stabilization policy a reconsideration i introduction in 1936 keynes s general theory explained how fiscal and monetary policy could be used to end depressions since that time no developed country has ever seen a downturn on the scale of the 1930s the general theory was not just a how to book on the avoidance of depressions it was an argument for stabilization policy itself the years since the general theory have seen a revolt against keynesian economics in a revisionist mode milton friedman argued that countercyclical policy cannot affect the average level of unemployment and output robert lucas and thomas sargent 1979 went further contending that it is not only impossible to increase average output it is also impossible to stabilize it more recently lucas 1987 2003 has argued that policies to stabilize output even if effective would yield negligible welfare gains thus stabilization policy should not be a macroeconomic priority lucas s conclusion notwithstanding stabilization policy has long been an explicit or implicit objective of monetary policy in most industrial countries even including those countries with inflation targets the volatility of output has in fact declined in most major industrial countries since the mid 1980s and monetary policy arguably deserves at least partial credit see bernanke 2004 mirroring practice monetary policy research commonly takes it as given that along with price stability stabilization policy the minimization of squared deviations of output around potential is an appropriate policy objective see for example clarida et al 1999 in this article we explore the economic rationale for stabilization as a policy goal concluding that it does in fact deserve high policy priority we survey a large body of literature that critiques the validity of key assumptions in lucas s argument we also offer suggestive evidence that stabilization policy can significantly reduce average levels of unemployment by providing stimulus to demand in circumstances where unemployment is high but underutilization of labor and capital does little to lower inflation a monetary policy that vigorously fights high unemployment should however also be complemented by a policy that equally vigorously fights inflation when it rises above a modest target level the federal reserve act thus wisely enunciated price stability and maximum employment as twin goals for monetary policy ii the case against stabilization policy macroeconomic analysis typically assumes that social welfare depends negatively on both inflation above a modest target level here assumed zero and unemployment above some minimum socially efficient level for example a standard social welfare function is the discounted sum of period losses l sub t of the form see among others barro and gordon 1983 pp 592 93 1 l sub t a u sub t 1 k u sup 2 b pi sup 2 sub t where u sub t and pi sub t are the unemployment and inflation rates in period t and u sup is the natural rate of unemployment the coefficient k is positive reflecting the desirability of unemployment below the natural rate because real economies deviate in many respects from perfect competition the natural rate of unemployment is likely to exceed the socially optimal unemployment rate for example with monopolistic competition goods are underproduced because they are priced above marginal cost so potential output is inefficiently low and equilibrium unemployment is too high standard macroeconomic analysis additionally assumes that inflation is determined by an expectations augmented accelerationist phillips curve of the form 2 pi sub t pi sup e sub t f u sub t u sup epsilon sub t where pi sup e sub t is the expected inflation rate at time t with expectations formed at t 1 and epsilon sub t captures supply shocks to the phillips curve at t

on measures of excess burden and their application abstract new measures of the additional excess burden of a tax reform are proposed and are shown to be useful in three key policy applications these new measures induce a unique measure of marginal excess burden meb among its interesting properties meb is uniformly zero for a proportional tax on inelastically supplied labor problems in applying the standard measures of total excess burden are demonstrated it is concluded that the induced measure of the marginal cost of funds mcf should be regarded as the most useful concept in applied tax analysis

capacity constraints mergers and collusion abstract the objective of this paper is two fold to contribute to the analysis of tacit collusion in bertrand supergames with asymmetric capacity constraints and from a more applied perspective to bring a new light on merger analysis and provide useful guidelines for competition policy taking into account dynamic aspects of competition it is well known that capacity constraints affect tacit collusion as they limit both incentives to deviate e g to undercut rivals and retaliation possibilities however most studies have so far focused on symmetric situations where all firms have the same capacity which leads to ambiguous and unintuitive results and also considerably limits the scope of application studying asymmetric situations makes it possible to analyse the impact of changes in the distribution of these capacities expansions but also mergers split offs transfers etc and to provide guidelines for competition policy and particularly for merger policy these guidelines which differ substantially from those inspired by more static analyses such as the herfindahl or other standard concentration tests are applied to a famous merger that took place in the french bottled water market the nestle perrier merger case

price setting supergames with capacity constraints this paper examines the role of industry capacity in enforcing collusion in the context of repeated games for a fixed capacity per firm it is shown that changes in the number of firms have a non monotone effect on the best enforceable cartel price this is due to the fact that while an additional firm lowers the share that each of the other firms enjoys at the collusive price it also increases the losses to each firm should the cartel fail

