the choice of an optimum currency peg for a small open country abstract this paper explores the choice of an optimal exchange rate system in a monetary context with rational expectations it is related to the problem of the choice of an exchange rate regime heller 1978 and some trade oriented solutions black 1976 branson and katseli papaefstratiou 1978 lipschitz 1979 lipschitz and sundararajan 1980 but differs from these in that broad monetary considerations are stressed it assumes that a country must choose to peg to one of two major currencies or to a basket of the two but cannot float independently for optimum currency reasons mundell 1961 mckinnon 1963 in particular the approach puts the accent on the notion of international competition between national monies tullock 1973 klein 1975 in a rational expectations framework with national money demands and supplies causing changes in relative prices connolly and taylor 1979 dornbusch 1978 the specific question asked is to which if any of two reserve currencies say the us dollar and the pound sterling should a small open country peg in order to best insure domestic monetary stability e g stable home prices or in general is a basket peg composed of the two currencies preferable to a single currency peg

reconciling the old and new census bureau education questions recommendations for researchers beginning with the 1990 census and the january 1992 current population survey cps the bureau of the census changed the emphasis of its educational attainment question from years of education to degree receipt using a matched sample from the 1991 and 1992 march cps this article addresses how to reconcile the old and new questions the effects of those methods on the estimated return s to education are then examined both the estimated linear return and the estimated college high school wage differential are slightly larger using information from the new question

interest rate arbitrage in currency baskets forecasting weights and measuring risk we use a time series modeling approach to address two related questions of interest to foreign exchange market participants and policy makers dealing with basket currencies first how are unknown weights appropriately extracted from basket currencies second how does one correctly account for the risk in terms of conditional variance of expected profits that time varying weights add to the standard basket hedge position we suggest a methodology that can provide answers to these questions and apply it to the heavily traded thai baht currency basket

taxes benefits and careers complete versus incomplete markets abstract an incomplete market life cycle model with indivisible labor makes career lengths and human capital accumulation respond to labor tax rates and government supplied non employment benefits we compare aggregate and individual outcomes in this individualistic incomplete market model with those in a comparable collectivist representative family model with employment lotteries and complete insurance markets the incomplete and complete market structures assign leisure to different types of individuals who are distinguished by their human capital and age these microeconomic differences distinguish the two models in terms of how macroeconomic aggregates respond to some types of government supplied non employment benefits but remarkably not to labor tax changes

optimal unemployment insurance for older workers this paper studies the optimal unemployment insurance for older workers in a repeated principal agent model where the search intensity of risk averse workers the agents is not observed by the risk neutral insurance agency the principal when unemployment benefits are the only available tool the insurance agency is not able to induce older workers to search for a job this is because of the short time horizon of workers close to retirement we propose to introduce a pension tax dependent on the length of the unemployment spell we show that this device performs better than a wage tax after re employment first it makes jobs more attractive as they are free of tax second because re employment will be short lived a pension tax is a more powerful incentive than a wage tax and provides more substantial fiscal gains to the agency finally a pension tax allows those workers near retirement who still do not exercise job search to smooth their consumption during their unemployment spell as if they could borrow against their future pension

optimum currency pegs for latin america the postwar economic record of latin america from 1950 to 1979 is a mixed one inflation rates range from a low of 3 percent in honduras panama and venezuela to highs of 120 percent in chile 67 percent in argentina and 37 percent in brazil further these rates have been stable in the low inflation countries with a standard deviation s d of about 4 percent while in chile argentina and brazil the standard deviations in the inflation rates were 1 15 percent 95 percent and 20 percent respectively monetary growth rates exhibit the same pattern low and stable in some countries high and unstable in others real growth rates range from lows of 1 percent in uruguay to highs of 9 percent in brazil and mexico for the eighteen latin american countries as a whole the inflation rate since 1950 has averaged 21 percent with a standard deviation of 30 percent monetary growth rates 29 percent s d of 25 percent and real growth rates 5 percent s d of 2 percent one striking fact emerges from a cursory examination of this historical record countries that peg to the u s dollar experience low and stable inflation rates while those that do not exhibit high and unstable inflation rates the choice to peg to the dollar is simultaneously a decision not to inflate more than the united states it is a clear signal regarding the future supply of local money similarly a decision to inflate more than the united states is simultaneously a choice not to have a fixed

strategic aspects of exchange rate policy in a developing country abstract in an economy facing inflation and external deficit the non cooperative behavior of the players introduces an inflationary bias which is eliminated if the government acts as a stackelberg leader the terms of trade is altered only with excess supply in the non traded goods sector through fiscal contraction

life cycle equilibrium unemployment this paper extends the job creation job destruction approach to the labor market to take into account a deterministic finite horizon as hirings and separations depend on the time over which investment costs can be recouped the life cycle setting implies age differentiated labor market flows while search by the unemployed falls with age the separation rate is rather u shaped over the life cycle worker heterogeneity in the context of undirected search implies an intergenerational externality which is not eliminated by the hosios condition we show that age specific policies are required to attain the first best allocation

the role of elasticity optimism in choosing an optimal currency basket with applications to israel abstract in a world in which exchange rates are floating each country must have some device for measuring the average exchange rate change whatever exchange rate policy it chooses the weight for each currency in computing such an average depends on the objective which exchange rate stabilization or change is expected to achieve if balance of trade stability is the desideratum the optimum weights optimum currency basket are shown to be a function of demand elasticities gnp trade shares etc we derive a loss function measuring the cost of using a wrong basket and compute the value of this function for our optimal israeli basket as a case study

