inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

technology structural change and bop constrained growth a structuralist toolbox the latin american structuralism las is a significant part of the heterodox tradition in the theory of long run growth with a focus on the problems of developing economies which started their industrialization process when other regions had already accumulated substantial technological capabilities the emergence of a centre periphery system posed specific problems to growth and distribution in laggard economies which las discusses in a systematic way in this paper we presented a simple model which firstly captures key insights of the las school such as the persistency of technological asymmetries and structural heterogeneity secondly it can be used to analyze the impacts of shocks and policies based on how they affect supply side and demand side parameters of the model thirdly it links more closely post keynesian macroeconomics based on the bop constraint with the evolutionary microeconomics concerned with the dynamics of learning lastly it can be used as a toolbox and a teachable model in the analysis of the interactions between structural change technological catching up and long run growth

global warming policy a public finance perspective in the last few years a substantial volume of research has considered the design of taxes to slow greenhouse gas emissions as well as the economic effects of such policies in this paper i summarize the insights that have emerged from this work i begin by explaining that while efficiency considerations create a presumption for using coordinated international policies to alter greenhouse gas emissions the prospects for such action are bleak then i focus on the public finance of carbon taxes at the national level considering the design of such taxes as well as their incidence across and within nations next i focus on greenhouse gas emission policies that could be enacted in less developed countries such as the elimination of fossil fuel subsidies and other policies to slow deforestation finally i suggest several promising directions for future study

global growth and international cooperation a structuralist perspective this paper revisits the structuralist ideas on trade and growth and suggests based on the prebisch s principle of implicit reciprocity that policies for promoting structural change in the periphery may lead to higher global growth and a better income distribution across countries the paper discusses the inter relations and complementarities that exist between autonomous expenditure and industrial and technology policies in the long run with this objective we develop a structuralist growth model in which the technology gap and the growth rate of the domestic autonomous expenditure are endogenously determined in a two country centre and periphery international economy copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

structural change and the bop constraint why did latin america fail to converge this paper discusses why latin america failed to achieve sustainable convergence with the developed world since 1960 and analyses different phases of convergence and divergence using a structuralist keynesian approach first it is argued that there are critical differences between latin america the developed economies and the asian economies as regards the evolution of the income elasticity of the demand for imports the rate of growth of exports and the balance of payments constrained rate of growth the income elasticity of the demand for imports in latin america showed an upward trend particularly after the mid 1970s which was not matched by a similar increase in exports a pattern in sharp contrast with that of the east asian countries the evolution of and exports are used to set forth a typology of latin american economic growth since 1960 in addition the paper relates elasticities and the less favourable latin american performance to the intensity and direction of structural change using a broad sample of developed and developing economies it is shown that the developing countries that succeed in reducing the income gap are those that transformed their economic structures in favour of sectors with higher schumpeterian and keynesian efficiency copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

the paradox of financial fire sales the role of arbitrage capital in determining liquidity how can fire sales for financial assets happen when the economy contains well capitalized but non specialist investors our explanation combines rational expectations equilibrium and lemons models when specialist informed market participants are liquidity constrained prices become less informative this creates an adverse selection problem decreasing the supply of high quality assets and lowering valuations by non specialist uninformed investors who become unwilling to supply capital to support the price in normal times arbitrage capital can multiply itself by making uninformed capital function as informed capital but in a crisis this stabilizing mechanism fails

real exchange rate technological catching up and spillovers in a balance of payments constrained growth model abstract the main objective of this work is to investigate the theoretical interrelationships between economic growth the national innovation system nis and the real exchange rate rer in an export led growth model formally this work presents new changes in the kaldor dixon thirlwal s model by the introduction of the rer the nis and a function that captures the endogeneity of productivity in the industrial sector in the short term the equilibrium growth rate depends on the real exchange rate level and of the nis development which responds to the size of the technological gap the public and private investments in r d in relation to the output growth rate ratio and the absorption capacity for technological spillovers in the long run assuming the constancy of all exogenous variables the convergence of the growth process depends on the output growth elasticity in relation to exports the price elasticity of exports and the elasticity of productivity growth relative to output growth of the economy in general and to industry in particular

