17 for housing costs for area remoteness from the combined tiers of the urban hierarchy differences in market potential also influence factor prices but these effects generally are smaller than those produced by urban hierarchy distances thus it appears that empirical tests of new economic geography models need to consider sources of agglomeration spillovers beyond aggregate market potential

forward guidance without common knowledge abstract how does the economy respond to news about future policies or future fundamentals standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond relaxing this assumption attenuates the general equilibrium effects of news and rationalizes a form of myopia at the aggregate level we establish these insights within a class of games which nests but is not limited to the new keynesian model our results help resolve the forward guidance puzzle offer a rationale for the front loading of fiscal stimuli and illustrate more broadly the fragility of predictions that rest on long series of forward looking feedback loops jel d82 d83 d84 e12 e23 e52 e62

the power of forward guidance revisited in recent years central banks have increasingly turned to forward guidance as a central tool of monetary policy especially as interest rates around the world have hit the zero lower bound standard monetary models imply that far future forward guidance is extremely powerful promises about far future interest rates have huge effects on current economic outcomes and these effects grow with the horizon of the forward guidance we show that the power of forward guidance is highly sensitive to the assumption of complete markets if agents face uninsurable income risk and borrowing constraints a precautionary savings effect tempers their responses to changes in future interest rates as a consequence forward guidance has substantially less power to stimulate the economy in addition we show that the business cycle dynamics of our incomplete markets model differ substantially from its complete market counterpart this contrasts with the well known results of krusell and smith 1998 we present approximate representations that can easily be incorporated into standard business cycle models

economic geography and wages abstract this paper estimates the agglomeration benefits that arise from vertical linkages between firms we identify the agglomeration benefits off the spatial variation in firms nominal wages u

the new keynesian liquidity trap abstract many new keynesian models produce a deep recession with deflation at the zero bound these models also make unusual policy predictions useless government spending technical regress capital destruction and forward guidance can raise output moreover these predictions are larger as prices become less sticky and as changes are expected further in the future i show that these predictions are strongly affected by equilibrium selection for the same interest rate path equilibria that bound initial jumps predict mild inflation small output variation negative multipliers small effects of far off expectations and a smooth frictionless limit fiscal policy considerations suggest the latter equilibria

pegging the interest rate on bank reserves a resolution of new keynesian puzzles and paradoxes abstract introducing bank reserves or money into the basic new keynesian nk model offers a resolution of nk puzzles and paradoxes the resulting models deliver local equilibrium determinacy under an exogenous interest rate on reserves and an exogenous nominal stock of reserves even for an arbitrarily small monetary friction this leads to a resolution of the forward guidance puzzle the fiscal multiplier puzzle and the paradox of flexibility as the monetary friction becomes vanishingly small the models converge to the basic nk model and serve to select a particular equilibrium of that model which also offers a resolution of the paradox of toil

inflation and output in new keynesian models with a transient interest rate peg a familiar result in the canonical dynamic new keynesian dnk model is that policymakers constrained by the zero bound can improve outcomes by promising to keep rates low after the zero bound is not binding we examine a general class of interest rate pegs in a variety of dnk models standard versions of the model produce counterintuitive reversals where the effect of the interest rate peg can switch from highly expansionary to highly contractionary for modest changes in the length of the interest rate peg this unusual behavior does not arise in sticky information models of the phillips curve

rural nonfarm incomes in nicaragua abstract this paper examines nonfarm incomes of rural nicaraguan households using a nationwide survey lsms from 1998 the key findings are as follows a rural nonfarm income rnfi constitutes 41 of rural household incomes b rnfi is much more important than farm wage labor income c rnfi tends to be relatively concentrated geographically and socioeconomically toward the rural areas of the managua zone and the rest of pacific zone which are denser in infrastructure and population and toward the upper income quartile of rural households this concentration implies high entry barriers and capital requirements for rural nonfarm activity that the poor are simply not equipped to overcome equipping the rural poor through training and acquisition of diverse forms of capital to have a chance at the higher return nonfarm jobs would be a major step toward helping them to share the benefits of the rural nonfarm economy d self employment small enterprise income in manufactures is very minor probably due to the ease of obtaining manufactured goods from urban industries and imports wage employment constitutes the bulk of rnfi despite it receiving little attention in development programs and debate e three quarters of rnfi is in the service sector and only one quarter is from manufactures that can be contrasted with the emphasis on small manufactures enterprises in rural development programs and research f education road access as well as access to electricity and water were found to be important to nonfarm incomes

