time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

retail payments new contributions empirical results and unanswered questions abstract we offer a selected survey of retail payments and suggest areas where additional research would prove useful after summarizing eight papers presented at a recent norges bank central bank of norway payment conference and published in this volume we show how they and many of the other papers presented there have contributed to the payments literature we also illustrate how institutional and other differences across countries led to different payment arrangements historically which now due to technological innovation affecting bank costs have made payment arrangements across countries more homogeneous

managing currency pegs the combination of a fixed exchange rate and downward nominal wage rigidity creates a real rigidity in turn this real rigidity makes the economy prone to involuntary unemployment during external crises this paper presents a graphical analysis of alternative policy strategies aimed at mitigating this source of inefficiency first and second best monetary and fiscal solutions are analyzed second best solutions are prudential whereas first best solutions are not

reforms and the real exchange rate the role of pricing to market abstract the paper investigates how endogenous markups affect the extent to which policy reforms can influence international competitiveness in a two country model where trade costs allow for international market segmentation we show that endogenous pricing to market behavior of firms acts as an important transmission channel of the policies by strengthening the degree of competition between firms product market deregulation at home leads to a reduction in domestic markups which generally leads to an improvement in the international competitiveness of the home country conversely the power of competitive tax policy to depreciate the real exchange rate is dampened as domestic firms take the opportunity of the labor tax cut to increase their markups the variability of markups also affects the normative implications of the reforms this indicates the importance of taking into account endogenous pricing to market behavior when intending to correctly evaluate the overall effects of the reforms

the return of the wage phillips curve the standard new keynesian model with staggered wage setting is shown to imply a simple dynamic relation between wage inflation and unemployment under some assumptions that relation takes a form similar to that found in empirical applications starting with the original phillips 1958 curve and may thus be viewed as providing some theoretical foundations to the latter the structural wage equation derived here is shown to account reasonably well for the comovement of wage inflation and the unemployment rate in the u s economy even under the strong assumption of a constant natural rate of unemployment

the economics of two sided markets at a local best buy a child places a new sony playstation 3 on the cashier s counter while the parents dig out their visa card the gaming system and the payment card may appear to have little connection other than this purchase however these two items share an important characteristic that is generating a series of economic insights and has important implications for strategic decision making and economic policymaking both video game systems and payment cards are examples of two sided markets broadly speaking a two sided market is one in which 1 two sets of agents interact through an intermediary or platform and 2 the decisions of each set of agents affects the outcomes of the other set of agents typically through an externality in the case of a video game system the intermediary is the console producer sony in the scenario above while the two sets of agents are consumers and video game developers neither consumers nor game developers will be interested in the playstation if the other party is not similarly a successful payment card requires both consumer usage and merchant acceptance where both consumers and merchants value each others participation many more products fit into this paradigm such as search engines newspapers and almost any advertisersupported media examples in which consumers often negatively value rather than positively value the participation of the other side as well as most software or title based operating systems and consumer electronics malls which seek retailers and consumers convention organizers which seek buyers and sellers dating services which seek men and women and the journal of economic perspectives which seeks content and readership all experience the economics of two sided markets the multi sided nature of many internet and high technology markets as well as

excessive volatility in capital flows a pigouvian taxation approach this paper analyzes prudential controls on capital flows to emerging markets from the perspective of a pigouvian tax that addresses externalities associated with the deleveraging cycle it presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts this mitigates the feedback effects of deleveraging episodes when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects in our model capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare

debt deleveraging and the liquidity trap a fisher minsky koo approach in this paper we present a simple new keynesian style model of debt driven slumps that is situations in which an overhang of debt on the part of some agents who are forced into rapid deleveraging is depressing aggregate demand making some agents debt constrained is a surprisingly powerful assumption fisherian debt deflation the possibility of a liquidity trap the paradox of thrift a keynesiantype multiplier and a rationale for expansionary fiscal policy all emerge naturally from the model we argue that this approach sheds considerable light both on current economic difficulties and on historical episodes including japan s lost decade now in its 18th year and the great depression itself

the stability pact more than a minor nuisance stability pact more than a minor nuisance the stability and growth pact will lead member countries to aim for cyclically balanced budgets until this steady state is reached europe will continue its efforts at de cit cutting while so doing politicians are less likely to undertake the dif cult labour market reforms that are really needed is further scal retrenchment wise the paper reviews the reasons that have been advanced in favour of a stability pact and nds them wanting the most serious justi cations such as the systemic risk of bank crisis following a government s failure to service its debt can be better dealt with in other ways for example by prudential limits on banks exposure to public debts moreover our analysis reveals that the macroeconomic costs of the stability pact while sizeable are not as dangerous as often believed the costs will be barely visible once the steady state is reached the true macroeconomic costs are front loaded they concern the next few years after a decade already dominated by convergence efforts barry eichengreen and charles wyplosz

