presidential address collateral and commitment optimal dynamic capital structure choice is fundamentally a problem of commitment in a standard trade off setting with shareholder debtholder agency conflicts full commitment counterfactually predicts the firm would rely almost exclusively on debt financing conversely absent commitment a modigliani miller like value irrelevance and policy indeterminacy result holds thus the content of dynamic trade off theory must depend on the commitment technology in this context collateral is valuable as a low cost commitment device because ex ante optimal commitments are likely to be suboptimal ex post observed capital structure dynamics will exhibit hysteresis and depart significantly from standard predictions

exchange rates and the fiscal theory of the price level abstract this paper addresses exchange rate determination under a nominal interest peg in a two country cash in advance model under two types of cash in advance constraints if both governments peg the nominal interest rate on domestic bonds there is a continuum of equilibria each consistent with different nominal exchange rates and real resource allocations the well known finding of equilibrium uniqueness under a nominal interest rate peg in a closed economy does not survive in a multi country multi currency setting

interactions between monetary and fiscal policy under flexible exchange rates we examine fiscal and monetary policy interactions by developing a two country open economy model under flexible exchange rates where overlapping generations of consumers supply labour to imperfectly competitive firms that change their prices infrequently we show in this context that the implications of lax fiscal policy in country a are significant for country b determinacy can be ensured by adopting a passive monetary policy in either country a or country b in both cases however lack of fiscal feedback in country a will imply that fiscal shocks have significant macroeconomic consequences for both countries we examine how the size of these spillovers is influenced by the degree of debt indexation we also show that the fiscal response required to support an active monetary policy is greater when consumers have finite lives and that the characterisation of active and passive regimes does not depend on whether or not debt is indexed

compatibility between monetary and fiscal policy under emu the debate over the stability and growth pact sgp as a part of european monetary union has highlighted the need to assess the extent to which fiscal policies of union members should be constrained as a pre requisite for price stability within the union in this paper we develop a two country open economy model where each country has overlapping generations of finitely lived consumers who supply labour to imperfectly competitive firms which can only change their prices infrequently we examine the case where the two countries have formed a monetary union but where the fiscal authorities remain independent we show that the fiscal response required to ensure stability of the real debt stock is greater when consumers are not infinitely lived in principle this allows for some compensating behaviour between governments but we show that the scope for compensation is limited the monetary authority can abandon its active targeting of inflation to stabilise the debt of at most one fiscal authority and any other combination of policies will either result in price level indeterminacy and or indefinite transfers of wealth between the two economies finally in a series of simulations we show that fiscal shocks have limited impact on output and inflation provided the fiscal authorities meet the weak requirements of fiscal solvency however when monetary policy is forced to abandon its active targeting of inflation then fiscal shocks have a much greater impact on both output and inflation

fiscal policy rules in an overlapping generations model with endogenous labour supply abstract a fiscal policy rule in which taxation is a function of the stock of government debt a wealth tax is usually believed to be effective in providing stability using a discrete time version of the blanchard 1985 debt deficits and finite horizons journal of political economy 93 223 247 overlapping generations model extended to include an endogenous labour supply we show that contrary to the conventional wisdom a wealth tax might not be enough to ensure the existence of a unique well defined steady state we suggest that a government willing to run a positive and sustainable level of debt could use an alternative rule a fiscal taylor rule in which another taxation component that takes in to account the level of the real interest rate is added

interactions between monetary and fiscal policy rules the fiscal stability pact for emu implies that constraints on fiscal policy facilitate inflation control in this paper we identify two stable policy regimes when monetary policy seeks to raise real interest rates in response to excess inflation a self stabilising fiscal policy is required to ensure model stability a fiscal policy which does not by itself ensure fiscal solvency constrains monetary policy to be relatively passive however in simulations we conclude that the central bank does not need to seek on this account the degree of debt stabilisation that appears to be implied by the fiscal stability pact

