implications of economic interdependence for endogenous wage indexation decisions this paper shows how economic interdependence affects the indexation decisions of atomistic wage setters in an environment in which monetary authorities do not observe stochastic disturbances before making their policy choices if stochastic disturbances are common across countries interdependence has no effect on equilibrium indexation choices in identical countries however if disturbances are country specific numerical simulations show that interdependence is likely to reduce equilibrium indexation choices relative to a small open economy we also show that indexation choices may be either strategic complements or strategic substitutes but that strategic complementarity becomes more likely as the degree of interdependence rises

wage indexation and the time consistency of government policy this paper concerns the role of wage indexation as a mechanism for enabling an economy to achieve outcomes that would not otherwise be time consistent the desirability of indexation depends on the size of real and nominal shocks and on a policymaker s incentives for short run inflation surprises policymakers incentives to utilize wage indexation are examined and it is found that weak policymakers are more likely to choose wage indexation hence in an electoral equilibrium voters may choose a policymaker who cares more about unemployment than inflation but who chooses wage indexation to commit to low inflation copyright 1995 by the editors of the scandinavian journal of economics

political cycles in oecd economies this paper studies whether the dynamic behaviour of gnp growth unemployment and inflation is systematically affected by the timing of elections and of changes of governments the sample include the last three decades in 18 oecd economies we explicitly test the implication of several models of political cycles both of the opportunistic and of the partisan type also we confront the implication of recent rational models with more traditional approaches our results can be summarized as follows a the political business cycle hypothesis as formulated in nordhaus 1975 on output and unemployment is generally rejected by the data b inflation tends to increase immediately after elections perhaps as a result of pre electoral expansionary monetary and fiscal policies c we find evidence of temporary partisan differences in output and unemployment and of long run partisan differences in the inflation rate as implied by the rational partisan theory by alesina 1987 d we find virtually no evidence of permanent partisan differences in output growth and unemployment

avoiding some costs of inflation and crawling toward hyperinflation the case of the brazilian domestic currency substitute the pattern of a classical hyperinflation is an acute acceleration of the inflation level accompanied by rapid substitution away from domestic currency until the real plan 1 july 1994 however brazil experienced inflation levels well above 1000 a year since 1988 without entering the classical hyperinflation path two elements played key roles in differentiating the brazilian case from the classical hyperinflations indexation and the provision of a reliable domestic currency substitute i e the provision of liquidity to interest bearing assets this paper claims that the existence of this domestic currency substitute was the main source of both the inability of the brazilian central bank to fight inflation and of the unwillingness of brazilians to face the costs of such a fight the provision of the domestic currency substitute through the banking sector is modeled and the main macroeconomic consequences of this monetary regime are derived those are the lack of a nominal anchor for the price system due to the passive monetary policy and the non controllability of seigniorage unlike traditional models of hyperinflations

wage indexation and discretionary monetary policy since the early 1970 s both academic researchers and policymakers have devoted considerable attention to the macroeconomic effects of wage indexation however these two groups have focused on different effects starting with jo anna gray 1976 and stanley fischer 1977a formal models emphasize the role of indexation in stabilizing or destabilizing output in contrast informal policy discussions usually focus on the allegation that indexation is inflationary e g arthur okun 1971 mario simonsen 1983 eliana cardoso and rudiger dornbusch 1987 to reduce this gap this paper presents a model of the effects of indexation on inflation and asks whether indexation raises economic welfare when these effects are taken into account until recently it was difficult to formalize the argument that indexation is inflationary because economists lacked models of the sources of inflation this paper applies the insight of robert barro and david gordon 1983a that with discretionary policy the employment gains from surprise inflation tempt the monetary authority to create positive trend inflation as stressed by fischer and lawrence summers 1989 policies that reduce the costs of inflation such as indexation cause barro gordon policymakers to choose higher inflation indeed inflation can rise so much that welfare falls despite greater protection against inflation this effect is appealing because it captures the common argument that indexation weakens policymakers will to fight inflation 1 this is not the end of the story however because wage indexation has a second effect it reduces the employment effects of surprise inflation that is unlike most policies to reduce the costs of inflation such as indexation of interest rates wage indexation steepens the phillips curve in the barrogordon model a steeper phillips curve reduces the temptation to inflate and hence reduces equilibrium inflation since indexation has one inflationary effect lower costs of inflation and one anti inflationary effect a steeper phillips curve the net effect appears ambiguous even if the net effect on inflation is determined the welfare effect may remain unclear if inflation rises the welfare loss might or might not be outweighed by the lower cost of a given amount of inflation 2 these ambiguities cannot be resolved with the barro gordon model alone because the phillips curve and the effect of inflation on welfare are ad hoc it is plausible that indexation affects these relations but the relative strengths of the effects are unclear resolving the ambiguities requires a more structural model in which the effects of indexation are derived rather than assumed this paper studies such a model specifically we use a model of staggered wagesetting based on gray 1976 fischer 1977a b and john taylor 1980 the degree of indexation is an explicit parameter and so we can derive its net effects on inflation and welfare section i of this paper presents our basic model and derives equilibrium inflation in

gold and silver health plans accommodating demand heterogeneity in managed competition abstract new regulation of health insurance markets creates multiple levels of health plans with designations like gold and silver the underlying rationale for the heavy metal approach to insurance regulation is that heterogeneity in demand for health care is not only due to health status sick demand more than the healthy but also to other taste related factors rich demand more than the poor this paper models managed competition with demand heterogeneity to consider plan payment and enrollee premium policies in relation to efficiency net consumer benefit and fairness the european concept of solidarity specifically this paper studies how to implement a silver and gold health plan efficiently and fairly in a managed competition context we show that there are sharp tradeoffs between efficiency and fairness when health plans cannot or may not because of regulation base premiums on any factors affecting demand enrollees do not choose the efficient plan when taste e g income can be used as a basis of payment a simple tax can achieve both efficiency and fairness when only health status and not taste can be used as a basis of payment health status based taxes and subsidies are required and efficiency can only be achieved with a modified version of fairness we refer to as weak solidarity an overriding conclusion is that the regulation of premiums for both the basic and the higher level plans is necessary for efficiency