multiperiod loans occasionally binding constraints and monetary policy a quantitative evaluation we study the implications of multiperiod mortgage loans for monetary policy considering several realistic modifications fixed interest rate contracts a lower bound constraint on newly granted loans and the possibility of the collateral constraint to become slack to an otherwise standard dsge model with housing and financial intermediaries we estimate the model in its nonlinear form and argue that all these features are important to understand the evolution of mortgage debt during the recent us housing market boom and bust we show how the nonlinearities associated with the two constraints make the transmission of monetary policy dependent on the housing cycle with weaker effects observed when house prices are high or start falling sharply we also find that higher average loan duration makes monetary policy less effective and may lead to asymmetric responses to positive and negative monetary shocks

de facto political power and institutional persistence much of the empirical work and the conceptual discussion of the impact of institutions on economic development either implicitly or explicitly assumes that institutions persist although acemoglu et al 2001 provide evidence that constraints on the executive persist many aspects of institutions change frequently less developed countries cycle between democracy and dictatorship and often change their constitutions relatedly while the current economic problems in latin america are often traced back to colonial times stanley l engerman and kenneth l sokoloff 1997 acemoglu et al 2002 the specific institutions that once underpinned the colonial economy such as the encomienda the mita or slavery vanished long ago these observations suggest that we need to develop a framework in which changes in certain dimensions of institutions are consistent with overall institutional persistence in this paper we make an attempt to highlight some important mechanisms for understanding simultaneous change and persistence in institutions institutional persistence in this context refers to the persistence of a cluster of economic institutions such as the extent of enforcement of property rights for a broad cross section of society acemoglu et al 2001 such lack of property rights enforcement may be driven by quite different specific institutions e g risk of expropriation entry barriers or economic systems such as serfdom or slavery in turn these different specific economic institutions may exist under different political institutions including dictatorships absolutist monarchies oligarchies and corrupt or even populist democracies given this rich array of possibilities a useful framework must specify which aspects of institutions can change which others have a tendency to persist in equilibrium and how the persistence of certain types of institutions could have lasting effects on economic outcomes in this paper we provide a simple model of the coexistence of change and persistence in institutions first we describe some existing approaches to the persistence of social arrangements as well as the essence of the mechanism we propose next we illustrate the key issues using the experience of the southern united states and last we provide a simple model that formalizes the main mechanism in the paper we conclude by discussing a complementary mechanism to the one presented in this paper

budgetary policy and unemployment dynamics in an olg model with collective bargaining we consider a dynamic general equilibrium model with capital accumulation and collective wage bargaining and investigate how unemployment responds to structural shocks under two stylised budgetary policies under balanced budgets tax adjustments lead to higher unemployment on impact but enable a quick recovery of employment by contrast unbalanced budgets mitigate unemployment effects on impact but dynamics are more persistent due to weaker capital accumulation and future fiscal consolidations these results are consistent with empirical evidence on a positive cross country relationship between government borrowing and unemployment persistence this paper starts out from the well known fact that many european countries have suffered from persistently high unemployment over the past two decades there is a large literature which attempts to explain this development as resulting from a combination of structural shocks and mechanisms which make the effects of any such shifts more persistent one prominent branch of this literature stresses that adverse structural shocks tend to induce a slowdown in capital accumulation which reinforces the employment losses and adds to unemployment persistence bean 1989 benassy 1997 blanchard 1997 burda 1988 caballero and hammour 1998 daveri and tabellini 2000 similarly these studies point out that when the shock is over the recovery of employment depends critically on the speed with which investments in capital respond to the new situation the purpose of this paper is to reconsider this capital shortage hypothesis by linking it explicitly to the stance of fiscal policy to see the importance of fiscal policy in this context consider a government which faces an adverse structural shock such as a drop in employment due to a wage setting shock and decides whether it should keep its budget balanced or not this decision will affect the overall structure of assets in the economy i e the mix between capital and government bonds and this mix will in turn be an important determinant of the speed with which the economy can create employment once the shock is over in particular according to the capital shortage hypothesis the recovery in terms of employment is likely to take longer under a policy which temporarily accepts structural budget deficits particularly when crowding out effects have been substantial

consumer switching costs and firm pricing evidence from bank pricing of deposit accounts we employ extensive information on bank deposit rates and area migration patterns to examine pricing relationships implied by switching costs we argue that because of the trade off between attracting new customers and exploiting old ones banks offer higher deposit rates in areas experiencing more in migration further because greater out migration implies that a locked in customer will not be with the bank for as many periods banks will offer lower deposit rates in areas exhibiting greater out migration also because this effect of out migration logically depends on the extent of in migration an interaction effect exists we find evidence strongly supporting these relationships

