on the time consistency of optimal capital taxes abstract this paper studies the time inconsistency problem of optimal capital taxes in the absence of full commitment it is well known that debt restructuring cannot solve the time inconsistency problem for economies with a private stock of capital we re examine this result by exploring the role of institutional delays in government policies we show that when the implementation of government policy requires time debt restructuring can enforce commitment to the optimal capital taxes we conclude that since institutional delays characterize democratic decision making the time inconsistency problem of capital taxes is not so severe

bankable permits for the control of environmental pollution abstract intertemporal trading of emission permits banking is often identified as one of three promising market mechanisms for controlling pollution along with averaging and trading surprisingly the efficiency properties of permit banking systems have not been investigated using a simple optimal control model this paper investigates firms incentives for banking or borrowing emission permits and compares the emission and output streams firms would choose with the socially optimal solution we find that in many cases firms will suboptimally choose excessive damage and output levels in early periods and correspondingly too few in later periods if given the opportunity to freely move emissions between time periods we propose a simple alternative trading scheme we term modified banking that counters this problem and should be no more difficult for an environmental authority to implement than a straigth banking system

carbon pass through in the electricity sector an econometric analysis abstract we conduct an econometric analysis to investigate the carbon pass through in the greek electricity sector for this reason we utilize a rich micro level panel dataset including hourly data for 24 thermal power plants spanning the period from january 2014 to december 2017 in order to study the pass through of emissions costs to wholesale electricity prices we employ an instrumental variable approach our findings survived several robustness checks accounting for logged linear and non linear econometric specifications the empirical results indicate the existence of an almost complete pass through revealing that retailers fully internalize the cost of co2 permits this study incurs important policy implications since the complete pass through signify that wholesale electricity prices will increase at least in the short run however the overall effect on retail prices will be mostly affected by the amount of co2 permits and the fuel energy mix

federal borrowing and short term interest rates this paper is an empirical study of the effects of federal government borrowing on short term interest rates it is often taken for granted that increases in federal borrowing cause higher short term rates but little empirical support exists for this assumption in fact this paper demonstrates that federal borrowing is a relatively unimportant and insignificant determinant of short term rates an implication of this result is that financial crowding out effects of government deficit spending may not be overly large postulates about interest rate behavior are the driving force behind many hypotheses of the crowding out literature however these interest rate effects have received relatively little direct attention in this literature this is surprising since as a general rule the stronger the interest rate effect is the stronger the crowding out effect will be an empirical determination of the size of the deficit spending interest rate effect gives some empirical content to the crowding out controversy in section ii of this paper the relationship between federal borrowing interest rates and crowding out is discussed and a loanable funds model of short term interest rates is developed in section iii the regression model is generated and tested the essential result is that variation in three month treasury bill rates is caused by expected inflation changes in the monetary base and by changes in the level of economic activity there is no statistically significant relation between short term interest rates and federal borrowing in section iv additional regression tests are performed which confirm the results in section iii and the problem of simultaneous equation bias is discussed the final part of the paper is a discussion of some implications of the results reported in sections iii and iv

credible public policy abstract credible public policy is defined in a way that incorporates competitive equilibrium behavior for households and subgame perfect nash equilibrium behavior for the government it is shown that the set of all equilibrium outcome paths for credible policies can be constructed by using arguments analogous to those of abreu 1988 for repeated games the results are then extended to systems with state variables simple models of monetary policy and capital taxation are studied by way of example

the economic consequences of federal deficits an examination of the net wealth and instability issues there is currently disagreement over the economic consequences of federal deficits some economists argue that deficits put upward pressure on real interest rates and thereby crowd out interest sensitive private spending others argue that deficits stemming from lump sum tax cuts do not raise interest rates because the response of individuals will be to increase their saving by the full amount of the resulting deficit to enable future generations to service i e make interest and principal payments on the additional debt without curtailing their consumption in other words individuals view debt and taxes as perfect substitutes because debt financed tax cuts imply higher taxes in the future to service that debt this effectively means that there really is no permanent tax cut so there is no increase in private net wealth current consumption or interest rates stated another way the debt that is issued to finance a tax cut does not add to private net wealth because it implies an offsetting future tax liability but if debt is not viewed as implying future tax increases then debt and taxes are not perfect substitutes and increases in debt resulting from tax cuts will indeed add to private net wealth stimulate consumption and raise interest rates 2

inflation and welfare in a monetary economy it is in everyone s private interest to try to get someone else to hold non interest bearing cash and reserves but someone has to hold it all so these efforts must simply cancel out all of us spend several hours per year in this effort and employ thousands of talented and highly trained people to help us these person hours are simply thrown away wasted on a task that should not have to be performed at all

commitment versus discretion in a political economy model of fiscal and monetary policy interaction abstract does price commitment result in lower welfare i pair an independent monetary authority controlling nominal bonds with a fiscal authority microfounded by the political economy model of battaglini and coate 2008 without price commitment time inconsistency is alleviated by interaction between the benevolent monetary authority and the politically distorted fiscal authority with price commitment nominal bonds will be used for wasteful spending by the politically distorted fiscal authority price commitment results in lower welfare because it eliminates monetary control over fiscal decisions

