a simple framework for international monetary policy analysis abstract we study the international monetary policy design problem within an optimizing two country sticky price model where each country faces a short run tradeoff between output and inflation the model is sufficiently tractable to solve analytically we find that in the nash equilibrium the policy problem for each central bank is isomorphic to the one it would face if it were a closed economy gains from cooperation arise however that stem from the impact of foreign economic activity on the domestic marginal cost of production while under nash central banks need only adjust the interest rate in response to domestic inflation under cooperation they should respond to foreign inflation as well in either scenario flexible exchange rates are desirable

optimal policy in markov switching rational expectations models abstract in this paper we consider the optimal quadratic control problem of markov switching linear rational expectation models these models are general and flexible tools for modelling not only regime but also model or parameter uncertainty we show first how to find the solution of a markov switching linear rational expectation model based on this solution we then show how to apply dynamic programming to find the optimal time consistent policy and the resulting nash stackelberg equilibrium suitable modifications of the algorithm allow to deal with the non re case in which the policymaker and the private sector hold different beliefs or probabilities over regime change we also show how the optimisation procedure can be employed to obtain the optimal policy under commitment as an illustration we compute the optimal policy in a small open economy subject to stochastic structural breaks in some of its key parameters

monetary policy and uncertainty in an empirical small open economy model this paper explores optimal policy design in an estimated model of three small open economies australia canada and new zealand within a class of generalized taylor rules we show that to stabilize a weighted objective of output consumer price in ation and nominal interest variation optimal policy does not respond to the nominal exchange this is despite the presence of local currency pricing and due in large part to observed exchange rate disconnect in these economies optimal policies that account for the uncertainty of model estimates as captured by the parameters posterior distrbution similarly exhibit a lack of exchange rate response in contrast to brainard 1967 the presence of parameter uncertainty can lead to more or less aggressive policy responses depending on the model at hand

all pay war we study a model of conflicts and wars in which the outcome is uncertain not because of luck on the battlefield as in standard models but because countries lack information about their opponent in this model expected resource levels and production and military technologies are common knowledge but realized resource levels are private information each country decides how to allocate its resources to production and warfare the country with the stronger military wins and receives aggregate production in equilibrium both comparative and absolute advantages matter a larger resource share is allocated to warfare by the country with a comparative advantage in warfare at relatively low realized resource levels and by the country with an absolute disadvantage in warfare at relatively high realized resource levels from an ex ante perspective the country with a comparative advantage in warfare is more likely to win the war unless its military potential is much lower

competitive effect of cross shareholdings in all pay auctions with complete information abstract this paper investigates the competitive effect of cross shareholdings in winner take all all pay auctions with two asymmetric bidders we show that cross shareholdings may paradoxically create a pro competitive effect and elicit more effort than a standard contest without cross ownership this observation runs in contrast to the anti competitive effect that cross shareholdings usually create in standard oligopolistic settings such as cournot or bertrand competitions both bidding costs and the sizes of cross shares affect the resultant total effort non monotonically neither a cross share nor a higher bidding cost necessarily decreases effort supply a complete account of equilibrium bidding behaviors is provided and the necessary and sufficient conditions under which cross shareholdings lead to higher or lower levels of overall effort are identified however the pro competitive effect comes at a loss of efficiency

do central banks respond to exchange rate movements a structural investigation abstract we estimate a small scale structural general equilibrium model of a small open economy using bayesian methods our main focus is the conduct of monetary policy in australia canada new zealand and the uk we consider generic taylor type rules where the monetary authority reacts in response to output inflation and exchange rate movements we perform posterior odds tests to investigate the hypothesis whether central banks do target exchange rates the main result of this paper is that the central banks of australia and new zealand do not whereas the bank of canada and the bank of england do include the nominal exchange rate in its policy rule this result is robust for various specification of the policy rule we also find that terms of trade movements do not contribute significantly to domestic business cycles

evolving monetary fiscal policy mix in the united states a micro founded model that allows for changes in the monetary fiscal policy mix and in the volatility of structural shocks is fit to us post wwii data agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion of the macroeconomy the results show that the 60s and the 70s were characterized by a prolonged period of active fiscal policy and passive monetary policy the appointment of volcker marked a change in the conduct of monetary policy but it took almost ten years for the fiscal authority to start accommodating this regime change

gordon tullock and experimental economics gordon tullock s research has substantially influenced the development of economic science in general and experimental economics in particular we present the first comprehensive survey of this significant achievement we show how tullock s research in bioeconomics influenced later developments in neuroeconomics and how his pioneering work on rent seeking generated a literature of laboratory tests of his hypothesis we also describe tullock s own experiments and draw attention to his early insights on trust games

contractionary devaluation in the southern cone the case of chile abstract this paper discusses the effects of a currency devaluation on output employment and the trade balance in a small open economy chile the structure of the foreign trade sector in terms of price elasticities the sectoral differences in relative domestic value added intensities across exports and import competing industries and the degree of wage indexation are the main determinants in our model of the impact of devaluation a simulation carried out with a computable macro model for chile shows a currency devaluation to be contractionary in the short to medium run

free entry and efficient rent seeking this paper concerns rent seeking and the extent to which rents are dissipated under various circumstances gordon tullock s 1967 insight that expenditures made to capture an artificially created transfer represent a social waste suggested that the cost to the economy of monopoly and regulation is greater than the simple harberger 1954 deadweight loss indeed under tullock s original formulation and in the extensions of his work by krueger 1974 and posner 1975 rents are exactly dissipated at the social level 1 is spent to capture 1 so that the total welfare loss from such activities is equal to the harberger triangle plus the rectangle of monopoly profits