political credit cycles the case of the euro zone we study the mechanisms through which the adoption of the euro delayed rather than advanced economic reforms in the euro zone periphery and led to the deterioration of important institutions in these countries we show that the abandonment of the reform process and the institutional deterioration in turn not only reduced their growth prospects but also fed back into financial conditions prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident we analyze empirically the interrelation between the financial boom and the reform process in greece spain ireland and portugal and by way of contrast in germany a country that did experience a reform process after the creation of the euro

financial liberalization and reversals political and economic determinants what accounts for the dynamics of financial reforms this paper identifies the political regime as one of the main factors focusing on democratization and financial reform it puts forward novel evidence for a u shaped relation across countries and over time for different reform measures and a wide range of estimators partial democracy is a main obstacle to financial reforms and democratization when incomplete may lead to severe financial reform reversals nauro f campos and fabrizio coricelli

capital goods measured tfp and growth the case of spain the effect of investing in equipment and or structures on tfp and long run growth is investigated here we argue that economies can grow in spite of stagnant tfp if the investment rate is inefficiently high we study the case of spain where real gdp per worker grew at 2 74 percent annually and tfp was stagnant during 1996 2007 we show that low spanish tfp is due to low istc and an inefficiently high investment in residential structures we quantify the effect of the housing boom of the 2000s the total cost of subsidies to residential structures in terms of tfp and income growth

shared atm networks and banking competition abstract in this paper we study the incentives of banks to share their automatic teller machines atms when they are competitors in the market for deposits we construct a stylized model of banking competition which emphasises the distinctive features of atm compatibility we find that in equilibrium either a strict subset of banks share their atms or total incompatibility prevails we also derive the implications for atm compatibility of withdrawal fees interchange bank fees entry and depositor switching costs finally we investigate the normative implications of our model and draw some policy conclusions

financial development financial fragility and growth the authors study the apparent contradiction between two strands of the literature on the effects of financial intermediation on economic activity on the one hand the empirical growth literature finds a positive effect of financial depth as measured by for instance private domestic credit and liquid liabilities for example levine loayza and beck 2000 on the other hand the banking and currency crisis literature finds that monetary aggregates such as domestic credit are among the best predictors of crises and their related economic downturns for example kaminski and reinhart 1999 the authors account for these contrasting effects based on the distinction between the short and long run impacts of financial intermediation working with a panel of cross country and time series observations they estimate an encompassing model of short and long run effects using the pooled mean group estimator developed by pesaran shin and smith 1999 their conclusion from this analysis is that a positive long run relationship between financial intermediation and output growth coexists with a mostly negative short run relationship the authors further develop an explanation for these contrasting effects by relating them to recent theoretical models by linking the estimated short run effects to measures of financial fragility namely banking crises and financial volatility and by jointly analyzing the effects of financial depth and fragility in classic panel growth regressions

how does incompatibility affect prices evidence from atm s if consumers value mix and match combinations of network complements incompatibility between different sellers components should affect prices in atm markets a 1996 governance change exogenously generated such incompatibility by allowing banks to impose surcharges when other banks deposit customers use their atm s in our data incompatibility makes the relationship between deposit account pricing and own atm s more positive and makes the relationship between deposit account pricing and competitors atm s more negative the level effect on prices is positive the pattern of results is more pronounced in high population density markets where customers may care more about atm s

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

occbin a toolkit for solving dynamic models with occasionally binding constraints easily abstract the toolkit adapts a first order perturbation approach and applies it in a piecewise fashion to solve dynamic models with occasionally binding constraints our examples include a real business cycle model with a constraint on the level of investment and a new keynesian model subject to the zero lower bound on nominal interest rates compared with a high quality numerical solution the piecewise linear perturbation method can adequately capture key properties of the models we consider a key advantage of the piecewise linear perturbation method is its applicability to models with a large number of state variables

investment and usage of new technologies evidence from a shared atm network when new technologies become available it is not only essential that firms have the correct investment incentives but often also that consumers make the proper usage decisions this paper studies investment and usage in a shared atm network be cause all banks coordinate their atm investment decisions there is no strategic but only a pure cost saving incentive to invest at the same time because retail fees for cash withdrawals are regulated to zero at both branches and atms consumers may not have the proper incentives to substitute their transactions from branches to the available atms we develop an empirical model of coordinated investment and cash withdrawal demand where banks choose the number of atms and consumers decide whether to withdraw cash at atms or branches we find that banks substantially underinvested in the shared atm network and thus provided too little geographic coverage this contrasts with earlier findings of strategic overinvestment in networks with partial incompatibility furthermore we find that consumer usage of the avail able atm network is too low because of the zero retail fees for cash withdrawals at branches a direct promotion of investment through subsidies or other means can improve welfare but the introduction of retail fees on cash withdrawals at branches would be more effective even if this does not encourage investment per se