on the sign of the optimum marginal income tax this paper studies a central aspect of optimal income taxation as modelled in mirrlees original paper on the topic identical leisure consumption preferences qualitatively homogeneous skills in production namely whether given concave utilitarianism alone the optimal marginal income tax will be non negative a well known positive answer to this question in weak inequality form was given in the said paper which however we show requires additive separability of individual utility in the ordinal and cardinal senses our main result here is to derive the required strict positivity of the marginal tax under weak conditions slightly wider than noninferiority of consumption and leisure with preferences otherwise arbitrary

oligopolistic pricing over the deterministic market demand cycle some evidence from the us portland cement industry abstract haltiwanger and harrington 1991 haltiwanger j harrington j e jr 1991 the impact of cyclical demand movements on collusive behavior rand journal of economics 22 89 104 formulated a theory of self enforcing collusion assuming a deterministic demand cycle they predicted that under a self enforcing non cooperative pricing scheme for any level of demand the price in the rising part of the cycle would always be greater than the price in the falling part of the cycle they also predicted that the path of collusive profits should reach its peak before market demand we test their predictions using data from the portland cement industry the hypotheses are tested using a multi equation system differentiating the boom and the bust periods from 1974 to 1989 the results support both of haltiwanger and harrington s hypotheses

long run competition in capacity short run competition in price and the cournot model in this article we investigate the nature of equilibrium in markets in which firms choose the scale of operation before they make pricing decisions we analyze a duopoly model in which firms choose their capacities before engaging in bertrand like price competition we demonstrate that the cournot outcome is unlikely to emerge in such markets and that the equilibrium tends to be more competitive than the cournot model would predict in addition our results indicate a tendency toward asymmetric firm sizes and price dispersion that results from the mixed strategies firms use in equilibrium

wage rigidity in canadian collective bargaining agreements the authors search information on the provisions of 10 947 wage contracts signed in the canadian unionized sector between 1976 and 1999 for evidence of downward nominal wage rigidity the disinclination of wages to fall in nominal dollars below their established level over the sample period real wage reductions were common but nominal wage reductions were rare the probability of downward nominal wage rigidity increased substantially during low inflation periods during such periods apparently there was no reduction in the incidence of real wage cuts but the magnitude of those cuts was modest suggesting a lesser ability of wages to adjust to labor market conditions than at other times

the optimal linear income tax revisited abstract this paper shows that the mirrlees seade conditions of agent monotonicity and noninferiority of leisure imply the positivity of the optimal marginal income tax rate in sheshinski s model of linear income taxation as well as in the general model the optimal marginal tax rate is bounded above by the rawlsian rate which in turn is bounded by the revenue maximizing rate the optimal marginal tax rate may be arbitrarily close to the rawlsian rate however the optimal marginal tax rate is bounded away from the revenue maximizing rate whenever the individual with the lowest ability works

escalators and elevators a phillips curve for keynesians the negatively sloped long run phillips curve remains an issue of contention this paper presents a theoretical model of the phillips curve in which nominal demand growth reduces unemployment caused by stochastic shifts of demand between sectors the model can be understood through the following metaphor keynesian economies are escalator economies in which markets adjust back to equilibrium slowly so that nominal demand growth presents a means of speeding up the escalator process contrastingly new classical economies as set forth by e g lucas 1973 are elevator economies in which adjustment is instantaneous consequently there is no role for nominal demand growth in the adjustment process and to the extent that policy sponsored nominal demand growth is uncertain it may actually disrupt the economy by sending the elevator to the wrong floor

interest rates and the fisher effect in india an empirical study abstract this study throws light on the importance of adjustment lags variability of inflation changes in real income etc in the empirical estimation of fisher hypothesis variability of inflation has a significant negative impact on both short and long term interest rates in a developing economy like india the philips curve effect has not been operative in a developing country

tax evasion and the optimal inflation tax abstract we developed a simple monetary model to study the effects of tax evasion on the optimal inflation tax the model is constructed so that inflation might be an indirect way of taxing the underground sector of the economy we show that while there are theoretical reasons for positive optimal inflation rates the effects are quantitatively small even in countries with large underground sectors we calculate the optimal nominal interest rate for peru to be between 7 and 19 despite the fact that its underground sector is close to 40 of measured gnp according to our calculations the welfare gain of using inflation to tax the underground sector is also very small

