can learning affect exchange rate behavior the case of the dollar in the early 1980 s this paper demonstrates that a change in parameters of the money market that is not immediately understood will affect the behavior of exchange rate forecast errors while the market is learning the analysis is applied to the behavior of u s dollar german mark forecast errors during the early 1980 s when the market appeared to systematically underpredict the strength of the dollar consistent with this observation empirical estimates of implied forecast errors based upon bayesian learning suggest that forecast errors would have been on average negative during the period as the market came to realize the increase in u s money demand

the credibility of policy announcements greek evidence this paper by using error correction ec methodology along with chow stability tests examines whether three cases of policy announcements in greece over the 1975 1995 period have been considered credible or not by the public focusing on the phillips curve trade off the empirical findings reveal that two out of three policy announcements are characterized as credible by private agents

theoretical approaches to monetary disinflation abstract during the 1980s many countries adopted tight monetary policies to reduce high inflation rates which were the legacy of the 1970s as inflation threatens to rise at the beginning of this decade this paper provides a survey of the 1980s literature which sought to provide theoretical understandings of how monetary disinflation is achieved four models are presented monetarist neo keynesian new classical and post keynesian each model s explanation of the recession which accompanies the monetary disinflation is outlined as well as possible policy measures to reduce the extent of the recession and to hasten the return to full employment

tax evasion and self employment in a high tax country evidence from sweden self employed individuals have arguably greater opportunities than wage earners to underreport their incomes this article uses recent swedish income and expenditure data to examine the extent of underreporting of income among self employed individuals a key hypothesis is that underreporting of incomes among the self employed would be visible in the data as excess food consumption for a given level of observed income our results confirm the underreporting hypothesis in particular we estimate that households with at least one self employed member underreport their total incomes by around 30 under reporting appears to be much more prevalent among self employed people with unincorporated businesses as among those with incorporated businesses

transmission use of system charges based on trade offs between short run operation cost and long run investment cost previous studies on long run network charges assume that network reinforcement would be required when the loading level of a circuit reaches its designed capacity such assumption works well for a passive distribution network but is not valid for transmission networks as they have active congestion management capabilities transmission network operators normally can only justify for network investment when congestion costs exceed network expansion costs this trade off between operational cost and investment cost is not considered in any of the existing long run marginal or incremental cost pricing lric or lrmc

tax evasion and occupational choice this paper is concerned with the combined effect of tax compliance and tax audit policy on the occupational choice of individuals and on public policy objectives such as tax revenue total production and social welfare individuals are assumed to have a choice between riskless work and a risky entrepreneurial occupation they are only differentiated according to their attitudes towards risk more risk averse individuals go into the safe occupation and less risk averse people become entrepreneurs tax evasion is only accessible to the latter and therefore its control tends to discourage risk taking whether control of tax evasion is desirable for the economy as a whole depends on the objective function of the government it is shown that tax audit policy has conflicting effects on tax revenue per capita income and social welfare these conflicts are illustrated through a numerical example in this paper the emphasis is placed on the clarity and the simplicity of the presentation so as to argue that even though the tax schedule can hardly be differentiated across individuals tax evasion and its control can be used by policymakers to introduce variability in the individual s tax treatment

uncertainty welfare cost and the adaptability of u s corporate taxes alternative corporate tax systems differ in their ability to adapt to changes in the rate of inflation in the absence of complete indexing of depreciation allowances policymakers may use a particular expected inflation rate to set accelerated depreciation allowances in a way that minimizes the welfare loss from the misallocation of capital this welfare loss is a nonlinear function of the assumed inflation rate however so the welfare loss at the expected inflation rate may be quite different from the expected welfare loss we compute these two welfare concepts for each of three alternative corporate tax schemes in the u s and for two different relationships between inflation and interest rates one important finding is that the auerbach jorgenson first year recovery plan is not equivalent to indexing as is often claimed if uncertainty about inflation implies uncertainty about the real after tax discount rate