income distribution and macroeconomics this paper analyzes the role of wealth distribution in macroeconomics through investment in human capital it is shown that in the presence of credit markets imperfections and indivisibilities in investment in human capital the initial distribution of wealth affects aggregate output and investment both in the short and in the long run as there are multiple steady states this paper therefore provides an additional explanation for the persistent differences in per capita output across countries furthermore the paper shows that cross country differences in macroeconomic adjustment to aggregate shocks can be attributed among other factors to differences in wealth and income distribution across countries

capital controls spillovers abstract i set up a three country business cycle model with one advanced ae and two emerging economies emes to analyze the spillover effects arising from capital controls following a push factor shock from the ae if one eme tightens capital controls the other eme experiences an additional wave of foreign investments which amplify the macroeconomic boom the spillovers effects are welfare improving for the other eme which can borrow at a lower interest rate moderate capital controls may be useful to emes to affect the interest rate at which they trade international bonds coordination among emes in setting capital controls delivers relatively small welfare gains compared with the nash equilibrium

identifying asymmetric effects of labor market reforms abstract this paper proposes a novel approach to identify structural long term driving forces of the labor market and their short run state dependent effects based on search and matching theory our empirical model extracts these driving forces within an unobserved components approach we relate changes in the labor market structures to reforms that enhance the flexibility of the labor market in expansion and recession results for germany and spain show that labor market reforms have substantially weaker beneficial effects in the short run when implemented in recessions from a policy perspective these results highlight the costs of introducing reforms in recessions

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

time consistent redistribution if the government cares more about workers than about capitalists and taxes capital income to finance redistribution to workers how are inequality and capital accumulation affected in the long run assuming that the government cannot commit to future taxes a time consistent equilibrium a differentiable subgame perfect markov equilibrium is characterized in this equilibrium the current government in part uses the tax via capital accumulation to manipulate future governments into setting lower taxes the equilibrium has substantially lower taxes on capital income than 100 even though workers do not save and even though the weight on capitalists in government utility is negligible

atm foreign fees and cash withdrawals abstract we evaluate the impact of foreign fees paid by consumers on their cash withdrawals at automatic teller machines henceforth atms these so called foreign fees are paid when consumers withdraw cash from atms which are not owned by their home bank we take advantage of a natural experiment whereby non linear foreign atm fees in one specific bank became suddenly applicable at one point in time we also use this experiment to evaluate the substitutions between foreign atm withdrawals and other home atm or desk withdrawals as well as with payments by card using panel data on accounts we first estimate average treatment effects on the treated before carrying on with the estimation of a simple structural model the latter procedure allows us to compute the counterfactual impacts of changing the schedule of foreign fees impacts are sizeable on bank profits and consumer welfare

the effect of local competition on admission prices in the u s motion picture exhibition market abstract this paper provides empirical evidence on the relationship between local market structure and the prices charged to consumers in the u s motion picture exhibition market i find that there is a statistically significant relationship between the geographic distribution of movie theaters in a market and the admission prices that they are able to charge however the magnitude of the price reducing effect of local competition appears to be economically modest moreover i find no evidence that increases in geographic concentration lead to increased adult admission prices the findings are directly relevant to merger policy in the industry and pertinent because of the dramatic changes in industry structure resulting from mergers that occurred during 2002 i conclude that the available evidence suggests that popular and governmental concerns about horizontal mergers in the industry leading to dramatically increased admission prices are likely misplaced

cross selling switching costs and imperfect competition in british banks this paper attempts to evaluate the competitiveness of british banking in the presence of cross selling and switching costs during 1993 2008 it presents estimates of a model of banking behaviour that encompasses switching costs as well as cross selling of loans and off balance sheet transactions the evidence from panel estimation of the model indicates that the consumer faced high switching costs in the loan market in the latter part of the sample period as a result of weaker competitiveness in the loan market additionally the weaker competitiveness in the loan market appears to facilitate the cross selling behaviour of british banks which helps explain the rapid growth of non interest income during the last two decades

structural reforms in a debt overhang we assess the eects of reforms in product and labor markets in an econ omy where credit restrictions and long term debt combine to produce a persis tent recession with slow deleveraging following a negative nancial shock we show that reforms that reduce markups in product markets stimulate output and employment even in the short run despite their de ationary eects by favouring a faster recovery of investment and collateral values product mar ket reforms bring forward the end of the deleveraging phase this last eect is missing in the case of labor market reforms the short run eects of which are sensitive to the response of trade ows and to debt maturity