impacts of eu carbon emission trade directive on energy intensive industries indicative micro economic analyses the cost impacts from the european emission trading system ets on energy intensive manufacturing industries have been investigated the effects consist of direct costs associated to the co2 reduction requirements stated in the eu directive and of indirect costs of comparable magnitude that originate from a higher electricity price triggered by the ets in the power sector the total cost impacts remain below 2 of the production value for most industries within the ets in the kyoto period in the post kyoto phase assuming a 30 co2 reduction the total cost impact may raise up to 8 of production value in the heaviest industry sectors in steel and cement industries the cost impacts are 3 4 fold compared to the least affected pulp and paper and oil refining electricity intensive industries outside the ets will also be affected for example in aluminum and chlorine production the indirect cost impacts from ets could come up to 10 of production value already in the kyoto period as industry sectors are affected differently by the ets some correcting mechanisms may be worthwhile to consider in securing the operation of the most electricity intensive sectors e g balancing taxation schemes that may include as income source a levy on the wind fall profits of the power sector due to ets a future improvement in ets for industries within the scheme could be scaling of the emission reduction requirement so that the relative total emission reduction costs are at about the same level

analysis of the nonlinear response of electricity prices to fundamental and strategic factors this paper seeks to characterize the nonlinear effects of exogenous factors on wholesale electricity price formation using a special type of regime switching the logistic smooth transition regression model we capture the mean reverting and spiky characteristics of spot prices and at the same time estimate their rather complex relationships to fundamentals we show that for different trading periods within the day prices can be a function of fundamentally different drivers in addition to including the usual fuel price demand and reserve margin drivers this analysis tests whether a market concentration variable is as significant in the high frequency context as it is known to be over the longer term the analysis is also innovative in testing the nonlinear influence of carbon emission trading

the influence of operational flexibility on the exploitation of co2 reduction potential in industrial energy production energy conservation is a key measure for reducing co2 emissions however realising the emission reduction potential of an energy conservation investment depends on many factors such as energy prices the eu emissions trading scheme has made the investment analysis more complicated and increased the economic value of operational flexibility under fluctuating carbon prices the different operational options in industrial energy production complicate the estimation of co2 reduction potential in the investment phase increasing operational flexibility enables optimisation in the economic dimension which may lead to less than optimum co2 reduction in our case study which analysed the effects of an energy conservation investment made in the pulp and paper industry the deviation from the expected emission reduction was around 30 over the period from 2000 to 2007 however it seems that with high carbon prices increasing operational flexibility has no significant effect on the carbon emissions in policy making the freedom of action that is made possible by increasing operational flexibility should be taken into account when evaluating the contribution of an individual energy efficiency investment towards meeting the national targets for energy efficiency improvement and co2 emission reduction

estimating the price of tradable permits for greenhouse gas emissions in 2008 12 abstract many attempts have been made recently to predict the prices of tradable permits for greenhouse gas ghg emissions in the first commitment period of the kyoto protocol 2008 12 in this paper we attempt to refine these price estimates based on i the results of economic models and identification of factors which influence prices but are not fully reflected in the models ii lessons from price forecasting experience in the us sulfur dioxide market and iii current price data from the nascent international market for ghg permits we expect ghg permit prices to be at the lower end of the broad spectrum of existing predictions this implies among other things that resource transfers to developing countries associated with emissions trading will be relatively low nevertheless even a modest price will have a significant influence on the decisions of consumers and investors in energy markets around the world

econometric analysis of australian emissions markets and electricity prices emissions trading schemes aim to reduce the emissions in certain pollutants using a market based scheme where participants can buy and sell permits for these emissions this paper analyses the efficiency of the two largest schemes in australia the nsw greenhouse gas abatement scheme and the mandatory renewable energy trading scheme through their effect on the electricity prices from 2004 to 2010 we use a long run structural modelling technique for the first time on this market it provides a practical long run approach to structural relationships which enable the determination of the effectiveness of the theoretical expectations of these schemes the generalised forecast error variance decomposition analysis finds that both schemes emissions prices have little effect on electricity prices generalised impulse response function analysis support this finding indicating that when shocks are applied to electricity by the two schemes it returns to equilibrium very quickly this indicates that these schemes are not having the effect anticipated in their legislation

the differing effects of pre and post 1981 federal budget deficits on tax adjusted real interest rates this paper employs an estimating equation relating tax adjusted real interest rates to deficits and other economic variables to examine the differing effects of pre and post 1981 federal budget deficits on ex ante and ex post real tax adjusted short term interest rates over the period 1961 1 1992 2 the results for the 1961 1 1992 2 period taking into account a shift in the linkage between the ratio of alternative measures of the deficit to potential gdp occurring in 1981 1 indicate that the ratio of both the nipa deficit and the cyclically adjusted deficit to potential gdp have a significant effect on ex ante and ex post real tax adjusted interest rates for the post 1981 period but no significant effect before 1981

budget deficits and interest rates in the united states in this paper an attempt has been made to reexamine the effect of budget deficits in the united states on interest rates unlike the previous studies which use only one definition of the dependent variable we have used all three namely the nominal and the ex post and the ex ante real interest rate further unlike previous studies we considered both short term and long term interest rates our results provide absolutely no support for the proposition that federal deficits affect interest rates and thus contradict the recent findings by cebula 1987 and kolluri and giannaros 1987 finally the paper provides some further support for the inverted fisher hypothesis proposed by carmichael and stebbing 1983

time consistency of fiscal and monetary policy a solution this paper demonstrates how time consistency of the ramsey policy the optimal fiscal and monetary policy under commitment can be achieved each government should leave its successor with a uniq