macroeconomic policy in a two party system as a repeated game this paper considers the interaction of two parties with different objectives concerning inflation and unemployment and rational and forward looking wage setters if discretionary policies are followed an economic cycle related to the political cycle results in equilibrium this cycle is significantly different from the traditional political business cycle reputational mechanisms due to the repeated interaction of the two parties and the public or commitments to a common policy rule can improve upon the discretionary outcome by reducing or eliminating the magnitude of the economic fluctuations

monetary policy in the presence of asymmetric wage indexation we study optimal monetary policy in the presence of asymmetric wage indexation we find that the monetary authorities do not react to small output shocks and that their reaction to large shocks is asymmetric insofar as they absorb positive shocks more than negative ones as a consequence we observe that asymmetric wage indexation can be contractionary it has ambiguous effects on expected inflation and welfare relative to an equivalent symmetric indexation optimal symmetric inflation however always outperforms optimal asymmetric indexation

sluggish intersectoral factor movements and alternative trade policies one of the basic assumptions of the standard two sector two factor general equilibrium model of production and trade is that factors are perfectly mobile between two sectors if a policy induced or policy independent change in a parameter of the model leads to an inequality in the price of a factor as between two sectors movement of the factor from the lower price sector to the higher price one will take place under the assumption of perfect mobility and that will eventually eliminate the intersectoral difference in factor prices at the new equilibrium this assumption of perfect mobility of factors has recently been a topic of further research in the two sector production and trade literature questions have been raised about the validity of this assumption see e g mussa 5 125 41 yu 7 387 93 casas 2 747 61 yu and parai 8 601 09 and parai and yu 6 842 52 in the context of labor it is argued that a policy induced increase in the wage rate in one sector does not necessarily lead to a movement of enough labor from the other sector so as to re establish the equality between sectoral wage rates even in the long run geographical or locational preferences of individuals for living in one area over another serious attachments of workers to one region due to strong family ties or high costs of moving from one place to another have usually been the reasons for the sluggish movement of labor from one sector to the other on the other hand the sluggishness in the mobility of physical capital is explained by the investors attitude towards uncertainty in other sectors and also the high cost of moving and adjusting to the need of the new industry given this imperfect mobility the net rental rates would not equalize between two sectors even in the long run mussa and casas separately modeled the imperfect labor mobility problem whereas grossman 3 1 17 modeled the case of imperfect capital mobility hill and mendez 4 19 25 however developed a general model incorporating the imperfect mobility of both capital and labor in the two sector general equilibrium model of production parai and yu have used the both factors are imperfectly mobile the purpose of the present paper is to extend the parai yu analysis further to investigate the implications of imperfect factor mobility in the analysis of standard gains from trade issues in the literature specifically we intend

money and economic activity inventories and business cycles abstract incomplete information is a necessary condition for any real effects produced by monetary impulses an alternative to the local global inference problem is explored in this paper agents are confronted with permanent and transitory shocks even with full knowledge about the stochastic structure their best perception at any particular time will usually be erroneous prices for each period are set at the beginning of the period on the basis of market conditions the realization of the shock process thus creates a short run disequilibrium absorbed by inventory adjustments this adjustment translates perceived transitory monetary shocks into serially correlated output movements the analysis proceeds within the context of rational expectations it offers a generalization of equilibrium analysis in two respects prices are always in equilibrium relative to perceived conditions but they do not reflect all ongoing shocks quantity adjustments reflect the perceived transitory shocks the framework used involves moreover a stock flow interaction operated by inventory adjustments the stock flow interaction imposes at any time a future expected adjustment path for price level and quantities to the system s unique stock equilibrium a major implication of the analysis resolves a puzzle experienced in a recent paper by robert hall it reconciles intertemporal substitution with lagged effects of monetary impulses it also reconciles small and inconclusive cyclic movements in real wages with the occurrence of production function and large variations in unemployment lastly the nature of the inference problem determined by the pattern of incomplete information produces serially correlated movements conditioned on large permanent shocks

un cola why have cost of living clauses disappeared from union contracts and will they return 1 introduction one of the major changes in collective bargaining in recent decades has been the gradual elimination of cost of living adjustments colas from union contracts in 1976 61 of union workers covered by major collective bargaining contracts had cola provisions but by the end of 1995 when the u s bureau of labor statistics stopped collecting data on collective bargaining settlements cola coverage had fallen to 22 1 although the decline in cola rates has been studied extensively there is no agreement as to which factors are primarily responsible for this decline one view attributes the elimination of colas or escalator clauses to declines in inflationary uncertainty a second view emphasizes the erosion of union power yet another view focuses on structural shifts in the u s economy previous research has not determined the relative importance of these and other hypotheses another reason to reassess cola determination is that the economy has changed since the early research was completed the bulk of studies to examine cola incidence statistically have relied on sample periods that end in 1982 or earlier 2 since then there have been major changes in union strength inflationary uncertainty and other potential determinants of wage indexation including deregulation of certain industries in addition more than 90 of the decline in cola rates has occurred since 1982 it is worthwhile to determine whether the factors deemed to be important in the early studies are still important we provide a comparison with previous research formally assess the contributions of various factors to the erosion of cola rates and provide insights as to likely changes in cola coverage in the future if inflation picks up and with it inflationary uncertainty 3 will cola rates rise to levels not seen since the 1970s what would be the consequences of a rebound in union power of further economic deregulation of likely industrial and demographic shifts in the economy once the major causes of past changes in cola coverage are understood it becomes possible to project the consequences of changes in key economic variables given the concern in macroeconomics with wage indexation and the linkage between wages and prices gray 1976 fischer 1986 ball and cecchetti 1991 schiller 1997 the extent to which cola coverage responds to economic factors has important implications for the economy underlying the empirical analysis is a pooled cross sectional time series model of cola incidence that accounts for industry fixed effects to estimate the model we assemble a panel data set of cola coverage and an array of characteristics for 32 private sector industries over a 22 year period because cola clauses are multiyear in nature the model also recognizes that the percentage of workers covered by cola clauses in a particular year depends on conditions in both the current year and previous years previewing results we find that the major cause of the decline in cola coverage has been the reduction in inflationary uncertainty second in importance has been the erosion of union power both the percentage of the industry s workforce that is unionized and the estimated union wage premium in the industry are highly significant determinants of cola coverage but because the union wage premium has remained largely intact in most industries changes in the premium are much less important than losses in unionization in explaining the overall decline in cola provisions economic deregulation industrial shifts and an increased presence of women in the workforce have had modest effects on cola rates on the basis of our findings a rebound in inflationary uncertainty to the levels experienced in the 1970s would raise cola coverage by 10 percentage points 2 background for workers in long term contracts colas provide at least partial protection from the consequences of unexpected inflation

