interest rates inflation and the aggregate consumption function this paper reports on an empirical study of the effects of interest rates and inflation on aggregate consumption in the united states empirical evidence based on quarterly u s data from the postwar period is first presented in support of the hypothesis that the real rate of interest varies inversely with the rate of inflation at least in the short run regression estimates of an aggregate consumption function for the united states also based on quarterly data from the postwar period are then presented these estimates indicate that the propensity to consume varies inversely with interest rates and directly with the rate of inflation

saving and after tax rates of return in recent years a number of economists have found or taken for granted a substantial positive interest elasticity of private saving and several have concluded that the current taxation of property income has played a major role in depressing saving and investment and therefore economic welfare thus probably the most quoted of these studies by michael boskin 1978 finds that a variety of functional forms estimation methods and definitions of the real after tax rate of return invariably lead to the conclusion of a substantial positive interest elasticity of private saving p 3 as a consequence he states current tax treatment of income from capital significantly retards capital accumulation rough estimates of the lost welfare exceed 50 billion per year the most recent of these studies by lawrence summers 1981 uses the boskin empirical results to check corresponding findings based on assumed values of the relevant parameters in a life cycle model of aggregate saving behavior summers raises the ante in his estimate of the welfare gain associated with the elimination of capital income taxation claiming it would exceed 150 billion annually and noting that this conclusion rests on a high positive interest elasticity of saving p 533 summers notes that his larger interest rate effect reflects his additional allowance for wealth changes since these findings on interest elasticity are inconsistent with earlier studies 2 and have received widespread attention by political activists it is important to determine how much confidence can be placed in the underlying analysis this paper will demonstrate that there is little scientific justification for the recent literature purporting to show a strong positive interest elasticity of saving so that government tax policies predicated on such saving behavior rest on a dubious foundation the evidence to be presented will indicate that at the present stage of knowledge we have no sound basis for alleging either a strong positive or negative after tax rate of return effect on saving the only prior published examination of these recent potentially important findings of a strong positive interest elasticity of private saving has been a brief reference to the boskin results in a paper by howrey and hymans 1978 which was largely devoted to an analysis of what the authors call personal cash or loanable funds rather than private saving these authors report that the significance of boskin s results is sensitive to estimation period inclusion of lagged unemployment and use of alternative interest rate variables they do not report the results of the alternative estimations however nor do they present consistent instrumental variable estimations despite the fact that the latter provide boskin with what he considers to be his best results in this paper in striking contrast to the boskin analysis we show that using the best available proxies for the relevant interest rate variables real expected after tax rates of return estimated both on an ex ante and on an ex post basis the estimated interest elasticity of household and private saving is generally found to be either statistically insignificant or significantly negative and only rarely significantly positive with the result depending on the specific interest rate series period and consumption function used nor is this finding altered when the single equation estimation of this saving or consumption function is replaced by an instrumental variable consistent estimation as a result there does not seem to be much basis to boskin s or summers strong criticism of the earlier literature which generally concluded that there was received for publication may 14 1982 revision accepted for publication november 23 1982 university of pennsylvania see boskin 1978 gylfason 1981 and summers 1981 2 see the consumption function in either the wharton model the wharton mark iv quarterly econometric model philadelphia 1977 and updates or the mps model the quarterly econometric model board of governors of the federal reserve system 1978 and updates

does direct democracy reduce public debt evidence from swiss municipalities although some countries have managed toobtain balanced budgets or even budgetsurpluses in recent times public debts ofmany oecd countries remain at high levels since structural reforms of public spendinghave only infrequently taken place in mostcountries fiscal pressure will increaseagain in the future due to society s ageingand the accompanying increases in socialtransfer spending constitutionalrestrictions on debt levels and legal rulesof the budgetary process such as a strongrole of the minister of finance aresupposed to be helping against the debtbias inherent in political decision makingprocedures in addition to such top downbudgetary procedures this paperinvestigates the impact of referendumapproval of budget deficits by the voterson the level of public debt in a crosssection of the 134 largest swissmunicipalities in 1990

