time consistent public policy in this paper we study how a benevolent government that cannot commit to future policy should trade off the costs and benefits of public expenditure we characterize and solve for markov perfect equilibria of the dynamic game between successive governments the characterization consists of an inter temporal first order condition a generalized euler equation for the government and we use it both to gain insight into the nature of the equilibrium and as a basis for computations for a calibrated economy we find that when the only tax base available to the government is capital income an inelastic source of funds at any point in time the government still refrains from taxing at confiscatory rates we also find that when the only tax base is labour income the markov equilibrium features less public expenditure and lower tax rates than the ramsey equilibrium

keynes uncertainty and interest rates uncertainty plays an important role in the general theory particularly in the theory of interest rates keynes did not provide a theory of uncertainty but he did make some enlightening remarks about the direction he thought such a theory should take i argue that some modern innovations in the theory of probability allow us to build a theory which captures these keynesian insights if this is the right theory however uncertainty cannot carry its weight in keynes s arguments this does not mean that the conclusions of these arguments are necessarily mistaken in their best formulation they may succeed with merely an appeal to risk employment was a problem because investment was and investment was problematic because of the uncertainty of its return shapiro 1997 83 keynes clearly saw an important role for uncertainty in his general theory however few contemporaries agreed with him and subsequent keynesians generally obliterated the distinction between risk and uncertainty in part this was caused by keynes s informal presentation of his views on uncertainty in the general theory this paper has two aims the first is to sketch a formal theory of uncertainty which captures keynes s insights about the risk uncertainty distinction i argue that the theory of imprecise probabilities developed in recent years best captures keynes s intuitions about uncertainty in particular this theory provides a formal distinction between risk and uncertainty and allows for an analysis of keynes s weight of arguments however the second aim is to show that if this is right then keynes was wrong to draw the economic consequences of uncertainty that he did in broad terms i argue that uncertainty is economically impotent it only has effects in conjunction with some other feature of models or the world such as missing markets or agent irrationality but these features plus the existence of risk are sufficient to get the conclusions keynes wants these conclusions of keynes might be right but if so they can be justified without reference to keynesian uncertainty at the end of the day uncertainty is not as economically interesting as it appears

post keynesianism meets feminist economics this article explores the relationships between post keynesian economics and feminist economics it distinguishes three key concepts in each tradition that recommend serious attention in the other tradition gender the household and unpaid work and caring as key concepts in feminist economics uncertainty market power and endogenous dynamics as core concepts in post keynesian economics this article will show with reference to the literature in which such cross fertilisation has been explored already how both traditions can be enriched from a stronger mutual engagement

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

unemployment hysteresis and the natural rate hypothesis i introduction rod cross et al university of st andrews ii reflections on hysteresis and the natural rate 1 the irrelevance of the natural rate lawrence summers harvard university 2 on the history of hysteresis rod cross university of st andrews iii the characteristics of the unemployed 1 unemployment vacancies and the long term unemployed peter smith l b s paul levine south bank polytechnic alan budd l b s 2 characteristics of the long term unemployed evidence from the labour force survey stephen creigh department of employment 3 is unemployment irreversible peter r hughes department of employment gillian hutchinson queen mary college london iv analysis of hysteresis effects 1 union activity and wage employment movements assar lindbeck institute for international studies university of stockholm and dennis snower birkbeck college london 2 a simple model of imperfect competition with walrasian features huw dixon birkbeck college london 3 unemployment and worker quality simon price university of bristol 4 screening in labour markets with heterogeneous workers inge schnell university of bonn and l s e iv hysteresis effects and the explanation of aggregate unemployment 1 testing for multiple natural rates of unemployment in the british economy alan carruth university of kent and andrew oswald centre for labour economics l s e 2 why is wage inflation in britain so high stephen nickell university of oxford 3 phillips curve estimates incorporating a natural rate with hysteresis effects david coe o e c d 4 hysteresis and european unemployment olivier blanchard m i t and lawrence summers harvard university 5 the natural rate empirical fact or theoretical straitjacket tim jenkinson merton college oxford iv panel discussion the implications of hysteresis effects for unemployment policy 1 david stanton employment market research unit department of employment 2 charles adams i m f 3 marcus miller university of warwick 4 peter mcgregor fraser of allander institute university of strathclyde

time consistent consumption taxation abstract we characterise optimal tax policies when the government has access to consumption taxation and cannot credibly commit to future policies we consider a neoclassical economy where factor income taxation is distortionary within the period due to endogenous labour and capital utilisation and non tax deductibility of depreciation contrary to the case where only labour and capital income are taxed the optimal time consistent policies with consumption taxation are remarkably similar to their ramsey counterparts the welfare gains from commitment are negligible while they are substantial without consumption taxation further the welfare gains from taxing consumption are much higher without commitment

is probability theory relevant for uncertainty a post keynesian perspective stable url http links jstor org sici sici 0895 3309 28199124 295 3a1 3c129 3aiptrfu 3e2 0 co 3b2 gthe journal of economic perspectives is currently published by american economic association your use of the jstor archive indicates your acceptance of jstor s terms and conditions of use available athttp www jstor org about terms html jstor s terms and conditions of use provides in part that unless you have obtainedprior permission you may not download an entire issue of a journal or multiple copies of articles and you may use content inthe jstor archive only for your personal non commercial use please contact the publisher regarding any further use of this work publisher contact information may be obtained athttp www jstor org journals aea html each copy of any part of a jstor transmission must contain the same copyright notice that appears on the screen or printedpage of such transmission the jstor archive is a trusted digital repository providing for long term preservation and access to leading academicjournals and scholarly literature from around the world the archive is supported by libraries scholarly societies publishers and foundations it is an initiative of jstor a not for profit organization with a mission to help the scholarly community takeadvantage of advances in technology for more information regarding jstor please contact support jstor org http www jstor orgsun feb 17 13 40 22 2008