inflation inflation uncertainty and relative price dispersion evidence from bivariate garch m models abstract one potential real effect of inflation is its influence on the dispersion of relative prices in the economy menu cost models generally imply that higher trend inflation will increase price dispersion in contrast signal extraction models predict that increased inflation uncertainty will raise relative price dispersion existing empirical studies do not distinguish between these separate hypotheses we constuct a bivariate garch m model of inflation and relative price dispersion to test these differing explanations in a single model and find that inflation uncertainty dominates trend inflation as a predictor of relative price dispersion

monetary mystique secrecy and central banking abstract the paper contains a discussion of the role of secrecy in the implementation of monetary policy it documents the federal reserve s defense of secrecy as argued in a recent freedom of information act suit the federal reserve s arguments are evaluated on the basis of economic theory theoretical papers related to the secrecy issue are reviewed the discussion highlights a number of potential benefits and costs of central bank secrecy and identifies some conditions under which secrecy could be socially beneficial

exchange rate policy and wage formation in an economy with many trade unions abstract exchange rate policy may confront governments with an important credibility problem while there is usually a long run gain from abstaining from devaluations there may also be a short run benefit from a devaluation this short run benefit may cause expectations of future devaluations resulting in wage and price rises that make the expectations self fulfilling this issue is analysed within a model with many trade unions if the government pursues a non devaluation policy the trade unions gain from voluntary wage restraint however if the non devaluation policy isn t credible the cooperation on wage restraint may break down

signalling wage controls and monetary disinflation policy focuses on wage control and monetary disinflation policy how the crucial variable to control is the money supply and wage and price controls should be avoided because of their macroeconomic costs the two types of government as being low inflation governments and high inflation governments how wage controls have microeconomic costs

nominal wage flexibility wage indexation and monetary union membership in a monetary union implies stronger incentives for nominal wage flexibility in the form of wage indexation and shorter contract length than non membership this counteracts the stabilisation policy cost of giving up monetary independence but more wage flexibility is only an imperfect substitute for an individual monetary policy it is possible that an increase in wage flexibility is welfare decreasing because of the accompanying rise in price variability the interaction between wage setting and central bank behaviour may result in either multiple equilibria or a unique full indexation equilibrium

wage indexation and time consistency note this note presents a simple model where the decision on the degree of wage indexation is taken by a large agent such as the government the optimal degree of indexing is shown to depend on the variance of real shocks and on the inflations bias of the government due to the incentive to raise employment above the market clearing level wage indexation will be low if real shocks are large and if the government is inflation averse the ability of monetary policy to offset monetary disturbances makes them irrelevant to the determination of the optimal degree of indexing copyright 1994 by ohio state university press

on the absence of positive wage indexation this paper rationalizes the absence of positive wage indexation in labour contracts that is of indexing provisions that link wage increases to inflation we investigate the equilibrium of a policy game in a stochastic economy in which wage setters and a policy maker interact strategically in order to determine the preferred degree of wage indexation and an optimal stabilization rule respectively our conclusion is that nominal wage rigidity and counterinflationary economic policy represent the best courses of action when price stability is valued and negative responses of contractual wages to price shocks are ruled out under these assumptions moreover the stochastic structure of the economy has no bearing on the optimality of maximal real wage flexibility this paper presents an argument for explaining nominal wage rigidity in labour contracts we investigate the equilibrium of a policy game in a stochastic economy in which wage setters and a policy maker interact strategically in order to determine the preferred degree of wage indexation and an optimal intervention rule respectively our conclusion is that indexing provisions that maximize the flexibility of real wages and counter inflationary economic policy represent the best courses of action for the players in the absence of schemes that create a negative correlation between wage and price movements maximal real wage flexibility is attainable through zero indexation or rigid nominal wages the crucial assumption that drives this result is that some price stability is desirable for the policy maker the introduction of price stability as a goal seems eminently justified from a practical standpoint the federal reserve system s legislative mandate from the federal reserve reform act of 1977 the ongoing debate about the house joint resolution 409 and the delors report which speaks of an unequivocal commitment to maintain price stability as the primary objective of the european system of central banks

rational expectations and policy credibility following a change in regime we examine the dynamic path of an economy after a change in regime when neither the policy to be followed nor the reactions of the public are known the model is an application of kreps and wilson s reputation model to barro and gordon s macroeconomic policy game equilibrium is defined to be the dynamically consistent solution to a game between the government and the private sector it involves mixed strategies and bayesian learning by both sides until the uncertainty about government and public behaviour is resolved the absence of complete credibility of government policy and intransigence of private sector wage demands increase the output loss of disinflation the analysis also sheds light on the strategic nature of economic policymaking and the role of information in macroeconomics