on the reversibility of structural reforms abstract what are the factors that explain reversals in the implementation of structural reforms our main hypothesis is that reversals in different reforms are driven by different factors this paper presents novel evidence showing that a fdi inflows reduce the likelihood of privatization reversals b worsened terms of trade increase the probability of external liberalization reversals and c labor strikes propel reversals in price liberalization

strategic incompatibility in atm markets abstract we test whether firms use incompatibility strategically using data from atm markets high atm fees degrade the value of competitors deposit accounts and can in principle serve as a mechanism for siphoning depositors away from competitors or for creating deposit account differentiation our empirical framework can empirically distinguish surcharging motivated by this strategic concern from surcharging that simply maximizes atm profit considered as a stand alone operation the results are consistent with such behavior by large banks but not by small banks for large banks the effect of incompatibility seems to operate through higher deposit account fees rather than increased deposit account base

house prices borrowing constraints and monetary policy in the business cycle i develop a general equilibrium model with sticky prices credit constraints nominal loans and asset prices changes in asset prices modify agents borrowing capacity through collateral value changes in nominal prices affect real repayments through debt deflation monetary policy shocks move asset and nominal prices in the same direction and are amplified and propagated over time the financial accelerator is not constant across shocks nominal debt stabilises supply shocks making the economy less volatile when the central bank controls the interest rate i discuss the role of equity debt indexation and household and firm leverage in the propagation mechanism finally i find that monetary policy should not target asset prices as a means of reducing output and inflation volatility

to surcharge or not to surcharge an empirical investigation of atm pricing this paper investigates depository institutions decisions whether or not to impose surcharges direct usage fees on nondepositors who use their atms in addition to documenting patterns of surcharging we examine motives for surcharging including both direct generation of fee revenue and the potential to attract deposit customers who wish to avoid incurring surcharges at an institution s atms consistent with expectations we find that the probability of surcharging increases with both the institution s share of market atms and the time since surcharging was first allowed in the state and decreases with increasing local atm density further we find evidence consistent with the use of surcharges to attract deposit customers who are new to the local banking market but we find no evidence that larger banks use surcharges as a means to attract existing customers away from smaller local competitors

macroeconomic effects of regulation and deregulation in goods and labor markets product and labor market deregulation reduce and redistribute rents leading economic players to adjust to this new distribution it typically comes with distribution and dynamic effects to study these effects we build a macroeconomic model on two central assumptions monopolistic competition in the goods market which determines the size of rents and bargaining in the labor market which determines the distribution of rents product market regulation determines entry costs and the degree of competition labor market regulation determines the bargaining power of workers we show the effects of deregulation we then use our results to discuss the political economy of deregulation and recent macroeconomic evolutions in europe

debt deleveraging and the exchange rate abstract deleveraging from high debt can provoke deep recession with significant international side effects swings in the nominal exchange rate and large variations in consumption output and terms of trade can happen during the adjustment all these movements are inefficient and interesting trade offs emerge from the perspective of global welfare the optimal adjustment to global imbalances should not necessarily require large movements in the nominal exchange rate a global liquidity trap can be desirable when countries are more open to trade

the benefit of crises for economic reforms when expenditures consistently outrun revenue the resulting inflation may have the effect of convincing the public and government that taxes must be raised to finance public investment in the advanced industrial countries income taxation and big spurts in taxation generally have become possible only under the impact of major emergency and crisis mostly in wartime in a number of developing countries in

the impact of employment tax cuts on unemployment and wages the role of unemployment benefits and tax structure abstract i model and simulate the effects of employment tax cuts on unemployment and wages in four equilibrium models competitive union bargaining search and efficiency wages i find that if the ratio of unemployment compensation to wages is fixed the effect of the tax cut is mainly on wages but if income out of work is fixed in real terms there are substantial employment effects when wages are determined by bargaining revenueneutral reforms that make the tax more progressive also reduce unemployment thus policy towards unemployment compensation and tax structure are key influences on the effect of taxes on unemployment

