can money matter for interest rate policy in this paper it is shown that money can matter for macroeconomic stability under interest rate policy when transactions frictions are non negligible we develop a sticky price model with a shopping time function which induces the marginal utility of consumption to depend on the predetermined stock of money held at the beginning of the period equilibrium stability and uniqueness are then ensured by a passive interest rate policy whereas activeness is associated with an explosive equilibrium by reacting to changes in beginning of period real balances the central bank can restore stability interest rates further depend on lagged real balances even if the central bank acts in an entirely forward looking way as under discretionary optimization if the model is revised such that end of period money provides transaction services money can in principle be neglected for a stabilizing interest rate policy discretionary monetary policy is however likely to be associated with equilibrium indeterminacy which can be avoided if interest rates are set contingent on beginning of period real balances

money and prices under uncertainty we study whether monetary economies display nominal indeterminacy equivalently whether monetary policy determines the path of prices under uncertainty in a simple stochastic cash in advance economy we find that indeterminacy arises and is characterized by the initial price level and a probability measure associated with state contingent nominal bonds equivalently monetary policy determines an average but not the distribution of inflation across realizations of uncertainty the result does not derive from the stability of the deterministic steady state and is not affected essentially by price stickiness nominal indeterminacy may affect real allocations in cases we identify our characterization applies to stochastic monetary models in general and it permits a unified treatment of the determinants of paths of inflation copyright 2005 wiley blackwell

interest rate policy in continuous time with discrete delays we study the design of monetary policy in a continuous time framework with delays more explicitly we consider a linear flexible price model where inflation and nominal interest rates change continuously but where nominal rates are set by the central bank in response to a lagged inflation measure and where the measure of inflation can be constructed as a flexible distributed delay therefore the central bank has in addition to the choice of an active or passive response to inflation two additional parameters to select the lag of the inflation measure and the coefficient for the distributed delay to construct the inflation measure the pure continuoustime and discrete time frameworks emerge as special cases of our differential delay system this richer framework also allows us to reconcile results on the local uniqueness and multiplicity of equilibria that are obtained in the two pure cases to uncover special assumptions embedded in the pure cases and to prescribe effective policy options to avoid the problem of local indeterminacy and its unintended consequences

multiple solution indeterminacies in monetary policy analysis abstract a sizeable fraction of recent research on monetary policy has been concerned with issues relating to analytical indeterminacies i e multiple solutions in rational expectations re models most of the literature features sophisticated re analysis conducted within dynamic models that reflect optimizing behavior by individual agents and incorporate taylor style policy rules a few papers have suggested that some of the particular indeterminacy arguments are misleading or irrelevant for the most part however there has been little dissent from the position that these indeterminacies present a genuine problem for monetary policy makers the purpose of the present paper by contrast is to argue that conclusions based on multiple solution indeterminacy findings are of dubious merit rather generally

ppp exchange rate rules macroeconomic in stability and learning in order to maintain competitiveness governments in developing economies seem to have pursued purchasing power parity ppp exchange rate rules by adjusting the nominal devaluation rate in response to real exchange rate deviations from an intermediate target this article shows that these rules are likely to induce macroeconomic instability as they generate sunspot driven fluctuations that are in fact learnable by agents in the expectational stability sense it finds that the existence of these learnable sunspots depends among others on open economy features including the degree of openness and the degree of exchange rate pass through to consumer s import prices

does the preference reversal phenomenon necessarily contradict the independence axiom one of the most puzzling paradoxes in decision theory is the preference reversal phenomenon this phenomenon seems to contradict the transitivity axiom for a long time one of the cornerstones of utility theory this paradox is established whenever a decision maker prefers lottery x to lottery y but is willing to put a lower selling price on x than on y such experiments first reported by harold lindman 1971 and sarah lichtenstein and paul slovic 1971 were repeated by david grether and charles plott 1979 werner pommerehne et al 1982 and robert reilly 1982 although the later researchers improved the mechanism through which the selling price emerges they all found systematic reversals a new approach to this problem was developed by charles holt 1986 and edi karni and zvi safra 1987 from two different starting points these authors showed that the preference reversal phenomenon does not necessarily prove a violation of the transitivity axiom as it may contradict the independence axiom this implies that people do not maximize expected utility but in that case the preference reversal phenomenon becomes just another evidence against expected utility theory but not against the transitivity axiom these results have their own disadvantages although the independence axiom is not as fundamental as transitivity it is nevertheless very appealing on normative grounds of course the preference reversal phenomenon necessarily contradicts at least one of the assumptions of expected utility theory but empirical evidence shows that despite its normative appeal violations of the reduction of compound lotteries axiom may happen see for example joshua ronen 1971 and doug snowball and clif brown 1979 in this paper i therefore suggest a decision mechanism for the preference reversals lotteries which is transitive and satisfies the independence axiom but not the reduction axiom