the argentine stabilization plan of december 20th abstract in this paper an analytical model is developed to incorporate the essential characteristics of the stabilization plan implemented in argentina in january 1979 the model is based upon a set of simplifying assumptions that only approximate the complexity of the real world it is assumed that the expectations of inflation and the degree of excess demand or supply in the non traded goods market are the main intermediate determinants of the rate of inflation in that market the rate of change of prices of traded goods being determined by the external inflation together with the rate of devaluation treating thus the external rate of inflation as exogenous the only instrument available for influencing the rate of inflation in the long run is the rate of devaluation since the model assumes a fixed exchange rate regime the money supply is endogenous and hence unsuitable as an instrument of economic policy

do entrepreneurs create jobs many countries support the creation of new firms such policy is based on the presumption that the total number of jobs increases when a person moves from unemployment or regular employment to self employment in this paper the link between self employment and overall employment is analyzed the empirical analysis based on panel data of swedish counties from 1976 1995 pays particular attention to simultaneity issues the results suggest that self employment may have a significant positive effect on overall employment

a test of strategic interaction in monetary policy beginning with an example provided by kydland and prescott 29 a large literature has evolved concerning strategic interaction between the public and a monetary authority in the conduct of monetary policy we undertake a direct test of a fundamental assumption of the strategic monetary policy literature monetary policy games suppose that the monetary authority and the public are aware of the strategic interdependence between them that is these models suppose that the monetary authority chooses an inflation rate that is a function of the public s expected inflation rate and that the public is sophisticated enough to realize that the inflation rate chosen by the monetary authority is a function of its beliefs below we extend cukierman and meltzer s 18 model of ambiguity and credibility in monetary policy to nest other models we then use a novel data set that permits a test of the assumption of strategic awareness for agents in the u s we find support for our extension of the cukierman and meltzer model the new data brought to bear is the federal reserve s forecast of inflation conditional on the monetary policy it chose throughout the sample period the federal open market committee fomc met from eight to twelve times per year to consider various short term monetary policies data on the forecasted paths for the inflation rate growth rate in output and unemployment rate associated with the different monetary policies under consideration is available for some of their meetings it seems reasonable to suppose that the chosen monetary policy satisfies revealed preference in the forecasts of these variables that it and the rejected monetary policies imply therefore in referring to the data we use the terms inflation rate forecast by the federal reserve and inflation rate chosen by the federal reserve interchangeably since theories of time consistent monetary policy have always been cast in the latter terminology the data are especially well suited to a direct test of the theory section i briefly reviews the theoretical literature on monetary policy games and empirical

factors influencing take up rates on the loan guarantee scheme this paper uses time series analysis to model explicitly the take up rate of the uk government s loan guarantee scheme over the 1980s in doing so we consider the rationale for the scheme in the context of empirical and theoretical research into the financing of small businesses and in particular the nature of the small firm bank relationship to begin we discuss the history and evolution of the scheme from its inception in 1981 a theoretical model is then outlined in which lgs funds are used to maximise the utility of capital constrained entrepreneurs

the role of expectations in stabilization policy abstract this paper develops and tests a theory of the process by which private agents in an economy form expectations about government policy agents form and update their beliefs about the true state of government policy in a bayesian fashion the credibility of a policy is defined to be the subjective probability that the government is pursuing a reform policy rule the credibility of a reform of monetary or exchange rate policies is a function of the parameters of both monetary and fiscal policies the theory is applied to the chilean and argentine exchange reforms of the late 1970 s

allocation of transmission fixed charges an overview the application of marginal cost in pricing the transmission services has shown not effective mainly due to revenue reconciliation problems to overcome this a set of other methods derived from the mw mile rule has been suggested to allocate transmission fixed costs this paper compares such methods known as embedded cost methods in a centralized transmission network environment although these methods actually share the total cost and are very simple they are usually rejected due to the lack of a good economic reasoning the economic issue and the impact on the system expansion planning of such allocation are addressed in this paper some examples with the brazilian transmission system illustrate the results derived from this analysis

