the ethics of intergenerational distribution reply and response to john e roemer recent concerns among economists over global climate change have given rise to an uneven literature on intergenerational welfare economics environmental resource economics in its march 2011 issue published a paper by the political philosopher john e roemer that contains not only errors of interpretation of what others have written but also misunderstandings of settled matters i respond and reply to roemer by re exploring the foundations of intergenerational welfare economics i show that ethical pluralism gives rise to a very different framework for thinking about the subject than the one roemer presents in his paper moreover his dismissal of much of what welfare economists write on such concepts as social discount rates has as its source an utterly narrow view of the contexts in which economic evaluation is undertaken in the contemporary world

the impact of fiscal policy on profits i introduction a large number of policy making decisions rely on the key issue of the impact of fiscal policy on the economy therefore it is not surprising that the effect of fiscal policy on macroeconomic aggregates has been extensively studied in the empirical literature 1 several authors starting with blanchard and perotti 2002 have attempted to estimate the effect of government spending shocks on output and other variables in the context of structural var models see perotti 2008 for a survey this interest has been renewed since the 2008 2009 recession given the unprecedented size of fiscal packages worldwide barro and redlick 2009 hall 2009 an important part of this literature focuses on the theoretical and empirical investigation of the fiscal policy transmission channels theories of fiscal policy transmission differ in their implications regarding the response of different macroeconomic variables to government spending shocks for example the neoclassical model predicts a negative impact of government spending on real wages and consumption while this prediction is challenged by new keynesian models to that end an important branch of empirical literature on fiscal multipliers has investigated the transmission channels of fiscal policy by looking mainly at the response of private consumption and real wages 2 this paper deals with an important but relatively under investigated channel of fiscal policy transmission which is the effect of fiscal policy on profits as pointed out by hall 2009 the impact of fiscal shocks on the markup of price over marginal cost is important for understanding the functioning of the fiscal multiplier in the purely neoclassical general equilibrium model a rise in government spending produces a negative wealth effect the labor supply curve shifts outward and real wages and consumption fall this implies that the output multiplier will be well below unity a keynesian type fiscal multiplier implying a large positive output effect and positive responses of private consumption and real wages to increased government spending relies on a negative response of the markup of price over marginal cost to an increase in economic activity the intuition is that a decrease in the price marginal cost markup in response to higher government spending allows a rise in wages or at least a smaller reduction in wages compared with the case when the markup is constant a rise in wages would then imply that households will substitute away from leisure and into consumption therefore if the markup is countercyclical conditional on government spending shocks sizeable output multipliers of fiscal spending are consistent with existing empirical evidence that fiscal shocks are not related to strong decreases in real wages or consumption blanchard and perotti 2002 fatas and mihov 2001 gall david lopez salid and valles 2007 perotti 2005 2008 in general a new keynesian model with sticky prices implies a countercyclical markup ratio as input prices rise in a boom while output prices stay constant however for understanding the fiscal policy transmission the key factor is markup and not price stickiness itself as a countercyclical markup could also be implied by models with flexible prices when the desired markup changes in response to a shock 3 a model which assigns a central role to markups for fiscal policy transmission has been presented by ravn schmitt grohe and uribe 2007 assuming that demand has a price inelastic component that is a function of deep habits a government spending shock that leads to a positive output response increases the share of the price elastic component of demand causing a rise in the overall demand elasticity and a corresponding decline in the optimal markup 4 thus for a sufficient decline in the markup the resulting rise in wages induces households to substitute away from leisure and into consumption thereby more than offsetting the negative wealth effect of government spending predicted by the neoclassical model

are optimal emissions really optimal four critical issues for economists in the greenhouse although the greenhouse effect is by many considered as one of the most serious environmental problems several economic studies of the greenhouse effect most notably nordhaus s dice model suggest that it is optimal to allow the emissions of greenhouse gases ghg to increase by a factor of three over the next century other studies have found that substantial reductions can be justified on economic grounds this paper explores into the reasons for these differences and identifies four partly overlapping crucial issues that have to be dealt with when analysing the economics of the greenhouse effect low probability but catastrophic events cost evaluation methods the choice of discount rate the choice of decision criterion the paper shows that i these aspects are crucial for the policy conclusions drawn from models of the economics of climate change and that ii ethical choices have to be made for each of these issues this fact needs wider recognition since economics is very often perceived as a value neutral tool that can be used to provide policy makers with optimal policies

the ethics of intertemporal distribution in a warming planet this paper evaluates from the ethical viewpoint current work by economists on intergenerational resource allocation in the presence of global warming we begin by attempting to elucidate the debate that has recently occurred on the appropriate choice of the discountrate weofferthreejustificationsformaximizingthediscountedsumofgenerational utilities and find only one of these to be a satisfactory justification of that practice the pos sibility that the human species may become extinct this implies that a very small discount rate large discount factor should be used we argue that the justification for discounting inherent in the approaches taken by many economists is that of the present generation of hegemon which is unacceptable the role of the ramsey equation in deducing the discount rate in these theories is explained as an alternative to discounted utilitarianism we propose a principle of sustainability we describe optimal paths that have been calculated for the sus tainabilitiarian rawlsian objectivefunction andpathsthatwillsustaingrowthinwelfare at a positive rate we report results concerning optimal paths when the uncertainty of existence of future generations is taken into account in sharp contrast to the utilitarian model it turns out that under some conditions the sustainabilitarian can ignore the uncertainty regarding thedateatwhichhumansbecomeextinct thereisastrikingdifferencebetweenthesolutions of the discounted utilitarian program and the sustainabilitarian program under uncertainty

tax structure and growth are some taxes better than others using pooled cross sectional data from 23 oecd countries between1965 and 1990 i find evidence that the tax structure affectseconomic growth specifically the proportion of tax revenueraised by taxing personal income has a negative correlation witheconomic growth this result is robust to a rigorous sensitivityanalysis where i control for other plausible growth determinantsin a systematic manner also there is some empirical evidencethat tax progressivity measured in terms of the long run incomeelasticity of tax revenue is associated with low economicgrowth

the impact of military burden on long run growth and welfare abstract this paper presents an endogenous growth model to examine how a government s resource allocation between the defense and non defense sectors will govern both economic growth and social welfare we demonstrate that there exists an optimal defense expenditure share that maximizes the economic growth rate but this rate is smaller than the welfare maximizing share this result can be viewed as a possible vehicle to explain why in many developing countries arms limitation and disarmament negotiations usually have low performance even failing

the damage costs of climate change a note on tangibles and intangibles applied to dice economic cost benefit analysis of the costs of greenhouse gas emission abatement and climate change often points towards limited abatement this note elucidates one reason why this result is obtained the way in which the intangible damages are treated and the utility function is specified on the basis of the dice model it is shown that by putting the intangible damages directly into the utility function and by assuming them to grow with per capita income the optimal reduction increases and in the second case more than triples compared to nordhaus s original results