demand for local public spending evidence from the british social attitudes survey the british social attitudes survey bsas is a uk wide survey that provides a rich source of information on individuals attitudes to a variety of topics including locally provided service in this paper we seek to model answers to questions on attitudes to local authority spending which invite the expression of a private demand for local public spending a convincing picture has emerged of locally provided public goods as imperfectly congested public goods with a price elastic and probably income inelastic demand the view that central government grants may induce voter confusion over tax prices of public services also finds support

the role of games in security design we contend that security design should be approached as a problem of game design that is contracts should specify the procedures that govern the behavior of contract participants in determining outcomes as well as the allocations resulting from those outcomes we characterize optimal contracts in two nested classes all contracts including those that depend on the state and state independent contracts we demonstrate that in situations in which the dependence of contracts on the state is limited contracts designed as games can improve the allocation of resources relative to nonstrategic allocation rules article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

fiscal deficits as a source of boom and bust under a common currency abstract we investigate in depth using predominantly analytical rather than numerical methods the mechanisms triggered by a one off debt financed fiscal deficit in a small open economy with a shared currency the economy incorporates staggered price setting and overlapping generations unsurprisingly these cause the impact effect to be a boom in the sense of price inflation and a positive output gap however contrary to what normally happens in new keynesian models without extraneous dynamics the boom later inevitably turns into a bust i e price deflation and a negative output gap therefore in this setting while short run keynesian deficit based fiscal stimulus works it also provokes a medium run backlash in aggregate activity

government size and macroeconomic stability abstract we analyze the effects of government size on output variability in the context of a rbc model in which government size is parameterized by the income tax rate and the share of government purchases in output the model implies that i income taxes are destabilizing and ii for most specifications considered government purchases are stabilizing we compare those predictions with the results of simple cross country regressions using data for 22 oecd countries the estimated relationship between empirical indicators of government size and measures of gdp variability appears far stronger than the model predicts and often has the opposite sign

estimating the effects of global patent protection in pharmaceuticals a case study of quinolones in india under the trips agreement wto members are required to enforce product patents for pharmaceuticals the debate about the merits of this requirement has been extremely contentious many low income economies claim that patent protection for pharmaceuticals will result in substantially higher prices for medicines with adverse consequences for the health and well being of their citizens on the other hand research based global pharmaceutical companies argue that prices are unlikely to rise significantly because most patented products have therapeutic substitutes in this paper we empirically investigate the basis of these claims central to the ongoing debate is the structure of demand for pharmaceuticals in poor economies where because health insurance coverage is so rare almost all medical expense are met out of pocket using a detailed product level data set from india we estimate key price and expenditure elasticities and supply side parameters for the fluoroquinolones sub segment of the systemic anti bacterials i e antibiotics segment of the indian pharmaceuticals market we then use these estimates to carry out counterfactual simulations of what prices profits and consumer welfare would have been had the fluoroquinolone molecules we study been under patent in india as they were in the u s at the time our results suggest that concerns about the potential adverse welfare effects of trips may have some basis we estimate that in the absence of any price regulation or compulsory licensing the total annual welfare losses to the indian economy from the withdrawal of the four domestic product groups in the fluoroquinolone sub segment would be on the order of u s 450 million or about 73 of the sales of the entire systemic anti bacterials segment in 2000 of this amount foregone profits of domestic producers constitute roughly 50 million or 11 the overwhelming portion of the total welfare loss therefore derives from the loss of consumer welfare in contrast the profit gains to foreign producers in the absence of any price regulation are estimated to be only around 53 million per year

renegotiation design with unverifiable information this paper considers a buyer seller relationship with observable but unverifiable investments and or random utility parameters in such situations it is known that contract renegotiation may prevent the implementation of first best outcomes in this paper we show however that efficient investments and optimal risk sharing can typically be achieved provided the initial contract is able to monitor the ex post renegotiation process specifically we focus on the following two features of renegotiation design first default options in case renegotiation breaks down second the allocation of all bargaining power to either contracting party moreover we show that these two features can be obtained in standard rubinstein bargaining games through contractual provisions such as specific performance clauses and penalties for delay or equivalently financial hostages refundable without interest