optimal taxation the compensation principle and the measurement of changes in economic welfare abstract this paper explores the implications of optimal taxation for the measurement of changes in economic welfare it shows that the measure implied by the compensation principle the sum of the relevant compensating variations is only accurate in the presence of optimal lump sum taxation an unsurprising conclusion but a gloomy one given that such taxation is generally infeasible however all is not lost the paper uses the linear income tax case to show that it is possible to derive weights that can be attached to the relevant compensating variations to provide accurate measures of changes in welfare in the presence of second best taxation weights that can be calculated from observable data

nominal price rigidity money supply endogeneity and business cycles abstract this paper investigates the ability of nominal price rigidity to explain the co movement of inflation with the cyclical component of output observed in the post war u s data a dynamic general equilibrium model is constructed with the introduction of monopolistic competition and nominal price rigidity in a standard real business cycle model allowing for an endogenous money supply rule it is then demonstrated that sticky price models can explain the observed associations between movements in inflation and output much better than flexible price models this result depends little on whether money supply is assumed to be endogenous or not

panel discussion price stability how should long term monetary policy be determined these comments address the question of monetary strategy as distinct from monetary tactics they are not directed at the question of what monetary policy is appropriate at the present time or of how monetary policy should be determined at any specific point as a function of prevailing conditions instead the issue i take is one that has been of increasing interest to economists in recent years what should be the long terrn objectives of the monetary authority increased interest in this issue as opposed to the issue of fine tuning the economy reflects the general intellectual consensus that has emerged on two points first what the monetary authority surely can control in the long run is the growth rate of nominal income second issues of dynamic consistency and commitment are crucial to the design of appropriate monetary policies beyond its recognition of these points my view is that most of what the academic economics community has had to say on the issue of long run monetary strategy has been tangential at best and i fear that many of the papers at this conference have not done much to improve the situation i wish to advance four propositions about monetary policy and to discuss their implications first an optimal tax theory has little or nothing to do with sensible inflation policy second positive rates of inflation are almost certainly desirable third to an important extent institutions do the work of rules and monetary rules should be avoided instead institutions should be drafted to solve time inconsistency problems fourth h j res 409 the proposed zero inflation amendment is a good idea if it is not taken too seriously or too literally but is instead viewed as a device for strengthening the independence of the federal reserve system my first proposition is that the connection between optimal tax theory and infla

excess capacity and collusion in this paper the authors analyze a restricted class of equilibria in the dynamic model of j p benoit and v krishna 1987 in which firms choose their scale of operation before engaging in a repeated game of price competition benoit and krishna established that all firms carry excess capacity in all collusive equilibria as the authors are interested in the relationship between excess capacity and collusion in price they examine equilibria in which firms tacitly collude in price but not in investment decisions copyright 1990 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on quota violations of opec members abstract over the last decades quota violations have become a norm for opec countries however the academic literature on opec focuses more on its production behavior than on analyzing the quota allocation process or characterizing quota violation patterns this paper offers a theoretical model with empirical evidence to explain opec members incentives for abiding or violating quotas we first offer a cartel model with a quota allocation rule and an endogenous capacity choice the model highlights the trade off between building spare capacity to bargain for a higher legitimate quota versus risking quota violation punishment using the quarterly data from 1995 to 2007 we empirically support the main results and intuitions for the model our empirical evidence is consistent with a theoretical framing in which capacity constraints work as an enforcement mechanism in good times and opec s quota system disciplining its members in bad times

the existence of equilibrium in discontinuous economic games ii applications in part i of this study we established two existence theorems for mixed strategy equilibrium in games with discontinuous payoff functions see theorems 4 4 and 5 5 in dasgupta and maskin 1986 hereafter d m 1986 in this second part we use the second of these two theorems to prove the existence of mixed strategy equilibrium in some wellknown discontinuous economic games that fail to have pure strategy equilibria the models we analyse are the bertrand edgeworth example of price setting duopolists with capacity constraints see section 2 2 price competition among firms producing differentiated products hotelling 1929 and d aspremont gabszewicz and thisse 1979 see section 2 3 spatial competition eaton and lipsey 1975 and shaked 1975 see section 3 and models of market dependent information rothschild and stiglitz 1976 and wilson 1977 section 4 the paper concludes section 5 with a classification of these models

tax reform results with different demand systems abstract we calculate the marginal welfare costs for a twelve commodity classification of the belgian indirect tax system price elasticities are estimated with rotterdam aids cbs and the linear expenditure system the ranking of the marginal welfare costs is similar when we use unrestricted estimates of the first three systems after the symmetry condition of the slutsky matrix is imposed the differences become more important however they diminish with increasing inequality aversion