aggregate comparative statics abstract in aggregative games each player s payoff depends on her own actions and an aggregate of the actions of all the players many common games in industrial organization political economy public economics and macroeconomics can be cast as aggregative games this paper provides a general and tractable framework for comparative static results in aggregative games we focus on two classes of games 1 aggregative games with strategic substitutes and 2 nice aggregative games where payoff functions are continuous and concave in own strategies we provide simple sufficient conditions under which positive shocks to individual players increase their own actions and have monotone effects on the aggregate the results are illustrated with applications to public good provision contests cournot competition and technology choices in oligopoly

rent seeking and market structure comment if the firms in an industry are to be successful in raising money to influence government two conditions must be met 1 there must be sufficient rents available from government decisions regarding that industry to make such expenditures worthwhile and 2 the industry must be sufficiently concentrated to avoid a free rider problem in fund raising this argument though seemingly intuitively appealing has been under recent empirical attack this paper seeks to restore the parapets

u s monetary regimes and optimal monetary policy in the euro area monetary policy in the united states has been documented to have switched from reacting weakly to inflation fluctuations during the 1970s to fighting inflation aggressively from the early 1980s onward in this paper i analyze the impact of the u s monetary policy regime switches on the eurozone i construct a new keynesian two country model where foreign u s monetary policy switches regimes over time i estimate the model for the u s and the euro area using quarterly data and find that the united states has switched between those two regimes in line with existing evidence i show that foreign regime switches affect home eurozone inflation and output volatility and their responses to shocks substantially as long as the home central bank commits to a time invariant interest rate rule reacting to domestic conditions only optimal policy in the home country instead requires that the home central bank reacts strongly to domestic producer price inflation and to international variables such as imported goods relative prices in fact i show that currency misalignments and relative prices play a crucial role in the transmission of foreign monetary policy regime switches internationally interestingly i show that only marginal gains arise for the euro area when the european central bank ecb adjusts its policy according to the monetary regime in the united states thus a simple time invariant monetary policy rule with a strong reaction to producer price index ppi inflation and relative prices is enough to counteract the effects of monetary policy switches in the united states

solution and estimation of re macromodels with optimal policy macro models of monetary policy typically involve forward looking behavior except in rare circumstances we have to apply some numerical method to find the optimal policy and the rational expectations equilibrium this paper summarizes a few useful methods and shows how they can be combined with a kalman filter to estimate the deep model parameters with maximum likelihood simulations of a macro model with staggered price setting interest rate elastic output and optimal monetary policy illustrate the properties of this estimation approach

rent seeking in natural resource quota allocations this paper examines the incentives for rent seeking in the allocation of natural resource quotas to competing user groups by political bodies the political body has discretion in making the allocation and competing user groups rent seek to influence the allocation we investigate ways in which the governmental body can affect the behavior of the players by setting the ground rules for the competition a political body can affect an allocatively pareto efficient outcome by choosing an appropriate default pre rent seeking policy surprisingly an allocatively efficient default policy is unlikely to minimize social costs however winner take all default policies are likely to maximize not minimize rent seeking a competitive post allocation market reduces rent seeking but is not either itself or in combination with an efficient default policy capable of minimizing social costs however forcing winners in political redistributions to fully compensate losers both lowers the rent seeking levels relative to a potential compensation criterion and when used together with an efficient default policy is capable of obtaining the first best solution of an allocatively efficient allocation with zero rent seeking

rent seeking in a market with morality solving a puzzle about corporate social responsibility rent seeking by lobbying for government favors is generally thought to be wasteful in view of this wastefulness it is puzzling that rent seeking by corporations has not been criticized as a failure to be socially responsible or even as an unethical business practice this article examines the compatibility of rent seeking with corporate social responsibility by utilizing thomas dunfee s idea of a marketplace with morality this idea is useful for solving this puzzle because in considering whether rent seeking is compatible with corporate social responsibility it is necessary first to define rent seeking which this article argues is a normative concept and second to find some principled way of identifying rent seeking behavior it also solves the puzzle about rent seeking by revealing that the concept of rent seeking itself is of little use in determining whether certain conduct is or is not socially responsible since rent seeking activity cannot be identified without first evaluating which activity is rent seeking

do the ecb and the fed really need to cooperate optimal monetary policy in a two country world abstract a two country model with monopolistic competition and price stickiness is employed to investigate the implications for macroeconomic stability and the welfare properties of three international policy arrangements a cooperative b non cooperative and c monetary union i characterize the conditions under which there is scope for policy cooperation and quantify the costs of non cooperation and monetary union the non cooperative equilibrium may be suboptimal because of terms of trade spillover effects while monetary union may be suboptimal because of the sluggishness of relative prices both the costs of policy competition and of a monetary union are sensitive to the values assumed for the intertemporal and international demand elasticity and the degree of openness of the economy independently of the calibration scenario adopted the ecb has little to gain by coordinating with the fed

