remaking macroeconomic policy after the global financial crisis a balance sheet approach this paper describes the origins of the global financial crisis and how the prevailing new keynesian macroeconomic orthodoxy failed to anticipate its severity this failure we argue stemmed from an incomplete understanding of the pivotal role of financial institutions in the amplification of the crisis and its transmission to the wider economy low global interest rates and a consequent search for yield in the pre crisis period encouraged financial institutions to build highly leveraged balance sheets which in turn generated extremely large asset price movements when a small event the downturn in the us sub prime mortgage market triggered the crisis the paper then briefly describes the element of the broadly successful and coordinated macroeconomic policy response to the crisis before turning to the medium term challenges facing policymakers in sustaining global recovery at the national level we focus on the resolution of fiscal imbalances which contributed in part to the crisis and which then worsened because of the policy actions which have been taken to deal with it at the international level we emphasise the need to rectifying the imbalances between savings and investment in many significant countries this will require greater coordination of macroeconomic policy across the world s major economies it will also involve strengthening the role and the governance of the international monetary fund

bank lending channel in a dual banking system why are islamic banks so responsive we examine the interest rate sensitivity of both deposits and credits at islamic and conventional banks in turkey we find that the bank lending channel is especially operative for islamic banks impulse responses for conventional and islamic banks reveal that islamic bank depositors sensitivity to policy rate changes is substantially larger than that of conventional bank depositors next to heavily dependence on deposit funding we consider that inertia in islamic bank deposit rates impedes these banks to keep those depositors who consider the opportunity cost of monetary policy rates is unbearable on the lending side we obtain similar results implying that tight monetary policy leads to a larger contraction in islamic bank credits this finding is a reflection of the favourable attitude of islamic banks towards small and medium sized enterprise sme financing when similar relationships are analysed for currency and inflation shocks we again find larger responses for islamic banks showing the cyclical nature of sme credits

life and work of john richard nicholas stone 1913 1991 sir richard stone knighted in 1978 and nobel laureate in economics in 1984 was one of the pioneering architects of national income and social accounts and one of the few economists of his generation to have faced the challenge of economics as a science by combining theory and measurement within a cohesive framework he was awarded the nobel prize in economics for his fundamental contributions to the development of national accounts but made equally significant contributions to the empirical analysis of consumer behaviour his work on the growth project was also instrumental in the development of appropriate econometric methodology for the construction and the analysis of large disaggregated macroeconometric models this paper provides an analysis of stone s many contributions

applied general equilibrium models of taxation and international trade an introduction and survey we wish to acknowledge the help of three referees and of john pencavel on several earlier drafts as well as the assistance of the modelers whose work is referred to in the paper they corrected our lack of understanding of their work and provided many other helpful comments excellent research and bibliographical assistance have been provided by debbie fretz radwan shaban and janet stotsky helpful comments have been made by charles ballard michael boskin lans bovenberg sylvester damus harvey galper glenn harrison gordon lenjosek jack mutti serena ng t n srinivasan charles stuart and eric toder the authors also acknowledgefinancial support from the national bureau of economic research the national science foundation international business machines and the social sciences and humanities research council ottawa canada

the sustainable borders of the state economic crises have historically set the stage for the reconfiguration of the economic borders of the state current concerns focus on debt and associated intergenerational issues such as pensions infrastructure and the environment the sustainable state is designed to put in place a framework for integrating these intergenerational issues alongside the traditional focus on macroeconomic policy static market failures and transfers the building blocks include the accounting framework and in particular a national balance sheet setting out assets and liabilities and providing for capital maintenance over time to support these assets and to provide for sufficient investment the sustainable state requires an appropriate level of savings and institutions to translate these savings into investments two components are the deployment of regulatory asset bases to underpin long term sunk and fixed costs given the time inconsistency problem in government s commitments and the development of financial intermediaries such as an infrastructure bank copyright 2011 oxford university press

on avoiding bank runs abstract can bank runs be avoided and should they be avoided i analyze a banking environment where bank runs can occur as a result of negative signals about the bank s investments in this environment banks can make sure that runs do not occur by designing the deposit contract appropriately i show that there are conditions under which it is profit maximizing for the bank to avoid runs and others under which occasional runs are part of optimal bank behavior i also compare the banking arrangement to an arrangement based on trading in equity

global macroeconomic cooperation in response to the covid 19 pandemic a roadmap for the g20 and the imf the covid 19 crisis has caused the greatest collapse in global economic activity since 1720 some advanced countries have mounted a massive fiscal response both to pay for disease fighting action and to preserve the incomes of firms and workers until the economic recovery is under way but there are many emerging market economies which have been prevented from doing what is needed by their high existing levels of public debt and especially by the external financial constraints which they face we argue in the present paper that there is a need for international cooperation to allow such countries to undertake the kind of massive fiscal response that all countries now need and that many advanced countries have been able to carry out we show what such cooperation would involve we use a global macroeconomic model to explore how extraordinarily beneficial such cooperation would be simulations of the model suggest that gdp in the countries in which extra fiscal support takes place would be around two and a half per cent higher in the first year and that gdp in other countries in the world be more than one per cent higher so far such cooperation has been notably lacking in striking contrast with what happened in the wake of the global financial crisis in 2008 the necessary cooperation needs to be led by the group of twenty g20 just as happened in 2008 9 since the g20 brings together the leaders of the world s largest economies this cooperation must also necessarily involve a promise of international financial support from the international monetary fund otherwise international financial markets might take fright at the large budget deficits and current account deficits which will emerge creating fiscal crises and currency crises and so causing such expansionary policies which we advocate to be brought to an end

international macroeconomic policy coordination an overview this article which serves as an introduction to the oxford review of economic policy s issue on macroeconomic policy coordination global imbalances and global growth charts the evolution of international macroeconomic policy coordination from the end of the second world war until the present day the arrangements laid out at the bretton woods conference in 1944 provide an intellectual framework with which to assess the evolving need for and feasibility of international coordination across three historical periods the fixed but adjustable exchange rate arrangements of the bretton woods system the subsequent flexible exchanges period of the non system which led into the great moderation and finally the period since the global financial crisis of 2008 increased economic integration particularly through the capital account combined with asymmetries in exchange rate regimes between china and the us have shown that reliance on the automatic adjustment mechanisms of the non system are no longer feasible so that a return to policy cooperation is necessary in order to rebalance the world economy and reduce the adverse spill over impacts that uncoordinated rebalancing would entail the article explores the nature of this coordination and provides a context for other contributions to the issue analysing positive and normative aspects of macroeconomic policy coordination from a global perspective and from the prospective of key global players including china and the european union copyright 2013 oxford university press