monetary anticipations and the demand for money reply to mackinnon and milbourne abstract mackinnon and milbourne 1984 in an extended comment on carr and darby 1981 claim that money supply shocks do not enter the money demand function for the united states this reply discusses the economic and econometric errors which led to this conclusion and presents further empirical evidence in support of our approach

money and prices evidence from the g7 countries this paper examines the exogeneity of money and prices within a money demand vector error correction model the exogeneity of the variables is central to several buffer stock models however the paper makes two modifications to the traditional approach the first is to explicitly acknowledge the importance of the supply of money function by including the function alongside its demand counterpart the second is to estimate the behaviour of the nominal sector and real sector simultaneously overall the results from the g7 countries suggest that the concerns raised by buffer stock models are relevant

the triumph of monetarism the story of 20th century macroeconomics begins with irving fisher in his books appreciation and interest 1896 the rate of interest 1907 and the purchasing power of money 1911 fisher fueled the intellectual fire that became known as monetarism but what has happened to monetarism at the end of the 20th century the short answer is that much of this current of thought is still there but its insights pass under another name we may not all be keynesians now but the influence of monetarism on how we all think about macroeconomics today has been deep pervasive and subtle why then do we today talk much more about the new keynesian economists than about the new monetarist economists i believe that to answer this question we need to look at the history of monetarism over the 20th century one fruitful way to look at the history of monetarism is to distinguish between four different variants or subspecies of monetarism that emerged and for a time flourished in the century just past first monetarism old chicago monetarism high monetarism and political monetarism

the politics of fdi expropriation i examine the role of political instability and fractionalization as potential explanations for the lack of capital flows from rich countries to poor countries i e the lucas paradox using panel data from 1984 to 2014 i document that i developed countries exhibit larger inflows of foreign direct investment fdi ii countries subject to high investment risk ir receive low fdi inflows and iii ir is higher in fractionalized and politically unstable economies these findings suggest a negative relationship between political instability and fdi through the ir channel i inspect the theoretical mechanism using a dynamic political economy model of redistribution wherein policymakers can expropriate resources from foreign investors the proceeds are used to finance group specific transfers to domestic workers but hinder economic growth by discouraging fdi i show that the political equilibrium exhibits overexpropriation and underinvestment

cognition market sentiment and financial instability the purpose of this paper is to explore the role for psychology within an open system structural theory of financial instability and to consider the implications for policy while behavioural finance has drawn on ideas from psychology in order to explain evidence of behaviour that deviates from the rationality axioms it is argued that the way in which psychology is framed by this approach is unduly limiting minsky s structural theory of financial instability with its keynesian and ultimately humean roots incorporates psychology into the theoretical foundations in particular cognition and sentiment are shown to be interconnected rather than separable it is concluded that the policy implications for addressing the current crisis while apparently similar between these different approaches are in fact very different the underlying theory involves different methodology and indeed different framing from behavioural finance the way in which the crisis is understood is therefore important for policy copyright the author 2010 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

post keynesian employment analysis and the macroeconomics of oecd unemployment the post keynesian hereafter pk theory of employment is derived from keynes s chapter 3 1936a the principle of effective demand where labour hire demand is derived from an effective demand point determined in the product markets 1 tobin 1992 p 392 states this chapter is the most important innovation of the general theory the effective demand principle means that there is an employment function keynes 1936a chapter 20 relating alternate labour hire decisions to alternate points of effective demand there is no aggregate demand for labour schedule with the real wage as the independent variable davidson 1983

structural analysis of cointegrating vars this survey uses a number of recent developments in the analysis of cointegrating vector autoregressions vars to examine their links to the older structural modelling traditions using autoregressive distributed lag ardl and simultaneous equations models sems in particular it emphasizes the importance of using judgement and economic theory to supplement the statistical information after a brief historical review it sets out the statistical framework discusses the identification of impulse responses using the generalized impulse response functions reviews the analysis of cointegrating vars and highlights the large number of choices applied workers have to make in determining a specification in particular it considers the problem of specification of intercepts and trends and the size of the var in more detail and examines the advantages of the use of exogenous variables in cointegration analysis the issues are illustrated with a small u s macroeconomic model

the short run demand for money a reconsideration the partial adjustment approach to the specification of the short run demand for money has dominated the literature for more than a decade there are three basic problems with this approach first the same lag structure is imposed on all variables and each independent variable enters only as a current value in contrast a rational individual would respond to different variables income interest rates prices with quite different lags second when the general price levelis subject to gradual adjustment hut can move quickly in response to supply shocks the influence of these supply shocks should enter with a negative sign third the estimated equation for real balances may not be a money demand equation at all but rather its coefficients may represent a shifting mixture of demand and supply responses the empirical work examines several alternative dynamic specifications including a generalized partial adjustment framework and the error correction model both of the latter specifications exhibit greater structural stability after 1973 than the standard partial adjustment specification and the generalized partial adjustment model also yields relatively small errors in post sample dynamic simulations shifts in coefficients as the sample period is extended after 1973 are consistent with the interpretation that the real balance equation no longer traces out structural demand parameters hut rather a mixture of demand and supply responses this abstract was borrowed from another version of this item

keynesian uncertainty and liquidity preference in his economic writings keynes hints that his liquidity preference analysis is informed by the notion of evidential weight that first appears in his earlier treatise on probability this paper reviews keynes s distinction between probability and evidential weight and offers an account of its influence in his later work on the incentive to hold liquid assets alternative representations of the keynesian uncertainty liquidity preference relation are assessed in the light of this discussion james tobin s mean variance approach the keynesian fundamentalist view of paul davidson and the flexibility approach represented by louis makowski copyright 1994 by oxford university press