the industrial structure of the california assembly committee assignments economic interests and campaign contributions this paper examines the provision of campaign contributions made by economic interests to incumbents seeking reelection in the 1984 1986 and 1988 california assembly elections the study tests whether the distribution of campaign contributions by specific industrial sectors corresponds to legislator possession of the policy property rights associated with membership on relevant assembly standing committees a non parametric statistical model compares the distribution of campaign contributions from groups within a given industrial sector to members of relevant policy committees with the distribution of contributions from all other contributor classes the empirical analysis confirms that committee assignments significantly affect the allocation of special interest resources in assembly elections substantiating the importance of institutional considerations in influencing special interest activity

ideological conviction and persuasion in the rent seeking society abstract the paper develops a model of rent seeking in a democratic political context where voting as well as rent seeking matters in this context the paper demonstrates that voter ideology is a constraint on the rent seeking game as well as a possible avenue of rent seeking in a setting where there are both rent seeking and ideological interest groups rent seekers can free ride on the efforts of ideologues which tends to reduce rent seeking effort in a setting where complementary economic and ideological interest groups coordinate their efforts both rent seeking and ideological conflict tend to increase

on the social costs of rent seeking versus the social costs of production flexibility in this paper an analysis is provided of two alternative methods of defensive behaviour by a firm first rent seeking and second potential adjustment by way of investing in product flexibility from the analysis it emerges that at times rent seeking may be socially superior less socially wasteful to other more traditional means of responding to threats this paper therefore suggests that in circumstances where some type of defensive or aggressive activity by firms is available rent seeking while constituting gross social waste may be a net social gain given the alternative options available to the firm

collective rent dissipation the theory of rent seeking was initiated by tullock 1967 1980 followed by krueger 1974 and posner 1975 and more recently extended in various directions by allard 1988 appelbaum and katz 1986a b c gradstein and nitzan 1989 hillman and katz 1984 1987 hillman and samet 1987 hillman and riley 1989 katz et al 1990 long and vousden 1987 ursprung 1990 and varian 1989 the purpose of this paper is to extend this theory by introducing the possibility of collective group rent seeking with voluntary individual decisions regarding their extent of participation in the collective rent seeking efforts

participation in deterministic contests abstract this paper considers participation in deterministic contests for m 1 identical prizes which employ an auction like rule to determine the winners in most papers that investigate such models participation by precisely m 1 players is associated with players having complete information about their opponents characteristics and participation by more than m 1 players is associated with players having incomplete information about their opponents characteristics i show that incomplete information is in fact neither sufficient nor necessary for participation by more than m 1 players

rent seeking with regretful agents theory and experiment abstract we investigate both theoretically and experimentally the role that information disclosure has on behavior in all pay environments in which all agents must exert costly effort but only the winner is rewarded through the lens of all pay auctions we show that bidders who have regret concerns when they lose an auction may alter their bids whether or not information about the winning bid is disclosed all losing bidders regret not bidding 0 however when feedback on the winning bid is provided those bidders who lost at an affordable price may regret not bidding more we show that the former effect causes bidders to lower their bids while the latter effect causes bidders to raise their bids our experimental results indicate overbidding whether or not the winning bid is disclosed to losing bidders however disclosing the winning bid leads to even more aggressive bidding increases revenues decreases the frequency of dropouts and also leads to more efficient allocations thus our results show that information disclosure is a powerful tool that mechanism designers may wish to exploit to extract more rents in all pay environments

conflict and distribution abstract we develop a behavioral model that links the level and pattern of social conflict to the societywide distribution of individual characteristics the model can be applied to groups that differ in characteristics such as wealth ethnicity religion and political ideology we settle questions of existence and uniqueness of conflict equilibrium conflict is seen to be closely connected with the bimodality of the underlying distribution of characteristics however in general the conflict distribution relationship is nonlinear and surprisingly complex our results on conflict patterns also throw light on the phenomena of extremism and moderation journal of economic literature classification numbers d63 d72 d74

a generalized model of rent seeking behavior in this paper i present a formal analysis of rent seeking games in which the players valuations for the prize are represented as vectors the players in this game are risk neutral and may not be indifferent to who wins the contestable rent if it is someone else both tullock s original rent seeking model and the public goods rent seeking model by katz et al turn out to be special cases of this more general model

designing targeting rules for international monetary policy cooperation this study analyzes a two country dynamic general equilibrium model with nominal rigidities monopolistic competition and producer currency pricing a quadratic approximation to the utility of the consumers is derived and assumed as the policy objective function of the policymakers it is shown that only under special conditions there are no gains from cooperation and moreover that the paths of the exchange rate and prices in the constrained efficient solution depend on the kind of disturbance that affects the economy it might be the case either for fixed or floating exchange rates despite this result simple targeting rules that involve only targets for the growth of output and for both domestic gdp and cpi inflation rates can replicate the cooperative allocation

welfare and macroeconomic interdependence we develop a baseline model of monetary and fiscal transmission in interdependent economies the welfare effects of expansionary policies are related to monopolistic supply in production and monopoly power of a country in trade an unanticipated exchange rate depreciation can be beggar thyself rather than beggar thy neighbor as gains in domestic output are offset by deteriorating terms of trade smaller and more open economies are more prone to suffer from inflationary shocks larger economies benefit from moderate demand led expansions but may be worse off if policy makers attempt to close the output gap fiscal shocks are generally beggar thy neighbor in the long run in the short run they raise domestic demand at given terms of trade thus reducing the welfare benefits from monetary expansions analytical tractability makes our model uniquely suitable as a starting point to approach the recent new open economy macroeconomic literature