government failure rent seeking and capture the design of climate change policy climate change has been described as one of the biggest market failures less attention has been paid to the government failures associated with interventions and the implications for the design of climate change policy this paper sets out the main types of government failure and shows how the processes of rent seeking and capture help to explain both why the choice of targets and instruments has been so inefficient and also why the resulting costs of carbon mitigation are likely to be considerably higher than the estimates provided by the stern review and other recent studies two examples are given emissions trading and renewables policy a number of generic conclusions are drawn about how taking account of government failures can help to improve policy design and limit the impact of the climate change pork barrel which existing policies have created copyright 2010 oxford university press

a computational analysis of japan s generalized system of preferences abstract in this paper we employ a general equilibrium computational model of world trade to evaluate the generalized system of preferences gsp of japan we conclude that the japanese gsp is strongly trade creating because preferential treatment is offered primarily on products for which japan is a major world exporter however tariff concessions result in a deterioration in japan s terms of trade which lowers welfare in japan and improves the welfare of japan s major trading partners among the ldcs the gain from preferential treatment accrues primarily to the asian nics hong kong south korea singapore and taiwan

the inherent dangers of using computable general equilibrium models as a single integrated modelling framework for sustainability impact assessment a critical note on bohringer and loschel 2006 the search for methods of assessment that best evaluate and integrate the trade offs and interactions between the economic environmental and social components of development has been receiving a new impetus due to the requirement that sustainability concerns be incorporated into the policy formulation process a paper forthcoming in ecological economics bohringer c loschel a in press computable general equilibrium models for sustainability impact assessment status quo and prospects ecological economics claims that computable general equilibrium cge models may potentially represent the much needed back bone tool to carry out reliable integrated quantitative sustainability impact assessments sias while acknowledging the usefulness of cge models for some dimensions of sia this commentary questions the legitimacy of employing this particular economic modelling tool as a single integrating modelling framework for a comprehensive evaluation of the multi dimensional dynamic and complex interactions between policy and sustainability it discusses several inherent dangers associated with the advocated prospects for the cge modelling approach to contribute to comprehensive and reliable sustainability impact assessments the paper warns that this reductionist viewpoint may seriously infringe upon the basic values underpinning the sia process namely a transparent heterogeneous balanced inter disciplinary consultative and participatory take to policy evaluation and building of the evidence base

on tax reform systems of business and personal taxation in most western economies are not efficient the paper discusses efficiency losses due to 1 tariffs and sales taxes 2 the nonneutral treatment of business durable inputs 3 differential rates of business income taxation and 4 the taxation of interest estimates of the possible magnitudes of the various efficiency losses are derived the second part of the paper outlines the elements of an efficient system of taxation a feature of the proposed system is that most workers would not have to file tax returns

the assessment monetary and fiscal policy in the 1980s the emphasis is on policy in the uk though many of the issues that arise e g about the links between monetary and fiscal policy or the concern over persistent deficits and debt are general being faced by other countries as well the uk s policy has however been more extreme and under the medium term financial strategy mfts more explicit than elsewhere the purpose of this assessment is not primarily prescriptive rather it is an alytical intended to lay out some of the major theoretical and empirical issues that underlie policy choice and to stimulate debate

developing countries and the gains from regionalism links between trade and farm policy reforms in mexico we use a multi country computable general equilibrium cge model with agricultural policy details to simulate the effects of north american free trade agreement nafta we find that mexico gains from nafta only when it also removes domestic distortions in agriculture in that case agriculture can generate allocative efficiency gains large enough to offset the terms of trade losses that arise because mexico has higher initial tariffs than its nafta partners when an rta forces a developing country to reform its domestic distortions that are linked to trade restrictions it becomes a building block toward multilateralism

the assessment financial innovation curse or blessing as financial services go through one of their most radical restructurings of this century this as sessment analyses the factors underlying these changes a picture of the function of different fi nancial institutions emerges which allows the concerns that have been expressed about recent developments in financial markets to be re evaluated the worrying implication is that systems for correcting substantial financial disruption are not yet in place

empirical studies of financial innovation lots of talk little action this paper reviews the extant empirical studies of financial innovation adopting broad criteria we could find only somewhat more than two dozen studies and since some financial innovations are examined by more than one study they cover only seventeen phenomena especially striking is the fact that only two studies offer tests of the broad hypotheses concerning the environmental conditions spurring financial innovation e g regulation taxes unstable macroeconomic conditions and ripe technologies that have been advanced in descriptive articles we offer some tentative conjectures as to why empirical studies of financial innovation are comparatively rare among our suggested culprits is an absence of accessible data we urge financial regulators to undertake more surveys of financial innovation and to make the survey data more available to researchers

on the use of ecological prices and system wide indicators derived therefrom to quantify man s impact on the ecosystem abstract ecological prices and other system wide quantitative descriptors of ecosystem functioning are derived from the assumption that ecosystems allocate available resources efficiently among their components however ecological prices are not efficiency prices only and using them does not require one to assume that the ecosystem is completely controlled by man the same prices balance flows of different biomasses in a multicomponent system as such they play the role of exchange prices in a decentralized ecosystem properly defined with the help of ecological prices the resulting ecosystem productivity is no less a significant indicator of ecosystem functioning than the national product is significant for assessing the functioning of an economy considerations of the values taken simultaneously by our proposed indicators and by their economic analogs are of much help in judging the desirability of projects with relatively mild environmental repercussions these values are obtained from an integrated model of a system in which ecological and economic activities are intertwined however for the indicators to have an analytical meaning the methodology should be applied to trace only those dynamic paths during which the system possesses unique state dependent intensive properties in other cases a more comprehensive methodology one which also pays due regard to the viability of the ecosystem must supplement the analytical approach this rather comprehensive methodology is scale dependent and probabilistic in nature while delineating relations between the structure of the system and its behavior this method implies that efficiency and viability are two complementary rather than two commensurate attributes of a single entity an outside observer may be guided by his own values in his attempts to weigh these features but no inherent property of the system exists that supports his values unequivocally nevertheless this paper proposes an approximation to overcome this difficulty and to estimate a quantitative limit to the rate of substitution between productivity and viability such a limit is also an intensive property of the simulated system and the estimation of its value is shown to be crucial for studying the vulnerability of real ecosystems to severe man made disturbances

