the effects of fiscal policies when incomes are uncertain a contradiction to ricardian equivalence this paper shows that when future earnings are uncertain the substitution of deficit fin ance for tax finance or the introduction of an unfunded social secur ity program can raise consumption even if all bequests reflect inter generational altruism an operative bequest motive therefore need not imply ricardian equivalence this conclusion follows from the result derived in the paper that the uncertainty of future income makes t he existence of a future bequest uncertain to the prospective donor copyright 1988 by american economic association

nonconvexities in optimal pollution accumulation abstract with a few exceptions the analysis of optimal pollution accumulation or detrimental stock externalities rests on the assumptions that the level of damage is unbounded and that pollution decay increases monotonically with the level of pollution stock we show that these assumptions are restrictive and that their generalization alters the basic economic properties of optimal pollution control we specify a decay function which is concave with low stock levels and convex when pollution is higher we show that although multiple steady states may exist the globally optimal solution may be independent of the initial pollution level it is also possible that there are cutoff levels which determine the optimal long run equilibrium implying that the feedback control law is discontinuous and nonmonotonic bounded damage may have similar implications but in contrast to concave convex decay they may occur even with zero discounting

on the economically optimal exploitation of a renewable resource the case of a convex environment and a convex return function we investigate optimal policies for the exploitation of a renewable resource subject to a concave growth function and a convex return function we prove an important result on the elasticity of the objective function and apply it to give a characterization of the optimal harvesting paths in this class of models in particular we derive conditions such that all optimal programs converge to a fixed point or to a cycle of finite period and hence result in the conservation of the resource we also show which assumptions guarantee that extinction of the stock is optimal that nonconvex preferences or technologies cause problems for economic theory is well known as our model can formally be interpreted as an optimal growth model with nonconcave utility function our results are a further contribution on the dynamics of optimal paths in the general class of economic models with nonconcavities journal of economic literatureclassification numbers c61 e32 q20

a nonsmooth nonconvex model of optimal growth this paper analyzes the nature of economic dynamics in a one sector optimal growth model in which the technology is generally nonconvex nondifferentiable and discontinuous the model also allows for irreversible investment and unbounded growth we develop various tools to overcome the technical difficulties posed by the generality of the model we provide sufficient conditions for optimal paths to be bounded to converge to zero to be bounded away from zero and to grow unboundedly we also show that under certain conditions if the discount factor is close to 1 any optimal path from a given initial capital stock converges to a small neighborhood of the golden rule capital stock at which sustainable consumption is maximized if it is maximized at infinity then as the discount factor approaches 1 any optimal path either grows unboundedly or converges to an arbitrarily large capital stock

global equilibrium dynamics with stationary recursive preferences abstract we study the global dynamics of capital accumulation for a general two sector model which is not necessarily convex and where preferences of an infinitely lived agent are stationary but not additively separable we obtain monotonicity and convergence results for capital under normality assumptions on preferences and factor intensity assumptions on technology we then derive results on oscillatory dynamics under alternative factor intensity conditions or under the assumption of inferiority of future utilities finally in an exchange model with two agents we show that utilities will be monotonic or oscillatory depending on the normality or inferiority of the preferences