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

illegal markets and the social costs of rent seeking this paper argues that making goods or services illegal results in an increase in the social costs associated with rent seeking the increased social cost is in the form of negative externalities that result from market participants use of coercion and violence in attempts to control trade in the illegal good consequently the social costs of rent seeking will exceed the value of resources dissipated in rent seeking competition and where the external costs exceed the undissipated portion of the tullock cost the social cost of rent seeking is greater than the sum of tullock and harberger costs

reexamining efficient rent seeking in laboratory markets given millner and pratt s 1989 finding of behavior inconsistent with theory we reexamine efficient rent seeking in experimental markets we show that a when r 3 no nash equilibrium exists and therefore behavior has no theoretical benchmark to judge consistency and b when r 1 with a new experimental design utilizing an explicit expected payoff matrix rent seeking behavior is consistent with both nash equilibrium and dissipation hypotheses

exchange rate based disinflation wage rigidity and capital inflows real exchange rate appreciation usually accompanies stabilization programs based on the exchange rate one thing that causes the real exchange rate to appreciate is the capital inflows that follow liberalization of the capital account and the financial market capital inflows cause the exchange rate to appreciate in part because of the resulting increase in expenditures this appreciation is exacerbated if there is some price rigidity and if control of the money supply is only partial all these conditions existed during chile s experiment with exchange rate based disinflation between 1978 and 1981 simulating what might have been the authors study how exchange rate based disinflation affects expenditures switching and reduction when wages are partially indexed in some segments of the labor market the paper also shows the extent to which a more flexible rule on wage indexing would have offset the adverse impact of lower capital flows on protected sector employment

regime switches agents beliefs and post world war ii u s macroeconomic dynamics the evolution of inflation and output over the last 50 years is examined through the lens of a micro founded model that allows for changes in the behavior of the federal reserve and in the volatility of structural shocks agents are aware of the possibility of regime changes and their beliefs have an impact on the law of motion underlying the macroeconomy the results support the view that there were regime switches in the conduct of monetary policy however the behavior of the federal reserve is identified by repeated fluctuations between a hawk and a dove regime instead of by the traditional pre and post volcker structure counterfactual simulations show that if agents had anticipated the appointment of an extremely conservative chairman inflation would not have reached the peaks of the late 70s and the inflation output trade off would have been less severe these beliefs counterfactuals are new in the literature finally the paper provides a bayesian algorithm to handle the technical difficulties that arise in a rational expectations model with markov switching regimes

optimal monetary policy in a regime switching economy the response to abrupt shifts in exchange rate dynamics abstract this paper examines the trade offs that a central bank faces when the exchange rate can experience sustained deviations from fundamentals and occasionally collapse the economy is modelled as switching randomly between different regimes according to time invariant transition probabilities we compute both the optimal regime switching control rule for this economy and optimised linear taylor rules in the two cases where the transition probabilities are known with certainty and where they are uncertain the simple algorithms used in the computation are also of independent interest as tools for the study of monetary policy under general forms of asymmetric additive and multiplicative uncertainty an interesting finding is that policies based on robust minmax values of the transition probabilities are usually more conservative

on the formation of alliances in conflict and contests this paper examines the problem of the formation of alliances in conflict and more generally in contests with three players each player possesses an exogenous strategic endowment e g arms efforts rent seeking activity the outcome of contests including those between any alliances of players is governed by a contest success function csf in the three person one cake problem an alliance between two players against the third one will form if and only if the csf has an increasing returns characteristic when an alliance forms there is a tendency to be formed by the weaker players against the strongest player similar tendencies exist in other three person problems that i examine

cooperative rent seeking this paper presents an analysis of cooperation in the context of a repeated rent seeking game which can be thought of as modeling bilateral situations such as military political conflict labor business lobbying gang illegal activities or criminal civil law suits the potential for mutually advantageous agreements is explored using the repeated nature of the game as the mechanism which sustains the cooperation the nash bargaining solution is applied to symmetric as well as asymmetric rent seeking situations the asymmetries can derive from the players valuing the rent differently or choosing sequentially

international prices wages and inflation in the open economy a chilean model this paper presents a macroeconomic model to explain the dynamics of chilean inflation during 1976 82 the model extends the australian and scandinavian open economy models by making a finer distinction between tradables and nontradables and by introducing more elaborate expectations formation results of the model supplied to quarterly chilean data over the period reject the homogeneity of the system indicating that a devaluation does indeed affect the relative price between tradables and nontradables in the chilean context the results cast doubt on the stabilization policies pursued during the period 1979 82 which implicitly relied upon a model in which full homogeneity obtains

rent seeking for pure public goods in this paper we present a formal analysis of rent seeking for public goods by two or more groups with different numbers of individuals we begin by considering equally wealthy groups under risk neutrality a case which constitutes our basic model several surprising and interesting results emerge from the analysis of this basic case the problem is then extended to deal with a groups with different wealth levels and b risk aversion this last extension brings about a further crop of interesting and useful results

efficient rents 1 rent seeking behavior in the long run we have analyzed long run behavior in rent seeking under several conditions and behavioral hypotheses the question of interest is whether or not the long run expenditures will exactly equal the value of the rents our results depend on the type of competitive response which is assumed to exist in the long run and on the r value governing the probability of winning