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

leaning against the credit cycle how should a central bank act to stabilize the ratio of debt over gross domestic product gdp we show how the persistent nature of household debt shapes the answer to this question in environments where households repay mortgages gradually surprise interest hikes only weakly influence household debt and tend to increase debt to gdp in the short run while reducing it in the medium run interest rate rules with a positive weight on debt to gdp cause indeterminacy compared to inflation targeting debt to gdp stabilization calls for a more expansionary policy when debt to gdp is high so as to deflate the debt burden through inflation and output growth

persistence of power elites and institutions we construct a model to study the implications of changes in political insti tutions for economic institutions a change in political institutions alters the distribution of de jure political power but creates incentives for investments in de facto political power to partially or even fully offset change in de jure power the model can imply a pattern of captured democracy whereby a democratic regime may survive but choose economic institutions favoring an elite the model provides conditions under which economic or policy outcomes will be invariant to changes in political institutions and economic institutions them selves will persist over time jel d02 d72 the domination of an organized minority over the unor ganized majority is inevitable the power of any minority is irresistible as against each single individual in the majority who stands alone before the totality of the organized minor ity at the same time the minority is organized for the very reason that it is a minority

understanding the gains from wage flexibility the exchange rate connection we study the gains from increased wage exibility and their dependence on exchange rate policy using a small open economy model with staggered price and wage setting two results stand out i the impact of wage adjustments on employment is smaller the more the central bank seeks to stabilize the exchange rate and ii an increase in wage exibility often reduces welfare and more likely so in economies under an exchange rate peg or an exchange rate focused monetary policy our ndings call into question the common view that wage exibility is particularly desirable in a currency union

capital controls and monetary policy autonomy in a small open economy abstract is there a link between capital controls and monetary policy autonomy in a country with a floating currency shocks to capital flows into a small open economy lead to volatility in asset prices and credit supply to lessen the impact of capital flows on financial instability a central bank finds it optimal to use the domestic interest rate to manage the capital account capital account restrictions affect the behavior of optimal monetary policy following shocks to the foreign interest rate capital controls allow optimal monetary policy to focus less on the foreign interest rate and more on domestic variables

oligarchic versus democratic societies this paper develops a model to analyze economic performance under different political regimes an oligarchic society where political power is in the hands of major producers protects their property rights but also tends to erect significant entry barriers against new entrepreneurs democracy where political power is more widely diffused imposes redistributive taxes on producers but tends to avoid entry barriers when taxes in democracy are high and the distortions caused by entry barriers are low an oligarchic society achieves greater efficiency because comparative advantage in entrepreneurship shifts away from the incumbents the inefficiency created by entry barriers in oligarchy deteriorates over time the typical pattern is one of rise and decline of oligarchic societies an oligarchic society may first become richer but later fall behind a similar democratic society i also discuss how democracies may be better able to take advantage of new technologies how within elite conflict in oligarchies might cause a transition to democracy and how the unequal distribution of income may keep inefficient oligarchic institutions in place jel p16 o10

the design of reform packages under uncertainty the authors present a model of large scale economic reforms modeled on the transition process in eastern europe with aggregate and individual uncertainty concerning the outcome of reforms the government is assumed to choose the speed and sequencing of reforms the authors compare big bang strategies with gradualist reform packages they show that gradualist reform packages may be easier to get started optimal sequencing of reforms should aim at creating constituencies for further reforms and gradualism may generate a higher investment response because of a lower option value of waiting than would a big bang approach copyright 1995 by american economic association

wage dynamics reconciling theory and evidence u s macroeconomic evidence shows a negative relation between the rate of change of wages and unemployment in contrast most theories of wage determination imply a negative relation between the level of wages and unemployment in this paper we ask whether one can reconcile the empirical evidence with theoretical wage relations we reach three main conclusions first we derive the condition under which the two can indeed be reconciled we show the constraints that such a condition imposes on the determinants of workers reservation wages as well as the relative importance of workers outside options as opposed to match specific productivity in wage determination second in the light of this condition we reinterpret the presence of an error correction term in macroeconomic wage relations for most european economies but not in the united states third we show that whether this condition holds or not has important implications for the effects of a number of variables from real interest rates to oil prices to payroll taxes on the natural rate of unemployment this abstract was borrowed from another version of this item

tax reforms under market distortions in product and labour markets using a two agent model comprised of capitalists and workers this paper examines the importance of imperfect competition in product and labour markets in determining the welfare effects of tax reform the reform considered consists of eliminating the capital tax alongside a concurrent rise in the labour tax in contrast to the perfectly competitive model models with product or labour market failures each result in welfare losses for the workers in the long run in a realistic calibration to the uk economy combining these imperfections implies that this tax reform will be pareto improving in the long run however these welfare gains over longer time horizons come at the cost of short run losses which consistent with previous research result in welfare losses for workers post reform

monetary policy surprises and interest rates evidence from the fed funds futures market abstract this paper estimates the impact of monetary policy actions on bill note and bond yields using data from the futures market for federal funds to separate changes in the target funds rate into anticipated and unanticipated components interest rates response to anticipated target rate changes is small while their response to unanticipated changes is large and highly significant these responses are generally consistent with the expectations hypothesis of the term structure surprise target rate changes have little effect on expectations of future actions however which helps to explain the lack of empirical support for the expectations hypothesis at the short end of the yield curve