stepping stones for biological invasion a bioeconomic model of transferable risk we investigate three sources of bias in valuation methods for ecosystem risk failure to consider substitution possibilities between goods failure to consider nonseparability of ecosystem services with market goods and failure to consider substitution possibilities between ecosystems the first two biases are known in the literature and we offer insight on the size of the bias for a specific example our work on spatially transferable risk is novel we develop the concept and show how it may undermine typical invasion prevention strategies we find three key results first partial equilibrium estimates of welfare loss are significantly overestimated relative to general equilibrium estimates if ecosystem services and market goods are substitutes the partial equilibrium bias is greater than if they are compliments second well intended policies do not necessarily reduce overall risk risk reduction actions can transfer risk to another time or location or both which may increase total risk third policies of quotas and inspections have to be extreme to improve welfare with inspections having advantages over quotas

rents and the cost and optimal design of commodity taxes this paper numerically investigates the significance of rents for both the welfare costs and the optimal design of commodity taxes using a general equilibrium model calibrated to 1986 canadian data in the data we use ricardian rents are concentrated in agriculture and utilities with market structure rents concentrated in manufacturing different types of rents have different implications for the welfare cost of taxes and hence also for appropriate tax design ricardian rents lower the cost of taxes rents supported by imperfect competition with no free entry raise the cost of taxes rents supported by regulation generate rent seeking costs and if taxed improve resource allocation model results show a markedly nonuniform optimal tax structure and a substantial influence of the treatment of rents on the pattern of optimal tax rates by commodity

monetary policy rules macroeconomic stability and inflation a view from the trenches i estimate a forward looking monetary policy reaction function for the federal reserve for the periods before and after paul volcker s appointment as chairman in 1979 using information that was available to the fomc in real time from 1966 to 1995 the results suggest broad similarities in policy and point to a forward looking approach to policy consistent with a strong reaction to inflation forecasts during both periods this contradicts the hypothesis based on analysis with ex post constructed data that the instability of the great inflation was the result of weak fomc policy responses to expected inflation a difference is that prior to volcker s appointment policy was too activist in reacting to perceived output gaps that retrospectively proved overambitious drawing on contemporaneous accounts of fomc policy i discuss the implications of the findings for alternative explanations of the great inflation and the improvement in macroeconomic stability since then

keynesian macroeconomics without the lm curve the is lm model has been a central tool of macroeconomic teaching and practice for over half a century legions of earlier writers have offered criticisms of the model that have become familiar with the passage of time the model lacks microeconomic foundations assumes price stickiness has no role for expectations and simplifies the economy s complexities to a handful of crude aggregate relationships but countless teachers students and policymakers have found the model to be a powerful framework for understanding macroeconomic fluctuations recent developments have created new difficulties for the is lm model although the new difficulties are less profound than the traditional ones they are more likely to be fatal like all models the is lm model is not universal its assumptions and simplifications make it better suited to analyzing some issues than others and to describing some economic environments than others but neither the issues nor the environment of macroeconomic fluctuations are fixed in terms of issues one major change is that the debates between keynesians and monetarists about the relative effectiveness of monetary and fiscal policy that were central to macroeconomics in the 1960s and 1970s now play only a modest role in the analysis of short run fluctuations in terms of the environment one important change is that most central banks including the u s federal reserve now pay little attention to monetary aggregates in conducting policy but the is lm model is particularly well suited to presenting the debates between keynesians and monetarists and one of its basic assumptions is that the central bank targets the money supply in short recent developments work to the disadvantage of is lm this observation suggests that it is time to revisit the question of whether is lm is the best

on the possibility of an inverse relationship between tax rates and government revenues abstract when arthur laffer and other supply side advocates plot total tax revenue as a function of a particular tax rate they draw an upward sloping segment called the normal range followed by a downward sloping segment called the prohibitive range a brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates high elasticity parameters or both the labor tax rate which maximizes total revenue for example will depend on the assumed labor supply elasticity this paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues separating the normal area from the prohibitive area a general purpose empirical u s general equilibrium model is used to plot the laffer curve for several elasticities and to plot the newly introduced curve using the labor tax example results indicate that the u s could conceivably be operating in the prohibitive area but that the tax wedge or labor supply elasticity would have to be much higher than most estimates would suggest

an experimental examination of general equilibrium tax incidence abstract tax incidence is examined in an experimental general equilibrium production micro economy consistent with predictions the imposition of a tax on corporate capital resulted in a flow of capital out of the corporate sector decreased corporate usage of capital relative to labor and tax shifting through decreases in the relative prices of capital and non corporate output although capital owners were able to shift some of the tax burden the corporate tax resulted in a 35 drop in capital owner s share of payoffs implications for policy are discussed

globalization and its challenges rudi was born and grew up in krefeld germany he was an undergraduate at the university of geneva and completed his ph d at the university of chicago in 1971 which is where we met he was a student of robert mundell and both the subject matter the development of the mundell fleming model and the elegance and insights of his early work reflected mundell s influence he taught at the university of rochester and at the university of chicago before accepting an offer from mit in 1975

reforming indirect taxes in canada some general equilibrium estimates the current indirect tax system in canada distorts economic activity in a variety of ways and has been the subject of considerable discussion as part of overall tax reform in this paper a general equilibrium model is used to analyze various changes in indirect taxes in canada focusing on possible changes to the federal and provincial sales taxes results suggest that replacing either the federal or provincial sales taxes with a broadly based sales tax yields a small but significant welfare gain the distributional effects from these changes are slightly regressive but appear to be quite small and easily offset by modest income tax credits targeted to low income households results also suggest that a broad based sales tax would be a significantly more efficient revenue source should additional sales tax revenues be required