corruption inflation and growth abstract we present a model in which the embezzlement of tax revenues by public officials leads the government to rely more on seigniorage to finance its expenditures this raises inflation which depresses investment and growth via a cash in advance constraint

tax structure and growth how robust is the empirical evidence this paper examines the link between the composition of tax revenues and the level of income per capita in the long run the tax and growth ranking suggested by some recent empirical studies is not robust under different assumptions about heterogeneity across countries of the long run and short run coefficients in the underlying econometric model evidence for significant taxstructure effects depends on long run parameter homogeneity restrictions underlying pooled mean group estimation which are found to be invalid

how to decide when experts disagree uncertainty based choice rules in environmental policy environmental economists have traditionally addressed the issue of choice under uncertainty by applying the expected utility hypothesis when policymakers face a panel of experts with widely divergent beliefs the problem may more accurately be described as a case of choice under pure uncertainty arrow and hurwicz 1972 demonstrate that rational choice criteria under pure uncertainty will focus on the extremes of the state space not the midpoint as is typically assumed using nordhaus s dice model uncertainty based choices about global warming policies are evaluated linkages to the safe minimum standard and the precautionary principle are also discussed

macroeconomic effects of corporate tax policy abstract prior studies on the relation between corporate taxes and future macroeconomic growth present contradictory evidence we argue this mixed evidence is at least partly due to the use of statutory corporate tax rates which ignore the complexity of tax exemptions tax deductions tax enforcement and firms tax planning we propose an alternative tax rate measure that aggregates cash effective tax rates of listed firms which reflect not only statutory tax rates but also other features of the tax code enforcement and firms tax planning we find a strong robust negative relation between country level effective tax rates and future macroeconomic growth

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

sustainability as intergenerational fairness efficiency uncertainty and numerical methods this paper presents an economic model of sustainability defined as intergenerational fairness assuming that intergenerational fairness is an obligation of each generation a recursive optimization problem is obtained the problem has the advantage that uncertainty can readily be incorporated in the model and it can be solved numerically for a wide range of specifications the possibility of trade offs between efficiency and sustainability are discussed under plausible conditions it is shown that a sustainability obligation is met only if there is the expectation of economic growth

military spending and economic growth in china a regime switching analysis this article investigates the impact of military spending changes on economic growth in china over the period 1953 to 2010 using two state markov switching specifications the results suggest that the relationship between military spending changes and economic growth is state dependent specifically the results show that military spending changes affect the economic growth negatively during a slower growth higher variance state while positively within a faster growth lower variance one it is also demonstrated that military spending changes contain information about the growth transition probabilities as a policy tool the results indicate that increases in military spending can be detrimental to growth during slower growth higher growth volatility periods

short term growth effects of fiscal policy revisited a markov switching approach abstract this paper investigates the growth effects of three different types of tax policy innovations on short term economic growth within a markov switching framework applied to the u s economy

scientific progress and irreversibility an economic interpretation of the precautionary principle abstract we consider the problem of the optimal use of a good whose consumption can produce damages in the future scientific progress is made over time that provides information on the distribution of the intensity of damages we show that this progress induces earlier prevention effort only if prudence is larger than twice absolute risk aversion this paper thus identifies the class of quite restrictive but plausible conditions such that scientific uncertainties justify an immediate reduction of the consumption of a potentially toxic substance

specifications of social welfare in economic studies of climate policy overview of criteria and related policy insights an important assumption in economic studies of climate policy is the social welfare function this paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control notably if climate change impacts are uncertain first decision criteria in current climate economic studies are reviewed next the most important alternatives are discussed including their mathematical formalization and incorporation in economy climate models most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach however several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy we conclude that there is clear need for systematic research on this theme for which the current review provides a solid basis

public debt and the limits of fiscal policy to increase economic growth abstract this study proposes a theoretical model of endogenous growth that demonstrates that the level of the public debt to gross domestic product gdp ratio should negatively impact the effect of fiscal policy on growth this effect occurs because government indebtedness extracts a portion of young people s savings to pay interest on the debts therefore the payment of debt interest requires an allocation exchange system across generations that is similar to a pay as you go pension system which results in changes in the savings rate of the economy the major conclusions of the theoretical model were verified using an econometric model that provides evidence of the validity of this conclusion our empirical analysis controls for time invariant country specific heterogeneity in growth rates we also address endogeneity issues and allow for heterogeneity across countries in the model parameters and for cross sectional dependence

threshold effects of inflation on economic growth in developing countries abstract this paper introduces a generalized panel threshold model by allowing for regime intercepts the empirical application to the relation between inflation and growth confirms that the omitted variable bias of standard panel threshold models can be statistically and economically significant

choice under partial uncertainty this paper analyzes problems of choice under uncertainty where a decisionmaker does not use subjective probabilities the decisionmaker has a set of beliefs about which states are more likely than others but his beliefs cannot be represented as subjective probabilities three main kinds of decision rules are possible in this framework these are maximin type maximax type and choosing that action that gives the highest payoff in the state which the decisionmaker believes to be most likely the author replaces the commonly used merger of states axiom with a version of the sure thing principle copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

using ols to estimate and test for structural changes in models with endogenous regressors summary we consider the problem of estimating and testing for multiple breaks in a single equation framework with regressors that are endogenous i e correlated with the errors we show that even in the presence of endogenous regressors it is still preferable in most cases to simply estimate the break dates and test for structural change using the usual ordinary least squares ols framework except for some knife edge cases it delivers estimates of the break dates with higher precision and tests with higher power compared to those obtained using an instrumental variable iv method also the ols method avoids potential weak identification problems caused by weak instruments to illustrate the relevance of our theoretical results we consider the stability of the new keynesian hybrid phillips curve iv based methods only provide weak evidence of instability on the other hand ols based ones strongly indicate a change in 1991 q1 and that after this date the model loses all explanatory power copyright 2013 john wiley sons ltd

the impact of government debt expenditure and taxes on aggregate investment and productivity growth in this paper we evaluate empirically the impact of fiscal policy on two key determinants of long term growth i e private investment and productivity growth we mostly focus on a panel of 20 oecd economies from 1970 to 2009 although we also present some estimates based on data for 80 developing economies our findings suggest that high public debt adversely affects both aggregate investment spending and productivity growth through distortions related to the size of the public sector we also find weak evidence of some non linear effects on productivity with government debt becoming more detrimental in advanced economies when above 85 90 of gdp