buffer stock money interpreting short run dynamics using long run restrictions time series techniques are used to assess the quantitative importance of buffer stock money the short run response of real money holdings to nominal money supply shocks the empirical model a vector autoregression of real and nominal money balances captures general dynamic properties of the time series but requires theoretical restrictions for sensible interpretation the authors just identify the system by imposing a long run neutrality restriction nominal money shocks have no permanent effects on real money they find that buffer stock effects play an important role in the evolution of real m1 in the short run the evidence for m2 is less conclusive copyright 1994 by ohio state university press

politics and economics in weak and strong states abstract while much research in political economy points out the benefits of limited government political scientists have long emphasized the problems created in many less developed nations by weak states which lack the power to tax and regulate the economy and to withstand the political and social challenges from non state actors i construct a model in which the state apparatus is controlled by a self interested ruler who tries to divert resources for his own consumption but who can also invest in socially productive public goods both weak and strong states create distortions when the state is excessively strong the ruler imposes such high taxes that economic activity is stifled when the state is excessively weak the ruler anticipates that he will not be able to extract rents in the future and underinvests in public goods i show that the same conclusion applies in the analysis of both the economic power of the state i e its ability to raise taxes and its political power i e its ability to remain entrenched from the citizens i also discuss how under certain circumstances a different type of equilibrium which i refer to as consensually strong state equilibrium can emerge whereby the state is politically weak but is allowed to impose high taxes as long as a sufficient fraction of the proceeds are invested in public goods the consensually strong state might best correspond to the state in oecd countries where taxes are high despite significant control by the society over the government

what s in a name tony lawson on neoclassical economics and heterodox economics in this article i respond to tony lawson s what is this school called neoclassical economics lawson s paper is provocative because it reformulates neoclassical economics based on veblen s original intent as a mismatch created by recognising the value of an evolutionary approach to the economy whilst remaining over reliant on elements of a taxonomic approach for lawson many heterodox economists may be neoclassical under this description i argue that there is clearly a case to be heard but that the reformulation of the neoclassical raises a number of issues there are issues concerning the specific critique of the current usage of the term neoclassical regarding genealogy and meaning there are specific issues regarding the further development of the new old veblen definition of the neoclassical how clear is the definition in a practical context as a way to identify a neoclassical group based on the commitments of the critique and the definition what does it mean to be more realistic and what is the strategic value of such a provocation for heterodoxy i argue that the combination of these are reasons for more consideration of issues of social ontology not less insofar as the terms of the argument are incomplete and this invites both lawson and those he is criticising to progress the argument particularly on method

time consistent public expenditures in this paper we study the optimal choice of public expenditures when there is no way of committing to future policy and reputational mechanisms are not operative this amounts to conflning our attention to markov equilibria the environment is a neoclassical growth model where consumers derive utility from a public good this environment gives rise to a dynamic game between successive governments and the private sector and this game is made interesting by the presence of a state variable the capital stock we characterize equilibria in terms of an intertemporal flrst order condition a generalized euler equation gee for the government and we use this condition both to gain insight into the nature of the equilibrium and as a basis for computation the gee reveals how the government optimally trades ofi tax wedges over time it also allows us to discuss in what sense a current government may be strategically in uencing future governments in their taxation decisions for a calibrated economy we flnd that when the tax base available to the government is capital income an inelastic source of funds at any moment in time the government still refrains from taxing at high rates in order to smooth distortions over time as a result the economy is far from the mix of public and private goods that would be optimal in a static context in return the savings distortion is not very severe and the capital stock is quite high

time consistent optimal fiscal policy this article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period s capital income tax rate we find that the results contrast markedly with those under full commitment first capital income tax rates are very high 65 on average versus close to zero on average under full commitment second labor income taxes are rather low on average about 12 versus a value of around 31 under full commitment finally labor income taxes are quite volatile whereas under full commitment their standard deviation is essentially zero

ambiguity and uncertainty in ellsberg and shackle this paper argues that the similarities between ellsberg s and shackle s frameworks for discussing the limits of the probabilistic approach to decision theory are more important than usually admitted the paper discusses the grounds on which the ambiguity surrounding the decision maker in ellsberg s urn experiments can be deemed analogous to the uncertainty faced by shackle s entrepreneur taking crucial decisions the two authors insights are assessed and special attention is paid to the criteria for decision under uncertainty they put forward the paper establishes a link between ellsberg s and shackle s perspectives and the non additive probability approach of gilboa and schmeidler an approach that offers an alternative to standard probability calculus which can be of use to analyse both ambiguity and uncertainty the comparison between ellsberg and shackle draws on an interpretation of keynes s treatise on probability emphasising keynes s rejection of both well defined probability functions and maximisation as a guide to human conduct it is shown that keynes s viewpoint implies a reconsideration of the boundaries of probability theory that is in the same vein of ellsberg s and shackle s concern in the years of the consolidation of savage s new probabilistic mainstream copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

uncertainty and money keynes tobin and kahn and the disappearance of the precautionary demand for money from liquidity preference theory keynes answered to critics of the general theory in 1937 that they failed to realize that there were two main innovations in that work the first was the relationship between money demand and uncertainty the second was the consumption multiplier the relation between money demand and uncertainty was in fact the main reason to explain why aggregate demand could fall short of full employment income however this was explained by keynes in 1937 by recourse to a form of precautionary demand for money in the gt keynes had actually merged the precautionary demand into the transactions demand for money making it very difficult for any reader friendly or unfriendly to actually see what he meant in 1937 as a result keynes liquidity preference theory of the interest rate in the gt exhibited some important shortcomings that were the subject of many reexaminations including one by richard kahn and another by james tobin the paper evaluates keynes s views kahn s and tobin s solutions to keynes s dilemmas at its conclusion it is shown why these themes remain relevant today particularly when financial systems are in turmoil copyright the author 2009 published by oxford university press on behalf of the cambridge political economy society all rights reserved oxford university press