balanced budget constraints and the time consistency of optimal policy in a non ricardian economy it has become increasingly apparent that some optimally determined monetary and fiscal policies may be time inconsistent if governments are allowed full discretion over time this is to say that at any point in time a government s announced commitment to a time path of its monetary and or fiscal instruments which seems optimal at the initial date may provide the government with the incentive to renege on the pre announced policy commitment upon re evaluation at a future date the often cited example 8 is of a government which inflates initially to minimize the current reliance on distortionary labour income taxes but promises reduced inflation in the future at a later date it finds it optimal to re evaluate the commitment and initiates a surprise inflation acquiring revenue in a relatively nondistortionary manner if the government s optimal policy is time inconsistent it will not likely be credible from the private sector s perspective as rogoff 16 has described some authors have suggested that the time inconsistency problem may be resolved if the private sector is able to impose reputational costs on the government for reneging on pre announced policies if the cost associated with the loss of reputation is sufficiently high the government may adopt consistent but sub optimal policies while consideration of reputational costs may yield a policy which is time consistent it may be a second best among the set of consistent policies for example a number of authors have suggested 2 3 16 optimal discretionary policies derived when the government is bound by a rule may be consistent and preferred to the optimal unconstrained discretionary policy imposition of the rule creates a pareto improvement since it alleviates the government s incentive to cheat and therefore reduces the social cost of the private sector s reputational enforcement the difficulty with this solution is to derive the appropriate rule the trivial solution is to commit the government to its optimal plan derived at the initial date however this type of rule relieves the government of any discretion after the policy is announced and it is unlikely that any government would restrict its discretionary powers to that extent a preferable rule would be one which restricts only

uncertainty and the neutrality of government financing policy abstract some ideas from the theory of finance are applied to consider whether debt financed tax cuts affect desired consumption it is shown that government financing policy is a matter of indifference to infinitely lived households if a perfect substitute for public debt exists the analysis allows for uncertainty about future taxes and for missing markets in some kinds of assets income redistribution risk and the public insurance aspects of an income tax scheme qualify this neutrality result but in general the net effect is ambiguous the real resource costs of financial transacting as well as government superiority in the intermediation process may be one rationale for activist debt management policy a better understanding of functioning capital markets is essential to evaluate these arguments

increasing returns and crowding out abstract this paper explores how public debt interferes with the accumulation of physical capital when the technology displays a production externality of the arrow romer type we identify conditions under which a small positive amount of debt will prevent the economy from ever approaching the stock of capital that it would achieve if public debt were zero we also show that the interaction of debt and production externalities may produce bounded possibly cycling capital stock sequences in economies where sustained growth rates are possible with zero national debt finally welfare issues concerning the relation between static and dynamic inefficiencies are discussed

economic policy precommitment and social welfare abstract the claim that economic policy precommitment is advantageous is investigated in a context in which the welfare basis of the government s objectives is explicit three results are demonstrated each one defining a class of welfare functions and a class of models such that precommitment would not raise welfare in models of that class it is concluded that if a purely welfare economic argument for precommitment is to be found attention will have to be paid either to conflicts asymmetries and differences within the private sector or to multiple equilibria

a complete characterization of optimal growth paths in an aggregated model with a non concave production function the convexity of technology has played a crucial role in economic analyses of optimal one sector growth problems for example two of the key results on the traditional model of ramsey 1928 that have relied on the convexity of the technology are that optimal intertemporal growth involves moving monotonically towards a unique steady state as in cass 1965 koopmans 1965 and that the value function is a concave differentiable function of the initial capital stock as in benveniste and scheinkman 1979

stationary optimal policies with discounting in a stochastic activity analysis model we consider optimal capital accumulation in a nonlinear activity analysis model in which production and primary resource supplies are affected by a stationary stochastic process of exogenous shocks the optimality criterion is the sum of discounted expected future social utilities under various neoclassical conditions on technology and preferences i there exists an optimal policy of investment and consumption expressible as a continuous time invariant function of the capital stocks and the history of stochastic shocks and ii there is a stationary stochastic process of capital stocks that is consistent with the optimal policy

investment in education and the time inconsistency of redistributive tax policy time inconsistency of tax policy is shown to arise in a setting where households differ in their ability to accumulate wealth and where the government has redistributional objectives it is assumed that wealth accumulation takes the form of human capital acquired through education the government is precluded from redistributing to a first best optimum by a self selection constraint the second best is shown to be time inconsistent in the time consistent optimum households underinvest in education an argument can be made for public intervention in the provision of education