taylor rules in a model that satisfies the natural rate hypothesis the authors analyze the restrictions necessary to ensure that the interest rate policy rule used by the central bank does not introduce real indeterminacy into the economy they conduct this analysis in a flexible price economy and a sticky price model that satisfies the natural rate hypothesis a necessary and sufficient condition for real determinacy in the sticky price model is that there must be nominal and real determinacy in the corresponding flexible price model this arises if and only if the taylor rule responds aggressively to lagged inflation rates

world war ii and convergence proxies that measure the effect of world war ii on a country s capital stock are used as instruments for estimating standard cross country growth regressions the war s destruction should offer a natural experiment that allows us to consistently estimate the speed at which productivity growth converges to its long run path this paper presents evidence that convergence rates are approximately 4 to 6 per annum substantially larger than conventional wisdom

monetary and fiscal policy interactions in a new keynesian model with capital accumulation and non ricardian consumers the paper examines simple monetary and fiscal policy rules consistent with determinate equilibrium dynamics in the absence of ricardian equivalence under this assumption government debt turns into a relevant state variable which needs to be accounted for in the analysis of equilibrium dynamics the key analytical finding is that without explicit reference to the level of government debt it is not possible to infer how strongly the monetary and fiscal instruments should be used to ensure determinate equilibrium dynamics specifically we identify bifurcations associated with threshold values of steady state debt leading to qualitative changes in the local determinacy requirements

chaotic interest rate rules a growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of taylor type interest rate feedback rules that is rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target this paper shows that such rules can easily lead to chaotic dynamics the result is obtained for feedback rules that depend on contemporaneous or expected future inflation the existence of chaotic dynamics is established analytically and numerically in the context of calibrated economies the battery of fiscal policies that has recently been advocated for avoiding global indeterminacy induced by taylor type interest rate rules such as liquidity traps are shown to be unlikely to provide a remedy for the complex dynamics characterized in this paper

interest rates and currency prices in a two country world abstract this paper is a theoretical study of the determination of prices interest rates and currency exchange rates set in an infinitely lived two country world which is subject both to stochastic endowment shocks and to monetary instability formulas are obtained for pricing all equity claims nominally denominated bonds and currencies and these formulas are related to earlier closely related results in the theories of money finance international trade

inflexible rules in incentive problems in practice contracts involve standard terms or rules allowing for variations only under exceptional circumstances we develop a simple model in which optimal contracts display this feature even in the absence of transactions costs rules arise when an agent has countervailing incentives to misrepresent private information these incentives are created by endowing the agent with a critical factor of production ex ante applications in regulatory labor and legal settings

only income diverges a neoclassical anomaly the neoclassical growth model ngm is only consistent with the absolute divergence in output levels we observe if some determinants of steady state income are also diverging in this paper we show that accumulation rates of physical and human capital are actually significantly converging as are openness to trade and several variables measuring institutional quality output divergence in the face of input policy and institutional convergence is a deep anomaly for the ngm

timing and real indeterminacy in monetary models an increasingly common approach to the theoretical analysis of monetary policy is to ensure that a proposed policy does not introduce real indeterminacy and thus sunspot fluctuations into the model economy policy is typically conducted in terms of directives for the nominal interest rate this paper uses a discrete time money in the utility function model to demonstrate how seemingly minor modifications in the trading environment result in dramatic differences in the policy restrictions needed to ensure real determinacy these differences arise because of the differing pricing equations for the nominal interest rate

intertemporal and intratemporal substitution and the speed of convergence in the neoclassical growth model abstract this paper re examines the speed of convergence in a one sector growth model under fairly general conditions with respect to both production and preferences we investigate the response of the rate of convergence to the intratemporal elasticity of substitution in production and to the intertemporal and intratemporal elasticities of substitution in consumption the speed of convergence is highly sensitive to the first two elasticities but not to the third which is reflected primarily in the agent s labor leisure choice small deviations in the elasticities from standard benchmark parameters can lead to significant variations in the rate of convergence encompassing the range of typical empirical estimates

