bureaucratic minimal squawk behavior theory and evidence from regulatory agencies this paper develops a model in which a desire to avoid criticism prompts otherwise public spirited bureaucrats to behave inefficiently decisions are taken to keep interest groups quiet and to keep mistakes out of the public eye the policy implications of this minimal squawk behavior are at odds with the view that agencies should be structured to minimize the threat of capture an empirical test using data from us state public utility commissions rejects the capture hypothesis and is consistent with the squawk hypothesis longer puc terms of office are associated with a higher incidence of rate reviews and lower household electricity bills jel d73 l51 l97 l98

information and the persistence of private order contract enforcement institutions an experimental analysis abstract we study an experimental market in which some sellers are prone to moral hazard and in which a private order contract enforcement institution exists that can mediate trade and prevent sellers from reneging on their contractual obligations using the institution to resolve the moral hazard problem is costly we demonstrate that in this market the utilization of the private order contract enforcement institution may make public and private market signals uninformative and inhibit learning we study whether this potential information externality can limit adaptation away from the private order institution when it is efficient to do so consistent with theory we find inefficient persistence when the institution is used but by contrast efficient adaptation in other situations providing information to individuals who are using the private order institution allows them to partially adapt

regulatory fog the role of information in regulatory persistence abstract regulation is very persistent even when inefficient we propose an explanation for regulatory persistence based on regulatory fog the phenomenon by which regulation obscures information regarding the value of counterfactual policies we construct a dynamic model of regulation in which the underlying need for regulation varies stochastically and regulation undermines the social planner s ability to observe the state of the world compared to a full information benchmark regulation is highly persistent often lasting indefinitely regulatory fog is robust to a broad range of partially informative policies and can be quite detrimental to social welfare regulatory experiments modeled as costly and imperfect signals of the underlying state do not eliminate the effects of regulatory fog we characterize their effects and provide a framework for choosing amongst a set of potential regulatory experiments

delay and cycles when the profitability of investment depends on the general level of economic activity entrepreneurs have an incentive to delay investments during a recession endogenous delay thus prolongs the recovery from a recession and heightens the effect of the boom this paper describes a dynamic model that exhibits both delay and cycles and develops methods for analysing the role of delay in propogating business cycles a number of interesting characteristics of the cycle are revealed first the effect of delay is asymmetric it lengthens the recovery but not the downturn second delay can increase the amplitude and typically reduces the frequency of the cycle third it can reduce the average level of activity but it achieves this effect by prolonging the recession rather than by reducing the amplitude of the cycle the welfare effects of delay are ambiguous however

price dispersion and incomplete learning in the long run abstract in each period a seller chooses a price and the customer for that period buys either one unit or nothing the relationship between price and purchase probability is one of two linear functions it is shown that the seller behaving optimally does not necessarily learn which function is the actual relationship since there can be a positive probability of sequences of prices converging to the price at which the two functions give the same purchase probability

the case for open market purchases in a liquidity trap prevalent thinking about liquidity traps suggests that the perfect substitutability of money and bonds at a zero short term nominal interest rate renders open market operations ineffective for achieving macroeconomic stabilization goals we show that even were this the case there remains a powerful argument for large scale open market operations as a fiscal policy tool as we also demonstrate however this same reasoning implies that open market operations will be beneficial for stabilization as well even when the economy is expected to remain mired in a liquidity trap for some time thus the microeconomic fiscal benefits of open market operations in a liquidity trap go hand in hand with standard macroeconomic objectives motivated by japan s recent economic experience we use a dynamic general equilibrium model to assess the welfare impact of open market operations for an economy in japan s predicament we argue japan can achieve a substantial welfare improvement through large open market purchases of domestic government debt

monetary policy when interest rates are bounded at zero this paper assesses the importance of the zero lower bound on nominal interest rates for the interest rate channel of monetary policy we simulate several interest rate setting policy rules with ei