the welfare economics of cooperative and noncooperative fiscal policy abstract in the absence of ricardian equivalence lump sum transfers between households within a country can alter the pattern of national saving and consumption allowing the government to exploit the country s size in world trade and in international borrowing and lending redistribution across generations through unfunded social security retirement schemes or public sector deficit finance with lump sum taxes and transfers enables a national planner to affect both the static and intertemporal terms of trade when trade restrictions or discriminatory taxation of asset income are unavailable due to international agreements the case for cooperative fiscal policy formation by governments of interdependent economies is examined in an overlapping generations economy with internationally perfectly mobile capital and a single relative price the world interest rate the optimum unfunded social security scheme when no distortionary tax instruments are allowed is derived for a government with nationalistic social preferences this policy targets both intergenerational distribution objectives and interest rate objectives the absence of distortionary taxes implies that no overall loss in world surplus need result from the strategic use of lump sum transfers so that coordination of intergenerational transfers is unnecessary for pareto optimality when internationally enjoyed public goods are introduced allocational efficiency requires cooperative selection of national exhaustive public spending programs but it does not demand that the financing of public expenditures be coordinated

time inconsistency of benevolent government economies abstract a dynamic walrasian economy is said to exhibit inconsistency if the competitive equilibrium path resulting from government reoptimization at some time 0 is not a continuation of the competitive equilibrium path resulting from the initial government optimization at time 0 the present paper establishes necessary and sufficient conditions for consistency for a general class of dynamic walrasian economies it is seen for example that reliance on nondistortionary policy instruments is neither necessary nor sufficient for consistency it is also shown that pareto optimal paths can be supported as optimal competitive equilibrium paths only if consistency prevails however consistent optimal competitive equilibrium paths need not be pareto optimal

policy cooperation among benevolent governments may be undesirable this paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable it also explains circumstances under which such counterexamples are possible and relates them to the literature on time inconsistency since the work of hamada 1976 investigating the effects of increasing policy cooperation among countries has been a major topic in international economics a standard conclusion of this work is that increasing policy cooperation among countries is desirable in a seminal paper rogoff 1985 has challenged this view using a simple monetary model rogoff shows that cooperation among policy makers can lead to a lower level of welfare than noncooperation does rogoff s result has caused much consternation among those who advocate policy cooperation and his work has been criticized along several dimensions for example some authors including canzoneri and henderson 1988 have noted that a key assumption in rogoff s model is that the objective function of each country s policy maker does not coincide with the objective function of its residents indeed if in his model policy makers maximize the welfare of their country s residents the counterexample is overturned and cooperation strictly dominates noncooperation this feature leads some to interpret rogoff s result as simply saying that if policy makers form a coalition against the private sector they may be worse off than if they do not others such as neck and dockner 1988 have claimed that rogoff s result depends on private agents acting strategically under this interpretation rogoff s result is relevant to say economies with a large trade union but not to economies with a large number of competitive private agents in a somewhat different vein persson 1988 and especially devereux 1986a b have questioned the significance of welfare comparisons across different institutional regimes in a model without a solid foundation for the behavioural relationships this paper presents a simple model in which governments are benevolent but cooperation is still undesirable the model is a two country version of fischer s 1980 optimal tax model in it private agents are competitive in that each agent takes both prices and government policies as uninfluenced by his actions and each government maximizes the welfare of its country s residents in the paper the two different regimes cooperative and noncooperative

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

income uncertainty and ricardian equivalence this note characterizes the nature of ricardian equivalence failure when either the old generation s or the young generation s income is uncertain and the nonnegativity constraint on bequests is binding in some states of nature assuming a positive third derivative of the utility function the same condition needed for precautionary savings it is shown that the degree of failure of ricardian equivalence is greater when the corner has to do with parental poverty than when the corner has to do with children s wealth the reason is that in corners associated with parental poverty and therefore lower parental consumption marginal utility is more sensitive to extra consumption leading to a higher marginal propensity to consume in the first period consequently government transfers cause a substantial reduction of precautionary savings in poor corners in contrast to rich corners where precautionary savings are only slightly affected

