trade policy and income inequality new evidence abstract this paper uses recently available data to investigate the link between income inequality and trade protection it finds that among less developed countries more open economies experienced increased income inequality during the late 1980s trade policy has had no effect on income inequality in developed countries

income distribution political instability and investment abstract this paper successfully tests on a sample of 71 countries for the period 1960 85 the following hypotheses income inequality by fuelling social discontent increases sociopolitical instability the latter by creating uncertainty in the politico economic environment reduces investment as a consequence income inequality and investment are inversely related since investment is a primary engine of growth this paper identifies a channel for an inverse relationship between income inequality and growth we measure socio political instability with indices which capture the occurrence of more or less violent phenomena of political unrest and we test our hypotheses by estimating a two equation model in which the endogenous variables are investment and an index of socio political instability our results are robust to sensitivity analysis on the specification of the model and the measure of political instability and are unchanged when the model is estimated using robust regression techniques

central bank transparency and the volatility of exchange rates abstract we analyze the effect of monetary policy transparency on bilateral exchange rate volatility we test the theoretical predictions of a stylized model using panel data for 62 currencies from 1998 to 2010 we find strong evidence that an increase in the availability of information about monetary policy objectives decreases exchange rate volatility using interaction models we find that this effect is more pronounced for countries with a lower flexibility of goods prices a lower level of central bank conservatism and a higher interest rate sensitivity of money demand

local underemployment and the discouraged worker effect summary the effect of poor local labour market opportunities on occupational achievement is an important aspect of the spatial mismatch hypothesis much of the research has concentrated on the direct link between geographical access to jobs and employment outcomes in contrast little attention has been given to the discouraging effect of poor chances on job search activities the discouraged worker effect is dee ned as the decision to refrain from job search as a result of poor chances on the labour market discouragement effects can arise from a lack of individual qualie cations from discrimination in the labour market or from a high local level of underemployment the empirical e ndings of this paper based on the netherlands labour force surveys 1994 97 show that discouragement can enter the job search process both at the stage of deciding to enter the labour force and at the stage of deciding to engage actively in a job search gender differentials in discouragement are revealed in the process of self selection into the labour force poor labour market chances lead to less activity in both off the job and on the job search indicating a role of discouragement in the spatial mismatch individual qualie cations and ascribed characteristics turn out to be more decisive than the local level of underemployment

u s deficits since world war i the tax smoothing theory suggests that deficits would respond particularly to recession temporarily high government spending and anticipated inflation my empirical estimates indicate that a relation of this type is reasonably stable in the u s since at least 1916 in particular the statistical evidence does not support the idea that there has been a shift toward a fiscal policy that generates either more real public debt on average or that generates larger deficits in response to recessions further the deficits for 1982 3 and popular projections formed in 1984 for 1984 5 are consistent with the previous structure the high values of these deficits reflect the customary response to substantial recession interacting with big government and to expected inflation

government size government debt and globalization this article empirically investigates the effect of globalization on government size and debt using panel heterogeneous cointegration techniques to a panel of developing and developed countries i

growth and unemployment in a shirking efficiency wage model the relationship between growth and unemployment in a general equilibrium shirking efficiency wage model is explored in contrast to past work on this subject detected shirkers are not dismissed but instead incur a monetary punishment as a result of this modification the model can account for a stable rate of unemployment when there is positive population growth and or technological growth in the economy moreover i show that institutions and policies that limit the ability of firms to punish detected shirkers or restrict their use of discretionary bonuses can increase unemployment and reduce the economy s long run growth rate jel classification e0 j41 croissance et chomage dans un modele de salaires efficients ou certains se derobent a leurs obligations ce memoire explore la relation entre croissance et chomage dans un modele d equilibre general de salaires efficients ou certains se derobent a leurs obligations contrairement a ce qui postule dans certains travaux anterieurs sur le sujet les tricheurs detectes ne sont pas renvoyes mais subissent une penalite monetaire gr ce a cette modification le present modele est capable d expliquer un taux de chomage naturel stable meme quand il y a croissance de la population et ou progres de la technologie dans l economie de plus les resultats suggerent que les institutions et politiques qui limitent la possibilite pour les entreprises de punir les tricheurs ou reduisent la possibilite d offrir des bonis discretionnaires peuvent accroitre le niveau de chomage d equilibre et reduire le taux de croissance a long terme de l economie

