optimal exchange intervention for a small open economy abstract this paper investigates the optimal exchange intervension strategy for a small open economy in which both the domestic price level and domestic real gnp are endogenous with the authority s objective being to stabilize a function involving both these variables a special feature of the underlying macro model is that real balances are productive ultimately this will mean that aggregate supply is sensitive to nominal interest rates additionally both expectations and the intervention policy are designed to exploit the fact that financial market data such as exchange and interest rates are observable on a fairly current basis contrary to conventional wisdom optimal intervention will usually require accentuating not moderating current exchange rate movements

an endogenous growth model for the evolution of water rights systems this article presents a model to help explain the transition path from one water management system to another typically a commons framework to one of tradable permit based property rights furthermore drawing from transaction cost literature the model demonstrates how this takes place when externalities the strain on water resources become severe enough to warrant the increased transaction costs inherent with more complex water rights management frameworks

understanding the evolution and performance of water markets and allocation policy a transaction costs analysis framework abstract water markets and associated allocation policy reforms have struggled to achieve their intended goals in many water stressed rivers in part due to the institutional friction imposed by transition and transaction costs this paper elaborates a transaction costs analysis framework to examine the evolution and performance of water markets and allocation policy reforms this analysis rests on three pillars i a synthesis of three theoretical traditions of institutional analysis williamson north and ostrom often considered independently ii a framework to examine the types and interactions of transaction costs in market based water allocation over time and iii an illustrative analysis of three large river basins the colorado columbia and murray darling with varying levels of success in market based water policy reforms the resulting framework accounts for water s complexity as an economic good this framework and the case studies lead to the identification of several policy implications including the need for a multiphase sequencing of reform strategic investment in institutional transition costs and institutional choices that preserve future flexibility to adjust water rights and diversion limits to manage social and environmental externalities

the choice of monetary policy instruments in canada an extension w poole 1970 and gordon sparks 1979 used fixed price models to examine the relative merits of various monetary policy instruments this paper extends the discussion to a flex price model it illustrates that bank reserve accounting systems have no effect on the choice of interest rate or exchange rate instruments the author shows that income is sheltered from financial innovation when a reserve instrument is used in conjunction with lagged reserve accounting

evaluating natural resource investments notwithstanding impressive advances in the theory of finance over the past 2 decades practical procedures for capital budgeting have evolved only slowly the standard technique which has remained unchanged in essentials since it was originally proposed see dean 1951 bierman and smidt 1960 derives from a simple adaptation of the fisher 1907 model of valuation under certainty under this technique expected cash flows from an investment project are discounted at a rate deemed appropriate to their risk and the resulting present value is compared with the cost of the project this standard textbook technique reflects modern theoretical developments only insofar as estimates of the discount rate may be obtained from crude application of single period asset pricing theory but see brennan 1973 bogue and roll 1974 turnbull 1977 constantinides 1978 the inadequacy of this approach to capital budgeting is widely acknowledged although not widely discussed its obvious deficiency is its the evaluation of mining and other natural resource projects is made particularly difficult by the high degree of uncertainty attaching to output prices it is shown that the techniques of continuous time arbitrage and stochastic control theory may be used not only to value such projects but also to determine the optimal policies for developing managing and abandoning them the approach may be adapted to a wide variety of contexts outside the natural resource sector where uncertainty about future project revenues is a paramount concern

an evolutionary approach to norms iorms provide a powerful mechanism for regulating conflict in groups even when there are more than two people and no central authority this paper investigates the emergence and stability of behavioral norms in the context of a game played by people of limited rationality the dynamics of this new norms game are analyzed with a computer simulation based upon the evolutionary principle that strategies shown to be relatively effective will be used more in the future than less effective strategies the results show the conditions under which norms can evolve and prove stable one interesting possibility is the employment of metanorms the willingness to punish someone who did not enforce a norm many historical examples of domestic and international norms are used to illustrate the wide variety of mechanisms that can support norms including metanorms dominance internalization deterrence social proof membership in groups law and reputation