correlated demand shocks and price wars during booms the supergame theoretic model of price competition rotemberg and saloner 1986 is re examined in the case of serially correlated demand shocks the equilibrium price is shown to exhibit the same counter cyclical movement as in the i i d case if the discount factor and the number of firms satisfy certain relationship

the relationship between the marginal cost of public funds and marginal excess burden a large literature has recently developed which attempts to measure the marginal cost shadow price of public funds the motivation for much of this literature is the recognition that many of the tax instruments used by governments generate substantial amounts of excess burden deadweight loss jerry a hausman 1981 for example estimates that for an average prime aged american male with a wage of ten dollars in 1975 the excess burden generated by the federal income tax was over fifty percent of the revenue raised from taxing that individual one might suspect that such large excess burden estimates would require a change in the way government project costs are calculated in benefit cost analysis if the revenue required to finance a project is raised through distortionary taxation then intuition would suggest that the excess burden generated by the increase in tax rates needed to finance the project should be incorporated into the cost of the project however this analysis is not entirely consistent with the theoretical literature on the optimal provision of public goods which are financed by distortionary taxation when distortionary taxes are used to finance public goods and the level of public good provision does not affect consumption of the taxed goods the standard samuelsonian rule which equates the sum over consumers of the marginal rates of substitution between a private good and a public good with the marginal rate of transformation between the two goods must be modified to account for the marginal effect of increases in tax rates on the revenue raised from the existing taxes 2 the intuition behind this result is that we need to correct for indirect leakages from existing government revenue sources when considering an incremental expenditure if the increase in tax rates needed to finance the project causes a reduction in the revenue raised by the current tax structure then we need to account for this loss in calculating the cost of the project it is important to note that this result concerns the values of uncompensated demand elasticities an example first provided by atkinson and stern 1974 illustrates this point consider a world where the only tax is on labor earnings and incremental expenditure on the public good does not affect the demand for leisure in this case the marginal rate of transformation will overstate the cost of the public good as long as the uncompensated wage elasticity of labor supply is negative this is because an increase in the tax rate causes an increase in labor supply leading to an indirect increase in government revenue from the excess burden perspective described earlier this example is very puzzling it is well known that even if the uncompensated own price elasticity of a good is zero a tax on that good can still result in a large deadweight loss we instead need the compensated elasticity to be zero to ensure that there will be no excess burden however the department of economics university of california davis ca 95616 this paper is based on chapter two of my dissertation at the university of wisconsin madison i wish to thank the members of my dissertation committee martin david robert haveman chair and arthur goldberger for very helpful advice and comments i have also benefited from comments by don fullerton and bruce hamilton an anonymous referee provided unusually helpful comments and corrected an error in the figure 1don fullerton 1989 provides a recent survey and analysis of this literature 2this is shown by anthony atkinson and nicholas h stern 1974 and david e wildasin 1979 the effect of provision of the public good on consumption of the taxed goods must also generally be taken into account

measurable welfare change with optimal commodity taxation abstract this paper extends the recent work of julian le grand on the measurability of welfare changes in the presence of second best taxation to the case of optimal commodity taxes and shows that the effects of public sector activities in the presence of such taxes may be accurately measured by use of observable market data

dynamic pricing in retail gasoline markets supergame models of tacit collusion show that supportable price cost margins increase with expected future collusive profits ceteris paribus as a result collusive margins will be larger when demand is expected to increase or marginal costs are expected to decline using panel data on sales volume and gasoline prices in 43 cities over 72 months we find behavior consistent with tacit collusion in retail gasoline markets controlling for current demand and cost current margins increase with expected next month demand and decrease with expected next month cost the results are not consistent with intertemporal l inkages due to inventory behavior or customer loyalty

bertrand edgeworth competition demand uncertainty and asymmetric outcomes abstract we analyze investment and pricing incentives in a symmetric bertrand edgeworth framework with uncertain demand firms choose production capacities before observing demand prices are chosen after demand is observed if the extent of demand variation exceeds a threshold level then a symmetric equilibrium in pure strategies for capacities does not exist a smaller firm has no incentive ex ante to expand its capacity because capacity expansion would reduce its expected revenue in the event that demand is lower than expected output prices are predicted to have positive variance when demand is low and zero variance when demand is high journal of economic literature classification numbers d43 l13