real wage rigidities and the new keynesian model most central banks perceive a trade off between stabilizing inflation and stabilizing the gap between output and desired output however the standard new keynesian framework implies no such trade off in that framework stabilizing inflation is equivalent to stabilizing the welfare relevant output gap in this paper we argue that this property of the new keynesian framework which we call the divine coincidence is due to a special feature of the model the absence of nontrivial real imperfections we focus on one such real imperfection namely real wage rigidities when the baseline new keynesian model is extended to allow for real wage rigidities the divine coincidence disappears and central banks indeed face a trade off between stabilizing inflation and stabilizing the welfare relevant output gap we show that not only does the extended model have more realistic normative implications but it also has appealing positive properties in particular it provides a natural interpretation for the dynamic inflation unemployment relation found in the data

general equilibrium analysis of black and white markets a computational approach abstract this paper explores the inter relationship between black and white markets and presents a formulation in which equilibrium conditions hold separately for each type of market for each product with linking conditions across market types using a traditional goods and factor general equilibrium model the simultaneous operation of price controls on white markets and surveillance with penalties for those caught trading on black markets is modelled a numerical example of such an economy is presented using data for india and equilibria under coexistence are reported

oil prices and rural migration the dutch disease goes south abstract we construct a two period general equilibrium model to evaluate policies affecting agricultural migration and exports the model is applied to mexico for the period 1986 1987 to obtain certain qualitative policy conclusions related to the dutch disease brought about by oil price increases dutch disease phenomena can be brought about both as the result of real exchange rate changes as well as price changes caused by migration out of agriculture in the short run it may be possible to use fiscal policy such as value added subsidies to agriculture to at least partially negate the effects of an oil price increase on agricultural exports jel f31 f41

how to measure labour market effects of immigration a review abstract this paper surveys available empirical evidence on labour market effects of immigration many different approaches have been used already to try to find out whether immigration hurts the labour market opportunities of natives no doubt new approaches will follow in the future as globalization will keep the migration issue on the agenda this literature review discusses the different approaches concentrating on both the methodology and the results at the end it tries to summarize available evidence

the impacts of tax reform on agricultural households estimates of tax reform s impacts usually concentrate on macroeconomic impacts but attention at the industry or sectoral level is often limited our study uses a computable general equilibrium cge model to estimate the disaggregated impacts of the tax cuts and jobs act tcja of 2018 which lowered personal and corporate tax rates focusing on agriculture we use survey data to calculate how the tcja would change the tax rates faced by farmers at the sector level we use internal revenue service data to calculate tax rates for all other producers we then simulate the economy wide and sectoral effects of tcja we find that the tcja would cause a reduction in agricultural output as resources would be reallocated to other sectors using our survey data we extend the cge results to measure the impacts to farm households from changes in on and off farm income we find that most farm households would have income gains from tax reform our tax reform scenario highlights the fact that investment weighs heavily on model results that is firms that are attractive to domestic and foreign investment have gains in demand for their products while other sectors such as primary agriculture experience decreases in production a sensitivity analysis that reduces the attractiveness of the united states in foreign investment shows smaller impacts of tcja especially for macroeconomic variables

domestic bank runs and speculative attacks on foreign currencies abstract the paper extends the international transmission of financial crisis literature by illustrating how a domestic bank run can cause a speculative attack on foreign currencies the idea is that when domestic banks invest abroad a domestic bank run will give way to a repatriation of foreign capital if the repatriation causes a depletion of the foreign central bank s foreign exchange reserves then the foreign currency will be devalued as such a devaluation will render domestic banks insolvent in the rational equilibrium domestic bank runs will 1 cause a speculative attack on the foreign currency and 2 be self justified

the ricardian approach to budget deficits persistent budget deficits have increased economists interest in theories and evidence about fiscal policy this paper develops the ricardian approach and contrasts it with standard models the discussion considers from major theoretical objections to ricardian equivalence finite lifetimes imperfect capital markets uncertainty about future taxes and incomes and the distorting effects of taxation the paper then considers empirical evidence on interest rates consumption and saving and current account deficits the conclusion is that the ricardian approach is a useful first order approximation and that this approach will probably become the benchmark model for assessing fiscal policy this abstract was borrowed from another version of this item

some anomalies in the production strategy of a labour managed firm however been given to the appropriate objective function of a labour managed cooperative firm in this paper we show that the conventional formulation of the objective function is incompatible with a homogeneous production function more precisely we prove that a labour managed firm with a production function homogeneous of degree a 1 the level of output depends only on the degree of homogeneity and is otherwise independent of the structural form of the production function in particular the level of output is independent of the price of capital this last result also holds if the production function is homothetic although these shortcomings apply specifically to homogeneous production processes the use of such production functions is so widespread that any objective function of a firm which is incompatible with them significantly reduces its analytical usefulness consequently we think that further research in the theory of labour managed firms will require a reformulation of the objective function in order to remove this anomaly

carbon pricing and energy efficiency improvement why to miss the interaction for developing economies an illustrative cge based application to the pakistan case abstract carbon energy taxes and energy efficiency improvement are studied well in the recent years for their potential adverse impacts on economy especially for lost production and international competitiveness and rebound effects however little attention has been paid to investigate them jointly which can not only prevent fall of energy services cost and thereby rebound effect but reduce the associated macroeconomic costs this study thus employs a 20 sector cge model to explore separately the impacts of carbon tax and its coordinated implementation with energy efficiency improvement on the pakistan economy the country underwent enormous pressure of energy security issues as well as climate change fallouts in the last couple of years and can be regarded as a suitable candidate for energy environmental conservation policies to be considered at a broader context with more concrete efforts the simulation results show that the impact of carbon tax on gdp is negative but resulting reductions in pollutant emissions are relatively high moreover the gdp is expected to grow comparatively positive when analyzed with improvements in energy efficiency with even higher decline in energy consumption demand and so emissions this simultaneous economic and environmental improvement would thus have positive implications regarding sustainable development of the country

on reforming the welfare system abstract using a simulation model for a small open economy quebec 1986 various negative income tax nit and workfare schemes are compared from the point of view of efficiency and equity the main finding is that there exist workfare schemes that are superior both to the quebec regime of 1986 and to a nit characterized by a 100 percent implicit tax rate however these workfare schemes are dominated by some nit programs this suggests that it may be necessary to have work requirements that vary across socio demographic classes for a workfare plan to be superior to any nit combining workfare with an nit could also be the prescription