enforcement for sale lobbying for water in pakistan s indus basin abstract surface irrigation is a common pool resource subject to over exploitation by upstream users we ask to what extent state enforcement of de jure water allocations designed to ensure adequate irrigation to downstream users is up for sale unique data on the land ownership of nearly a quarter million irrigators in pakistan s vast indus basin watershed provide a measure of political influence consistent with an influence driven model the decline in water availability and land values from head to tail is accentuated along channels having greater lobbying power at the head and attenuated along channels having greater lobbying power at the tail our paper shows how power disparities can be leveraged through the administrative state to capture valuable common resources

managing local commons theoretical issues in incentive design local commons encompass a wide range of resources whose shared feature is the need for some form of collective management in what follows we shall be concerned mainly with the problems of implementing a collective management plan whatever the mechanisms invoked many recent contributions to the literature have stressed that relatively informal collective management of common property resources can in the right circumstances avoid the severe resource degradation predicted by the tragedy of the commons nevertheless both empirical and theoretical arguments suggest that cooperative behavior may be only partial and the incentives of short term self interest only partially held in check under what circumstances then can more formal implementation mechanisms make good the deficiency and given that formal incentives are typically stronger than informal ones are there any reasons why informal incentives might nevertheless sometimes be preferred

pricing american style securities using simulation abstract we develop a simulation algorithm for estimating the prices of american style securities i e securities with opportunities for early exercise our algorithm provides both point estimates and error bounds for the true security price it generates two estimates one biased high and one biased low both asymptotically unbiased and converging to the true price combining the two estimators yields a confidence interval for the true price the proposed algorithm is especially attractive compared with lattice and finite difference methods when there are multiple state variables and a small number of exercise opportunities preliminary computational evidence is given

on endogenous growth under uncertainty this paper incorporates uncertainty in two distinct models of endogenous growth in both models the representative agent is uncertain about the productivity of knowledge creation as represented by a probability measure over the relevant parameter the main purpose of this paper is to analyze the effects of risk or volatility in productivity of knowledge creation on the decision variables and the expected long run growth rate both the first and the second models may explain part of the observed negative link between volatility and growth

spring cleaning rural water impacts valuation and property rights institutions the brief summarizes the spring cleaning rural water impacts valuation and property rights institutions the first two rounds of spring protection occurred in january april 2005 and august november 2005 the author measure health impacts of spring protection an investment that improves source water quality the author also estimate households valuation of spring protection and simulate the welfare impacts of alternatives to the current system of common property rights in water which limits incentives for private investment spring infrastructure investments reduce fecal contamination by 66 percent but household water quality improves less due to recontamination child diarrhea falls by one quarter travel cost based revealed preference estimates of households valuations are much smaller than both stated preference valuations and health planners valuations and are consistent with models in which the demand for health is highly income elastic the author estimate that private property norms would generate little additional investment while imposing large static costs due to above marginal cost pricing private property will function better at higher income levels or underwater scarcity and alternative institutions could yield pareto improvements

coping with asymmetries in the commons self governing irrigation systems can work many analysts presume that the appropriators of a common pool resource are trapped in a hobbesian state of nature and cannot themselves create rules to counteract the perverse incentives they face in managing the resource the logical consequence of this view is to recommend that an external authority the government take over the commons but considerable empirical evidence from field and experimental settings holds that appropriators frequently do constitute and enforce their own rules and that these rules work our research agenda is to develop a coherent understanding of the set of conditions that enhance or detract from self organizing capabilities when individuals differ substantially from one another for the sake of concreteness this paper focuses on the asymmetry present in most irrigation systems between those who are physically near the source of water the head enders and those who are physically distant from it the tail enders this paper first explores the interaction between head end and tail end farmers particularly their decisions about whether to devote resources to the upkeep of the irrigation system and how bargaining between the parties can benefit all sides finally we examine empirical evidence from a study of irrigation institutions in nepal and discuss the broader practical significance of our findings

locational asymmetry and the potential for cooperation on a canal abstract illegal water diversions and lax rule enforcement are common on irrigation canals we present a mathematical programming model of a watercourse calibrated to a canal in maharashtra on which farmers voted to cooperate to control water theft the model solution computes the crop choices and profits of individually optimizing farmers who differ in their location it reveals the spatial distribution of gains and losses from cooperation it illuminates why voluntary bargaining will rarely achieve an efficient water allocation it also shows that landless laborers might well be against local cooperation if the expropriated water nurtures labor intensive crops