inefficient investment waves we show that firms individually optimal liquidity management results in socially inefficient boom and bust patterns financially constrained firms decide on the level of their liquid resources facing cash flow shocks and time varying investment opportunities firms liquidity management decisions generate simultaneous waves in aggregate cash holdings and investment even if technology remains constant these investment waves are not constrained efficient in general because the social and private value of liquidity differs the resulting pecuniary externality affects incentives differentially depending on the state of the economy and often overinvestment occurs during booms and underinvestment occurs during recessions in general policies intended to mitigate underinvestment raise prices during recessions making overinvestment during booms worse however a well designed price support policy will increase welfare in both booms and recessions

optimal security design how should new securities be designed traditional theories have little to say on this the literature on capital structure and general equilibrium theories with incomplete markets take the securities firms issue as exogenous this paper explicitly incorporates the transaction costs of issuing securities and develops a model where the instruments that are traded are chosen optimally and the economy s market structure is endogenous among other things it is shown that the firm s income stream should be split so that in every state all payoffs are allocated to the security held by the group that values them most this abstract was borrowed from another version of this item

aig in hindsight the near failure on september 16 2008 of american international group aig was an iconic moment in the financial crisis two large bets on real estate made with funding vulnerable to bank run like dynamics pushed aig to the brink of bankruptcy aig used securities lending to transform insurance company assets into residential mortgage backed securities and collateralized debt obligations ultimately losing at least 21 billion and threatening the solvency of the life insurance companies aig also sold insurance on multisector collateralized debt obligations backed by real estate assets ultimately losing more than 30 billion these activities were apparently motivated by a belief that aig s real estate bets would not suffer defaults and were money good we find that these securities have in fact suffered write downs and that the stark money good claim can be rejected ultimately both liquidity and solvency were issues for aig

the effects of moral hazard on asset prices when financial markets are complete abstract this paper discusses the implications for prices and quantities of an alternative trading arrangement in kahn s 1990 economic environment with moral hazard unlike kahn s model of asset trade my model does not impose any unmotivated restrictions on short sales instead it features complete markets and publicly observable asset transactions like kahn s model my model implies that allocations are constrained pareto optimal however the implications of my model for asset prices are considerably different in particular when all agents have log utility asset prices satisfy an aggregation theorem also unlike kahn s model the model in this paper does worse than the standard representative agent model in terms of explaining the equity premium

limited investment capital and credit spreads using proprietary credit default swap cds data i investigate how capital shocks at protection sellers impact pricing in the cds market seller capital shocks measured as cds portfolio margin payments account for 12 of the time series variation in weekly spread changes a significant amount given that standard credit factors account for 18 during my sample in addition seller shocks possess information for spreads that is independent of institution wide measures of constraints these findings imply a high degree of market segmentation and suggest that frictions within specialized financial institutions prevent capital from flowing into the market at shorter horizons

is cumulative growth in manufacturing productivity slowing down in the eu12 regions the cumulative causation in the relation between labour productivity and output growth known as verdoorn s law is empirically tested using data from 109 eu12 regions during the period 1977 2005 several specifications of verdoorn s law are put forward in this paper which attribute the process of cumulative causation to a series of factors including manufacturing agglomeration spatial interaction and responses to the problems of growth the findings suggest that although cumulative causation holds over this period the slowdown of its pace is nonetheless apparent post 1992 revisions in responses e g policy along with further research are thus recommended the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved

the effect of liquidity constraints on consumption a cross sectional analysis this paper examines the effect of liquidity constraints on consumption expenditures using a single year cross section data set a reduced form equation for consumption is estimated on high saving households by the tobit procedure to account for the selectivity bias since high saving households are not likely to be liquidity constrained the estimated equation is an appropriate description of how desired consumption that would be forthcoming without liquidity constraints is related to the variables available in the cross section data when the reduced form equation is used to predict desired consumption the gap between desired consumption and measured consumption is most evident for young households

international coordination of fiscal policy in limiting economies we examine the limiting behavior of cooperative and noncooperative fiscal policies as countries market power goes to zero we show that these policies converge if countries raise revenues through lump sum taxation however if there are unremovable domestic distortions such as distorting taxes there can be gains to coordination even when a single country s policy cannot affect world prices these results differ from the received wisdom in the optimal tariff literature the key distinction is that contrary to the tariff literature the spending decisions of governments are explicitly modeled

handbook of natural resource and energy economics volume 1 this book presents papers on the economics of energy sources topics considered include basic concepts selected methods and applications of economics to environmental problems the economics of environmental policy the economics of renewable resource use the economics of providing renewable resource goods and services environmental and renewable resources in socialist systems analytical tools and applications to policy and forecasting issues