time consistent collection of optimal seigniorage a unifying framework this paper reviews the existing literature on the time consistency problem of seigniorage collection when monetary policy is determined by optimal taxation considerations it develops a unifying accounting framework and suggests a general measure for seigniorage which encompasses the standard measures employed in the literature in addition the ex ante optimal solution to the optimal taxation problem is derived and interpreted in relation to the ramsey principle we show that the different recommendations of the public finance literature i e the friedman rule of optimal deflation moderately positive inflation and seigniorage maximizing inflation are specific solutions to the optimal taxation problem the paper continues with a formal illustration of the time consistency problem of the ex ante optimal policy and the characterization of the time consistent solution under discretion as possible solutions to the time consistency problem we consider reputational forces institutional reforms that establish central bank independence and specific ways of asset and debt management in particular it is formally shown that a modified version of the asset and debt management scheme suggested by persson persson and svensson is not only necessary but also sufficient for optimality although this did not hold in their model

union wage setting and exchange rate policy the performance of an optimally managed float is compared with that of a credibly fixed exchange rate in a small open economy framework where wages are set by a monopoly union two key results emerge first a sufficient condition for the managed float to outperform a fixed rate is that the union be no less inflation averse than society second introducing an inflation target into the central bank s loss function ensures the superiority of the managed float regardless of the weight attached to inflation by the union both results reflect the sensitivity of the union mark up to the policy regime

standing tiebout on his head tax capitalization and the monopoly power of local governments much of the public finance literature argues that localgovernments behave competitively due to residents ease of exitand entry the model presented here challenges this widespreadconclusion though it is costless to relocate to anotherlocality the presence of tax capitalization makes it impossiblefor land owners to avoid monopolistic pricing of public servicesby moving land owners can only choose between paying the taxdirectly or paying it indirectly in the form of a lower sale valuefor their housing if they exit in consequence the only realcheck on local governments comes through imperfectly functioningelectoral channels

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

a theory of ambiguity credibility and inflation under discretion and asymmetric information this paper develops a positive theory of credibility ambiguity and inflation under discretion and asymmetric information the monetary policymaker maximizes his own politically motivated objective function that is positively related to economic stimulation through monetary surprises and negatively related to monetary growth the relative importance he assigns to each target shifts stochastically through time his current preference trade off is known to him but not to the public when choosing the state contingent path of money growth for the present and the future the policymaker compares the benefits from current stimulation with the costs associated with higher future inflation expectations current monetary growth conveys information to the public about future money growth because there is persistence in the policymaker s objectives although expectations are rational information is imperfect because monetary control procedures are imprecise as a result the public cannot correctly distinguish persistent changes of emphasis on different policy objectives from transitory monetary control errors the public becomes aware of changes gradually by observing past monetary growth credibility is defined in terms of the speed with which the public recognizes changes in the objectives of the policymaker credibility is lower the noisier monetary control and the more stable the objectives of the policymaker looser monetary control and a higher degree of time preference on the part of the policymaker induce him to produce higher and more variable monetary growth when the policymaker is free to determine the accuracy of monetary control he does not always choose the most effective control available in spite of the fact that monetary surprises always have an expected value of zero the reason is that ambiguous control procedures enable the policymaker to generate positive surprises when he cares more than on average about economic stimulation he leaves the inevitable negative surprises for periods in which he cares more about inflation prevention this result provides an explanation for the fed s preference for ambiguity recently documented by goodfriend 1986 the policymaker is more likely to pick more ambiguous control procedures the more uncertain his objectives and the higher his time preference the paper also provides a theoretical underpinning for the well documented crosscountry positive correlation between the level and the variability of inflation

cost minimizing risk adjustment conventional risk adjustment which sets capitation payments equal to the average cost of individuals with similar observable characteristics is not optimal if health plans can use private information to select low cost enrollees cost minimizing risk adjustment minimizes the sum of capitated hmo premiums plus ffs costs by balancing the gains from hmo cost efficiency against the overpayments that result from hmo selection estimations using privately insured data suggest that cost minimizing risk adjusted premiums reduce total sponsor costs as much as 25 6 below conventional risk adjustment premiums

monetary institutions monopolistic competition unionized labor markets and economic performance recent literature on the interactions between labor unions and monetary institutions features either a supply or a demand channel of monetary policy but not both this leads to two opposing views about the effects of central bank conservativeness we evaluate the relative merits of those conflicting views by developing a unified framework we find that i the effect of conservativeness on employment depends on unions relative aversion to unemployment versus inflation and ii for plausible values of this relative aversion and more than one union social welfare is maximized under a highly conservative central bank we also evaluate the effects of centralization of wage bargaining and product market competition on unemployment and inflation

time consistency indexation and the costs of inflation abstract we examine the effects of indexation measures on inflation costs of inflation and economic welfare within the barro gordon journal of political economy 1983 91 589 610 model the main result is that wage indexation in addition to making the phillips curve steeper also reduces the marginal cost of inflation which is inflationary

central bank independence and output variability abstract the benefit of greater central bank independence is the reduction in inflation that should result from the mitigation of a country s time consistency problem the cost of greater independence is the loss of discretionary monetary policymaking and consequent increase in output variability empirically however there is no correlation between output variability and central bank independence a possible explanation for this lack of correlation is that countries which are more likely to have lower output variability are also more likely to choose to have an independent central bank this hypothesis is tested using data for 44 countries while the evidence is weakly consistent with this hypothesis this does not seem sufficient to explain the zero correlation between output variability and central bank independence

risk selection and the specification of the conventional risk adjustment formula we argue that a sharp distinction must be made between the empirical problem of finding the best equation for explaining medical expenditures and the normative question of deriving capitations which give health plans the appropriate incentives we propose a procedure taken from the social choice literature to go from the estimated equations to the capitations if the estimated equations are not additively separable in legitimate and illegitimate risk adjusters it is impossible to remove all incentives for risk selection while respecting at the same time a straightforward requirement of horizontal equity this has immediate implications for the choice of the functional form moreover in so far as the conventional risk adjustment literature only includes so called legitimate risk adjusters in the estimations its results may suffer from omitted variables bias we illustrate our general methodological points with empirical results obtained from a cross section of 321 111 belgian patients