intertemporal distribution sufficiency and the social cost of carbon abstract we explore how the intertemporal distribution of well being affects the social cost of carbon in contrast to the literature that studies parameters of a particular social welfare function such as the discount rate we shift the focus and directly assume a parametric form for the intertemporal distribution of well being this has the advantage of avoiding explicit discounting choices which has initiated much debate specifically we consider a set of intertemporal distributions that reach a steady state at a pre specified level of sufficient well being or equivalently after a pre specified end of growth horizon we numerically illustrate our results in dice and find that the social cost of carbon increases over proportionally with the sufficiency level of well being while the social cost of carbon in 2015 is us 7 if the sufficiency level is four fold the present level it is us 30 if the sufficiency level is 15 fold and us 100 if the sufficiency level is 26 fold the present level this shows in a transparent way how conceptions of intergenerational distributive justice drive the social cost of carbon

growth effects of flat rate taxes recent estimates of the potential growth effects of tax reform vary wildly ranging from zero to eight percentage points using an endogenous growth model we assess which model features and parameter values are important for determining the quantitative impact of tax reform we find that the critical parameters are factor shares depreciation rates the elasticity of intertemporal substitution and the elasticity of labor supply the elasticities of substitution in production on the other hand are relatively unimportant the quantitative estimates in several recent papers are compared with each other and with some of the evidence from u s experience we find that robert lucas s conclusion that tax reform would have little or no effect on the u s growth rate is theoretically robust and consistent with the evidence

a cost benefit analysis of slowing climate change there are many conflicting views regarding the true dimensions of the climate change problem often these viewpoints are based on different estimates of key parameters with little indication as to why parameter estimates vary so much and which ones might be the more reliable the prospects for a co ordinated strategy to tackle climate change appear dim little consensus has emerged for example regarding the costs of abating carbon emissions some take the view that considerable improvements in energy efficiency are available at negative cost by setting minimum efficiency standards for vehicles and domestic appliances e g mills et al 1991 others regard the macroeconomic costs of even small reductions in carbon emissions as substantial manne and richels 1993 in the judgement of other researchers a proportion of carbon emissions arise purely as a result of institutional failings either at a regional level in the subsidies paid to fossil fuel energy producers in the erroneous belief that this promotes economic growth shah and larsen 1994 in failure to deal with air pollution glomsrod et al 1992 and vehicle congestion in urban areas hughes 1994 or at a global level in failing to make appropriate transfers to those countries whose forests contain rich biodiversity which we would wish to preserve pearce 1991

empirics of hills plateaus mountains and plains a markov switching approach to growth abstract most economic growth research has been aimed at explaining cross country differences in average growth rates however it is well known that growth experiences differ over time within a country almost as much as they differ among countries this paper builds on pritchett s 2000 pritchett lant understanding patterns of economic growth searching for hills among plateaus mountains and plains world bank economic review may 2000 14 2 221 250 observation that the growth process can be thought of as transitions between different growth regimes and proposes a framework for systematic analysis of such regimes and the dynamics of the transitions i estimate a markov switching regression to characterize four distinct growth regimes and transitions between them the results show that countries switch among regimes of stable growth miracle catch up stagnation and crisis with the transition probabilities determined by the quality of institutions better institutions appear to improve long run growth by making episodes of fast growth more persistent low average growth rates in countries with weak institutions are a result of these countries spending more time in stagnation regimes rather then being incapable of fast growth at all weak institutions do not rule out growth takeoffs but limit their sustainability the approach directs attention to shifts in growth performance and highlights the fact that identical average growth rates can mask very distinct growth paths

on the economics of renewable energy sources abstract with the global expansion of renewable energy re technologies the provision of optimal re policy packages becomes an important task we review pivotal aspects regarding the economics of renewables that are relevant to the design of an optimal re policy many of which are to date unresolved we do so from three interrelated perspectives that a meaningful public policy framework for inquiry must take into account first we explore different social objectives justifying the deployment of re technologies and review model based estimates of the economic potential of re technologies i e their socially optimal deployment level second we address pivotal market failures that arise in the course of implementing the economic potential of re sources in decentralized markets third we discuss multiple policy instruments curing these market failures our framework reveals the requirements for an assessment of the relevant options for real world decision makers in the field of re policies this review makes it clear that there are remaining white areas on the knowledge map concerning consistent and socially optimal re policies

why the far distant future should be discounted at its lowest possible rate abstract a critical feature of the distant future is currently unresolvable uncertainty about what will then be the appropriate rate of return on capital to use for discounting this paper shows that there is a well defined sense in which the lowest possible interest rate should be used for discounting the far distant future part of any investment project some implications are discussed for evaluating long term environmental projects or activities like measures to mitigate the possible effects of global climate change

budget deficits and interest rates a fresh perspective we extend the literature on budget deficits and interest rates in three ways we examine both advanced and emerging economies and for the first time a large emerging market panel explore interactions to explain some of the heterogeneity in the literature and apply system gmm there is overall a highly significant positive effect of budget deficits on interest rates but the effect depends on interaction terms and is only significant under one of several conditions deficits are high mostly domestically financed or interact with high domestic debt financial openness is low interest rates are liberalized or financial depth is low

taxation aggregate activity and economic growth cross country evidence on some supply side hypotheses data from sixty three countries are used to examine the impact of average and marginal tax rates on the level and growth of economic activity apparent negative effects of tax rates on growth disappear upon controlling for 1 potential endogeneity of average tax rates to per capita income and 2 the relation between economic growth and per capita income however controlling for average tax rates increases in marginal tax rates have negative effects on the level of economic activity this evidence supports the hypothesis that reductions in the progressivity of tax rates induce a parallel shift upward in the growth path

searching for non linear effects of fiscal policy evidence from industrial and developing countries several recent studies suggest that the response of national saving to scal policy may be non linear in this paper we use two data sets to search for the circumstances in which such non linear response may arise a sample of oecd countries already used in previous studies and a sample of developing countries using more recent world bank data we nd that in both samples non linear e ects tend to be associated with large and persistent scal impulses in the oecd sample the non linearity of the response is stronger for scal contractions than for expansions an increase in net taxes has no e ect on national saving during large scal contractions while it has a positive e ect in less pronounced contractions high or rapidly growing public debt does not appear to be a good predictor of non linear e ects in the world bank sample of developing countries non linearities in the response national saving to scal policy are not limited to large scal contractions and also tend to occur in periods in which debt is accumulating rapidly regardless of its initial level 2000 elsevier science b v all rights reserved jel classixcation e21 e62 h31

defence spending economic growth and temporal causality evidence from taiwan and mainland china 1952 1995 this paper uses a cointegration analysis and a vector autoregressive model var to examine the causal relationship between defence spending and economic growth for taiwan and mainland china over the period 1952 1995 it is found that these two variables are not cointegrated for both countries studied the results of the granger causality tests suggest bidirectional granger causality feedback between defence spending and economic growth for taiwan unidirectional granger causality running from economic growth to defence spending for mainland china and unidirectional granger causality running from taiwan s defence spending to mainland china s defence spending for cross country studied these results further indicate that there exists no arms race between two countries from both sides of taiwan strait furthermore impulse responses and variance decompositions are incorporated into the analysis the results from the impulse responses and variance decompositions tell a similar story