banning banking in eu emissions trading abstract admitting banking in emissions trading systems reduces overall compliance costs by allowing for inter temporal flexibility cost savings can be traded over time however unless individual eu member states ms decide differently the transfer of unused allowances from the period of 2005 2007 into the first commitment period under the kyoto protocol i e 2008 2012 will be prohibited in this paper we first explore the implications of such a ban on banking when initial emission targets are lenient this analysis is based on a simulation which was recently carried out in germany with companies and with a student control group the findings suggest that a eu wide ban on banking would lead to efficiency losses in addition to those losses which arise from the lack of inter temporal flexibility second we use simple game theoretic considerations to argue that under reasonable assumptions such a eu wide ban on banking will be the equilibrium outcome thus to avoid a possible prisoners dilemma ms should have co ordinated their banking decisions

the effect of federal deficits and debt on the tax adjusted short term real interest rate the stock versus flow effect of the federal debt deficit on a real interest rate is examined in a reduced form equation the evidence shows a positive and significant linkage between the federal debt and an ex post tax adjusted short term real interest rate

new evidence on financial crowding out this paper has provided evidence that federal government borrowing has in fact as least for the period 1970 through 1982 exercised a significant impact upon short term interest rates in the private sector in particular it is shown here that the rate of change of the interest yield on three month t bills exercises a positive and very highly significant impact upon the rate of change of the prime rate of interest to the extent that private sector spending is sensitive to the interest rate a very strong argument on behalf of financial crowding out can be made

federal deficits and the real rate of interest in the united states a note this brief note provides strong empirical evidence that federal govern ment deficits can indeed have a positive and significant impact upon short term interest rates the findings in this paper thereby establish another mechanism for the transmission of crowding out this study differs from most other studies in the adoption of two particular procedures first unlike most although not all other related studies the rate of interest is expressed as a real rate this is done in simple fashion by subtracting the inflation rate of the gnp deflator from the nominal rate of interest taken to be the 3 month t bill rate second also unlike most although not all other related studies the deficit is expressed in real terms and then divided by the real gnp level expressing the deficit in this ratio form enables us to judge the deficit relative to the size of the economy which must finance it no previous related study to date has adopted both of these procedures and most studies of this topic have adopted neither procedure

a model for energy pricing with stochastic emission costs we use a supply demand approach to value energy products exposed to emission cost uncertainty we find closed form solutions for a number of popularly traded energy derivatives such as forwards european call options written on spot prices and european call options written on forward contracts our modeling approach is to first construct noisy supply and demand processes and then equate them to find an equilibrium price this approach is very general while still allowing for sensitivity analysis within a valuation setting our assumption is that in the presence of emission costs traditional supply growth will slow down causing output prices of energy products to become more costly over time however emission costs do not immediately cause output price appreciation but instead expose individual projects particularly those with high emission outputs to much more extreme risks through the cost side of their profit stream our results have implications for hedging and pricing for producers operating in areas facing a stochastic emission cost environment

have large budget deficits caused rising trade deficits for the united states the 1980s have been years of both large and unprecedented trade deficits as well as massive federal budget deficits the trade deficit rose from 25 billion in 1980 to 124 billion in 1985 during this same period federal budget deficits soared from 74 billion in 1980 to more than 212 billion in 1985 it is widely believed that the u s trade deficit rose mainly because of the skyrocketing federal budget deficit presenting such a view are for example hutchison and pigott 25 hutchison and pyle 26 clark 11 modigliani 30 and aschauer 2 besides economists many labor unions i e afl cio and official government documents see the economic report of the president particularly of 1984 have all shared similar views the issues involved have important policy implications suppose that the basic reason for rising trade deficits is indeed the escalating federal budget deficit in this case policy makers may focus on curtailing the budget deficit in order to resolve the trade deficit problem that has adversely affected several sectors such as manufacturing industries and agriculture however if such a view concerning the causal role of the budget deficit is incorrect then reductions in the federal budget deficit may not resolve the trade deficit dilemma and moreover attention will be diverted from more relevant and urgently needed policy options 6 the purpose of this paper is to empirically investigate the conventional argument that high federal budget deficit has been the prime cause of the escalating u s trade deficit finding only partial empirical evidence to support it in section ii i argue that most of previous studies in this area appear flawed by a methodological error rendering their tests unreliable for discriminating between a number of equally plausible hypotheses section iii describes the data and methodology used in the paper section iv presents the empirical results section v summarizes and concludes the paper

time consistency of fiscal and monetary policy a comment in an important recent contribution persson persson and svensson 1987 hereafter pps suggest that through careful restructuring of its nominal and real debt obligations a government may be able to induce future governments to follow the monetary and fiscal policies that it regards as optimal today the pps argument builds on lucas and stokey s 1983 demonstration that in a special nonmonetary setting the time inconsistency of optimal fiscal policy can be avoided through managing the term structure of real government obligations to the public the basic idea of the pps scheme for monetary economies is disarmingly intuitive in addition to continually restructuring nominal and real debt obligations a la lucas stokey each government must ensure that the next government inherits a stream of nominal claims on the public whose present discounted value equals the stock of money this equality pps argue removes the incentive for surprise inflation or deflation because such surprises would not affect the real net worth of the government this note shows that the pps prescription for avoiding time inconsistency appealing as it is is not generally sufficient even under the debt restructuring they recommend optimal policy is likely to be time inconsistent the main reason why their scheme fails is that the restrictions it imposes on government asset stocks satisfy first order but not second order conditions for an optimum because of the complex interactions between the current price level and future interest rates a government can raise its objective function by moving several variables at once away from the levels planned by the previous government even though price level changes alone would not affect government net worth we develop our argument using the model notation and equation numbers of pps to which the reader is referred for details the maximization problem associated with