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

productive government expenditures and long run growth the purpose of this paper is to review some of the recent developments in endogenous growth models specifically our focus is on the growth effects of productive government spending in dynamic general equilibrium models we use a simple overlapping generations model as our basic framework and illustrate the role of taxes and spending we then examine several related issues nonrivalry in publicly provided goods existence and uniqueness of competitive equilibrium endogenous public policy ways of financing public expenditures composition of publicly provided goods and services and private alternatives finally we review some empirical results related to output elasticity of public capital and educational expenditures

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

is a plumber or a new financial architect needed to end global international liquidity problems how one interprets volatility in the international financial markets and therefore chooses a policy stance regarding these markets depend on the underlying economic theory that one explicitly or implicitly utilizes to explain the role of financial markets in a market oriented entrepreneurial economy there are two major alternative theories of financial markets 1 the classical efficient market theory hereafter emt and 2 keynes s liquidity preference theory hereafter lpt each produces a different set of policy prescriptions emt advocates call for a liquidity plumber to patch up some short run stresses in today s efficient international financial flow system lpt proponents believe that the current system is structurally flawed consequently it will require an architect to build a new international financial structure on more solid foundations

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

ageing government budgets retirement and growth we analyze the short and long run effects of demographic ageing increased longevity and reduced fertility on per capita growth the olg model captures direct effects working through adjustments in the savings rate labor supply and capital deepening and indirect effects working through changes of taxes government spending components and the retirement age in politico economic equilibrium growth is driven by capital accumulation and productivity increases fueled by public investment the closed form solutions of the model predict taxation and the retirement age in oecd economies to increase in response to demographic ageing and per capita growth to accelerate if the retirement age were held constant the growth rate in politico economic equilibrium would essentially remain unchanged due to a surge of social security transfers and crowding out of public investment

the place of portfolio management in the keynesian canon recent publications such as the two volume oxford handbook of post keynesian economics harcourt and kreisler 2013 and the elgar companion to post keynesian economics king 2012 provide authoritative summaries of the current state of the art on a very wide range of relevant topics in particular the contents pages of these books define the field as seen by adherents the obvious implication being that those topics excluded have not yet acquired the necessary status by passing appropriate academic tests of relevance and coherence inter alia the focus of this article portfolio management is on one of these omitted topics starting from the fundamental recognition of uncertainty we examine the whole range of characteristics of the keynesian approach demonstrating the coherence and applicability of its multidimensional nature in the process pointing by contrast to the one dimensional sterility of the conventional approach our general conclusion is that there is a rightful place in the keynesian canon for portfolio management by which we mean not only investment management but also speculative management where these two qualifiers are used in the keynes graham sense

should a monetary policymaker look at money abstract this paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policymaker has incomplete information about the environment we find that money does not contain useful information for the policymaker if we calibrate the model to the u s economy if money demand were to be appreciably less variable observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks we provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases

public investment in infrastructure in a simple growth model abstract in this paper we examine the implications for capital accumulation when infrastructure enters as an external input into private production functions in our model infrastructure is nonexclusive but may exhibit varying degrees of nonrivalry revenues from uniform taxes on capital and labor income are used to finance public investment in infrastructure we show that the optimal tax rate is independent of the degree of nonrivalry when production exhibits constant returns to augmentable factors the equilibrium displays constant growth for most parameters the growth rate depends on the population size under decreasing returns the optimal trajectory exhibits monotonic convergence to a steady state level

the causal direction between money and prices abstract causality is viewed as a matter of control controllability is captured in simon s analysis of causality as an asymmetrical relation of recursion between variables in the unobservable data generating process tests of the stability of marginal and conditional distributions for these variables can provide evidence of causal ordering the causal direction between prices and money in the united states 1950 1985 is assessed the balance of evidence supports the view that money does not cause prices and that prices do cause money

how the world achieved consensus on monetary policy the worldwide progress in monetary policy is a great achievement and especially considering the situation 30 years ago a remarkable success story i describe how the world achieved a working consensus on the core principles of monetary policy by the late 1990s i survey the muddled state of affairs in the 1970s and then ask what happened in federal reserve policy to produce an understanding of the practical principles of monetary policy how did formal institutional support for targeting low inflation abroad follow from an international acceptance of these ideas and how did a consensus theoretical model develop in academia i explain how the modern theoretical consensus known alternatively as the new neoclassical synthesis or the new keynesian model of monetary policy reinforces key advances the priority for price stability the targeting of core rather than headline inflation the importance of credibility for low inflation and preemptive interest rate policy supported by transparent objectives and procedures of course a working consensus does not constitute complete agreement accordingly the conclusion identifies important monetary policy issues that remain to be explored

indicator variables for optimal policy under asymmetric information the optimal weights on indicators in models with partial information about the state of the economy and forward looking variables are derived and interpreted both for equilibria under discretion and under commitment the private sector is assumed to have more information about the state of the economy than the policymaker certainty equivalence holds for the optimal reaction function in state space form t he coefficients are independent of the degree of uncertainty about the state of the economy however in the case of commitment certainty equivalence does not hold for the reaction function in integrative form the policy instrument cannot be written as a distributed lag of past estimates of past states of the economy instead optimal policy will generally depend on new estimates of past states of the economy and in ways that depend on the information structure furthermore the usual separation principle does not hold since the estimation of the state of the economy is not independent of optimization and is in general quite complex we present a general characterization of optimal filtering and control in settings of this kind and discuss an application of our methods to the problem of the optimal use of real time macroeconomic data in the conduct of monetary policy

