monetary policy and the stock market theory and empirical evidence this paper gives a comprehensive review of the literature on the interaction between real stock returns inflation and money growth with a special emphasis on the role of monetary policy this is an area of research that has interested monetary and financial economists for a long time monetary economists have been interested in the question whether money has any effect on real stock prices while financial economists have investigated whether equity is a good hedge against inflation empirical studies show that money can be helpful in predicting future stock returns empirical evidence also suggest that equity is not a good hedge against inflation in the short run but may be so in the long run the short run negative relation between stock returns and inflation can easily be explained by theoretical models if the central bank conducts a countercyclical monetary policy this will result in a negative relation between inflation and stock returns while if it conducts a procyclical policy we could observe a positive relation according to both theoretical and empirical studies investors receive an inflation risk premium for holding equity

term limits and electoral accountability abstract periodic elections are the main instrument through which voters can hold politicians accountable from this perspective term limits which restrict voters ability to reward politicians with re election appear counterproductive we show that despite the disciplining effect of elections term limits can be ex ante welfare improving from the perspective of voters by reducing the value of holding office term limits can induce politicians to implement policies that are closer to their private preferences such truthful behavior by incumbents in turn results in better screening of incumbents we characterize under which circumstances two term or even longer term limits are the optimal institution for voters

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

regulating banks through market discipline a survey of the issues abstract the interest in the application of market discipline to regulate the financial industry has boomed recently due to the proposed new capital accord this paper reviews the potential role market discipline can play in financial regulation we start with a discussion of the rationale for financial regulation and with a brief history of the current regulatory mechanisms next a definition of market discipline as a regulatory mechanism is advanced we evaluate the disciplining power various market participants have finally we argue that more external risk management disclosure is a condition sine qua non in order to enable market discipline as a regulatory mechanism in this respect the basle committee has taken the right approach

elusive persistence wage and price rigidities the new keynesian phillips curve and inflation dynamics abstract we review the main new keynesian inflation equations that have arisen as a result of aggregation from individual firms price rigidities we find that on the whole they cannot account for inflation persistence a key feature of the empirical dynamics of inflation and with important policy implications the only exceptions seem to be when indexation is allowed in price setting or when price stickiness is combined with wage rigidity and staggering

public debt stabilization the relevance of policymakers time horizons policymakers are stuck in time political short termism policy myopia policy short sightedness and similar words have been coined to emphasize the present centric policy thinking politics tends to produce short time horizons and as a result policymakers often fail to use present opportunities to mitigate future harms focusing on fiscal and monetary strategic interactions given different separate decision makers our paper aims to explore the effects of policymakers time horizons on debt stabilization to formalize our ideas we use the novel concept of nonlinear model predictive control feedback nash equilibrium nfne and find that present centric policy thinking and decision horizons matters under several dimensions

taking stock a critical assessment of recent research on inventories empirical and theoretical aspects of inventory behavior became hot topics in the 1950s and early 1960s no one seemed to notice the tension that was developing between the emerging macroeconomic and microeconomic views of inventories macroeconomists routinely thought of inventories as a destabilizing factor yet the prevailing micro theory viewed inventories as a stabilizing factor it was a fascinating question that was barely explored instead somewhat inexplicably interest in inventories dried up as if inventories were of minor economic significance and little intrinsic interest by the early 1980s then economists once again knew something they had known in the 1950s that inventory investment is of first order importance in business cycles but they were also beginning to realize that the standard production smoothing buffer stock model of inventories was in deep trouble this paper focuses on developments since that realization

constituent interest vs legislator ideology the role of political opportunity cost this paper applies the economic model of legislative voting to the automobile industry domestic content vote in the u s house of representatives in 1982 we consider constituent interests for and against the ml and compare the predictive powers of alternative indicators of ideological preferences we also examine the role of political opportunity cost and find that lame ducks were significantly less likely to vote for the bill than were returnees to congress given the political advantages of voting for the bill this is consistent with the view that legislators were influenced by the case for freer trade

