a test of the wagner s hypothesis for the fiji islands in this article we examine wagner s law for fiji for the period 1970 to 2002 using the johansen 1988 test for cointegration we find one cointegration relationship between national output and government expenditure using five different long run estimators we find robust results on the impact of national income on government expenditure the elasticity ranges from 1 36 to 1 44 implying that a 1 increase in income leads to a 1 36 1 44 increase in government expenditure moreover we find that in the long run national income granger causes government expenditure while these results are consistent with wagner s law we warn policy makers that because fiji s total debt stands at around 69 of gdp in future the bulk of expenditure will go towards debt financing at the expense of productive sectors

employment and education discrimination against disabled people in cape verde this article assesses the employment and school enrolment gaps between disabled and nondisabled persons using the last cape verdean census the unexplained part of these gaps accounts for most of them whatever the age group considered furthermore differences in age structures between disabled and nondisabled persons have almost no effect on these gaps taking into account potential misclassification errors in the disability variable seems to change only marginally these results these findings thus suggest that there is scope for programs to better target and promote employment and education of the disabled in cape verde

changes in wage discrimination against people with disabilities 1984 93 a group of health impaired workers who self report in the survey of income and program participation that their productivity is not affected by their impairment is used to separately measure the effects of discrimination from the effects of poor health on earnings in 1984 and 1993 the results indicate that in 1984 only 3 7 percentage points of the earnings gap is due to discrimination and the amount of discrimination did not decrease by 1993 although discrimination did not change over the 1984 to 1993 period the negative effects of poor health on the earnings of people with disabilities fell substantially

government debt management the long and the short of it standard optimal debt management dm models prescribe a dominant role for long bonds and advocate against issuing short bonds they require very large positions in order to complete markets and assume each period that governments repurchase all outstanding bonds and reissue r r new ones these features of dm are inconsistent with u s data we introduce incomplete markets via small transaction costs which serves to make optimal dm more closely resemble the data r r are negligible short bond issuance substantial and persistent and short and long bonds positively co vary intuitively long bonds help smooth taxes over states and short bonds over time solving incomplete market models with multiple assets is challenging so a further contribution of this article is introducing a novel computational method to find global solutions

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

optimal inflation persistence ramsey taxation with capital and habits ramsey models of fiscal and monetary policy featuring time separable preferences and a fixed supply of capital predict highly volatile inflation with no serial correlation in this paper we show that an otherwise standard ramsey model that incorporates capital accumulation and habit persistence predicts highly persistent inflation the result depends on increases in either the ability to smooth consumption or the preference for doing so the effect operates through the fisher relationship a smoother profile of consumption implies a more persistent real interest rate which in turn implies persistent optimal inflation our work complements a recent strand of the ramsey literature based on models with nominal rigidities in these latter models inflation volatility is lower than in the baseline model but continues to exhibit little persistence we quantify the effects of habit and capital on inflation persistence and also relate our findings to recent work on optimal fiscal policy with incomplete markets

fiscal and monetary rules for a currency union abstract this paper addresses the optimal joint conduct of fiscal and monetary policy in a two country model of a currency union with staggered price setting and distortionary taxes a tractable linear quadratic approximation permits a representation of the optimal policy plan in terms of targeting rules in the optimal equilibrium monetary policy should achieve aggregate price stability following a flexible inflation targeting rule fiscal policy should stabilize idiosyncratic shocks allowing for permanent variations of government debt but should abstain from creating inflationary expectations at the union level simple policy rules can approximate the optimal commitment benchmark through a mix of strict inflation targeting and flexible budget rules conversely the welfare costs of balanced budget rules are at least one order of magnitude higher than conventional estimates of the costs of business cycle fluctuactions

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

fiscal insurance and debt management in oecd economies assuming the role of debt management is to provide hedging against fiscal shocks we consider i what indicators can be used to assess the performance of debt management ii how well historical debt management policies have performed iii how performance is affected by variations in debt issuance using oecd data between 1970 and 2000 we propose performance indicators for debt management which we evaluate using monte carlo analysis those based on the relative persistence of debt perform best there is only limited evidence that debt management has helped insulate policy against unexpected fiscal shocks the degree of fiscal insurance achieved is not well connected to cross country variations in debt issuance patterns

the longitudinal structure of earnings losses among work limited disabled workers this paper asks what are the dynamic effects of disability on earnings unlike most of the previous literature it uses panel data and fixed effects methods are used to assess how the earnings of disabled workers depart from expected levels over many years before and after the date of onset of their disability the paper also examines how worker characteristics affect earnings losses from disability with particular attention paid to the age at which the person suffers onset disabled men are found to experience sharp drops in earnings that predate the measured date of onset earnings recover rapidly soon after onset with much of the immediate reduction made up in the first two post onset years a modest downward trendfollows resulting in significant long term losses in expected annual earnings of about 12 percent per year being older at onset nonwhite more chronically disabled and less educated cause the losses from disability to be larger and the recovery smaller a large portion of these differences across groups appear to derive from industry affiliation after onset the paper argues the facts are all consistent with a simple human capital explanation of the disability process

on the relevance of exchange rate regimes for stabilization policy this paper assesses the relevance of the exchange rate regime for stabilization policy using both fiscal and monetary policy we conclude that the exchange rate regime is irrelevant this is the case independently of the severity of price rigidities independently of asymmetries across countries in shocks and transmission mechanisms the only relevant conditions are on the mobility of labor and financial assets the results can be summarized with the claim that every currency area is an optimal currency area however with labor mobility or tradable state contingent assets additional policy instruments would be required to establish the irrelevance result