testing the multilateral version of purchasing power parity an application to burma and jordan under the sdr peg 1981 5 this paper derives the multilateral version of the classical purchasing power parity ppp hypothesis as it applies to the determination of the price level in a small open economy under a basket peg arrangement this is tested under the assumption of constant market clearing as well as that of slow price adjustment in the non traded good sector the result based on burma and jordan the currencies of which were pegged to the special drawing right sdr during 1981 5 supports the validity of the hypothesis namely that the price level in such an economy is determined by the currency share weighted average of the price levels in those countries whose currencies are included in the chosen basket

liberalizing foreign investments by pension funds positive and normative aspects abstract the paper evaluates the economics of foreign investment regulation for pension funds with a focus on developing countries where fully funded pension systems are being started de novo the analysis proceeds in three steps first it is argued that the benefits of global portfolio diversification apply particularly to developing country pension assets because the volatility of asset returns is high while the risk tolerance of pensioners is low second restrictions of foreign investmetn by domestic pension funds can hardly be justified on ground of financial development arguments the paper presents crosscountry evidence which shows little support for the claim that the accumulation of pension assets would provide strong externalities for financial development moreover the home bias generally observed in pension fund investment should translate into sufficient potential demand for domestic financial assets as to deepen markets and develop the institutional infrastructure third a case for initial localization requirements however can be derived from the fiscal costs of moving from unfunded to fully funded pension systems if fiscal illustion and domestic tax collection costs are important

on the optimal currency peg for developing countries abstract this paper suggests that while crawling peg exchange rates whether active or passive can be a valuable device for maintaining external balance in an inflationary environment they may be inferior to a common currency area in a number of ways particularly with respect to monetary stability and monetary integration evidence is presented on the stability of the french franc zone in west africa and on the now defunct dollar zone in latin america when such zones exist without restrictive exchange controls they should be preserved and strengthened when they exist only de jure with strict exchange controls adopting john williamson s crawling peg solution is superior since it can accommodate the levying of the inflationary tax without causing external imbalance due to a failure to adjust the exchange rate

the life cycle and the business cycle of wage risk cross country comparisons abstract we provide evidence on life cycle and business cycle fluctuations in the dispersion of household level wage innovations comparing the us the uk and germany first we find that household characteristics explain about 25 of the dispersion in wages within an age group in all three countries second the cross sectional variance of wages is almost linearly increasing in household age in all three countries but with increments being smaller in the european data third wage risk is procyclical in germany while it is countercyclical in the us and acyclical in the uk

on becoming more flexible exchange rate regimes in latin america and the caribbean abstract this paper examines the shift from fixed to more flexible exchange rate regimes among countries in latin america and the caribbean in contrast to most traditional approaches the one followed here recognizes that fixed rates can be and often are adjusted but argues that policy makers incur a political cost from devaluation at the same time flexible exchange rates even managed ones may be very volatile with persistent misalignment a stylized model of regime choice is developed based on the perceived losses from exchange rate misalignment incurred under fixed versus more flexible regimes the model is estimated for a sample of 24 countries over the period 1978 1992 and empirical results are quite supportive misalignments proxied by current account deficits and moderate to high rates of inflation were associated with a move to more flexible rates during 1978 1986 misalignment indicators appear to have mattered less during 1987 1992 however there appears to have been a major reduction in the perceived difficulty of managing flexible rates during this period the paper then cautions against attributing differences in economic growth between groups of countries to their exchange regime the central point here is that the endogeneity of regime choice introduces selection biases into the samples of countries with fixed and with more flexible exchange regimes

promises and endogenous reneging costs we present a novel theoretical mechanism that explains the capacity for non enforceable communication about future actions to improve efficiency we explore a two player partnership game where before choosing a level of effort to exert on a joint project each player makes a cheap talk promise to their partner about their own future effort we allow agents to incur a psychological cost of reneging on their promises we demonstrate a strong tendency for evolutionary processes to select agents who incur intermediate costs of reneging and show that these intermediate costs induce second best optimal outcomes

a survey of the literature on the optimal peg abstract it is widely agreed that floating is not an appropriate exchange rate policy for most developing countries but in a world of generalized floating the question of exchange rate policy is not resolved by deciding to peg rather than to float it is also necessary to decide to what to peg this is the question of the optimal peg on which a significant literature has emerged since 1976 the present paper provides a survey of that literature section 2 summarizes the principal papers section 3 compares the objectives and rules advocated by different authors section 4 evaluates the alternative approaches arguing that in general the peg should be chosen to stabilize the nominal trade weighted effective exchange rate section 5 considers whether this criterion points to the sdr as a satisfactory peg

social security disability insurance applications awards and lifetime income flows this article provides new evidence about the impact of social security disability insurance on male labor force participation decisions based on estimates from a structural model of applications awards and state contingent lifetime income flows the lifetime framework makes it possible to consider long term opportunity costs associated with early labor force withdrawal and the disincentive to applications resulting from the statutory waiting period before benefits may be received estimation techniques account for the self selected nature of the pool of applicants when predicting the individual specific probability of acceptance and the opportunity costs of applying

transitions in the german labor market structure and crisis abstract since the so called hartz iv reforms around 2005 and during the global crisis of 2008 2009 the german labor market featured mainly declining unemployment rates we develop a search and matching model with heterogeneous skills to explore the role of structural and cyclical policies for this performance calibrating unemployment benefits to approximate legislation before and after the reforms we find a large reduction in unemployment and its duration with the transition concluding after about three years during the crisis the extended use of short time labor subsidies that prevent jobs from being destroyed is likely to have prevented strong increases in unemployment