learning innovation increasing returns and resource creation luigi pasinetti s original sin of and call for a post classical economics we draw on the seminal contribution to economics by luigi pasinetti respond to his call to reverse what he saw as the original sin of classical economists exacerbated by neoclassical economists namely the assumption of non increasing returns to scale and move towards building a post classical economics we outline the contours of a post classical framework that draws on key themes and contributions from pasinetti on learning technical progress increasing returns resource creation trade and catching up and contributions from within and without economics that are in line with lend support to and challenge it we advocate the pressing need and opportune timing for a concerted effort to revitalise ideas from the once vibrant cambridge school of economics and help develop a fresh more pluralist and inclusive post classical economics that cuts across divides and opens up opportunities for a less dismal science

renewable resources in an overlapping generations economy without capital abstract we incorporate a renewable resource into an overlapping generations model without capital and with quasi linear preferences besides being an input for production the resource serves as a store of value we characterize the dynamics efficiency and stability of the steady state equilibria the stability properties are sensitive to the type of resource growth for constant growth there is only one steady state equilibrium which is stable and efficient in the general case of the concave growth function there are usually at least two steady state equilibria one of which is stable and the other one unstable the unstable steady state is efficient but the stable one may or may not be we study the robustness of our results by assuming a logarithmic utility function we show that for the cobb douglas production function the steady state is unique and stable regardless of whether the equilibrium is efficient or inefficient our analytical results are illustrated by numerical calculations

pecuniary externalities in economies with financial frictions this article characterizes the efficiency properties of competitive economies with financial constraints in which phenomena such as fire sales and financial amplification may arise we show that financial constraints lead to two distinct types of pecuniary externalities distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price dependent financial constraints for both types of externalities we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations we also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities we demonstrate how to employ our framework in a number of applications whereas collateral externalities generally lead to over borrowing the distortions from distributive externalities may easily flip sign leading to either under or over borrowing both types of externalities may lead to under or over investment

externalities in economies with imperfect information and incomplete markets this paper presents a simple general framework for analyzing externalities in economies with incomplete markets and imperfect infonnation by identifying the pecuniary effects of these externalities that net out the paper simplifies the problem of determining when tax interventions are pareto improving the approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained pareto optima it can also lead to simple tests based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection signaling moral hazard incomplete contingent claims markets and queue rationing equilibria traditional discussions of externalities have emphasized the distinction between technological externalities in which the action of one individual or firm directly affects the utility or profit ofanother and pecuniary externalities in which one individual s or firm s actions affect another only through effects on prices while the presence of technological externalities imply in general that a competitive equilibrium may not be pareto efficient pecuniary externalities hy themselves are not a source of inefficiency the fact that prices change has of course important consequences there are both distributional and allocational effects but the distribution effects net out gains for example hy firms whose prices increase are precisely offset by losses e g to individuals who must pay higher prices and there are no welfare losses from the allocation effects as long as the price changes involved are small if firms are maximizing profits and individuals are maximizing utility both facing prices that correctly refiect opportunity costs then standard envelope theorem arguments imply that changes in profits or utility induced by changes in allocations resulting from any small change in prices are negligible

a technology gap interpretation of growth paths in asia and latin america abstract this paper presents a north south technology gap model which combines the schumpeterian approach to technical and structural change with the keynesian perspective on effective demand and the balance of payments bop constraint as drivers of growth three are the contributions of the paper first it develops a model in which the technology gap relative productivity and relative wages co evolve and may generate different paths of convergence or divergence between south and north depending on the parameters of the model second the parameters of the model are associated with different types of policies which allows for discussing how these policies may change the growth path finally the model is used to discuss the contrasting experiences of asia and latin america since 1970 convergence in asia and divergence in latin america have been extensively debated topics in the literature on comparative economic development which highlights the crucial role of industrial policy it is argued that the results of the technology gap model are consistent with the findings of this literature and helps understand the forces behind convergence and divergence