optimal time consistent government debt maturity this paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt as the literature has established if the government can perfectly commit to fiscal policy it fully insulates the economy against government spending shocks by purchasing short term assets and issuing long term debt these positions are quantitatively very large relative to gdp and do not need to be actively managed by the government our main result is that these conclusions are not robust when lack of commitment is introduced under lack of commitment large and tilted debt positions are very expensive to finance ex ante since they ex post exacerbate the government s problem stemming from a lack of commitment in contrast a flat maturity structure minimizes the cost entailed by a lack of commitment though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions we show that the optimal time consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility thus under lack of commitment the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols

capital taxation and ownership when markets are incomplete this paper is a normative investigation of the properties of optimal capital taxation in the neoclassical growth model with aggregate shocks and incomplete markets the model features a representative agent economy with linear taxes on labor and capital i first allow the government to trade only a real risk free bond optimal policy has the following features labor taxes fluctuate very little capital taxes are volatile and feature a positive negative spike after a negative positive shock to the government budget and capital taxes average to roughly zero across periods i then consider the implications of allowing the government to trade capital

sovereign default and maturity choice abstract this study develops a novel model of endogenous sovereign debt maturity that rationalizes various stylized facts about debt maturity and the yield spread curve first sovereign debt duration and maturity generally exceed one year and co move positively with the business cycle second sovereign yield spread curves are usually non linear and upward sloped and may become non monotonic and inverted during a period of high credit market stress such as a default episode finally output volatility impatience risk aversion and especially sudden stops are key determinants of maturity both in our model and in the data

short and long term relation between economic development and government spending the role of quality of institutions abstractthis paper tests the wagner s assumption of the one sided directional flow moving from economic growth to public spending considering an international database over the 1996 2012 period by

the size and composition of government expenditure abstract this paper tests several leading hypotheses on determinants of government expenditure the purpose is to avoid omitted variables bias by testing the prominent theories in a comprehensive specification to identify persistent puzzles for the current set of theories and to explore those puzzles in greater depth by looking at the composition of government expenditure and the level of government at which it takes place as well as its magnitude using government financial statistics data from the imf covering over 100 countries from 1970 2000 i look at cross sectional and inter temporal variation in government expenditure and both individual categories of expenditure such as defense education health care and different levels of government central and local among other results i find a new explanation for wagner s law widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in expenditures that a great deal of the expenditure associated with increased trade openness is not in categories that explicitly insure for risk and evidence that both political access and income inequality affect the extent of social insurance

fiscal hedging with nominal assets abstract we analyze optimal fiscal and monetary policy in an economy with distortionary labor income taxes nominal rigidities nominal debt of various maturities and short selling constraints optimal policy prescribes the almost exclusive use of long term debt such debt mitigates the distortions associated with hedging fiscal shocks by allowing the government to allocate them efficiently across states and periods

debt and deficit fluctuations and the structure of bond markets we analyse the implications of optimal taxation for the stochastic behaviour of debt we show that when a government pursues an optimal fiscal policy under complete markets the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase by contrast under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit data for us government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness

optimal fiscal and monetary policy with sticky prices in this paper i consider the role of state contingent inflation as a fiscal shock absorber in an economy with nominal rigidities i study the ramsey equilibrium in a monetary model with distortionary taxation nominal non state contingent debt and sticky prices with sticky prices the ramsey planner must balance the shock absorbing benefits of state contingent inflation against the associated resource misallocation costs for government spending processes resembling post war experience introducing sticky prices generates striking departures in optimal policy from the case with flexible prices for even small degrees of price rigidity optimal policy displays very little volatility in inflation tax rates display greater volatility compared to the model with flexible prices with sticky prices tax rates and real government debt exhibit behavior similar to a random walk for government spending processes resembling periods of intermittent war and peace optimal policy displays extreme inflation volatility even when the degree of price rigidity is large as the variability in government spending increases smoothing tax distortions across states of nature becomes increasingly important and the shock absorber role of inflation is accentuated

interest costs and the optimal maturity structure of government debt the government faces a trade off between the benefits of tax smoothing and an associated increase in expected interest costs when choosing its optimal debt portfolio the article solves for optimal policies in an incomplete markets model where the government uses two debt instruments long term and short term non contingent nominal bonds in this setup the basic prescription is to borrow long and invest short even though equilibrium expected interest costs are higher on long term debt the resulting welfare gains are close to what the government could achieve with complete markets significant welfare gains are possible even in the presence of leverage constraints

public expenditure and economic growth in the gulf cooperation council countries this article uses a dynamic model calibrated to the gulf cooperation council gcc countries data to examine the nature of the relationship between government expenditure and economic growth the article finds that national income is a predictive factor of the expanding role of government as postulated by wagner empirical investigations do not support the hypothesis of public expenditure causing national income as proposed by the keynesian theory

optimal fiscal policy rules in a monetary union this paper investigates the importance of fiscal policy in providing macroeconomic stabilization in a monetary union we use a microfounded new keynesian model of a monetary union which incorporates persistence in inflation and non ricardian consumers and derive optimal simple rules for fiscal authorities we find that fiscal policy can play an important role in reacting to inflation output and the terms of trade but that not much is lost if national fiscal policy is restricted to react on the one hand to national differences in inflation and on the other hand to either national differences in output or changes in the terms of trade however welfare is reduced if national fiscal policy responds only to output ignoring inflation

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

wage discrimination against handicapped men and women the extent of discrimination against handicapped men and women is estimated in this paper observed wage differentials are corrected for selectivity bias the results indicate that almost one third of the wage differential for men and close to one half for women can be attributed to discrimination interestingly handicapped women are also subjected to sex discrimination