wage indexation employment and inflation price versus productivity indexing is considered in a model of monetary policy with incomplete information and wage bargaining in a perfectly price indexed economy the inflationary bias due to lack of credibility is eliminated however productivity indexing is more appropriate to dampen macroeconomic fluctuations that are caused by real disturbances we show that productivity indexing alone guarantees both price and employment stability provided the government s reputation is good enough and the union s bargaining power is not too strong this reduces the degree of price indexation as the union becomes weaker and the government s reputation improves productivity indexing is desirable with volatile productivity processes and weak unions jel classification e24 e52

imperfect factor mobility a generalization and synthesis of two sector models of international trade the paper constructs and analyses a two sector model characterized by an endogenous factor price differential resulting from imperfect factor mobility it is shown that various models commonly used in international trade theory are special cases of our model the major conclusions include 1 a demonstration that commodity factor intensity rankings do not alone determine the relationship between endogenous and exogenous variables 2 an indication of the role played by the elasticity of intersectoral factor mobility in determining the effects of exogenous disturbances and 3 a proof that the allocational and distributional effects of factor price differentials must be dissociated from their welfare implications mobiliue imparfaite desfacteurs de production synthese et gmneralisation des modcles a deux secteurs dans la theorie du commerce international ce memoire pr6sente et analyse un modele a deux secteurs caracterise par un differentiel endogene dans le prix des facteurs de production entre secteurs suscite par la mobilit6 imparfaite des facteurs de production on montre que les divers modeles utilises traditionnellement dans la theorie du commerce international sont des cas particuliers du modele presente ici les conclusions principales sont i que l ordonnancement des coefficients d intensite des facteurs pour les differents biens ne suffit pas pour definir le rapport entre les variables exogenes et endogenes ii une indication du role joue par l elasticite de la mobilite des facteurs entre secteurs dans la definition de l impact des chocs exogenes et iii une preuve que les effets d allocation et de repartition des differentiels de prix des facteurs entre secteurs peuvent etre dissocies de leur impact au plan du bien etre

inflation and wage indexation in the postwar united states this paper examines the relationship between inflation and wage indexation in the postwar united states using data on the prevalence of cost of living adjustments in major collective bargaining agreements the author finds that increases in inflation precede increases in wage indexation but reductions in inflation do not precede reductions in wage indexation there is virtually no evidence that wage indexation affects inflation copyright 1995 by mit press

reimbursing health plans and health providers efficiency in production versus selection the tradeoff between an insurer s or medical provider s incentives to select good risks and to produce efficiently is governed by the supply price analog to the demand price tradeoff between moral hazard and risk aversion under a variety of models the optimum supply price is a mixture of capitation and fee for service payments empirical literature shows that pure capitation payment leaves strong incentives for selection that are acted upon the presence of contracting costs in a rothschild stiglitz model means a limited pooling equilibrium can exist and that poor risks will not be at their preferred outcome

how do nominal and real rigidities interact a tale of the second best this paper analyses the importance of real wage rigidities in particular through their interaction with price stickiness for optimal monetary policy in a calibrated small open economy dsge model including oil in production and consumption blanchard and gali 2007a show real rigidities to introduce a trade off between stabilising inflation and the welfare relevant output gap the present paper complements their findings by showing that the welfare cost of real rigidities can be substantial compared to nominal frictions in a typical tale of the second best we also show that in the presence of real wage rigidities price stickiness can be welfare enhancing

factor immobility and gains from trade the implications of imperfect factor mobility have been studied by for example batra 1 ch 10 mussa 10 grossman 7 hill and mendez 8 and casas 4 among others this factorimmobility literature has generated many interesting results in the neo classical trade theory the issue of gains from trade has been studied by batra 1 ch 4 eaton and panagariya 6 choi and yu 5 and batra and naqvi 2 the implications of imperfect factor mobility for gains from trade remain by and large unexplored the main purpose of this paper is to explore the implications of factor immobility for several gains from trade and optimal policy issues a special feature of the present paper involves an endogenously determined wage differential arising from factor immobility however the wage distortion is not a genuine distortion as the social welfare depends upon workers locational preferences in addition to consumer demands the paper is developed as follows section ii describes the model and its assumptions section iii presents the analysis regarding the optimality of free trade free trade vs no trade and the optimal policies section iv shows the welfare effects of protection measures section v offers the concluding remarks

alternative models of choice under uncertainty and demand for health insurance the authors test a standard expected utility model and alternative models about how people evaluate risky prospects using data about individuals preferences among health insurance plans a model that assumes people evaluate gains and losses relative to a reference rather than final outcomes treat gains and losses asymmetrically and process certain and uncertain outcomes separately provides a better fit than the standard utility model these findings suggest inertia in health insurance plan choice and that individuals are more responsive to decreases than to increases in the price of insurance copyright 1996 by mit press

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

fiscal restraints and voter welfare this paper explores the logic of fiscal restraints in a political agency model with both moral hazard and adverse selection the role of the political process is both to discipline incumbents who may act against the public interest and to sort in those politicians who are most likely act in voters interests we use the model to examine the optimality of inefficient taxation limits on the size of government increasing transparency and yardstick competition some conclusions are surprising for example we show that some forms of fiscal restraint can only be desirable when incumbents are sufficiently likely to be benevolent

the indexation of wages and bonds in brazil this paper analyses the dynamic relationship between the degrees of indexation of wages and public bonds in brazil a simple model is constructed to show that both degrees of indexation are determined simultaneously we apply cointegration techniques and estimate error correction representations to assess the temporal causality between them our results provide empirical support for the existence of simultaneity in the degrees of indexation in brazil in the period 1980 93

goods diversion and repressed inflation notes on the political economy of price liberalization most analyses of parallel markets in centrally planned systems focus on queue rationing as the mechanism whereby state sector goods become available for second economy resale this article takes into account employee diversion of goods as a second channel through which merchandise can move to private markets diversion of goods tends to temper the adverse distributional consequences of price liberalization as repressed inflation increases more goods are diverted out of the state sector and the likelihood that an individual will be made worse off by a transition of free prices is diminished