commodity trade and international risk sharing how much do financial markets matter abstract this paper evaluates the social gains from international risk sharing in some simple general equilibrium models with output uncertainty a simulation model calibrated to selected moments of u s and japanese data estimates the incremental loss from a ban on international portfolio diversification to be on the order of 0 20 percent of output per year even the theoretical gains from asset trade may disappear under alternative sets of assumptions on preferences and technology the paper argues that the small magnitude of potential trade gains may help explain the apparently inconsistent findings of empirical studies on the degree of international capital mobility

slow boom sudden crash abstract many asset markets exhibit slow booms and sudden crashes this pattern is explained by an endogenous flow of information in the model agents undertake more economic activity in good times than in bad economic activity generates public information about the state of the economy if the economic state changes when times are good and information is abundant asset prices adjust quickly and a sudden crash occurs when times are bad scarce information and high uncertainty slow agents reactions as the economy improves a gradual boom ensues data from u s and emerging credit markets support the theory

price stability in open economies this paper studies the conditions under which price stability is the optimal policy in a two country open economy model with imperfect competition and price stickiness special conditions on the levels of country specific distortionary taxation and the intratemporal and intertemporal elasticities of substitution need to be satisfied these restrictions apply to both cooperative and non cooperative settings most importantly we show that cooperative and non cooperative solutions do not coincide despite market completeness and producer currency pricing in this framework our analysis suggests a role for international policy coordination

learning public good provision and the information trap abstract we consider an economy with uncertainty about the true production function for a public good by using bayes rule the economy can learn from experience we show that it may learn the truth but that it may also converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap we also show that our results are robust with respect to small experimentation

resistance to reform status quo bias in the presence of individual specific uncertainty comment why do governments so often fail to adopt policies which economists consider to be efficiency enhancing our answer to this question relies on uncertainty regarding the distribution of gains and losses from reform we show that there is a bias towards the status quo and hence against efficiency enhancing reforms whenever some of the individual gainers and losers from reform cannot be identified beforehand there are reforms which once adopted will receive adequate political support but would have failed to carry the day ex ante the argument does not rely on risk aversion irrationality or hysteresis due to sunk costs jel d72 f13 why do governments so often fail to adopt policies that economists consider to be efficiency enhancing this is one of the fundamental questions of political economy the answer usually relies on what may be

the fiscal multiplier and spillover in a global liquidity trap we consider the fiscal multiplier and spillover in an environment in which two countries are caught simultaneously in a liquidity trap using an optimizing two country sticky price model we show that the fiscal multiplier and spillover are contrary to those predicted in textbook economics for the country with government expenditure the fiscal multiplier exceeds one the currency depreciates and the terms of trade worsen the fiscal spillover is negative if the intertemporal elasticity of substitution in consumption is less than one and positive if the parameter is greater than one incomplete stabilization of marginal costs due to the existence of the zero lower bound is a crucial factor in understanding the effects of fiscal policy in open economies

the impact of immigration on the british labour market using data from the british labour force survey this article provides an empirical investigation of the way immigration affects labour market outcomes of native born workers in britain set beside a theoretical discussion of the underlying economic mechanisms we discuss problems arising in empirical estimation and how to address them we show that the overall skill distribution of immigrants is remarkably similar to that of the native born workforce we find no strong evidence that immigration has overall effects on aggregate employment participation unemployment and wages but some differences according to education

twin deficits openness and the business cycle in this paper we study the co movement of the government budget balance and the trade balance at business cycle frequencies in a sample of 10 oecd countries we find that the correlation of the two time series is negative but less so in more open economies moreover for the us the cross correlation function is s shaped we show that a standard business cycle model featuring government spending and technology shocks is able to replicate these empirical regularities the model predicts that conditional on spending shocks the correlation of the budget balance and the trade balance is close to perfect consistent with the twin deficit hypothesis despite this high correlation however the economic effect of spending shocks on the trade balance is contained if the economies are not very open to trade