government size and economic growth a new framework and some evidence from cross section and time series data a study of the impact of government size on economic performance and growth is important theoretically one point of view suggests that a larger government size is likely to be detrimental to efficiency and economic growth because for example i government operations are often conducted inefficiently ii the regulatory process imposes excessive burdens and costs on the economic system and iii many of government s fiscal and monetary policies tend to distort economic incentives and lower the productivity of the system at the other extreme one can identify some points of view that assign to the government a critical role in the process of economic development and could argue that a larger government size is likely to be a more powerful engine of economic development there are several arguments on which the latter point of view is based these include besides others i role of the government in harmonizing conflicts between private and social interests ii prevention of exploitation of the country by foreigners and iii securing an increase in productive investment and providing a socially optimal direction for growth and development

military spending and the growth maximizing allocation of public capital a cross country empirical analysis i introduction public spending promotes economic growth by enhancing the productive capacity of private firms the literature recognizes the possibility that different types of public spending e g infrastructure education health and military expenses can exert different impacts on economic growth military spending is a case in point given its value in maintaining both internal and external security military spending increases the incentives to accumulate private capital and attract foreign investment the defense sector also provides a variety of public infrastructure e g roads and communication networks while also enhancing human capital accumulation through training and provision of educational services on the other hand military spending diverts resources that could be more productive for the economy in nonmilitary uses in this sense defense spending may degrade long run economic growth 1 the characterization of the external effect of public spending on private firm decisions has focused on the context of a production function with the specification of the aggregate flow of public spending barro 1990 or the aggregate stock of public capital turnovsky 1997 a line of research takes care to break out different forms of public spending devarajan swaroop and zou 1996 recognize productive and unproductive public spending play distinct roles in an endogenous growth model using a production function kalaitzidakis and kalyvitis 2004 break down public spending into infrastructure and maintenance expenditure while chen 2006 into productive and consumptive spending benoit s 1973 1978 seminal work decomposes growth rates to investigate defense expenditure rates on economic growth for a panel of 44 less developed nations between 1950 and 1965 with a view toward assessing the impact of different forms of public capital on economic growth the production function approach has been undertaken to investigate the impact of government spending by type on growth e g baffes and shah 1998 cross country panel evans and karras 1994 for a panel of states in the united states devarajan swaroop and zou 1996 investigate the impact of public capital types by focusing on growth rates and assume linear relations between the different types of government spending and the growth rate of real per capita gross domestic product gdp 2 however a theoretical growth model developed recently by shieh lai and chang 2002 suggests that the effect of the budget share of military spending on gdp growth is nonlinear following an inverse u shaped pattern building upon theoretical construction in shieh lai and chang 2002 this study derives the growth maximizing values of the shares of public investment allocated to the two different types of public capital i e military and nonmilitary spending as well as the growth maximizing tax rate focusing on a panel of both developed and developing economies an empirical investigation is undertaken to assess the theoretical implications of the model that both the effect of the budget share of military spending and that of the tax rate on long run growth are nonlinear following an inverse u shaped pattern the rest of the paper is organized as follows section ii sets up a representative firm model and derives the growth maximizing levels of the tax rate and the shares of public capital investment section iii sets up the econometric procedures followed and presents an empirical investigation of the theoretical model in a sample of developed and developing economies finally section iv concludes the paper ii theoretical framework we consider a closed economy populated by identical agents consuming and producing a single commodity y without population growth the labor force is equal to the population with labor supplied inelastically on the production side the representative firm j produces its output using a conventional cobb douglas technology i

an overlapping generations model of climate economy interactions a numerically calibrated overlapping generations model of climate change and the world economy is examined in this paper in the absence of intergenerational transfers efficient rates of greenhouse gas emissions abatement rise from 16 in the present to 25 in the long run while mean global temperature increases by 7 40c relative to the preindustrial norm a utilitarian optimum which attaches equal weight to each generation s life cycle utility yields abatement rates that rise from 48 to 89 with a long run temperature increase of 3 40c a second best utilitarian path in which intergenerational transfers are by assumption institutionally infeasible also supports stringent abatement measures i introduction the infinitely lived agent framework pioneered by frank ramsey 1928 has emerged as a central structure in the economics of climate change as characterized by ipcc 1996 working group iii climate change occurs when anthropogenic emissions of greenhouse gases principally carbon dioxide but also chlorofluorocarbons methane nitrous oxide and water vapor contribute to long term increases in mean global temperature potentially disrupting ecological systems and climate dependent production activities the best known study on the economics of this subject is nordhaus 1994 dynamic model of climate and the economy dice which incorporates assumptions regarding the costs and benefits of greenhouse gas emissions in a standard one sector growth model in nordhaus analysis a 50 reduction in greenhouse gas emissions would reduce gross world output by 0 93 a doubling of greenhouse gas concentrations relative to the preindustrial norm which is expected to occur by the middle of the twenty first century would reduce output by

epstein zin utility in dice is risk aversion irrelevant to climate policy climate change involves uncertain probabilities of catastrophic risks and very longterm consequences of current actions climate economics therefore is centrally concerned with the treatment of risk and time yet conventional assumptions about utility and optimal economic growth create a perverse connection between risk aversion and time preference such that more aversion to current risks implies less concern for future outcomes and vice versa the same conflation of risk aversion and time preference leads to the equity premium puzzle in finance a promising response to the equity premium puzzle the recursive utility of epstein and zin allows separation of risk aversion and time preference at the cost of considerable analytic complexity we introduce an accessible implementation of epstein zin utility into the dice model of climate economics creating a hybrid ez dice model using epstein zin parameters from the finance literature and climate uncertainty parameters from the science literature we find that the optimal climate policy in ez dice calls for rapid abatement of carbon emissions it is similar to standard dice results with the discount rate set to equal the risk free rate of return ez dice solutions are sensitive to the intertemporal elasticity of substitution but remarkably insensitive to risk aversion insensitivity to risk aversion may reflect the difficulty of modeling catastrophic risks within dice implicit in dice are strong assumptions about the cost of climate stabilization and the certainty and speed of success under these assumptions risk aversion would in fact be unimportant a more realistic analysis will require a subtler treatment of catastrophic climate risk

justifying social discounting the rank discounted utilitarian approach the popular discounted utilitarian criterion for infinite horizon social choice has been criticized on the ground that it treats successive generations unfairly i propose to evaluate intergenerational welfare with a rank discounted utilitarian rdu criterion instead the criterion amounts to discounted utilitarianism on non decreasing paths but it treats all generations impartially discounting becomes the mere expression of intergenerational inequality aversion i show that more inequality averse rdu societies have higher social discount rates when future generations are better off i apply the rdu approach in two benchmark economic growth models and i prove that it promotes sustainable policies maximizing discounted utility