fiscal discipline and exchange rate systems a new fiscal theory of price determination has implications for exchange rate systems and common currency areas we show that deeper monetary integration requires the discipline of a ricardian regime that is the government must guarantee fiscal solvency for any sequence of prices or exchange rates particularly striking results are that a currency peg is not credible without the discipline of a ricardian regime and a common currency area is not viable if fiscal policy in two or more of the countries in the union is non ricardian interestingly constraints written into the maastricht treaty are sufficient for a ricardian regime

macroeconomic interdependence under incomplete markets this paper uses a two country flexible price model with overlapping generations of infinitely lived households to study the role of net foreign asset dynamics in the propagation of productivity shocks absence of ricardian equivalence ensures existence of a unique steady state level of net foreign assets to which the economy returns following temporary shocks model dynamics are significantly different from those of a setup in which terms of trade movements perform all the international adjustment and net foreign assets do not move the difference relative to a complete markets economy in which net foreign asset movements play no role in shock transmission is smaller it is amplified if the substitutability across goods rises and if shocks are permanent

income distribution evaluation and the law of one price abstract the growing literature on evaluating changes in the distribution of income has led recently to a consideration of the conditions under which such evaluation is possible without reference to existing prices this paper provides a complete characterization of the class of preferences social orderings for which this is possible in the case where the law of one price is not assumed different individuals may face different price vectors the relationship of this result to those which are known for the one price case is also briefly considered

interest rate policy debt and indeterminacy with distortionary taxation abstract the interest rate setting policy of the central bank influences the amount of funds the government must raise to pay the interest on its existing debt with distortionary taxation fiscal adjustments feed back on the model s endogenous variables the conditions under which interest rate and tax policies are compatible with a uniquely determined stable equilibrium are derived for an optimizing sticky price model if the fiscal government continuously balances its budget active interest rate policy easily leads to indeterminacy if there is a positive steady state stock of public debt when short run deficits are allowed active interest rate policy and determinacy are compatible unless the tax rate is too strongly increasing in response to changes in debt the real interest rate or output

control rights and capital structure an empirical investigation we show that incentive conflicts between firms and their creditors have a large impact on corporate debt policy net debt issuing activity experiences a sharp and persistent decline following debt covenant violations when creditors use their acceleration and termination rights to increase interest rates and reduce the availability of credit the effect of creditor actions on debt policy is strongest when the borrower s alternative sources of finance are costly in addition despite the less favorable terms offered by existing creditors borrowers rarely switch lenders following a violation a fundamental question in financial economics is how do firms choose their financial policies extant empirical research on this question has focused primarily on the presence of taxes and bankruptcy costs e g scott 1976 information asymmetry e g myers and majluf 1984 and more recently market timing behavior e g baker and wurgler 2002 however beginning with jensen and meckling 1976 a large body of theoretical research examines how incentive conflicts between managers and external investors affect corporate financial policies in particular theoretical research on financial contracting shows that in the presence of incentive conflicts optimal debt contracts will allocate certain rights to creditors after negative performance in order to help firms secure financing ex ante e g aghion and bolton 1992 and dewatripont and tirole