spatial wage disparities sorting matters spatial wage disparities can result from spatial differences in the skill composition of the workforce in non human endowments and in local interactions to distinguish between these explanations we estimate a model of wage determination across local labour markets using a very large panel of french workers we control for worker characteristics worker fixed effects industry fixed effects and the characteristics of the local labour market our findings suggest that individual skills account for a large fraction of existing spatial wage disparities with strong evidence of spatial sorting by skills interaction effects are mostly driven by the local density of employment not controlling for worker heterogeneity leads to very biased estimates of interaction effects endowments only appear to play a small role

are low interest rates deflationary a paradox of perfect foresight analysis we argue that an influential neo fisherian analysis of the effects of low interest rates depends on using perfect foresight equilibrium analysis under circumstances where it is not plausible for people to hold expectations of that kind we propose an explicit cognitive process by which agents may form their expectations of future endogenous variables perfect foresight is justified by our analysis as a reasonable approximation in some cases but in the case of a commitment to maintain a low nominal interest rate for a long time our reflective equilibrium implies neither neo fisherian conclusions nor implausibly strong predicted effects of forward guidance

mobility and the return to education testing a roy model with multiple markets self selected migration presents one potential explanation for why observed returns to a college education in local labor markets vary widely even though u s workers are highly mobile to assess the impact of self selection on estimated returns this paper first develops a roy model of mobility and earnings where workers choose in which of the 50 states plus the district of columbia to live and work available estimation methods are either infeasible for a selection model with so many alternatives or place potentially severe restrictions on earnings and the selection process this paper develops an alternative econometric methodology that combines lee s 1983 parametric maximum order statistic approach to reduce the dimensionality of the error terms with more recent work on semiparametric estimation of selection models e g ahn and powell 1993 the resulting semiparametric correction is easy to implement and can be adapted to a variety of other polychotomous choice problems the empirical work which uses 1990 u s census data confirms the role of comparative advantage in mobility decisions the results suggest that self selection of higher educated individuals to states with higher returns to education generally leads to upward biases in ols estimates of the returns to education in state specific labor markets while the estimated returns to a college education are significantly biased correcting for the bias does not narrow the range of returns across states consistent with the finding that the corrected return to a college education differs across the u s the relative state to state migration flows of college versus high school educated individuals respond strongly to differences in the return to education and amenities across states

a behavioral new keynesian model this paper presents a framework for analyzing how bounded rationality affects monetary and fiscal policy the model is a tractable and parsimonious enrichment of the widely used new keynesian model with one main new cognitive discounting parameter which quantifies how poorly agents understand future economic disturbances that myopia parameter in turn affects the power of monetary and fiscal policy in a microfounded general equilibrium a number of consequences emerge i fiscal stimulus or helicopter drops of money are powerful and indeed pull the economy out of the zero lower bound more generally the model allows for the joint analysis of optimal monetary and fiscal policy ii the taylor principle is strongly modified even with passive monetary policy equilibrium is determinate whereas the traditional rational model yields multiple equilibria which reduces its predictive power and generates indeterminate economies at the zero lower bound zlb iii the zlb is much less costly than in the traditional model iv the model brings a natural solution to the forward guidance puzzle the fact that in the rational model shocks to very distant rates have a very powerful impact on today s consumption and inflation because agents are partially myopic this effect is muted v optimal policy changes qualitatively the optimal commitment policy with rational agents demands nominal gdp targeting this is not the case with behavioral firms as the benefits of commitment are less strong with myopic firms vi the model is neo fisherian in the long run but keynesian in the short run a permanent rise in the interest rate decreases inflation in the short run but increases it in the long run the non standard behavioral features of the model seem warranted by extant empirical evidence