dynamic monetary control and interest rate stabilization abstract interest rate stabilization results in an instrument shortage that complicates monetary control by introducing strategic considerations into the trading desk s decision problem the paper demonstrates that when expected future open market operations influence current bank and depositor behavior an instrument shortage is necessary and sufficient for the commitment policy to be time inconsistent and for the discretionary policy to be suboptimal i e worse than the commitment policy the moving average component of the commitment policy is of higher order than the discretionary policy under either regime the expected value of the representative bank is increasing in the trading desk s emphasis on interest rate stability

interactions of commitment and discretion in monetary and fiscal policies we consider monetary scal interactions when the monetary authority is more conservative than the scal with both policies discretionary 1 nash equilibrium yields lower output and higher price than the ideal points of both authorities 2 of the two leadership possibilities scal leadership is generally better with scal discretion monetary commitment yields the same outcome as discretionary monetary leadership for all realizations of shocks but scal commitment is not similarly negated by monetary discretion second best outcomes require either joint commitment or identical targets for both authorities output socially optimal and price level appropriately conservative or complete separation of tasks jel e61 e63

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

the economics of non convex ecosystems introduction the word convexity is ubiquitous in economics but absent from economics in this paper we explain why and show what difference it makes to economic analysis if ecosystem non convexities are taken seriously a simple proof is provided of the connection between self similarity and power laws we also provide an introduction to each of the papers in the symposium and draw out the way in which they form a linked set of contributions

aspirations and inequality the premise of this paper is twofold first people s aspirations for their future wellbeing or that of their children aect their incentives to invest second the experiences of others help shape one s aspirations this paper marries a model of aspirations based choice with a simple theory of aspirations formation to study the relationship between aspirations and the distribution of income through its impact on investments aspirations aect economic mobility and the income distribution which in turn shape aspirations thus aspirations income and the distribution of income evolve jointly and in many situations in a self reinforcing way we study the consequences of this model for income distribution as well as for growth rates over dierent quantiles of the distribution we show that extreme equality is unstable moreover when the same aspirations are shared in a society polarization arises the theory we propose captures both the complacency stemming from low aspirations and the frustration resulting from aspirations that are too high as a result for commonly held aspirations growth rates have an inverted u shape along the income distribution

is equality stable economic inequality is of interest not only at some intrinsic level but also for its close connections to diverse variables ranging from economic indicators such as growth rates to sociopolitical outcomes such as collective action and conflict it is only natural then to study the evolution of inequality in an economic system it is fair to say that the dominant view on this topic is that inequality is the outcome of a constant battle between convergence and luck gary becker and nigel tomes 1979 current asset inequalities may echo into the future but their natural tendency is to die out owing to a convex investment technology disparities are only sustained through ongoing stochastic shocks see also david champernowne 1953 glenn loury 1981 a second approach emphasizes that initial conditions determine final outcomes owing principally to a nonconvex investment technology see e g mukul majumdar and tapan mitra 1982 abhijit banerjee and andrew newman 1993 oded galor and joseph zeira 1993 ray and peter streufert 1993 historical disparities may persist and magnify if such differences straddle some bifurcation threshold inequality is not inevitable in this view stable steady states with inequality coexist with others that involve perfect equality in this paper we examine a third view which emphasizes an intrinsic tendency of the market mechanism to create inequality in this approach economic inequality appears as an inevitable outcome even if all agents are identical to begin with and even if there is no uncertainty or technological nonconvexity this view has received attention in ray 1990 debasis bandyopadhyay 1993 lars ljungqvist 1993 scott freeman 1996 kiminori matsuyama 2001 and mookherjee and ray 2001 the basic argument is as follows suppose that an economy is populated by several dynasties each of which allocates resources to current consumption and bequests to descendants assume for the moment that the latter consists entirely of educational expenditures preparing children for their chosen professions of course the returns to such professions are endogenous they depend on the distribution of individuals across different professions now if several professional categories are necessary wages must adjust so as to force separation in choices even if all individuals are ex ante identical to be sure this broken symmetry matsuyama 2002 has no payoff implications for the generation alive today identical individuals must receive identical payoffs starting with the next generation however there must be inequality not just in wages but in payoffs there must be individuals in lowpaying professions that involve low training costs whose parents invested little and there must be others in high paying high trainingcost professions whose parents invested a lot once such inequality sets in it may well magnify richer offspring will find it easier to invest in better paying professions for their children two ingredients are used in this argument first credit markets must be missing or imperfect otherwise the necessary finances may be borrowed and wages net of costs must be equalized over all professions however the assumption that parents cannot borrow against their children s future earnings seems innocuous enough second parents cannot make financial bequests to supplement or substitute for educational expenditures such bequests could conceivably neutralize earnings inequality this motivates the question when might financial bequests compensate for earnings inequality in steady state moreover starting from perfect equality will equality be preserved thereafter or will inequality emerge and persist we discuss an extended example from an ongoing research project mookherjee department of economics boston university 270 bay state road boston ma 02215 ray department of economics new york university 269 mercer street new york ny 10003 and instituto de analisis economico csic barcelona spain we thank kiminori matsuyama who encouraged us to write this paper

