some consequences of opening a neo keynesian model this paper presents a model of a small open economy in which unemployment or excess demand for labour can occur due to the exogeneity of the nominal wage it incorporates into the analysis a wholly imported intermediate good which can be thought of and is sometimes referred to as oil an internationally traded consumption good and a non traded domestic good whose price is flexible the paper s main antecedents are dixit i976 buiter and lorie i977 and neary i980 the rest of this introduction relates this paper to the relevant literature and the remainder of the paper is structured as follows section i which presents the model is divided into subsections describing the actions of the various agents involved the choice theory of the model the labour market where quantity constraints can arise and finally equilibrium for the system as a whole this section also contains a non technical summary of the subsequent analysis section ii considers in some detail the comparative statics of the price of the non traded good this is necessary because of the central part this price plays in mediating the effects of exogeneous changes on the system section iii investigates the short run consequences of one major disturbance which originates outside the economy a rise in the price of oil section iv considers the effects on the balance of trade of exchange rate policy and derives some simple conditions under which a devaluation will improve the balance of trade the appendix contains a numerical example which shows inter alia that for plausible parameter values it is possible to obtain the expected negative response of employment to an increase in money wages together with a government multiplier greater than one in the last decade several models have been developed of economies in which prices do not necessarily adjust to clear markets within the period in which trade takes place thus trades can occur at false prices see for example clower i965 hicks i965 barro and grossman i976 malinvaud i977 muellbauer and portes i978 the ultimate aim of this programme has been to provide some micro economic basis for certain macroeconomic phenomena especially involuntary unemployment these models make a number of simplifying assumptions they usually assume the existence of representative worker consumers and firms an

toward a reconstruction of keynesian economics expectations and constrained equilibria a two period model of temporary equilibrium with rationing is presented paying particular attention to agents expectations of future constraints it is shown that with arbitrary constraint expectations many different types of current equilibrium may be consistent with the same set of current and expected future wages and prices and that constraint expectations exhibit bootstraps properties e g a higher expectation of keynesian unemployment tomorrow increases the probability that it will prevail today in addition the concept of rational constraint expectations i e perfect foresight of future constraints is introduced and shown to enhance rather than reduce the effectiveness of government policy

the consumption function and intertemporal spillover effects the fact that consumers save more or consume less as long as they expect pessimistically that labor supply constraint will be binding in the future is speculated all the time however no theoretical works are developed satisfactorily without taking the intertemporal spillover effects into account in this paper an explicit solution to the consumer s intertemporal optimization problem is derived by taking account of the intertemporal spillover effects in addition it is shown that the extrinsic uncertainty of labor supply rationing induces people to save more money thus this model is an extension of clower s and barro grossman s models

supply shocks in a two country world with wage and price rigidities the implications of quantity adjustments in the face of sticky prices in open economy macroeconomic models have been introduced by dixit i978 neary i980 and dixit and norman i980 the first two employ the small country assumption that the foreign price level is an exogenous variable with the latter including a non traded good into the discussion dixit and norman introduce a two country one good model and only consider a generalised keynesian outcome under fixed exchange rates in this paper we analyse a two country two good model and consider the international link between unemployment in both countries with special emphasis on supply shock originated disequilibria under fixed and flexible exchange rates naturally the terms of trade become an important transmission mechanism in a two good model under flexible exchange rates the work of barro and grossman i976 malinvaud i977 et al for closed economies has shown that temporary equilibria in a closed economy can be classified into regions of keynesian unemployment classical unemployment repressed inflation and under consumption when two countries linked by trade are discussed the classification of international temporary equilibria multiplies accordingly we choose a small subset of these possibilities focusing on those that are likely to be associated with supply shocks i e combinations of keynesian and classical unemployment two country models have been extensively studied under walrasian and simple keynesian specifications see for instance laursen and metzler i950 harberger i95i meade i95i mundell i968 swoboda and dornbusch i973 and mussa i979 we consider these models briefly in section iii emphasising their micro foundations and general equilibrium properties stability of both fixed and flexible exchange rates regimes for walrasian and keynesian equilibria revolves around some form of the marshall lerner conditions being satisfied the problem of competitive devaluations to export unemployment in a keynesian world is discussed while a keynesian outcome for both countries applies for some configurations of wages and product prices and exchange rates this is not true for all configurations hence with sticky prices monetary deflation in both countries should lead to keynesian unemployment in both but when negative supply shocks reduce national labour demands and output supplies keynesian aggregate demands cease to determine the levels of economic activity and employment appropriately

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

booming sector economic activity in paraguay 1973 86 a case of dutch disease the primary purpose of this study is to investigate the applicability of the dutch disease model as a means of explaining the changing sectoral composition of output for paraguay in the period 1973 86 the consequences of booming sector activity for 1 the distribution of income as it affects wages and 2 the in stability of export earnings for paraguay are examined the dutch disease model predicts that the consequences of booming activity will include a contraction of non booming sector activity as well as a real appreciation of the exchange rate these outcomes are tested in several single and multiple equation estimable models for the case of paraguay

taxes on tax exempt bonds implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates with implicit tax rates close to 100 using retail trades and above 70 for interdealer trades these implied tax rates can be identified because a portion of secondary market municipal bond trades involves income taxes after valuing the tax payments market discount bonds which carry income tax liabilities trade at yields around 25 basis points higher than com parable municipal bonds not subject to any taxes the high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions the issue of how taxes affect asset prices is an important issue in finance accounting and economics in theoretical models examining the effect of taxes