atm surcharges effects on deployment and welfare this paper analyzes the effects of atm surcharges on deployment and welfare in a model where banks compete for atm and banking services foreign fees surcharges and the interchange fee are endogenously determined we find situations in which surcharges are welfare enhancing under strategic fee setting the increase in deployment caused by surcharging might compensate the surplus loss caused by the increase in prices

the fiscal roots of financial underdevelopment why do some countries indulge in financial repression harming economic development in the process whereas others promote financial development three main explanations have been put forth market failures due to information asymmetries mean that credit is rationed even when lenders could potentially benefit from making loans readily available political failures due to state capture mean that credit will be rationed as a way of generating rents for politically powerful financial incumbents the state might however have its own fiscal reasons for politicizing the supply and price of credit since financial repression provides easy to collect revenues i draw on the third approach to argue that the state s fiscal imperative is usually the primary reason behind financial repression and even when private actors benefit they are subordinate to this concern a dynamic panel analysis that exploits instrumental variables and a case study of mexico adduce strong empirical support for my fiscal transaction cost theory

the impact of ecb policy on structural reforms abstract we estimate the impact of monetary policy on structural reform adoption in the euro area we identify exogenous ecb policy changes through an event study that extracts the unexpected variation in euro area interest rates on policy announcement days we find that surprise monetary expansions increase the number of reforms significantly and that the effect is stronger for countries with weaker macroeconomic fundamentals or tighter public budget constraints these findings are consistent with the hypothesis that expansionary monetary policy by attenuating the short run costs of reforms and increasing governments financial leeway spurs competition friendly supply side policy

exploiting old customers and attracting new ones the case of bank deposit pricing abstract recent theoretical contributions suggest that deposit interest rates should be higher in geographic areas characterized by greater in migration and lower for depositors at banks with greater shares of existing or so called locked in depositors these hypotheses are tested using a rich data set obtained for the spanish banking industry results confirm that all else equal banks offer higher deposit rates in territories characterized by greater in migration and also that they tend to offer lower rates the larger the number of their locked in depositors these findings confirm the existence of the trade off between exploiting old customers and attracting new ones

optimal trade policy with trade imbalances abstract optimal trade and capital control policies are characterized under a dynamic model with endogenous trade imbalances in the absence of capital controls optimal trade protection is counter cyclical optimal use of capital controls however dampens the time variation of optimal trade taxes generally trade imbalances are not predictive of optimal policy however optimal trade policy and equilibrium trade imbalances move together when a country grows consistently faster or slower than the rest of the world quantifying the model for the u s economy shows that welfare gains from optimal policy are largely due to static terms of trade effects implying that gains from time varying tariffs or capital controls are small

trade unions non binding wage agreements and capital accumulation abstract this paper provides a counterexample to some recent results of grout and others which state that in a bargaining situation without binding wage agreements the capital stock will be biased downwards in a general equilibrium setting this result may be reversed the model is a simple diamond type overlapping generations economy where the young supply labour and the old own both capital and shares in firms in this environment a move from binding to non binding wage contracts may increase the capital stock as will a rise in trade union power finally it is shown that the move to non binding contracts may increase or decrease steady state utility but that the non binding contracts equilibrium is always pareto inefficient

growth in transition what we know what we don t and what we should abstract this essay surveys macroeconomic issues that marked the transition from planned to market economy in central and eastern european and former soviet union countries we first establish stylized facts of the transition so far we then critically survey the theoretical literature on transition discussing explanations for the initial output fall and mediumterm issues such as optimal speed of transition disorganization institutions and sectoral reallocation as source of output dynamics we review the empirical literature to assess how well it translates the theoretical models and explains the stylized facts we conclude with suggestions for future research

monetary policy divergence and net capital flows accounting for endogenous policy responses abstract this paper measures the effect of monetary tightening in key advanced economies on net capital flows around the world measuring this effect is complicated by the fact that the domestic monetary policies of affected economies respond endogenously to the foreign tightening shock using a structural var framework with quarterly panel data we estimate the impulse responses of domestic policy variables and net capital flows to a foreign monetary tightening shock we find that the endogenous response of domestic monetary policy depends on each economy s capital account openness and exchange rate regime we use a method to compute counterfactual impulse responses for net capital outflows under the assumption that the domestic policy rate does not respond to foreign monetary tightening our results suggests that failing to account for the endogenous response of domestic monetary policy biases down the estimated elasticity of net capital flows to foreign interest rates by as much as one third for countries with open capital accounts