optimal monetary policy in open versus closed economies an integrated approach in clarida et al 1999 hereafter cgg we presented a normative analysis of monetary policy within a simple optimization based closedeconomy framework we derived the optimal policy rule and among other things characterized the gains from commitment also we made precise the implications for the kind of instrument feedback rule that a central bank should follow in practice in this paper we show how our analysis extends to the case of a small open economy openness complicates the problem of monetary management to the extent the central bank must take into account the impact of the exchange rate on real activity and inflation how to factor the exchange rate into the overall design of monetary policy accordingly becomes a central consideration here we show that under certain conditions the monetary policy design problem for the small open economy is isomorphic to the problem of the closed economy that we considered earlier hence all our qualitative results for the closed economy carry over to this case openness does affect the parameters of the model suggesting quantitative implications though the general form of the optimal interest rate feedback rule remains the same as in the closedeconomy case for example how aggressively a central bank should adjust the interest rate in response to inflationary pressures depends on the degree of openness in addition openness gives rise to an important distinction between domestic inflation and consumer price inflation as defined by the cpi to the extent that there is perfect exchange rate pass through we find that the central bank should target domestic inflation and allow the exchange rate to float despite the impact of the resulting exchangerate variability on the cpi kosuki aoki 1999 gali and tommaso monacelli 2000

pricing and welfare in health plan choice premiums in health insurance markets frequently do not reflect individual differences in costs either because consumers have private information or because prices are not risk rated this creates inefficiencies when consumers self select into plans we develop a simple econometric model to study this problem and estimate it using data on small employers we find a welfare loss of 2 11 percent of coverage costs compared to what is feasible with risk rating only about one quarter of this is due to inefficiently chosen uniform contribution levels we also investigate the reclassification risk created by risk rating individual incremental premiums finding only a modest welfare cost

fiscal solvency and price level determination in a monetary union abstract this paper applies the fiscal theory of price level determination to the case of a monetary union a fiscal perspective suggests first that the focus of past studies on seigniorage per se may be misplaced second a rise in the level of debt by one member government can raise the common price level throughout the union suggesting a role for fiscal rules third conditions are discussed under which fiscal solvency is not necessary for each member government in a monetary union

strategic transfers and private provision of public goods abstract this paper considers strategic monetary transfers between two agents when these contribute to a mutual public good if the agents differ in their contribution productivity then the less productive agent has an incentive to make large unconditional transfers to the more productive agent although agents move simultaneously in each stage of the game the less productive agent becomes a stackelberg leader furthermore the generic subgame perfect equilibrium is characterized by full specialization

estimated general equilibrium models for the evaluation of monetary policy in the us and europe a persistent criticism of general equilibrium models of monetary policy which incorporate nominal inertia in the form of the new keynesian phillips curve nkpc is that they fail to capture the extent of inflation inertia in the data in this paper we derive a general equilibrium model based on optimising behaviour but which also implies a data consistent nkpc specifically our model accounts for nominal inertia in both price and wage setting as well for habits in consumption using us and european data from 1970 to 1998 our parameter estimates reveal that i there is relatively more inertia in price setting in europe ii wage contracts last longer in the us iii the extent of backward looking behaviour in price and wage setting is statistically significant but small in both the us and europe and iv significant habits effects are present in european consumption finally we simulate the effects of monetary policy and find that while the magnitude of the impact of monetary policy on the endogenous variables in our estimated models are similar to other econometric studies the dynamic paths for variables display less inertia than is typically found in studies which use output gaps to proxy changes in marginal costs

the effectiveness of government debt for demand management sensitivity to monetary policy rules abstract we construct a staggered price dynamic general equilibrium model with overlapping generations based on uncertain lifetimes price stickiness plus lack of ricardian equivalence could be expected to make an increase in government debt with associated changes in lump sum taxation effective in raising short run output however we find this is very sensitive to the monetary policy rule a permanent increase in debt under a basic taylor rule does not raise output to make debt effective we need either a temporary nominal interest rate peg or inertia in the rule or an exogenous money supply policy or to make the debt increase temporary

cost share equilibria a lindahlian approach abstract we offer a new formalization of lindahl s equilibrium notion for public goods which yields an endogenous theory of profit distribution in line with the benefit approach to taxation increasing returns in the production of public goods are not a priori excluded our equilibrium notion coincides with kaneko s ratio equilibrium for economies with only one public good by reinterpreting the commodity space the equilibrium concept can be applied to economies with purely private goods or with externalities in the pure private good case our concept singles out allocations that are efficient and where individual net payments agree with average cost