do central banks react to the stock market the case of the bundesbank abstract in this paper we ask whether the bundesbank prior to the european central bank taking responsibility for monetary policy in 1999 reacted systematically to stock price movements in contrast to the results for the us our empirical findings show a generally weak relationship between german stock returns and short term interest rates at the daily and the monthly frequency the results are extremely robust to alternative model specifications the evidence is inconsistent with the hypothesis of a systematic reaction of the bundesbank to german stock prices however we do find that as in the us the bundesbank may have reacted to the stock market crash of 1987 by loosening monetary policy

public goods self selection and optimal income taxation using the self selection approach to tax analysis this paper derives a modified samuelson rule for the provision of public goods when the government deploys an optimal nonlinear income tax this approach gives a straightforward interpretation of the central result in this area generalises it and provides a simple characterisation of optimal policy in a wide range of circumstances the analysis also emphasises and clarifies the significance of the choice of numeraire for the optimality of decentralising public spending decisions it is well known that the famous samuelson rule for the provision of public goods may not be applicable when the tax revenues used to finance the public goods come from distorting taxes the principle was recognized as long ago as pigou 1947 long before the samuelson rule was devised pigou saw that in addition to the resource cost involved in transferring funds from the private to the public sector there was a deadweight loss involved from this insight he suggested that the criterion for providing public goods should be more stringent than the samuelson rule would later suggest in particular one might expect that the inclusion of the deadweight loss of taxes as part of the cost of providing a public good would lead to a reduction in its optimal provision relative to a situation in which lump sum taxes were available the problem was investigated more systematically by atkinson and stern 1974 who considered the case in which a public good is financed by a set of optimal commodity taxes all individuals were assumed to be identical so efficiency alone dictated the objective they found that no prima facie case could be made for the pigou position that the use of distortionary taxes called for a reduction in the supply of the public good their analysis clearly showed that there were two influences at work when the financing of a public good was by distorting taxes on the one hand

time inconsistency and fiscal policy empirical analysis of u s states 1969 89 abstract we offer an extensive and robust test of the time inconsistency theory of fiscal politics we employ data of u s states from 1969 to 1989 and the results of our tests indicate the variables such as legislative stability and executive term limits have strongly predictable impacts on the volatility of various measures of fiscal policy

does electoral accountability affect economic policy choices evidence from gubernatorial term limits this paper analyzes the behavior of u s governors from 1950 to 1986 to investigate a reputation building model of political behavior we argue that differences in the behavior of governors who face a binding term limit and those who are able to run again provides a source of variation in discount rates that can be used to test a political agency model we find evidence that taxes spending and other policy instruments respond to a binding term limit if a democrat is in office the result is a fiscal cycle in term limit states which lowers state income when the term limit binds

which commodity taxes should supplement the income tax the analysis takes as its point of departure a continuum of consumers economy in which an optimum income tax exists and is the only tax instrument in operation the welfare effects of introducing small excise taxes to supplement the income tax are then explored essential in this context are changes in the tax distortions of work incentives it is shown that a commodity should be taxed or subsidized depending on whether it is positively or negatively related to leisure in a sense which is precisely defined the results are related to earlier contributions to the literature on direct versus indirect taxation the history of debates on the proper roles of direct and indirect taxation goes back at least to the days of gladstone as well described by atkinson 1977 the prevailing political opinion of the balance between the two types of taxes has varied over time at present the swing in a number of european countries seems to be in favour of reforms towards tax systems which rely more heavily on indirect taxation and less on income taxation in view of this long economic political record it is not surprising that the choice between income tax and commodity taxes has also become an important subject in tax theory an early contribution to the understanding of this issue was corlett and hague 1953 54 their main model considers a three good economy containing leisure and two taxed commodities there is only one consumer or a population of identical consumers labour is the only source of income producer prices are fixed the government s revenue requirement is given the starting point of the analysis is a situation in which the two commodities are taxed at uniform rates the question which is analyzed is then how the government can raise welfare by slightly differentiating the tax rates the answer which is derived is that the consumer good which is the stronger substitute for labour complement with leisure should be taxed at