a stochastic fuel switching model for electricity prices abstract this paper develops and applies a novel electricity price model we reproduce the merit order of a thermal dominated electricity system by establishing a non linear dependency of wholesale electricity prices on the prices of fuels coal and natural gas and of co 2 emission allowances the coefficients are estimated using a markov switching regression this approach might prove valuable for cross hedging positions in the fuel electricity and emission spot markets it is also of use for studying the degree to which electricity prices in different countries reflect fuel and emission cost applying the model to the electricity markets of the uk and germany we find that british electricity prices are quite well explained by short run cost factors while the german ones are less well explained

the impacts of eu co2 emissions trading on electricity markets and electricity consumers in finland abstract in this paper the likely impacts of the eu emission trading system on the nordic electricity market and on the position of various market actors are assessed in its first phase the eu co 2 emission trading system includes power plants with thermal capacity greater than 20 mw metals industry pulp and paper industry mineral industry and oil refineries this paper describes the assessment done for the finnish minister of trade and industry analysing the likely impacts on power plant operators on energy intensive industries on other industries and on other consumer groups the impacts of emissions trading were studied with the vtt electricity market model and with the times energy system model the annual average electricity price was found to rise 0 74 eur mw h 1 for every 1 tonne co 2 1 in the nordic area large windfall profits were estimated to incur to electricity producers in the nordic electricity market in finland metals industry and private consumers were estimated to be most affected by the electricity market price increases expanded nuclear power generation could limit the increases in the prices of electricity to one third compared to those in the base case

price drivers and structural breaks in european carbon prices 2005 2007 this article aims at characterizing the daily price fundamentals of european union allowances euas traded since 2005 as part of the emissions trading scheme ets the presence of two structural changes on april 2006 following the disclosure of 2005 verified emissions and on october 2006 following the european commission announcement of stricter phase ii allocation allows to isolate distinct fundamentals evolving overtime the results extend previous literature by showing that eua spot prices react not only to energy prices with forecast errors but also to unanticipated temperatures changes during colder events besides the sub period decomposition of the pilot phase gives a better grasp of institutional and market events that drive allowance price changes

the role of the budget deficit during the rise in the dollar exchange rate from 1979 1985 the u s dollar appreciated in value over 40 from early 1979 until it peaked in february 1985 also during this period the u s federal government budget deficit grew from 16b to 200b according to hakkio and higgins 15 it is high u s interest rates and foreign capital inflows into the u s that provide the linkage between these two events there is a considerable debate in the literature as to the precise influence of budget deficits upon these various linkages evans 10 for example suggests that large deficits did not cause the rise in the dollar also there are numerous studies refuting the association between deficits and interest rates see evans 11 and hoelscher 16 for example on the other hand plosser 25 reports a positive association between government spending and interest rates and hoelscher 17 reports a positive association between deficits and long term rates this paper uses an open economy vector autoregression var model to investigate these linkages finding that after controlling for the influence of money inflation the dollar and the trade deficit there is indeed causality running from deficits to long term interest rates the model also identifies a relationship between long rates and the dollar value thus verifying the linkage albeit indirect of budget deficits and the dollar value a second concern is that large budget deficits may have led to an accommodative monetary policy causing excessive money growth rates at times for example from 1982 07 1983 09 ml growth averaged 13 and when the dollar value peaked in 1985 ml was growing at about 12 2 a number of authors have examined this issue yet collectively they have not arrived at a uniform conclusion ahking and miller 1 provide a summary of these studies the majority of these studies suffer from at least one of two faults that i attempt to correct in this paper in particular they either suffer from exogeneity problems stemming from single equation models or they suffer from omitted variable bias due to the exclusion of international variables variance decompositions generated from an open economy var indicate that deficits explain more of the variance of the forecast error of money growth than any other variable the results also verify that deficits affect inflation only through their influence on the money supply

government deficits capital flows and interest rates 1988 government deficits capital flows and interest rates applied economics vol 20 no 6 pp 753 765

modeling co2 emission allowance prices and derivatives evidence from the european trading scheme this paper studies the three main markets for emission allowances within the european union emissions trading scheme eu ets powernext nord pool and european climate exchange ecx the analysis suggests that the prohibition of banking of emission allowances between distinct phases of the eu ets has significant implications in terms of futures pricing motivated by these findings we develop an empirically and theoretically valid framework for the pricing and hedging of intra phase and inter phase futures and options on futures respectively

inflation and government deficits there is a pronounced positive correlation of inflation andgovernment deficits in the united states since world war ii the purpose of this paper is to test the three leading explanationsof this correlation these three explanations are a a deficitincreases prices through a wealth effect b a deficit results inthe federal reserve purchasing debt thus increasing the moneysupply and prices and c expected inflation increases the deficit which is the change in the nominal value of bonds no supportis found for either of the first two hypotheses the results indi cate that expected government deficits have no significance forfuture inflation since world war ii the united states has experienced large federal government deficits and a sustained peacetime inflation three differentconnections between the deficits and inflation are prominent in theliterature the most direct connection between government deficits and inflationis that by increasing the real value of outstanding bonds and perceived netwealth a deficit can raise total spending and the price level this connec tion is also the most long standing and is suggested by metzler 1951 andpatinkin 1965 for example monetarists generally and buchanan and wagner 1977 in particularhave emphasized a different link between deficits and inflation they sug gest that the federal reserve purchases government bonds when the trea sury sells bonds thus increasing high powered money the money supply and the price level the federal reserve might behave this way for exam ple because it is attempting to hold down interest rates on governmentsecurities when deficits occur recently barro 1978 1979 has put forward a hypothesis that deficitsare a result of inflation rather than inflation being a result of deficits thegovernment deficit is the change in the nominal value of outstanding gov ernment bonds if the anticipated inflation rate increases then the nomi nal value of bonds must increase i e the government will run a deficit tokeep the same anticipated real amount of bonds all three of these possible connections between government deficitsand inflation are consistent with the observed positive correlation of defi cits and inflation the implications however are strikingly different con