keynesian models of deflation and depression revisited abstract this paper extends tobin s tobin j 1975 keynesian models of recession and depression american economic review 65 195 202 keynesian analysis of deflation to include a range of additional channels through which deflation exacerbates keynesian unemployment the paper provides further theoretical reasons why downward price level adjustment may not solve the keynesian problem these arguments challenge the received wisdom that keynes general theory is a special case resting on downwardly rigid prices and nominal wages this conventional wisdom has led many economists to recommend policies promoting downward flexibility these policies have created an environment in which deflation is more likely giving new relevance to keynesian analysis of deflation

on the local uniqueness of the fixed price equilibria a number of recent works have addressed the problem of describing the allocation of resources in an economy where prices are fixed at a value that may not achieve equilibrium of supply and demand in the classical sense it seems that by and large through the works of benassy 1975 dreze 1975 malinvaud younes 1977 and younes 1975 agreement has been reached as to the properties that an allocation should possess when transactions take place at given arbitrary fixed prices the purpose of this paper is to present a result in comparative statics which applies in this approach in the framework of an exchange economy a necessary and sufficient condition for the local uniqueness of the fixed price allocation in a neighbourhood of a competitive equilibrium is established under this condition in a neighbourhood of the competitive allocation the fixed price equilibrium is locally a continuous function of the price system a prerequisite for most studies in comparative statics this condition can be related to the stability of the quantity adjustment process associated with fixed price equilibria in a neighbourhood of the competitive equilibrium as is suggested by samuelson s principle of correspondence stability implies local uniqueness while the converse is not true finally it is shown that the fixed price equilibria are both locally unique and stable when the commodities are substitutes for the rationed consumers the paper is organized as follows section 2 presents the model and results the main proofs are gathered in section 3 while an appendix gives the properties of the derivatives of the consumer s demands the mathematical tools involved are first a generalization of the inverse function theorem for lipschitzian functions due to clarke 1976 and second the identity of sylvester for determinants gantmacher 1966 pp 32 33

keynesian and classical unemployment in an open economy this paper examines various unemployment equilibria in a fix price model of an open economy with nontraded goods the economy exports an internationally traded good and imports an intermediate input good the comparative static effects of various exogenous variables on total employment and the balance of trade are derived and compared across regimes considerable emphasis is placed on the employment effects of external disturbances both price shocks such as a rise in the price of the imported intermediate good and quantity shocks e g a slump in the demand for exportables are examined and the appropriate policy for restoring full employment is discussed in each case

disequilibrium rational expectations abstract in this paper we present a simple dynamic general disequilibrium model which generates both unemployment and inflation as a stationary long run equilibrium rational expectations in the mean are an essential part of this equilibrium policy remedies are examined by means of an example it is shown that rational expectations are consistent with depressed economic activity and that government policy can play an important role it is entirely possible for inflation and unemployment to persist indefinitely

coffee economic fluctuations and stabilisation an intertemporal disequilibrium model with capital market imperfections abstract this paper develops a two period disequilibrium model of a small open economy under keynesian unemployment to analyse the effects of temporary anticipated and permanent coffee price shocks the model includes a government sector that administers a commodity price stabilisation fund and allows for capital market imperfections the type of capital market imperfection makes an important difference to the results of the model in particular when the government borrows on more favourable terms than individuals the coffee price stabilisation fund reduces the multiplier effects of temporary and permanent shocks not only in the first but also in the second period by contrast when individuals face an upward sloping supply of capital curve the stabilisation fund shifts some of these effects from the first to the second period

a simple model of the taxable and tax exempt yield curves i examine the anomalous behavior of the taxable and tax exempt yield curves long municipal yields appear too high relative to the equivalent after tax yield that can be earned in treasury or corporate bonds i discuss existing explanations of the problem and propose a simple model that relates the yields of taxable bonds to the yield curve for par tax exempts the ratio of the tax exempt yield to the taxable yield increases with maturity in the model so it is consistent with observed phenomena such as inverted yield curves for taxables and contemporaneous rising yield curves for tax exempts statistical and descriptive comparisons between the yields predicted by the model and observed yields on par bonds that the model has some promise in explaining the apparent anomalies in the behaviors of the two yield curves article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

political uncertainty and public financing costs evidence from u s gubernatorial elections and municipal bond markets this research investigates how political uncertainty around u s gubernatorial elections in uences the borrowing costs of public debt measured by yields of municipal bonds our evidence from both the new issuance market and the secondary market shows that yields of municipal bonds increase sharply by 6 to 8 basis points before elections and then reverse afterward elections have more pronounced impact during economic downturns when outcomes are less predictable and when states have more outstanding debt several state institutions such as gaap budgeting spending limits and tax increase limits help to mitigate the adverse impact of political uncertainty

the effect of school choice on participants evidence from randomized lotteries school choice has become an increasingly prominent strategy for enhancing academic achievement to evaluate the impact on participants we exploit randomized lotteries that determine high school admission in the chicago public schools compared to those students who lose lotteries students who win attend high schools that are better in a number of dimensions including peer achievement and attainment levels nonetheless we find little evidence that winning a lottery provides any systematic benefit across a wide variety of traditional academic measures lottery winners do however experience improvements on a subset of nontraditional outcome measures such as self reported disciplinary incidents and arrest rates

disequilibrium dynamics with monetarist price expectations abstract in this note we sketch the main features of the dynamic evolution of a rationed equilibrium macroeconomic model in which prices and wages respond to excess demands and inflation expectations and the money stock is endogenous we postulate monetarist inflation expectations i e expected inflation is assumed to be equal to the current percentage rate of change of the money stock if the system is stable monetarist inflation expectations are asymptotically rational