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

tax smoothing in a business cycle model with capital skill complementarity this paper undertakes a normative investigation of the quantitative properties of optimal tax smoothing in a business cycle model with state contingent debt capital skill complementarity and endogenous skill acquisition under technology and public expenditure shocks we find that skilled and unskilled labour tax smoothing maintain quantitatively under externalities and exogenous shocks in skill acquisition as well as when the relative skill supply is exogenously determined we further find that the government finds it optimal to reduce both the size of the wedge between the marginal rates of substitution and transformation in skill attainment in the long run and the standard deviation of this wedge over the business cycle this is achieved by subsidising skill creation and taxing both types of labour income

global implications of self oriented national monetary rules author s obstfeld maurice rogoff kenneth abstract it is well known that if international linkages are relatively small the potential gains to international monetary policy coordination are typically quite limited but what if goods and financial markets are tightly linked is it then problematic if countries unilaterally design their institutions for monetary stabilization are the stabilization gains from having separate currencies largely squandered in the absence of effective international monetary coordination we argue that under plausible assumptions the answer is no unless risk aversion is very high lack of coordination in rule setting is a second order problem compared to the overall gains from monetary policy stabilization

fiscal policy and inflation in a monetary union this paper studies optimal scal policies in a small open economy within a mon etary union the government has access to nominal non state contingent debt and distortionary labour taxes to nance exogenous spending price levels dier across countries due to consumption home bias thus scal policy in uences in ation and the terms of trade prices are exible we show that unlike in a country with an inde pendent monetary policy some variability in labour taxes is optimal this is true even when the terms of trade externality is shut down while scal policy aims at smooth ing production distortions with nominal public debt there is an incentive to use taxes to in ate in bad times when debt levels are high reminiscent of chari et al s 1991 optimal monetary policy result

inflation stabilization and welfare the case of a distorted steady state this paper considers the appropriate stabilization objectives for monetary policy in a microfounded model with staggered price setting rotemberg and woodford 1997 and woodford 2002 have shown that under certain conditions a local approximation to the expected utility of the representative household in a model of this kind is related inversely to the expected discounted value of a conventional quadratic loss function in which each period s loss is a weighted average of squared deviations of inflation and an output gap measure from their optimal values zero however those derivations rely on an assumption of the existence of an output or employment subsidy that offsets the distortion due to the market power of monopolistically competitive price setters so that the steady state under a zero inflation policy involves an efficient level of output here we show how to dispense with this unappealing assumption so that a valid linear quadratic approximation to the optimal policy problem is possible even when the steady state is distorted to an arbitrary extent allowing for tax distortions as well as market power and when as a consequence it is necessary to take account of the effects of stabilization policy on the average level of output we again obtain a welfare theoretic loss function that involves both inflation and an appropriately defined output gap though the degree of distortion of the steady state affects both the weights on the two stabilization objectives and the definition of the welfare relevant output gap in the light of these results we reconsider the conditions under which complete price stability is optimal and find that they are more restrictive in the case of a distorted steady state we also consider the conditions under which pure randomization of monetary policy can be welfare improving and find that this is possible in the case of a sufficiently distorted steady state though the parameter values required are probably not empirically realistic

asset backed contracts and sovereign risk abstract a fundamental problem with sovereign default is the lack of a legal enforcement mechanism since the 1920s there have been an ongoing set of initiatives undertaken by the league of nations and the unctad to set international laws on borrowing and lending standards all of which have failed to address the unenforceability problem this paper proposes to use asset backed contracts where the usufruct of the asset transfers to the asset holder unlike conventional sovereign borrowing there are international laws governing asset backed contracts which allow the international assets of a country to be seized this paper exemplifies on the idea that asset backed contracts which are also widely practiced in islamic finance can provide a solution to unenforceable sovereign debt contracts the paper focuses specifically on argentina which has defaulted twice in 13 years if argentina had utilized asset backed contracts prior to its 2001 debt default it would have gained from the following advantages higher debt to gdp ratios larger welfare gains lower probability of default and thus lower borrowing costs

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

keynes versus wagner public expenditure and national income for three african countries the public expenditure income hypothesis has long been debated in economics following keynes public expenditure is seen as an exogenous factor to be used as a policy instrument to influence growth on the other hand wagner argues that expenditure is an endogenous factor or an outcome not a cause of growth in national income the purpose of this paper is to apply both the granger and holmes hutton statistical procedures to test the income expenditure hypothesis for three african countries ghana kenya and south africa we find that the hypothesis of public expenditure causing national income is not supported by the data for these african countries

disability and the labour market an analysis of british males this paper attempts using data from the british labour force survey 1996 to examine to what extent differences in labour market outcomes between able bodied and disabled men may be attributed to differences in endowments of human capital and associated productivity differences both labour force participation and selectivity corrected human capital equations are estimated and decomposition techniques applied to them using the methodology of baldwin and johnson baldwin m johnson w g 1994 labor market discrimination against men with disabilities journal of human resources xxix 1 winter 1 19 the employment effects of wage discrimination against the disabled are also estimated evidence of both substantial wage and participation rate differences between able bodied and disabled men are found which have implications for the operation of the 1995 disability discrimination act