tax evasion and labor markets abstract concern with revenue losses inequities and inefficiency that may result from tax evasion has produced a number of formal analyses of taxpayer dishonesty most of this work has concentrated on the behavior of individual evaders and has ignored the interaction between evasion and labor market equilibrium to remedy this our analysis uses a model with two labor markets which differ in the potential for evasion to examine how changes in various tax parameters affect evasion and labor market equilibrium we also simulate the effect of switching from a proportional to a progressive tax system in order to evaluate the well known claim that progressivity encourages evasion

taxation and entrepreneurship in a welfare state does tax policy affect the rate of self employment in a modern welfare state this question is analyzed empirically based on swedish data for the entire postwar period available tax data indicate that payroll taxes have had a negative influence on the unincorporated rate of self employment though the effect is modest no effects from regular labor income taxation or capital gains taxation are found the paper improves upon earlier studies in that it tries to separate the effects of different taxes and uses cointegration techniques a further extension is that it studies a scandinavian high tax welfare state earlier time series studies analyzing self employment and taxation have with few exceptions been based on data from countries with relatively low tax levels and less comprehensive welfare systems notably the usa and the uk

learning and the volatility of exchange rates abstract this paper investigates the implications for the volatility of exchange rates of specifying market uncertainty as parameter uncertainty private agents learn by means of bayes rule about a parameter of the stochastic process generating the exogenous variables learning is shown to magnify the reaction of exchange rates to random shocks to the market fundamentals this magnification effect of learning can explain the rejections of the econometric tests on the variance bounds and on the absence of bubbles that have been reported in the literature

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

does exchange rate pegging enhance credibility evidence from the european monetary system the european monetary system ems has been credited with immediately enhancing the credibility of onetary policy among its member countries however there is little empirical evidence to support this view this study provides evidence from exchange rate data that political actions taken to support the ems enhanced rate arangement further empirical results were sensitive to the specification of the estimating equations and varied dramatically if risk premia discounts were absent from estimating equations

the rise in self employment amongst u k males this paper uses time series data to attempt to identify the factors responsible for the rise in self employment amongst uk males focusing in particular on the period of rapid growth which was experienced during the 1980s the empirical results suggest that the most significant long run influence on the growth of self employment has been the rise in the real value of personal sector liquid wealth though rising levels of gdp and to a lesser extent increases in the real value of housing wealth have also made a significant contribution there is tentative support for the notion that mrs thatcher may have succeeded in ushering in an entrepreneurial renaissance within the uk economy though the evidence for this is rather crude there is no evidence for the view that recession push effects have been significant in accounting for the rise in self employment

long run incremental cost pricing based on unused capacity this paper proposes a novel approach for providing long run incremental cost lric pricing in network charges the proposed approach makes use of the unused capacity of an exiting network to reflect the cost of advancing or deferring future investment consequent upon the addition of generation or load at each study node on a distribution network compared with existing approaches to lric pricing the proposed approach produces forward looking charges that reflect both the extent of the network needed to service the generation or load and the degree to which that network is utilized the efficacy of the proposed lric approach has been validated by a comparison with the established investment cost related pricing icrp method used for deriving transmission charges in great brain gb this paper draws on work undertaken in projects for western power distribution and ofgem office of gas and electricity markets u k however the views expressed in this paper are those of the authors

credibility and the dynamics of disinflation in open economies a note on the southern cone experiments abstract when people lack confidence in the ability of politicians to carry out a newly announced disinflationary policy disinflation becomes more difficult to achieve numerous writers have emphasized the importance of policy consistency for establishing credibility this essay suggests in addition that policies with a quicker disinflationary impact become more credible sooner and thus have a better chance of succeeding with that proposition in mind the objective is to examine and compare the initial impacts of alternative disinflationary strategies in an open economy with capital mobility using evidence from the southern cone experience with preannounced exchange rates for illustrative purposes