are electricity risk premia affected by emission allowance prices evidence from the eex nord pool and powernext the links between emission and energy markets are of great interest to practitioners academics and policy makers in this paper it is conjectured that a positive relationship exists between emission allowance spot returns and electricity risk premia within the european union emissions trading scheme eu ets we discuss how this can be justified on the basis of the substantial uncertainties in the carbon markets we also argue that this link could be due to trading strategies followed by electricity producers who attempt to exploit their initial allocation of free allowances analysis of data from three major markets the eex nord pool and powernext offers empirical support to our conjecture these findings have significant policy implications since they imply that efforts should be made in order to reduce the uncertainty in the carbon markets by clearly defining the eu ets regulative framework and design over the next years moreover our results suggest that the allocation of free allowances and their unrestricted trading enable electricity producers to accomplish windfall profits in the derivatives market at the expense of other market participants

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

the emissions trading paradox abstract this article considers the price history of co2 allowances in the eu emission trading scheme since european emissions trading started in 2005 the prices of allowances have varied between less than one and thirty euro per ton of co2 this previously unpredicted volatility and more notably a significant price crash in may 2005 led to the hypothesis that electricity producers might use their market power to influence the prices of allowances besides market power the combination of information asymmetry and price interdependencies between prices of primary goods especially electricity and allowances plays an important role in explaining the emissions trading paradox the model presented will show that banking can lead to such a price crash if market participators act rationally furthermore in such a scenario banking can be profitable for sellers at the cost of buyers

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

structural federal deficits and interest rates some causality and co integration tests the relationship between federal budget deficits and interest rates has been the focus of extensive research recently cebula 4 examined this relationship empirically and concluded that the federal budget deficit does in fact exercise a positive and significant impact upon the nominal moody s aaa rated corporate bond rate 4 208 such a finding is at odds with the great majority of recent empirical studies in this area if valid this finding assigns to large deficits significant adverse effects on both private investment crowding out and on trade balance via an overvalued dollar given these profound public policy implications cebula s finding warrants further examination

the time consistency of optimal monetary and fiscal policies we show that optimal monetary and fiscal policies are time consistent for a class of economies often used in applied work economies appealing because they are consistent with the growth facts we establish our results in two steps we first show that for this class of economies the friedman rule of setting nominal interest rates to zero is optimal under commitment we then show that optimal policies are time consistent if the friedman rule is optimal for our benchmark economy in which the time consistency problem is most severe the converse also holds if optimal policies are time consistent then the friedman rule is optimal

a literature based multi criteria evaluation of the eu ets abstract this article reviews the existing literature on the european union emission trading scheme eu ets focusing on empirical ex post research since the end of the first period 2007 the literature is presented through a multi criteria evaluation concerning environmental effectiveness despite over allocation during the first period abatement is estimated between 2 5 and 5 trade driven carbon leakage was not observed even if long term economic models predict divergent leakage estimates for certain at risk sectors the abatement target was likely to be below an economically efficient level but was reached in a fairly cost effective way even if free allocation gave rise to several distortional effects equity concerns were manifold and constitute a major drawback to the policy finally institutional feasibility can be considered positive in that the eu ets passed the european legislative process unlike the previously proposed eu wide carbon tax

an empirical investigation into the impact of us federal government budget deficits on the real interest rate yield on intermediate term treasury issues 1972 2012 this study provides new empirical evidence on the impact of the federal budget deficit on the real interest rate yields on intermediate term debt issues of the us treasury represented herein by the ex post real interest rate yields on 3 year treasury notes and 7 year treasury notes two interest rate measures that have received essentially no attention in the economics and finance literature in recent years this study is couched within a loanable funds model that includes two ex post real interest rate yields the monetary base as a per cent of gdp the change in per capita real gdp net financial capital inflows as a per cent of gdp and the budget deficit as a per cent of gdp this study uses annual data for the study period 1972 to 2012 a time period that includes quantitative easing monetary policies by the federal reserve two stage least squares estimations reveal that the federal budget deficit expressed as a per cent of gdp exercised a positive and statistically significant impact on the ex

optimal monetary policy when agents are learning abstract we derive optimal monetary policy in a sticky price model when private agents follow adaptive learning we show that this slight departure from rationality has important implications for policy design the central bank faces a new intertemporal trade off not present under rational expectations it is optimal to forego stabilizing the economy in the present in order to facilitate private sector learning and thus ease the future intratemporal inflation output gap trade offs the policy recommendation is robust the welfare loss entailed by optimal policy under learning if the private sector actually has rational expectations is much smaller than if the central bank mistakenly assumes rational expectations when in fact agents are learning

federal deficits and money growth in the united states a vector autoregressive analysis abstract a multivariate var modelling technique is employed in this paper to test for causality between federal deficits and money growth in the united states four alternative causality hypotheses including the common accommodation view are examined in addition to the two policy variables four other related macro variables are included in the empirical analysis namely short term interest rates prices real output and exchange rates the var results consistently reject the accommodation hypothesis and indicate that monetary and fiscal policy actions are set independently in the united states other causality inferences are also obtained and their implications are discussed