public sector deficits and macroeconomic performance in the 1980s chronic public sector deficits forced countries to undertake fiscal adjustment the need to face hard choices continues in the 1990s but the problem is not a simple and easily diagnosed one with an obvious solution rather public sector deficits have had widely differing consequences high inflation in some countries low inflation but also low investment and growth in others and in still others no evident short term macroeconomic spillovers this book presents the findings of a world bank research project designed to shed light on the complex dynamics of public sector deficits it includes an in depth examination of eight countries argentina chile colombia cote d ivoire ghana morocco pakistan and zimbabwe these cases are analyzed within a comprehensive theoretical framework elaborated for the study and in conjunction with cross country data from a larger set the book draws the following conclusions the ways chosen to finance deficits money creation debt or arrears go far to explain medium term financial and macroeconomic imbalances but in the short term these relations are blurred deficits tend to be bad for growth they increase financial and price instability and crowd out private investment public saving typically reduces private saving only slightly increasing public saving is a very effective policy instrument for raising national saving fiscal adjustment typically leads to a lower trade deficit and a moredepreciated real exchange rate finally the blame for large systemic public deficits must be placed not on bad luck but on unwise policy choices and conversely sound fiscal policies can set a country on a path leading to stability and growth

labor turnover and the natural rate of unemployment efficiency wage vs frictional unemployment wage and unemployment responses to changes in economic environment are compared for efficiency wage and frictional models changes in aggregate demand persistence of job specific shocks cost of living and unemployment benefits are considered wages and unemployment move in the same direction in the two models except that an upward shift in aggregate labor demand can reduce the real wage in the efficiency wage but not the frictional model in a numerical simulation calibrated to u s data real productivity shocks in the efficiency wage model yield a ratio of unemployment to wage variability close to that of the united states

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

employment fluctuations with downward wage rigidity the role of moral hazard we study the cyclical dynamics of job creation and destruction when workers effort is not perfectly observable the no shirking constraint may amplify fluctuations in hiring by making firms surplus share procyclical and may cause a burst of inefficient firing when a downturn begins but quantitatively it mainly raises the cost of motivating marginal workers in booms since firms cannot commit to keep them in recessions and thereby strongly damps the countercyclical fluctuations in the separation rate this implies a robust beveridge curve but casts doubt on ramey and watson s 1997 contractual fragility mechanism and worsens shimer s 2005a volatility puzzle

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

involuntary unemployment and worker moral hazard this paper critically examines the hypothesis that layoffs are involuntary in implicit labour contracts because they are used by employers to punish inferior worker performance in repeated moral hazard situations workers typically bear risk associated with whether they are chosen to be laid off even though the latter is uninformative about previous effort choices and wages are performance contingent however the hypothesis is unsatisfactory as optimal contracts involve involuntary retentions rather than involuntary layoffs in a wide variety of circumstances the theory of implicit labour contracts as developed over the past decade has thrown considerable light on the nature of long term employment relationships by emphasizing that firm owners are usually less risk averse than workers and thus have an incentive to insure workers against fluctuations in the demand for the firm s product the theory manages to explain the emergence of long term contracts characterized by downward real wage rigidity see holmstrom 1983 however the theory also typically implies that workers will be indifferent about whether they are to be retained or laid off this runs contrary to the common observation that there is an element of involuntariness in layoff decisions i e within any job category with given skill and performance history if a proportion of randomly chosen workers are to be laid off in a recession the laid off workers would strictly prefer to be retained not only is this phenomenon of involuntary layoffs interesting to explain per se it also seems relevant to the keynesian notion of involuntary unemployment interpreted as unequal treatment of similar workers where some are employed while others are not and unemployed workers would strictly prefer to be employed it thus seems worthwhile to examine if the theory of implicit contracts can be extended to explain this phenomenon satisfactorily as a test of its plausibility and as a possible source of a consistent microfoundation for keynesian propositions to explain why the firm does not insure workers against the risk associated with selection of those to be laid off it is natural to think of possible informational asymmetries this has been attempted by geanakoplos and ito 1981 and moore 1985 geanakoplos and ito introduce the realistic feature that a firm does not observe spot market opportunities available ex post to a laid off worker this permits only incomplete insurance against the risk of layoff however their model produces the paradoxical conclusion that with decreasing absolute risk aversion workers strictly prefer ex ante being laid off moore allows workers to have better ex ante information about their spot market opportunities but finds a similar tendency toward involuntary retentions rather than involuntary layoffs in this paper we explore the alternative hypothesis that firms cannot perfectly observe effort decisions of employed workers and use the threat of involuntary layoff as a discipline device the analysis of stiglitz and weiss 1983 shapiro and stiglitz 1984 and singh 1982 of principal agent relations in the absence of demand fluctuations suggests that the threat of contract termination may be used as an incentive device in their models