resource windfalls and public debt a political economy perspective abstract can natural resource windfalls increase public debt in democracies adopting a political economy perspective we show that the answer is in the affirmative resource windfalls increase both the government s income and wealth the former mitigates the need to borrow whereas the latter encourages further borrowing as it improves its terms implying an ambiguous pure effect of resource windfalls on debt re election considerations shorten political time horizons and give rise to political myopia we show that higher political myopia induced by more stringent institutional re election restrictions magnifies the wealth effect turning positive the effect of resource windfalls on debt we test the model s predictions using a panel of u s states over the period 1963 2007 our identification strategy rests on constitutionally entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re election prospects and geographically based cross state differences in natural endowments our baseline estimates indicate that a resource windfall of 1 induces an increase of approximately 20 in the public debt of states with more stringent re election restrictions

a critical review and an extension of the political shirking literature after substituting actual and real changes for proposed and nominal changes in budgetary and employment levels it is clear that the size and scope of the federal leviathon had not been reduced over 1982 83 it is also clear that the agencies which witnessed real budget cuts over this period were of minor importance in terms of the total u s budget future research on why only small agencies receive real budget cuts will provide us with a better understanding of the budgetary process

non welfarist optimal taxation and behavioral public economics research in behavioral economics has uncovered the widespread phenomenon of people making decisions against their own good intentions in these situations the government might want to intervene indeed individuals might want the government to intervene to induce behavior that is closer to what individuals wish they were doing the analysis of such corrective interventions through taxes and subsidies might be called behavioral public economics however such analysis where the government has an objective function that is different from that of individuals is not new in public economics in these cases the government is said to be non welfarist in its objectives and there is a long tradition of nonwelfarist welfare economics especially the analysis of optimal taxation and subsidy policy where the outcomes of individual behavior are evaluated using a preference function different from the one that generated the outcomes the object of this paper is to first of all present a unified view of the non welfarist optimal taxation literature and secondly to present behavioral public economics as a natural special case of this general framework

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

term limits causes and consequences this paper consults multiple literatures to specify andevaluate the economic rationales for term limitation particularly on congress i first consider theories that aroseto explain among related issues why individual states mightunilaterally self impose term limits on their own delegationsto congress next i consider two main lines of argument foruniversal limits both of which begin with the empiricalphenomenon of high and rising congressional tenure first supporters of term limits argue that higher tenure biaseslegislatures toward inefficiency big government highspending second higher tenure creates inefficient anti competitive conditions in the legislative election market term limitation would remedy these inefficiencies by virtue ofdecreasing average tenure these claims are then evaluated inlight of the evidence amassed in the literature based on theliterature reviewed this paper finds that while term limitswill reduce average tenure there is no evidence to suggestthat term limits will affect the underlying causes of theseinefficiencies further research on a more general reform which would strike deeper at these underlying causes isimplied

does legislative turnover adversely affect state expenditure policy evidence from indian state elections the effect of legislative turnover on the size and composition of government expenditures in indian states over the 1980 2000 period is examined the paper finds that excessive turnover in indian state elections results in inefficient government expenditure policy first the higher the turnover the larger the government size second excessive turnover affects the allocative efficiency of government expenditures by skewing the composition of government spending toward pure consumption and away from more productive investment expenditures third the effect of turnover on fiscal policy is not linear public consumption expenditure is convex in turnover while public investment expenditure is concave in turnover

optimal taxation when people do not maximize well being abstract i derive the optimal nonlinear income tax when individuals do not necessarily maximize their own well being this generates a corrective argument for taxation optimal marginal taxes are higher lower if individuals work too much too little from a well being point of view i allow for multidimensional heterogeneity and derive the optimal tax schedule in terms of measurable sufficient statistics one of these statistics measures the degree to which individuals fail to optimize their labor supply i empirically estimate this by using british life satisfaction data as a measure of well being i find that low income workers tend to work too little and high income workers too much providing a motive for lower marginal tax rates at the bottom and higher marginal tax rates at the top of the income distribution

strategic institutional choice voters states and congressional term limits states choices on term limits are quantified as a multiple categorical variable capturing variation in the type of limits passed measures of relative political influence in congress explain much of this variation using 1992 data on the american states the model controls for unobserved heterogeneity due to voter access to direct democracy in some states at 2002 values for congressional tenure and federal spending the model predicts approximately eight to ten additional states would choose to limit their own members terms but cannot under a supreme court ruling we discuss implications for institutional federalism and the potential passage of similar political institutions across the states