time consistency of fiscal and monetary policy the problem of time inconsistency arises from two different sources first as shown by guillermo a calvo 1978 the re is an incentive for each government to engage in an initial unanti cipated inflation second as discussed by robert e lucas and nancy l stokey 1983 there is an incentive for each government to deviat e from the path of taxes announced by the preceding government in th is paper it is shown that these two sources of time inconsistency ca n be removed by a particular method of debt management involving bot h nominal and indexed government bonds of various maturities copyright 1987 by the econometric society

a cointegrating approach to budget deficits and long term interest rates a cointegrating approach is undertaken in this study to determine if there is a long run equilibrium relationship between budget deficits and long term interest rates for the united states and nine european countries the cointegration approach consists of conducting cointegration tests and then testing several hypothesized values for the deficit and price expectations variables the cointegration results suggest the existence of several significant cointegrating vectors for each of the ten countries which would seem to appeal to the view of budget deficits having a positive impact on long term interest rates the hypothesized values for the deficit and price expectations variables are found to be too strict since the hypotheses are rejected in every case but one

anticipated federal budget deficits monetary policy and the rate of interest in recent years a number of studies have attempted to investigate the impact of federal budget deficits on the rate of interest studies by evans 6 7 makin 13 hoelscher 9 10 barth iden and russek 2 3 dwyer 5 cebula 4 among others have analyzed this issue but have provided conflicting evidence on the impact of federal budget deficits on the rate of interest this is due in part to differences in methodology definition of budget deficit variables sample period and estimation techniques hoelscher 10 barth iden and russek 2 3 feldstein and eckstein 8 find that budget deficits affect interest rates but evans 6 7 makin 13 and hoelscher 9 conclude that budget deficits have no significant effect on interest rates the contributions of this paper are first to directly introduce within the framework of rational expectations models federal budget deficit and monetary variables this technique of analyzing the impact of deficits on interest rates may shed new light on this important issue which has not appeared in the literature second the deficit measure employed in this study is designed in a manner that it avoids being contaminated by changes in expenditures and tax receipts due to the automatic stabilizing aspects of fiscal policy third it is explicitly recognized that monetary and fiscal policies jointly interact in determining interest rates finally the policy process determining the interest rate is tested for stability over time this is important in light of evans s 6 work who finds various episodes in the u s history when budget deficits increased for a few years but had no appreciable impact on interest rates the intention in this paper is to investigate the reaction of economic agents who find that budget deficits may persist for a longer time in the future

on the joint determination of fiscal and monetary policy abstract the conduct of fiscal and monetary policy absent commitment depends on the interaction between the objective of smoothing distortions intertemporally and a time consistency problem when net nominal government obligations are positive both fiscal and monetary policies are distortionary and the choice of debt depends on how the anticipated response in future monetary policy affects the current demand for money and bonds there exists a unique steady state with positive net nominal government obligations which is stable and time consistent for any initial level of debt the welfare loss due to lack of commitment is small

optimal time consistent government debt maturity this paper develops a model of optimal debt maturity in which the government cannot issue statecontingent debt as the literature has established if the government can perfectly commit to fiscal policy it fully insulates the economy against government spending shocks by purchasing short term assets and issuing long term debt these positions are quantitatively very large relative to gdp and do not need to be actively managed by the government our main result is that these conclusions are not robust when lack of commitment is introduced under lack of commitment large and tilted debt positions are very expensive to finance ex ante since they ex post exacerbate the government s problem stemming from a lack of commitment in contrast a flat maturity structure minimizes the cost entailed by a lack of commitment though this structure also limits the ability to insure against shocks and increases the volatility of fiscal policy distortions we show that the optimal time consistent maturity structure is nearly flat because reducing average borrowing costs is quantitatively more important for welfare than reducing fiscal policy volatility thus under lack of commitment the government actively manages its debt positions and can approximate optimal policy by confining its debt instruments to consols

is a military really a luxury good an international panel study of ldcs this paper introduces country specific fixed effects into a theoretical and empirical model of military expenditure contrary to the existing literature the model indicates that the share of military expenditure decreases with a country s income

an empirical analysis of federal budget deficits and interest rates directly affecting savings and loans the crisis in the savings and loan sl furthermore over the same period there were some eight years when only one federally insured sl 4 6 7 10 11 13 15 16 17 18 none of the published research has investigated the impact of the budget deficit on interest rate measures directly faced by s ls such as the cost of funds to the s ls the yield on new home mortgages at s ls or the s l mortgage portfolio yield accordingly this study investigates empirically the impact of federal budget deficits upon these interest rate measures that directly affect s ls

crowding out deficits and interest rates comment cebula s investigation along with the work of the other participants in this controversy is grounded in the is lm framework this comment utilizes the same framework to demonstrate that the amount of crowding out may be inversely related to the size of the interest rate change therefore cebula s claim that his evidence establishes a transmission mechanism for crowding out is unfounded indeed full crowding out in a simple is lm world is possible with or without increases in the interest rate at the other end of the spectrum zero crowding out can occur with or without increases in the interest rate a similar indeterminacy applies to partial crowding out scenarios the statistical significance of the relationship between deficits and the interest rate is irrelevant as far as the issue of a transmission mechanism for crowding out is concerned the appropriateness of cebula s econometric procedures is not the issue our contention is that it does not make any difference what the procedures show thus our comment applies with equal force to cebula s antagonists those who argue that a transmission mechanism does not exist because their empirical work shows no relationship between budgetary deficits and the interest rate