federal reserve system implementation of monetary policy analytical foundations of the new approach on october 6 1979 the federal reserve announced a change in its open market operating procedures that moved the focus of short run guides for open market operations away from the federal funds rate and toward reserve aggregates under the old procedures the trading desk maintained close week to week control over the federal funds rate within a range specified by the federal open market committee fomc alteration of the funds rate between fomc meetings was subject to guidelines conditional on behavior of the money supply relative to specified tolerance ranges under the new procedures the trading desk targets on a family of reserve aggregates principally nonborrowed and total reserves the reserve operating guides under the new procedures are derived from targets for growth of the monetary aggregates and are expressed as averages of weekly levels over the short run operating period normally the intermeeting period as a corollary less attention is paid to the federal funds rate and it is permitted to vary over a much wider range during the short run operating period as compared with the old procedures it should be understood that the october shift to a reserve operating guide for openmarket operations did not also encompass a change in either the proximate or ultimate objectives of monetary policy they continued to be respectively the money supply and goals for economic growth employment and prices rather the shift involved a change in the technique of achieving the proximate money supply objectives two reasons can be advanced for the shift first the old technique of operating on the federal funds rate seemed to be a less reliable means in practice of attaining the proximate policy objectives second in view of the worsening inflationary psychology at the time a shift to a different technique of operations would help to dramatize the federal reserve s continuing commitment to slowing money growth to curb inflation and thereby would work to reduce inflationary psychology this paper first summarizes the analytical framework underlying the choice between a reserve aggregate and a federal funds rate operating target as well as some previous research bearing on the issue next the technical aspects of implementing the new procedures are explained and contrasted to the theoretical paradigm underlying previous empirical results finally experience with the new procedures since last october is reviewed and some conclusions are drawn

irrigation technology adoption and gains from water trading under asymmetric information we develop a water allocation and irrigation technology adoption model under the prior appropriation doctrine with asymmetric information among heterogeneous farmers and between farmers and water authorities we find that adverse selection reduces the adoption of modern irrigation technology we also show that even with asymmetric information incentives for water trade exist and lead to additional technology adoption with gains to all parties this suggests that under asymmetric information a thin secondary market improves the allocation of water resources and induces additional adoption of modern irrigation technologies

evaluating natural resource projects with embedded options and limited reserves this study proposes a dynamic option simulation dos approach to evaluate natural resource investment projects that contain several embedded options and limited reserves to construct a practical pricing model dos combines simulation and dynamic programming techniques that can value natural resource investments with multi variable early exercise various embedded options and finite reserve properties a copper mine project offers a demonstration the mine holder may temporarily close reopen and abandon the mine at specific times before the expiration date the mine holder may also accelerate mining speed to be optimal referred to as the acceleration option numerical analyses of the copper price and interest rate effects on the copper mine value suggest that dos can efficiently assess complex multiple variable american style real options problems

commons regulation and rent seeking behavior the dilemma of pakistan s guzara forests curred over the past 120 years these forests known locally as guzara forests can be characterized as regulated commons the regulation by placing quantitative restrictions on felling aimed at an orderly exploitation of these forests on the surface the failure of regulation seems to be a simple case of enforcement failure however a closer look reveals a fairly complex picture in which factors such as the delineation of property rights and the rent seeking behavior of those subject to regulation as well as of the regulators themselves have contributed to the problems of these forests the evidence presented in this article shows that the way the regulation was devised gave rise to a discordant structure of property rights involving the government and the local inhabitants despite early signals that it could not be effectively enforced no rectifying change was introduced in the structure of rights which has persisted into the postcolonial era indeed there was a reversal of some potentially beneficial institutional changes that had been introduced toward the end of the colonial period while the process of degradation was set in motion by discordances that arose in the process of delineating property rights it is the theory of rentseeking behavior that provides an adequate explanation of its persistence as well as of the subsequent reversals an effective response to the problem of the guzara forests must take account of two additional features in the regulation of these forests first in addition to the common property externality that leads to the tragedy of the commons these forests also display interjurisdictional externality by virtue of their location second a common

the system of administrative and political corruption canal irrigation in south india the paper describes how some irrigation engineers raise vast amounts of illicit revenue from the distribution of water and contracts and redistribute part to superior officers and politicians it argues that the corruption system which is centred on control of personnel transfers is an important supply side reason for poor performance of canal irrigated agriculture insofar as the same system operates in other government departments it may be more important for understanding indian politics and the political influences on economic development than has previously been realised