inflation and unemployment the world economy today is vastly different from the 1930s when seymour harris the chairman of this meeting infected me with his boundless enthusiasm for economics and his steadfast confidence in its capacity for good works economics is very different too both the science and its subject have changed and for the better since world war ii but there are some notable constants unemployment and inflation still preoccupy and perplex economists statesmen journalists housewives and everyone else the connection between them is the principal domestic economic burden of presidents and prime ministers and the major area of controversy and ignorance in macroeconomics i have chosen to review economic thought on this topic on this occasion partly because of its inevitable timeliness partly because of a personal interest reaching back to my first published work in 1941

optimal monetary policy under commitment with a zero bound on nominal interest rates we determine optimal monetary policy under commitment in a forwardlooking new keynesian model when nominal interest rates are bounded below by zero the lower bound represents an occasionally binding constraint that causes the model and optimal policy to be nonlinear a calibration to the u s economy suggests that policy should reduce nominal interest rates more aggressively than suggested by a model without lower bound rational agents anticipate the possibility of reaching the lower bound in the future and this amplifies the effects of adverse shocks well before the bound is reached while the empirical magnitude of u s mark up shocks seems too small to entail zero nominal interest rates shocks affecting the natural real interest rate plausibly lead to a binding lower bound under optimal policy however this occurs quite infrequently and does not imply positive average inflation rates in equilibrium interestingly the presence of binding real rate shocks alters the policy response to non binding markup shocks

price competition in a capacity constrained duopoly abstract this paper characterizes the set of nash equilibria in a model of price setting duopoly in which each firm has limited capacity and demand is continuous and decreasing in general there is a unique equilibrium so that comparative static exercises are meaningful the properties of the equilibrium conform with a number of stylized facts the equilibrium prices are lower the smaller is demand relative to capacity when demand is in an intermediate range the firms use mixed strategies they randomly hold sales if capacities are chosen simultaneously before prices the set of equilibrium capacities coincides with the set of cournot quantities

collusive pricing with capacity constraints in the presence of demand uncertainty we explore the response of collusive prices to changing demand conditions when firms operate under capacity constraints in the presence of demand uncertainty we find support for the conventional view that periods of low demand lead through the emergence of excess capacity to a breakdown of collusive pricing we also find that the nature of price wars depends on the degree of excess capacity in the industry while small amounts of excess capacity can lead firms to engage in mild price wars characterized by uniform price reductions and market share stability more severe price wars characterized by price undercutting and market share instability can emerge if excess capacity is sufficiently great finally our results lend support to the view that market share instability is a symptom of ineffective collusion

collusion with capacity constraints over the business cycle this paper investigates the efiect of capacity constraints on the sustainability of collusion in markets subject to cyclical demand uctuations in the absence of capacity constraints i e a limiting case of our model haltiwanger and harrington 1991 show that flrms flnd it more di cult to collude during periods of decreasing demand we flnd that this prediction can be overturned if flrms capacities are su ciently small capacity constraints imply that punishment proflts move procyclically so that periods of increasing demand may lead to lower losses from cheating even if collusive proflts are rising haltiwanger and harrington s main prediction remains valid for su ciently large capacities

do we care a study of canada s indirect tax system this paper builds on the optimal taxation literature of diamond and mirrlees 1971 ahmad and stern 1984 and christiansen and jansen 1978 using ethically defensible measures of social welfare the effective redistribution due to the canadian indirect tax system is measured and directions of welfare enhancing tax reform are uncovered using micro data from the family expenditure survey this study finds that surprisingly the existing canadian indirect tax system is neither progressive nor regressive rather the implicit government preferences as reflected in the indirect tax system show no aversion to cross class income inequality

the theory of reform and indian indirect taxes abstract given a set of value judgements an initial state and a model of the economy one can ask whether some feasible tax change would increase welfare we do this by defining the marginal cost in terms of welfare of raising an extra rupee from the i th good the inverse optimum problem is the calculation of non negative welfare weights on households which imply that the initial state is optimum if no such welfare weights exist then a pareto improvement is possible we illustrate the concepts and results using data from the indian economy for 1979 1980 directions of tax reform for a number of specific social welfare functions and for pareto improvements are presented

on inflation and real price variability this paper studies the consequences of costly price adjustments for the variability of real prices accompanying inflation for constant elasticity demand and cost of production it is shown that a higher demand a lower cost of production or a lower cost of price adjustment leads to less intertemporal variability of real prices if the marginal cost of production does not increase too fast then the average real price is less than the real price that would prevail in the absence of inflation additionally a higher demand a lower cost of production or a lower cost of price adjustment leads to a higher level of real prices