municipal bond liquidity and default risk this paper examines the pricing of municipal bonds i use three distinct complementary approaches to decompose municipal bond spreads into default and liquidity components and find that default risk accounts for 74 to 84 of the average spread after adjusting for tax exempt status the first approach estimates the liquidity component using transaction data the second measures the default component with credit default swap data and the third is a quasi natural experiment that estimates changes in default risk around pre refunding events the price of default risk is high given the rare incidence of municipal default and implies a high risk premium

rethinking macroeconomics what failed and how to repair it the standard macroeconomic models have failed by all the most important tests of scientific theory they did not predict that the financial crisis would happen and when it did they understated its effects monetary authorities allowed bubbles to grow and focused on keeping inflation low partly because the standard models suggested that low inflation was necessary and almost sufficient for efficiency and growth after the crisis broke policymakers relying on the models floundered notwithstanding the diversity of macroeconomics the sum of these failures points to the need for a fundamental re examination of the models and a reassertion of the lessons of modern general equilibrium theory that were seemingly forgotten in the years leading up to the crisis this paper first describes the failures of the standard models in broad terms and then develops the economics of deep downturns and shows that such downturns are endogenous further the paper argues that there have been systemic changes to the structure of the economy that made the economy more vulnerable to crisis contrary to what the standard models argued finally the paper contrasts the policy implications of our framework with those of the standard models

taxes default risk and yield spreads this paper develops a model of bond prices and yield spreads that incorporates the effect of both taxes and differences in default probabilities the tax loss consequences of default are recognized traditionally tax free municipal bond yields have been viewed as linearly related to taxable yields with a slope coefficient equal to one minus the tax rate and the intercept representing differences in default risk while our model supports the linearity assumption it implies that the slope and intercept are both functions of both the break even tax rate and the default probability ies clientele effects among both municipal and taxable bonds are demonstrated finally the implied marginal tax rates and the implied default probabilities are estimated for different categories of municipal bonds students of financial markets cannot help but be impressed by the number of new financial instruments that have been introduced successfully in recent years the fixed income market has been particularly innovative as bonds carrying a whole host of specific features have been successfully marketed bonds with small or zero coupons variable coupon rates or detachable warrants are three examples from among an expanding list of such features not surprisingly there has developed a large and expanding literature attempting to explain the rate spreads between different fixed income securities this literature has evolved much as one would expect early empirical work was in general not well founded in theory and was not based on an underlying expected return price model later empirical research has tended to be more careful in its specification of factors affecting yield spreads and as a consequence better founded in valuation

budget deficits and the current account an intertemporal disequilibrium approach the objective of the present paper is to develop an intertemporal disequilibrium model of a monetary economy to explain the effects of fiscal policy on the current account we wish to emphasize the role of aggregate demand determined output fluctuations and flexible exchange rates within a microtheoretic optimizing framework furthermore the differing effects of monetary versus non monetary i e tax or bond finance of government expenditures are considered

the performance and competitive effects of school autonomy this paper studies a recent british reform that allowed public high schools to opt out of local authority control and become autonomous schools funded directly by the central government schools seeking autonomy had only to propose and win a majority vote among current parents almost one in three high schools voted on autonomy between 1988 and 1997 and using a version of the regression discontinuity design i find large achievement gains at schools in which the vote barely won compared to schools in which it barely lost despite other reforms that ensured that the british education system was by international standards highly competitive a comparison of schools in the geographic neighborhoods of narrow vote winners and narrow vote losers suggests that these gains did not spill over

fixed price equilibria in a two country model of trade existence and comparative statics abstract the barro grossman malinvaud model of fixed price equilibrium is extended to a two country model of trade with a fixed exchange rate there are various possible types of fixed price equilibria for the international economy depending on the structure of rationing the existence and uniqueness of one type of fixed price equilibrium are proved indeed the extension of the simple macroeconomic model to a two country economy allows a new treatment of the problem of uniqueness of the type of fixed price equilibrium at last some comparative statics results are derived among others the model allows to meet on new grounds i e with some microfoundations some well known results of the conventional keynesian approach but much more general results can be derived applying to a class of market states not already dealt with in international trade theory

on the stability of non walrasian equilibria abstract we present a dynamic disequilibrium macro model which permits non walrasian or keynesian equilibria as stationary states unlike the stability results obtained by varian 1977 and eckalbar 1979 1980 1981 in a series of papers in the same model we show that such equilibria have the saddle point property when the real wage rate the real money balances and expected output demand all change in disequilibrium

rationing in an open economy fix price equilibrium and two gap models abstract two gap models have been criticized severely for the lack of realism of their assumptions but are still prominent in development planning and implicitly in discussions of short run policy problems here the model s applicability outside a command economy is considered by comparing it with a rationing model with proper micro foundations it is shown that the two gap model in general violates fix price equilibrium properties but that the fix price model generates quite similar results

useful government spending direct crowding out and fiscal policy interdependence this paper introduces perfect substitutability between private and public consumption in a dynamic open economy with imperfect competition and nominal rigidities this implies a direct crowding out effect that generalising to the two country case some well known properties of a closed economy tends to reduce consumption following both domestic and foreign expansions a less expected result is that sub stitutability has a positive effect on the short run output spillover we also show that if we modify the model to allow for home bias in government spending temporary fiscal expansions display a quasi neutrality property

effective demand differential information and the multiplier the paper develops a rigorous model of the interaction between employment income and demand it is shown that when agents are differently informed about the income generated in the economy aggregate demand shocks create a keynesian type unemployment moreover the model explains nominal wage price stickiness and a multiplier effect so as to imply that a larger burden of adjustment is taken by quantities rather than prices copyright 1987 by royal economic society