taxation of human capital and wage inequality a cross country analysis wage inequality has been significantly higher in the united states than in continental european countries ceu since the 1970s moreover this inequality gap has further widened during this period as the us has experienced a large increase in wage inequality whereas the ceu has seen only modest changes this paper studies the role of labor income tax policies for understanding these facts we begin by documenting two new empirical facts that link these inequality differences to tax policies first we show that countries with more progressive labor income tax schedules have significantly lower before tax wage inequality at different points in time second progressivity is also negatively correlated with the rise in wage inequality during this period we then construct a life cycle model in which individuals decide each period whether to go to school work or be unemployed individuals can accumulate skills either in school or while working wage inequality arises from differences across individuals in their ability to learn new skills as well as from idiosyncratic shocks progressive taxation compresses the after tax wage structure thereby distorting the incentives to accumulate human capital in turn reducing the cross sectional dispersion of before tax wages we find that these policies can account for half of the difference between the us and the ceu in overall wage inequality and 76 of the difference in inequality at the upper end log 90 50 differential when this economy experiences skill biased technological change progressivity also dampens the rise in wage dispersion over time the model explains 41 of the difference in the total rise in inequality and 58 of the difference at the upper end

strategic fiscal policies in europe why does the labour wedge matter abstract most european countries suffer from a structural weakness in employment and competitiveness can an optimal tax system reinforce european countries in this respect in this paper we show that fiscal competition can be a welfare improving second best solution if the labour wedge is sufficiently large indeed a sufficiently large labour wedge calls for an expansion of the production set in both countries thus increasing global opportunities for a small labour wedge this would not be the case because the terms of trade externality would call for a fiscal policy that exacerbates a non cooperative behaviour between countries in a two country world we show that the symmetric nash equilibrium can be pareto efficient if employment subsidies are financed by a consumption tax this is not the case when the former are financed by tariffs

optimal timing of decisions a general theory based on continuation values abstract by extending a methodology dating back to jovanovic 1982 we develop a comprehensive theory of optimal timing of decisions based on continuation value functions and operators that act on them rewards can be bounded or unbounded one advantage of this approach over standard bellman methods is that continuation value functions are smoother than value functions another is that for a range of problems the continuation value function exists in a lower dimensional space than the value function we exploit these advantages to obtain a range of new results on optimality optimal behavior and efficient computation

disability transfers and the work decision of older men the potential causal relationship between the availability and generosity of disability transfers and the nonparticipation rates of older men is often asserted and much studied parsons 1980 haveman and wolfe 1984 leonard 1986 however estimates of the magnitude of this linkage vary widely the growth in transfer availability and generosity has been credited with from 30 to 100 percent of the significant post 1960 fall in older male participation rates the disparity in these research results stems primarily from 1 alternative sources of data that differentially constrain estimation of relevant expected wage and transfer incomes 2 specifications that are unable to distinguish income transfer from labor market effects and 3 reliance on measures of health status that are endogenous to the work leisure decision this study seeks to narrow the range of estimates by addressing each of these issues our utility maximization model of work status choice assumes that workers who differ in health status choose between the mutually exclusive options of working at the wage offered for their characteristics and accepting public or private disability transfers because the income flows in the two options are censored they are estimated using switching regression techniques as expectations conditional on exogenous individual characteristics hence accounting for the potentially endogenous process that separates wage earners from transfer recipients the marginal utilities of income from the two sources are allowed to differ because of stigma effects in the estimation we adjust the choice based nature of our sample employ longitudinal earnings data to measure expected changes in as distinct from the expected level of income in the two options and use a separately estimated latent health status measure largely purged of its endogeneity with the participation decision

the rise in the disability rolls and the decline in unemployment between 1984 and 2001 the share of nonelderly adults receiving social security disability insurance income di rose by 60 percent to 5 3 million beneficiaries rapid program growth despite improving aggregate health appears to be explained by reduced screening stringency declining demand for less skilled workers and an unforeseen increase in the earnings replacement rate we estimate that the sum of these forces doubled the labor force exit propensity of displaced high school dropouts after 1984 lowering measured u s unemployment by one half a percentage point steady state calculations augur a further 40 percent increase in the rate of di receipt

the effects of extended unemployment insurance over the business cycle evidence from regression discontinuity estimates over 20 years one goal of extending the duration of unemployment insurance ui in recessions is to increase ui coverage in the face of longer unemployment spells although it is a common concern that such extensions may themselves raise nonemployment durations it is not known how recessions would affect the magnitude of this moral hazard to obtain causal estimates of the differential effects of ui in booms and recessions this article exploits the fact that in germany potential ui benefit duration is a function of exact age which is itself invariant over the business cycle we implement a regression discontinuity design separately for 20 years and correlate our estimates with measures of the business cycle we find that the nonemployment effects of a month of additional ui benefits are at best somewhat declining in recessions yet the ui exhaustion rate and therefore the additional coverage provided by ui extensions rises substantially during a downturn the ratio of these two effects represents the nonemployment response of workers weighted by the probability of being affected by ui extensions hence our results imply that the effective moral hazard effect of ui extensions is significantly lower in recessions than in booms using a model of job search with liquidity constraints we also find that in the absence of market wide effects the net social benefits from ui extensions can be expressed either directly in terms of the exhaustion rate and the nonemployment effect of ui durations or as a declining function of our measure of effective moral hazard copyright 2012 oxford university press

the effect of unemployment benefits and nonemployment durations on wages abstract we estimate that unemployment insurance ui extensions reduce reemployment wages using sharp age discontinuities in ui eligibility in germany we show this effect combines two key policy parameters the effect of ui on reservation wages and the effect of nonemployment durations on wage offers our framework implies if ui extensions do not affect wages conditional on duration then reservation wages do not bind we derive resulting instrumental variable estimates for the effect of nonemployment durations on wage offers and bounds for reservation wage effects the effect of ui on wages we find arises mainly from substantial negative nonemployment duration effects jel j31 j64 j65