inflation targeting a new framework for monetary policy he world s central bankers and their staffs meet regularly in venues from basle to washington to share ideas and discuss common problems perhaps these frequent meetings help explain why changes in the tactics and strategy of monetary policymaking such as the adoption of money growth targets in the 1970s the intensification of efforts to reduce inflation in the 1980s and the recent push for increased institutional independence for central banks tend to occur in many countries more or less simultaneously whatever their source major changes in the theory and practice of central banking are of great importance for both individual countries and the international economy in this article we discuss a new strategy for monetary policy known as inflation targeting which has sparked much interest and debate among central bankers and monetary economists in recent years this approach is characterized as the name suggests by the announcement of official target ranges for the inflation rate at one or more horizons and by explicit acknowledgment that low and stable inflation is the overriding goal of monetary policy other important features of inflation targeting include increased communication with the public about the plans and objectives of the monetary policymakers and in many cases increased accountability of the central bank

the existence of equilibrium in discontinuous economic games i theory the article presents information about the existence of equilibrium in discontinuous economic games in this paper and its sequel presents study the existence of nash equilibrium in games where agents payoff functions are discontinuous the enquiry is motivated by a number of recent studies that have uncovered serious existence problems in seemingly innocuous economic games in the sequel to this paper authors have explained the utility function in the economic games referred to earlier are neither continuous nor quasi concave however they demonstrate that the payoff functions in mildly modified versions of these constructs exhibit two weaker forms of continuity which together with the requirement of quasi concavity suffice for the existence of an equilibrium from this one may conclude that at least in the modified versions of these models discontinuities in the payoff functions are not the real source of the problem rather it is the failure of the payoff functions to the quasi concave which is responsible for the non existence of equilibrium these observations bear on the existence of nash equilibrium in pure strategies

sensitivity of optimal commodity tax rates to alternative demand functional forms an econometric case study of india this study investigates on a nine commodity disaggregation of indian budget data nss 28th round the sensitivity of optimal commodity tax rates to alternative demand systems les and rnlps optimality is used here in the very special sense of being conditional on observed expenditure and fixed consumer prices the alternative sets of tax rates agree at low levels of inequality aversion but disagree widely at rawlsian levels les is heavily rejected in favour of its one parameter generalisation rnlps the results suggest that les price elasticities should not be used in optimal tax calculations the optimal tax rates imply only a modest redistribution

foreign demand for domestic currency and the optimal rate of inflation we characterize the ramsey optimal rate of inflation in a model with a foreign demand for domestic currency in the absence of such demand the model implies that the friedman rule deflation at the real rate of interest is optimal we show analytically that in the presence of a foreign demand for domestic currency this result breaks down calibrated versions of the model deliver optimal annual rates of inflation between 2 and 10 the domestically benevolent government imposes an inflation tax to extract resources from the rest of the world in the form of seignorage revenue

on the asymmetric u shaped relationship between inflation inflation uncertainty and relative price skewness in the uk we investigate the asymmetric relationships between aggregate inflation and the second and third moments of the cross sectional distribution of relative prices using a modified calvo pricing model with regime dependent price rigidities calibration experiments reveal that the inflation standard deviation and inflation skewness relationships exhibit u shaped asymmetries around the historical mean inflation rate uk sectoral data support our results we conclude that monetary policy should target an inflation rate proximate to the common minima of these nonlinear relationships and that core inflation measures should not be used for policy purposes as they exclude much of the information contained in the higher moments

downward wage rigidities and optimal monetary policy in a monetary union this paper analyses the implications of heterogeneity in the type of downward wage rigidity nominal or real for optimal monetary policy in a monetary union with asymmetric wage adjustment costs indexation in one region of the union reduces optimal grease inflation in the presence of common productivity shocks large common shocks may have sizeable and persistent effects on the intra union terms of trade whereby the region characterized by downward real wage rigidity adjusts with a persistent loss of competitiveness in response to asymmetric productivity shocks there is no role for grease inflation because relative price changes facilitating the real wage changes dominate the adjustment mechanism

on quality bias and inflation targets does ramsey optimal policy call for adjusting the inflation target by the size of the quality bias in measured inflation we find that if it is nonhedonic or sticker prices that are sticky the conventional view according to which it is optimal to adjust the inflation target upward by the size of the quality bias is misguided furthermore we establish that quality improvement is crucial for the determination of the optimal inflation target even in the absence of quality bias in this case if nonhedonic prices are sticky sticker prices should fall at the rate of quality growth