has monetary policy become more effective we investigate the implications of changes in the structure of the u s economy for monetary policy effectiveness estimating a vector autoregression over the pre and post 1980 periods we provide evidence of a reduced effect of monetary policy shocks in the latter period we estimate a structural model that replicates well the economy s response in both periods and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy s volatility we find that by responding more strongly to inflation expectations monetary policy has stabilized the economy more effectively in the post 1980 period

a dynamic macroeconometric model for short run stabilization in india this paper presents a small macroeconometric model examining the determinants of indian trade and inflation to address the effects of a reform policy package similar to those implemented in 1991 this is different from previous studies along one important dimension that we explicitly incorporate the non stationarity of the data into our model and estimation procedures which suggest that the stationarity assumption may be a source of misspecification in previous work so the model has been estimated using the data from 1950 to 1995 employing fully modified phillips hansen method of estimation to obtain the cointegrating relations and short run dynamic model policy simulations using dynamic simulations method compare the dynamic responses to devaluation with the responses to tight credit policy it is shown that the trade balance effects of tight credit policy are more enduring than those of devaluation the simulations demonstrate that the devaluation has actually worsened the trade balance and hence devaluation is not an option in response to a negative trade shock whereas the reduction in domestic credit produces a desirable improvement in the trade balance

monetary policy regime shifts and inflation persistence abstract using bayesian methods we estimate a markov switching new keynesian msnk model that allows shifts in the monetary policy reaction coefficients and shock volatilities with u s data we find that a more aggressive monetary policy regime was in place after the volcker disinflation and before 1970 than during the great inflation of the 1970s our estimates also indicate that a low volatility regime has been in place during most of the sample period after 1984 we connect the timing of the different regimes to a measure of inflation persistence

term structure evidence on interest rate smoothing and monetary policy inertia abstract numerous studies have used quarterly data to estimate monetary policy rules or reaction functions that appear to exhibit a very slow partial adjustment of the policy interest rate the conventional wisdom asserts that this gradual adjustment reflects a policy inertia or interest rate smoothing behavior by central banks however such quarterly monetary policy inertia would imply a large amount of forecastable variation in interest rates at horizons of more than 3 months which is contradicted by evidence from the term structure of interest rates the illusion of monetary policy inertia evident in the estimated policy rules likely reflects the persistent shocks that central banks face

risk averse rent seekers and the social cost of monopoly power there is now quite general recognition that the social cost of monopoly power encompasses the resources expended by individuals seeking to become the beneficiaries of monopoly rents however since the activity of rent seeking is generally not observable direct estimates of resources expended in quests to acquire monopoly power are usually impossible to come by 1 as a consequence the indirect approach of taking the observed value of monopoly rents as indicative of the unobserved value of the resources expended in rent seeking is quite generally adopted in approaches to evaluation of the social cost of such activity

reforms and macroeconomic adjustments in chile during 1974 1984 abstract this paper provides a background on the main macroeconomic developments of the reform period after a review of the macroeconomic disequilibrium before the reforms the paper interprets the macroadjustments the interpretation covers two distinct periods 1973 1976 when policy was based on a closed economy view and 1977 1982 when macropolicy was increasingly guided by an open economy model the paper argues that the setback that chile suffered during 1982 1983 and the large external debt that was accumulated were the result of two major errors the first was the use of the exchange rate to stabilize prices without due regard for the incentives for large capital inflows that arose from this policy at a time when international capital markets were very liquid the second major error was in the second half of 1981 after a large drop in capital inflows the authorities relied on an automatic adjustment mechanism by which the monetary squeeze from the reduction in capital inflows would improve the real exchange rate because wages were indexed to prior inflation the adjustment mechanism was bound to create substantial unemployment as indeed was the case the paper concludes with the assessment that most of the micro reforms were in the right direction and had the expected result and the errors were mostly in the design of macroeconomic policies

long run equilibrium and total expenditures in rent seeking the lure of excess profits or rents associated with monopoly power gives rise to expenditures to obtain these rents competitive rent seeking behavior is recognized as a factor which must be included among the wastes associated with monopoly power tullock 1967 posner 1975 1 the expenditures are aimed at transferring wealth rather than its creation and the use of resources to obtain this transfer is a loss to society how important rent seeking is as a part of the total monopolistic waste hinges on the size of the total expenditures induced by a given level of excess profits

incentive contracts and elections for politicians with multi task problems abstract we consider a model with a politician facing a multi task problem while in office the reelection mechanism distorts the allocation of effort in favor of tasks whose outcomes can be measured more precisely than others we show that a combination of elections and incentive contracts can alleviate this inefficiency the incentive contract does not require direct information about the performance of the politician and is self financing across terms

prices wages and import prices in israel 1970 1983 this paper presents an empirical investigation of the dynamics of prices wages and import prices in a small open economy using data for israel in the accelerating inflationary period of 1970 1983 the appropriateness of the specification of a price equation as a function of import prices and wages is critically reviewed using sims s methodology the main finding is that the only significant lags in the representation of the rate of change in prices wages and import prices are the lags of the rate of change in prices the rate of inflation other factors in the representation are attributed to market forces influencing real wages and the real exchange rate testing the correlation of the estimated var residuals leads to the conclusion that a short term inflation equation specified as a function of present and past wages is not acceptable a further decomposition of the var residuals presents evidence in favour the hypothesis that price shocks contribute to the explanation of the inflationary process in israel a rational expectation interpretation of the results is proposed followed by some policy implications