tax base and crowding in effects of balanced budget fiscal policy a dynamic general equilibrium business cycle model is constructed with staggered price adjustment monopolistic wage setting and distortionary taxation the government purchases goods runs an unemployment benefit system and balances its budget through a proportional tax on labour income a temporary tax financed increase in government expenditures can lower the tax rate through a demand induced widening of the tax base it is shown analytically that this allows private consumption to rise under realistic conditions despite the negative wealth effect of increased fiscal spending

supply side effects of monetary policy and equilibrium multiplicity abstract empirical evidence indicates that changes in the nominal interest rate significantly affect lending costs of firms introducing working capital into an otherwise conventional new keynesian model active interest rate policy remains necessary but should be moderate to ensure real determinacy the likelihood for the latter can approach zero when utility is linear in leisure

real balance effects timing and equilibrium determination this paper examines whether the existence and the timing of real balance effects contribute to the determination of the absolute price level as suggested by patinkin 1949 1965 and if they afiect conditions for local equilibrium uniqueness and stability i show that there exists a unique price level sequence that is consistent with an equilibrium under interest rate policy only if beginning ofperiod money yields transaction services predetermined real money balances can then serve as a state variable implying that interest rate setting must be passive a violation of the taylor principle for unique stable and non oscillatory equilibrium sequences on the contrary when the end of period money stock facilitates transactions the equilibrium displays nominal indeterminacy and equilibrium uniqueness requires an interest rate setting consistent with the taylor principle

interest rate rules for fixed exchange rate regimes abstract this paper shows that properly designed interest rate rules can be consistent with maintaining exchange rate stability it sheds light on the relation between interest rate rules exchange rate regimes and determinacy of the rational expectation equilibrium in a modern macroeconomic framework

can fiscal spending stimulate private consumption abstract empirically government expenditure shocks seem to crowd in private consumption while neoclassical and new keynesian models predict crowding out we derive conditions under which a government in utility specification in a sticky price model helps to reconcile theory and evidence

on the irrelevance of government debt when taxes are distortionary abstract we consider a government that can only raise funds by levying distortionary taxes we allow the government to collect taxes in a given period that are based on incomes earned in previous periods we show that once we do so given any debt path the government can adjust its tax policy so as to attain that debt path without affecting equilibrium allocations or prices

short and long interest rate targets can both short and long term interest rates be targeted independently can the target of the term structure help solve the problem of multiplicity of equilibria that occurs when only the short rate is targeted both questions are addressed and the answer is yes to both

the indeterminacy of prices under interest rate pegging the non ricardian case abstract this paper investigates the issue of price level indeterminacy under a pure interest rate peg in models that depart from standard ricardian assumptions using a monetary version of blanchard s finite horizons model i find wealth effects operating on government bonds are not sufficient to determine a unique price level next i consider price determination under a non ricardian fiscal authority i show that if agents rationally perceive the possibility of fiscal default the price level is again indeterminate i conclude that departures from ricardian equivalence are not sufficient to ensure a unique price level under a monetary policy of pure interest rate pegging

renegotiation and information revelation over time the case of optimal labor contracts the paper analyzes the issue of commitment in grossman and hart s model of optimal labor contracts under asymmetric information about firm profitability we extend their framework by allowing employment to vary over time at equidistant intervals when both parties can precommit ex ante not to renegotiate the contract this replicates the grossman hart outcome each subperiod when precommitment is not possible information revealed through the contract can create pareto improving renegotiation opportunities and the issue of optimal information revelation arises the paper analyzes the impact of ex post pareto improving renegotiations on the optimal contract

balanced budget rules distortionary taxes and aggregate instability a traditional argument against a balanced budget fiscal policy rule is that it amplifies business cycles by stimulating aggregate demand during booms via tax cuts and higher public expenditures and by reducing demand during recessions through a corresponding fiscal contraction this paper suggests an additional source of instability that may arise from this type of fiscal policy rule it shows that within the standard neoclassical growth model a balanced budget rule can make expectations of higher tax rates self fulfilling if the fiscal authority relies heavily on changes in labor income taxes to eliminate short run fiscal imbalances calibrated versions of the model show that indeterminacy occurs for income tax rates that are empirically plausible for the u s economy and other group of seven countries