covenants and collateral as incentives to monitor although monitoring borrowers is thought to be a major function of financial institutions the presence of other claimants reduces an institutional lender s incentives to do this thus loan contracts must be structured to enhance the lender s incentives to monitor covenants make a loan s effective maturity and the ability to collateralize makes a loan s effective priority contingent on monitoring by the lender thus both covenants and collateral can be motivated as contractual devices that increase a lender s incentive to monitor these results are consistent with a number of stylized facts about the use of covenants and collateral in institutional lending modern finance theory suggests that financial intermediaries such as commercial banks insurance companies and finance companies monitor and control their borrowers on behalf of other investors 1 this article investigates how the loans made by these institutions can be structured so as to best enhance the institutions role as delegated monitors covenants and collateral are common features of loans made by financial institutions but these features are somewhat difficult to justify consider loan covenants clauses in a loan contract that require the borrower to take or refrain from various actions berlin and mester 1992 magee and sridhar 1994 and park 1994 show that by giving institutions the right to renegotiate or call loans when covenants are violated covenants serve as tripwires that enhance the flexibility and efficiency of financial contracting also as documented in smith and warner 1979 control rights from covenants reduce borrower adverse selection or moral hazard nevertheless by allowing institutions to demand repayment based on any information contractible or not

inflation targeting monetary and fiscal policies in a two country stock flow consistent model this paper develops a simple two country stock flow consistent model based on that of godley and lavoie in order to motivate the use of stabilisation policies persistent inflationary pressure and endogenous economic cycles are introduced into the model three scenarios are then simulated a step decrease in real exports from country b increased wage pressure in country b and an income tax cut in country a in all cases monetary and fiscal policies in isolation enjoy little success but a combined monetary and fiscal approach to stabilisation proves highly effective moreover the model suggests that the pursuit of autonomous inflation targeting in each country introduces excessive exchange rate volatility relative to an alternative rule in which one central bank takes a leading role in interest rate setting

the design of bank loan contracts the unique characteristics of bank loans emerge endogenously to enhance efficiency in a model of renegotiation between a borrower and a lender in which there is the potential for moral hazard on each side of the relationship firm risk is endogenous and renegotiated interest rates on the debt need not be monotone in firm risk the initial terms of the debt are not set to price default risk but rather are set to efficiently balance bargaining power in later renegotiation loan pricing may be nonlinear involving initial transfers either from the borrower to the bank or front the bank to the borrower article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

can exchange rate predictability be achieved without monetary convergence evidence from the ems by kenneth rogoff the author shows that the ems has contributed to stabilizing the exchange rates of member countries and attributes the stabilization to the implementation of capital controls however this success becomes a failure as departing from market rules is a source of inefficiency therefore the ems experience should be rejected as a lesson for an extended monetary coordination among countries with large capital markets we concur broadly with the author s conclusions concerning the variability of exchange rates and interest rates but believe that his rejection of the ems as a lesson on monetary coordination with a view to stabilizing exchange rates remains a moot point in particular the ems experience has demonstrated that a large sterilized foreign exchange interventions in the presence of a risk premium have also contributed to stabilizing exchange rates together with capital controls and b this exchange rate arrangement has succeeded in fostering strong incentives towards policy coordination and convergence of inflation rates among some member countries

estimating the benefits of contractual completeness i provide a revealed preference based framework that uses covenant prices and choices to quantitatively study how covenants generate firm benefits by completing debt contracts i use a rational expectations based panel estimator of covenant prices which does not require quasi experimental variation to circumvent the problem of endogenous covenant choices i find that firms surpluses exceed the spread paid on a loan leverage and interest rate covenants produce the largest benefits lending quantitative credence to several standard theories of covenants once covenants are chosen the benefits from fine tuning them are small thus rationalizing boilerplate covenants i conclude by discussing the extensions and limitations of my method the author 2013 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