tacit collusion with imperfect monitoring in the canadian manufacturing industry an empirical study this article undertakes a cross sectoral analysis of a salient empirical implication of the model of tacit collusion advanced by abreu pearce and stachetti 1986 specifically we assess the prevalence of a first order markovian process for alternating between price wars and collusive periods through nonparametric tests the analysis focuses on 30 different industries in canada the evidence provides weak support for optimal collusion in one industry which is consistent with the idea that such kind of collusive arrangements is unusual or if collusion is all too common that price wars as deviations from collusion are rare

the value of collusion with endogenous capacity and demand uncertainty collusion has often been alleged in industries where long lived capacity investments are important this article develops a computational duopoly model with capacity investments demand shocks and either competitive or collusive pricing it shows that allowing for endogenous capacity investments can sometimes make collusion less valuable than competition and that it can change the normal relationships between the profitability of collusion and both the discount rate and industry wide demand shocks

labor market frictions and optimal steady state inflation in central theories of monetary non neutrality the ramsey optimal steady state inflation rate varies between the negative of the real interest rate and zero this paper explores how the interaction of nominal wage and search and matching frictions affect the policy prescription we show that adding the combination of such frictions to the canonical monetary model can generate an optimal inflation rate that is significantly positive specifically for a standard u s calibration we find a ramsey optimal inflation rate of 1 16 percent per year

some results on optimal penal codes in asymmetric bertrand supergames abstract optimal penal codes in asymmetric bertrand supergames exhibit security level punishments for the largest firm if no firm has sufficient capacity to service the market then collusion that is barely sustainable by optimal penal codes entails higher capacity utilization by the largest firm than by the other firms collusion supported by optimal penal codes in models with a large firm facing a competitive fringe can result in the large firm having low capacity utilization and thus providing a price umbrella for the fringe firms which have high capacity utilization journal of economic literature classification numbers c72 c73 l11 l13

dynamic duopoly prices and quantities we study a dynamic model of duopoly in which firms choose both prices and quantities if quantity capacity choices are relatively inflexible firms generally carry excess idle capacity in equilibrium because of this enforcement cost firms are unable to achieve monopoly levels this contrasts with models in which which firms compete in either prices or quantities alone on the other hand if capacities are flexible firms may be able to sustain monopoly behaviour

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

the optimal rate of inflation with trending relative prices relative price trends mean that monetary policy cannot stabilize the nominal prices of all consumption categories if prices are sticky monetary policy must then trade off distortions within different categories more weight should be placed on stabilizing prices for which adjustment entails greater distortions with exogenous price stickiness a simple model calibrated to u s data implies that slight deflation is optimal even absent money demand considerations if price stickiness is endogenous because of fixed costs of adjustment small inflation or small deflation can be optimal depending on whether demand conditions or price adjustment costs vary across sectors

are efficient linear taxes inequitable abstract i explore the household weights in the bergson samuelson social welfare functions which have a turning point at an efficient linear tax structure the inverse optima a tax structure is defined to be inequitable if every inverse optimum has weights that increase with household productivity over part of the productivity range i find that the inequity of an efficient tax structure depends on the normality of leisure on the number of households and on the natureof household demands an efficient indirect tax structure is not inequitable if the expenditure share of each taxed commodity is constant across households this has welfare implications for the choice of tax instrument to finance a project accepted under benefit cost analysis

collusion over the business cycle we present a theory of collusive pricing for markets in which demand alternates stochastically between fast growth boom and slow growth recession phases we show that 1 the most collusive prices are weakly procyclical countercyclical when demand growth rates are positively negatively correlated through time and 2 the amplitude of the collusive pricing cycle is larger when the expected duration of boom phases decreases and when the expected duration of recession phases increases we also offer a generalization of rotemberg and saloner s 1986 model interpreting their findings in terms of transitory demand shocks that occur within broader business cycle phases

optimal inflation rates with the trending relative price of investment abstract i study the effect of the trending relative price of investment on the optimal target rate of inflation in an estimated dynamic general equilibrium model of the u s economy the price of investment has a decreasing trend relative to that of consumption because of investment specific technological progress if the prices of investment goods are sticky a benevolent planner puts weight on stabilizing these prices which works to raise the optimal target rate of inflation in terms of the price of consumption the estimated model shows a high degree of price stickiness in an investment sector and the resulting optimal target rate of inflation is significantly positive this result is robust to an extended model in which the prices of some categories of investment goods are flexible