how misleading is linearization evaluating the dynamics of the neoclassical growth model this paper investigates the reliability of employing linearization to evaluate the dynamic adjustments to changes in productive government spending in a ramsey growth model if government expenditure is introduced as a flow and the dynamic adjustment is fast linearization may yield a reasonably good approximation to the true dynamics even for fairly large policy shocks if government expenditure assumes the form of a stock leading to more sluggish adjustment linearization may yield misleading predictions these errors occur at the beginning of the transition and weigh heavily in welfare calculations the implications for temporary shocks and the speed of convergence are also considered

income convergence among u s states cross sectional and time series evidence we perform convergence tests on the u s states for per capita income from 1930 to 2009 cross sectional tests support overall convergence and convergence but may not hold true for the last three decades time series tests suggest that about half of the states exhibit stochastic convergence and of these all are also converging probit regressions reveal that the likelihood a state is converging is a function of changing capital to labour ratios the size of the agricultural sector and levels of taxation and tax revenue regional disparities in convergence remain among the southern and midwestern states convergence des niveaux de revenus entre les etats americains resultats a partir de donnes transversales et de series chronologiques on presente des tests de convergence des revenus per capita des etats americains entre 1930 et 2009 les tests transversaux supportent l hypothese de convergence de type et de type mais pourraient ne pas tenir pour les trois dernieres decennies les tests utilisant les series chronologiques suggerent que la moitie des etats montrent une convergence stochastique et que de ceux ci tous supportent l hypothese de convergence de type des regressions par la methode probit revelent que la vraisemblance qu un etat converge depend des rapports capital travail changeants de la taille du secteur agricole et des niveaux de taxation et de rentrees fiscales des disparites regionales dans la convergence demeurent entre les etats du sud et du midwest

monetary policy taxes and the business cycle this paper analyzes the interaction of inflation with the tax code and its contribution to aggregate fluctuations we find significant effects operating through the tax on realized nominal capital gains a tax on nominal bond income magnifies these effects our innovation is to combine monetary policy shocks with non indexed taxes in a model where the central bank implements policy using an interest rate rule monetary policy had important effects on the behavior of the business cycle before 1980 because policymakers did not exert effective control over inflation monetary policy reform around 1980 led to better control and with more stable inflation the effect of the interaction between monetary policy and the nominal capital gains tax has become negligible

capital tax competition under a common currency abstract we re examine the view that capital taxes are too low when capital is mobile across tax jurisdictions we do so by emphasising a previously neglected implication of decentralised capital tax setting when jurisdictions share a common currency namely capital taxes give rise to a vertical externality by affecting the revenues of the over arching central bank from issuing the common currency this externality may lead ceteris paribus to too high regional capital taxes and may more than offset the usual effects of tax competition in this case and contrary to conventional wisdom decentralised capital taxes will be too high

monetary policy under a fiscal theory of sovereign default abstract this paper examines equilibrium determination under different monetary policy regimes when the government might default on its debt we apply a cash in advance model where the government does not have access to non distortionary taxation and does not account for initial outstanding debt when it sets the income tax rate solvency is then not guaranteed and sovereign default can affect the return on public debt if the central bank sets the interest rate in a conventional way the equilibrium allocation cannot be determined if instead money supply is controlled the equilibrium allocation can uniquely be determined

learning about monetary policy rules abstract we study macroeconomic systems with forward looking private sector agents and a monetary authority that is trying to control the economy through the use of a linear policy feedback rule we use stability under recursive learning a la evans and honkapohja learning and expectations in macroeconomics princeton university press princeton new jersey 2001 as a criterion for evaluating monetary policy rules in this context we find that considering learning can alter the evaluation of alternative policy rules

solow and the states new evidence yamarik s 2006 solow and the states new evidence regional studies 40 571 582 the aim of this study is to reassess the sources behind us state level growth during the post war period it improves upon the existing literature 1 by using a general method of moments gmm estimator that eliminates omitted variable and endogeneity bias 2 by allowing for parameter heterogeneity and 3 by extending the sample to the pre and post productivity slowdown periods unlike previous regional growth studies the paper supports both predictions of neoclassical growth theory first strong evidence of convergence in state level growth rates is found second the rate of convergence and capital share are inversely related moreover numerical computations show that the estimated values for the convergence rate and capital share are consistent with the neoclassical growth model yamarik s 2006 solow et les etats de nouvelles preuves regional studies 40 571 582 cette etude cherche a reevaluer les origine