debt inflation and central bank independence abstract increasing the independence of a central bank from political influence although ex ante socially beneficial and initially successful in reducing inflation would ultimately fail to lower inflation permanently the smaller anticipated policy distortions implemented by a more independent central bank would induce the fiscal authority to decrease current distortions by increasing the deficit over time inflation would increase to accommodate a higher public debt by contrast imposing a strict inflation target would lower inflation permanently and insulate the primary deficit from political distortions

economic policies and demand for money evidence from canada this study identifies canadian fiscal and monetary policy regime changes that could influence the services of money it is argued that if these policy regime changes were not incorporated in the estimation of demand for real balances the resulting estimate would be biased and unstable using canadian monthly data for the january 1975 to june 2001 period the paper estimates a standard demand for money m1 function with and without these policy regime changes it was found the demand for money in canada is stable over the short and long run periods when these policy regime changes are incorporated and the estimated coefficients have correct signs

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

ecological threshold and ecological economic threshold implications from an ecological economic model with adaptation abstract this paper investigates ecological threshold and ecological economic threshold by developing an ecological economic model an extension of a population resource dynamics model developed by brander and taylor 1998 the model reflects three critical issues regarding an ecological economic system system boundary non convexity and adaptation the paper elucidates six main findings ecological economic threshold may come before ecological threshold the ecological economic threshold may exhibit a highly context dependent and dynamic nature which suggests the precautionary principle markets do not respond sufficiently to maintain resiliency under an external shock as prices do not reflect thresholds the system can be restored by intervention even after crossing the ecological economic threshold various transitional paths are possible in restoring the system and adaptation affects resilience to a somewhat significant effect which suggests the importance of better information and education because of the complexity of the model i adopt a system dynamics approach for the development and analysis of the model

a dynamic theory of public spending taxation and debt this paper presents a dynamic political economy theory of public spending taxation and debt policy choices are made by a legislature consisting of representatives elected by geographically defined districts the legislature can raise revenues via a distortionary income tax and by borrowing these revenues can be used tofinance a national public good and district specific transfers interpreted as pork barrel spending the value of the public good is stochastic reflecting shocks such as wars or natural disasters in equilibrium policy making cycles between two distinct regimes business as usual in which legislators bargain over the allocation of pork and responsible policy making in which policies maximize the collective good transitions between the two regimes are brought about by shocks in the value of the public good in the long run equilibrium tax rates are too high and too volatile public good provision is too low and debt levels are too high in some environments a balanced budget requirement can improve citizen welfare

information expectations and monetary policy keynes s and friedman s complementary lessons for today this paper considers what lessons there might be for our contemporary monetary consensus in keynes s and friedman s respective policy principles i focus first on the expectations issue for both keynes and friedman monetary policy aims at the stabilisation of expectations and in both cases major issues arise for knowledge and uncertainty although each conceives this in a different manner next i deal with the core of monetary policy principles while keynes s approach is at odds with our modern strategy of inflation targeting friedman would warn us that even in this case interest rate manipulation might not be the appropriate approach the analysis concludes with the issue of interest rate determination the issue of intertemporal coordination and financial stability policy principles are always rooted in theoretical investigation keynes s approach is based upon an analysis of intertemporal coordination failures whereas friedman s policy schemes require that financial markets be made perfectly competitive

inflation and central bank independence a meta regression analysis using 59 studies we perform a meta regression analysis of studies examining the relationship between inflation and central bank independence cbi the studies considered are very different with respect to the cbi indicator used the sample of countries and time periods covered model specification estimators used and publication outlet we conclude that there is a significant publication bias however we also find a significant genuine effect of cbi on inflation differences between studies are not caused by differences in cbi indicators used

roads to prosperity assessing the link between public capital and productivity does the positive correlation between infrastructure and productivity reflect causation if so in which direction the author finds that when growth in roads the largest component of infrastructure changes productivity growth changes disproportionately in u s industries with more vehicles that vehicle intensive industries benefit more from road building suggests that roads are productive at the margin however road investments do not appear unusually productive intuitively the interstate system was highly productive but a second one would not be road building thus explains much of the productivity slowdown through a one time unrepeatable productivity boost in the 1950s and 1960s

optimal taxation and spending in general competitive growth models abstract we find that the optimal long run tax on capital income is zero even if the capital stock does not converge to a steady state nor to a steady state growth rate the optimal tax on human capital is also zero if human capital is not a final good but the long run wage tax is not generally zero we argue that consumption tax proposals such as the flat tax are not consumption taxes and are biased against human capital

equilibrium welfare and government policy with quasi geometric discounting abstract we consider a representative agent equilibrium model where the consumer has quasi geometric discounting and cannot commit to future actions we restrict attention to a parametric class for preferences and technology and solve for time consistent competitive equilibria globally and explicitly we then characterize the welfare properties of competitive equilibria and compare them to that of a planning problem the planner is a consumer representative who without commitment but in a time consistent way maximizes his or her present value utility subject to resource constraints the competitive equilibrium results in strictly higher welfare than the planning problem whenever the discounting is not geometric journal of economic literature classification numbers e21 e61 e91

the long run link between money growth and inflation is inflation always a monetary phenomenon many economists believe that the link between money growth and inflation in the u s has weakened over the last two decades due in part to the federal reserve s policy experiment in 1979 1982 and innovations in the financial sector of the economy i find that the long run relationship between money growth and inflation is strong in a statistical sense and important economically the key result is that the trend or growth component in cpi inflation is entirely due to the trend component of monetary base growth jel c32 e31 e51

the role of money supply shocks in the short run demand for money abstract previous money demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest rate fluctuations in response to innovations in nominal money we propose a shock absorber money demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings expected changes do not engender such fluctuations in real money inventories in simultaneous estimates for eight industrial countries the shock absorber model proved empirically superior