supermajority voting requirements for tax increases evidence from the states abstract this paper measures the effect of state level supermajority requirements for tax increases on tax rates unobserved attitudes towards taxation tend to influence both the adoption of supermajority requirements and tax policy consequently one cannot distinguish between the effect of these requirements and their correlation with these unobserved attitudes a model is presented in which legislatures controlled by a pro tax party adopt a supermajority requirement to reduce the majority party agenda control the propensity of pro tax states to adopt supermajority requirements results in an underestimate of the true effect of these requirements on taxes to correct this identification problem the paper first uses fixed effects to control for unobserved attitudes and then employs instruments that measure the difficulty of amending state constitutions the paper concludes that supermajority requirements have significantly reduced taxes

are contributions to public pension programmes a tax on employment many studies describe the potentially adverse impact on employment of the payroll costs of financing public pension programmes conventionally empirical studies treat contributions to public pension programmes as a pure tax in for example calculations of the tax wedge by oecd but this approach ignores any future rights to benefits that are perceived by contributors in fact public pension programmes contain both an actuarial and a redistributive component the former closer to saving the latter a tax the paper constructs indicators of the tax component of pension programmes both between and within generations across a range of oecd countries and time periods it uses these measures in a cross country panel analysis of the determinants of age and gender specific economic activity rates the results reveal robust evidence that when public pension programme contributions are broken down into a tax component and a savings component the tax component of the payroll contribution reduces economic activity rates among women while a higher retirement saving component has the opposite effect there is little evidence that average tax rates however constructed have any adverse impact on the economic activity rates of men richard disney

precautionary savings a panel study theoretical literature shows that income uncertainty boosts saving yet empirical work is incomplete i test for the precautionary motive for saving using panel data knowing this motive s size is important for gauging the responsiveness of saving to government programs that reduce uncertainty and for comparison to other motives such as bequests most empirical studies of precautionary saving use either aggregate time series or cross sectional data which cannot capture the effects of individual income uncertainty i derive measures of total permanent and transitory income uncertainty from panel data the national longitudinal survey and find a strong precautionary motive a doubling of uncertainty increases the ratio of wealth to permanent income by 29

correlated uncertainty and policy instrument choice abstract for two decades environmental economists have generally maintained that benefit uncertainty is irrelevant for choosing between price and quantity instruments but that cost uncertainty matters with the identity of the efficient instrument depending upon the relative slopes of the marginal benefit and cost functions but in the presence of simultaneous correlated uncertainty such policy instrument recommendations may be inappropriate with plausible values of relevant parameters the conventional identification of a price instrument will be reversed to favor instead a quantity instrument the opposite reversal from the choice of a quantity instrument to a price instrument seems less likely to occur

the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition this paper examines a claim made in the introduction to milton friedman s presidential address to the american economic association and that is now taken for granted in orthodox economics according to friedman the theoretical developments initiated by haberler but named for pigou provide sufficient grounds for rejecting keynes s key theoretical proposition and the economics of keynes in its entirety the problem with this claim is that it turns out given the scrutiny that it clearly deserves to be false the theoretical developments initiated by haberler but named for pigou do not provide sufficient grounds for rejecting keynes s key theoretical proposition and thus the economics of keynes as a whole there is no legitimate rationale for believing in other words even in a world of flexible prices that the system will tend naturally toward a position of equilibrium at full employment

where did all the saving go a look at the recent decline in the personal saving rate the inadequacy of aggregate saving is often cited as an explanation of the low levels of capital accumulation and productivity growth in the united states aggregate saving is low in large part because of the steep decline in the personal saving rate that has occurred since 1975 this paper uses a modified life cycle model to analyze the determinants of this recent decline in the personal saving rate the empirical results do not support the hypothesis that the decline in the saving rate was the result of a reduction in the real rate of return the reduction in the rate of growth of income and the changing demographic profile of the labor force are the most important factors in accounting for the fall in the personal saving rate