persistence of dollarization after price stabilization credit contracts in developing countries are often denominated in foreign currencies even after many of these economies succeeded in controlling inflation this paper proposes a new interpretation of this apparent puzzle based on the demand for insurance against real shocks the fact that devaluations occur more frequently in adverse states of the world provides a motive for holding dollar assets this approach implies a complementarity between the optimal monetary policy and the currency denomination of contracts when a large proportion of liabilities is denominated in a foreign currency the optimal exchange rate volatility is low which reinforces the demand for dollar assets

the wage price spiral this paper rehabilitates the old wage price spiral it shows that after an increase in aggregate demand the process of adjustment of nominal prices and nominal wages results from attempts by workers to maintain or increase their real wage and by firms to maintain or increase their markups of prices over wages under continuous price and wage setting the process of adjustment would be instantaneous under staggering of price and wage decisions the adjustment takes time the more inflexible real wages and markups are to shifts in demand the higher is the degree of price level inertia and the longer lasting are the effects of aggregate demand on output

deadweight costs and the size of government abstract we provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare an improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending we demonstrate the similarity of the political responses to revenue shocks spending shocks changes in tax efficiency and changes in spending program efficiency empirical analysis of oil shocks intergovernmental grants and other autonomous changes in taxes or spending indicates that cause and effect is not only from spending to tax structures

credibility capital controls and the ems abstract a common rationale for membership in an exchange rate arrangement such as the european monetary system ems is that may enhance the credibility of a central bank s commitment to stable monetary growth in this paper we consider this idea in the lightof two other features of the ems namely the existence of exchange rate bands on the ongoing liberalization of capital controls we find that capital controls themselves affect credibility in a way that depends on the exchange rate bands we also show that it is difficult to reconcile the non zero width of the bands with the credibility based interpretation of the ems

the politics of ambiguity politicians face a trade off between the policies that maximize their chances of reelection and their most preferred policies or the policies most preferred by the constituency which they represent this paper analyzes this trade off in a dynamic electoral model in which the voters are not fully informed about the preferences of the incumbent first we show that the incumbent follows a policy which is intermediate between the other party s ideal policy and his own ideal policy second we show that often the incumbent has an incentive to choose procedures which make it difficult for voters to pinpoint his preferences with absolute precision thus politicians may prefer to be ambiguous

a theory of yardstick competition in the typical regulatory scheme a franchised monopoly has little incentive to reduce costs this article proposes a mechanism in which the price the regulatedfirm receives depends on the costs of identical firms in equilibrium each firm chooses a socially efficient level of cost reduction the mechanism generalizes to cover heterogeneous firms with observable differences medicare s prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here

america s historical experience with low inflation the inflation of the 1970s was a marked deviation from america s typical peacetime historical pattern as a hard money country we should expect america to continue to be a hard money low inflation country in the future at least in peacetime the low rate of future inflation that we thus forecast changes the balance of macroeconomic risks and opportunities the risk of debt deflation mediated recessions is somewhat higher because a low trend rate of goods and services price index inflation somewhat increases the chances of deflation but it does not raise such risks as much as one might think the failure of the fisher effect to hold empirically means that a low inflation era will in all likelihood be a high real interest rate era but such high real interest rates do not appear to significantly discourage investment or growth

establishing credibility a rational expectations viewpoint ongoing attempts to reduce the rate of inflation through restrictive monetary policy in the united states and a number of other countries have brought practical focus to the problem of establishing the credibility of macroeconomic policy while credibility is usually an unquestioned criterion of good public policy in the case of disinflation it takes on special importance credibility about a future change in the course of policy may be able to directly reduce the costs of disinflation by changing inflationary expectations since inflationary expectations have a significant influence on current wage and price decisions a reduction in actual inflation may result to the extent that it is quantitatively significant this expectations effect of credibility the expectations bonus puts a premium on establishing the credibility of a monetary disinflation program the purpose of this paper is to consider the problem of establishing the credibility of such a program from the perspective of a rational expectations approach to macroeconomic policy evaluation that credibility would have significant disinflation effects once established is closely associated with the rational expectations hypothesis and has been demonstrated both in the context of market clearing and contract based rational expectations models a summary of the results from the different models is contained in my 1980 review paper from macroeconomic research completed during the last ten years it now seems clear that a rational expectations approach to policy evaluation should not be confined to market clearing situations where all prices and wages adjust instantaneously nullifying the real effects of anticipated policy and leaving only unanticipated policy to matter in fact much rational expectations research in macroeconomics has given explicit attention to contracts and other rigidities which lead to infrequent adjustment of most wages and prices in this paper however i will only touch on this technical research and instead attempt to apply some of the more general principles of rational expectations to the problem of establishing credibility of macroeconomic policy at this time in the united

the demand for episodes of treatment in the health insurance experiment abstract this paper analyzes claims data from the rand health insurance experiment which were grouped into episodes of treatment the insurance plans in the experiment have coinsurance and a cap on out of pocket spending using new statistical techniques to adjust for the increased sickliness of those who exceed the cap the effects of coinsurance on cost per episode and number of episodes are estimated cost sharing reduced the number of episodes but had little effect on cost per episode people in the experiment responded myopically as their current insurance status changed through the year the price elasticity of spending was about 0 2 throughout the range of coinsurance studied when data permit it the study of episodes complements analyses of annual medical spending by revealing more about how decisions to spend are made within the year