health a source of bias in labor supply models the inconsistency of the labor supply estimates using nonexperimental data has led to the costly income maintenance experiments that have taken place in various parts of the country in addition to being costly the analyses of experimental data also have their share of econometric problems 1 both experimental and nonexperimental studies face the problems of sample selection model specification and variable measurement in order to determine what effects the variables of interest have on labor supply all relevant factors must be included one of these control variables namely health is often included in a form which results in biased estimates in this paper we hope to show that the analysis of experimental and nonexperimental labor supply data must carefully address the health variable problem before meaningful estimates can be obtained in general three treatments emerge in the literature no control for health is used a binary variable which we shall call a disability variable is included in the model as an exogenous variable or the disability variable is used as a partitioning criterion to obtain a sample of able bodied men or women the disability variable is often the response to the question does your health prevent you from working altogether or does your health limit the kind or amount of work you could do this study will examine the bias created by each of these approaches and will suggest a method of measurement for health which does not produce biased estimates 2 health and labor supply

fiscal policy and regional inflation in a currency union abstract substantial attention has been devoted to inflation differentials within the european monetary union including suggestions that inflation differentials are a policy issue for national governments this paper investigates the ability of a region participating in a currency union to affect its inflation differential with respect to the union through fiscal policy in a two region general equilibrium model with traded and nontraded goods lowering the labor income tax rate in response to positive inflation differentials succeeds in compressing inflation differentials such policies can lead to higher volatility of domestic inflation while leaving the volatility of real output roughly unchanged regional fiscal policies also have spill over effects on the volatility of union wide and foreign inflation in our model

in search of a theory of debt management the complete market approach to government debt management argues that a portfolio of non contingent bonds at different maturities should be chosen so that fluctuations in market value offset changes in expected future deficits however this approach recommends huge fluctuations in positions enormous changes in portfolios for minor changes in maturities and no presumption it is always optimal to issue long and invest short term in a wide array of model specifications these extreme volatile and unstable features are undesirable for two reasons firstly fragility of portfolios to small changes in assumptions means that it is often better to follow a balanced budget rather than issue the optimal debt portfolio under some possibly misspecified model secondly for even miniscule transaction costs governments prefer a balanced budget rather than the large positions complete markets recommends the complete market recommendations conflict with a number of features we believe are integral to bond market incompleteness e g transaction costs liquidity effects robustness etc and which need to be explicitly incorporated into the portfolio problem

sovereign debt maturity structure under asymmetric information abstract this paper studies the optimal choice of sovereign debt maturity when investors are unaware of the government s willingness to repay under a pooling equilibrium there is a wedge between the borrower s true default risk and the default risk priced in debt and its size differs with the maturity of debt safe borrowers tilt their debt maturity towards short term relative to the optimal choice under perfect information since long term debt pools more default risk that is not inherent to them risky borrowers mimic their behavior of safe borrowers to preclude the market from identifying their type in times of financial distress spreads increase and the default risk wedge of long term debt relative to short term debt increases which makes borrowers shorten their debt maturity data on bond issuances for a panel of countries show that consistent with the model maturities co vary negatively with spreads and that this co movement is stronger in those situations in which informational asymmetries are larger

the futile quest for a grand explanation of long run government expenditure this paper carries out a critical reappraisal of the two contending theories purporting to explain long run government spending wagner s law and different variants of the ratchet effect we analyze data spanning from the early 19 th century until the present day in sweden and the united kingdom hence in contrast to previous studies we evaluate the validity of wagner s law and the ratchet effect hypothesis over a very long time period starting at the beginning of industrialization cointegration analysis is used to investigate the long run relationships between government expenditure and gdp focusing on sub periods and structural breaks moreover we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment according to our main results wagner s law does not hold in the long run although the data are consistent with wagner s law between roughly 1860 and the mid 1970s this can be traced to the formation of the modern public sector including the introduction of public education health care and so forth yet wagner s law did not hold during the initial industrialization phase before 1860 and in recent periods gdp only affects the government spending share when we control for population age structure finally we find some evidence of asymmetric adjustment in the uk particularly in the post wwii period however the ratchet effect is not a general cause of the growth of government spending

tax smoothing with stochastic interest rates a reassessment of clinton s fiscal legacy the return to sound fiscal policy after the high budget deficits of the 1980s and early 1990s has been hailed by many as the clinton administration s most important achievement we evaluate post war u s fiscal policy using a generalized tax smoothing model that allows for stochastic interest rates and growth rates we show that contrary to conventional wisdom the evolution of the u s debt gdp ratio during the 1980s was remarkably consistent with the tax smoothing paradigm in fact a more substantial departure occurred during the late 1990s when the debt gdp ratio fell more rapidly than predicted by optimal tax smoothing

debt maturity without commitment i analyze how lack of commitment afiects the maturity structure of sovereign debt governments balance beneflts of default induced redistribution and costs due to income losses in the wake of a default their choice of short versus longterm debt afiects default and rollover decisions by subsequent policy makers the equilibrium maturity structure is shaped by revenue losses on inframarginal units of debt that re ect the price impact of these decisions the model predicts an interior maturity structure with positive gross positions and a shortening of the maturity structure when debt issuance is high output low or a cross default more likely these predictions are consistent with empirical evidence

managing the maturity structure of government debt abstract it is known that a government can implement the optimal complete market ramsey allocations by issuing non contingent bonds of different maturities the implied optimal maturity structure is time and state invariant i e it is not actively managed i construct a model where the ramsey allocations can be implemented with active management of the maturity structure in a numerical example that reflects the time series properties of the british government s expenditure during the 18th century its historic pattern of maturity management is replicated

estimating wage discrimination in the labor market if labor supply curves are not perfectly inelastic wage discrimination induces some minority workers to leave the labor force studies of discrimination that focus only on wage differentials overlook these disincentive effects on minority employment

bond ladders and optimal portfolios we analyze complex bond portfolios within the framework of a dynamic general equilibrium asset pricing model equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets instead portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies the welfare loss of these simple investment strategies when compared to the equilibrium portfolio converges to zero as the length of the bond ladder increases this article therefore provides a rationale for naming bond ladders as a popular bond investment strategy

an econometric test of wagner s law for six countries based on cointegration and error correction modelling techniques the present study empirically examined five different versions of wagner s law by employing annual time series data on six countries over the period 1951 1996 three countries are part of the emerging industrialized countries of asia south korea taiwan thailand and three are industrialized countries japan usa and the united kingdom the analysis is an advance over previous work in two ways first the stationarity propertities of the data and the order of integration of the data are empirically investigated using the augmented dickey fuller adf and the kwiatkowski et al journal of econometrics 1 1992 kpss tests and second the hypothesis of a long run relationship between income and government spending is tested using bivariate cointegrated systems and employing the methodology of cointegration analysis as suggested by johansen journal of economic dynamics and control 12 1988 and johansen and juselius oxford bulletin of economics and statistics 52 1990 the results indicate that