intergenerational equity discounting and the role of cost benefit analysis in evaluating global climate policy when public policies with impacts far into the future are being debated the question inevitably is raised whether cost benefit analysis which discounts future costs and benefits is not biased against future generations and whether if such discounting is appropriate at all a lower rate should be used to avoid such bias the debate on global climate change is no exception this paper sketches and analyses the welfare foundations of cost benefit analysis and from this perspective analyses the role of cost benefit analysis in the climate policy debate particularly with reference to intergenerational effects the paper concludes that the cost benefit criterion cannot provide a definitive basis for deciding whether we should commit to a longer term programme to moderate climate change the issues of intergenerational equity are not that global climate change will significantly lower the gnp of future generations but relate to the possibility of science fiction like changes in the planet that will produce catastrophic effects in the future and the typical way in which the cost benefit problem is posed obscures the basic choices that we should be evaluating

a regional dynamic general equilibrium model of alternative climate change strategies outcomes and noncooperative equilibria this study finds that cooperative policies show much higher levels of emissions reductions than do noncooperative strategies that there are substantial differences in the levels of controls in both the cooperative and the noncooperative policies among different countries and that high income countries may be the major losers from cooperation jel h41 q4 q2 q20

government spending and economic growth this study reviewed recent empirical studies providing fresh evidence of the impact of government spending on economic growth it is followed by a new theoretical synthesis and this as well as the other models are in turn subjected to empirical validation the empirical validation is conducted for both developed and less developed economies based on simultaneous equations as well as single equation models with or without adjusting for differences in th total factor productivity growth government size is estimated to have positive impact on economic growth in the short run but not in the intermediate run 25 years in this study

the growth effects of tax rates in the oecd this paper explores the merits of macro and micro based tax rate measures within an open economy fiscal policy and growth model using annual data for 15 oecd countries we find statistically small non robust long run growth effects of macro based average tax rates on capital income and consumption but some evidence for average labor income tax effects changes in micro marginal income tax rates at both the personal and corporate levels yield statistically robust gdp responses of modest size both domestic and foreign corporate taxes appear relevant in general tax effects on gdp operate largely via factor productivity rather than factor accumulation

declining discount rates in this paper we ask whether the us government should replace its current discounting practices with a declining discount rate schedule as the united kingdom and france have done or continue to discount the future at a constant exponential rate to address the question we briefly present the theoretical basis for a declining discount rate ddr schedule and focus on how in practice a ddr could be estimated for use by policy analysts we discuss the empirical approaches in the literature and review how the united kingdom and france estimated their ddr schedules we conclude with advice on how the united states might proceed to consider modifying its current discounting practices i the expected net present value approach to ddrs

are there reasons against open ended research into solar radiation management a model of intergenerational decision making under uncertainty solar radiation management srm has been proposed as a means of last resort against dangerous climate change we propose a stylized model of intergenerational decision making on srm research greenhouse gas abatement and srm deployment under uncertainties about a the extent of future climate damage and b effectiveness and potential harmful side effects of srm open ended research may reveal either that srm effectively reduces climate damage or that it would cause more harm than benefits we find that srm research increases the likelihood of deployment slippery slope and derive conditions that it decreases abatement effort in expectation moral hazard neither of these provides a rationale against srm research though the rational decision is to perform srm research unless i discounting is hyperbolic and ii the absolute prudence of expected climate damage is smaller than absolute risk aversion these results generalize to the case where srm research also provides information on climate sensitivity

unemployment growth and taxation in industrial countries unemployeement and taxes do taxes affect the rate of umemployeement to the layman the upward trend in european unemployment is related to the slowdown of economic growth we argue that the layman s view is correct the increase in european unemployment and the slowdown in economic growth are related because they stem from a common cause an excessively rapid growth in the cost of labour in europe labour costs have gone up for many reasons but one is particularly easy to identify higher taxes on labour if wages are set by strong and decentralized trade unions an increase in labour taxes is shifted onto higher real wages this has two effects first it reduces labour demand and thus creates unemployment secondly as firms substitute capital for labour the marginal product of capital falls over long periods of time this in turn diminishes the incentive to invest and to grow the data strongly support this view according to our estimates the observed rise of 14 percentage points in labour tax rates between 1965 and 1995 in the eu could account for a rise in eu unemployment of roughly 4 percentage points a reduction of the investment share of output of about 3 percentage points and a growth slowdown of about 0 4 percentage points a year francesco daveri and guido tabellini

government size and growth a rejoinder in our 2011 survey of the literature in the journal of economic surveys on the effect of government size on economic growth in wealthy countries we find a relatively consistent pattern an increase in government size by 10 percentage points is associated with a 0 5 1 percentage point lower annual growth rate this conclusion is questioned by colombier in this rejoinder we present a rebuttal of colombier s argument based on a detailed scrutiny of his own statistical evidence and regression results furthermore we note that several new papers that have appeared since our original paper was published give support to our main conclusion

fundamental irreversibilities in stock externalities abstract this paper concerns the irreversibility effect in stock externalities in an environment of uncertainty with learning taking place one may wish to under emit today to avoid potential environmental irreversibilities alternatively one may wish to under invest in pollution control capital avoiding investments in sunk capital that turn out to be wasted the paper develops theoretical results on the tension between these two effects and separates risk aversion from the irreversibility effect the paper also presents a simple example in climate change policy

the impact of taxes on growth and distribution in developed capitalist countries a cross national study has the scope of public planning in contemporary capitalist economies promoted or hindered economic growth and income distribution we explore this question by assessing the impact of various mechanisms for raising government revenues on investment growth and income distribution in 22 developed market economy countries the article considers whether growth and distribution are affected differently by governments relative reliance on personal and corporate income taxes social security contributions property taxes and sales and value added taxes or by the relative progressivity of tax mechanisms our findings lend support to the assertion that fiscal instruments especially personal income taxes can be used successfully to achieve greater income equality on the other hand these findings run counter to the conventional notion that an automatic trade off exists between an active public sector and a dynamic expanding economy although there is surely some tension between the economic goals of growth and equality it is not at all clear that they are necessarily incompatible or that government can contribute only to the latter

robust monetary policy structural breaks and nonlinearities in the reaction function of the central bank of brazil abstract in this work we seek to investigate the existence of nonlinearities in the reaction function of the central bank of brazil arising from this policymaker s uncertainties about the effects of the output gap on inflation theoretically we follow tillmann 2011 to obtain a nonlinear optimal monetary policy rule that is robust to uncertainty about the output inflation trade off of the phillips curve in addition we perform structural break tests to assess possible changes in the conduct of the brazilian monetary policy during the inflation targeting regime the results indicate that i the uncertainties about the slope in the phillips curve implied nonlinearities in the central bank of brazil s reaction function ii we cannot reject the hypothesis of a structural break in the monetary rule parameters occurring in the third quarter of 2003 iii there was an increase in the response of the selic rate to output gap and a weaker response to the current inflation gap in meirelles tombini s administration and iv the central bank of brazil has also reacted to the exchange rate in meirelles tombini s administration