accounting information in financial contracting the incomplete contract theory perspective this paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research we argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved by discussing its rich theoretical implications we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

property taxes tax cost illusion and desired education expenditures the extensive tax cost illusion found in the marshall survey is interesting both in terms of its magnitude and the direction of its impact counter to the common view that tax illusion will result in higher expenditures there appears to be at least one case where the overestimation of tax cost has the potential of leading to lower expenditure levels

fiscal incidence at the local level this paper represents an attempt to make aaron and mcguire s 1 approach to incidence operational 2 the tax paid by any individual is interpreted by aaron and mcguire as the sum of two components the first is a lindahl tax equal to the individual s marginal rate of substitution between the public good and income times the amount of the public good provided the second component is a negative or positive transfer equal to the lindahl tax minus the tax the individual has actually paid this second component is used to measure the incidence or redistributional impact of a particular budget program empirically aaron and mcguire found that the computation of lindahl taxes is highly sensitive to the choice of individual utility functions under certain assumptions that sensitivity is reflected in the value of a coefficient related to the marginal rate of substitution between the public good and income maital 16 later on used three separate identical estimates of this coefficient to reduce the ambiguity in the computation of lindahl taxes this paper offers an alternative computational approach to aaron and mcguire s the key information on lindahl tax prices or marginal rates of substitution is obtained from individual demand curves for public goods which are estimated using the median voter model see 5 an advantage of this approach over aaron and mcguire s is that it does not assume separability of the public good and income in taxpayers preferences the present approach also permits the study of the incidence of a budget policy on groups defined by socio demographic characteristics other than income on the other hand and because of empirical reasons which will become apparent below the present approach is useful for the study of incidence at the local level only section 1 of the paper restates the measure for the simultaneous incidence of taxes and one public good henceforth called fiscal incidence in the context of a formalized political process this section also discusses some of the theoretical difficulties involved in extending the case with one public good to the multi

estimating welfare in insurance markets using variation in prices we provide a graphical illustration of how standard consumer and producer theory can be used to quantify the welfare loss associated with inefficient pricing in insurance markets with selection we then show how this welfare loss can be estimated empirically using identifying variation in the price of insurance such variation together with quantity data allows us to estimate the demand for insurance the same variation together with cost data allows us to estimate how insurers costs vary as market participants endogenously respond to price the slope of this estimated cost curve provides a direct test for both the existence and the nature of selection and the combination of demand and cost curves can be used to estimate welfare we illustrate our approach by applying it to data on employerprovided health insurance from one specific company we detect adverse selection but estimate that the quantitative welfare implications associated with inefficient pricing in our particular application are small in both absolute and relative terms

taylor rules in the open economy abstract taylor rules which link short term interest rates to fluctuations in inflation and output have been shown to be a good guide both positively and normatively to the conduct of monetary policy as a result they have been used extensively to model policy in the context of both closed and open economy models their determinacy properties have also been analysed in the context of closed and to a more limited degree in small open economy models in this paper we extend the analysis of the determinacy properties of taylor rules to the case of a benchmark two country model when the rules are specified in terms of output price inflation we confirm and extend the conventional results from the closed economy literature satisfying the taylor principle is the key to ensuring determinacy although the presence of backward looking price setting can affect the determinacy properties of the two country model however the conventional results do not hold when we replace output price inflation with consumer price inflation in the specification of the rule in this case taylor rules which satisfy the taylor principle will be indeterminate unless there is an unusually large home bias in consumption similar indeterminacy problems arise when one country targets cpi inflation and the other output price inflation in this case we show that even if determinacy is achieved large spillovers may occur between countries