is the swedish central government a wage leader is the swedish central government a wage leader this question is studied empirically in a vector error correction model using a unique high quality data set it is first shown that salaries of white collar workers in the private sector and central government are cointegrated it is then found that private sector salaries are weakly exogenous to the system of equations this means that the private sector is the wage leader in the long run model it is also found that changes in central government salaries do not granger cause changes in private sector salaries together these findings clearly demonstrate that the central government is not placing undue pressure on salaries in the private sector the central government is not acting as a wage leader

income tax evasion an intersectoral analysis abstract this paper develops an intersectoral model of income tax evasion with general equilibrium effects key elements of the model are imperfectly substitutable outputs from the compliant and evading sectors and workers with heterogeneous evasion costs the model allows for biased public expenditures a wide range of behavioural responses and both legitimate and criminal activities evading tax as well as tax avoidance activities qualitative and quantitative assessments are undertaken for the effects of tax rate changes on evasion activity relative output prices and real tax revenues this approach offers useful findings for taxation policy and is amenable to further analytical extensions

the long term impact of transmission pricing transmission pricing has been one of the major issues on the ongoing debate about deregulation and privatization many papers have dealt with the static nature of the tariff using the incremental and the embedded cost approaches however few of them have focused on the dynamic aspects of the tariff and therefore on its impact on the long term expansion planning of both generation and transmission the main target of this paper is to address some interesting topics about the effect of the transmission pricing methods on system cost in this new environment where generation is treated as an open market and transmission as a monopoly some examples with the brazilian power system illustrate the main points shown in this paper

changing beliefs and systematic rational forecast errors with evidence from foreign exchange this paper addresses a new interpretation to the appearance in the early 1980s of systematic errors in forecasting the dollar exchange rate following a change in the process of a fundamental variable market participants revise their beliefs about the process using bayes rule since the market does not immediately recognize the change forecast errors are on average wrong during a period when the market is rationally learning for conservative parameter values the learning behavior of the dollar exchange rate in the early 1980s appears consistent with about half of the dollar s underprediction implied by the forward market copyright 1989 by american economic association

the role of policymakers reputation in the ems disinflations abstract it is frequently argued that the ems itself in connection with the high anti inflation reputation of the german bundesbank is responsible for the inflation reduction and convergence which member countries have experienced based on the game theoretical model of backus and driffill 1985 american economic review 75 530 538 an empirical measure of the government s reputation for fighting inflation is derived by using a bayesian learning approach time varying estimates of these counterinflation reputation measures are computed for the original ems member countries and for a control group of major non ems countries the paper finds that only the smaller ems participants have gained anti inflation reputation during the ems period

explaining international variations in self employment evidence from a panel of oecd countries organisation for economic cooperation and development oecd data from 1972 to 1996 reveals substantial differences in the levels and trends of self employment rates across countries this article uses recently developed panel integration and cointegration techniques to explore the determinants of aggregate self employment rates we find that within the panel self employment rates are positively and significantly related to personal income tax rates and negatively and significantly related to the unemployment benefit replacement rate this accords a central role to government tax and transfer policies in contrast to nonrobust influences from macroeconomic variables which have been widely used in previous studies

credibility and changes in policy regime this paper addresses the issue of credibility from an econometric perspective it develops a rational expectations model of inflation in which the dynamics are driven by the level of government spending and by the effect of past inflation rates on the value of real taxes government expenditure is modeled as an exogenous autoregressive process subject to discrete changes in regime the regimes are defined by whether the level of spending is or is not consistent with the rate of inflation targeted by the government as part of a stabilization program in making their money demand decision the agents need to construct probability inferences regarding the state of the expenditure process credibility is quantified by the agents inferred probability that the joint observation of inflation the nominal interest rate and government spending is generated by the reformed expenditure regime in an application to israel results indicate that the failed stabilization program of november 1984 was less than fully c