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

the kyoto protocol market power and enforcement the kyoto protocol aims to limit aggregate carbon emissions by participating countries to 1990 emissions levels in aggregate it also allows for the creation of a permit market in which countries will be able to buy and sell the right to emit carbon dioxide this paper investigates how market power held by the countries of the former soviet union and enforcement of the carbon emission limits might affect the abatement and the cost of compliance with the kyoto protocol to do so it uses a modified version of the van egteren weber 1996 model to investigate a permit market in the presence of both market power and enforcement difficulties it then simulates the model finding that if meeting abatement targets is the goal regulating the supply side of the market and convex fine schedules are the most effective tools

market power with interdependent demand sale of emission permits and natural gas from russia with implementation of the kyoto protocol russia will most likely be able to exert market power in the emission permit market but as russia is also a big exporter of fossil fuels the incentives to boost the permit price may be weak however a significant share of russia s fossil fuel exports is natural gas if a high permit price boosts the demand for natural gas through substitution from more polluting fuels and thus increase gas profits this may increase the incentives to exert monopoly power in the permit market moreover a large fossil fuel exporter may use its market position to influence the effective demand for permits hence the relationship between permit income and fossil fuels exports runs in both directions in this article we explore the interdependence between the revenues from permit and fossil fuel exports both theoretically and numerically a computable general equilibrium model suggests the fact that russia as a big gas exporter has small effect on the incentives to exert monopoly power in the permit market moreover russia s monopoly power in the permit market has a small but non negligible impact on the optimal level of russian gas exports

investments in eop technologies and emissions trading results from a linear programming approach and sensitivity analysis abstract this paper offers a general approach to valuating investments in end of pipe technologies eop technologies with special regard to an emissions trading scheme since investments of this kind affect production it is necessary to derive the required payments for a financial valuation and the constraints from production theory and production planning on this basis it is possible to develop a valuation model this model considers joint production activity level dependent and independent payments and specifically includes the indivisibility of the investment applying duality theory enables us to examine the determinants of the price ceiling for such an investment sensitivity analysis shows that tradable permits have several effects on an investment and do not always encourage environmentally beneficial investments in particular cases they may even be counterproductive

optimality of the friedman rule in economies with distorting taxes abstract we find conditions for the friedman rule to be optimal in three standard monetary models our main contribution is to shed light on two issues in the literature first the conventional view maintains that when money is a final good its services should be taxed moreover if money demand is interest inelastic its services should be taxed heavily we show that this view is incorrect second there is an ongoing controversy about whether the optimality of the friedman rule is connected to the intermediate goods result from public finance we resolve this controversy by showing a deep connection between these results

new evidence on deficits and interest rates it is generally assumed on theoretical grounds that increases in government borrowing cause interest rates to rise 1 but empirical support for this proposition has been weak at best several recent papers have uncovered no strong relationship between deficits and short terrn interest rates however the research reported here indicates that although the relationship between deficits and short terrn interest rates may be tenuous there is strong evidence that larger deficits are associated with higher long terrn interest rates much of the debate about whether there is a strong relationship between federal borrowing and interest rates concerns the crowding out question this controversy centers on the direct and indirect eilffects of government fiscal actions on private spending these effects have been well documented in the theoretical literature e g buiter 1977 carlson and spencer 1975 blinder and solow 1973 many of the crowding out effects studied in this literature depend on the connection between government borrowing and high interest rates friedman 1978 meyer 1975 silber 1970 this is called short run indirect crowding out and may occur when increases in government spending and borrowing cause interest rates to rise which then may cause private spending to be reduced buiter 1977 pp 310 13

time consistency of optimal monetary and fiscal policy in a small open economy abstract this paper characterizes conditions under which optimal monetary and fiscal policy is time consistent in a stylized small open economy with a flexible foreign exchange rate regime it shows that these conditions depend on the way in which leisure is assumed to enter preferences and or on the process which productivity is assumed to follow this paper further argues that these conditions may fail to be sufficient if the small open economy implements a fixed foreign exchange rate regime thus a credible fixed exchange rate regime does not necessarily help render optimal policy time consistent

alternative u s monetary and deficit reduction policies for the 1980s the authors have developed a thirty six equation econometric model to measure the effects of deficit reduction policies the model features endogenous explanations of the money stock through the federal budget constraint the price level and the capital stock and includes wealth in the consumption and money demand functions the authors conducted two groups of five simulations for the 1980 85 period the capital stock was endogenous in the first group and exogenous in the second group negative crowding in with an endogenous capital stock made deficit reduction policies without offsetting stimulus elsewhere costly supply side effects played a decisive role in the simulations copyright 1988 by ohio state university press

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

fiscal deficits and long term interest rates further evidence from annual data much debate has recently centered on the popular view that large u s budget deficits financed by the sale of bonds cause high interest rates if valid this view implies that deficits crowd out efficient private investment and adversely affect economic growth however bailey 2 and barro 3 have challenged this conventional view on theoretical grounds based on the ricardian equivalence proposition bailey and barro contend that rational economic agents interpret government deficits as postponed tax liabilities and thus will have no effects on private wealth or interest rates such theoretical ambiguity in regards to the impact of budget deficits has also been matched by an equally conflicting empirical evidence for example barth iden and russek 4 deleeuw and holloway 8 hutchison and pyle 20 makin 24 makin and tanzi 25 and zahid 35 have found a positive and significant effect of deficits on interest rates on the other hand evans 11 12 13 hoelscher 17 motley 28 and plosser 29 30 have all failed to find any systematic support for a significant positive impact of deficits on interest rates it should be observed that the above empirical studies have employed either monthly or quarterly data however some researchers e g hoelscher 18 have recently charged that monthly or quarterly data bias the results in favor of finding no significant linkage between deficits and interest rates they reasoned that portfolio adjustment lags are too long for monthly or even quarterly observations to reflect the actual correlation between deficits and interest rates to eliminate this problem of periodicity annual data was instead advocated 2 using annual data hoelscher 18 concluded that deficits have caused positive and significant changes in long term interest rates in the united states