equilibrium and optimality some imprints of david gale abstract the paper is a review of some of the themes to which david gale made lasting contributions it touches upon a number of the fundamental issues in the walrasian equilibrium theory existence uniqueness and stability the overlapping generations model non optimality and indeterminacy of competitive equilibria the von neumann equilibrium as a turnpike and in the theory of decentralized intertemporal allocation through competitive prices efficiency and golden rules duality and existence of optimal programs

commodity tax competition between member states of a federation equilibrium and efficiency we first describe regional market equilibria whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices taxes and transportation costs next regional optimal tax levels and public good quantities are derived the tax of the other region being held constant fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other

social insurance with risk reducing investments a two sector model with sector dependent disability risks is presented working in the low risk sector requires skills that can be obtained by investments in education moral hazard precludes full insurance the labour force allocation is responsive to the incentives created by a social insurance system the rationale for intervention lies in the government s power to cross subsidize between the sectors and it is demonstrated how the responsiveness of the labour force allocation limits cross subsidization the second best policy is time inconsistent the consistent equilibrium is explored and is argued to provide weak incentives to reduce risks ties to live off their own work recently social insurance has come under scrutiny owing to increased pressures to reduce government expenditures one critical view that has been put forward is that a public system that pools work ers with different occupations may cause a significant loss of welfare since different occupations are associated with different levels of risk it is argued that pooled systems while adhering to a general notion of fairness cause an inefficient allocation of the labour force put in simple terms pooled systems implicitly subsidize risky activities and thereby promote excessive undertaking of such activities the purpose of this study is to investigate the problem of social insurance design in a setting where workers can influence the disability risks they are exposed to by choosing a low risk occupation the model presented has two sectors a high risk sector and a low risk sector working in the low risk sector requires some kind of costly investment which we represent as a choice of education although it is clear that any investment undertaken by the work ers e g migration investments leads to precisely the same trade offs the workers choose which sector to enter in response to the incentives created by the social insurance system this allows an analysis of the trade off between the efficiency of the labour force allocation and distributive concerns as well as a characterization of optimal social insurance under various assumptions about the government s ability to cross subsidize and to affect occupational choices following the seminal work by diamond and mirrlees 1978 a moral hazard problem precludes full insurance and creates a second best environment our framework is similar in some respects to that of whinston 1983 in a pure moral hazard framework whinston shows that optimal contracts cross subsidize in favour of more accident prone workers to an extent that makes them better off than less accident prone workers on this point we extend whinston s result by identifying the exact redistributive rule and by providing an interpretation of the result as an instance of tagging whinston further