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

fiscal spending and economic growth some stylized facts using an event analysis this paper complements the cross country approach to the study of fiscal correlates of growth data on fiscal expenditures and growth for a database of 140 countries 118 developing countries over 1972 2005 are reorganized around turning points providing a summary but encompassing description of what is in the data for this sample the probability of occurrence of a fiscal event is about 10 and the probability of a growth event once a fiscal event had occurred is around 26 for developing countries fiscal events followed by growth events occur under situations of i significantly lesser deficit ii fewer resources devoted to non interest general public services and iii shift in primary expenditures toward transport communication after controlling for the growth inducing effects of positive terms of trade shocks and of trade liberalization reform probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event moreover the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit confirming that success of a growth oriented fiscal expenditure reform is associate with a stabilized macroeconomic environment through limited primary fiscal deficit

designing climate mitigation policy this us paper provides an exhaustive review of critical issues in the design of climate mitigation policy by pulling together key findings and controversies from diverse literatures on mitigation costs damage valuation policy instrument choice technological innovation and international climate policy the authors begin with the broadest issue of how high assessments suggest the near and medium term price on greenhouse gases would need to be both under cost effective stabilization of global climate and under net benefit maximization or pigouvian emissions pricing the remainder of the paper focuses on the appropriate scope of regulation issues in policy instrument choice complementary technology policy and international policy architectures

fiscal deficits and growth in developing countries this paper examines the relation between fiscal deficits and growth for a panel of 45 developing countries based on a consistent treatment of the government budget constraint it finds evidence of a threshold effect at a level of the deficit around 1 5 of gdp while there appears to be a growth payoff to reducing deficits to this level this effect disappears or reverses itself for further fiscal contraction the magnitude of this payoff but not its general character necessarily depends on how changes in the deficit are financed through changes in borrowing or seigniorage and on how the change in the deficit is accommodated elsewhere in the budget we also find evidence of interaction effects between deficits and debt stocks with high debt stocks exacerbating the adverse consequences of high deficits

on international equity weights and national decision making on climate change abstract estimates of the marginal damage costs of carbon dioxide emissions require the aggregation of monetised impacts of climate change over people with different incomes and in different jurisdictions implicitly or explicitly such estimates assume a social welfare function and hence a particular attitude towards equity and justice we show that previous approaches to equity weighting are inappropriate from a national decision maker s point of view because domestic impacts are not valued at domestic values we propose four alternatives sovereignty altruism good neighbour and compensation with different views on concern for and liability towards foreigners the four alternatives imply radically different estimates of the social cost of carbon and hence the optimal intensity of climate policy

a dynamic analysis of human welfare in a warming planet anthropogenic greenhouse gas ghg emissions have caused atmospheric concentrations with no precedents in the last half a million years inducing serious uncertainties about future climates and their effects on human welfare recent climate science supports the view that the climate stabilization will require very low ghg emissions in the future we ask is a path of low emissions compatible with sustainable levels of human welfare with steady growth in human quality of life addressing these questions requires both defining welfare criteria and empirically estimating the possible paths of the economy we specify and calibrate a dynamic model with four intertemporal links education physical capital knowledge and the environment in line with nordhaus 2008a and with the stern review 2007 we assume that ghg emissions allow increased production while a higher stock of atmospheric carbon decreases production our index of human welfare which we call quality of life quol emphasizes education knowledge and the environment affected by greenhouse gas emissions in addition to consumption and leisure thus we avoid a consumptionist fallacy that welfare depends only on commodity consumption and perhaps leisure we reject discounted utilitarianism as a normative criterion and consider two alternatives the first is an intergenerational maximin criterion which maximizes the quality of life of the first generation subject to maintaining at least that level for all successive generations the second is human development optimization that seeks the maximization of the quol of the first generation subject to achieving a given constant rate of growth in all subsequent generations hence our analysis focuses on a human notion of sustainability as opposed to the conventional green sustainability limited to keeping the quality of the environment constant because our dynamic optimization programs defy explicit analytical solutions our approach has been computational as a benchmark we consider a simple model with physical and human capital for which we prove a turnpike theorem we then devise a computational algorithm inspired by the turnpike property to construct feasible although not necessarily optimal paths in the more complex and realistic model our analysis indicates that with ghg emission paths entailing very low emissions in the future positive rates of growth in quol are possible while the first generation experiences a quol higher than the historical reference level we also observe a tradeoff between the quality of life of the first generation and the rate of growth in the quality of life yet generation 1 s sacrifice for the sake of a higher growth rate appears to be small the paths that we compute involve investments in knowledge at noticeably higher levels than in the past

anticipated inflation and the capital stock in a cash in advance economy abstract an economy is constructed in which the steady state capital stock is inversely related to the rate of inflation as a result that is directly opposite the usual conclusion

consistency of the least squares estimator in threshold regression with endogeneity this paper shows that when the threshold variable is independent of other covariates such as in the structural change model the least squares estimator of the threshold point is consistent even if endogeneity is present

global warming endogenous risk and irreversibility this paper develops two period analytical and numerical models to study the question given a stock of greenhouse gases that poses a risk of future damages of unknown magnitude and the possibility of learning about damages how do sunk abatement capital and a nondegradable stock of greenhouse gases affect optimal first period investment we show that both affect investment the former negatively and the latter positively additionally endogenous risk the risk of damages dependent on the stock of gases results in an increase in optimal investment for any level of capital sunkness or greenhouse gas degradability quantitatively the effect of sunk capital is stronger than the effect of greenhouse gas irreversibility or that of endogenous risk

transitional dynamics and economic growth in the neoclassical model neoclassical transitional dynamics are a central element of standard macroeconomic theory quantitative experiments with the fixed savings rate models of the 1960s showed lengthy transitions thus potentially rationalizing sustained differences in growth rates across countries the authors investigate quantitative transitional dynamics in various neoclassical models with intertemporally optimizing households lengthy transitions occur only with very low intertemporal substitution generally when one tries to explain sustained economic growth with transitional dynamics there are extremely counterfactual implications these result from the fact that implied marginal products are extraordinarily high in the early stages of development copyright 1993 by american economic association

var based estimation of euler equations with an application to new keynesian pricing abstract var based estimation of euler equations exploits cross equation restrictions that the theory imposes on a vector autoregressive var process for market expectations this paper shows that sargent s 1979 a note on maximum likelihood estimation of the rational expectations model of the term structure journal of monetary economics 5 133 143 original approach of imposing these restrictions on the endogenous variable of the euler equation i e computing the rational expectations solution implies multiple solutions and is therefore impracticable the paper shows that this identification problem can be circumvented by reverse engineering the cross equation restrictions on the forcing variable of the euler equation the proposed reverse engineering approach contrasts with the conventional approach in the literature that avoids the identification problem by constraining the system formed by the euler equation and the var process to yield a unique stable rational expectations equilibrium this uniqueness condition makes little economic sense because the var process is just a reduced form approximation of true market expectations and a simulation experiment shows that imposing uniqueness can lead to severe misspecification bias the severity of this misspecification bias is illustrated in practice with an application to gali and gertler s 1999 inflation dynamics a structural econometric analysis journal of monetary economics 44 195 222 hybrid new keynesian phillips curve