search unemployment and age abstract we examine a search and matching model of the labor market with overlapping generations of workers in this model we focus on the effects of the finite lifetime of workers as a result of finite lifetime very old workers with the same productivity as younger workers generally earn less a market solution with nash bargained wages is never optimal as old workers search too long compared to the efficient solution we also examine the effects of policy measures such as hiring subsidies or unemployment insurance on employment labor market institutions have a differential impact for different age groups

a determination of the optimal currency basket a macroeconomic analysis abstract this paper analyzes the choice of the optimal currency basket using a general equilibrium macro model of a small open economy with perfect capital mobility the optimal weights are derived to minimize the variance of domestic output the general properties of the optimal basket so obtained are identified and a number of special cases are analyzed in detail the weights are also compared with those found in the existing literature which differs from the approach here in its more partial equilibrium nature its neglect of capital flows and its focus on the stabilization of more proximate policy objectives

disability capacity for work and the business cycle an international perspective important policy issues arise from the high and growing number of people claiming disability benefits for reasons of incapacity for work in oecd countries economic conditions play an important part in explaining both the stock of disability benefit claimants and inflows to and outflows from that stock employing a variety of cross country and country specific household panel data sets as well as administrative data we find strong evidence that local variations in unemployment have an important explanatory role for disability benefit receipt with higher total enrolments lower outflows from rolls and often higher inflows into disability rolls in regions and periods of above average unemployment in understanding the nature of the cyclical fluctuations and trends in disability it is important to distinguish between work disability and health disability the former is likely to be influenced by economic conditions and welfare programmes while the latter evolves in a slower fashion with medical technology and demographic changes there is little evidence of health disability being related to the business cycle so cyclical variations are driven by work disability the rise in unemployment due to the current global economic crisis is expected to increase the number of disability insurance claimants

the choice of an optimum exchange currency regime for a small economy an econometric analysis abstract this paper investigates empirically the issue of a fixed versus a flexible exchange currency regime for a small economy the west african monetary union the econometric analysis implements a mundellian trade off between economic development and monetary stability which measures the main cost and benefit of the various exchange currency regimes examined the empirical results indicate that the fixed trade weighted basket peg is optimal by the tower and willet criterion and that it meets some of kenen s criteria for an efficient exchange currency regime

disability insurance benefits and labor supply a critical input for assessing the optimal size of disability insurance programs is the elasticity of labor force participation with respect to the generosity of benefits unfortunately this parameter has been difficult to estimate in the context of the u s disability insurance program since all workers face an identical benefits schedule i surmount this problem by studying the experience of canada which operates two distinct disability insurance programs for quebec and for the rest of canada the latter program raised its benefits by 36 percent in january 1987 whereas benefits in quebec were constant i find a sizable labor supply response to the policy change my central estimates imply an elasticity of labor force nonparticipation with respect to disability insurance benefits of 0 28 0 36

earnings losses and labor mobility over the life cycle an extensive empirical literature has documented that workers with high tenure suffer large and persistent earnings losses when they get displaced we study the reasons behind these losses in a tractable search model with a life cycle dimension endogenous job mobility worker and match heterogeneity the model reconciles key characteristics of the u s labor market large average transition rates a large share of stable jobs and the earnings losses from displacement we decompose the earnings losses and find that only 50 result from skill losses endogenous reactions and selection account for the remainder our findings have important implications for the welfare costs of displacement and labor market policy

a critical evaluation of exchange rate policy in turkey abstract this paper reviews and critically evaluates the exchange rate policy followed in turkey in the post 1980 period during which a far reaching program of liberalization has been launched we conclude that the new exchange rate policy has been essential for turkey s regaining its creditworthiness furthermore it has positively contributed to growth of output and exports and to expansion of tradables production relative to nontradables persistence of inflation and weakness of private investment in tradables overshadow the successes recorded in other areas and cast doubt over the sustainability of turkey s outward orientation we argue that the root cause of these problems has been inconsistencies between overall economic policies rather than the exchange rate policy itself we compare the period of real appreciations since late 1998 with the earlier period of real depreciations and draw policy implications

understanding european unemployment with a representative family model abstract a representative family model with indivisible labor and employment lotteries has no labor market frictions and complete markets nevertheless its aggregate responses to an increase in government supplied unemployment insurance ui and to an increase in microeconomic turbulence are qualitatively similar to those in two macromodels with labor market frictions and incomplete markets namely the matching and search island models in ljungqvist and sargent 2007a understanding european unemployment with matching and search island models journal of monetary economics this issue because there is no frictional unemployment in the representative family model an increase in employment protection ep decreases aggregate work because the representative family substitutes leisure for work an effect opposite to what occurs in matching and search island models heterogeneity among workers highlights the economy wide coordination in labor supply and consumption sharing that employment lotteries and complete markets achieve in the representative family model a high disutility of labor makes generous ui cause very low employment levels

the effect of implicit contracts on the movement of wages over the business cycle evidence from micro data in this paper we address the question of whether wages are affected by labor market conditions in a manner more consistent with a contract approach than with a standard spot market model from a simple implicit contract model we derive implications about the links between wages and past labor market conditions using individual data from the current population survey and the panel study of income dynamics we find that an implicit contract model with costless mobility describes these links better than either a simple spot market model or an implicit contract model with costly mobility

financial development and economic growth abstract this paper examines the empirical relationship between long run growth and financial development proxied by the ratio between bank credit to the private sector and gdp we find that this proxy is positively correlated with growth in a large cross country sample but its impact changes across countries and is negative in a panel data for latin america we argue that the latter findings is the result of financial liberalization in a poor regulatory environment our findings also show that the main channel of transmission from financial development to growth is the efficiency rather than the volume of investment