government spending interest rates prices and budget deficits in the united kingdom 1701 1918 abstract the british data from the early 1700s through wwi provide an unmatched opportunity for studying temporary changes in government purchases temporary increases which appeared mainly as wartime spending raised long term interest rates but significantly increased the growth rates of money and prices only during suspensions of the gold standard 1797 1821 and 1914 1918 temporary changes in military spending accounted for the bulk of budget deficits over the sample of more than 200 years i found only two major non war deficits one associated with compensation payments to slaveowners in 1835 1936 and the other with a dispute over the income tax in 1909 1910 interest rates did not react much to these exogenous deficits

income distribution factor endowments and trade openness abstract this paper studies the empirical links among factor endowments trade and personal income distribution by using panel data we show that land and capital intensive countries have a less equal income distribution while skill intensive countries have a more equal income distribution we also show that the effects of trade openness on inequality depend on factor endowments in a way consistent with several recent case studies but not with the simple hecksher ohlin framework our results are robust to the division of the sample according to level of income the inclusion of different regressors the use of different measures of trade openness and of relative factor abundance and tests for possible problems of endogeneity

explaining fiscal policies and inflation in developing countries abstract in this paper we investigate empirically the determinants of inflation seigniorage and fiscal deficits in developing countries we first test the optimal taxation theory of inflation for a group of 21 lcds we find that the implications of this theory are rejected for all these countries we then proceed to implement a number of tests based on the new political economy approach to macroeconomic policies we deal with some of the implications of a credibility and reputation model and of a strategic government behavior model we find that the data support the most important predictions of the political economy view of fiscal policy our measures of political instability and political polarization play an important role in explaining cross country differences in seigniorage inflation government borrowing and fiscal deficits we end by discussing directions for future research

a theory of dual labor markets with application to industrial policy discrimination and keynesian unemployment this paper develops a model of dual labor markets based on employers need to motivate workers in order to elicit effort from their workers employers may find it optimal to pay more than the going wage this changes fundamentally the character of labor markets the model is applied to a wide range of labor market phenomena it provides a coherent framework for understanding the claims of industrial policy advocates it also can provide the basis for a theory of occupational segregation and discrimination that will not be eroded by market forces finally the model provides the basis for a theory of involuntary unemployment

unemployment and the business cycle abstract this paper presents a dynamic general equilibrium model where labor effort is imperfectly observable and there is unemployment in equilibrium in contrast to shirking models in the efficiency wage literature detected shirkers are not dismissed instead they face a monetary punishment because they forgo an increase in their compensation estimated versions of the model can generate the high variation in employment and low variation of real wages observed over the business cycle and are consistent with existing qualitative evidence about the responses of the economy to fiscal policy shocks

incentives in competitive search equilibrium this paper proposes a labor market model with job search frictions where workers have private information on match quality and eort firms use wage contracts to motivate workers in addition wages are also used to attract employees we de ne and characterize competitive search equilibrium in this context and show that it satis es a simple modi ed hosios rule the model is used to address the shimer puzzle related to the low volatility of the unemployment rate relative to the volatility of output observed in the data we nd that private information may increase the responsiveness of the unemployment rate to changes in productivity and in particular to changes in