the new uk monetary arrangements a view from the literature this paper considers the likely operating characteristics of the new uk monetary arrangements introduced in may 1997 the paper first argues that the time inconsistency of policy is not an issue provided the bank of england is properly independent however the current inflation remit from the chancellor to the bank specifies a numerical target for the inflation rate but does not specify how quickly deviations from the target are to be corrected it is thus an incomplete contract and there is a danger that the bank may choose to stabilise inflation at the cost of excessively volatile movements in output or vice versa we estimate the optimal policy frontier for the uk economy and show that in practice it is close to rectangular consequently all the bank needs to assume is that the government s preferences are reasonable in order to know approximately where to locate on this frontier the incompleteness of the remit therefore need not be a cause for concern

a computational general equilibrium model with endogenous unemployment an analysis of the 1980 fiscal reform in mexico abstract in this paper we develop a general equilibrium model of the mexican economy in which unemployment and government deficits play important roles the unemployment rate depends on a downwardly rigid real wage in the urban sector the government runs a deficit simply by selling bonds that consumers consider perfect substitutes for physical capital as savings instruments the model is used to analyze the impact of the 1980 fiscal reform the presence of the rigid real wage and alternative specifications of government policies regarding the size of the deficit are found to have significant effects on the comparative statics results whether or not the reform improves the welfare of rural households compared to urban households for example depends on whether government policy is to keep the deficit constant or keep expenditures constant in response to changes in tax revenues

financial crises and balance of payments crises a simple model of the southern cone experience abstract this paper starts from a simple model of the domestic banking sector and develops the potentially destabilizing macroeconomic consequences of its role in intermediating foreign capital inflows both financial and balance of payments crises may result reminiscent of the southern cone experience

the world economy analysis and prospects the rate of growth for the us has now slipped into the 2 3 range the official figure for 1985 fourth quarter is 2 4 from 6 6 in 1984 growth in the volume of imports has also fallen sharply from almost 23 in 1984 to less than 2 in 1985 although this has been insufficient to prevent further increases in the current account deficit latest trade figures show a record visible trade deficit of 17 4 bn for december 1985

the effects of energy taxes on the kenyan economy a cge analysis abstract the paper utilizes a computable general equilibrium model to evaluate the impact of the second oil price shock and consequent energy tax policies on the kenyan economy simulations show that dramatic change in energy prices and consequent changes in domestic energy consumption generate sequential feedbacks in the production process and affect economic structures terms of trade deteriorate the balance of payments deficit increases and national income falls energy import tariffs and a sales tax are effective policy instruments in controlling energy consumption and increasing government revenue both energy policies have net negative effects on other economic activities similar to those observed under the oil price shock as long as there are no other economically feasible sources of energy supplies there are economic losses associated with less petroleum product consumption in a net oil importing developing economy with oil intensive production technology

the g 20 framework for strong sustainable and balanced growth glass half empty or half full the g 20 framework for strong sustainable and balanced growth was launched by the g 20 leaders in 2009 to strengthen coordination of national economic policies as the world emerged from the 2008 9 financial crisis building on earlier attempts at international economic policy coordination the framework has made significant advances in the detailed institutional procedures for policy coordination including information sharing analytical tasking and the development of structured policy discussions to address medium term issues some politically difficult challenges have been overcome using varied techniques including enabling the system of collaboration to evolve incrementally over time however further progress is needed if the framework is to deliver on the remit set by leaders copyright 2013 oxford university press

second best agricultural policy abstract since full economic liberalization is not generally feasible getting the prices of selected agricultural markets right involves optimal price distortions a methodology is developed for calculating the second best output price in a particular market by incorporating externalities government revenue constraints and distortions in other markets into the marginal social cost and benefit schedules for that market in the illustrative application to thailand tax friction consumption externalities and the optimal tariff argument are seen to support an export tax on rice even though import tariffs already discriminate against agricultural exports

the efficiency gains from dynamic tax reform this paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general equilibrium rational expectations growth path of life cycle economies the principal findings concern the effects of switching from a proportional income tax with rates similar to those in the u s to either a proportional tax on consumption or a proportional tax on labor income a switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources in contrast a transition to wage taxation generates a loss of greater than percent of lifetime re sources a second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost this abstract was borrowed from another version of this item

estimating distortions in the chinese economy a general equilibrium approach a computable general equilibrium model is constructed to simulate the chinese economy under a system of free markets and is estimated using a calibration procedure coupled with econometric estimation for key parameters the equilibrium solution of the model indicates substantial distortions in prices and resource allocation in the 1983 chinese economy labour was found to be overpaid and capital underpaid in most non agricultural sectors two fifths of the agricultural labour force would have been employed by the non agricultural sectors had china been a market economy the elimination of these distortions would imply a significant improvement in allocative efficiency and a redistribution of income from labour to capital from households to the state and from urban to rural households china embarked upon its economic reform programme in the late 1970s over the period 1979 83 there were dramatic reforms in the rural agricultural sector including the dismantling of the three level ownership of communes the dis tribution of land to peasant households and the relaxation of controls over labour transfer from the agricultural sector to the rural non agricultural sector in contrast in the urban economy and especially in the state industrial sector reforms were confined to modest improvements in incentives for enterprises and workers notably through the introduction of profit retention schemes and bonus systems in 1983 much of the traditional mechanism of resource alloca tion remained essentially intact the problem of distortions in the price system and in resource allocation in centrally planned economies cpes has long been a concern of economists and there has been a considerable interest in empirical modelling of distortions in cpes thornton 1971 estimated potential efficiency gains from equalizing the return to capital for different branches of soviet industry in the early 1960s desai and martin 1983 provided similar estimates using econometrically esti mated production functions portes and winter 1980 estimated excess demand in the aggregated consumption goods market for a number of pre reform eastern european economies using the technique of econometric dis equilibrium modelling podkamine 1988 calculated free market demands and prices in the absence of rationing for consumption goods markets in poland during 1965 86 by transplanting demand systems estimated for market econ omies into the quantity constrained polish economy chow 1985 investigated the efficiency of labour allocation in chinese state industry by comparing the average wage rate with the value of the marginal product of labour all these studies however involve partial equilibrium analysis in the sense that they are concerned only with examining the distortion in a specific market and therefore have tended to ignore distortions in the rest of the economy and a