where modern macroeconomics went wrong this paper provides a critique of the dsge models that have come to dominate macroeconomics during the past quarter century it argues that at the heart of the failure were the wrong microfoundations which failed to incorporate key aspects of economic behaviour e g incorporating insights from information economics and behavioural economics inadequate modelling of the financial sector meant they were ill suited for predicting or responding to a financial crisis and a reliance on representative agent models meant they were ill suited for analysing either the role of distribution in fluctuations and crises or the consequences of fluctuations on inequality the paper proposes alternative benchmark models that may be more useful both in understanding deep downturns and responding to them

determinants of the decreasing term structure of relative yield spreads for taxable and tax exempt bonds the empirical finding that the relative yield spread for taxable and tax exempt bonds decreases across the term structure is usually attributed to tax differentials and or arbitrage opportunities using monthly data it is found that the decresing term structure of relative yield spreads is determined by the decreasing forward marginal tax rate increasing default risk premium increasing tax timing option premium and expected rate of inflation

the pricing of corporate debt a note to develop a theory of the risk structure of interest rates r c merton 2 defines the risk as the possible gains or losses to bond holders as a result of unanticipated changes in the probability of default p 449 he derives the pricing theory of a pure discount bond corporation debt along the line of blackscholes 1 comparative statics are used to develop graphs of the risk structure although his algebraic derivation is correct his graphical presentation is inadvertently wrong

a neo kaleckian goodwin model of capitalist economic growth monopoly power managerial pay and labour market conflict this paper presents a neo kaleckian goodwin model of growth and distribution the key innovation is the introduction of managerial pay kaleckian monopoly power determines the functional distribution of income and goodwin labour bargaining power determines the wage bill division the model helps explain slower us growth over the past 30 years for much of that period the functional distribution of income was relatively constant but growth slowed because income inequality increased owing to a wage bill shift from workers to managers the wage bill division effect explains why economies can display wage led and profit led characteristics economies can be profit led regarding functional income distribution and wage led regarding wage bill distribution

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

examining the link between teacher wages and student outcomes the importance of alternative labor market opportunities and non pecuniary variation researchers using cross sectional data have failed to produce systematic evidence that teacher salaries affect student outcomes these studies generally do not account for non pecuniary job attribu

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

was the tax exempt bond market inefficient or were future expected tax rates negative this paper shows that the sharp narrowing with maturity of the spread between taxable and tax exempt yields leaves room for tax arbitrage at times tax exempt forward rates have exceeded taxable forward rates at such times only expectations of higher taxes on treasury than on municipal bonds would eliminate profit opportunities the authors develop the idea of forward tax rates and compute forward tax rates for 1955 through 1984 they also outline tax arbitrage mechanisms involving private forward sale of long municipal bonds or the use of the municipal bond futures contract and show the potential profits the municipal yield curve has been upward sloping for the entire postwar period even at times when taxable yield curves were humped or downward sloping thus the spread in yields between taxable and tax free bonds narrows dramatically with increasing maturity this paper focuses on the term structure of the spread in yields between taxable and tax exempt bonds we show that the sharp narrowing of the spread with maturity leaves room for some apparently unexploited tax arbitrage at times the narrowing has been so dramatic that taxexempt forward rates have exceeded taxable forward rates in other words only expectations of negative future tax rates on treasury interest or the expectations of a reversal in the relative taxability of treasury and municipal bonds would eliminate profit opportunities this situation makes little sense if the markets are well arbitraged three theories of the relationship between the yields on taxable and taxexempt bonds have attracted attention 2 miller 8 asserts that the corporate tax rate determines the yield spread between taxable and tax exempt debt in the

tax incidence in a model with perfect foresight of agents and rationing in markets abstract this paper examines the incidence of several taxes in a macroeconomic model producers and consumers optimize with perfect foresight price inertia leads to rationing in the market for goods and for labour in the long run the system tends towards walrasian equilibrium meanwhile there may be keynesian unemployment classical unemployment or repressed inflation with possible switches of regimes balanced budget policies are analysed by working through numerical examples

auction failures and the market for auction rate securities abstract the market for auction rate securities ars made headlines during the second week of february 2008 when auctions at which the bonds interest rates reset experienced a wave of failures contrary to headlines that attribute the failures to a frozen market or investors irrationality we find that 1 even at their height less than 50 of ars experienced auction failures 2 the likelihood of auction failure was directly related to the level of the bonds maximum auction rates 3 the implied market clearing yields of bonds with failed auctions were significantly above their maximum auction rates and 4 ars yields were generally higher than yields of various cash equivalent investment alternatives we infer that investors priced the possibility of auctions failures into ars yields and rationally declined to bid for bonds for which required market yields exceeded their maximum auction rates

cost benefit rules in a regionalized disequilibrium model in 1982 83 a mining company in northern sweden laid off 1 800 employees the parliament allotted sek 309 million for a program of job creating measures evaluation of these measures requires a welfare theoretic foundation this analysis focuses on the welfare implications of public production of private goods these effects depend on which market output is sold and the type of taxes used to balance the public budget the rules include partial and indirect spill over effects that can be interpreted in terms of multipliers and marginal propensities to consume

disequilibrium and the welfare maximising levels of government spending taxation and debt a disequilibrium framework which extends that of r j barro and h i grossman 1971 and e malinvaud 1977 to include overlapping generations and dynamics due to perfect foresight and t he accumulation of bonds and capital is used to determine when a welfare maximizing fiscal policy requires a higher level of government spending than in walras ian equilibrium when deficits are permitted optimum spending either equals the walrasian optimum or differs in a way depending arbitrarily on preferences when a balanced budget is imposed two situations which may justify spending clearly above the walrasian optimum are 1 when capital accumulation is included 2 when spending provides utility to consumers copyright 1987 by royal economic society