the zero interest rate bound and the role of the exchange rate for monetary policy in japan in this paper we study the role of the exchange rate in conducting monetary policy in an economy with near zero nominal interest rates as experienced in japan since the mid 1990s our analysis is based on an estimated model of japan the united states and the euro area with rational expectations and nominal rigidities first we provide a quantitative analysis of the impact of the zero bound on the effectiveness of interest rate policy in japan in terms of stabilizing output and inflation then we evaluate three concrete proposals that focus on depreciation of the currency as a way to ameliorate the effect of the zero bound and evade a potential liquidity trap finally we investigate the international consequences of these proposals

the fuelwood consumption in a rural area of greece abstract renewable energy sources are called to play an important role as regards the increasing energy demand worldwide in particular the need to address the problems created by the oil crises has distinguished the importance of renewable energy in economic development biomass is recognized as one of the most important renewable energy sources that can contribute decisively to the energy needs of modern society and the environment protection in both industrialized and developing countries a very important source of biomass is wood and especially fuelwood in greece because of the economic crisis there is an increased consumption of fuelwood especially in rural areas in this paper using a questionnaire and descriptive statistics and logistic regression analysis we explore the determinants of fuelwood consumption in a rural area in order to propose appropriate policies for the efficient supply of the market

investment cycles strategic delay and self reversing cascades we study investment cycles and information flows in a model of social learning in which investment returns fluctuate according to a markov process in our waiting game agents observe the investment history and a private signal correlated with the current period s investment return agents then decide whether to invest in round 1 or to delay their decision to round 2 of the current period cascades in which everyone invests and no one invests eventually correct themselves as compared to the no waiting game with no opportunity for delay the waiting game has shorter investment cascades longer recessions and shorter booms the waiting game also has more underinvestment and less overinvestment

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

market power and price increases for basic cable service since deregulation since the deregulation of rates for basic cable television service increases in price have outpaced the rate of inflation this article examines whether or not cable systems increased market power or their increased exercise of market power explains these price increases an estimated quasi supply function for cable systems before and after deregulation implies that real basic cable prices increased 18 since deregulation holding quality and other costs constant accounting for 43 of the total real price increase a demand equation is also estimated and the estimated demand elasticity of basic cable does not change after deregulation implying that this 18 real price increase is due to greater exercise of existing market power made possible by the elimination ofprice regulation rather than to an increase in market power caused by a change in the demand elasticity for cable

how progressive is the u s federal tax system a historical and international perspective this paper provides estimates of federal tax rates by income groups in the united states since 1960 with special emphasis on very top income groups we include individual and corporate income taxes payroll taxes and estate and gift taxes the progressivity of the u s federal tax system at the top of the income distribution has declined dramatically since the 1960s this dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income the sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity international comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity both for time trends and for cross country comparisons the pattern for the united kingdom is similar to the u s pattern france had less progressive taxes than the united states or the united kingdom in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the united states or the united kingdom

policy persistence and rent extraction the existing literature has shown that special interest groups can have both growth enhancing and growth retarding effects on an economy in either case it is always assumed that the nature of the special interest groups remains constant over time the hypothesis of this paper is that a dynamic relationship exists between politicians and lobbyists i e that opportunities for rent extraction for special interest groups can evolve over time in the short run politicians may support projects proposed to them by lobbies because they yield clear economic benefits however continued governmental support may imply a cost to society and yield rents to the lobbies a theoretical framework in which established and new lobbies overlap is developed to model a government s incentives to behave in a manner consistent with the hypothesis in this framework voters can still rationally reelect politicians even if the latter support lobbies for an inefficiently long period of time because if they did not then the quality of the pool of new projects would deteriorate

the dark side of sunshine regulatory oversight and status quo bias abstract as the mortgage foreclosure crisis accelerated in the u s in the late 2000s state level policymakers implemented measures designed to protect consumers and stem the tide of foreclosures one form of policy was simply to require lenders to report on foreclosure prevention activities such policies represented a shift from the status quo for mortgage loan servicing firms operating under incomplete information doing nothing with non paying loans while waiting for more information to be revealed to either foreclosing on the borrower or offering the borrower a modification of loan terms using a difference in difference in differences empirical strategy we exploit one policy implemented in maryland for a subset of mortgage servicers and find evidence that firms perform more loan modifications as well as file more foreclosures increasing foreclosure filings was contrary to the intent of the policy suggesting that policymakers should be aware of how firms exhibit systematic biases much like individuals