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

optimal non linear income taxation for the alleviation of income poverty there has been much discussion recently of structuring tax and transfer programs to ensure that resources go to the poor with minimal leaks to the nonpoor the poor have no incentive to earn income with 100 percent marginal tax rates but how high or low the marginal rate of taxation should be and how they should vary with income is a complex issue and opinions vary social security schemes that withdraw benefits represent an extremely high effective marginal tax rate other schemes call for relatively low marginal tax rates at the bottom of the income distribution which tax transfer schedule does most to reduce poverty the issue is one of optimal nonlinear income taxation the authors show that one of the key theoretical results of the welfarist literature is overturned if it is desirable for everybody to work the optimal marginal tax rate on the very poorest individuals is strictly negative they argue that the nonwelfarist perspective points toward lower marginal tax rates in the lower part of the income distribution than does the welfarist perspective but numerical simulations suggest that the effect is of limited quantitative significance using conventional functional forms and parameter values optimal marginal tax rates on the poor are in the 60 70 percent range

effects of term limits on fiscal performance evidence from democratic nations political reputation models feature forward looking rational voters who re elect incumbents based on their estimate of an incumbent s ability level fiscal policy is one of the ways an incumbent establishes a reputation and thereby signals this ability level to voters the reputation building framework implies that term limits should affect fiscal performance a term limited incumbent places less value on reputation building than an incumbent eligible for re election does we examine differences in fiscal performance in democratic countries under alternative executive term limit regimes our results generally agree with the prior findings of besley and case 1995a who analyzed gubernatorial term limits in the american states we provide new evidence that the fiscal effects of term limits differ under a two term rule versus a single term rule

relativity inequality and optimal nonlinear income taxation how does concern for consumption relative to others relativity affect the structure of optimal nonlinear income taxation our article provides three sets of answers to this general question first it supports the conclusion in the literature that relativity leads to higher marginal tax rates in doing so it both generalizes some of the conditions under which this result is obtained in the literature and fleshes out the detailed structure for optimal marginal tax rates for specific functional forms for distribution utility function and social welfare function second the article goes beyond the literature and examines the impact of relativity on the progression of optimal marginal tax rates by and large we find support for greater progressivity defined as the steepness of the rise of the marginal tax rate schedule as relativity concern increases third none of the papers in the literature to our knowledge examines the interplay of relativity and inequality in determining the optimal structure of income taxes our special analytical cases and more general numerical calculations support the conclusion that higher inequality dampens the positive impact of greater relativity on the level and the progression of marginal tax rates more work is needed to further explore this interaction between relativity and inequality that our analysis has uncovered

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

market reactions to ecb policy innovations a cross country analysis abstract regulators have been paying increasing attention to governing and steering market fluctuations with their role in shaping the economic cycle being ever more crucial the combined effect of the financial and sovereign debt crises as well as the approach to the zero lower bound has made actions even more pressing forcing the european central bank to resort to unconventional instruments to revive the economies and counter deflationary pressures by using a combined event study and panel regression methodology we investigate whether european monetary union equity markets react heterogeneously to standard and non standard european central bank policy innovations our results show that conventional policies unevenly affect financial indices in the eurozone and hence are bound to generate asymmetries that reflect on real economies while unconventional measures albeit with different intensities exercise a homogeneous pressure on all markets our evidence highlights the beneficial impact of unconventional measures and suggests that they can play a useful role even in non crisis times