monetary policy and policy credibility theories and evidence within the past decade there has been a significant shift in attitude by many western industrialized countries toward the objectives and conduct of national economic policy the events of the 1970s accelerating inflation and stagnant economic growth motivated the view that inflation had created its own stubborn self sustaining momentum that either was not amendable to the influences of conventional macroeconomic policy or else would yield to such influences only at unacceptable costs this led to the development of a program aimed at reestablishing control over prices while minimizing any adverse consequences of anti inflationary policies on output and employment seen as a new monetary experiment the essential ingredients included prudent financial management abstinence from discretionary intervention commitment to intermediate targets and above all prior announcement of these policies evidence of this program and its effects can be found oni the continents of europe north america and latin america and provide further important lessons in anti inflationary management this paper is a survey of recent theoretical developments in monetary policy which among other issues attempt to explain one rationale for this program and the likely consequences thereof to the extent that the new program of monetary and fiscal reform was deliberately made public and impressed upon citizens as an overriding commitment of governments in advance of its execution reflects a prevailing opinion that economic policies are more effective if they are credible to private economic agents this view emphasized forcefully by william fellner 1976 1979 may be seen as being mainly due to the assimilation of the rational expectations hypothesis

sustained endogenous growth with decreasing returns and heterogeneous capital abstract the possibility of sustained long run growth is typically associated with the presence of some endogenous engine of growth it may allow the economy to grow without bound despite the use of some non reproducible resources such situations can lead to dynamic models combining the features of sustainable growth and decreasing returns one sector models of this kind have recently attracted much attention in macroeconomics applications their approximate linearity for the purposes of long run analysis has been noted this paper is aimed at establishing the general fact dynamic models one or multi sector which are characterized by sustained endogenous growth with non increasing returns display the patterns of optimal growth asymptotically equivalent to those generated by models with linear technology i consider a neoclassical growth model with heterogeneous capital develop its linear counterpart and prove their asymptotic equivalence in terms of long run optimal growth rates and cross sectoral profiles of consumption real interest rates and relative prices this result also implies the non substitution theorem for the neoclassical dynamic model of sustained growth optimal input profiles relative prices and interest rates are asymptotically independent of intertemporal preferences

fiscal discipline and the budget process the critical economic policy issue for many oecd countries developing countries and transition economies currently is fiscal consolidation and the maintenance of long run fiscal balance two related components underlie this general goal first several countries face the issue of deficit reduction particularly those countries with high debt gdp ratios second it is becoming increasingly apparent that major reforms of the welfare system and specifically of social security systems are critical ingredients of a long lasting fiscal consolidation see alesina and perotti 1995a in the case of monetary policy a constructive discussion has generated a widespread consensus about the benefits of different monetary institutions relatively few economists dispute the benefits of a certain amount of central bank independence even though different commentators and policymakers may disagree on the optimal degree of independence also a contracting approach has highlighted the benefit of inflation targeting and of certain institutional relationships contracts between the executive and the central bank a similar theoretical and empirical discussion on the role of budget procedures and budget institutions is just beginning in this paper we ask the following two questions i do budget procedures matter for the determination of the budget balance and its composition ii are there certain institutional reforms that one should feel comfortable in recommending based on the relatively scarce empirical evidence available we tentatively answer yes to the first question budget procedures matter on the second question we suggest that the two critical areas of reform are first more transparency second a strengthening of the roles of the executive branch vis a vis the legislature and of the treasury minister vis a vis the rest of the executive branch in order to achieve a centralized and top bottom approach to the budget process

turnpike theorems in nonconvex nonstationary environments this paper provides a comprehensive development of turnpike theory in a stochastic aggregative model with time varying nonconvex technology a new approach to turnpike theorems is developed that exploits the monotonicity of optimal programs and utilizes a supermartingale process generated by stochastic euler equations this extends the classical turnpike theory to general nonconvex nonstationary environments copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

consistent tariffs with dynamic supply response abstract this paper models a large importer of a competitively produced good for which there are nonlinear adjustment costs in production if producers have rational expectations and the importer is unable to make a credible commitment regarding future tariffs market power may be disadvantageous this is more likely to occur when the difference between short and long run elasticities of supply are large this result depends on the particular subgame perfect equilibrium that is chosen if producers were capable of strategic behavior other equilibria which rely on trigger strategies would be reasonable and market power could no longer be disadvantageous