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

a bound testing analysis of wagner s law in nigeria 1970 2006 this study tests wagner s law the tendency for government activities to expand along with economic expansion for nigeria using annual time series data between 1970 and 2006 it adopts the bounds test approach proposed by pesaran et al 2001 based on unrestricted error correction model uecm and toda and yamamoto s 1995 granger noncausality tests empirical results from the bounds test indicate that there exists no long run relationship between government expenditure and output in nigeria in addition toda and yamamoto s 1995 causality test results show that wagner s law does not hold for more than the period being tested rather we found a weak empirical support in the proposition by keynes that public expenditure is an exogenous factor and a policy instrument for increasing national income

increasing public debt and the role of central bank independence for debt maturities abstract governments are interested in lengthening debt maturity to reduce fiscal refinancing and default risks on the other hand investors may worry that highly indebted governments will inflate away their debts when it is long term based on a new panel dataset spanning from 1990 2016 for 28 oecd countries the paper finds that governments prolong the average debt maturity if debt ratios increase interestingly the marginal effect of the debt ratio on average maturity is higher for countries with an independent central bank than for countries with a more politically dependent one there are two possible explanations for this effect of central bank independence first an independent central bank reduces the inflation risk premium that longer maturities otherwise would have second governments with independent central banks are unable to use monetary policy for inflating and reducing fiscal and interest rate shock burdens again this calls for longer maturities to reduce the relevant risks

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

economic growth and government expenditure evidence from a new test specification a new test specification of wagner s law of public expenditure has been formulated the aim is to disentangle the effects of accelerating and decelerating economic growth on growth in government expenditure two alternative proxies for the state of the economy are experimented with the first defines the current state of the economy by relating it to its historical mean growth rate while the second defines it relative to a pooled time series cross sectional mean growth rate this distinction is then explicitly incorporated into an error correction model that parameterizes the bivariate relation between government expenditure and economic growth for alternative oecd country groupings the results suggest that government expenditure increases less than proportionately with accelerating economic growth and decreases more than proportionately with decelerating economic growth there is only a limited support for wagner s law

testing wagner versus keynes using disaggregated public expenditure data for canada this paper attempts to test wagnerian versus keynesian hypotheses by examining the relationship between national income and total public expenditure as well as its various components for canada during the period 1950 1995 engle and granger s two step cointegration and error correction techniques are employed to test these two hypotheses the results of this study support both the hypotheses when tested with broader aggregate expenditure data i e total government current expenditure ce and total current expenditures on goods and services cegs although the results of this study do not support the existence of any long run relationship between gdp and the disaggregated public expenditure variables they do support the existence of short run causation implying that national income may be causing or caused by a component of the total government current expenditure in the short run

optimal fiscal and monetary policy equivalence results in this article we analyze the implications of price setting restrictions for the conduct of cyclical fiscal and monetary policy we consider standard monetary economies that differ in the price setting restrictions imposed on the firms we show that independently of the degree or type of price stickiness it is possible to implement the same efficient set of allocations and that each allocation in that set is implemented with policies that are also independent of the price stickiness in this sense environments with different price setting restrictions are equivalent

labor market discrimination against men with disabilities in the year of the ada the americans with disabilities act ada provides civil rights protections to persons with disabilities but the debate that preceded passage of the act was not based on empirical estimates that could be used to measure its performance this article estimates the extent of wage discrimination against men with disabilities in 1990 providing a reference that can be used to evaluate the impact of the ada the results show large productivity standardized wage differentials between disabled and nondisabled men that are weakly correlated with the strength of prejudice against different impairments physical limitations explain part but not all of the wage differentials the results also show that low employment rates are a more serious problem than wage discrimination for workers with disabilities provide civil rights protections to persons with disabilities the act s supporters promised that it would increase the employment and wages of persons with disabilities and reduce their dependency on public programs the promises were not based on empirical estimates of discrimination and there is no empirical base against which to compare the promises to the performance of the ada this article estimates the extent of wage discrimination against men with disabilities in 1990 providing a reference that can be used to evaluate the impact of the act the ada does not grant a right to employment to all persons with disabilities it requires that persons with disabilities be able to perform the jobs they seek subject to reasonable accommodations by employers this article therefore considers men who are able to work even though their health limits the amount or kind of work they can perform the ada s provisions assume that low wages and low employment rates for persons with disabilities are the result of discrimination caused by prejudice prejudice against persons with disabilities is well documented but so are the limiting effects of physical impairments on workplace productivity hahn 1987 margolis and shapiro 1987 clogston 1990 the core of the debate concerning the value of the ada is whether the poor labor market outcomes of persons with disabilities are the result of discrimination or the limiting effects of health con