dynamic government performance honeymoons and crises of confidence we use a formal theoretical framework to explore the interplay between a government s longevity and its performance ministers perform well when their careers are valuable this is so when the government s duration is expected to be long the government s survival depends on its popularity and finally that popularity depends on its ministers performance the feedback loop between performance and longevity means that multiple rational expectations equilibria can arise ministers work hard for a popular government but divert efforts elsewhere if they believe the government is doomed these alternatives are both self fulfilling prophecies however the presence of perhaps small random events that buffet the performance and popularity of a government is sufficient to pin down a unique equilibrium we explore the dynamics that arise a crisis of confidence involving the rapid collapse of a government s performance is sparked when a sequence of negative shocks push the popularity of the government below a unique critical threshold

does stock market uncertainty impair the use of monetary indicators in the euro area the relationship between monetary indicators and inflation is usually assumed to be linear implying that looser monetary conditions always signal an increase in inflation recently money growth in the euro area surged while inflation remained comparatively subdued this seems at variance with linearity at the same time stock market uncertainty peaked suggesting that part of the money growth resulted from portfolio adjustment and was hence non inflationary a threshold regression model is employed to verify the claim that the impact of monetary indicators on future inflation varies conditional on stock price volatility it is shown that there is limited evidence to support this claim on the other hand the results indicate that stock market data may contain useful information regarding future inflation

labor supply and targeting in poverty alleviation programs the introduction of variable labor supply raises some fundamental issues in analyzing the targeting of poverty alleviation programs in developing countries it forces a reconsideration of the standard objective function which is based on income or expenditure and so makes no allowance for the effort made in earning that income the authors show that alternative views on the appropriate valuation of effort have very different implications for commodity based targeting rules they also establish a benchmark for marginal effective tax rates inclusive of benefit withdrawal in income tested schemes and show that indicator targeting rules may also have to be modified significantly when labor supply responses are recognized

moral hazard income taxation and prospect theory the standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximise expected utility however prospect theory has now been established as an alternative model of individual behaviour with empirical support this paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets of prospect theory it is seen that many of the standard results are modified in interesting ways the first order approach for solving the optimisation prob lem is not valid over the domain of losses and the marginal tax schedule offers full insurance around the reference consumption level the implications of non welfarist objectives under income uncertainty are also examined

lame ducks and local fiscal policy quasi experimental evidence from portugal i use the introduction of mayoral term limits in portugal to identify how an exogenous variation in eligibility for office affects policy decisions relying on a quasi experimental difference in differences approach i find that term limited incumbents pursue more conservative fiscal policies than those who are eligible for re election heterogeneous effects show that the treatment effects primarily reflect the behaviour of right leaning term limited incumbents results are in line with a model in which right leaning officeholders try to maintain a good reputation by pleasing an electorate prone to redistribution while they are eligible but adopt policies closer to their true preferences when term limited

the optimal income tax when poverty is a public bad abstract poverty is considered as an aggregate negative externality that may affect people differently depending on their aversion to poverty if society is on average averse to poverty then the optimal income tax schedule displays negative marginal tax rates at least for the less skilled individuals negative marginal tax rates play the role of a pigouvian earnings subsidy and foster the supply of labor of poor individuals the no distortion at the endpoints result which is therefore violated can be restored once the focus is shifted from individual to social distortions

poverty alleviation and tax policy abstract this paper examines public good provision and tax policy optimal non linear income taxation and linear commodity taxation when the government departs from purely welfarist objective function and seeks to minimise poverty this assumption reflects much policy discussion and may help understand some divergences of practical tax policy from lessons in optimal tax analysis in contrast to atkinson and stiglitz j public econom 6 1976 55 it may be optimal to use differentiated commodity tax rates including the taxation of savings even if preferences are separable in goods and leisure the optimal effective marginal tax rate at the bottom of the distribution may be negative suggesting that wage subsidy schemes can be optimal finally optimal provision of a public good is analysed under poverty minimisation