inventories in the open economy macro model a disequilibrium analysis this study examines a disequilibrium model of a small open economy with explicit links between periods due to inventory accumulation as well as the more conventional channels through current account imbalances and the government budget constraint the key features of the model are that agents have perfect foresight with neutral public debt and that inventories adjust to smooth production intertemporarily the paper explores the extent to which fiscal policy can be used selectively for coping with an export slump without running into a balance of payments constraint

municipal debt and marginal tax rates is there a tax premium in asset prices we study the marginal tax rate incorporated into short term municipal rates using municipal swap market data using an affine model we identify the marginal tax rate and the credit liquidity spread in 1 week tax exempt rates as well as their associated risk premia the marginal tax rate averages 38 0 and is related to stock bond and commodity returns the tax risk premium is negative consistent with the strong countercyclical nature of after tax fixed income cash flows these results demonstrate that tax risk is a systematic asset pricing factor and help resolve the muni bond puzzle

the macroeconomic impact of development aid a critical survey the early literature explained aid s macroeconomic impact in the context of the dual gap model showing a clear link between aid and growth many now believe that the empirical evidence shows there to be no such relationship this paper critically reviews the different theoretical perspectives the dual gap model the savings debate recipient fiscal response and aid as dutch disease and the empirical debates on aid savings and growth the basis for denying a relationship between aid and growth is shown to be weak though more recent areas of research offer promising directions for future work

the tax rate induced bond substitution hypothesis and the traditional textbook treatment of the relationship between tax free and taxable bond yields abstractthis empirical study posits and tests the tax rate induced bond substitution hypothesis wherein the propensity for bond buyers to substitute tax exempt municipal bonds for taxable bonds

the relationship between production and unemployment in japan okun s law in comparative perspective abstract this paper studies the question whether the celebrated okun s law a relation between excess capacity and unemployment applies to the postwar japanese economy though the fitness of estimation is weak the coefficient that measures the responsiveness of the output gap to the unemployment rate is very large reaching 28 this large coefficient can be attributed to the elastic response in the female participation ratio to flexible working hours to the slow adjustment in employment and to changes in industrial structures the results are compared with those in the united states

imperfect competition and the suboptimality of rational expectations abstract this paper investigates whether nonrational expectations can lead to outcomes which other things being equal pareto dominate rational expectations outcomes in order to carry out this investigation we construct an intertemporal micro based macroeconomic model with the two following strong points a it accommodates both rational and non rational expectations b both prices and quantities are determined by optimizing agents in particular prices are determined by explicit price setters using objective demand curves in this model the first theorem of welfare holds so that the walrasian equilibrium with rational expectations cannot be pareto dominated this conclusion is extremely fragile however and we show that as soon as some degree of imperfect competition is present rational expectations are suboptimal in the sense that they are dominated by irrational expectations

are individual investors tax savvy evidence from retail and discount brokerage accounts using brokerage account data we analyze the tax awareness of individual investors we find strong evidence that taxes matter investors prefer to locate bonds and mutual funds in retirement accounts and in december harvest stock losses in their taxable accounts however investors also trade actively in their taxable accounts realize gains more frequently than losses and locate a material portion of their bonds in taxable accounts though taxes leave clear footprints in the data we analyze many investors could improve their after tax performance by fully capitalizing on the tax avoidance strategies available to equities while optimally locating their assets

long term educational consequences of secondary school vouchers evidence from administrative records in colombia colombia s paces program provided over 125 000 poor children with vouchers that covered the cost of private secondary school the vouchers were renewable annually conditional on adequate academic progress since many vouchers were assigned by lottery program effects can reliably be assessed by comparing lottery winners and losers estimates using administrative records suggest the paces program increases secondary school completion rates by 15 to 20 percent correcting for the greater percentage of lottery winners taking college admissions tests the program increased test scores by two tenths of a standard deviation in the distribution of potential test scores jel i21 j12 i28

do investors value smooth performance abstract this paper presents empirical evidence that cash flow volatility is negatively valued by investors the magnitude of the effect is substantial with a 1 increase in cash flow volatility resulting in approximately a 0 15 decrease in firm value we show that this increase however is not associated with earnings smoothing resulting from managers accrual estimates our results are consistent with a preference by the market for less volatile cash flows and suggest that managers efforts to produce smooth financial statements add value but only via the cash component of earnings

a discussion of belgian unemployment combining traditional concepts and disequilibrium econometrics with a gdp of less than 100 billion and exports of more than 60 billion belgium comes perhaps closer than any other country to being a small open economy consequently trends in world trade and export performance have a major impact on domestic activity whereas the impact of domestic fiscal policy is damped by import leakages table 1 presents a few figures confirming these observations

the foreign exchange constraint suppression of the trade deficit and the shadow price of foreign exchange in a fix price economy abstract the foreign exchange gap is analysed as a possible feature of a fix price economy the implications of closing the gap by means of import rationing are then discussed finally a set of shadow rates of exchange is derived these shadow prices are conditional on the prevailing regimes and include the paradoxical possibility of a negative shadow rate of exchange

shadow prices and public policies in a disequilibrium model of an open economy the paper focuses on the interaction between the goals of optimal stabilization and of allocative efficiency in project evaluation in an economy that is small as an exporter which must maintain trade balance and where some disequilibrium may prevail on goods and labour markets the criteria that are developed reflect an aggregation of profitability and reduction of unemployment additional foreign demand foreign currency savings should be evaluated in welfare terms after weighting by the gap between the relevant market and shadow prices the shadow prices also lead to the definition of an optimal taxation system