has u s monetary policy changed evidence from drifting coefficients and real time data despite the large amount of empirical research on monetary policy rules there is surprisingly little consensus on the nature or even the existence of changes in the conduct of u s monetary policy three issues appear central to this disagreement 1 the specific type of changes in the policy coefficients 2 the treatment of heteroskedasticity and 3 the real time nature of the data used this paper addresses these issues in the context of forwardlooking taylor rules with drifting coefficients the estimation is based on real time data and accounts for the presence of heteroskedasticity in the policy shock the findings suggest important but gradual changes in the rule coefficients not adequately captured by the usual split sample estimation in contrast to orphanides 2002 2003 i find that the fed s response to the real time forecast of inflation was weak in the second half of the 1970s perhaps not satisfying taylor s principle as suggested by clarida gali and gertler 2000 however the response to inflation was strong before 1973 and gradually regained strength from the early 1980s onward moreover as in orphanides 2003 the fed s response to real activity fell substantially and lastingly during the 1970s

comparative statics of contests and rent seeking games this paper develops the comparative statics properties of a contest encountered in patent races and rent seeking games the author shows that symmetric equilibrium expenditure and profit per player decrease with the number of competitors and the discount rate but increase with the value of the prize a fundamental lemma established in the paper shows that a stability condition usually imposed on the model is automatically satisfied the author identifies a class of likelihood or hazard rate functions for which aggregate expenditure increases with the number of competitors and total profits converge to zero copyright 1997 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

international dimensions of optimal monetary policy abstract this paper provides a baseline general equilibrium model of optimal monetary policy among interdependent economies with monopolistic firms and nominal rigidities an inward looking policy of domestic price stabilization is not optimal when firms markups are exposed to currency fluctuations such a policy raises exchange rate volatility leading foreign exporters to charge higher prices vis a vis increased uncertainty in the export market as higher import prices reduce the purchasing power of domestic consumers optimal monetary rules trade off a larger domestic output gap against lower consumer prices optimal rules in a world nash equilibrium lead to less exchange rate volatility relative to both inward looking rules and discretionary policies even when the latter do not suffer from any inflationary or deflationary bias gains from international monetary cooperation are related in a non monotonic way to the degree of exchange rate pass through

evolving macroeconomic dynamics in a small open economy an estimated markov switching dsge model for the uk this paper investigates the possibility of shifts in the uk economy using a markov switching open economy dynamic stochastic general equilibrium dsge model we find overwhelming evidence to reject the hypothesis that the deep structural parameters of the underlying structural model had stayed constant throughout the sample period and there is significant changes to the volatility of the structural shocks counterfactual experiments based on the model with the best empirical fit indicate that the change in the policy rule as well as changes to the volatility of the structural shocks over the sample period are crucial features in explaining uk s macroeconomic performance

risk aversion heterogeneity and contests we introduce a novel method of modellingcontests that avoids the complexitiesencountered by the best response function approach we analyse contests in which i there are many risk averse players ii attitudes to risk may differ acrossindividuals and iii the technology thattransforms rent seeking effort intoprobability of winning may also differacross individuals we establish that ifevery player has a constant degree ofabsolute risk aversion a uniqueequilibrium exists we also establishcomparative static results and examine howthe level of rent dissipation is affectedby the heterogeneity of attitudes towardsrisk and the precise nature of the technology

on the international transmission of technology shocks abstract using vector autoregressions on u s time series and an aggregate of industrialized countries we find that technology shocks appreciate the terms of trade and lower the trade balance they induce an s shaped cross correlation function for both variables the s curve in calibrating a prototypical international business cycle model under complete and incomplete financial markets we find two distinct sets of parameter values while both model specifications deliver the s curve the underlying transmission mechanism of technology shocks is fundamentally different most importantly only in the incomplete markets economy the terms of trade appreciate and thus amplify the relative wealth effects of technology shocks as suggested by the evidence

contest efforts in light of behavioural considerations this study shows that distortion of probabilities is a possible reason for rent under dissipation incontests with relatively small number of participants such distortion may also result however inover dissipation of the contested rent focusing on contests with homogeneous contestants and thecommonly studied contest success function our main results clarify under what circumstances i rents are more under dissipated relative to the standard situation where probabilities are notdistorted ii rents are under dissipated yet less intensely relative to the standard situation whereprobabilities are not distorted iii rents are over dissipated and iv the contest does not possess asymmetric interior equilibrium in pure strategies

policy instrument choice and non coordinated monetary policy in interdependent economies abstract non coordinated monetary policy is analyzed in a stochastic two country general equilibrium model non coordinated equilibria are compared in two cases one where policy is set in terms of state contingent money supply rules and one where policy is set in terms of state contingent nominal interest rate rules in general the non coordinated equilibrium differs between the two types of policy rule but a number of special cases are identified where the equilibria are identical the endogenous choice of policy instrument is analyzed and the nash equilibrium in the choice of policy instrument is shown to depend on the interest elasticity of money demand