centralised wage setting inflation contracts and the optimal choice of central banker the paper examines the appropriate design of central banking institutions in an economy in which the nominal wage is set by an inflation averse monopoly union as a positive mark up over its market clearing value the analysis considers both the optimal choice of central banker and the potential role for a linear inflation contract the optimal set of arrangements is a central banker who attaches less significance to inflation than does society combined with an inflation contract where the value of the contract parameter is related to the union s degree of inflationaversion following the important contribution of rogoff 1985 the appointment of a conservative central banker has been widely accepted as a potential albeit partial solution to the time inconsistency problem associated with discretionary policy making in placing a greater weight on inflation than does the government and society as a whole in the setting of monetary policy the central bank s temptation to create inflation surprises is reduced this then leads to a lower inflation rate in equilibrium than would otherwise prevail whilst in rogoff s stochastic framework this reduction in the inflationary bias has to be weighed against an increase in output variability the appropriate choice of central banker ensures a net improvement in welfare an important feature of rogoff s model is the assumption of an atomistic labour market in which nominal wages embodied in single period contracts reflect interaction between agents who hold no market power such a representation of the labour market also characterises most subsequent extensions of rogoff s analysis e g lohmann 1992 and waller 1992 however a number of recent papers in considering the time inconsistency issue have employed the assumption of unionised wage setting assuming either an allencompassing monopoly union or alternatively a number of individual unions each of which has a non negligible impact on macroeconomic variables examples include agell and ysander 1993 bleaney 1996 cubitt 1992 1995 horn and persson 1988 hutchison and walsh 1998 and skott 1997 these contributions have examined the implications of the assumed labour market imperfection from a variety of perspectives but only those of bleaney and skott directly consider its consequences for the appropriate specification of central bank objectives in what follows we explore the significance of unionised wage setting for

does inequality cause inflation the political economy of inflation taxation and government debt a democratic society in which the distribution of wealth is unequal elects political parties that are likely to represent the interests of poor people it is in the interests of the clientele of the resulting governments to attempt to levy inflation taxes in order to erode the real value of debt service and redistribute from the rich to the poor consequently inequality and high levels of nominal government debt sow the seeds for inflation some cross country evidence for this proposition is provided

factor mobility and the general equilibrium model of production abstract the two sector production model is generalized to accommodate any degree of mobility in the two factors the model provides a convenient framework for exploring the manner in which factor mobilities interact with factor intensities in resolving a number of basic issues in neoclassical trade theory particular emphasis is placed on determining the importance of absolute mobility when the two factors are equally mobile and of the size of the mobility differential when factor intensities are equal across sectors

the effect of monetary variability on welfare in a simple macroeconomic model abstract in many rational expectations macro models monetary variability reduces welfare this note provides a counterexample based on an extension of the discretionary equilibrium of barro and gordon 1983 to an economy with endogenous wage indexing greater monetary variability leads to greater wage indexing this lowers the authority s perceived return to discretionary monetary policy and thereby lowers the equilibrium rate of inflation the implication is that over a certain interval monetary variability may increase welfare

time consistent policy and persistent changes in inflation abstract this paper presents a model of dynamically consistent monetary policy that explains changes in inflation over time in the model as in the postwar united states adverse supply shocks trigger increases in inflation high inflation persists until a tough policymaker causes a recession to disinflate the paper also proposes an approach to selecting a unique equilibrium in infinite horizon models of monetary policy

market perceptions of federal reserve policy and the weekly monetary announcements abstract in october 1979 the federal reserve altered its operating procedures emphasizing control of the growth rate of the money stock was the fed able to gain credibility in the market the paper investigates this question by examining the reactions of spot and expected future exchange rates foreign interest rates and long run domestic forward interest rates to the weekly federal reserve announcements of m l both before and after october 1979 the empirical evidence points out that the fed did gain credibility but was unable to establish full credibility the market reactions are consistent with the hypothesis that market participants attached a positive probability to the event that the fed may at some point in the future abandon its money stock targets

risk sharing as a supplement to imperfect capitation a tradeoff between selection and efficiency this paper describes forms of risk sharing between insurers and the regulator in a competitive individual health insurance market with imperfectly risk adjusted capitation payments risk sharing implies a reduction of an insurer s incentives for selection as well as for efficiency in a theoretical analysis we show how the optimal extent of risk sharing may depend on the weights the regulator assigns to these effects some countries employ outlier or proportional risk sharing as a supplement to demographic capitation payments our empirical results strongly suggest that other forms of risk sharing yield better tradeoffs between selection and efficiency

imperfect factor mobility and the distribution of income abstract when labor is imperfectly mobile between industries workers may have a special interest in commercial policies that increase the price of the output of the industry in which they are employed this proposition is investigated in a two good model in which the degree of labor mobility is measured by the elasticity of a convex input transformation curve the existence of such a transformation curve is justified by a model in which individual workers have differing relative and absolute efficiencies in different industries the results are extended to the case of many industries

setting health plan premiums to ensure efficient quality in health care minimum variance optimal risk adjustment abstract risk adjustment refers to the practice of paying health plans a premium per person or per family based on a formula using risk adjusters such as age or gender and weights on those adjusters one role of risk adjustment is to make sure plans have an incentive to accept all potential enrollees another role at least as important in our view is to lead health plans to choose the efficient level of quality of care for the various services they offer most of the research and policy literature on risk adjustment focuses on the first problem this paper proposes a new way to calculate weights in a risk adjustment formula that contends with both problems for a given set of adjusters we identify the weights that minimize the variance in plan predictable health care costs that are not explained by risk adjustment addressing the access problem subject to the payments satisfying conditions for an optimal risk adjuster making sure plans provide the efficient quality we call the formula minimum variance optimal risk adjustment mvora

externalities from contract length an increase in the length of a firm s labor contract contributes to rigidity in the aggregate price level this increases the variance of aggregate demand but decreases the variance of other firms real wages under certain conditions the net effect is to increase the variance of other firms employment this negative externality implies that the equilibrium contract length in a decentralized economy is greater than the social optimum in other words wages are too rigid copyright 1987 by american economic association