terms of trade shocks in africa are they short lived or long lived abstract this paper examines the persistence of shocks to the terms of trade using annual data on 42 sub saharan african countries for the period 1960 96 instead of using unit root tests to distinguish between stationary and random walk processes for the terms of trade this paper characterizes the persistence of shocks using point and interval estimates of the half lives of terms of trade shocks using median unbiased mu estimation techniques that remove the downward bias of standard least squares ls estimators we find that the cross country average of the half lives of terms of trade shocks is about 6 years it is also found that the estimated persistence of african terms of trade shocks varies widely for about one half of the countries their half lives are short lived less than 4 years while for one third of the countries their half lives are long lived permanent the majority of african countries are found to have terms of trade that typically experience finitely persistent transitory shocks which is consistent with the reversion of terms of trade to their long run trends

workers trust funds and the logic of wage profiles this paper defines a concept a worker s trust fund which is useful in analyzing optimal age earnings profiles the trust fund represents what a worker loses if dismissed from a job for shirking in considering whether to work or shirk a worker weighs the potential loss due to forfeiture of the trust fund if caught shirking against the benefits from reduced effort this concept is used to show that the implicit bonding in upward sloping age earnings profiles is not a perfect substitute for an explicit up front performance bond or employment fee it is also shown that the second best optimal earnings profile in the absence of an up front employment fee pays total compensation in excess of market clearing in a variety of stylized cases

external and budget deficits in some developing countries abstract this paper documents and explains the positive comovement between the external and budget deficits of developing countries for which post 1960 time series data are available first the estimates indicate that the empirical covariance between these deficits is always positive and is statistically significant for many cases second the empirical covariance is close to that predicted from a tractable small open economy overlapping generation model with heterogeneous goods capturing the joint behavior of the external and budget deficits also the predicted covariance is induced by shocks which are closely related to internal conditions such as domestic resources and fiscal policies and to a much lesser extent to external conditions such as the world interest rate real exchange rate and terms of trade

business cycles with worker moral hazard we consider an economy with unemployment where firms pay efficiency wages due to effort enforcement problems and face output prices that vary cyclically between a high and a low level ph and pl we show that for a range of pl ph 1 employment and the wage will be cylically rigid and that this range is greater the shorter h periods are for lower pl ph employment will vary procyclically but then also the wage and more so the more employment varies this implies a limited role for efficiency wage theory in explaining employment variations over the business cycle but a greater role for explaining productivity fluctuations according to okun s law

the rise in unemployment a multi country study one of the most remarkable features of recent economic history has been the remorseless rise in unemployment throughout the industrialized countries however while the trend to higher unemployment is universal the experience of individual countries also differs widely the increase is especially marked within the european community where unemployment rates rival those reached in the interwar years by contrast in the scandinavian countries and japan unemployment is lower and has risen very much less experience in the united states lies somewhere between these extremes and in the last few years unemployment there has fallen sharply

the inefficiency of unemployment the supervision perspective we study an example economy with costly labor monitoring under a wage cum supervision arrangement where workers utilities are not equalized across sectors workers are identical to each other our main task is to look for and find a set of flat taxes and subsidies that bring about a pareto improvement over the laissez faire solution we show that any of such welfare improving schemes involves a tax on labor income from those workers whose utility is the lowest

labor productivity in the efficiency wage model a consideration of the firm s death rate it is inappropriate to equate the representative firm with the typical firm particularly for economies which consist of small enterprises where a large number of jobs are created or disappear as establishments are born or die if workers care about the job disappearance risk their utility and effort offered will be influenced by the death rate of firms this paper sets out an efficiency wage model and takes the probability of the firm s closure into account by extension it is shown that equilibrium labor productivity is plausibly procyclical under certain circumstances which is consistent with the stylized facts observed in many countries

efficiency wage models of unemployment keynesian economists hold it to be self evident that business cycles are characterized by involuntary unemployment but construction of a model of the cycle with involuntary unemployment faces the obvious difficulty of explaining why the labor market does not clear involuntarily unemployed people by definition want to work at less than the going wage rate why don t firms cut wages thereby increasing profits

how does trade openness influence budget deficits in developing countries abstract this paper analyses the effects of trade openness on budget balances by distinguishing the effects of natural openness from those of trade policy revealed indicators of natural openness and trade policy are computed using gmm system estimator the econometric analysis focuses on 66 developing countries over 1974 98 the results show that trade openness increases a country s exposure to external shocks this enforces the negative impact on budget balances of terms of trade instability additionally trade openness influences budget balances through several other channels corruption income inequalities etc then natural openness and trade policy have opposite effects the former deteriorates budget balances whereas the latter enhances them