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

civil institutions and evolution concepts critique and models abstract the paper examines the relation between civil norms and evolution the survival of norms in the long run may depend on the evolutionary process and natural selection the sieve of natural selection may ensure that norms which persist must have minimal efficiency properties this paper begins with a general discussion of evolutionary processes and the survival of civil institutions it then presents an introductory account of the theory of evolutionary games it is argued that the model of evolutionary games is more suited to analyzing animal behaviour than the human one since it is the latter that is of interest to economists an attempt is made in this paper to develop some new solution concepts which are more apt for human games

fiscal structures and economic growth international evidence i introduction a large and growing body of literature searches for the determinants of economic growth employing cross country regression analysis e g kormendi and meguire 1985 grier and tullock 1989 barro 1990 1991 1992 romer 1989 1990 levine 1991 and levine and renelt 1992 1 the cross country regression approach implicitly assumes that the growth process possesses similar structural properties across the countries in the sample structural differences be they political economic social or other between countries therefore do not condition the growth process or if they do then the effects are randomly distributed with zero mean if structural differences between countries do matter significantly and non randomly in the growth process then the existing cross country research is potentially flawed attempts are sometimes made to control for such differences by including dummy variables for different regions of the world e g dummy variables for african latin american and other groups of countries within the literature on the determinants of economic growth some papers e g landau 1983 1985 1986 kormendi and meguire 1985 ram 1986 koester and kormendi 1989 barth keleher and russek 1990 easterly and rebelo 1993 and fischer 1993 consider the effects if any of government expenditure and revenue on economic growth overall the findings of these studies paint a mixed picture the relationship between growth and government is sometimes significant and positive sometimes significant and negative and sometimes not significant although these studies consider many different fiscal variables they do not as a rule examine the effects of these fiscal variables in a systematic way that controls for the mode of financing they generally overlook for example how an increase in government consumption expenditure is financed is it with higher taxes and which taxes or is it with lower spending and which spending finally is it with a larger deficit controlling for these factors may lead to different findings about the effect of an increase in government consumption expenditure on economic growth borrowing from some work on the effect of fiscal structure on national economic growth within the united states in helms 1985 mofidi and stone 1990 and miller and russek 1993 we introduce the government budget constraint into the regression equations that examine the determinants of economic growth as a result we directly address the three financing questions raised in the previous paragraph in this framework we consider the growth process using pooled times series cross section data and comparing the results from fixed and random effects econometric techniques 2 these techniques attempt to accommodate structural differences between countries and across time we also compare the performance of the more standard ordinary least squares regression approach with that of the fixed and random effect models ii an overview of international fiscal structures before presenting our model and statistical findings a brief overview of the growth and fiscal characteristics of the countries in our sample provides some additional information for those not familiar with the data which otherwise would not be revealed by our analysis 3 this information can contribute in a limited way to the debate about the effects of government on economic growth although it is not a substitute for modeling the growth process for the sample as a whole the growth rate of real per capita gross domestic product gdp averaged 1 35 per year during 1975 to 1984 with a coefficient of variation of 3 52 by comparison the average growth rate in the united states was 1 45 the five fastest growth countries were botswana 6 72 indonesia 4 19 korea 6 32 sri lanka 3 20 and thailand 4 31 the five slowest growth countries were el salvador 1

why has u s inflation become harder to forecast we examine whether the u s rate of price inflation has become harder to forecast and to the extent that it has what changes in the inflation process have made it so the main finding is that the univariate inflation process is well described by an unobserved component trend cycle model with stochastic volatility or equivalently an integrated moving average process with time varying parameters this model explains a variety of recent univariate inflation forecasting puzzles and begins to explain some multivariate inflation forecasting puzzles as well

global warming irreversibility and learning a number of economists have argued that the literature on the irreversibility effect implies that current abatement of greenhouse gas emissions should be greater when there is the possibility of obtaining better information in the future about the potential damages from global warming than when there is no possibility of obtaining better information in this paper we show that even the simplest model of global warming does not satisfy either of epstein s 1980 sufficient conditions so it is not possible to use epstein s analysis to tell whether the irreversibility effect applies to models of global warming we derive an alternative sufficient condition for the irreversibility effect to hold

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

on some effects of international fragmentation of production on comparative advantages trade flows and the income of countries in traditional trade models whether based on technological differences or on relative factor endowments merchandise composition and directions of trade are derived from closed economy conditions but nowadays one of the basic assumptions of traditional trade models i e that production processes are integrated within just one country is being increasingly violated as previously integrated productive activities are segmented and spread over an international network of production sites as a result an increasingly large share of trade flows is made up of intermediate and unfinished goods being transferred from one country to another in order to be processed in this paper we submit that such new configuration of production processes has important effects on at least three dimensions of economic research first we show that international disintegration of production processes leads to a lessening of the power of comparative advantages when it comes to explaining both merchandise composition and directions of trade while it is the concept of absolute advantage to become increasingly relevant second we show that empirical measures of revealed comparative advantages are inherently misleading if they do not account for differences in the stage of processing of traded goods third we estimate a simple model of aggregate demand accounting for international trade in intermediates results of estimation lend support to our prior that participation of a country in the process of international fragmentation of production plays a specific and significant role in determining its year over year change in gdp

what have we learned about policy and growth from cross country regressions economists have been seeking to comprehend why some countries are rich and others poor for well over 200 years a better understanding of the national policies associated with long run growth would both contribute to our ability to explain cross country differences in per capita incomes and provide a basis for making policy recommendations that could lead to improvements in human welfare recently economists have used cross country regressions to search for empirical linkages between longrun growth and indicators of national policies e g roger kormendi and philip meguire 1985 robert j barro 1991 the large cross country growth literature has identified various fiscal monetary trade exchange rate and financial policy indicators that are significantly correlated with longrun growth yet levine and david renelt 1992 show that many of these findings are fragile to small alterations in the conditioning information set that is small changes in the right hand side variables produce different conclusions regarding the relationship between individual policies and growth in this paper we take stock of what the profession has learned from cross country regression studies of policy and long run growth i limitations