global effects of national stabilization policies under fixed and floating exchange rates this paper deals with international effects of two types of stabilization policies monetary expansion directed towards the demand side and a reduction in payroll taxes directed towards the supply side the analysis focuses on employment relative prices and welfare issues it rests on a simple intertemporal general equilibrium model of two countries that includes a specific micro theory of money under floating exchange rates a country s employment is insulated from both policies abroad but its consumption generally changes under fixed exchange rates no such insulation prevails while monetary expansion is generally expansionary reduced payroll taxes constitute a beggar thy neighbor policy in both systems the welfare of a country may decrease although its employment increases an immiserizing expansion may occur

the personal tax advantages of equity abstract we value a firm that pays its cash flows to equity through share repurchases in a dynamic environment where personal taxes are paid on capital gains upon realization the cost of capital is reduced by approximately 0 8 through the use of repurchases relative to dividends we use the empirical distribution of pre tax free cash flows in fama and french 1999 to evaluate the tradeoffs between the costs of financial distress the personal tax advantages of equity and the corporate tax advantage to debt the optimal capital structure is interior with a 3 bankruptcy cost

bottlenecks and the phillips curve a disaggregated keynesian model of inflation output and unemployment benchmark macroeconomic models of output and inflation combine the demand side of the economy with aggregate supply equations based upon some version of the phillips curve in contrast to classical and new classical models such as lucas i972 and sargent 1979 chs i xii and xvi in which prices jump instantaneously to market clearing levels the gradual price adjustment approach represented by tobin 1972 laidler and parkin i975 section 4 barro and grossman 1976 ch 5 sargent 1979 ch ii and ch v i okun i98i and perry i983 take wages and or prices to be predetermined at an instant in time while their rates of change depend on the level of aggregate output in the prototype complete macroeconomic model incorporating this approach output is determined by aggregate demand equations while the augmented phillips curve specifies that prices move in a direction which will tend to return output to its equilibrium value this short run keynesian long run monetarist character is typical of many structural macroeconometric models it is the standard textbook account found for example in dornbusch and fischer i98i and is implicit in much current research there are fundamental questions of consistency in the type of model just described the central difficulty is that with wages and prices predetermined the non market clearing analysis ofbarro and grossman i 976 ch 2 and malinvaud i977 is applicable but in this world the aggregate demand equations are decisive only in the keynesian regime in the other regimes which must arise at high levels of aggregate demand the effective supplies of output or labour or both must be modelled indeed at the aggregate level it is difficult to provide a coherent account of how it is possible to have output above its equilibrium value since this would require labour and output in excess of their notional supplies violating barro and grossman s min condition that quantities be determined by the short side of the market an appealing line for addressing this last difficulty is to disaggregate markets an approach taken by hansen i970 tobin i972 and barro and grossman i976 ch 5 however because each market can be in either excess supply or demand a formal fixed price general equilibrium model appears to be intractable due to the resulting multiplicity of regimes and is not attempted by these authors in this paper these problems are overcome in a disaggregated model in which

does greater school autonomy make a difference evidence from a randomized natural experiment in south korea abstract we exploit the unique features of high schools in seoul to study the effects of school autonomy on student outcomes under south korea s equalization policy both private and public schools in seoul admit students that are assigned randomly to them receive equal government funding charge identical fees and use similar curricula however private schools have greater flexibility in personnel decisions and their principals and teachers face stronger incentives to perform we find that private high schools have better student outcomes than public high schools our results suggest that autonomy in personnel decisions explains the positive student outcomes in private schools

accountability and flexibility in public schools evidence from boston s charters and pilots charter schools are publicly funded but operate outside the regulatory framework and collective bargaining agreements characteristic of traditional public schools in return for this freedom charter schools are subject to heightened accountability this paper estimates the impact of charter school attendance on student achievement using data from boston where charter schools enroll a growing share of students we also evaluate an alternative to the charter model boston s pilot schools these schools have some of the independence of charter schools but operate within the school district face little risk of closure and are covered by many of same collective bargaining provisions as traditional public schools estimates using student assignment lotteries show large and significant test score gains for charter lottery winners in middle and high school in contrast lottery based estimates for pilot schools are small and mostly insignificant the large positive lottery based estimates for charter schools are similar to estimates constructed using statistical controls in the same sample but larger than those using statistical controls in a wider sample of schools the latter are still substantial however the estimates for pilot schools are smaller and more variable than those for charters with some significant negative effects

reflections on macroeconomics the turmoil that has characterized macroeconomics for at least a decade originated with the inflation that emerged in the late 1960 s and persisted stubbornly throughout the 1970 s the inability of the neoclassical synthesis to model inflation convincingly spawned the new classical models because they infer macroeconomic results more directly from principles of maximizing behavior they appeal to some as more rigorous many others reject them as irrelevant because neither the microeconomic behavior that these models postulate nor their macroeconomic implications are realistic the central postulates are that all agents are price takers and that all markets clear in the sense of walrasian auction markets in a dynamic or multiperiod context this means markets clear in rationally expected future prices the most controversial implications are policy ineffectiveness and in some versions the proposition that inflation could be eliminated with little cost in real output as one of those who was unimpressed with these more provocative postulates and implications i was distressed that anyone took them seriously and that the profession became so divided over important policy issues but it is also true that some more interesting ideas that were originally linked with the auction market model by robert lucas and other authors might not have been developed without the controversy one is that the rational expectations methodology should be applied in a thorough way to macroeconomic relations another is that private agents behavior will depend on the rules governing the conduct of policy or the policy regime i am optimistic that we are on the verge of generating more light and less heat than we have been recently the interesting new ideas and methodology that have developed in the course of the past decade s debates will continue to be explored but inevitably i believe these and other ideas will be examined within the framework of an economy that in crucial ways does not operate with auctionlike markets both the lack of empirical success with the classical postulates and the intellectual challenge of developing a more general micro foundation to supplant the auction model are pushing in this direction with this development the gap between rigor and reality should narrow as researchers differ less about the basic postulates underlying macro models