public economics and the theory of public policy when james mirrlees and william vickrey were awarded the nobel prize in economics last year it marked only the third time that the award had gone to scholars of public sector economics in contrast to the reception given to the previous two winners ronald coase and james buchanan the news was greeted with some bewilderment by policy specialists once removed from the academic literature who are mirrlees and vickrey and what have they done that has been of lasting benefit to the study of public economics let alone of practical benefit to policy makers this seems to me to be a fair question coase after all had set out a conceptual approach to the study of externalities and transaction costs that has become an implicit part of the methodological baggage carried around by policy economists and policy makers alike buchanan was in part responsible for the welcome emphasis on institutions in public sector decision making and for insisting that politicians bureaucrats and voters are human beings with human motives the legacy of mirrlees and vickrey is less well known but i would argue it is every bit as profound their approach to the theory of economic policy which is grounded on the importance of imperfect information as a constraint on public policy has changed the very nature of public economics research and of its implications for economic

equipment prices human capital and economic growth abstract this paper presents a multisectoral model of economic growth in which endogenous technological progress is embodied in new equipment capital the difference in the intensity of use of human capital across sectors creates aggregate dynamic non convexities and hence the model may generate multiple balanced growth paths under standard parameter values our model can explain the observed correlations found for a pool of countries between investment rates in equipment capital and income growth on the one hand and between the rate of decline in equipment prices and income growth on the other the model is then used to study the effectiveness of two public policies that have been widely implemented to promote economic growth an equipment investment tax credit and a tax incentive to human capital accumulation our results indicate that both policies have positive effects on equipment investment and on long run growth

strategic discipline in monetary policy with private information optimal targeting periods this paper analyzes a multiperiod monetary targeting procedure as a possible resolution to the credibility problem in pol icy when the monetary authority has some private information by limitin g the degree of flexibility permitted in policy this procedure mitiga tes the credibility problem as the length of the targeting horizon decreases the severity of the credibility problem falls but at the expense of weakening the monetary authority s ability to pursue its stabilization goals based on model simulations the analysis studi es the determinants of the optimal targeting horizon that balances the benefits of flexibility and discipline in policy copyright 1993 by american economic association

optimal monetary policies and policy interdependence in the world economy the literature on strategic policy interactions has focused on the implications of alternative strategic policy interactions cooperative versus noncooperative for equilibrium macroeconomic policies given the state of the world economy this paper asks how changes in world economic conditions alter equilibrium policies given the nature of policy interdependence among nations the paper considers a world economy comprised of two countries operating under a system of flexible exchange rates both governments act noncooperatively and choose the rate of growth of their money supply so as to maximize the utility of their country s residents given the rate of growth of the other country s money supply the resulting nash equilibrium rates of growth of the home and foreign money supplies are determined and the dependence of international differences in money growth and inflation rates on international differences in technology jel e52 e60 f41 f42 the international transmission of monetary and fiscal policies has been studied a great deal by economists however policy interdependence how one country s policies depend on the policies enacted by other countries has only recently begun to be explored hamada s 1976 paper was one of the first major contributions in this regard hamada considered a world economy comprised of n countries operating under a fixed exchange rate system in which policymakers set domestic credit growth so as to maximize an objective function depending on inflation and the rate of accumulation of international reserves using this framework hamada demonstrated that in equilibrium optimal domestic credit policies are generally not pareto efficient when they are chosen noncooperatively but are pareto efficient when they are set cooperatively in subsequent work hamada 1979 1985 has elaborated on this and various other aspects of cooperative and noncooperative monetary policies under both fixed and flexible exchange rates many others have followed hamada s lead by comparing the properties of cooperative and noncooperative monetary policies eichengreen 1985 for instance considers discount rates as the instrument of monetary policy and examines issues of leadership and cooperation during the interwar years under the gold standard oudiz and sachs 1985 have used simulation methods to