the potential for water market efficiency when instream flows have value most of the effort being expended to revise western water policy concerns the maintenance of instream waters to the exclusion of traditional diversionary interests absent from the economics literature is a theoretical treatment addressing the interface between diversionary and instream water uses at issue is the potential for refining market operations to accomplish efficient allocation in the presence of both diversionary and instream uses optimization methods are employed to examine this issue in a highly generalized framework if a specific structure is adopted markets and other incentive based policies are demonstrated to be capable of efficient water allocation

2006 presidential address water markets in the west prices trading and contractual forms rising urban and environmental demand for water has created growing pressure to reallocatewaterfromtraditionalagriculturaluses theevolutionofwatermarketshas beenmorecomplicatedthanthoseforotherresources inthispaper wefirstexplainthese differences by examining water rights and regulatory issues second we place our research in the context of the economics literature on water marketing third we present new comprehensive data on prices and the extent nature and timing of water transfers across 12 western states from 1987 to 2005 we find that prices are higher for agriculture to urban trades versus within agriculture trades in part reflecting the differences in marginal values between the two uses prices for urban use are also growing relative to agricultural use markets are responding in that the number of agriculture to urban transactions is rising whereas the number of agriculture to agriculture transfers is not further there is a shift from using shortterm leases to using multiyear leases of water and permanent sales of water rights this pattern underscores the need to consider the amounts of water obligated over time rather than examining only annual flows in assessing the quantities of water traded as is the common practice in the literature considering water obligated over time termed committed water we find significantly more is transferred and the direction of trading is different than if the focus is on annual flows finally the data reveal considerable variation in water trading across the states jel q2 n5 l5 k3

water allocation under distribution losses comparing alternative institutions abstract the distribution of water resources is characterized by increasing returns to scale distribution links water generation to its end use standard economic analysis overlooks the interaction among these micro markets generation distribution and end use we compare water allocation when there is market power in each micro market these outcomes are compared with benchmark cases social planning and a competitive business as usual regime simulations suggest that institutions with market power in generation and end use generate significantly higher welfare than the distribution monopoly and the competitive regime however if the policy goal is to maximize the size of the grid a distribution monopoly is preferred

toward a theory of induced institutional innovation in this paper we elaborate a theory of institutional innovation in which changes in the demand for institutional innovation are induced by changes in relative resource endowments and by technical change we illustrate from agricultural history how changes in resource endowments and technical change have induced changes in private property rights and in the development of non market institutions we also consider the impact of advances in social science knowledge and of cultural endowments on the supply of institutional change in a final section we present the elements of a model of institutional innovation that maps the relationships among resource endowments cultural endowments technology and institutions

property rights regimes and natural resources a conceptual analysis the term common property resource is an example of a term repeatedly used to refer to property owned by a government or by no one it is also used for property owned by a community of resource users such usage leads to confusion in scientific study and policy analysis in this paper we develop a conceptual schema for arraying property rights regimes that distinguishes among diverse bundles of rights ranging from authorized user to claimant to proprietor and to owner we apply this conceptual schema to analyze findings from a variety of empirical settings including the maine lobster industry

instrument choice for money stock control with contemporaneous and lagged reserve requirements note this paper assumes that an economy s monetary author1ty wishes to achieve accurate control of the stock of money and asks whether that goal can be more fully accomplished by means of an operating procedure that manipulates interest rates or reserve aggregates while a sizable number of papers on the subject has been published 1 we believe this is the first to utilize a model that treats output and prices as endogeneous is explicitly dynamic and incorporates rational expectations given recent interest in monetary control issues it is striking that no such analysis has previously been conducted a likely reason is that until very recently it appeared that the values of all nominal magnitudes will be indeterminate in most rational expectations models if the monetary authority uses an interest rate as its operating instrument this appearance was fostered by a result in the well known paper of sargent and wallace 9 and by recognition that similar results hold in other rational expectations models including ones without the policy ineffectiveness property 2 it is shown in 5 however that this indeterminacy does not prevail if an interest rate instrument is used but in a manner that is designed to have some desired effect on the expected quantity of money in some future period that is if some weight is given to a nominal target thus it is in fact possible to conduct an analytical comparison of the type desired even in a model entirely free of money illusion and expectational irrationality in the context of the instrument choice issue it is crucial to distinguish between