disentangling the effect of arthritis on earnings a simultaneous estimate of wage rates and hours worked poor health affects both wage rates and hours of work here we develop a procedure for examining the separate impact of a specific chronic disease arthritis on wages and hours worked and then translate these results into earnings our methodology provides a consistent approach for measuring how a specific chronic disease affects total earnings as well as its component parts we find that arthritis affects wage rates and hours worked differently and the pattern of these effects differs considerably between men and women

a causal relationship between government spending and economic development an empirical examination of the greek economy during the past few years in many countries both developed and developing there has been a tendency to increase government spending this article intends to examine this tendency of the public sector as well as the existing relationship between the extent of government spending and economic development the data used cover a time period between 1960 and 2001 an effort is made to determine causal relationships between spending and economic development through the use of wagner s theory

self fulfilling debt crises a quantitative analysis this paper investigates the role of self fulfilling expectations in sovereign bond markets we consider a model of sovereign borrowing featuring endogenous debt maturity risk averse lenders and self fulfilling crises a la cole and kehoe 2000 in this environment interest rate spreads are driven by both fundamental and nonfundamental risk these two sources of risk have contrasting implications for the maturity structure of debt chosen by the government therefore they can be indirectly inferred by tracking the evolution of debt maturity we fit the model to italian data and find that nonfundamental risk played a limited role during the 2008 2012 crisis

labor market discrimination against hispanic and black men h ispanic american men have lower average wage rates than white non hispanics in 1975 the average white non hispanic male wage earner in the united states earned 5 97 an hour mexican men earned 4 31 72 as much as white non hispanics puerto rican men earned 4 52 76 as much and cuban men earned 5 33 89 as much as white non hispanics by way of comparison black men s average wages in 1975 were 4 65 78 of the white male wage several possible reasons for the hispanics lower wages come to mind among them are age and education geographic location immigration language difficulties and discrimination for example as shown in table 1 mexicans and puerto ricans are younger on average than the white non hispanic population and earnings tend to rise with age hispanics have lower average levels of education than white non hispanics and wages are positively associated with education many mexican americans live in the southwest where prices are relatively low moreover hispanics are more likely to be recent immigrants and to lack fluency in english than white non hispanics and so to be at a disadvantage in the labor market in addition there is a widespread belief that hispanics suffer from employment discrimination and cannot obtain the wages that their human capital would command if they were non hispanic whites how much of the wage differentials described above are due to each of these factors and to other inter group differences in wage related characteristics in particular how much impact does labor market discrimination have on the average hispanic man s wage and how does this compare with discrimination against blacks this paper provides answers to these questions a few other efforts have been made to analyze the relative earnings of hispanic and white nonhispanic men using 1960 and 1970 census data fogel 1966 poston and alvirez 1973 poston alvirez and tienda 1976 long 1977 and gwartney and long 1978 we use more recent data from the 1976 survey of income and education this data set enables us to measure wage rates more accurately and to specify the wage function more completely than does the census unlike previous analysts in estimating the wage function we take account of possible selectivity bias due to the distinction between average wage offers and average observed wages thus we hope to obtain a more accurate and up to date measure of labor market discrimination against hispanic men section ii explains the method used to separate the minority white non hispanic wage differential into the portions due to differences in average characteristics and the portion due to differences in unobserved factors and discrimination taking into account the possibility of selectivity bias in the observed wage sample section iii describes the data used in the study and the specification of the wage equation the breakdown of the observed wage differentials into components due to differences in participation in the wage and salary sector local price levels average characteristics and discrimination are presented in section iv section v summarizes our findings and discusses their implications for efforts to improve the economic situation of hispanics in the united states

fiscal policy and debt management with incomplete markets a ramsey planner chooses a distorting tax on labor and manages a portfolio of securities in an economy with incomplete markets we develop a method that uses second order approximations of ramsey policies to obtain formulas for conditional and unconditional moments of government debt and taxes that include means and variances of the invariant distribution as well as speeds of mean reversion the asymptotic mean of the planner s portfolio minimizes a measure of fiscal risk we obtain analytic expressions that approximate moments of the invariant distribution and apply them to data on a primary government deficit aggregate consumption and returns on traded securities for u s data we find that the optimal target debt level is negative but close to zero the invariant distribution of debt is very dispersed and mean reversion is slow

enhanced debt management solving the eurozone crisis by linking debt management with fiscal and monetary policy abstract unconventional approaches to suit unusual circumstances have become acceptable in monetary policy a formerly highly conservative discipline in this paper it is argued that unconventional approaches should also be considered in sovereign debt management in order to contribute to resolving the eurozone sovereign debt crisis first the troika crisis lending to indebted sovereign borrowers in the eurozone is reviewed and compared with standard imf post crisis lending the main difference and shortcoming is the unsustainable character of the eurozone approach due to the omission of demand stimulation components to address this and other shortcomings the features of an ideal alternative funding tool are identified it would solve the funding problems of affected sovereigns help stabilise the banking system but most of all stimulate domestic demand and hence end the vicious downward spiral it is found that this funding method can be implemented as part of enhanced public debt management by each nation s debt management office

gender differences in wage losses from impairments estimates from the survey of income and program participation this article develops a model of the relationships among functional impairments work disability employment participation and wage offers the model is estimated separately for males and females with data from the 1984 survey of income and program participation using estimates of disability and wage equations we rank 25 functional impairments by severity of disability and estimate the wage penalty associated with each impairment the results show that limitations to mobility and strength are relatively more disabling for males than for females while the opposite is true for limitations to sensory capacities and appearance