inflation forecasts and monetary policy proposals for inflation targeting as a strategy for monetary policy leave open the important operational question of how to determine whether current policies are consistent with the long run inflation target an interesting possibility is that the central bank might target current private sector forecasts of inflation either those made explicitly by professional forecasters or those implicit in asset prices we address the issue of existence and uniqueness of rational expectations equilibria when the central bank uses private sector forecasts as a guide to policy actions in a dynamic model which incorporates both sluggish price adjustment and shocks to aggregate demand and aggregate supply we show that strict targeting of inflation forecasts is typically inconsistent with the existence of rational expectations equilibrium and that policies approximating strict inflation forecast targeting are likely to have undesirable properties we also show that economies with more general forecast based policy rules are particularly susceptible to indeterminacy of rational expectations equilibria we conclude that although private sector forecasts may contain information useful to the central bank ultimately the monetary authorities must rely on an explicit structural model of the economy to guide their policy decisions this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

nonrevelation in employment contracts the author considers an employment contracting model in which firms have private information that is directly payoff relevant to workers and workers are always free to quit in contrast to existing models firms will sometimes fail to reveal adverse information to workers in equilibrium because of the effect this will have on quits risk averse workers can prefer such pooling contracts to separating ones because inducing truth telling requires firms to cut wages in states that are already bad for the worker applications to firms incentives to reveal unsafe working conditions and impending layoffs or plant closures are discussed copyright 1994 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

determinacy and expectational stability of equilibrium in a monetary sticky price model with taylor rule abstract recent studies show that the taylor rule possesses desirable properties in terms of generating determinacy and e stability of rational expectations equilibria under sticky prices this paper examines whether this policy rule retains these properties within a discrete time money in utility function model employing three timings of money balances of the utility function that the existing literature contains end of period timing and two types of cash in advance timing this paper shows i even a small degree of non separability of the utility function between consumption and real balances causes the taylor rule to be much more likely to induce indeterminacy or e instability if this rule responds not only to inflation but also to output or the output gap ii differences among the three timings strongly alter conditions for the taylor rule to ensure both determinacy and e stability

the dynamics of incentive contracts the paper studies a simple two period principal agent model in which the principal updates the incentive scheme after observing the agent s first period performance the agent has superior information about his ability the principal offers a first period incentive scheme and observes some measure of the agent s first period performance cost or profit which depends on the agent s ability and unobservable first period effort the relationship is entirely run by short term contracts in the second period the principal updates the incentive scheme and the agent is free to accept the new incentive scheme or to quit the strategies are required to be perfect and updating of the principal s beliefs about the agent s ability follows bayes rule the central theme of the paper is that the ratchet effect leads to much pooling in the first period first for any first period incentive scheme there exists no separating equilibrium second when the uncertainty about the agent s ability is small the optimal scheme must involve a large amount of pooling the paper also gives necessary and sufficient conditions for the existence of partition equilibria and looks at the effect of cost uncertainty

distortionary taxation debt and the price level this paper considers the nominal and real determinacy of equilibria under an exogenously specifi ed path of interest rates in an economy in which taxation is either lump sum or distortionary under lump sum taxation we confirm the well known finding that equilibria display nominal in determinacy if the primary surplus is exogenous endogenous under distortionary taxation this classification is no longer relevant nominal determinacy is always ensured since distortionary taxes establish a link between the allocation and the sequences of taxes and debt and hence the price level regardless of whether the primary surplus is exogenous or endogenous distortionary taxation however increases the scope for real indeterminacy as a general feature the real in determinacy of equilibria depends on the interaction of fiscal and monetary policies i e on the sequences of taxes debt and interest rates if for example fiscal policy runs a balanced budget the central bank should set the nominal interest rate in a way consistent with long run deflation in order to ensure real determinacy this finding is different from a balanced budget policy under lump sum taxes where no such qualification with respect to the interest rate needs to be made

does the reserve bank of australia follow a forward looking nonlinear monetary policy rule abstractthe conventional monetary policy rule describes a simple linear relationship between the domestic interest rate inflation rate and output gap an important extension to this rule is to inc

do real balance effects invalidate the taylor principle in closed and open economies this paper examines the determinacy implications of forecast based monetary policy rules that set the interest rate in response to expected future inflation in a neo wicksellian model that incorporates real balance effects we show that the presence of such effects in closed economies restricts the ability of the taylor principle to prevent indeterminacy of the rational expectations equilibrium the problem is exacerbated in open economies particularly if the policy rule reacts to consumer price rather than domestic price inflation however determinacy can be restored in both closed and open economies with the addition of monetary policy inertia