efficient spatial allocation of irrigation water in the presence of conveyance losses the efficient quantity of water applied falls with distance from the water source but the amount of water sent including conveyance losses actually increases with distance from the source except toward the tail end of the inigation system this implies that if marginal cost pricing were implemented farmers at the middle and lower reaches of the system would have to pay more money for less water received the model is illustrated and alternative financing schemes compared for an empirically derived demand function for imgation water despite massive public investments in irrigation infrastructure ex post evaluations of irrigation projects in developed and developing countries indicate that actual benefits are substantially below projected levels considerable evidence suggests that these low benefits are largely the result of poor on farm water use efficiencies and rent seeking activities that result from water charges that are low and often unrelated to water use chaudhry repetto bowen and young for example farmers near the system headworks are said to consume a disproportionate share of irrigation water while tail farmers are left with scanty and unreliable residual supplies reidinger wade many governments faced with increasing political pressure to conserve water and reduce fiscal deficits are considering higher water charges to decrease waste and increase cost recovery from project beneficiaries there is also increased awareness that low water charges and loosely enforced water rationing guidelines lead to environmental damages and excessive mining of groundwater resources in general the problems of water allocation and low user charges contribute to derivative problems in achieving efficiency equity fiscal stability and environmental sustainability

on exchange intervention sterilization and bank reserve accounting abstract this note illustrates that when the central bank implements monetary policy through the use of a reserve instrument the output stabilizing value of the exchange intervention paprameter is sensitive to the method of bank reserve accounting sterilization is shown to play a pivotal role in the presence of real disturbances

transaction costs collective action and adaptation in managing complex social ecological systems abstract with the escalating uncertainties and surprises faced in responding to environmental and natural resource challenges has come growing recognition of the need to manage such issues as social ecological systems and value the capacities that enable adaptation to these changes adaptations in environmental management often involve complex including wicked problems of collective action institutions introduced to reduce the transaction costs of solving these problems do not come for free a cost effectiveness framework designed to provide a comprehensive and logical structure for economic evaluation of path dependent institutional choices in this context and a procedure for boundedly rational empirical application of the framework are proposed and illustrated in this article including for the choice between water buy back and infrastructure upgrade programmes for accumulating the environmental water needed to sustain the ecosystems of australia s murray darling basin also outlined is a research strategy designed to help identify the heuristics needed for application of this procedure

choice welfare and development a festschrift in honour of amartya k sen professor amartya sen has been a distinguished and influential scholar in development economics for over twenty years and this edited volume seeks to reflect his interests and the inspiration he has provided for others the editors have succeeded in creating a coherent and stimulating set of papers from well known contributors the volume deals with the enduring themes of amartya sen s work ranging through theoretical issues of development economics to the philosophical foundation of welfare systems and ethics in society contributors kenneth arrow a b atkinson pranab bardhan j l coles rajat deb jean dreze louis gevers peter hammond ravi kanbur eric maskin robert nozick siddiq osmani martin ravallion kevin roberts robert solow s wibaut

optimal saving under poisson uncertainty abstract this paper studies optimal saving and investment behaviour of a household that can either invest in a riskless or a risky saving technology when risk results from a poisson process the focus is on behaviour of households in a general equilibrium setup poisson processes are introduced since they allow us to understand and model endogenous cycles jointly with long run growth it turns out that a very simple intuitive and tractable characterization of equilibrium is possible journal of economic literature classification numbers c61 o33 o41

leaving emu a real options perspective we examine the real option implicit in a country s decision of whether to leave an existing monetary union when there is uncertainty over the future benefits of this move our theoretical model is calibrated for the current euro 12 area by proxying policymakers inflation preferences with unemployment rates and debt to gdp ratios we observe a robust group of countries that would choose to remain within emu consisting of belgium finland greece and italy france and spain loosely also belong to this core only luxembourg would robustly want to leave emu ireland and the netherlands however complement that core closely