are grains of sand in the wheels of international finance sufficient to do the job when boulders are often required this paper criticises the effectiveness of a tobin tax in acting as a deterrent to short run round trip speculation on exchange rate movements it is demonstrated that given the usual magnitude of a proposed tobin tax the deterrent to short term speculation will be negligible and in all likelihood smaller than the deterrent to real trade flows and arbitrage activities finally an alternative proposal for preventing currency speculations while creating incentives for global full employment based on keynes s 1940s writings is proposed

optimal fiscal policy public capital and the productivity slowdown abstract this paper develops a quantitative theoretical model for the optimal provision of public capital we show that the ratio of public to private capital in the us economy since 1925 evolves in a manner that is broadly consistent with an optimal transition path derived from a simple growth model the model is used to quantify the conditions under which an increase in the stock of public capital is desirable and to investigate the degree to which nonoptimal fiscal policies can account for the us productivity slowdown

economic history and economics i have in the back of my mind a picture of the sort of discipline economics ought to be or at least the sort of discipline i wish it were if economics were practiced in that way there would be nothing problematical about its reciprocal relationship with economic history it would be pretty clear what it is that economic theory offers to economic history and what economic history offers to economic theory i will try to describe what i mean below for better or worse however economics has gone down a different path not the one i have in mind one consequence not the most important one but the one that matters for this discussion is that economic theory learns nothing from economic history and economic history is as much corrupted as enriched by economic theory i will come to that too later on you will notice that i am using strong language i am prepared to admit right away that i may be dead wrong in my judgements but there is no point in pussyfooting bluntness may lead to an interesting discussion after all no one would remember the old german historical school if it were not for the famous methodenstreit actually no one remembers them anyway there must be a lesson in that to get right down to it i suspect that the attempt to construct economics as an axiomatically based hard science is doomed to fail there are many partially overlapping reasons for believing this but since that is not the topic under discussion today i do not have to lay them out in an orderly way i hope the following hodgepodge will convey what i mean a modern economy is a very complicated system since we cannot conduct controlled experiments on its smaller parts or even observe them in isolation the classical hardscience devices for discriminating between competing hypotheses are closed to us the main alternative device is the statistical analysis of historical time series but then another difficulty arises the competing hypotheses are themselves complex and subtle we know before we start that all of them or at least many of them are capable of fitting the data in a gross sort of way then in order to make more refined distinctions we need long time series observed under stationary conditions unfortunately however economics is a social science it is subject to damon runyon s law that nothing between human beings is more than three to one to express the point more formally much of what we observe cannot be treated as the realization of a stationary stochastic process without straining credulity moreover all narrowly economic activity is embedded in a web of social institutions customs beliefs and attitudes concrete outcomes are indubitably affected by these background factors some of which change slowly and gradually others erratically as soon as time series get long enough to offer hope of discriminating among complex hypotheses the likelihood that they remain stationary dwindles away and the noise level gets correspondingly high under these circumstances a little cleverness and persistence can get you almost any result you want i think that is why so few econometricians have ever been forced by the facts to abandon a firmly held belief indeed some of fortune s favorites have been known to write scores of empirical articles without once feeling obliged to report a result that contradicts their prior prejudices if i am anywhere near right about this the interests of scientific economics would be better served by a more modest approach there is enough for us to do without pretending to a degree of completeness and department of economics massachusetts institute of technology cambridge ma 02139

some reflections on keynes s finance motive for the demand for money this essay offers a fresh interpretation of keynes s finance motive some competing interpretations are assessed which it is argued are inconsistent with the conceptual framework of keynes s monetary analysis the finance motive is interpreted as an intrinsically dynamic conception which displays important aspects of keynes s monetary thought not brought out in the current macroeconomic paradigm the essay attempts to show that liquidity preference theory should be understood in a dynamic context as a theory of financial intermediation 1995 academic press limited

is public expenditure productive abstract this paper considers the relationship between aggregate productivity and stock and flow government spending variables the empirical results indicate that i the nonmilitary public capital stock is dramatically more important in determining productivity than is either the flow of nonmilitary or military spending ii military capital bears little relation to productivity and iii a core infrastructure of streets highways airports mass transit sewers water systems etc has most explanatory power for productivity the paper also suggests an important role for the net public capital stock in the productivity slowdown of the last fifteen years

on the size of u s government political economy in the neoclassical growth model we study a dynamic version of meltzer and richard s median voter model of the size of government taxes are proportional to total income and they are redistributed as equal lump sum transfers voting takes place periodically over time and each consumer votes for the tax rate that maximizes his equilibrium utility we calibrate the model to u s data key elements in the calibration are the income and wealth distribution and the parameters governing the leisure and consumption choices the total size of transfers predicted by our political economy model is quite close to the size of transfers in the data

median voter equilibria in the neoclassical growth model under aggregation we study a dynamic version of meltzer and richard s median voter model where agents differ in wealth taxes are proportional to income and are redistributed as equal lump sum transfers voting occurs every period and each consumer votes for the tax that maximizes his welfare we characterize time consistent markov perfect equilibria twofold first restricting utility classes we show that the economy s aggregate state is mean and median wealth second we derive the median voter s first order condition interpreting it as a tradeoff between distortions and net wealth transfers our method for solving the steady state relies on a polynomial expansion around the steady state

barriers to investment in polarized societies i present a tractable dynamic model of political economy where disagreements about the composition of public spending result in implementation of short sighted policies the relative price of investment to consumption is excessively large in equilibrium due to over taxation investment rates are too low which slows down growth along the transition in the long run this results in output consumption and welfare being inefficiently low the larger is the degree of polarization the greater is the inefficiency political stability mitigates the effects of polarization by making the incumbent internalize the dynamic inefficiencies introduced by the choice of growth retarding policies