labor contracts under asymmetric information when workers are free to quit this paper examines the impact of workers ability to quit on the performance of labor contracts between workers and privately informed firms while the need to induce workers to remain with the firm necessarily lowers total welfare the effect on employment levels is to reduce the magnitude of the inefficiency due to asymmetric information whether this inefficiency is under or overemployment the model predicts that employment distortions increase with the strength of lock in effects on workers a prediction which contrasts with the results of efficiency wage models and which may help in empirical testing of labor contract theory

learning and the central bank abstract it is well known that sunspot equilibria may arise under an interest rate operating procedure in which the central bank varies the nominal rate with movements in future inflation a forward looking taylor rule this paper demonstrates that these sunspot equilibria may be learnable in the sense of e stability

money and interest in a cash in advance economy the authors analyze an aggregative general equilibrium model in which the use of money is motivated by a cash in advance constraint applied to purchases of a subset of consumption goods the system is subject to both real and monetary shocks which are economy wide and observed by all they develop methods for verifying the existence of characterizing and explicitly calculating equilibria copyright 1987 by the econometric society

inflation targeting price path targeting and indeterminacy abstract in this paper we examine the areas of indeterminacy in a flexible price rbc model with shopping time role for money and a central bank that uses an interest rate rule to target inflation and or the price level we present analytical results showing that although inflation targeting often results in real indeterminacy a price level target generally delivers a unique equilibrium for a relevant range of policy parameters

labor contracts with voluntary quits this paper considers labor contracts between the risk neutral firm and risk averse workers with heterogeneous outside opportunities alternative wages which become known to the worker after a costly on the job search in the case of a deterministic alternative wage self selection over a menu of contract wages would achieve the first best contract if the alternative wages are stochastic the second best contract emerges as a trade off between productive efficiency and risk sharing workers who voluntarily search are fewer and workers who search are less likely to quit if the search effort is not monitored even fewer workers search

fiscal policy in the new neoclassical synthesis we analytically derive the cyclical effects of fiscal policy shocks in a new neoclassical synthesis model price stickiness has the consequence that a rise in government demand affects labor demand while at the same time the usual wealth effect boosts labor supply the strength of the demand effect depends on the response of the real interest rate governed by the monetary policy regime when the central bank controls money growth fiscal expansions are deflationary and might even be contractionary whereas output wages and inflation can increase when the rise in the real interest rate is dampened by an interest rate rule however price stickiness alone is not sufficient to explain a rise in consumption as predicted by keynesian theory

on the informational content of wage offers this article investigates signaling and screening roles of wage offers in a single play matching model with two sided unobservable characteristics it generates the following predictions as matching equilibrium outcomes i good jobs offer premia if high quality worker population is large ii bad jobs pay compensating differentials if the proportion of good jobs to low quality workers is large iii all firms may offer a pooling wage in markets dominated by high quality workers and firms or iv gresham s law prevails good types withdraw if bad types dominate the population the screening signaling motive thus has the potential of explaining a variety of wage patterns

how fast do economics converge the conventional approach to estimating how fast economics converge examines the cross economy relationship between the growth rate of per capita output over some time period and its initial level this approach produces consistent estimates only under highly restrictive assumptions which are violated by the data the paper develops an alternative approach that produces consistent estimates under weak assumptions this approach yields estimates substantially larger than those reported in the literature and also sufficiently large to be broadly consistent with the predictions of neoclassical growth theory

the fiscal theory of the price level a critique abstract this paper argues that the fiscal theory of the price level ftpl has feet of clay the source of the problem is a fundamental economic misspecification the ftplconfuses two key building blocks of a model of a market economy budgetconstraints which must be satisfied identically and market clearing or equilibriumconditions the ftpl asssumes that the government s intertemporal budgetconstraint needs to be satisfied only in equilibrium this economic misspecification has far reaching implications for the mathematicalproperties of the equilibria supported by models that impose the structure of theftpl it produces a rash of contradictions and anomalies jel classifications e31 e41 e51 e52 e62 e63 key words fiscal theory of the price level ricardian fiscal financial monetaryprogrammes government budget constraint price level indeterminacy author willem h buiter european bank for reconstruction and development oneexchange square london ec2a 2jn uktel 44 20 73386805fax 44 20 73386110 6111e mail buiterw ebrd comweb page http www nber org wbuiter index htm