the effects of male and female labor supply on commodity demands we examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply using data on individual households from six years of the uk fes we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables allowance is made for the possible endogeneity of these conditioning labor supply variables we find that separability is rejected furthermore we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates

a comparison of international income inequality an ordered probit model analysis in this study the ordered probit model with marginal effect was applied to examine the key elements that influence changes in the gini levels the empirical results indicated that export incentives and poverty have a positive impact on the gini levels moreover the marginal effect revealed that export incentives increase income inequality for countries with higher inequality and reduce inequality for those countries with a relatively even income distribution likewise the study found that the asian pacific economic cooperation apec and the eu countries move from inequality to equality more efficiently than countries in the latin american integration association laia

collective action clauses in international sovereign bond contracts whence the opposition in the debate on strengthening the international financial architecture which peaked in 2002 after a series of emerging market sovereign debt crises the universal adoption of collective action clauses cacs was the most promising reform proposal academics and the official sector had been promoting cacs at least since 1995 yet market practice did not begin to change until 2003 this delay is often attributed to the opposition of investors and sovereign borrower to cacs this paper evaluates the publicly stated as well as the suspected private motives of the two sides to block the spread of cacs it draws on a wide range of existing evidence and adds some new theoretical considerations to show that there is no reason to be sceptical of cacs unless bailouts exist as an alternative crisis resolution mechanism this conclusion may be of interest purely for the sake of historical accuracy but more importantly it may help to better understand any potential future resistance by market participants e g in the process of introducing cacs in bonds governed by german law

a primer on financial contagion abstract this paper presents a theoretical framework to highlight possible channels for the international transmission of financial shocks we first review the different definitions and measures of contagion adopted by the literature we then use a simple multi country asset pricing model to classify the main elements of the current debate on contagion and provide a stylized account of how a crisis in one country can spread to the world economy in particular the model shows how crises can be transmitted across countries without assuming ad hoc portfolio management rules or market imperfections finally tracking our classification we survey the results of the empirical literature on contagion

accountability and yardstick competition in the public provision of education abstract this paper explores the institutional change introduced by the public disclosure of an education development index ideb basic education development index in 2007 to identify the effect of education accountability on yardstick competition in educational spending among brazilian municipalities an exploratory analysis of the data shows a minor reduction 20 in spatial interaction in public educational spending after ideb disclosure compared with the spatial correlation before disclosure of the index our main results explore a discontinuity around the cutoff of 30 students enrolled in the grade under assessment after ideb disclosure the estimates suggest that the spatial autocorrelation and thus yardstick competition is reduced by 52 falsification and robustness tests were performed and suggest that we can claim causality around small bandwidths of the cutoff this finding suggests that the public release of information may decrease the importance of neighbors information on voters decisions

legislative term limits and state spending supporters of legislative term limits often claim that they will lower state spending levels using fiscal data from 48 states from 1977 to 2001 this paper finds little support for this assertion instead this analysis finds that states with term limits have higher spending levels than states without term limits these results suggest that term limits give legislators greater incentives to deviate from socially optimal fiscal policy by altering the legislative environment in which such policy is formulated

sources of inefficiency in a representative democracy a dynamic analysis this paper studies the efficiency of policy choice in representative democracies it extends the citizen candidate model of democratic policy making to a dynamic environment equilibrium policy choices are shown to be efficient in the sense that in each period conditional on future policies being selected through the democratic process there exists no alternative current policy choices which can raise the expected utilities of all citizens however policies that would be declared efficient by standard economic criteria are not necessarily adopted in political equilibrium the paper argues that these divergencies are legitimately viewed as politicalfailures

food subsidies and poverty alleviation this paper formulates the problem of the optimal pattern of food subsidies in a general setting where the objective is to minimize a class of poverty indices within the framework of the mo dern public finance theory taking explicit account of the budget con straint and preferences and technologies the authors derive rules fo r retargetting food subsidies to reduce poverty many operational rul es of thumb appear as special cases of the general results the analy sis thus provides not only the microfoundations of these operational rules but also their appropriate generalizations when the conditions under which they arise are not fulfilled copyright 1988 by royal economic society