escaping from a liquidity trap and deflation the foolproof way and others existing proposals to escape from a liquidity trap and deflation including my foolproof way are discussed in the light of the optimal way to escape the optimal way involves three elements 1 an explicit central bank commitment to a higher future price level 2 a concrete action that demonstrates the central bank s commitment induces expectations of a higher future price level and jump starts the economy and 3 an exit strategy that specifies when and how to get back to normal a currency depreciation is a direct consequence of expectations of a higher future price level and hence an excellent indicator of those expectations furthermore an intentional currency depreciation and a crawling peg as in the foolproof way can implement the optimal way and in particular induce the desired expectations of a higher future price level i conclude that the foolproof way is likely to work well for japan which is in a liquidity trap now as well as for the euro area and the united states in case either would fall into a liquidity trap in the future

u s industry adjustment to economic deregulation conomic deregulation does not happen overnight it takes time for lawmakers and regulators to dismantle regulatory regimes and then it takes more time for the deregulated industries to adjust to their new competitive environment federal regulatory agencies and the u s congress began liberalizing pricing entry and exit in the transportation financial energy and communications industries during the mid 1970s but while some smaller industries such as intercity bus transportation and air cargo have been fully deregulated during that time the only major american industries fully deregulated to date are airlines and motor carriers as to the pace of industry adjustment consider airlines economic deregulation of the airline industry began in 1974 when the civil aeronautics board first encouraged experiments with discount fares it was completed in 1983 when all regulations on fares entry and exit were eliminated yet more than 20 years after the deregulatory process began the airline industry continues to shed inefficiencies that accumulated over decades of regulation and to find new ways to market their service indeed the airlines latest marketing innovation selling discount fares on the internet would be illegal if fares were still regulated it is not surprising that deregulated or partially deregulated industries are slow to achieve maximum efficiency when regulatory restrictions on pricing operations and entry especially from new firms have been enforced for decades managers and employees of regulated firms settle into patterns of inefficient production and missed opportunities for technological advance and entry into new markets deregulation frees an industry from the state s control over prices entry and exit although of course firms are still subject to antitrust laws and safety regulations after deregulation some costs usually fall in short order but it takes

optimal monetary policy at the zero interest rate bound what should a central bank do when faced with a weak aggregate demand even after reducing the short term nominal interest rate to zero to address this question we solve a central bank s intertemporal loss minimization problem in which the non negativity constraint on nominal interest rates is explicitly considered we find that the optimal path is characterized by policy inertia in the sense that a zero interest rate policy should be continued for a while even after the natural rate of interest returns to a positive level by making such a commitment the central bank is able to achieve higher expected inflation lower long term nominal interest rates and a weaker domestic currency in the adverse periods when the natural rate of interest significantly deviates from a steady state level

optimal monetary policy when interest rates are bounded at zero abstract this paper characterizes the optimal monetary policy reaction function in the presence of a zero lower bound on the nominal interest rate we analytically prove and numerically show that the function is highly non linear more expansionary and more aggressive than the taylor rule we then test its empirical validity taking the case of japan in the 1990s qualitatively we find some evidence of non linear monetary policy quantitatively we find the actual monetary policy to be too contractionary during the first half of the decade while the low interest policy during the latter half turns out to be fairly consistent with the simulated path