learning and stock effects in environmental regulation the case of greenhouse gas emissions abstract this paper concerns the optimal regulation of greenhouse gases that lead to global climate change in particular we focus on uncertainty and learning which over time resolves uncertainty we present an empirical stochastic model of climate economy interactions and present results on the tension between postponing control until more is known vs acting now before irreversible climate change takes place uncertainty in our model is in the damage caused by global warming the results suggest that a temporary carbon tax may dominate a permanent one because a temporary tax may induce increased flexibility

threshold effects of financial status on the cost frontiers of financial institutions in nondynamic panels this article applies hansen s 1999 2000 threshold regression model to estimate translog cost frontiers in the hope of shedding light on the banking industry s production processes and the extent of its technical efficiency te the threshold technique allows for the existence of multiple technologies of production distinguished by an exogenous threshold variable strong evidence of multiple technologies is found in the industry irrespective of which financial indicator as constructed by factor analysis defines the threshold variable cost savings and scale economies among the various underlying technologies are compared herein we also highlight the differences between the threshold results and the conventional cost frontier

large versus small foreign exchange interventions abstract we use non temporal threshold analysis to investigate the exchange rate effects of large versus small interventions more than two decades of official daily data on intervention in the jpy usd market facilitate our analysis we find no evidence that small interventions exert a discernible influence on the exchange rate while large interventions significantly influence the exchange rate in the theoretically consistent manner we conclude that small interventions may not be considered a determinant of the exchange rate while large interventions constitute an important element in our understanding and modeling of the exchange rate

consistent climate policies what are the optimal climate policies when time preferences deviate from the standard exponential discounting and decision makers cannot commit to future policies we show that with time declining discounting the delay and persistence of climate impacts provide a commitment device to policy makers we quantify the commitment value in a climate economy model by solving time consistent markov equilibrium capital and emission taxes explicitly the returns on capital and climate investments are no longer equal leading to a large increase in the emission tax compared to a benchmark with equalized returns the commitment value increases the tax by a factor of 20 in our quantitative assessment

optimal taxes on fossil fuel in general equilibrium we analyze a dynamic stochastic general equilibrium dsge model with an externality through climate change from using fossil energy our central result is a simple formula for the marginal externality damage of emissions or equivalently for the optimal carbon tax this formula which holds under quite plausible assumptions reveals that the damage is proportional to current gdp with the proportion depending only on three factors i discounting ii the expected damage elasticity how many percent of the output flow is lost from an extra unit of carbon in the atmosphere and iii the structure of carbon depreciation in the atmosphere thus the stochastic values of future output consumption and the atmospheric co2 concentration as well as the paths of technology whether endogenous or exogenous and population and so on all disappear from the formula we find that the optimal tax should be a bit higher than the median or most well known estimates in the literature we also formulate a parsimonious yet comprehensive and easily solved model allowing us to compute the optimal and market paths for the use of different sources of energy and the corresponding climate change we find coal rather than oil to be the main threat to economic welfare largely due to its abundance we also find that the costs of inaction are particularly sensitive to the assumptions regarding the substitutability of different energy sources and technological progress

efficiency sustainability and global warming abstract economic analyses of global warming have typically been grounded in the theory of economic efficiency such analyses may be inappropriate because many of the underlying concerns about climate change are rooted not in efficiency but in the intergenerational allocation of economic endowments a simple economic model is developed which demonstrates that an efficient economy is not necessarily a sustainable economy this result leads directly to questions about the policy relevance of several economic studies of the issue we then consider policy alternatives to address global warming in the context of economies with the dual objectives of efficiency and sustainability with particular attention to carbon based taxes

nonlinear growth effects of taxation a semi parametric approach using average marginal tax rates summary one of the major challenges of empirical tax research is the identification and calculation of appropriate tax data while there is consensus that average marginal tax rates are most suitable for studying the effects of tax policy on economic growth because of data limitations the calculation of marginal tax rates has been limited to the usa and the uk this paper provides calculations of average marginal tax rates for the four scandinavian countries using the methodologies of seater 1982 1985 and barro and sahasakul 1983 1986 then by pooling the newly calculated tax rates for the scandinavian countries with the data for the usa and the uk we investigate the effects of tax policy shocks on the per capita gdp growth rate our results suggest that an increase in average marginal tax rates has a negative impact on economic growth employing additive mixed panel models with penalized splines as estimation approach we show that changes in tax rates have nonlinear effects increasing average marginal tax rates turn out to be the most distorting at relatively moderate tax rates copyright 2013 john wiley sons ltd

the composition of public expenditure and economic growth abstract noting that the literature has focused on the link between the level of public expenditure and growth we derive conditions under which a change in the composition of expenditure leads to a higher steady state growth rate of the economy the conditions depend not just on the physical productivity of the different components of public expenditure but also on the initial shares using data from 43 developing countries over 20 years we show that an increase in the share of current expenditure has positive and statistically significant growth effects by contrast the relationship between the capital component of public expenditure and per capita growth is negative thus seemingly productive expenditures when used in excess could become unproductive these results imply that developing country governments have been misallocating public expenditures in favor of capital expenditures at the expense of current expenditures

government size and growth a survey and interpretation of the evidence the literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings this conflict is largely explained by variations in definitions and the countries studied an alternative approach of limiting the focus to studies of the relationship in rich countries measuring government size as total taxes or total expenditure relative to gdp and relying on panel data estimations with variation over time reveals a more consistent picture the most recent studies find a significant negative correlation an increase in government size by 10 percentage points is associated with a 0 5 to 1 percent lower annual growth rate we discuss efforts to make sense of this correlation and note several pitfalls involved in giving it a causal interpretation against this background we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth one hypothesis is that countries with higher social trust levels are able to develop larger government sectors without harming the economy another explanation is that countries with large governments compensate for high taxes and spending by implementing market friendly policies in other areas both explanations are supported by ongoing research

inconsistency of 2sls estimators in threshold regression with endogeneity abstract this paper shows the inconsistency of three forms of 2sls estimators to illustrate the specialty of the endogeneity problem in threshold regression

trading off generations equity discounting and climate change the prevailing literature discusses intergenerational trade offs in climate change predominantly in terms of the ramsey equation relying on the infinitely lived agent model we discuss these trade offs in a continuous time olg framework and relate our results to the infinitely lived agent setting we identify three shortcomings of the latter first underlying normative assumptions about social preferences cannot be deduced unambiguously second the distribution among generations living at the same time cannot be captured third the optimal solution may not be implementable in overlapping generations market economies