differences in the returns to education for males by disability status and age of disability onset author affiliation kevin hollenbeck w e upjohn institute 300 south westnedge avenue kalamazoo mi 49007 usa e mail hollenbeck upjohninstitute org jean kimmel department of economics western michigan university kalamazoo mi 49008 4023 usa e mail jean kimmel wmich edu corresponding author acknowledgment this paper is a substantially revised version of a paper that was first presented at the january 2001 assa meetings held in new orleans louisiana and then circulated as upjohn institute working paper no 01 72 the authors thank our discussant robert haveman for his excellent suggestions andrew houtenville for generous assistance with the disability literature doug kruse for input and data assistance above and beyond the call of duty and noyna debburman jason preuss and yuanlei zhu for their skillful research assistance additionally we are very appreciative to claire black and sue berkebile for their superb assistance in preparation of the manuscript finally we thank our journal editor plus two anonymous journal referees 1 introductionin 1990 the u s congress passed the americans with disabilities act ada legislation perceived as a hallmark in the quest by individuals with disabilities for equal access to labor market opportunities numerous studies have been published in recent years assessing the outcomes to date of this legislation and much debate continues regarding its success or failure in improving labor market outcomes however the ada is only one means of addressing labor market difficulties faced by individuals with disabilities because its primary intent is to expand the number of employment opportunities via employer accommodation the ada may be characterized as a demand side intervention 1 numerous education training and rehabilitation programs operate on the supply side of the labor market one example of increased attention on supply side programs may be seen in the workforce investment act of 1998 this sort of disability management model program has the goal of enhancing the skills and knowledge of workers with disabilities to increase their productivity and employability 2 the returns to education for the population with disabilities is indicative of the potential efficacy of such supply side interventions if the rates of return to formal education are large then it might be argued that there is an underinvestment in such interventions if the rates are low then expanding this human capital intervention as a way to improve employment or earnings may not be indicated formal educational attainment and its differential effects by disability status and age of onset are the focus of this paper for an individual with a work limiting condition the age of onset of this condition plays a role in education choices and employment a priori one might expect that among the population with disabilities those with early onset of the disability are the most able to adjust human capital investments and obtain job matches that minimize the potentially negative labor market impacts of the disabling condition see loprest and maag 2003 however the early onset of the disability might hinder human capital investment or affect its quality many studies and data sets have been used to document the disparities in employment related outcomes between people with and without disabilities and many nice summaries exist in the literature 3 depending on the data used and the definition of disability 4 approximately 8 15 of individuals of working age have disabilities in general individuals with a disability report lower employment rates lower levels of educational attainment and lower wages additionally many researchers have reported a post ada decline in employment rates although the cause of this trend is not clear and might be related to a worsening in recent years of disability severity amongst the population reporting disabilities or the trend might be confounded by changes in the labor force participation rates among the disabled

government expenditure and economic growth evidence from g7 countries this paper examines wagner s law of public expenditure which emphasizes economic growth as the fundamental determinant of public sector growth using time series data drawn from the g7 industrialized countries over the sample period 1960 1993 it presents evidence on both the short and long run effects of growth in national income on government expenditure by resorting to recent developments in the theory of cointegrated processes an attempt is also made in this study to examine if wagner s law holds between certain key components of government expenditure and income

calculating and using second order accurate solutions of discrete time dynamic equilibrium models we describe an algorithm for calculating second order approximations to the solutions to nonlinear stochastic rational expectations models the paper also explains methods for using such an approximate solution to generate forecasts simulated time paths for the model and evaluations of expected welfare differences across different versions of a model the paper gives conditions for local validity of the approximation that allow for disturbance distributions with unbounded support and allow for non stationarity of the solution process

stylized facts and regime changes are prices procyclical we investigate empirically the stability of the correlation between output growth and inflation using a technique that allows for changes in regime we look at recent quarterly data for the g4 and at historical data for the u s and u k we find evidence of changes both in means and variances in both sources of data in the quarterly data we find that the covariance between output growth and inflation is typically negative in the historical data we find as suggested in previous studies that inflation was procyclical especially in the inter war years but has been countercyclical in the post war period

optimal monetary policy responses to relative price changes abstract an optimizing model with a flexible price sector and a sticky price sector is presented to analyze the effects of relative price changes on inflation fluctuations the relative price of the flexible price good represents a shift parameter of the new keynesian phillips curve the optimal monetary policy is to target sticky price inflation rather than a broad inflation measure although stabilizing the relative price around its efficient value is one of the appropriate goals of the central bank stabilizing sticky price inflation is sufficient for achieving this goal an optimal monetary policy for a small open economy is also discussed

the labor market effects of disability discrimination laws we present new evidence on the effects of disability discrimination laws based on variation induced by state level antidiscrimination measures passed prior to the americans with disabilities act ada the evidence expands upon other research that focuses solely on the impact of the ada by using a quasi experimental framework that generates treatment and comparison groups we find that disability discrimination laws are associated with lower relative earnings of the disabled with slightly lower disabled relative labor force participation rates but are not associated with lower relative employment rates for the disabled once we control for preexisting employment trends among the disabled

on the international dimension of fiscal policy this paper analyses the international dimension of fiscal policy using a small open economy framework in which the government finances its spending by levying distortionary taxation and issuing non state contingent debt the main finding of the paper is that once the open economy aspect of the policy problem is considered it is not optimal to smooth taxes following idiosyncratic shocks even when prices are flexible and inflation can costlessly act as a shock absorber to restore fiscal equilibrium the presence of a terms of trade externality lead to movements in the tax rate also in contrast with the closed economy the introduction of sticky prices can reduce the optimal volatility of taxes

short and long interest rate targets can both short and long term interest rates be targeted independently can the target of the term structure help solve the problem of multiplicity of equilibria that occurs when only the short rate is targeted both questions are addressed and the answer is yes to both