rational expectations and the effects of government debt abstract this paper incorporates the effects of government debt into a standard rational expectations macroeconomic model due to limited current information even when the most extreme propositions about fiscal neutrality are true there are output and interest rate effects of unanticipated changes in government debt therefore the observation of a positive correlation between government deficits and output or interest rates does not imply that government bonds are net wealth

the after tax rate of return affects private savings level of savings and the rate of capital formation are of central concern to both economists and policymakers although the welfare effects of tax reforms do not directly depend on their impact on savings the effects of taxes on savings is crucial to considerations of tax incidence and equity and to the issue of long run growth the impact of the rate of return on consumption and savings decisions also bears on questions regarding the appropriate government discount rate the short run crowding out effects of fiscal policy and the effects of public indebtedness on capital intensity the traditional view among economists is that changes in the rate of return are likely to have only a small effect on the savings rate this consensus is supported by theoretical arguments pointing to the opposing income and substitution effects associated with changes in the rate of return the ambiguous implications of theory are matched by empirical studies which yield conflicting estimates as to the size of the impact of changes in the rate of return the polar empirical estimate is michael boskin s 1978 suggestion that the interest elasticity of savings is 4 this estimate is widely regarded as too high

economic research in canada evolution and convergence we describe the history and current state of economic research in canada including the role of the canadian economics association cea and other institutions our paper is organized around two central questions is canadian economic research distinctive and should it be more distinctive we argue that a distinct canadian school of economics existed in the past but that economic research in canada has converged on an evolving global standard in both method and topics we ask whether this convergence serves the canadian public interest and we raise some questions about the future of the cea and its flagship journal the cje

the loanable funds fallacy saving finance and equilibrium the loanable funds controversy cannot be settled without prior agreement on the meanings of income and equilibrium the essential claim of loanable funds theory is that disequilibrium in the goods market affects the rate of interest this paper introduces financial accounting concepts and a new understanding of the principle of effective demand to clarify that loanable funds theory relies on a concept of income other than current income namely yesterday s income in the case of robertson or full employment equilibrium income in the case of hicks in robertson s case this is a matter of bad accounting a confusion between an income statement and a balance sheet in hicks s more subtle case it is about the inapplicability of walras law to a monetary economy keynes s principle embodies a marshallian concept of system equilibrium under which the goods market is treated as never in disequilibrium in the sense required by loanable funds theory copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

estimating a public school expenditure model under binding spending limitations abstract a model explaining desired expenditure on education is estimated for a sample of new jersey school districts because the limit on annual increases in school spending is binding for a subsample of jurisdictions the tobit estimation procedure is used we test for equality of the pre and postlimitation structures and find substantial similarity the cap on expenditure increases was part of a court ordered reform of new jersey school finance law the results can be used to explain the failure of the existing school finance laws in lessening expenditure disparities at the lower end of the distribution

capital subsidies versus labor subsidies a trade off between capital and employment this paper investigates regime switching in the response of u s output to a monetary policy action we find substantial statistically significant time variation in this response that corresponds to high response and low response regimes we then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as functions of state variables we find strong evidence that policy actions taken during recessions have larger effects than those taken during expansions we find less evidence of asymmetry related to the direction or size of the policy action

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

optimal saving interest rates and endogenous growth the main point of this paper is that the apparent failure of economists thus far to establish a positive empirical link between interest rates and saving does not by itself discredit the hypothesis of a direct structural relationship between the two ceteris paribus because this structural relationship may be shifting about in response to changes in exogenous variables such as tastes and technology in a way that is consistent with any type of reduced form correlation between interest rates and saving in the data this point is demonstrated within a simple model of optimal saving interest rates and economic growth the different implications of endogenous versus exogenous growth are explored in this context

survey expectations in the time series consumption function this paper introduces survey based measures of expectations and uncertainties about income and real interest rates into an otherwise conventional consumption function the survey dat a contribute more than conventional variables to the explanation of changes in consumption the hypothesis that consumption follows a random walk is rejected in favor of a model in which consumption responds with a lag to changes in expected income growth the significance of inflation in earlier estimates of the u s consumpti on function is shown to be spurious and due to a strong negative correlation between expected inflation and expected income growth copyright 1992 by mit press