generalizations about using value added measures of teacher quality the extensive investigation of the contribution of teachers to student achievement produces two generally accepted results first there is sub stantial variation in teacher quality as measured by the value added to achievement or future aca demic attainment or earnings second variables often used to determine entry into the profession and salaries including post graduate schooling experience and licensing examination scores appear to explain little of the variation in teacher quality so measured with the exception of early experience together these findings underscore explicitly that observed teacher characteristics do not represent teacher quality

armod a small numerical macroeconomic world model with non clearing markets the purpose of this paper is to demonstrate the usefulness of a non walrasian numerical modeling approach to current macroeconomic problems of excessive unemployment and trade imbalances in the oecd area the model which consists of five world regions generates a sequence of short run equilibria the model captures international transmission mechanisms of business cycle impulses and of the effects of monetary and fiscal policy assuming flexible interest and exchange rates full capital mobility and adaptive expectations a scenario with successful international policy coordin ation illustrates how the model works copyright 1987 by the editors of the scandinavian journal of economics

finishing high school and starting college do catholic schools make a difference in this paper we consider two measures of the relative effectiveness of public and catholic schools finishing high school and starting college these measures are potentially more important indicators of school quality than standardized test scores in light of the economic consequences of obtaining more education single equation estimates suggest that for the typical student attending a catholic high school raises the probability of finishing high school or entering a four year college by thirteen percentage points in bivariate probit models we find almost no evidence that our single equation estimates are subject to selection bias

did policy activism work abstract how macroeconomic policy activism influences business cycles remains a major unresolved question this paper compares the degree of cyclical stability in industrialized countries over three periods 1870 1913 1922 1937 and 1950 1979 two of which were little affected by demand management while the third saw a large degree of policy involvement the evidence shows that the 1950 1979 years were unprecedently stable neither problems of data reliability nor the influence of the world cycle nor the smaller role of agriculture appear to be responsible for this the major reason seems to be the greater influence of government which operated via automatic and discretionary policies and by changing expectations

borrowing cost reduction by interest rate swaps an option pricing analysis abstract interest rate swaps generally involve two firms with different credit ratings a quality spread differential qsd is observed to exist at different maturities for firm debts with different credit ratings the quality spread differential allows two firms with different credit ratings to decrease their borrowing costs through interest rate swaps by utilising their comparative advantage in borrowing in different markets the credit ratings of firms are determined by credit risk factors such as leverage and volatility of earnings asset value this paper investigates the effect of the leverage and the volatility on the behaviour of risk premia between firm debts with different credit ratings by using the contingent claim analysis our results show that the quality spread differential can be explained by the differences in leverage and volatility thus two firms with different leverage and volatility of earnings asset value will benefit from interest rate swaps however it is found that the duration within which the qsd exists is limited by the values of the leverage and the volatility of two firms in conclusion this paper shows that interest rate swaps can help the firms to lower borrowing costs without necessarily relying on the arbitrage argument asserted by existing literature

vouchers for private schooling in colombia evidence from a randomized natural experiment colombia used lotteries to distribute vouchers which partially covered the cost of private secondary school for students who maintained satisfactory academic progress three years after the lotteries winners were about 10 percentage points more likely to have finished 8th grade primarily because they were less likely to repeat grades and scored 0 2 standard deviations higher on achievement tests there is some evidence that winners worked less than losers and were less likely to marry or cohabit as teenagers benefits to participants likely exceeded the 24 per winner additional cost to the government of supplying vouchers instead of public school places

a two country disequilibrium model the implications of wage and price rigidities for several open economy macroeconomic questions are studied in a two country framework using comparative statics and numeric analytic solutions in contrast to a small country disequilibrium approach the proposed model highlights the critical dependence of trade balance stability and other comparative static results on the specification for the export rationing scheme although coordination of export rationing policies carries potential mutual benefits it is shown that these may not be realized due to game theoretic problems the analysis also offers new illustrations and more general results which emphasize 1 the dependence of the efficacy of macroeconomic policies on the specific set of wage and price rigidities as well as quantity constraints in both countries and 2 the likelihood that a devaluation will have perverse trade balance effects in supply constrained regimes

default risk cannot explain the muni puzzle evidence from municipal bonds that are secured by u s treasury obligations fama 1977 and miller 1977 predict that one minus the corporate tax rate will equate after tax yields from comparable taxable and tax exempt bonds empirical evidence shows that long term tax exempt yields are higher than theory predicts two popular explanations for this empirical puzzle are that relative to taxable bonds municipal bonds bear more default risk and include costly call options i study u s government secured municipal bond yields which are effectively default free and nonmalleable these municipal yields display the same tendency to be too high i conclude that differential default risk and call options do not explain the municipal bond puzzle article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

estimation of a quarterly macroeconomic model with quantity rationing we specify and estimate a small fix price model with quantity rationing on both the goods and labor markets the side of the market which is rationed is random the model is able to generate a productivity cycle and the degree of capacity utilization is endogenous the rationing scheme allocating supply between the various components of demand is estimated the probabilities of being in the various regimes the intensity of the dispquilibrium on the markets and the results of policy exercises are discussed