fiscal policy with limited time commitment we propose a theory of optimal fiscal policy consistent with the observation that governments typically inherit their predecessors plans and formulate their policies over a finite future horizon we use this framework which we call limited time commitment ltc to make two contributions first in a general stochastic model we show that under an intuitive sufficient condition a chain of successive governments with ltc sustains the full commitment fc ramsey equilibrium this equivalence result clarifies in which cases existing recursive methods to solve for fc plans have a positive interpretation based on partial commitment we apply this result in two benchmark models of optimal fiscal policy with and without capital in which the fc policy is time inconsistent second we investigate the implications of ltc in a model of capital taxation in which the fc outcome cannot be achieved with finite commitment we show that the internalisation of near future tax distortions represents a key distinction with respect to the literature on no commitment nc in a calibrated version of the model we find that a single year of fiscal commitment leads to large welfare gains approximately a third of the difference between fc and nc finally we use ltc to analyse commitment to different fiscal instruments and to study the importance of state contingency in fiscal plans

budget deficits short term real interest rates and the specification of expected inflation an empirical investigation the purpose of this paper is to illustrate whether empirical estimates of the effects of budget deficits on short term real interest rates are sensitive to the choice of the expected inflation variable survey data on expected inflation and the rational expectations method described by mishkin 1981 are used to construct two measures of the short term real interest rate results for two previous studies on this deficit interest rate relationship are re estimated using these measures of expected inflation and the interest rate variables additional results reported in this paper further indicate that empirical estimates of the interest rate effects of budget deficits are sensitive to the choice of the expected inflation variable in addition to the choice of the inflation variable a number of other robustness tests are included we are able to conclude that 1 increases in budget deficits do not generally raise short term real interest rates and 2 short term real interest rates are not independent of

trading hot air the influence of permit allocation rules market power and the us withdrawal from the kyoto protocol after the conferences in bonn and marrakech it is likely that international emissions trading will be realized in the near future major influences on the permit market are the institutional detail the participation structure and the treatment of hot air different scenarios not only differ in their implications for the demand and supply of permits and thus the permit price but also in their allocative effects in this paper we discuss likely the institutional designs for permit allocation in the hot air economies and the use of market power and quantify the resulting effects by using the computable general equilibrium model dart it turns out that the amount of hot air supplied will be small if hot air economies cooperate in their decisions under welfare maximization more hot airis supplied than in the case where governments try to maximize revenues from permit sales

how much carbon offsetting and where implications of efficiency effectiveness and ethicality considerations for public opinion formation a fundamental policy design choice in government led climate change mitigation is what role should flexibility mechanisms like carbon offsetting play in reducing greenhouse gas ghg emissions since public opinion affects the policy choices of government we investigate how arguments regarding carbon offsetting s economic efficiency effectiveness and ethicality which have been key points in the public debate impact the public s preferences we fielded an online framing experiment in the united states n 995 to empirically identify how arguments for and against carbon offsetting influence public preferences for the inclusion of offsetting in national ghg mitigation policy we find that the public s support for international offsetting increases and support for reductions at their source i e within firms own operations diminishes when considerations of economic efficiency gains are at the forefront support for offsetting declines when individuals are confronted with arguments concerning its effectiveness and ethicality which suggests that future policies will require clear standards of additionality in order to address these concerns moreover we find that how carbon offsetting is framed matters even amongst climate skeptics and support could potentially be enhanced via improved communication on efficiency gains

a comparison of nominal and indexed debt under fiscal constraints this paper makes a welfare comparison between the issuance of price indexed and nominal public debt in the presence of fiscal constraints viz a debt constraint a deficit constraint and a combination of both distortionary taxes or public consumption are regulated to avoid the violation of the relevant fiscal constraint s under a debt constraint indexed debt is generally preferred while under a deficit constraint the results are more mixed introducing inflation persistence and raising the maturity of the debt tend to increase the magnitude of the welfare differences between the two types of debt welfare differences are further affected by the degree to which public consumption and tax revenues are indexed to actual versus structural nominal gdp

the impacts of carbon pricing on coastal megacities a cge analysis of singapore abstract pricing carbon is a widely used policy instrument for climate change mitigation quantitative analysis of carbon pricing are mainly conducted at the regional and national level rarely at the city level due to data availability as a representative of coastal megacities that are vulnerable to both climate change and climate policies singapore has announced to impose carbon tax on large direct emitters as a complementary mitigation option to technical measures a city level computable general equilibrium cge model is developed to simulate potential impacts of carbon pricing on the city including paying border carbon adjustment bca on exports or introducing a domestic carbon tax different sector coverages and carbon tax revenue recycling schemes are investigated for domestic carbon tax the simulation results show that a domestic carbon tax is a more cost effective option than paying bca given an identical carbon price at s 10 t co 2 gdp total exports and household consumption would decline less and average abatement cost is much smaller in the carbon tax scenarios compared to the bca scenario in terms of absolute emissions reduction a carbon tax that covers energy manufacturing and land transport sectors would be preferred making emissions around 2 7 lower than 2010 baseline level