the health and earnings of rejected disability insurance applicants applicants for social security disability benefits who fail to pass the medical screening form a natural control group for beneficiaries data drawn from the 1972 and 1978 surveys of the disabled done for the social security administration show that fewer than 50 percent of rejected male applicants work typical earnings of those that do are less than 59 percent of median earnings for other men their age these data cast doubt on recent econometric work that suggests that the disincentive effects of the social security disability program have been substantial copyright 1989 by american economic association

unemployment responses to skill biased technology shocks the role of labour market policy do skill biased shocks that increase the spread of labour productivities interacting with different policy regimes explain the rise in unemployment in europe relative to the united states in the 1980s and 1990s the hypothesis is an implication of a version of the mortensen and pissarides 1994 model of equilibrium unemployment which allows for worker heterogeneity a calibrated version of the model implies that a similar unemployment increase would have occurred in the united states over this period given changes in relative productivity by education implied by observed wage changes had unemployment compensation and employment protection policies been at european levels

unobserved heterogeneity exit rates and re employment wages exit rates from unemployment and re employment wages decline over an unemployment period after controlling for worker observable characteristics we study the role of unobserved heterogeneity in an economy with asymmetric information and directed search we show that the unique equilibrium is separating and skilled workers have more job opportunities and higher wages the composition of the unemployed varies with the duration of unemployment so average exit rates and wages fall with time the separating equilibrium relies on performance related pay schemes and the ability of firms to commit to renting an input that is complementary to the worker skills

unemployment insurance takeup rates and the after tax value of benefits the recent decline in the unemployment insurance ui takeup rate has puzzled researchers using administrative data with accurate information on the potential level and duration of benefits we examine whether a separating employee receives ui we find a strong positive effect of the benefit level on takeup and smaller effects of the potential duration and the tax treatment of benefits simulations indicate that the recent inclusion of ui in the income tax base can account for most of the previously unexplained decline in ui receipt

equilibrium unemployment and retirement we first propose some new empirical evidence on the fact that the labor market conditions matter for the retirement decision at the individual level we investigate whether unemployed workers retire before employed workers other things being equal our main objective in this paper is then to propose an equilibrium unemployment approach to retirement decisions that allows us to derive the positive and normative features of retirement decisions when search and matching frictions are considered two main conclusions emerge the retirement decision of unemployed workers depends on the labor market frictions whereas that of employed workers does not the existence of search externalities makes the retirement age of unemployed workers intrinsically suboptimal considering social security policy issues we show that the complete elimination of the implicit tax on continued activity is not necessarily welfare optimizing in a second best world where the labor market equilibrium suffers from distortions

capital controls collection costs and domestic public debt abstract the implications of a large public debt for the implementation of capital controls for an economy where tax revenue collection is costly are examined conditions are analyzed under which policymakers will resort to capital controls to reduce the cost of recycling domestic public debt the linkages between a costly tax collection mechanism capital controls and domestic government debt are explored in terms of a two period model of optimal taxation numerical simulations are provided to illustrate how capital controls are linked to different domestic public debt levels and to different degrees of efficiency in tax revenue collection

disability insurance rejection rates and the labor supply of older workers abstract we investigate the effects of trying to mitigate moral hazard in the disability insurance di program by raising the stringency of the screening process for applicants we do so by studying a dramatic increase in rejection rates for the di program in the late 1970s which varied substantially across the us states we find that each 10 rise in denial rates led to a statistically significant 2 8 fall in labor force non participation among 45 64 year old males we also find that the denial rate increases effectively targeted their incentive effects to more able individuals according to an anthropometric measure of disability

assessing the effect of payroll taxes on formal employment the case of the 2012 tax reform in colombia in 2013 colombia implemented a tax reform that reduced payroll taxes by a total of 13 5 percentage points of wages this paper evaluates the effects of this component of the 2012 colombian tax reform on firms formal employment and average wages we construct a panel of firms based on their employees administrative records to account for the endogeneity of the treatment we use an instrumental variables technique that exploits the exogenous variation from the decisions of firms that are similar to each other in several dimensions but belong to different economic sectors based on our preferred specification we estimate a positive and significant increase in formal employment as a result of the implementation of the reform of approximately 213 000 jobs in existing pre reform firms in the long run these effects will increase to more than 600 000 jobs the effect of the reform on the average wages paid by firms was also found to be positive for some sizes of firms but the overall effect in the short run is rather small

real exchange rate variability and the choice of exchange rate regime by developing countries abstract this paper draws together two distinct strands of the exchange rate literature it proposes that real exchange rate variability and the choice of exchange rate regime are jointly determined i test this claim by estimating a simultaneous limited dependent variable model with data from a cross section of developing countries during the recent floating period drawing on the relevant exchange rate literature the paper examines a number of exogenous determinants of exchange rate variability and the choice of exchange rate regime

distinguishing income from substitution effects in disability insurance a set of studies conducted over the last 15 years has produced a near consensus that the social security disability insurance system ssdi has substantial disincentive effects on the labor supply of near elderly males diminishing labor force participation increasing the sensitivity of labor force exit decisions to adverse economic shocks and encouraging those nearing retirement to claim disability benefits and subsequently transfer into the social security retirement program yet efforts by the social security administration ssa to encourage labor supply among the disabled by removing the work disincentives built into ssdi have been almost entirely unsuccessful most notably in 1999 congress authorized the ticket to work program which provides an array of inducements for current ssdi beneficiaries to take up employment including permitting a trial work period of up to nine months providing 7 75 years of ongoing medicare eligibility following return to work and providing three years of automatic benefit reinstatement when claimants workplace earnings fall below a threshold level each of these steps reduces the implicit tax placed on labor supply by the ssdi program despite these lures fewer than 1 400 0 01 percent of the 12 2 million tickets issued to date have led to successful workforce integration autor and duggan 2006