allocation and pricing at the water district level efficient water pricing schemes are introduced for nonprofit water agencies where members have property rights based upon historical usage the existing average cost rate design is compared with the proposed designs active trading and passive trading both schemes lead to efficiency but passive trading has operational advantages since it generates less transaction costs than active trading block rate pricing is shown to be suboptimal and inferior to passive trading an example from the israeli water economy is used as an empirical illustration

information and the coase theorem abstract some economists think the coase theorem implies a lot about the proper scope of government intervention in the economy and about the welfare consequences of laissez faire others see it as a mere tautology that if people negotiate efficiently then every outcome will be efficient the coase theorem is important only if we believe that efficient negotiation is likely of course we can attribute inefficiencies to bargaining imperfection but it may not be useful to do so such attitudes sometimes seem to depend more on ideology than on reason this article gives one economist s reasoned view it discusses the coase theorem as a decentralization result and why decentralization results are interesting it considers mechanism design for revealing private information and describes the problems of centralization should the coase theorem should be viewed as a second best result property rights are more efficient than some reasonable alternative does the coase theorem recommend an institution or make

determinants of collective action on the local commons a model with evidence from mexico i develop a model of cooperation in small irrigation systems i give conditions under which an equalizing redistribution of wealth increases the level of equilibrium cooperation but also show that some redistributions that increase inequality can also increase cooperation the distributive rule a combination of arrangements for maintenance cost sharing and water allocation also affects the cooperation level i estimate statistical models of cooperation for three maintenance indicators using field data from a study of mexican irrigation societies social heterogeneity and landholding inequality are significantly associated with lower maintenance distributive rules that allocate water proportionally to landholding size likewise reduce maintenance

evaluation of price policy in the presence of water theft mathematical programming models of representative farms are commonly used to evaluate policies such as input subsidies and output price supports on canals in india upstream farmers routinely use more irrigation water than allotted in such circumstances the programming model should encompass farmers locational heterogeneity here a representative watercourse with thirty farms is calibrated to the eight crops fifteen irrigation turns yield responses to water and seepage in maharashtra not only does water theft increase the social cost of price policies but the policies increased inducement to theft by upstream farmers leaves those downstream with less water and lower incomes

wage indexation and exchange market intervention in a small open economy the analysis of this paper stresses the interdependence between wage indexation on the one hand and exchange market intervention on the other as tools of macroeconomic stabilization policy in a small open economy subject to stochastic disturbances it is shown how the choice of eitherpolicy instrument impinges on the effectiveness of the other in particular if the domestic money wage is fully indexed to some weighted average of the domestic and foreign price levels then irrespective of what that chosen weight may be exchange market intervention is rendered totally ineffective insofar as the stabilization of the real part of the domestic economy is concerned likewise if the monetary authority intervenes in the exchange market so as to exactly accommodate for nominal movements in the demand for money thereby rendering the excess demand for money dependent only upon real variables then any form of wage indexation is totally ineffective for the stabilization of the real part of the system in either polar case the respective instrument can stabilize the domestic price level alternative combinations of policy for the stabilization for domestic and foreign disturbances are considered this abstract was borrowed from another version of this item

numerical valuation of high dimensional multivariate american securities we consider the problem of pricing an american contingent claim whose payoff depends on several sources of uncertainty several efficient numerical lattice based techniques exist for pricing american securities depending on one or few up to three risk sources however these methods cannot be used for high dimensional problems since their memory requirement is exponential in the number of risk sources we present an efficient numerical technique that combines monte carlo simulation with a particular partitioning method of the underlying assets space which we call stratified state aggregation ssa using this technique we can compute accurate approximations of prices of american securities with an arbitrary number of underlying assets our numerical experiments show that the method is practical for pricing american claims depending on up to 400 risk sources

appropriative water rights and the efficient allocation of resources this paper investigates the allocative efficiency of the appropriative system of water rights within the context of a simplified model of a water using industry at a long run competitive equilibrium for the industry and with a prohibition on the transfer of water rights among firms it is shown that 1 senior appropriators claim and use more water than junior appropriators 2 senior appropriators bear less risk than junior appropriators 3 the allocation of water and diversion capacitie 6among firms is inefficient being dominated by an equal sharing among firms the equal sharing allocation which is pareto optimal when diversion capacities are supplied by a competitive leasing industry can be achieved under the appropriative system if there are competitive markets in water rights and in leases for the use of diversion capacities an application of the coase theorem