liquidity constraints and imperfect information in subprime lending ditions for precisely the population that is most likely to have a difficult time obtaining credit those with low incomes and poor credit histories these consumers who typically cannot qualify for regular bank loans comprise the so called subprime market because the company we study originates subprime loans its loan applications and transaction records provide an unusual win dow into the consumption and borrowing behavior of households that are rationed in primary credit markets moreover we track loan repayments allowing us to analyze the difficulties in lending to the subprime population we begin by documenting the importance of short term liquidity constraints for individuals in our sample we present two pieces of evidence both are based on purchasing behavior and indicate a high sensitivity to cash on hand first we document a dramatic degree of demand seasonality associated with tax rebates overall demand is almost 50 percent higher during tax rebate season than during other parts of the year this seasonal effect varies with household

progression under the benefit approach to the theory of taxation abstract the implications for progression of the benefit approach to the theory of taxation are studied in this paper it is concluded that the case for progression rests on the degree of substitutability between public and private goods

european inflation dynamics abstract we provide evidence on the fit of the new phillips curve npc for the euro area over the period 1970 1998 and use it as a tool to compare the characteristics of european inflation dynamics with those observed in the u s we also analyze the factors underlying inflation inertia by examining the cyclical behavior of marginal costs as well as that of its two main components namely labor productivity and real wages some of the findings can be summarized as follows a the npc fits euro area data very well possibly better than u s data b the degree of price stickiness implied by the estimates is substantial but in line with survey evidence and u s estimates c inflation dynamics in the euro area appear to have a stronger forward looking component i e less inertia than in the u s d labor market frictions as manifested in the behavior of the wage markup appear to have played a key role in shaping the behavior of marginal costs and consequently inflation in europe

optimal mandates and the welfare cost of asymmetric information evidence from the u k annuity market much of the extensive empirical literature on insurance markets has focused on whether adverse selection can be detected once detected however there has been little attempt to quantify its welfare cost or to assess whether and what potential government interventions may reduce these costs to do so we develop a model of annuity contract choice and estimate it using data from the u k annuity market the model allows for private information about mortality risk as well as heterogeneity in preferences over different contract options we focus on the choice of length of guarantee among individuals who are required to buy annuities the results suggest that asymmetric information along the guarantee margin reduces welfare relative to a first best symmetric information benchmark by about 127 million per year or about 2 percent of annuitized wealth we also find that by requiring that individuals choose the longest guarantee period allowed mandates could achieve the first best allocation however we estimate that other mandated guarantee lengths would have detrimental effects on welfare since determining the optimal mandate is empirically difficult our findings suggest that achieving welfare gains through mandatory social insurance may be harder in practice than simple theory may suggest

what is benefit taxation abstract benefit taxation is a system in which individuals are taxed according to the benefits they receive from public expenditures this paper describes an alternative to the standard lindahl method of determining the distribution of individual benefits from government provided public goods and uses this alternative to calculate benefit taxes this alternative avoids some of the paradoxial features of lindahl pricing and generates outcomes in which all consumers benefit from reduced costs of providing public goods an illustrative calculation shows that benefit taxes defined in this way may be quite regressive

contract pricing in consumer credit markets we analyze subprime consumer lending and the role played by down payment requirements in screening high risk borrowers and limiting defaults to do this we develop an empirical model of the demand for financed purchases that incorporates both adverse selection and repayment incentives we estimate the model using detailed transaction level data on subprime auto loans we show how different elements of loan contracts affect the quality of the borrower pool and subsequent loan performance we also evaluate the returns to credit scoring that allows sellers to customize financing terms to individual applicants our approach shows how standard econometric tools for analyzing demand and supply under imperfect competition extend to settings in which firms care about the identity of their customers and their postpurchase behavior

voluntary income redistribution with migration abstract this paper examines theoretically the welfare magnet problem brought about by income redistribution in a small area where disparities across jurisdictions in transfer policies may induce both recipient and resource migration we show that the level of redistribution determined by majority rule may either rise or decline as household mobility increases and that this level will be either higher or lower than the efficient level to an extent that depends on local market conditions the social value of migrants and the mobility of both the rich and the poor in particular an economy may benefit from the immigration of transfer recipients we also derive the form of an efficient community specific subsidy to transfers which in some cases will be negative