unemployment fluctuations over the life cycle abstract in this paper we show that i the volatility of worker flows increases with age in us cps data and ii a search and matching model with life cycle features endogenous separation and search effort is well suited to explain this fact with a shorter horizon on the labor market older workers outside options become less responsive to new employment opportunities thereby making their wages less sensitive to the business cycle their job finding and separation rates are then more volatile along the business cycle the horizon effect cannot explain the significant differences between prime age and young workers as both age groups are far away from retirement a lower bargaining power on the youth labor market brings the model closer to the data

unemployment at risk the policy determinants of labour market exposure to economic shocks this paper examines the vulnerability of labour markets to adverse economic shocks we define labour market exposure as the cumulated amount of excess unemployment generated by a shock before unemployment returns to steady state we use a panel of 19 countries covering the period 1985 2010 to assess the influence of labour market policies on labour market exposure which is also calculated country by country we find that less generous unemployment insurance more active labour market policies or a lower minimum wage imply a trade off between average unemployment and labour market exposure as they help low skilled workers to get out of unemployment at the cost of increased vulnerability to adverse shocks on the other hand reducing the tax wedge is conducive to both lower steady state unemployment and labour market exposure alain de serres and fabrice murtin

distance to retirement and older workers employment the case for delaying the retirement age this paper presents empirical evidence and a theoretical foundation in favor of the view that the retirement age decision affects older workers employment prior to retirement to the extent that there are search frictions on the labor market the return on jobs is determined by their expected duration the time to retirement is then key to understanding older workers employment countries with a retirement age of 60 are indeed characterized by lower employment rates for workers aged 55 59 based on the french labor force survey we show that the likelihood of employment is significantly affected by the distance to retirement in addition to age and other relevant variables we then extend mccall s job search model by explicitly integrating life cycle features with the retirement decision using simulations we show that the distance effect in interaction with the generosity of unemployment benefits and the depressed demand for older workers explains the low rate of employment just before the eligibility age for the social security pension finally we show that implementing actuarially fair schemes not only extends the retirement age but also encourages a more intensive job search by older unemployed workers jel j22 j26 h55

disability transfers self reported health and the labor force attachment of older men evidence from the historical record we use trends in self reported disability to gauge the impact of the growth of disability transfer programs on the labor force attachment of older working aged men our tabulations suggest that between 1949 and 1987 about half of the 4 9 percentage point drop in the labor force participation of men aged 45 54 and between one quarter and one third of the 19 9 point drop among men aged 55 64 represented a movement of men out of the labor force and onto the rolls of transfer programs targeted at the disabled since the expansion of transfer programs represents only one of the forces behind this movement these figures represent upper bounds on the impact of such programs on work force attachment

exchange rate indicators and optimal currency baskets a macroeconomic analysis with application to developing countries this paper presents a framework for deriving and estimating an optimally weighted exchange rate index within a general equilibrium model the main contribution is a dual one at a theoretical level the paper yields the unambiguous result that the kalman filter technique and turnovsky optimization control technique for deriving optimal weights are equivalent at an empirical level the paper illustrates how the theoretical optimal weights can be translated into empirical weights and estimated within a simple general equilibrium model optimally weighted exchange rate indices are constructed for a group of asian developing countries using a vector autoregressiori model in which the weights are designed to minimize the forecast variance of a target variable real output the properties of the weighted indices are examined and their potential usefulness for exchange rate policy both as economic indicators and as currency baskets is discussed

the flexible exchange basket a macroeconomic analysis abstract this paper constructs and analyzes a multi country stochastic equilibrium framework suitable for analyzing the behavior of an economy which pursues a flexible exchange basket policy the framework is general enough to accommodate the special cases of a multilateral floating exchange rates and b rigid basket regimes an important issue that is addressed in the present framework involves the composition of the optimal flexible basket versus that of the corresponding rigid basket such an investigation is carried out for various patterns of multilateral trade for various types of structural disturbances and for alternative optimality criteria

incarceration and racial inequality in men s employment to estimate employment population ratios for black and white men with an adjustment for incarceration a factor overlooked by most research on employment inequality the authors combine data from sur

the un importance of unemployment fluctuations for the welfare cost of business cycles abstract this paper studies the cost of business cycles within a real business cycle model with search and matching frictions in the labor market we endogenously link both the cyclical fluctuations and the mean level of unemployment to the aggregate business cycle risk the key result of the paper is that business cycles are costly fluctuations over the cycle induce a higher average unemployment rate since employment is nonlinear in the job finding rate and the past unemployment rate we show this analytically for a special case of the model we then calibrate the model to u s data for the calibrated model too business cycles cause higher average unemployment the welfare cost of business cycles can easily be an order of magnitude larger than lucas s 1987 estimate the cost of business cycles is the higher the lower the value of nonemployment is or equivalently the lower is the disutility of work the ensuing cost of business cycles rises further when workers skills depreciate during unemployment

should i stay or should i go an econometric analysis of retirement decisions by couples abstractthis article analyses retirement decisions from a household perspective treating the retirement timing of spouses as potentially interdependent choices to identify the determinants of ret