dynamic interaction models of economic equilibrium abstract the paper develops a stochastic dynamic model of economic equilibrium with locally interacting agents the main focus of the study is on the modeling of market interactions those arising in connection with commodity exchange and regulated by price mechanisms the mathematical framework is a control theory for random vector fields on directed graphs the graphs involved serve to describe the spatio temporal structure of commodity flows in the system the main results are concerned with the existence uniqueness and stability of stochastic dynamic equilibria

the superiority of contingent rules over fixed rules in models with rational expectations the paper investigates the robustness of the proposition that in stochastic models contingent or feddback rules dominate fiped or openloop rules four arguments in favour of fixed rules are considere 1 the presence of an incompetent op malevolent policy maker 2 a trade off between flexibility and simplicity or credibility 3 the new classical proposition that only unanticipated stabilization policy has real effects 4 the time inconsistency of optimal plans in non causal models that is models in which the current state of the economy depends on expectations of future states the main conclusion is that the rational expectations revolution represented by arguments 3 and 4 does not affect the potential superiority of time inconsistent closed loop policies over time inconsistent open loop policies the case against conditionality in the design of policy must therefore rest on argument 1 or 2 which predate the new classical macroeconomics

macroeconomic policy evaluation and optimal control theory a critical review of some recent developments abstract this survey addresses the recent literature on the application of optimal control theory and game theory to macroeconomic policy evaluation and design this literature focuses on strategic interactions between governments and private agents engaged in dynamic non cooperative games and emphasizes such issues as precommitment credibility and reputation as important and endemic aspects of optimal policy design a dominant theme is the problem of dynamic inconsistency and the inferiority of an equilibrium in single stage full information games without commitment this may be alleviated in repeated games involving reputation effects and threat strategies designed to coerce rivals into pursuing particular strategies and to sustain a sequential equilibrium the type and characteristics of a sequential equilibrium also depend importantly upon the information structure conditioning players beliefs under uncertainty included here are separating and pooling equilibria involving notions of learning signalling and information revelation additional dimensions exist in stochastic systems which introduce other forms of uncertainty optimal control and game theory have also been applied to international macroeconomic policy design with emphasis on the potential costs and benefits of non cooperative and cooperative behaviour between countries and problems of international policy coordination

on income fluctuations and capital gains with a convex production function abstract this work considers a one good economy the production function is random and not necessarily concave the interest factor is variable and the consumer must maximize asymptotically the expected accumulated and discounted utility one proves that the value function is concave and the limit policy is optimal and is the unique one furthermore if the production function is convex there exist two levels of capital with the property that for initial capitals below the first level the optimal sequence of capitals stays bounded with probability one for initial capitals above the second level the optimal sequence of capitals tends monotonically to infinity for initial capitals between the two levels the optimal sequence of capitals leaves the interval with probability one

dynamic efficiency of conservation of renewable resources under uncertainty abstract we examine the efficiency of conservation of a renewable resource whose natural productivity is influenced by random environmental disturbances we allow for non concave biological production and stock dependent social welfare unlike deterministic models conservation may be inefficient no matter how productive the resource growth function is in addition improvements in the natural productivity of the resource might increase the possibility of extinction we characterize the conditions on social welfare resource growth the discount rate and the distribution of environmental disturbances that are sufficient for conservation to be efficient the productivity of the resource under the worst possible environmental conditions the discount rate and the welfare function are all crucial factors in determining the efficiency of conservation journal of economic literature classification numbers q20 o41 d90

uneven growth a framework for research in development economics the textbook paradigm of economy wide development rests on the premise of balanced growth that is on the presumption that all sectors will grow in unison over time as a country gets richer this view has served us reasonably well in some circumstances but is not particularly useful for accounts of modern under development in many developing countries economic growth has been fundamentally uneven software development the outsourcing of services sectoral technological change quick compositional shifts between agriculture and other sectors the rise of particular exports special economic zones and so on this paper will discuss both the sources of uneven growth and its implications with greater emphasis on the latter the paper will argue that much of the distributional issues or the reactions to globalization that we see in modern developing societies can be viewed as reactions to a growth process that is fundamentally uneven and is indeed perceived as such