the econometric analysis of models with risk terms summary in this paper we have attempted to provide an integrated approach to the estimation of models with risk terms it was argued that there exist orthogonality conditions between variables in the information set and higher order moments of the unanticipated variable density these could be exploited to provide consistent estimators of the parameters associated with the risk term specifically it was recommended that an iv estimator should be applied with instruments constructed from the information set four existing methods commonly used to estimate models with risk terms are examined and applications of the techniques are made to the estimation of the risk term in the us c exchange market and the effects of price uncertainty upon production

keynes s theory of liquidity preference and his debt management and monetary policies this paper seeks to bolster the view that keynes was a monetary economist concerned primarily with monetary and not fiscal policy his most fundamental policy conclusion for national economies was that the authorities could control the long term rate of interest and should do so to promote investment growth and employment keynes s theory of liquidity preference is presented as a theory of money as a store of value that leads to this fundamental policy conclusion the theory is then applied to explain the debt management monetary and international financial policies that were adopted in world war ii copyright 2006 oxford university press

the effectiveness of institutional borrowing restrictions empirical evidence from spanish municipalities the need for restrictions on borrowing by subnational governments is a generally accepted notion that is justified both by public choice theory and by the fact that such restrictions are in force in the majority of decentralized countries furthermore recent breaches of the stability and growth pact of the european union have led to the introduction of legislative tools aimed at balancing the budget at all levels of government have come to the forefront of interest in european public finance research this paper is concerned with the financial situation and debt level of spanish municipalities from 1988 to 2000 we have two main objectives the first is to assess the value of mandatory limitations on municipal borrowing and past trends in the borrowing policies adopted by spanish local authorities the second is to develop an econometric model using panel data stratified by population size to measure indebtedness in spanish municipalities these measures enable us to formulate a series of hypotheses to explain municipal borrowing practices which are then tested empirically the evidence thus obtained appears to support the effectiveness of institutional borrowing restrictions to introduce some financial discipline in the borrowing policies adopted by local governments in spain

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

does devaluation improve the current account this paper incorporates the link between devaluation foreign interest payments and the current acccount into a fairly general macroeconomic model in which exchange rate changes influence aggregate demand through exports imports and expenditures as well as aggregate supply via the cost of imported factors of production on the basis of avaliable statistical estimates of the behavioral and structural parameters of the model an attempt is mafe to assess the empirical importance of this link among others in a group of highly indebted industrial and developing countries by and large the empirical results indicate that high foreign debt and interest payments tend to reduce the short to medium run effect of devaluation on national income expecially in the ldcs but make little difference to its generally positive effect on the current account

the loanable funds fallacy exercises in the analysis of disequilibrium this essay analyses the core proposition of loanable funds theory that changes in technology and time preferences directly and immediately affect interest rates applying what may be seen as a generalised financial buffers approach to the analysis of disequilibrium we find that loanable funds theory is flawed and should therefore be abandoned a challenge to the neo walrasian general equilibrium approach to monetary theory remains that of justifying the idea that by some mechanism intertemporal prices correctly reflect technology and time preferences copyright 2001 by oxford university press

does devaluation cause stagflation the traditional view that devaluation tends to increase domestic real income and output has been challenged in recent years on the grounds that trade flows including factor imports are relatively insensitive to exchange rate changes especially in developing countries this paper presents a simple macro economic model in which devaluation influences real income and output both through the cost of imported inputs on the supply side of the economy and through exports imports and expenditures on the demand side statistical estimates of the structural parameters of the model for a group of ten industrial and developing countries are used to show that the demand effects dominate the cost effects in most cases thus supporting the traditional view that devaluation has positive real effects in these countries in the short to medium run est ce que la devaluation engendre la stagflation le point de vue conventionnel veut que la devaluation tende a accroitre le niveau du revenu et de la production domestiques c est un point de vue qui a ete remis en question ces dernieres annees parce que dit on les flux de commerce international y compris les flux d importation de facteurs de production semblent relativement insensibles aux changements dans le taux de change ce memoire developpe un modele macro economique simple dans lequel la devaluation influence le niveau de revenu et de production en termes reels via le co ut des facteurs de production importes du cote de l offre et via les exportations les importations et les niveaux de depenses du c6te de la demande les auteurs utilisent la calibration statistique des parametres structurels du modele pour un groupe de dix pays industrialises et en voie de developpement pour montrer que les effets du cot6 de la demande dominent les effets de cofuts dans la plupart des cas voila qui supporte le point de vue traditionnel qui veut que la devaluation ait un impact positif reel dans les pays devaluateurs a court et a moyen tenne