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

pareto optima and competitive equilibria with adverse selection and moral hazard this paper explores the extent to which standard general equilibrium analysis of pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems allowing for lotteries contracts with random components we first establish that an adverse selection insurance economy a moral hazard insurance economy a signaling economy and a private information labor market economy are all special cases of a simple general structure we then show that techniques for characterizing pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable allowing for lotteries we show how to characterize the optimal allocations for the adverse selection insurance and labor market economies we then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy wide resource constraints in a homogeneous way other kinds of diversity are not critical for economies with moral hazard which satisfy the homogeneity condition competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk the adverse selection insurance and signaling economies however do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system

macroeconomic constraints to growth of the brazilian economy diagnosis and some policy proposals the recent accelerated expansion of the brazilian economy from 2004 to 2007 was driven by exports and gross fixed capital formation although this pace of growth is more robust than it was in the 1990s we can still witness the presence of macroeconomic constraints to its continuation in the long term such as the exchange rate overvaluation particularly since 2005 and in general the modus operandi of monetary policy such constraints may jeopardise the sustainability of the current pace of growth we argue that brazil still lies in a trap made up of high interest and low exchange rates the elimination of the exchange rate misalignment would bring about a large increase in the rate of interest which in turn would impact negatively upon investment and hence upon long term growth we indicate a set of policy measures to eliminate such a trap in particular the adoption of an implicit exchange rate target capital controls and the substitution of the present regime of inflation targeting with a double mandate regime where monetary authorities must pursue two objectives i e output stabilisation and inflation control recent events seem to go in this direction

leverage and default in binomial economies a complete characterization our paper provides a complete characterization of leverage and default in binomial economies with financial assets serving as collateral our binomial no default theorem states that any equilibrium is equivalent in real allocations and prices to another equilibrium in which there is no default thus actual default is irrelevant though the potential for default drives the equilibrium and limits borrowing this result is valid with arbitrary preferences and endowments contingent or noncontingent promises many assets and consumption goods production and multiple periods we also show that only no default equilibria would be selected if there were the slightest cost of using collateral or handling default our binomial leverage theorem shows that equilibrium loan to value ltv for noncontingent debt contracts is the ratio of the worst case return of the asset to the riskless gross rate of interest in binomial economies leverage is determined by down risk and not by volatility

accumulation innovation and catching up an extended cumulative growth model this paper presents an extended model of cumulative growth in which the effects of innovation and catching up are considered innovation adds another source of cumulative growth to that of traditional models and allows a consideration of the importance of non price determinants of international competitiveness catching up is the major force leading to convergence in productivity owing to the effect of the diffusion of technology the model allows one to analyse whether cumulative forces may lead to stable growth and whether this solution generates convergence in productivity levels the structural model is tested for a set of oecd countries over the period 1965 94

distribution aggregate demand and productivity growth theory and empirical results for six oecd countries based on a post kaleckian model empirical research based on the bhaduri marglin variant of the kaleckian model has recently shown that aggregate demand in many medium sized and large open economies tends to be wage led in the medium to long run even in a period of increasing globalisation in this paper we extend this type of analysis and integrate the effects on productivity growth theoretically and empirically productivity growth is introduced into the theoretical model making use of the verdoorn effect or of kaldor s technical progress function and hence of a positive relationship between gdp or capital stock growth and productivity growth further on a cost push or marx hicks effect and hence a positive impact of real wage growth or the wage share on productivity growth is taken into account in the empirical part we estimate productivity growth equations for six countries introducing these two effects finally economic policy conclusions are drawn

on efficient distribution with private information this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with many consumers each of whom is subject to private idiosyncratic taste shocks we propose a recursive method for finding feasible allocations that are incentivecompatible and that are pareto optimal within this set the method is applied to several parametric examples we find that in an efficient allocation the degree of inequality continually increases with a diminishing fraction of the population receiving an increasing fraction of the resources we discuss the extent to which these allocations can be decentralized via market arrangements this paper is a study of the dynamics of the efficient distribution of consumption in an exchange economy with private information the economy we study has a constant endowment flow of a single non storable consumption good which is to be allocated each period among a large number of consumers each period these consumers experience unpredictable idiosyncratic privately observed taste shocks affecting their marginal utility of current consumption efficiency dictates that more resources be allocated to those consumers who in any given period have a high marginal utility of current consumption