high growth and low consumption in east asia how to improve welfare while avoiding financial failures this paper analyzes certain policies that are typical of a number of rapidly growing east asian countries in which a fixed exchange rate combined with a surplus labor market has made domestic assets relatively inexpensive generating high rates of fdi as well as domestic capital formation this investment hunger can lead to unanticipated declines in the returns to investment and resulting financial insolvencies private consumption remains low and there are concerns that high savings rates cannot be sustained we construct a dynamic general equilibrium model and apply it to a stylized asian economy loosely based upon china we calibrate a benchmark equilibrium and carry out various counterfactual simulations to analyze alternative policies in particular tax cuts and exchange rate revaluations as instruments in increasing private consumption while avoiding bank failures

economic effects of vat reforms in germany in the tax policy debate differentiation of value added taxes is often justified by distributional concerns our quantitative analysis for germany indicates that such concerns are misplaced we find that the abolition of vat differentiation has only negligible redistributive effects instead reduced vat are found to act as industry specific subsidies whereas the overall welfare effects of pure vat reforms are very small a revenue neutral introduction of a harmonised vat combined with reductions in the marginal income tax rates or social security contributions turns out to produce substantial welfare gains for all households

property tax classification and welfare in urban areas a general equilibrium computational approach abstract this paper examines some of the structural and welfare effects of a change from a tax system in an urban area that classifies property by use for tax assessment to one that does not discriminate in its treatment of property a long run general equilibrium model of intraurban spatial location is developed due to analytical intractability the tax policy changes are simulated by use of a fixed point algorithm the model is stylized to the boston metropolitan area to the extent possible general equilibrium versions of compensating and equivalent variations in income are used as measures of welfare change the qualitative welfare results obtained from sensitivity analysis are fairly robust in a substantial majority of the cases considered there is a welfare gain in moving from the particular tax classification structure posited to a system in which all property is taxed at the same effective rate

the macroeconomic role of fiscal policy this article examines the new consensus that fiscal policy should have no macroeconomic role in flexible inflation targeting regimes there is little basis for this presumption fiscal policy remains important in setting the policy mix and in managing shocks and imbalances the credibility of an inflation targeting regime should be enhanced rather than reduced if fiscal policy plays its proper role it is true nevertheless that the costs of focusing fiscal policy narrowly on public sector concerns may not be very great most of the time however when interest rates cannot be used the role of fiscal policy must be different with interest rates at their lower bound of zero there is no plausible alternative for asymmetric shocks and adjustments in emu fiscal policy needs ideally to substitute for the interest rate policy reaction function of the consensus but the difficulties are very great we suggest a policy focus on real exchange rates as a way of resolving some of the dilemmas there is a serious danger that orthodox views about fiscal policy drawn from the consensus will be inappropriately applied especially in europe copyright 2005 oxford university press

what should fiscal councils do fiscal watchdogs so called fiscal councils have been proposed as a method to counter deficit bias of fiscal policy the paper analyses theoretically what role fiscal councils could play and surve

america s historical experience with low inflation the inflation of the 1970s was a marked deviation from america s typical peacetime historical pattern as a hard money country we should expect america to continue to be a hard money low inflation country in the future at least in peacetime the low rate of future inflation that we thus forecast changes the balance of macroeconomic risks and opportunities the risk of debt deflation mediated recessions is somewhat higher because a low trend rate of goods and services price index inflation somewhat increases the chances of deflation but it does not raise such risks as much as one might think the failure of the fisher effect to hold empirically means that a low inflation era will in all likelihood be a high real interest rate era but such high real interest rates do not appear to significantly discourage investment or growth

joseph schumpeter lecture the great moderation the great panic and the great contraction this lecture examines the causes of the recent financial crisis and subsequent recession on the macroeconomic side the great moderation encouraged an overly optimistic assessment of risk combined with low interest rates reflecting both loose monetary policy and relatively high asian savings rates that encouraged a build up of excessive leverage in the banking system on the microeconomic side distorted incentives led to a concentration and mispricing of risk informational complexities associated with new financial assets and the interconnectedness of financial institutions then resulted in the closure of funding markets and a flight to safety when loan defaults rose unexpectedly the episode indicates the need to focus on agency and information problems between banks and their funders in addition to those between the banks and their borrowers it also suggests that the process of financial intermediation should play a more prominent role in macroeconomic models jel e32 e44 e52 e58 f32 g01 g21

the place of agricultural research in the development of sub saharan africa abstract outside sub saharan africa ssa agricultural research ar yields excellent returns why does ssa get so little from its major ar effort why do its ar scientists cost more yet produce less smallness of countries and research stations dispersion and high turnover make it hard to attain a critical mass of national ar scientists to remedy this they could concentrate on a few problems and crops yet they have neglected many of the most important e g cassava and overstressed export crops in other ways too european biases have distorted african ar socioeconomists moreover have entered research design too little and too late above all current domestic funds have been too scanty and unreliable to adequately support international and capital account ar efforts this lack of steady commitment illustrates ar s need for direction from clearer agricultural policy based on radically improved information and recognizing ssa s dramatic rise in labor land ratios guidelines for such policy are indicated within these a formalized and poverty oriented ar design system is suggested

industry equilibrium with uncertainty and labor managed firms abstract this paper characterizes long run industry equilibrium composed of labor managed firms under demand uncertainty moreover it is demonstrated how the number and size of firms in the industry respond to a change in uncertainty

on the theory of international trade between capitalist and labour managed countries abstract this paper attempts to establish a model of international trade between capitalist and labour managed countries and to reexamine whether or not the basic theorems of the traditional trade theory carry over to environments characterized by the coexistence of capitalist and labour managed countries