the impact of cyclical demand movements on collusive behavior recent work by rotemberg and saloner 1986 investigates the effect of the business cycle on optimal collusive pricing by specifying that demand is subject to i i d shocks an implication of the i i d assumption is that firms expectations on future demand are unrelated to the current level of demand we put forth a model that allows for both the level of current demand and firms expectations on future demand to change over time thus it captures two important properties of the business cycle our analysis reveals that while the gain to deviating from a collusive agreement is greatest during booms firms find it most difficult to collude during recessions as the forgone profits from inducing a price war are relatively low an implication of this effect for pricing behavior is that at the same level of demand price is lower when demand is declining than when demand is rising consistent with previous theoretical work we find that firms price countercyclically for a range of values for the discount factor however numerical simulations reveal a greater tendency for firms to price countercyclically during recessions than during booms

is there a quality bias in the canadian cpi evidence from micro data rising consumer prices may reflect shifts by consumers to new higher priced products mostly for durable and semi durable goods i apply bils 2009 methodology to newly available canadian consumer price data for non shelter goods and services to estimate how price increases can be divided between quality growth and price inflation

collusion under risk aversion and fixed costs we analyze collusion under demand uncertainty by risk averse cartels that care about the utility derived from profits with sufficient risk aversion and non trivial fixed operating costs it becomes difficult for cartels to collusively restrict output both when demand is low and marginal dollars are highly valued and when demand is high and potential defection profits are high output relative to monopoly levels becomes a u shaped function of demand greater risk aversion or higher fixed operating costs make collusion more difficult to support in recessions but easier to support in booms

tacit collusion in the presence of cyclical demand and endogenous capacity levels abstract we analyze tacit collusion in an industry characterized by cyclical demand and long run scale decisions firms face deterministic demand cycles and choose capacity levels prior to competing in prices our focus is on the nature of prices we find that two types of price wars may exist in one collusion can involve periods of mixed strategy price wars in the other consistent with the rotemberg and saloner 1986 definition of price wars we show that collusive prices can also become counter cyclical we also establish pricing patterns with respect to the relative prices in booms and recessions if the marginal cost of capacity is high enough holding current demand constant prices in the boom are generally lower than the prices in the recession this reverses the results of haltiwanger and harrington 1991 in contrast if the marginal cost of capacity is low enough then prices in the boom are generally higher than the prices in the recession for costs in an intermediate range numerical examples are calculated to show specific pricing patterns

optimal penal codes in price setting supergames with capacity constraints this paper constructs optimal pure strategy penal codes for a broad class of symmetric bertrand supergames with capacity constraints the results should simplify the analysis of bertrand supergames because the punishments comprising the penal codes constructed below have a very simple form and the associated payoffs are often easy to calculate it is also shown that for a commonly employed subclass of the games considered the admission of mixed strategies does not allow severer punishments the analysis draws heavily on the pathbreaking work of abreu 1984 he demonstrated that in the search for optimal penal codes attention can be restricted to simple penal codes simple penal codes are characterized by a vector of outcome paths one for each player the ith outcome path is interpreted as the punishment to be imposed on the ith player if he deviates from the equilibrium path or from any punishment path section 2 explains the basic framework of analysis the class of bertrand games studied is very general no particular rationing rule is imposed some mild restrictions are placed on the firms sales functions instead the commonly used models of levitan and shubik 1972 and beckman 1965 are special cases of the games analysed below it is assumed throughout that there is a price firms can be induced to charge if the punishment for charging a different price gives the offending firm a payoff equal to its security level for the supergame thus either there must exist a static nash equilibrium in pure strategies or else the discount factor must not be too close to zero in section 3 optimal penal codes are constructed and it is established that the punishments comprising them always drive punished firms to their security levels the arguments employed make clear that optimal penal codes are not generally unique this issue is addressed in section 4 where it is also shown that the levitan shubik rationing rule exhibits more types of optimal penal codes than do other rules in particular if the levitan shubik rule is employed then punishments that are analogous to abreu s 1986 symmetric two phase punishments for cournot games can be used to construct optimal penal codes in bertrand games this property does not hold generally however

capacity dynamics and endogenous asymmetries in firm size empirical evidence suggests that there are substantial and persistent differences in the sizes of firms in most industries we propose a dynamic model of capacity accumulation that is consistent with the observed facts the model highlights the mode of product market competition and the extent of investment reversibility as key determinants of the size distribution of firms in an industry in particular if firms compete in prices and the rate of depreciation is large then the industry moves toward an outcome with one dominant firm and one small firm industry dynamics in this case resemble a preemption race contrary to the usual intuition this preemption race becomes more brutal as investment becomes more reversible