government policy in monetary economies i study how the specic details of a micro founded monetary economy aect the determination of government policy i consider three variants of the lagos wright monetary framework a benchmark were all markets are competitive a case which allows for nancial intermediaries and a case with trading frictions although intitutions frictions are shown to have a signicant structural impact in the determination of policy the calibrated articial economies are observationally equivalent in steady state the policy response to aggregate shocks is qualitatively similar in the variants considered however there are signicant quantitative dierences in the response of government policy to productivity shocks mainly due to the idiosyncratic behavior of money demand the variants with no trading frictions display the best t to u s post war data

democratic public good provision this paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting expenditures are financed through age dependent taxation that distorts human capital investment taxes redistribute income both across skill groups and across generations we focus on politico economic markov equilibria and contrast these with the ramsey allocation under commitment the model features indeterminate equilibria with a key role of forward looking strategic voting due to the lack of commitment to future policies the tax burden may be on the wrong side of the dynamic laffer curve moreover restrictions on government policies can in some cases be welfare improving

choice under uncertainty problems solved and unsolved ffifteen years ago the theory of choice under uncertainty could be considered one of the success stories of economic analysis it rested on solid axiomatic foundations it had seen important breakthroughs in the analytics of risk risk aversion and their applications to economic issues and it stood ready to provide the theoretical underpinnings for the newly emerging information revolution in economics 1 today choice under uncertainty is a field in flux the standard theory is being challenged on several grounds from both within and outside economics the nature of these challenges and of our profession s responses to them is the topic of this paper

fiscal policy in general equilibrium this paper studies four classic fiscal policy experiments within a quantitatively restricted neoclassical model the authors main findings are as follows 1 permanent changes in government purchases can lead to short run and long run output multipliers that exceed one 2 permanent changes in government purchases induce larger effects than temporary changes 3 the financing decision is quantitatively more important than the resource cost of changes in government purchases and 4 public investment has dramatic effects on private output and investment these findings stem from important dynamic interactions of capital and labor absent in earlier equilibrium analyses of fiscal policy copyright 1993 by american economic association

forecasting in a large macroeconomic system this paper examines the efficiency gains yielded from estimating multiple equation cointegrated systems as compared to their single equation counterparts in particular this paper is concerned with the ability of utilizing the cointegrating information to improve forecasting performance recently an inability to improve forecasts of real income once money demand error correction terms were introduced has been used to argue that the m2 relationship had broken down during the early 1990s however the results suggest that once the underlying responses of variables are more closely investigated the behaviour of m2 has remained stable

the heterogeneity of animal spirits a first taxonomy of entrepreneurs with regard to investment expectations investment expectations are highly subjective and subjectivity is inherently diverse we propose an analytical taxonomy of entrepreneurs with regard to investment expectations of how diverse animal spirits are we draw on past research so as to outline the relevant independent classification variables motivations skills management styles and affective traits comprise our four groups of classification variables based on a field study using a sample of 289 entrepreneurs and performing two different cluster analyses we find 11 stable groups of entrepreneurs we portray them as ideal types a la weber there may be major and minor memberships our 11 groups are the neoclassical manager the builder the administrator the paternalistic manager the hero the mogul the prophet the craftsman the inventor the gambler and the explorer

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

is money really exogenous testing for weak exogeneity in swiss money demand although exogeneity is often associated with controllable policy variables engle hendry and richard 1983 show that the one condition is neither necessary nor sufficient for the other whether variables such as monetary aggregates are weakly exogenous depends on the conditioning properties of the data generating process testing exogeneity claims represents an important step in analyzing money demand functions although switzerland adheres to fairly strict monetarist prescriptions we reject the hypothesis that m0 and m1 are weakly exogenous for a price equation our results for m1 support the conventional view in which money market equations reflect the demand for money as the dependent variable copyright 1993 by ohio state university press

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

the buffer stock notion in monetary economics not the least of harry johnson s contributions to our discipline was the series of survey papers on aspects of monetary economics which he produced during the 1960s and 1970s it is no exaggeration to say that the way in which the literature of monetary economics is organised even now follows the design which johnson first set out in 1962 and built on in the subsequent decade nevertheless the subject has not stood still and one of the more interesting developments of the last few years has involved the introduction of what has been variously described as the disequilibrium money shock absorber or as i prefer to call it the buffer stock notion into monetary economics the development of this line of thought was getting underway before johnson s untimely death much of it indeed under the auspices of his own research programme at the lse even so this did not happen early enough for the relevant ideas to be put in their proper niche by johnson himself and the buffer stock approach is not yet fully integrated into the mainstream of monetary economics much of the relevant literature is empirical concerned with modelling particular aspects of the monetary experience of specific countries hence it is fragmented and contains few papers which attempt a coherent account of just what this approach is and how it relates to other approaches to monetary analysis although essays by goodhart 1982a b and judd and scadding 1982a contain important discussions of these issues to the best of my knowledge only jonson 1976a and knoester 1979a have devoted entire papers solely to this central issue and these are relatively inaccessible and hence less widely known than they deserve to be in this lecture i shall attempt to give a brief account of the essentials of this approach first i shall sketch out its microeconomic background and then i shall discuss those theoretical characteristics which differentiate it from the neo austrian analysis of robert e lucas jr and his associates as well as from the conventional keynesian approach to monetary economics last but by no means least i shall argue that it yields simple theoretical insights into important empirical and policy related issues which are troublesome for alternative approaches in short my tribute to harry