large market cournot equilibria in labour managed economies a basic point in the theory of labour managed market economies is the fundamental role of free entry in order to achieve efficiency see dreze 1974 greenberg 1979 ichiishi 1977 meade 1972 1979 vanek 1970 but modelling a framework of firm selection process can be undertaken with different approaches dreze meade and vanek for example consider a perfectly competitive process greenberg and ichiishi build models of coalition formation in the spirit of core theory in the present study we take the other classical way the cournot oligopoly theory in order to capture the effect of increasing competition in the cournot oligopoly two kinds of models have long been traditionally elaborated in the first the effects of an exogenously increasing number of active firms facing a given demand function are examined see okugushi 1976 ruffin 197 1 seade 1980 in the second initiated by shubik 1959 the number of active firms and the size of the market are simultaneously increased at the same rate in this case what is sought is to isolate some sort of pure effect of an increasing number of competitors and not the combined result of a greater number of firms facing a constant market but in the two kinds of approaches the number of active firms are not explained by the theory what is missing is consideration of the role of potential competitors recently novshek 1980 proposed to give the same status to potential competitors and active firms i e to consider that the potential competitors have a cournot type behaviour hence the very fact that they are not active comes from optimizing behaviour in the same way as for active firms a positive production level comes from maximizing behaviour a potential competitor taking the production of the active firms as given and maximizing his objective function remains potential only because he does not find it attractive to produce hence we get a unified theory which explains the number of active firms for the case of u shaped average cost firms novshek 1980 has shown that in sufficiently large markets first such a free entry cournot equilibrium exists and second it is approximately a perfectly competitive equilibrium state in this paper we study the welfare properties of free entry cournot equilibria in labour managed economies we adopt novshek s notion of free entry which is more appealing than the classical zero profit constraint 2 a recent paper by hill and waterson 1983 shows that with the zero profit definition of free entry and strong assumptions of decreasing marginal labour productivity uniqueness and stability of equilibria cournot equilibria are asymptotically efficient and furthermore have the same number of active firms in both the labour managed and entrepreneurial frameworks under much weaker assumptions the graphical analysis of this paper shows that asymptotic

big bang new beginning or beginning of the end thirty years ago the 1986 oxford review of economic policy assessment of financial innovation foretold the events leading up to the financial crisis and the factors that lay behind it those same insights suggest significant deficiencies in the response to the financial crisis and a failure to identify the limits to as well as requirements for strengthened regulation in particular there is a need for institutional reforms that have received insufficient attention to date

the assessment real interest rates the assessment attempts to provide a broad explanation of the post war pattern of real interest rates drawing on the theoretical and empirical papers in this issue of the oxford review it is argued that the concept of the neutral rate of interest at which the economy grows at its productive potential without changes in the inflation rate provides a helpful framework for understanding these developments the neutral rate provides a bridge between on the one hand the fundamental determinants of real returns as suggested by models of economic growth and on the other hand the functioning of asset markets and the operating procedures of central banks the change in policy stance towards tighter money at the beginning of the 1980s is seen as having had long lasting effects especially when account is taken of the fiscal stance copyright 1999 by oxford university press

the assessment macroeconomic policy this paper describes the emerging consensus about the reaction function approach to macroeconomic policy the first section of the paper describes the historical emergence of this consensus as a synthesis of pre keynesian keynesian and monetarist ideas the theoretical part of the paper presents the basic framework of the approach and explains a number of extensions including finding the optimal reaction function avoiding the problem of inflation bias the relevance of the taylor rule forward looking expectations extensions to the open economy and the interconnections between monetary and fiscal policy the later parts of the paper contain a detailed discussion of some of the practical and institutional issues involved in the implementation of this new framework

evaluation of external market effects and government intervention in malaysia s agricultural sector a computable general equilibrium framework the purpose of this study is to evaluate the effects of changes in the external trade environment and domestic economic policies on the agricultural development of malaysia the scope of this research also includes providing further insights into the strengths and weaknesses of the computable general equilibrium cge methodology for agricultural policy analysis the first analysis focuses on the export agriculture sector which encompasses malaysia s two primary agricultural commodities rubber and palm oil heavily dependent on exports of rubber in the 1950s and 1960s malaysia has since built a more diversified economy with strong emphasis on manufacturing export agriculture however is still an important component of the national economy the second objective examines the influence of domestic policy on agricultural development the simulation results demonstrate the growing resiliency of the malaysian economy to external shocks also they point to the domestic economy s ability to buffer internal policy induced distortions

the interactions between fiscal policy and monetary policy this paper studies the interactions of fiscal policy and monetary policy when they stabilize a single economy against shocks in a dynamic setting if both policy makers are benevolent then in our model the best outcome is achieved when monetary policy does nearly all of the stabilization if the monetary authorities are benevolent but the fiscal authority discounts the future or aims for an excessive level of output then a nash equilibrium will result in large welfare losses after an inflation shock there will be excessively tight monetary policy excessive fiscal expansion and a rapid accumulation of public debt however if in these circumstances there is a regime of fiscal leadership then the outcome will be very nearly as good as when both policy makers are benevolent

exogenous shocks contagion and bank soundness a macroeconomic framework abstract in a model where all banks are initially solvent an exogenous shock affects confidence causing a flight from deposits into domestic and foreign currency real interest rates increase unexpectedly affecting firms and raising the share of the banks nonperforming assets this contagion causes a bank run simulations show that compensatory monetary policy mitigates the bank run but causes macroeconomic imbalances combining compensatory monetary policy with tight fiscal policies slows the bank run and mitigates insolvency a devaluation combined with compensatory monetary policy reduces insolvencies and increases the growth of real income but at the cost of increased inflation

the parallel market of illegal aliens a computational approach abstract this paper develops the notion of illegal aliens as a parallel market in coexistence with the regular market of legal labor in the presence of both price controls on legal labor by minimum wage legislation and quantity controls on illegal aliens by immigration laws illegal aliens involve not only rural urban migration but also tax evasion and deportation costs we develop an analytical equilibrium structure which links markets for legal labor and illegal aliens illustrate how much an equilibrium can be computed and explore some implications of the linkage using united states data

a unified theory of the behaviour of profit maximising labour managed and joint stock firms operating under uncertainty a comment in a recent paper of this journal hey i98i addressed the problem of a unified theory which treats three types of firms a profit maximising firm henceforth pmf a labour managed firm henceforth lmf and a joint stock firm henceforth jsf by one framework on the basis of his unified theory he concluded that with respect to the behaviour of the lmf and the jsf the results can be deduced from those of the pmf the purpose of this comment is to point out that his argument in the long run about the behaviour of these three firms does not hold if their production functions are homogeneous we use the same notation as hey to begin with the objective functions of the pmf the lmf and the jsf under certainty are defined respectively as follows

applied general equilibrium models for energy studies a survey the importance of energy in any economy developed or underdeveloped became clear after the first oil shock in 1973 since then different studies were carried out to formulate energy policies and to study their impact on the economies since energy policy issues are related to various aspects of the economy such as price formation output determination income generation and distribution consumption behaviour government operation etc a coherent and systematic mechanism is required for such analysis by offering such a framework of analysis age models gained popularity among energy modellers in the 1980s the environmental issues have gained importance and the focus shifted towards curbing and containing emissions of environmentally unfriendly gases resulting from the use of energy age models because of their capability to capture the complexities of the economy have found relevance in analysing the economic impacts of controlling pollution and greenhouse gases this paper surveys the literature on such general equilibrium models as applied to energy studies and reports their special features evolution through time as well as their limitations