were there regime switches in u s monetary policy working paper 2004 14 june 2004 abstract a multivariate model identifying monetary policy and allowing for simultaneity and regime switching in coefficients and variances is confronted with u s data since 1959 the best fit is with a model that allows time variation in structural disturbance variances only among models that also allow for changes in equation coefficients the best fit is for a model that allows coefficients to change only in the monetary policy rule that model allows switching among three main regimes and one rarely and briefly occurring regime the three main regimes correspond roughly to periods when most observers believe that monetary policy actually differed and the differences in policy behavior are substantively interesting though statistically ill determined the estimates imply monetary targeting was central in the early 80s but was also important sporadically in the 70s the changes in regime were essential neither to the rise in inflation in the 70s nor to its decline in the 80s jel classification e52 e47 c53 key words counterfactuals lucas critique policy rule monetary targeting simultaneity volatility model comparison i the debate over monetary policy change in an influential paper clarida gali and gertler 2000 cgg presented evidence that us monetary policy changed between the 1970 s and the 1980 s indeed that in the 70 s it was drastically worse they found that the policy rule apparently followed in the 70 s was one that when embedded in most stochastic general equilibrium models would imply non uniqueness of the equilibrium and hence vulnerability of the economy to sunspot fluctuations of arbitrarily large size their estimated policy rule for the later period on the other hand eliminated this indeterminacy these results are a possible explanation of the volatile and rising inflation of the 70 s and of its subsequent decline the cgg analysis has two important weaknesses one is that it fails to account for stochastic volatility us macroeconomic variables and particularly the federal funds rate have gone through periods of tranquility and of agitation with forecast error variances varying greatly from period to period ignoring such variation does not lead to inconsistent estimates of model parameters when the forecasting equations themselves are constant but it strongly biases toward a finding of changed parameters tests of the stability of the forecasting equations the other weakness is that the cgg analysis rests on powerful and implausible identifying assumptions they require that we accept that the response of the monetary authority to expected future inflation and output does not depend on the recent history of inflation money growth or output it is hard to understand why this should be so especially in the 70 s when monetarism was a prominent theme in policy debates congress was requiring reports from the fed of projected time paths of monetary aggregates and financial markets were reacting sensitively to weekly money supply numbers the requirement for existence and uniqueness of equilibrium in dynamic models is that the monetary policy rule show a more than unit response of interest rates to the sum of the logs of all nominal variables that appear on the right hand side of the reaction function if we force a particular measure of expected future inflation to proxy for all the nominal variables that actually appear independently in the reaction function we are bound to get distorted conclusions on the one hand because expected future inflation will be a noisy measure of the full set of nominal influences on policy we might get downward bias in our estimates from the usual errorsin variables effect on the other hand to the extent that expected future inflation like most expected future values shows less variation than current nominal variables we could find a mistaken scaling up of coefficients

lottery versus all pay auction models of lobbying i first provide a complete characterization of the unique equilibrium of the lottery game by n lobbyists with asymmetric valuations and then compare the lottery and the all pay auction models of lobbying i show that the exclusion principle discovered by baye kovenock and de vries 1993 for all pay auction does not apply to lottery i also show that the perverse effect that an exogenous cap may increase the total lobbying expenditure in a two bidder all pay auction discovered by che and gale 1998 does not apply to lottery

why inflation rose and fell policy makers beliefs and u s postwar stabilization policy this paper provides an explanation for the run up of u s inflation in the 1960s and 1970s and the sharp disinflation in the early 1980s which standard macroeconomic models have difficulties in addressing i present a model in which rational policymakers learn about the behavior of the economy in real time and set stabilization policy optimally conditional on their current beliefs the steady state associated with the self confirming equilibrium of the model is characterized by low inflation however prolonged episodes of high inflation ending with rapid disinflations can occur when policymakers underestimate both the natural rate of unemployment and the persistence of inflation in the phillips curve i estimate the model using likelihood methods the estimation results show that the model accounts remarkably well for the evolution of policymakers beliefs stabilization policy and the postwar behavior of inflation and unemployment in the united states

ambiguous political power and contest efforts when there is incomplete information on the source of power in a contest the contestants may divide their lobbying efforts between the potential centers of power only one of which determines the contests winning probabilities our analysis focuses on the effect of ambiguity regarding the source of power on the contestants aggregate effort in a symmetric simple lottery contest with two potential centers of power specifically we examine the effects of varying the informativeness of the contestants private signals i e the probability that a signal is correct and the degree of correlation between them our benchmark case is the standard tullock s model in which the source of power is known i e the contestants signals are perfectly informative we show that the level of aggregate effort in this case is reached also when the signals are perfectly uninformative however in any intermediate case the contestants aggregate effort is lower provided that the signals are not perfectly correlated in other words there is a u shape relationship between the informativeness of the signals and the aggregate effort in the contest the lowest level of effort is spent when the signals are independent and the probability that a signal is true is about 0 85 in this case efforts are reduced by about one fifth in comparison with the benchmark case from a rent dissipation of 50 to slightly over 40

interest group competition over policy outcomes dynamics strategic behavior and social costs this paper analyzes a two period model of interestgroup competition between two groups to affect thepolicy outcome the paper characterizes the subgameperfect equilibrium and considers the welfareimplications of the model the subgame perfectequilibrium to this game is allocatively efficient ifand only if the initial equilibrium is allocativelyefficient and interest groups are equally adept atproducing political pressure when rent seeking isconstitutionally protected the notion of rent seekingconstrained efficiency is defined as the cooperativesolution to the rent seeking game it is shown that arent seeking constrained efficient equilibrium isattainable by forcing winners in political competitionto fully compensate losers