income strategies among rural households in mexico the role of off farm activities abstract off farm activities generate on average more than half of farm households incomes in the mexican ejido sector participation in these activities helps reduce poverty and contributes to greater equality in the distribution of income this paper analyzes the determinants of access to off farm sources of income across households we find that education plays a major role in accessing better remunerated nonagricultural employment adults of indigenous ethnic origin suffer from an educational lag and have less access to off farm nonagricultural employment than non indigenous adults at identical educational levels the regional availability of off farm employment strongly affects participation in addition women are differentially limited by distance to urban centers in their ability to gain off farm employment

monetary policy bounded rationality and incomplete markets this paper extends the benchmark new keynesian model by introducing two frictions i agent heterogeneity with incomplete markets uninsurable idiosyncratic risk and occasionally binding borrowing constraints and ii bounded rationality in the form of level k thinking compared to the benchmark model we show that the interaction of these two frictions leads to a powerful mitigation of the effects of monetary policy which is more pronounced at long horizons and offers a potential rationalization of the forward guidance puzzle each of these frictions in isolation would lead to no or much smaller departures from the benchmark model

assets activities and rural income generation evidence from a multicountry analysis summary this paper examines the links between the assets and the economic activities of rural households in developing countries to provide insight into how the promotion of certain key assets particularly education land and infrastructure influences the economic choices of these households nationally representative data from 15 countries which form part of the rural income generating activities riga database are used in the analysis the results indicate that improved land access is linked to agricultural production and thus will lead households to take on average this path for improving household welfare higher levels of education and greater access to infrastructure appear to be most closely linked to non agricultural wage employment

geographic poverty traps a micro model of consumption growth in rural china how important are neighbourhood endowments of physical and human capital in explaining diverging fortunes over time for otherwise identical households in a developing rural economy to answer this question we develop an estimable micro model of consumption growth allowing for constraints on factor mobility and externalities whereby geographic capital can influence the productivity of a household s own capital our statistical test has considerable power in detecting geographic effects given that we control for latent heterogeneity in measured consumption growth rates at the micro level we find robust evidence of geographic poverty traps in farm household panel data from post reform rural china our results strengthen the equity and efficiency case for public investment in lagging poor areas in this setting copyright 2002 john wiley sons ltd

livelihoods and chronic poverty in semi arid zimbabwe abstract remoteness and geographic natural physical human and social capital are contrasted with social and political exclusion in explaining persistent rural poverty we found that persistent poverty was strongly associated with the structural poverty of zimbabwe s semi arid communal areas relative urban proximity assisted income diversification and improvement in a very poor socially and politically excluded area less excluded but remote areas remained poor but not as poor as the excluded population livelihoods changed and diversified more in the nonremote area speeding poverty reduction as measured by an index of perceived change we conclude with what policy options and sequence might support the inclusion of chronically poor people

are negative supply shocks expansionary at the zero lower bound the standard new keynesian model predicts that economies behave differently at the zero lower bound completely wasteful government spending or forward guidance is very stimulative and capital des

are workers close to cities paid higher nonagricultural wages in rural china in the present study we investigate whether workers close to cities are paid higher non agricultural wages than workers in outlying rural areas we find that workers close to urban areas not only benefit from more opportunities to engage in non agricultural activities but also from better paid jobs in addition distance exhibits a strongly nonlinear impact distance always has a negative impact on wages but the effect is more detrimental the closer the village is to the urban center we also find evidence of urban hierarchy effects workers living close to bigger cities are paid higher wages finally we provide evidence on the transmission channels at work

wheeling rates based on marginal cost theory knowledge of what rates for wheeling electric power should be if based on marginal costs is vital in the debate on how wheeling should be priced the authors present extensive computations of marginal costs sensitivities to losses constraints load levels amount of power wheeled revenue reconciliation etc are examined in the context of two case studies revenue reconciliation for capital recovery is described briefly

was the new deal contractionary can government policies that increase the monopoly power of firms and the militancy of unions increase output this paper shows that the answer is yes under certain emergency conditions these emergency conditions zero interest rates and deflation were satisfied during the great depression in the united states the new deal which facilitated monopolies and union militancy was therefore expansionary in the model presented this conclusion is contrary to a large previous literature the main reason for this divergence is that this paper incorporates rigid prices and the zero bound on the short term interest rate jel e23 e32 e52 e62 j51 n12 n42