financial crises and exchange rate policy this paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and fisherian deation the goal is to evaluate the performance of alternative exchange rate policies in sudden stop prone economies the key element of the analysis is a pecuniary externality arising from frictions in the international credit markets which creates a trade o between price

economic backwardness in political perspective government policies and institutions shape economic incentives and via this channel have a first order impact on economic development why then do many societies adopt policies that discourage investment and maintain institutions that cause economic backwardness perhaps politically powerful groups elites are not in favor of economic growth but why it would appear that economic growth would provide more resources for these groups to take over or tax increasing their economic returns so why don t powerful groups always support economic development in this paper we develop a theory of inefficient government policies and institutions all else equal politically powerful groups would welcome superior institutions and technologies but in practice all else is not equal because superior institutions and technologies may reduce their political power and make it more likely that they will be replaced at the center of our theory is therefore the idea that changes in institutions or the introduction of new technologies often create turbulence eroding the political advantages and future economic rents of incumbent elites alternatively new technologies may enrich competing groups increasing their threat to incumbents these considerations make politically powerful groups fear losing power and oppose economic and political change even when such change will benefit society as a whole to understand the mechanism at work and its potential applications consider a concrete example industrialization in the nineteenth century bairoch 1982 estimates that between 1830 and 1913 world manufacturing output increased by a factor of 5 see table 1 panel a nevertheless this process was highly uneven across regions and countries bairoch also calculates that over the same period manufacturing output in developed countries europe and north america increasedbyafactorofover10 whereasitdeclinedinthe third world among developed countries there were

should capital income be taxed in the steady state this paper provides a new economic interpretation of the well known dynamic optimal taxation principle that capital income should not be taxed in the steady state we show that the result is related to the minimization of distortions at the intratemporal margin when every factor of production can be taxed at the optimal rate capital income should not be taxed in the steady state but when there are restrictions on the taxation of production factors the tax rate on capital income in the steady state is different from zero

supply side reforms and learning dynamics this paper studies the nature the magnitude and the length of the transition after a capital tax cut the transition is analysed with adaptive learning under which agents do not need to adjust instantaneously to the change as with rational expectations re impulse response analysis reveals that the transition with learning is asymmetrically sensitive to the nature of the exogenous technological shock at the time of the reform if the reform coincides with a negative shock the transition to the new steady state is slow whereas if it coincides with a positive shock it is approximately the same as the one predicted by re the results imply that cutting capital income taxes before or during a recession may not be an effective means for short run fiscal stimulus

the concentration conduct relationship in bank deposit markets this study investigates the structure conduct performance relationship in retail deposit markets the study explicitly incorporates conduct as the link between structure and performance in local deposit markets it attempts to determine whether banks typically behave competitively or strategically and whether their conduct is influenced by market concentration the empirical investigation is guided by an equilibrium model of a retail deposit market the model is applied to regression equations for local msa mmda and three and six month cd rates the empirical results indicate that strategic conduct is the norm in mmda and in three and six month cd markets copyright 1991 by mit press

heterogeneity stratification and growth macroeconomic implications of community structure and school finance this paper examines how socioeconomic stratification and alternative systems of education finance affect inequality and growth agents interact through local public goods or externalities school funding neighborhood effects and economywide linkages complementary skills knowledge spillovers sorting families into homogeneous communities often minimizes the costs of existing heterogeneity but mixing reduces heterogeneity faster integration therefore tends to slow down growth in the short run yet raise it in the long run a move to state funding of education presents society with a similar intertemporal trade off local and global complementarities play major roles in determining the efficient social and educational structures copyright 1996 by american economic association

the price concentration relationship in banking the commonly observed positive correlation between market concentration and profitability may be explained by noncompetitive pricing behavior as argued by the structure performance hypothesis or by the greater efficiency of firms with dominant market shares as argued by the efficient structure hypothesis by examining the price concentration relationship instead of the profit concentration relationship this paper tests the structure performance hypothesis in a manner that excludes the efficient structure hypothesis as an alternative explanation of the results the results strongly support the structure performance hypothesis and are robust with respect to model specification measurement of concentration and econometric technique copyright 1989 by mit press

till mortgage do us part mortgage switching costs and household s bank switching abstract we investigate the role of mortgage switching costs in shaping the households decision to change their main bank to this end we use a unique panel dataset that enables us to infer household s bank switching in conjunction with a legal reform that exogenously slashed down the mortgage switching costs the empirical evidence which survives to a variety of robustness checks supports the hypothesis that the explicit switching costs in the retail banking market are a weighty factor in shaping households bank switching despite any potential informational lock in dissecting the results we show that the effects of the reform were not uniform across households the more educated households those with a longer or broader relationship with their previous bank and those residing in ex ante less competitive banking markets were at the forefront of the wave of bank switching