the economic case for limits to government in june of 1978 the voters of california approved proposition 13 restricting the rate of local property taxation to no more than 1 percent of 1975 market values in november 1978 the voters of michigan approved the headlee amendment which limited state revenues from own sources to a fixed share of state personal income in november of 1980 massachusetts voters followed the lead of california and required all cities and towns to limit their taxation to a rate of 22 percent of full and fair cash value numerous hypotheses have been advanced and analyzed to explain the emergence of these new restrictions on fiscal choice the results point to two explanations voters feel governments are too big providing more services than what they prefer or governments spend too much on redistributive activities to help the poor and through higher wages to help public employees themselves the response to this perceived failure of government has been to propose and in california michigan and massachusetts to approve absolute limits to government expenditures the question i wish to address here is whether a compelling economic argument can be advanced for such a policy response politics and personalities aside the answer i think is yes but particular preconditions must apply first and perhaps most importantly is the inability of citizens to directly control the provision of public services responsibility for providing public goods is delegated to agents of the voter and these agents be they bureaucrats or elected representatives have their own objectives and an ability to act upon them to the possible disadvantage of the voters second without direct control over public outputs voters must use indirect controls through the manipulation of their appointed agents these indirect controls take two general forms price incentives or quantity restrictions third the choice of either of these indirect controls must take place before the agent acts to provide public goods further voters must often make their choice of a price or quantity control before the benefits or costs of the public service are known to them with certainty agents however can wait to observe true benefits and coststhat is why we use agents and then provide a level of public services in response to costs benefits and the voters chosen control voter uncertainty over benefits and costs can be interpreted as placing the voter within a constitutional perspective where a voter s precise position in society that is his or her benefits and costs are unknown when choosing a control geoffrey brennan and james buchanan ch 1 were the first to really stress this important point fourth if benefit and cost uncertainty is predominantly over the position rather than slope of the marginal benefit and marginal cost schedules and if the marginal benefit schedule is relatively steep loosely an inelastic demand curve while the marginal cost schedule is relatively flat an elastic supply curve then quantity controls on agents behavior through tax or spending limitations will be the preferred control these four preconditions strike me as quite plausible rather than just an emotional reaction to a peculiar configuration of political and economic circumstances proposition 13 the headlee amendment and proposition 24 may be perfectly reasoned responses to a failure in the politi professor university of pennsylvania and research associate the national bureau of economic research inc an alternative hypothesis which has been tested and generally rejected attributes voter approval to a desire to alter the tax mix away from property taxation and towards other taxes what approving voters really want it seems is increased government efficiency and less redistribution see the recent studies by jack citrin paul courant edward gramlich and daniel rubinfeld and helen ladd and julie wilson

whatever happened to keynes s monetary theory some see a return to keynes s ideas in response to the crisis that began in 2007 but we argue that the resurrected ideas belong to that betrayal of keynes s thought known as keynesian economics what happened is almost a reversal of the whig history view of economics in which past knowledge is embodied in later theory keynes has been made a pre keynesian we trace this transformation mainly through his monetary theory though we range more widely where necessary we state what we consider to be his monetary theory then identify and summarise the key contributions to its destruction then in a speculative section we suggest a variety of motivations for this subversion of his ideas we end by assessing what has been lost in particular his monetary policy and suggest social and political pressures that may have been partly responsible