does legal enforcement affect financial transactions the contractual channel in private equity analyzing 210 developing country private equity investments we find that transactions vary with nations legal enforcement whether measured directly or through legal origin investments in high enforcement and common law nations often use convertible preferred stock with covenants in low enforcement and civil law nations private equity groups tend to use common stock and debt and rely on equity and board control transactions in high enforcement countries have higher valuations and returns while relying on ownership rather than contractual provisions may help to alleviate legal enforcement problems these results suggest that private solutions are only a partial remedy

selfishness versus public regardingness in voting behavior abstract the selfishness hypothesis in voting behavior is formalized and tested for the first time individual net benefits from a bond proposal computed using the median voter model are used to explain voting behavior it was found that taxpayers in general voted according to their self interest as defined by net benefits however high income groups voted in favor of proposals that would have redistributed income to the poor their behavior is consistent with either the public regardingness hypothesis or with an extension of the selfishness hypothesis which includes real estate speculation

using elasticities to derive optimal bankruptcy exemptions this article studies the optimal determination of bankruptcy exemptions for risk averse borrowers who use unsecured contracts but have the possibility of defaulting in a large class of economies knowledge of four variables is sufficient to determine whether a bankruptcy exemption level is optimal or should be increased or decreased these variables are 1 the composition of households liabilities 2 the sensitivity of the credit supply schedule to exemption changes 3 the probability of filing for bankruptcy with non exempt assets and 4 the value given by households to a marginal dollar in different states which can be mapped to changes in households consumption i recover empirical estimates of the sufficient statistics using u s data over the period 2008 16 and find that increasing exemption levels improves overall welfare although there is substantial variation in estimated welfare gains across u s states and income quintiles

the fiscal theory of the price level in an open economy abstract recent work loyo e going international with the fiscal theory of the price level manuscript john f kennedy school of government harvard university 1998 dupor b exchange rates and the fiscal theory of the price level journal of monetary economics 45 613 630 has shown that extension of the fiscal theory of the price level to an open economy yields indeterminate prices and exchange rates calling into question the usefulness of the theory this paper shows that by carefully tailoring policies in an independent fashion governments can eliminate price and exchange rate indeterminacy specifically governments are assumed to care about the welfare of their agents so that they never set policy to yield an intertemporal government budget surplus

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

coase versus the coasians who should enforce laws or contracts judges or regulators many coasians though not coase himself advocate judicial enforcement we show that the incentives facing judges and regulators crucially shape this choice we then compare the regulation of e nancial markets in poland and the czech republic in the 1990s in poland strict enforcement of the securities law by a highly motivated regulator was associated with a rapidly developing stock market in the czech republic hands off regulation was associated with a moribund stock market i introduction at the heart of economists traditional skepticism about government regulation is the coase theorem coase 1960 the theorem states that when property rights are well dee ned and transaction costs are zero market participants will organize their transactions in ways that achieve efe cient outcomes when they can do so it is not necessary for the government to engage in corrective actions through taxes regulations or even legal rules financial markets are often used to demonstrate the coase theorem s case against regulation advocates of the regulation of these markets point to a variety of potential failures such as the ability of security issuers to expropriate both potential and existing investors through misrepresentation or proe t diversion investors fear of such expropriation prevents e rms from raising external funds and keeps efe cient projects from being undertaken not so reply the coasians they point out that most securities transactions take place between sophisticated adults and that both the buyers and the issuers of securities have available to them a vast range of private arrangements to achieve efe ciency including contracts such as corporate charters certie cation by intermediaries and various forms of bonding such contracts render most laws and regulations unnecessary stigler 1964 easterbrook and fischel 1991