interaction between knowledge and technology a contribution to the theory of development this article attempts to explain the large and persistent disparities in levels of output per worker across countries it is argued that an explanation for these disparities requires an understanding of the relationship between knowledge and technology the model that is constructed can be summarized as an open economy version of the solow swan growth model in which technological change is investment specific and knowledge about new technologies is embodied in labour in the model income differences arise because poor countries lack the knowledge to implement foreign technologies productively furthermore these disparities persist when countries differ in their ability to learn jel

re examination of convergence hypothesis among indian states in panel stationarity testing framework with structural breaks abstractthis article examines the conditional income convergence hypothesis for 17 major states in india for the period of 1960 2012 univariate stationarity tests without structural breaks provide evidence against the convergence hypothesis however when two or more structural breaks are applied in per capita income series the incomes of around 11 13 states are found to stochastically converge to the national average this finding supports the convergence hypothesis for the panel as a whole after accounting for two data features cross sectional dependence and structural breaks in incomes using a unified panel stationarity testing framework

the transitional dynamics of fiscal policy long run capital accumulation and growth this paper analyzes the effects of fiscal policies in a non scale growing economy with public and private capital the equilibrium dynamics are characterized and we contrast the dynamic effects of government expenditure on investment and expenditure on consumption under four alternative modes of tax financing most of our attention focuses on the numerical simulations of a calibrated economy the results emphasize the lengthy transition periods which implies that policies have sizeable level effects leading to substantial welfare effects even though long run growth rates are unaffected the paper highlights the intertemporal dimensions of fiscal policy and the tradeoffs these involve for economic performance especially growth and welfare

debt nonneutrality policy interactions and macroeconomic stability we study the consequences of non neutrality of government debt for macroeconomic stabilization policy in an environment where prices are sticky assuming transaction services of government bonds ricardian equivalence fails because public debt has a negative impact on its marginal rate of return and thus on private savings stability of equilibrium sequences requires a stationary evolution of real public debt which steers inflation expectations and rules out endogenous fluctuations under anti inflationary monetary policy regimes macroeconomic fluctuations tend to decrease with the share of tax financing which justifies tight debt constraints in particular a balanced budget policy stabilizes the economy under cost push shocks such that output and inflation variances can be lower than in a corresponding case where debt is neutral

interest rate rules and price determinacy the role of transactions services of bonds abstract interest rate rules have been associated with price indeterminacy when they do not respond aggressively enough to inflation price indeterminacy is typically associated with indeterminacy of real bond balances suggesting that the missing element is a meaningful role for government bonds we assume that government bonds provide arbitrarily small transactions services and show that this can dramatically change the local and global determinacy conditions in particular the specification of fiscal policy affects the aggressiveness with which monetary policy must respond to inflation to deliver local determinacy a range of passive monetary policies even an interest rate peg may yield determinacy

the fiscal myth of the price level i examine the fiscal theory of the price level according to which non ricardian policy and predetermined nominal government debt fiscally determine prices i argue that the non ricardian policy

federal state and local governments evaluating their separate roles in us growth we use us county level data from 1970 to 1998 to explore the relationship between economic growth and government employment at three levels federal state and local increases in federal state and local government employments are all negatively related to economic growth we find no evidence that government is more efficient at lower levels while we cannot separate out the productive and redistributive services of government we document that the county level income distribution became slightly more unequal from 1970 to 1998 we conclude that a release of government employed labor inputs to the private sector would be growth enhancing

signalling ability to pay and rent sharing dynamics abstract it is often argued that competitive and rent sharing models of wage determination should be distinguished by their long run properties in general rent sharing models predict the existence of a long run relationship between wages and firm specific ability to pay but the competitive model does not i present a two period counter example which demonstrates that rent sharing can be merely a short run phenomenon in the separating equilibria the firm signals ability to pay through first but not second period wage offers the model also has pooling equilibria in which the firm pays rents in the long run

optimal fiscal and monetary policy under sticky prices this paper studies optimal fiscal and monetary policy under sticky product prices the theoretical framework is a stochastic production economy without capital the government finances an exogenous stream of purchases by levying distortionary income taxes printing money and issuing one period nominally risk free bonds the main findings of the paper are first for a miniscule degree of price stickiness i e many times below available empirical estimates the optimal volatility of inflation is near zero this result stands in stark contrast with the high volatility of inflation implied by the ramsey allocation when prices are flexible the finding is in line with a recent body of work on optimal monetary policy under nominal rigidities that ignores the role of optimal fiscal policy second even small deviations from full price flexibility induce near random walk behavior in government debt and tax rates third sluggish price adjustment raises the average nominal interest rate above the one called for by the friedman rule finally an interest rate feedback rule whereby the nominal interest rate depends on inflation and output fits well the data emanating from the ramsey economy however the fitted rule is not of the taylor type for the implied inflation coefficient is less than one and close to zero and the output coefficient is negative jel classification e52 e61 e63