optimal fiscal policy in a world liquidity trap we construct a model of the international transmission of liquidity trap shocks and examine the case for international coordination of scal policy to respond to the liquidity trap integrated nancial markets tend to propagate liquidity traps in a global environment scal policy may be eective in raising gdp when the economy is stuck in a liquidity trap but it does so in a beggar thy neighbor fashion when one economy is in a liquidity trap the cross country spillover eect of scal policy is negative we examine the welfare optimizing policy response to a liquidity trap when countries coordinate on scal policy fiscal policy may be an eective tool in responding to a liquidity trap although it is never optimal to use scal expansion su ciently to fully eliminate a downturn moreover there is little case for coordinated global scal expansion for the most part the country worst hit by a liquidity trap shock should use its own policies to respond without much help from foreign policies

credible commitment to optimal escape from a liquidity trap the role of the balance sheet of an independent central bank we start from two empirical facts 1 central banks target cpi inflation 2 independent central banks are concerned about their balance sheet and the level of their capital the first fact makes it difficult for a central bank to implement the optimal escape from a liquidity trap because it makes a commitment to overshoot the inflation target not credible we show that the second fact helps to solve this credibility problem the optimal policy can take the form of a currency depreciation combined with a crawling peg a policy advocated by svensson as the foolproof way to escape from a liquidity trap jel e52 f31 f41 this paper starts from two empirical facts 1 central banks target infl ation measured by the consumer price index cpi 2 independent central banks are concerned about their balance sheet and the level of their capital we provide evidence for these facts below the first fact adds to the well known credibility problem of the optimal escape from a liquidity trap the second fact provides a mechanism through which the credibility problem can be solved and the optimal escape

twin deficit or twin divergence fiscal policy current account and real exchange rate in the u s abstract in spite of concerns about twin deficits fiscal and the current account deficits for the united states economy empirical evidence suggests that twin divergence is a more usual feature of the historical data i e when fiscal accounts worsen the current account improves and vice versa this paper empirically studies the effects of fiscal policy government budget deficit shocks on the current account and the real exchange rate during the flexible exchange rate regime period based on var vector auto regression models we identified exogenous fiscal policy shocks after controlling for business cycle effects on fiscal balances in contrast to the predictions of most theoretical models the u s results suggest that an expansionary fiscal policy shock or a government budget deficit shock improve the current account and depreciate the real exchange rate increases in private savings and declines in investment contribute to the current account improvement while a nominal exchange rate depreciation as opposed to a relative price level change is mainly responsible for the real exchange rate depreciation the twin divergence of fiscal balances and current account balances is also explained by the prevalence of output shocks i e output shocks more than fiscal shocks appear to drive the co movements of the current account and the fiscal balance

the incidence of regulatory rents in the motor carrier industry this article focuses on two questions in the debate over motor carrier regulation first did regulation create eliminate or have no effect on monopoly rents in the trucking industry second ifthere were rents what was their incidence were they received by owners oftrucking firms dissipated through higher costs or captured by the teamsters union data on share price responses to deregulation announcements reveal declines in expected profits of 8 19 of totalfirm value this suggests that regulation created monopoly profits and indicates that at least some of these rents accrued to owners of trucking firms firms responses to regulatory change are modelled as functions of company s operating characteristics and measures of unionization operating efficiency and service characteristics are shown to affect the impact of deregulation on share values

the costs of price regulation lessons from railroad deregulation previous calculations of the costs of railroad rate regulation assumed that deregulation would lower railroad rate levels and allow railroads to capture significant amounts of traffic from other modes of transportation this article presents empirical results that show that neither of these effects materialized under deregulation a calculation based on actual price and market share changes places the annual cost of regulation at roughly 90 million well below previous estimates

lobbying and adjustment in declining industries abstract this paper explains the persistence of protection in terms of interaction between industry adjustment lobbying and the political response faced with a trade shock owners of industry specific factors can respond in two ways they can undertake costly adjustment or they can lobby politicians for trade protection and thereby mitigate the need for adjustment the choice will depend on the relative returns from adjusting relative to lobbying by introducing an explicit lobbying process it can be shown that the current level of protection is an increasing function of past protection and that declining industries contract more slowly over time the more responsive are politicians to lobbying in addition the model makes clear that the type of senescent industry collapse predicted by cassing and hillman 1986 is only possible under fairly special assumptions about the technology of lobbying