a new keynesian model of policy irrelevance of the developments in macro theory of the last thirty years few have been as far reaching as the introduction of rational expectations in particular to the study of how discretionary use of monetary policy by central bankers affects output and employment by ascribing rational expectations to private agents lucas 11 kydland and prescott 10 barro and gordon 6 alesina and tabellini 1 rogoff 16 and a host of others have demonstrated examples in which agents who understand the motives of the monetary authority will correctly anticipate the monetary authority s actions and render them ineffective in affecting any real variables in these models it is only the innovations in monetary policy which private agents could not forecast that had any real effects systematic use of the tools of monetary policy to achieve an end were ineffective typically these models represented the economy as a reduced form game in which the payoffs to private agents depended on the realizations of actions of the monetary authority agents forecasts of those actions and random shocks imposed by nature it was understood if not always explicitly stated that some general equilibrium model existed whose equilibrium outcomes generated the payoff functions of the game the goal of the monetary authority was to alter the outcome of the game away from the non cooperative equilibrium towards some other outcome which was not consistent with autarkic payoff maximization but superior to the non cooperative outcome each individual agent would maximize his payoff by correctly anticipating the monetary authority s move in the aggregate the result would be that the monetary authority s action would be rendered ineffective

optimal contract length in a reputational model of monetary policy we develop a reputational model of monetary policy with endogenous contract length in choosing contract length private sector agents trade off recontracting costs against the expected costs resulting from trading under contracts based on incorrect inflation expectations however due to an externality the private and socially optimal contract lengths differ when selecting individual contract length private agents do not consider the effect of contract length on the surprise inflation output trade off in a reputational model of monetary policy this results in an excessive equilibrium inflation rate the socially optimal outcome may be achieved by public policies that reduce recontracting costs

indexation and incomes policy a study of wage adjustment in unionized manufacturing data from nearly 200 collective bargaining units are used to study the frequency of wage change from 1957 to 1978 it is shown that incomes policies during the kennedy johnson and nixon administrations encouraged changes in the length of time between wage adjustments inflation often thought to be responsible for fluctuations in the coverage of indexing provisions is found to play virtually no role the conclusion is that government intervention in the wageprice process aroused fears that the government will intervene again in the future in the presence of this uncertainty the wage adjustment provisions of collective bargaining contracts were changed

inflation unemployment and public opinion polls it is well known that public opinion polls report that the public regards inflation as a more serious problem than unemployment in this paper we examine public opinion surveys with the aim of discovering what if anything the poll results mean we describe in some detail the questions about inflation and unemployment asked in the surveys and analyze the determinants in both cross section and time series of answers to those questions the typical opinion poll question about inflation and unemployment is which of the two problems inflation or unemployment do you think will cause the more serious economic hardship for people during the next year or so 1 section 1 discusses the possible issues to which opinion poll questions about inflation and unemployment might be relevant section 2 tabulates a variety of questions that have been asked along with the responses and examines the views expressed and their consistency both internal and across different polls section 3 presents a regression analysis of the cross sectional determinants of responses to the michigan poll question cited above while section 4 studies determinants of changes over time

optimal reform postponement abstract the postponement of a reform program recognized to be necessary to control inflation is examined as a decision in an optimal control framework with a deteriorating and increasingly costlier inflation it is found that reforms are both more likely to be implemented and more likely to fail as inflation rises factors suggesting improved future conditions for a reform such as the possibility of external aid induce further postponement indexation and any other measures that reduce the current costs of inaction have the same effect

new macroeconomics and credibility analysis this paper gives a general view of the new macroeconomics the new keynesian macroeconomics the real business cycle models and the analysis of credibility of monetary policy an outline of the chief technical features that distinguish the new keynesian and the real business cycle formulations is provided highlighting the specific characteristics that have been reconciled by the recent literature on credibility analysis the point to be illustrated is that the combination of new keynesian market failures and the new classical general equilibrium approach to macroeconomics leads to better microeconomic foundation for the credibility analyses of monetary policy that follow the barro gordon notion of inflation bias of discretionary monetary policy

fiscal inconsistencies and high inflation abstract this paper presents a simple model of steady state inflationary financing the discrepancy between the target level of spending and a fixed taxing capacity indicates the degree of fiscal pressures this variable need not be monotonically related to the measured deficit since actual expenditures are endogenous large fiscal inconsistencies generate unique steady states located on the bad side of the inflation tax laffer curve there high inflation may coexist with low observed deficits and the revenue constraint results in repressed spending such situations correspond qualitatively with the loss of control over fiscal policies typical of high inflation economies

the incidence and intensity of wage indexation an empirical analysis variables suggested by theoretical studies of indexation are considered with a view to examining their utility in the context of the decision to index incidence and the desired degree of indexation when escalator clauses are put into effect intensity the tobit model which can address both of these issues suggests that most of the effects of explanatory variables on the regressand occur by modifying the incidence of indexation not its intensity however the tobit model is itself rejected in favour of separate probit and truncated regression investigations of incidence and intensity respectively the results obtained indicate that the standard list of explanatory variables which one thinks of in the context of the theoretical literature as dealing primarily with intensity perform well in explaining incidence but very poorly in accounting for the non limit observations the latter are influenced by bargaining power proxies such as the unemployment rate and union density a very clear trade off be

a model of the impact of reimbursement schemes on health plan choice flat capitation uniform prospective payments makes enrolling healthy enrollees profitable to health plans plans with relatively generous benefits may attract the sick and fail through a premium spiral we simulate a model of idealized managed competition to explore the effect on market performance of alternatives to flat capitation such as severity adjusted capitation and reduced supply side cost sharing in our model flat capitation causes severe market problems severity adjustment and to a lesser extent reduced supply side cost sharing improve market performance but outcomes are efficient only in cases in which people bear the marginal costs of their choices

efficiency wages disinflation and labor mobility abstract the paper analyzes the role of labor market segmentation and relative wage rigidity in the transmission process of disinflation policies in an open economy facing imperfect capital markets wages are flexible in the nontradables sector and based on efficiency factors in the tradables sector with perfect labor mobility a permanent reduction in the devaluation rate leads in the long run to a real appreciation a lower ratio of output of tradables to nontradables an increase in real wages measured in terms of tradables and a fall in the product wage in the nontradables sector under imperfect labor mobility unemployment temporarily rises