evaluating participation in african monetary unions a statistical analysis of the cfa zones abstract thirteen african nations are engaged in two monetary unions with france often referred to as the cfa zone despite the acknowledged benefits of zone membership a convertible currency pooled resources and greater monetary and fiscal discipline several observers have questioned whether particular aspects of the zone such as the lack of autonomy of the two central banks and the surrender of the exchange rate as a policy instrument have impeded its members growth this paper addresses that question by testing whether cfa zone countries had different gnp growth rates from selected comparator countries during 1960 1982 results show that cfa countries grew significantly faster than comparator sub saharan african countries but usually slower and often significantly so than the whole sample of developing countries when the comparison is made by subperiod before and after 1973 cfa countries performance vis a vis that of their comparators improved during the 1973 1982 period casting further doubt on the claim that the monetary union is not functioning adequately

economic aspects of optimal disability benefits this paper analyzes optimal disability and retirement or welfare benefits with imperfect disability evaluation with some able workers judged disabled and some disabled workers judged able thus the levels of both disability and retirement benefits affect labor supply with anyone not working eligible for retirement benefits we analyze the optimal structure of benefits for a given disability screening mechanism and briefly consider the problem of optimal evaluations of disability evidence in the united states there is an overlap in eligibility for disability and retirement portions of social security more generally welfare is sometimes available to people denied disability benefits

optimal currency baskets for small developed economies optimal weights for a currency basket are derived under the assumption that the objective of the policymaker is to minimize fluctuation in the production of traded goods using the formulas derived in the analysis various optimal basket calculations are carried out for finland norway and sweden for all these countries the optimal basket weights for germany and united kingdom are found to be less than the trade share weights the opposite is true for united states moreover the actual weights in the basket of sweden are almost identical to those we have computed as optimal

a basket peg policy operational issues for developing countries abstract while many developing countries have recently adopted a basket peg there has been little discussion of the operational aspects of such an exchange rate policy this paper will discuss major operational issues that are unique to the implementation of a basket peg policy including the choice of a valuation method the provision of forward facilities the frequency of exchange rate quotations public disclosure of the basket composition the width of margins and the frequency of adjustment in the basket it is argued that in the resolution of many of these issues the trade off between rules and discretion becomes the determining principle

unemployment participation and worker flows over the life cycle we estimate and report life cycle transition probabilities between employment unemployment and inactivity for male workers using current population survey monthly files we assess the relative importance of each probability in explaining the life cycle profiles of participation and unemployment rates using a novel decomposition method a key robust finding is that most differences in participation and unemployment over the life cycle can be attributed to the probability of leaving employment and the probability of transiting from inactivity to unemployment while transitions from unemployment to employment the job finding probability play secondary roles we then show that a simple life cycle extension of a three state labor search model with leisure shocks can qualitatively replicate the empirical unemployment and participation life cycle profiles without introducing age or worker heterogeneity in market abilities we conclude that models that seek to explain life cycle work patterns should not ignore transitions to and from inactivity

understanding european unemployment with matching and search island models abstract to understand european and american unemployment during the last 60 years we use a search island model and four matching models with workers who have heterogeneous skills and entitlements to government benefits when there is higher turbulence in the sense of worse skill transition probabilities for workers who suffer involuntary layoffs high government mandated unemployment insurance ui and employment protection ep in europe increase unemployment rates and durations but when there is lower turbulence high european ep suppresses unemployment rates despite high european ui four matching models differ in how they assign unemployed workers to matching functions that affects how strongly unemployment responds to increases in turbulence heterogeneity among unemployed workers highlights the central role of adverse labor market externalities in matching models and reveals that the cost of posting vacancies is the lynchpin of a matching model

external shocks financial reforms and stabilization attempts in uruguay during 1974 1983 abstract this paper interprets and evaluates uruguay s reforms emphasizing the outcome of financial reforms and attempts to bring down inflation it is shown that domestic interest rate deregulation and the removal of prohibition towards holding dollar denominated assets led to a rise in the ratio of financial assets in gdp and to a shift towards dollar denominated assets causes of the persistent and large spread between peso and dollar interest rates adjusted for the preannounced rate of devaluation tablita are examined the discussion of the stabilization program during 1979 1982 and its aftermath in 1983 shows that setting the tablita at less than the difference between internal and external inflation led to severe imbalances because of remaining redundant protection and price stickness the real exchange rate appreciated sharply for a prolonged period and the trade balance widened until the stabilization episode ended with capital flight when doubts set in about the sustainability of the tablita

exchange rate management and macroeconomic policy a national perspective this paper reviews the literature on alternative exchange rate arrangements for a small economy it discusses exchange rate management for short run stabilization purposes and the choice of exchange rate regimes to foster policy discipline recent research has emphasized that the appropriate degree of exchange rate flexibility depends on the nature of disturbances exchange rate movements provide information about shocks and can serve as a basis for intervention rules empirically operational guidelines have not yet been provided floating rates are said to be desirable because they allow policy makers greater autonomy recent research has questioned the implicit assumption that autonomy is always useful rules that prevent discretionary policy may be preferable what role if any the exchange rate should play in such rules has not yet been resolved

two questions about european unemployment a general equilibrium search model makes layoff costs affect the aggregate unemployment rate in ways that depend on equilibrium proportions of frictional and structural unemployment that in turn depend on the generosity of government unemployment benefits and skill losses among newly displaced workers the model explains how before the 1970s lower flows into unemployment gave europe lower unemployment rates than the united states and also how after 1980 higher durations have kept unemployment rates in europe persistently higher than in the united states these outcomes arise from the way europe s higher firing costs and more generous unemployment compensation make its unemployment rate respond to bigger skill losses among newly displaced workers those bigger skill losses also explain why u s workers have experienced more earnings volatility since 1980 and why especially among older workers hazard rates of gaining employment in europe now fall sharply with increases in the duration of unemployment