incumbent behavior vote seeking tax setting and yardstick competition this paper develops a model of the political economy of tax setting in a multijurisdictional world where voters choices and incumbent behavior are determined simultaneously voters are assumed to make comparisons between jurisdictions to overcome political agency problems this forces incumbents into a yardstick competition in which they care about what other incumbents are doing we provide a theoretical framework and empirical evidence using u s state data from 1960 to 1988 the results are encouraging to the view that vote seeking and tax setting are tied together through the nexus of yardstick competition

monetary policy and stock prices cross country evidence from cointegrated var models abstract this study applies the cointegrated vector autoregressive cvar model to analyze the long run relationships and short run dynamics between stock markets and monetary policy across five developed and three emerging economies our main aim is to check whether monetary policy plays an important role for stock market developments as an innovation monetary policy enters the analysis from three angles in the form of a broad monetary aggregate short term interest rates and net capital flows based on this framework we analyze whether central banks are able to influence stock market developments our findings suggest different patterns and causalities for emerging and industrial economies with the stock markets of the former economies more frequently related to monetary aggregates and capital flows a direct long run impact from short term interest rates on stock prices is only observed for 3 out of 8 economies

the design of income maintenance programmes this paper provides a comprehensive treatment of a basic income maintenance problem for a group of individuals who differ in their income generating abilities it stresses the impact that imperfect information about such abilities has on programme design the analysis serves two purposes first we are able to unify the theoretical literature on the income maintenance problem second we examine the impact of allowing the government to impose workfare on recipients of income support in addition to being of policy interest this is a theoretically challenging problem since it requires solving a multi dimensional screening problem the solution that we find is strikingly simple it separates the poor into two categories with the lower income groups subject to workfare while facing a 100 marginal tax rate on earnings the second group does no public work and is offered a benefit schedule which taxes earnings at a lower rate

running out of steam a political incentive perspective of fdi inflows in china drawing on the sociological literature of state bureaucracy we develop a political incentive perspective on fdi inflows we argue that political term as a core feature of career advancement in state bureaucracy influences the incentives of newly appointed government officials and in turn their efforts toward achieving the state s goal of attracting fdi due to the mandatory retirement age which limits the career advancement officials in their first terms perceive that they have better chances of promotion and hence have stronger incentives to work toward advancement than those continuing to serve in the current position for the following term we test this argument by examining chinese city government leaders and fdi inflows in their cities from 2003 to 2010 using a difference in differences design the results show that first term leaders who are newly appointed after political turnover attract more fdi inflows than continuing leaders the difference is smaller when the new leaders are close to retirement but greater if they are appointed to cities with low prior gdp performance this study offers a new perspective on intra country fdi variations and extends the literature on the role of political institutions by investigating the political incentives of government officials

capital income taxation when inherited wealth is not observable this paper extends the atkinson stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics productive ability and inherited wealth bequests are motivated by the joy of giving a child s inheritance is a random variable with a probability distribution that depends on his parent s investment in a bequest technology public borrowing is assumed and implies the modified golden rule we study the optimal tax policy when two instruments are available a non linear wage income tax and a proportional tax on capital income we show that the second instrument ought in general to be used but that the tax rate is not necessarily positive however a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability

monetary transmission in the euro area early evidence monetary transmission evidence we examine the euro area monetary policy transmission process using post 1999 data with two main questions in mind has it changed after and because of economic and monetary union emu and if so is it becoming homogeneous across countries given the data limitations we concentrate on three components of the transmission mechanism the banking the interest rate and the asset market channels we find evidence that the transmission through banks has become more potent and homogeneous across countries on the financial market channels our evidence is somewhat weaker but suggestive the interest rate channel appears to have changed even before emu and now affects national economies in a broadly similar way the asset market channel proxied by the stock market effects of monetary policy also seems to work rather homogeneously across national markets no comparison with pre emu is available here a positive answer to both questions raised above represents in our view the best working hypothesis under current knowledge ignazio angeloni and michael ehrmann