fiscal sustainability in a new keynesian model recent work on optimal monetary and fiscal policy in new keynesian models suggests that it is optimal to allow steady state debt to follow a random walk in this paper we consider the nature of the time inconsistency involved in such a policy and its implication for discretionary policymaking we show that governments are tempted given inflationary expectations to utilize their monetary and fiscal instruments in the initial period to change the ultimate debt burden they need to service we demonstrate that this temptation is only eliminated if following shocks the new steady state debt is equal to the original efficient debt level even though there is no explicit debt target in the government s objective function analytically and in a series of numerical simulations we show which instrument is used to stabilize the debt depends crucially on the degree of nominal inertia and the size of the debt stock we also show that the welfare consequences of introducing debt are negligible for precommitment policies but can be significant for discretionary policy finally we assess the credibility of commitment policy by considering a quasi commitment policy which allows for different probabilities of reneging on past promises

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

efficient sovereign default in this article i show that the key aspects of sovereign debt crises can be rationalized as part of the efficient risk sharing arrangement between a sovereign borrower and foreign lenders in a production economy with informational and commitment frictions the constrained efficient allocation involves ex post inefficient outcomes that resemble sovereign default episodes in the data and can be implemented with non contingent defaultable bonds and active maturity management defaults and periods of temporary exclusion from international credit markets happen along the equilibrium path and are essential to supporting the efficient allocation furthermore during debt crises the maturity composition of debt shifts towards short term debt and the term premium inverts as in the data

the impact of work limiting disabilities on earnings and income mobility this article uses the 1968 2007 waves of the panel study of income dynamics psid to examine how work limiting disabilities influence the intragenerational earnings and income mobility of individuals the results show that work limiting disabilities increase the probability of downward mobility for several years after onset furthermore the probability of being in the bottom portions of the distributions increases significantly not only during the year of onset but also for at least 10 years afterwards these results are more pronounced for those individuals suffering from a disability that is more chronic or severe in nature income from spousal earnings and government transfer payments offers some protection against disability s adverse effect with more protection being provided to those who are more chronically disabled

did fiscal institutions affect wagner s law in italy during 1951 2009 period an empirical analysis in this article we test wagner s assumption of the one sided directional flow moving from economic growth to public spending in italy for the 1951 2009 period we pay particular attention to the impact of certain regime shifts related to changes in italian budget regulations and procedures and the relevance of fiscal institutions to the fiscal performance equation i e the public spending national income nexus the error correction model is estimated to measure short run dynamic effects and the long run equilibrium between the two time series the empirical evidence suggests that wagner s law is supported in regard to policy implications we find that public spending reacted less to positive changes in economic growth when the strengthening of the ministry of finance occurred in 1997 ciampi s reform some sensitivity analyses confirm our empirical evidence

bond market clienteles the yield curve and the optimal maturity structure of government debt we propose a clientele based model of the yield curve and optimal maturity structure of government debt clienteles are generations of agents at different life cycle stages in an overlappinggenerations economy an optimal maturity structure exists in the absence of distortionary taxes and induces efficient intergenerational risksharing if agents are more risk averse than log then an increase in the long horizon clientele raises the price and optimal supply of long term bonds but while a welfare maximizing government caters to clienteles it does not accommodate fully their demand and limits issuance of long term bonds to a level where these earn negative expected excess returns

interpreting wage gaps of disabled men the roles of productivity and of discrimination using the uk labour force survey we study wage gaps for disabled men after the introduction of the disability discrimination act we estimate wage gaps at the mean and at different quantiles of the wage distribution and decompose them into a part explained by differences in workers and job characteristics a part that can be ascribed to health related reduced productivity and a residual part the large original wage gaps reduce substantially when we control for differences in education and occupation although significant residuals remain however when we isolate productivity differences between disabled and nondisabled workers the residual wage gap becomes insignificant in most cases

on the need for fiscal constraints in a monetary union the desirability of fiscal constraints in monetary unions depends critically on whether the monetary authority can commit to following its policies if it can commit then debt constraints can only impose costs if it cannot commit then fiscal policy has a free rider problem and debt constraints may be desirable this type of free rider problem is new and arises only because of a time inconsistency problem

what is wrong with taylor rules using judgment in monetary policy through targeting rules it is argued that inflation targeting is best understood as a commitment to a targeting rule rather than an instrument rule e ither ageneral targeting rule explicit objectives for monetary policy or a specific targeting rule a criterion for the forecasts of the target variables to be fulfilled essentially the equality of the marginal rates of transformation and substitution between the target variables targeting rules allow the use of judgment and extramodel information are more robust and easier to verify than optimal instrument rules and they can nevertheless bring the economy close to the socially optimal equilibrium

optimal fiscal policy with redistribution i study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks unlike representative agent ramsey models workers are heterogenous and lump sum taxation is not ruled out i consider two tax scenarios a linear taxation with a lump sum intercept and b nonlinear mirrleesian taxation when taxes are linear i derive a partial equivalence result with ramsey settings that provides a reinterpretation of such analyses i find conditions for perfect tax smoothing oflabor income taxes and zero capital taxation implications that contrast with ramsey are derived for public debt management for the nature of the time inconsistency problem and for the viability of replicating complete markets without state contingent bonds shifts in the distribution of skills provide a novel source for variations in tax rates for the nonlinear tax scenario i show that taxation based on income averages is optimal

international real business cycles we ask whether a two country real business cycle model can account simultaneously for domestic and international aspects of business cycles with this question in mind we document a number of discrepancies between theory and data the most striking discrepancy concerns the correlations of consumption and output across countries in the data outputs are generally more highly correlated across countries than consumptions in the model we see the opposite