international competitiveness in post keynesian growth theory controversies and empirical evidence a fundamental starting point for post keynesian theory concerning growth in open economies is succinctly expressed in the following statement by kaldor t he main autonomous factor governing both the level and the rate of growth of effective demand of an industrial country is the external demand for its exports and the main factor governing the latter is international competitiveness which in turn depends on the level of its industrial cost relatively to other industrial exporters kaldor 1971 p 7 italics added moreover thanks to increasing returns in manufacturing export expansion and international competitiveness would interact so as to create vicious or virtuous circles of cumulative causation a few years later kaldor having found a positive correlation between the time changes of the main industrial countries relative manufacturing export shares and that of their relative unit costs a correlation that became known as the kaldor paradox dismissed his original cumulative causation theory and adopted a version close to harrod s foreign trade multiplier the purpose of this paper is to reaffirm the kaldorian cumulative causation theory in its original version by providing a firmer analytical basis and showing that contrary to the kaldor paradox time changes in export performance must be explained by levels rather than by changes in unit costs

history versus equilibrium and the theory of economic growth a model of cumulative causation is developed and the limits of this model as a characterization of historical rather than equilibrium long run growth outcomes are discussed an extension of the model which postulates that cumulative causation occurs in the context of technological and institutional regimes is proposed outcomes in the extended model are shown to be more influenced by history than those in the original model the extended model also addresses a number of recent criticisms of cumulative causation copyright 1997 by oxford university press

optimal leverage and aggregate investment we analyze the optimal financing of investment projects when managers must exert unobservable effort and can also switch to less profitable riskier ventures optimal financial contracts can be implemented by a combination of debt and equity when the risk shifting problem is the most severe while stock options are also needed when the effort problem is the most severe worsening of the moral hazard problems leads to decreases in investment and output at the macroeconomic level moreover aggregate leverage decreases with the risk shifting problem and increases with the effort problem

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

estimating intergenerational distribution preferences resource management decisions influence not only the output of the economy but also the distribution of utility between groups within the community the theory of cost benefit analysis provides a means of incorporating distributional changes into the decision making calculus through the application of distributional or welfare weights however this practice has not been widely adopted in part due to difficulties in the estimation of distributional weights this paper addresses this problem by using the stated preference method of choice modelling to estimate distributional weights suitable for inclusion in a cost benefit analysis framework the findings of a choice modelling experiment designed to estimate community preferences with respect to intergenerational utility distribution illustrate the potential of this method in addressing distributional issues

excessive dollar debt financial development and underinsurance we propose that the limited financial development of emerging markets is a significant factor behind the large share of dollar denominated external debt present in these markets we show that when financial constraints affect borrowing and lending between domestic agents agents undervalue insuring against an exchange rate depreciation since more of this insurance is present when external debt is denominated in domestic currency rather than in dollars this result implies that domestic agents choose excessive dollar debt we also show that limited financial development reduces the incentives for foreign lenders to enter emerging markets the retarded entry reinforces the underinsurance problem

real exchange rate and elasticity of labour supply in a balance of payments constrained macrodynamics a macrodynamic model is proposed in which the real exchange rate and the elasticity of labour supply interact defining different trajectories of growth and income distribution in a developing economy growth depends on imports of capital goods which are paid with exports there are no capital flows and hence is constrained by equilibrium in current account the role of the elasticity of labour supply is to prevent the real exchange rate from appreciating as the economy grows thereby sustaining international competitiveness the model allows for endogenous technological change and considers the impact of migration from the subsistence to the modern sector on the cumulative kaldor verdoorn process of learning copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

structural modernization and development traps an empirical approach in this paper we analyse economic development through the lenses of a newly developed index the structural modernization index this index combines two dimensions that have been widely invoked as prime drivers of economic development namely structural change and technological catch up for each country the index calculates the productivity gap with respect to the world frontier in activities that typically represent the modern part of the economy and weighs this relative productivity by the employment share of those activities in the total labour force in doing so it combines a technological dimension relative productivity and a structural dimension the size of the modern sector thus providing a concise measure of the degree of modernity of an economy the index is calculated for a large sample of countries over a long time span significant efforts have been made to put together a dataset with international comparable data on value added and employment disaggregated by sectors for 100 countries covering the period 1950 2009 the estimates are used to explore the relationship between structural modernization and the so called poverty and middle income traps in analysing this relationship the interactive nature of structural change and technological catch up is stressed important insights are obtained regarding the nature of low and middle income development traps finally the usefulness of this new index is illustrated when studying the diverse structural trajectories of a set of countries that can be taken as examples of success and failure in the process of economic development