some remarks on uncertainty and economic analysis in an important paper lawson i 985 a discusses the conditions under which it is possible to carry out a coherent economic analysis of a system which is subject to fundamental uncertainty as opposed to mathematical risk the issue is crucial for although the fact of uncertainty can hardly be denied it seems to have been extraordinarily difficult to take this into account in formal economic theory it remains in coddington s i982 phrase a troublesome theme since the subject of uncertainty was broached by keynes and by knight in the interwar period the response by economists has fallen into two main categories those whose major interest has been pushing on with the technical analysis have simply ignored it apparently on operational grounds for example a remarkably frank modern statement of the position is to be found in lucas i98i as quoted by lawson i985a p gog on the other hand those economists who have wished to emphasise uncertainty notably shackle and the post keynesians have been rightly or wrongly accused of analytical nihilism coddington i983 p 6i and have certainly not yet provided an alternative theoretical framework which would be persuasive to the majority of the profession against this background lawson seeks to establish the view as he puts it i 985 a p 9 i o that economic analysis can be constructive whilst admitting that we know less about the future than is typically assumed lawson begins his discussion with a re examination of j m keynes early work on probability theory in the treatise on probability i973 b and on the perceived links 1 985 a p 914 between the treatise and keynes later treatment of uncertainty in the context of economics i973a pp 147 64 1973 d pp 109 23 1 given keynes seminal contributions to the literature we would agree that this focus is appropriate but we wish to argue in the present note that the discussion can be usefully extended by consideration of certain issues raised by keynes which are not emphasised in lawson s treatment particularly important in this context is the position which keynes reached on the basic difference in subject matter between the natural sciences and the so called moral sciences and hence on the appropriateness of what he had described in the treatise i973b pp 276 8 as the atomic and organic assumptions as applied to each this is an issue which has attracted the

on keynes s conception of the weight of evidence abstract various modern decision theories seek to capture the intuition behind keynes s conception of evidential weight keynes was nevertheless hesitant about the practical relevance of weight in the process of rational decision making because of the stopping problem of finding a rational principle to decide where to stop the process of acquiring information in forming a probability judgment before making a decision this paper discusses the relevance of the stopping problem by way of an inquiry into the nature properties and implications for rational decision making of keynes s conception of evidential weight it is argued that in practical choice situations the decision maker often decides where to stop the process of acquiring information by following keynes s advice to consider the degree of completeness of the available information before making a decision this method implies that the decision maker is able to arrive at an assessment of the dimension of what may be called her relevant ignorance by considering some examples of how the acquisition of new evidence may affect the decision maker s behaviour it is argued that it is in fact possible to talk reasonably about relevant ignorance or what are sometimes called unknown unknowns and that this concept might explain a range of human behaviours while this concept does not provide a rational principle to solve the stopping problem it does provide a method of inquiry for dealing with a number of paradoxes not solvable within the bayesian approach

uncertainties in macroeconomic assessments of low carbon transition pathways the case of the european iron and steel industry abstract the climate targets agreed in paris 2015 render deep decarbonization of energy and emission intensive industries crucial policy makers are interested in the macroeconomic consequences of such decarbonization pathways and often rely on integrated modelling studies however the underlying modelling assumptions and uncertainties often remain unquestioned or invisible although they may govern the models results for the case of a zero process emission pathway of the european iron and steel industry we demonstrate how different assumptions on different layers of uncertainty influence results we show that effects strongly depend on technology choice prevailing macroeconomic states as well as regional characteristics the underlying socio economic development and the climate policy trajectory seem to play a less important role particularly we find that the choice of model i e which macroeconomic theory strand it arises from influences the sign and magnitude of macroeconomic effects and thus should be well understood in terms of appropriate interpretations by both modelers and policy makers we emphasize that model assumptions should be transparent results sought as to be robust across a range of possible contexts and presented together with the conditions under which they are valid to that end co design and co production in research would support its relevance and applicability

distortionary taxes and public investment when government promises are not enforceable abstract we characterize the optimal financing of productive public capital and compute the welfare loss from being unable to commit to the ramsey policy because this calculation ultimately relies on numerical approximations we contrast alternative approaches while perturbation and linear quadratic methods deliver accurate steady states the latter can yield misleading policy implications during transitions we find that moving from a regime with commitment to one with discretion implies only a small welfare loss although markov perfect consumption falls noticeably short of its ramsey counterpart in steady state consumption under discretion is higher in the short run which largely offsets this long run loss

the new institutional economics and the theory of behaviour under uncertainty the new institutional economics nie is diverse in terms of the theory of behaviour under uncertainty some views are close to neoclassical economics but others are similar to those held by heterodox economists distinctions between procedural and substantive uncertainty weak and strong uncertainty and ambiguity and fundamental uncertainty help to identify different approaches to uncertainty in nie regarding the influence of institutions on economics behaviour not all nie focuses on institutions as constraints and takes individuals as given the dominant views of rationality in nie are standard neoclassical maximization and bounded rationality but alternative notions have also been defended

the nature of heterodox economics heterodoxy serves as an umbrella term to cover the coming together of separate projects or traditions in answering the question what distinguishes heterodoxy from the orthodoxy the author argues that matters of ontology are central in answering the question how are the various traditions that make up the modern heterodoxy to be distinguished from each other the author defends criteria other than varying commitments to specific substantive theories policy measures or techniques or basic units of analysis

public infrastructure investments productivity and welfare in fixed geographic areas abstract measures of the value of public investments are critical inputs into the policy process and aggregate production and cost functions have become the dominant methods of evaluating these benefits this paper examines the limitations of these approaches in light of applied production and spatial equilibrium theories a spatial equilibrium model of an economy with nontraded localized public goods like infrastructure is proposed and a method for identifying the role of public capital in firm production and household preferences is derived empirical evidence from a sample of large us cities suggests that public capital provides significant marginal benefits but the marginal productivity of public capital is low and aggregate city willingness to pay for large increases in public capital is less than their cost the paper concludes with a brief discussion of the political economy of urban infrastructure investment