on gradual disinflation the real exchange rate and the current account abstract we study the effects of a credible gradual exchange rate based disinflation program in a two sector economy after an initial exchange rate depreciation the reductions in the rate of devaluation reduce the monetary wedge generated by the cash in advance constraint leading to a gradual increase in absorption that yields progressive real exchange rate appreciations and current account deficits an initial boom in economic activity is not followed by a later contraction as labour supply expands during the whole length of the program many of the model s predictions are in accordance with the stylized facts on disinflation in chronic inflation countries in particular those of the mexican program of 1988 1992

income taxes and entrepreneurs use of labor we investigate the effect of entrepreneurs personal taxes on their use of labor analyze the tax returns of sole proprietors before and after the tax reform act of 1986 and determine how the substantial reductions in marginal tax rates affected their hiring decisions and wage bills individual income taxes exert a statistically and quantitatively significant influence on the probability of hiring workers raising the entrepreneur s tax price by 10 raises the mean probability of hiring by about 12 further taxes influence total wage payments to workers the tax price elasticity of the median wage bill is about 37

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

can state tax policies be used to promote entrepreneurial activity despite a recent flurry of empirical research on the effects of taxes on small business activity state level taxes faced by entrepreneurs have been overlooked by most of the existing literature using a 50 state panel of tax policy information spanning the years 1989 through 2002 our analysis reveals that state tax policies generally do not appear to have quantitatively important effects on entrepreneurial activity when we find statistically important effects we find that higher individual income tax rates the existence of a state level estate inheritance or gift tax and a higher weight on the sales factor in the state corporate income tax apportionment formula all slightly reduce a state s share of the national entrepreneurial stock results also indicate that states with more progressive personal income tax structures and states that have more aggressive corporate income taxes through the imposition of a combined reporting requirement both tend to have slightly higher entrepreneurship rates the composition of state tax portfolios is not found to be a significant determinant of state entrepreneurship

the incredible volcker disinflation abstract the reduction in inflation that occurred in the early 1980s when the federal reserve was headed by paul volcker is arguably the most widely discussed and visible macroeconomic event of the last 50 years of u s history inflation had been dramatically rising but under volcker the fed first contained and then reversed this process using a simple modern macroeconomic model we argue that the real effects of the volcker disinflation were mainly due to its imperfect credibility in our view the observed upward volatility and subsequent stubborn elevation of long term interest rates during the disinflation are key indicators of that imperfect credibility studying transcripts of the federal open market committee recently released to the public we find to our surprise that volcker and other fomc members likewise regarded the long term interest rates as indicative of inflation expectations and of the credibility of their disinflationary policy drawing from the transcripts and other contemporary sources we consider the interplay of monetary targets operating procedures and credibility during the volcker disinflation

self employment in the uk regions the significant regional variations which exist in the rate of self employment among uk males are highlighted and attempts made to explain them using pooled crosssection time series data for the period 1973 93 it is found that in the long run regional rates of self employmentare a function of the real value of net housing wealth and the industry composition of regional gdp however a significant proportion of regional variations in self employment can only be explained by regional fixed effects which reflect fundamental long term influences which make some regions more fertile environments for self employment than others

does health reform affect self employment evidence from massachusetts this paper evaluates whether the implementation of the 2006 massachusetts health reform law affected the decision of taxpayers to be self employed using both difference in differences and synthetic control methods on a panel of tax returns that spans 1999 2010 though tenuous our results suggest that the reform led to a decline in the rate of taxpayers earning a majority of income from self employment in addition it appears to have had a positive impact on earning some self employment income among joint filers and earning the majority of income from self employment among older taxpayers but these were offset by negative impacts on single filers and taxpayers age 35 49

testing capital account liberalization without forward rates another look at chile 1979 1982 abstract the paper offers a way to test the impact of capital account liberalization on domestic interest rates when proxies for expectations of depreciation are unavailable the model is tested on the well understood japanese experience in 1979 1980 and then applied to the chilean liberalization from 1979 1982 the evidence points to chilean monetary authorities retaining significant control over interest rates across the period and offers support to an evolving interpretation of the period that stresses the excessive optimism about the reforms rather than their lack of credibility as the source of their ultimate collapse