a multi attribute comparative evaluation of relative risk for a sample of banks abstract this paper proposes a comparative analysis of five different attributes of commercial banks liabilities that may be thought of as either directly measuring the default risk or are perceived by the market as impacting upon that default risk two of these attributes are credit ratings assigned by moody s and standard and poor s to debt issues the third attribute that we consider is yield to maturity which is typically assumed to be positively related to default risk the fourth attribute that is proposed is the fair value risk adjusted deposit insurance premium derived from option theoretic modeling and estimated from the daily data on equity prices finally we propose a term structure adjusted difference in yield between the risky debt and default free government debt as a more precise and theoretically sound measure of the default risk premium and develop a methodology for eliciting it on a composite basis for a given bank from the market prices of its various bond issues this term structure adjusted risk premium provides an analytical approximation to the valuation of corporate bonds call features and sinking fund provisions in view of the ordinality of the credit ratings given by the investment agencies spearman s rank correlation coefficient is employed as an analytical tool the analysis

peer effects teacher incentives and the impact of tracking evidence from a randomized evaluation in kenya to the extent that students benefit from high achieving peers tracking will help strong students and hurt weak ones however all students may benefit if tracking allows teachers to better tailor their instruction level lower achieving pupils are particularly likely to benefit from tracking when teachers have incentives to teach to the top of the distribution we propose a simple model nesting these effects and test its implications in a randomized tracking experiment conducted with 121 primary schools in kenya while the direct effect of highachieving peers is positive tracking benefited lower achieving pupils indirectly by allowing teachers to teach to their level jel i21 j45 o15

tax subsidized underpricing the market for build america bonds build america bonds babs were issued by municipalities for 20 months as a part of the 2009 fiscal package unlike traditional tax exempt municipals babs are taxable to the holder but the treasury rebates 35 of the coupon to the issuer the stated purpose was to provide municipalities access to a more liquid market including foreign tax exempt and tax deferred investors we find babs do not exhibit greater liquidity than traditional municipals babs are more underpriced initially particularly for interdealer trades babs also show a substitution from underwriter fees toward more underpricing suggesting that the underpricing is a strategic response to the tax subsidy

employment effects of an increased oil price in an economy with short run labor immobility the effects of an increased oil price are analyzed in a two sector economy with immobile labor combined with a wage leadership assumption starting with a full employment equilibrium an increased oil price will generally lead to unemployment in one of the sectors this unemployment may be eliminated by an appropriate change in fiscal policy if unemployment occurs in the sector which produces nontradeables taxes should be reduced whereas taxes should be increased if unemployment occurs in the sector which produces tradeables if an increased oil price leads to an international excess supply of tradeable goods the direction of the tax change necessary to eliminate unemployment is unambiguous even when the sector in which there is unemployment is known

pricing black scholes options with correlated credit risk abstract this paper presents an improved method of pricing vulnerable black scholes options under assumptions which are appropriate in many business situations an analytic pricing formula is derived which allows not only for correlation between the option s underlying asset and the credit risk of the counterparty but also for the option writer to have other liabilities further the proportion of nominal claims paid out in default is endogenous to the model and is based on the terminal value of the assets of the counterparty and the amount of other equally ranking claims numerical examples compare the results of this model with those of other pricing formulas based on alternative assumptions and illustrate how the model can be calibrated using market data

effective demand and spillovers when individuals face rationing on a particular market they will seek to amend their trade offer on this and other markets to account for the extra constraint on their behaviour empirical researchers must attempt to mimic this behaviour by specifying effective demand functions there is no consensus however about how this should be done the development of applied multi market disequilibrium modelling has given this problem an immediate practical relevance moreover aggregation and computational considerations further complicate the problem of specifying theoretically consistent yet tractable effective demands this paper explores theoretical aspects of empirical effective demand functions and in this light reviews the existing empirical literature we stress the practical nature of the problems encountered in applied work and the limited guidance that theory provides the initial systematic discussion of the problems involved in specifying empirical effective demand functions in portes 1977 has been supplemented by gourieroux laffont and monfort 1980 ito 1980 sneessens 1981 and lee 1986 our paper is partly an update of this work there are three main candidates differing according to both the measurement of excess demand on other markets and how individuals are assumed to respond to this using linear forms for the effective demands portes showed how the three candidates are observationally equivalent in that they all imply the same level of trade perhaps because of this we find a wide range of effective demand concepts used in existing empirical applications we then consider the implications for empirical effective demand functions of allowing rationing to operate at a disaggregated level these smoothing by aggregation models have been the most significant

the term structure of interest rates in real and monetary economies abstract this paper modifies standard asset pricing models by introducing capital a variable labor supply and money a surprising but very positive result is that in a real production economy the interest rate is close to a random walk this result is found to be true even if there is no persistence in the driving process of the model in this paper we generalize the standard cash in advance constraint by using a shopping time technology this generalization makes it possible to match observed variability for the velocity of money this type of monetary model however is not successful in matching observed behavior of bond prices

training wages and sample selection estimating sharp bounds on treatment effects this paper empirically assesses the wage effects of the job corps program one of the largest federally funded job training programs in the u s even with the aid of a randomized experiment the impact of a training program on wages is difficult to study because of sample selection a pervasive problem in applied microeconometric research wage rates are only observed for those who are employed and employment status itself may be affected by the training program this paper develops an intuitive trimming procedure for bounding average treatment effects in the presence of sample selection in contrast to existing methods the procedure requires neither exclusion restrictions nor a bounded support for the outcome of interest identification results estimators and their asymptotic distribution are presented the bounds suggest that the program raised wages consistent with the notion that the job corps raises earnings by increasing human capital rather than solely through encouraging work the estimator is generally applicable to typical treatment evaluation problems in which there is nonrandom sample selection attrition copyright wiley blackwell