commodity prices and growth in africa a frican economies export primary commodities and most export little else policymakers as well as economists and historians of african economic development have seen these exports as both a hope and a curse the following parable tells the story once upon a time a servant of the ruler discovered a miraculous plant which grew readily in that country and whose seeds could be woven into fine cloth so desirable was this fabric that it became prized all over the world and fetched a high price after two score years the plant accounted for most of the country s trade with the world the ruler ordered the peasants to grow the plant paid them only a fraction of its price and he and his nobles became fabulously wealthy because the ruler wished to be remembered as a great ruler and as the father of his country he used his wealth to build a great army and brought machines from foreign countries to make the fine goods that previously could only be obtained from foreign merchants but the machines often broke down and the goods that they made were of poor quality and after the ruler died they were left to rust under the ruler s successor there was a war in a foreign land where the plant also grew so that there was a great shortage and its price increased threefold in only three seasons the new ruler spent his newfound riches on fantastic extravagance while immense sums were expended on public works after the manner of the east and on productive works carried out in the wrong way or too soon not even the threefold increase in prices could support these expenditures and the country soon found itself deeply in debt when the war ended and the price fell the country could no longer pay the interest on its debt or borrow more money even after it had sold its only useful public work to a foreign power so that power sent a mission to the country the publication of whose report from which the above

an empirical analysis of excess interbank liquidity a case study of pakistan we investigate the drivers of excess interbank liquidity in pakistan using the autoregressive distributed lag approach on weekly data for december 2005 to july 2011 we find that the financing of the government budget deficit by the central bank and nonbanks leads to persistence in excess liquidity moreover we identify a structural shift in the interbank market in june 2008 before june 2008 low credit demand was driving the excess liquidity holdings by banks after june 2008 banks precautionary investments in risk free securities drive excess liquidity holdings monetary policy is less effective if banks hold excess liquidity for precautionary reasons

why women work closer to home this paper analyzes the extent to which differences in labor force status in household composition and in household roles account for sex differences in workplace residence separation modelling work trip length as the outcome of the choice of household residential and individual job locations equilibrium work trip length is estimated empirically as a function of labor market housing and household characteristics for male and female employees in seven different household categories data from the 1976 panel survey of income dynamics are used the study concludes that while sex differences in job tenure work hours and wages are in themselves sufficient to fully account for observed sex differences in workplace residence separation sex differences in household roles i e responses to spouses characteristics are of even greater importance in influencing women to work closer to home

what drives private saving around the world the authors investigate the policy and non policy factors behind saving disparities using a large panel data set and an encompassing approach including several relevant determinants of private saving they extend the literature in several dimensions by 1 using the largest data set on aggregate saving assembled to date 2 using panel instrumental variable techniques to correct for endogeneity and heterogeneity 3 performing robustness checks on changes in estimation procedures data samples and model specification their main empirical findings a private saving rates show considerable inertia are highly serially correlated even after controlling for other relevant factors b private sector rates rise with the level and growth rate of real per capita income so policies that spur development are in indirect but effective way to raise private saving rates c predictions of the life cycle hypothesis are supported in that dependency ratios generally have a negative effect on private saving rates d the precautionary motive for saving is supported by the finding that inflation conventionally taken as a summary measure of macroeconomic volatility has a positive impact on private saving holding other facts constant e fiscal policy is a moderately effective tool for raising national saving f the direct effect of financial liberalization are largely detrimental to private saving rates greater availability of credit reduces the private saving rate financial depth and higher real interest rates do not increase saving

do two earner households base their choice of residential location on both incomes this article focuses on the role of individual incomes in the residential location decisions of two earner households conventional studies often treat households as a black box and describe them by a single utility function the article raises the question is the household utility paradigm an adequate framework for understanding the location decisions of two earner households it tests an implication of the household utility paradigm the income pooling hypothesis for location decisions the results provide evidence for rejecting the hypothesis among childless families but fail to provide evidence for rejecting it when children are present the results raise the need to address intrahousehold dynamics in modelling location decisions