the impact of economic conditions on participation in disability programs evidence from the coal boom and bust abstract we examine the impact of the coal boom of the 1970 s and the coal bust of the 1980 s on disability program participation these shocks provide clear evidence that as the value of labor market participation increases disability program participation falls for the disability insurance program the elasticity of payments with respect to local earnings is between 0 3 and 0 4 and for supplemental security income the elasticity is between 0 4 and 0 7 consistent with a model where qualifying for disability programs is costly the relationship between economic conditions and program participation is much stronger for permanent than for transitory economic shocks

decomposing trends in inequality in earnings into forecastable and uncertain components a substantial empirical literature documents the rise in wage inequality in the american economy it is silent on whether the increase in inequality is due to components of earnings that are predictable by agents or whether it is due to greater uncertainty facing them these two sources of variability have different consequences for both aggregate and individual welfare using data on two cohorts of american males we find that a large component of the rise in inequality for less skilled workers is due to uncertainty for skilled workers the rise is less pronounced

unemployment insurance and cultural transmission theory and application to european unemployment this paper emphasizes the two way causality between the provision of unemployment insurance and the cultural transmission of work ethic values affect the size of the moral hazard problem and hence the policy to be implemented conversely when parents rationally choose how much effort to exert to raise their children to work hard they form expectations on the policy that will be implemented by the next generation in this context we show that the different cultural traits are complementary and that there is some cultural heterogeneity in all steady state equilibria the model could generate a lag between the introduction of unemployment insurance and a deterioration of the work ethic relying on a calibration we argue that it can account for a substantial fraction of the history of european unemployment since world war ii as our explanation is compatible with the co existence of generous unemployment insurance and low unemployment in the 1950s and 1960s it could be seen as an alternative to the dominant story that relies on the occurrence of large shocks since the 1970s supportive empirical evidence is provided

age dependent employment protection this paper examines the age related design of firing taxes by extending the theory of job creation and job destruction to account for a finite working life time we first argue that the potential employment gains related to employment protection are high for older workers as they are magnified by the proximity to retirement but higher firing taxes for these workers increase job destruction rates for the younger generations furthermore from a normative standpoint when firms cannot ex ante age direct their search the impact of each generation of unemployed workers on the average return on vacancies makes the internalization of the search costs for the other generations imperfect through the ex post nash bargaining process we show that the first best age profile of firing taxes is typically hump shaped partially in contradiction with existing policies in some european countries taking into account the fact that the human capital of older workers is more specific than general tends to exacerbate these results

the effect of unemployment compensation on unemployment duration in germany in west germany during the 1980s law changes cut the level of unemployment compensation for the unemployed without children and extended the duration of unemployment insurance for unemployed aged over 41 analysis of these changes using the german socioeconomic panel shows that transitions from unemployment for those under 49 were particularly responsive to extensions of unemployment insurance the implied elasticity for escapes of men to employment is similar to estimates for men in the united states suggesting that differences in the potential duration of unemployment insurance only partially explain the difference in spell lengths between germany and the united states

what does purchasing power parity mean this paper examines the theoretical and empirical content of purchasing power parity ppp in efficient markets it analyzes the sources of deviations from the strictest version of ppp that exchange adjusted price levels are everywhere identical focusing on the role played by uncertainty relative price changes inappropriate price data transaction costs and government intervention in creating these deviations it then identifies and addresses the key issue involving purchasing power parity are the deviations from ppp that occur sufficiently large persistent and predictable as to enable individuals or governments to successfully exploit them an answer of no is shown to be consistent with both economic theory and the empirical evidence

macroeconomic issues for latin america abstract recent macroeconomic issues in latin america are reviewed with an emphasis on theory topics covered include multiple equilibria from hysteresis or increasing returns exchange rate management and the output and asset market effects of devaluation speculation interest rate management and financial reform government behavior income distribution and growth inertial inflation and heterodox policy shocks and disequilibrium theories

informational efficiency and the open economy a troublesome feature of existing stochastic macroequilibrium models of the open economy is the nature of the informational assumptions usually made most of these models assume that full contemporaneous information on all relevant macrovariables is freely available to economic agents this is the assumption made for example in cox 7 driskill and mccafferty 10 driskill 8 and turnovsky 17 18 among others further when information gaps are introduced the lack of full current information refers to the inability of domestic agents to correctly identify permanent versus transitory components of movements in either the currently observed domestic money supply as in ueda 20 or the observable foreign price level 2 16 5 yet prevailing economic reality is characterized by the availability of differentiated current information to economic agents information or data on variables relevant to auction markets such as asset markets is far more easily and frequently available than information that relates to markets that are contractual in nature such as commodity markets a financial newspaper such as the wall street journal for example provides daily information on half a dozen foreign prime interest rates a multitude of u s

rising occupational and industry mobility in the united states 1968 97 we document and analyze the high level and the substantial increase in worker mobility in the united states over the 1968 97 period at various levels of occupational and industry aggregation this is important in light of the recent findings that human capital of workers is largely occupation or industry specific to control for measurement error in occupation and industry coding we develop a method that utilizes the psid retrospective occupation industry supplemental data files we emphasize the importance of our findings for understanding a number of issues such as the changes in wage inequality aggregate productivity job stability and life cycle earnings profiles

unemployment history and frictional wage dispersion abstract recent evidence shows that baseline search models struggle to match the observed levels of wage dispersion this paper studies a random matching search model with human capital losses during unemployment wage dispersion increases as workers accept lower wages to avoid long unemployment spells the model explains between a third and half of the observed residual wage dispersion when adding on the job search the model accounts for all of the residual wage dispersion and generates substantial dispersion even for high values of non market time the paper thus addresses the trade off between explaining frictional wage dispersion and the cyclical behavior of unemployment