a simple approach to international monetary policy coordination this paper analyzes the strategic interaction between the monetary policies of two countries in an intertemporal general equilibrium model with nominal rigidities and imperfect competition it offers an excursus on non cooperative towards cooperative solutions all the results can be read by comparing the strength of the two biases the monopolistic distortions and the terms of trade externalities in the best feasible allocation the larger country retains some monopolistic distortions while the smaller country reaches the competitive level

distributional coalitions and the politics of economic reform in latin america for much of the discipline of economics a closed economy is seen as the result of efforts of distributional coalitions and rent seekers to maintain sector specific protections accordingly economic liberalization is explained by the policy consistency of uncompromising reform elites students of the politics of economic adjustment in the developing world in turn have argued that reform programs concentrate costs in the present and disperse benefits in the future hence losers are prepared to engage in collective action whereas prospective winners facing uncertainty about payoffs remain disorganized they thus posit the cohesiveness and insularity of policymakers as the main variable for explaining successful reform both economists and political scientists therefore adopt a collective action approach that overlooks how groups organize in support of liberalization in the recent latin american experience however these reforms have preserved market reserves for firms that provided vital political support to and often colluded with policymaking elites this setting has thus reproduced incentives for rent seeking behavior even in the presence of comprehensive liberalization this evidence supports two interrelated theoretical claims first distributional coalitions may proliferate when the state withdraws from the economy not only when it intervenes second interest based variables retain explanatory power in political economy which state autonomy arguments disregard irrespective of whether the economy is closed or open which neoclassical perspectives overlook to highlight the centrality of interest groups favoring marketization therefore the article suggests modifications to the dominant theories of collective action and the literature on the politics of economic adjustment

cultural institutions and value formation on the art market a rent seeking approach the formation of value in the artistic market can be specifically affected by the behavior of cultural institutions acting on it as monopolistic quality certifiers the rent maximizing strategy limits quantities to sub optimum levels and keeps prices and costs higher this can be worsened by institutional rent seeking the establishment s strategies cannot always be matched through public policies because this can result in an increase of monopoly social losses and of the establishment s lobbying efforts

shocks and government beliefs the rise and fall of american inflation working paper 2004 22 september 2004 abstract the authors use a bayesian markov chain monte carlo algorithm to estimate a model that allows temporary gaps between a true expectational phillips curve and the monetary authority s approximating nonexpectational phillips curve a dynamic programming problem implies that the monetary authority s inflation target evolves as its estimated phillips curve moves the authors estimates attribute the rise and fall of post world war ii inflation in the united states to an intricate interaction between the monetary authority s beliefs and economic shocks shocks in the 1970s altered the monetary authority s estimates and made it misperceive the tradeoff between inflation and unemployment that misperception caused sharp rise in inflation in the 1970s the authors estimates indicate that policy makers updated their beliefs continuously by the 1980s policy makers beliefs about the phillips curve had changed enough to account for fed chairman paul volcker s conquest of u s inflation in the early 1980s jel classification e3 e5 key words updating beliefs policy evaluation self confirming equilibrium nash inflation ramsey outcomes i introduction today many statesmen and macroeconomists believe that inflation can largely be determined by a government monetary authority then why did the federal reserve board preside over high us inflation during the late 1960s and the 1970s and why under paul volcker did it rapidly bring inflation down during the early 1980s this paper answers these questions by estimating a model that features a particular process that makes a procession of economic shocks induce the monetary authority to alter its model of inflation unemployment dynamics the phillips curve at each date t the monetary authority updates its beliefs about the phillips curve and then recomputes a first period action recommended by a phelps problem a discounted dynamic programming problem that minimizes the expected value of a discounted quadratic loss function of inflation and unemployment 1 the monetary authority pursues the same objectives at each date using the same structural model with only its estimates of that model changing over time 2 this model of the systematic part of inflation puts the monetary authority s beliefs about the phillips curve front and center 3 we assume that the monetary authority s model of the phillips curve deviates in two subtle but important ways from what it would be in a rational expectations model e g kydland and prescott 1977 the first deviation is that while the true phillips curve is like kydland and prescott s we assume that the monetary authority omits the public s expected rate of inflation from its phillips curve by itself this omission need not prevent the outcomes of our model from coinciding with those of kydland and prescott s nor need it imply that the government s model is wrong in a way that could be detected from even an infinite sample whether the monetary authority s model is wrong in a statistically detectable way depends on how we allow the monetary authority to reestimate the parameters of its model in particular if the monetary authority were to believe that the coefficients of its phillips curve are constant over time then its estimates would converge to ones that support a self confirming equilibrium sce after convergence its estimated phillips curve would correctly describe occurrences along the sce path for inflation and unemployment such an after convergence version of our model has little hope of explaining the rise and fall of us inflation that model would have inflation fluctuating randomly around a constant sce level that coincides with kydland and prescott s time consistent suboptimal i e excessive level 4 this outcome motivates our second subtle deviation from a rational expectations equilibrium

efficient rents 2 free entry and efficient rent seeking in the competition for a monopoly right in which the number of bidders is fixed tullock and others have found the value of the resources spent in the aggregate to capture the transfer to be sometimes less than and sometimes greater than the value of the monopoly we think this approach to be incomplete since it leaves unanswered the question of what determines the number of individuals who will vie for the right to be the monopolist it is unsatisfactory to imagine for example that the franchisor sets the number of contestants one could then foresee that rent seeking would arise to influence the permissible number of bidders and this merely moves the rent seeking dissipation question one step back