taxation and income distribution dynamics in a neoclassical growth model we examine how changes in tax policies affect the dynamics of the distributions of wealth and income in a ramsey model in which agents differ in their initial capital endowment the endogeneity of the labor supply plays a crucial role in determining inequality as tax changes that affect hours of work will affect the distribution of wealth and income reinforcing or offsetting the direct redistributive impact of taxes our results indicate that tax policies that reduce the labor supply are associated with lower output but also with a more equal distribution of after tax income we illustrate these effects by examining the impact of recent tax changes observed in the us and in european economies

equilibrium long term labor contracts the paper presents a labor market equilibrium analysis of implicit contract theory a two period single good model is used to propose consistent notions of labor market equilibrium for long term employment contracts both when labor is specialized and cannot move in the second period and when there is free mobility without costs the result that long term contracts emerge in equilibrium even without mobility costs is novel and contrary to common beliefs the main features of equilibrium are that risk neutral firms will insure risk averse workers against downside risk yielding downward rigid wages wages are not fully rigid as in earlier work on contract theory because workers may quit and wages have to be bid up to retain them the firm gets its return of the insurance deal by paying less than marginal product in the first period the resulting equilibrium is second best and lies between productive efficiency and full insurance workers gain from long term contracts in comparison to spot markets whereas owners may not in the model with specialized skills there exist transfer payments such that both parties are better off within an equilibrium with long term contracts

optimal severance pay with incomplete information this paper contrasts optimal employment contracts in a world of full information and in a world in which the worker s alternative employment possibilities cannot be observed by the firm the difference between income and severance pay that is the opportunity cost of separating will be higher in more productive states of nature with complete wage insurance no longer possible we therefore have an explanation of higher ability individuals receiving high wages in the short run in long term contracts the explanation does not rely as past explanations have done on the imperfections in bonding arrangements or in loan markets

how does labor mobility affect income convergence abstract labor mobility is introduced into the neoclassical growth model for a small open economy with capital intensity below its steady state level outmigration directly contributes to faster income convergence but also creates a disincentive for gross capital investment at low relative income levels the latter disincentive effect tends to dominate so that labor mobility can actually slow the speed of income convergence

monetary policy rules in theory and in practice evidence from the uk and the us given the large amount of interaction between research on monetary policy and its practice this article examines whether some simple monetary policy rules that have been proposed in the academic literature part of which has originated from within central banks provide a reasonable characterization of actual policy in the united kingdom and the united states the article finds the simple rule that describes best the actual us monetary policy is a speed limit rule with dynamics whilst for the uk it is a forward looking rule the simpler dynamics in the uk s monetary policy rule are reflective of the lower persistence of inflation as a result of its policy of inflation targeting

does trade openness matter for aggregate instability abstract this paper presents a cash in advance model of a small open economy and shows that whether an inflation targeting interest rate rule introduces aggregate instability depends in general on the degree of openness to international trade this result emerges regardless of whether prices are sticky or flexible in a closed economy as the monetary authority responds to movements in inflation the resulting changes in interest rates affect aggregate consumption through an intertemporal substitution effect and an inflation tax effect in a small open economy this policy also induces changes in the terms of trade which depending on the degree of openness can generate counteracting effects on consumption as a consequence the implications of interest rate rules on macroeconomic stability in an open economy differ from those in a closed economy

does it matter for equilibrium determinacy what price index the central bank targets what inflation rate should the central bank target we address determinacy issues related to this question in a two sector model in which prices can differ in equilibrium we assume that the degree of nominal price stickiness can vary across the sectors and that labor is immobile the contribution of this paper is to demonstrate that a modified taylor principle holds in this environment if the central bank elects to target sector one and if it responds with a coefficient greater than unity to price movements in this sector then this policy rule will ensure determinacy across all sectors the results of this paper have at least two implications first the equilibrium determinacy criterion does not imply a preference to any particular measure of inflation second since the taylor principle applies at the sectoral level there is no need for a taylor principle at the aggregate level