external sector closing rules in applied general equilibrium models abstract this paper examines formulations of external sector behavior adopted in some of the recent applied general equilibrium models in many cases these models are constructed for single economies and the model builder attempts to use a convenient external sector specification to close the model issues and difficulties with export demand and import supply functions for foreigners which satisfy trade balance and the modeling of small economy price taking behavior are explored

the displacement and multiplier effects of regional selective assistance a computable general equilibrium analysis this paper uses a hybrid approach to simulate the effects of regional selective assistance rsa for scotland this combines industrial survey estimation of the direct impacts and computable general equilibrium cge modelling of the system wide effects the results are compared to those derived using the method currently adopted in official evaluation studies of rsa and other regional regeneration policy instruments the cge approach captures capacity labour market displacement and migration effects ignored in existing studies simulation identifies the conditions under which these effects are likely to be quantitatively important a partir d une facon hybride cet article cherche a simuler pour l ecosse l impact des primes regionales une estimation des effets directs a partir d une enquete aupres de l industrie se voit allier a la modelisation des effets generalises par une analyse d equilibre general sur ordinateur on compare les resultats a ceux qui proviennent des methodes employees actuellement

monetary and fiscal policy in the great moderation and the great recession in this paper we argue for a new approach to monetary and fiscal policy during the great moderation the inflation targeting regime worked well central banks used the interest rate to stabilize inflation and subject to inflation being controlled stabilized the level of demand fiscal policy exerted discipline over the public sector deficits thereby indirectly managing the level of public debt such fiscal housekeeping worked well because the monetary authorities were stabilizing the economy but once private sector deleveraging led to the great recession and interest rates hit their zero bound the outcome could no longer be managed by monetary policy recovery depended on the automatic stabilizers output and tax revenues have fallen public debt has been created and assets have been created which a deleveraging private sector wishes to hold but the effect has been very gradual recovery would have been faster if fiscal policy had been responsible for the restoration of full employment in an environment which tolerated the necessary rises in public debt conversely policies of austerity designed to reduce public debt have slowed the recovery growth will not be resumed until the private sector begins to invest strongly again creating the financial assets which the private sector wishes to hold thereby enabling public debt to be retired this has not yet happened because the private sector correctly does not believe that macroeconomic policy is capable of sustaining a strong recovery

bank failures and fiscal austerity policy prescriptions for a developing country abstract this work employs a dynamic general equilibrium model to evaluate the causes and implications of bank insolvencies we apply the model to stylized data from bangladesh a country whose banking system is currently suffering from large stocks of non performing assets the model is used to derive positive conclusions about alternative policy instruments designed to alleviate the impact of these insolvencies a benchmark case is simulated using historical exogenous parameters we then generate a bank failure by assuming that firms cannot service their debt if their interest obligations rise above their anticipated return on capital the public withdraws deposits from the banking system in reaction to worries about defaulting bank assets if banks optimize by restricting credit to risky borrowers these failures can be partially avoided such bank behavior is often prohibited in developing countries so we investigate an active monetary policy that compensates banks for withdrawn deposits the resulting outcome indicates that such a policy can slow the pace of bank failures although at the cost of certain macro imbalances our final simulation imposes a reduction in public spending in order to tighten fiscal policy and thereby reduce budgetary pressure the resulting decline in interest rates eliminates all investor defaults and bank failures we conclude that the combination of compensating monetary policy and restrictive fiscal policy may offer the best way of responding to a bank crisis

trade preferences for developing countries a survey of results empirical studies of the trade and development effects of the major preferential trading schemes between the industrialised countries and the developing countries are surveyed most studies find the agreements to be trade creating improving welfare for the donor though general equilibrium analysis indicates that terms of trade deterioration offsets efficiency gains there is some evidence that trade preferences stimulate ldc exports of preferred products but total exports are not significantly affected due to limited product coverage the existing literature does not provide evidence on the degree of infant industry protection or on economic diversification of the beneficiaries

the interface between environmental and trade policies last march i gave the frank paish lecture to the society under the title economic life in a greenhouse in my lecture i tried both to survey professional opinion as to some of the possible climatic implications of the greenhouse effect and also to draw out the economic consequences which might follow towards the end of my talk i made reference to some preliminary joint work with randy wigle 2 a colleague at wilfrid laurier university in canada on the global consequences of carbon tax schemes designed to limit and or reduce the build up of co2 emissions a key element underlying the greenhouse effect the written version of the lecture consciously does not reproduce the survey material which made up the first part of the lecture instead it elaborates on the issues raised towards the end it incorporates the work by randy wigle and myself and offers some thoughts on what seems to be a growing issue for the iggos namely the consequences for the international trading system of interactions between trade issues and both future global and current national environmental policies what follows emphasises that if they occur in the next few decades global policy responses3 carbon taxes tradeable permit schemes to environmental concerns will almost certainly have large economic effects among these are likely to be significant effects on trade patterns and trade volumes large interregional effects will also accompany such policies depending upon how such policies are implemented also the i99os may see a growing use of trade measures to achieve objectives set for environmental policies environmental policies towards such countries as brazil the philippines and others where deforestation is a concern may increasingly take the form of threatened trade sanctions unless compliance with global environmental policy objectives occurs 4

innovation and imitation in an information age we study the behavior of imitation and innovation in a dynamic general equilibrium model that captures the salient features of an information age we study a world where innovations can be made but at a cost that reflects the type of goods after innovation takes place imitation is possible but again at some cost which reflects the nature of the good we show that the behavior of innovation and imitation are very different for high information content goods and low information content goods and this has important implications for the structure and evolution of industry jel o31 l16

taxing tourism and subsidizing non tourism a welfare enhancing solution to dutch disease abstract using a combined analysis of a general equilibrium and a partial equilibrium this study models the impacts of a combined policy tool based on taxing tourism and subsidizing non tourism in a tourism dependent destination the results suggest that such a policy tool while widely discussed in economics literature may not be suitable for a tourism destination as it might have adverse effects on local welfare