public capital in the 21st century as productive as ever abstractthe global financial crisis and the euro area sovereign debt crisis that followed induced a rapid deterioration in the fiscal positions of countries across the globe in the ensuing fiscal

long term competition in a dynamic game the cold fish war this article presents a model of credible voluntary collective agreements in a dynamic game these agreements are implicit in collections of history dependent threat strategies i consider the strategies in a game of resource exploitation credibility is represented by perfect equilibrium voluntarism requires at least that all behavior be supported by the threat of collapse of the agreement which would return the players to the memoryless equilibrium collective rationality requires that the agreement be robust to the possibility of mutually beneficial renegotiation i analyze the set of agreements meeting each of these restrictions

cooperative management of groundwater resources in the presence of environmental externalities this paper investigates how cooperation among users can achieve a better management of groundwater in the presence of environmental externalities cooperation allows users to internalize the damages caused by their activities and reduce extractions the paper develops a game theoretical framework to assess the value of cooperation in an aquifer that is divided into three sub aquifers that are being overly exploited two types of externalities are modeled first water extractions in each sub aquifer impact water levels in neighboring sub aquifers extraction externality second the three sub aquifers are also connected to an ecosystem and thus decisions in each sub aquifer affect the health of the ecosystem environmental externality a cooperative game theory model is applied the model empirically shows how the uncontrolled extractions in each sub aquifer affects neighboring groundwater users but also cause severe impacts to the linked ecosystem the model is tested empirically in one of the most important aquifers in spain the eastern la mancha aquifer the results illustrate how both extraction and environmental externalities interact in affecting the likelihood of cooperation among the users the paper estimates the value of cooperation and its stability with and without the environmental externality

persistent government spending and fiscal multipliers the investment channel this paper inspects the mechanism shaping government spending multipliers in various smallscale dsge setups with endogenous labor supply and capital accumulation we analytically characterize the short run investment multiplier which in equilibrium can be either positive or negative the investment multiplier increases with the persistence of the exogenous government spending process the response of investment to government spending shocks strongly affects short run multipliers on output and consumption

fiscal policy interventions at the zero lower bound we build on a new keynesian dynamic stochastic general equilibrium dsge model to explore the macroeconomic consequences of fiscal expansionary shocks during the economic crisis of 2008 in the eurozone in this setting we find that the big four eurozone economies france germany italy and spain can effectively escape from their liquidity trap through fiscal policy interventions caused by government purchases we estimate the government spending multiplier to be above 1 8 when this policy is associated with a long term commitment to keeping the nominal interest rate at the zero lower bound as suggested by krugman 1998 notably the short term deficit effect on the budget balance can be offset five years after the implementation of a large spending program we also show that alternative policies with tax cuts that expand the supply do not appear to have the same power in the short run moreover we provide novel empirical evidence that a large government debt renders a government spending policy ineffective

increasing returns capital utilization and the effects of government spending abstract we show that a one sector real business cycle model with mild increasing returns to scale variable capital utilization and saddle path stability is able to produce qualitatively realistic business cycles driven solely by disturbances to government purchases due to an endogenous increase in labor productivity a positive spending shock can lead to simultaneous increases in output consumption investment employment and real wage our analysis illustrates a close relationship between this result and the recent literature that explores indeterminacy and sunspots in real business cycle models under laissez faire in particular the condition which governs the required magnitude of increasing returns for government spending shocks to generate procyclical macroeconomic effects is identical to that necessary for a laissez faire one sector real business cycle model to exhibit local indeterminacy

stability and success of regional fisheries management organizations according to international law straddling fish stocks should be managed cooperatively through regional fisheries management organizations rfmos this paper analyzes the stability and success of these organizations through a game in partition function form based on the classical gordon schaefer bioeconomic model results show that the larger the number of fishing states that compete for the fish stock the higher are the relative gains from full cooperation but the lower is the likelihood of large rfmos being stable it is also shown that new entrants increase the incentives of rfmo members to leave and decrease the incentives of non members to join it moreover the success of coalition formation is positively correlated with the degree of cost asymmetry among fishing states and negatively with the overall level of efficiency

consumer demand and equilibrium unemployment in a working model of the customer market incentive wage economy though not conceived as a constant the natural unemployment rate was taken to be invariant to supply shocks until the late seventies and to real demand shocks until now the largely micro theoretic model here is one in a series deriving the natural rate path from general equilibrium in this model the labor market exhibits generalized real wage rigidity resulting from the use of incentive wages to combat shirking and the asset backing shares is the firms customers arising from customer market friction one finding is that increased consumer demand drives up the natural rate by driving real interest rates up

real government size automatic feedback rules and the measured effectiveness of fiscal policy this paper argues that as intervention fiscal policy means more than simply any change in government spending and this requires of fiscal analysis a measure that separates the allocative from the counter cyclical activities of government defining intervention as an optimal policy rule that responds automatically to privately unanticipated variations in output a general equilibrium model is built to separate the supply side effects of desired changes in the size of government from demand side interventions designed to stimulate aggregate demand the model is tested using the results of a public choice investigation of the real size of government ferris and west 1996 that exercise produces a measure of desired size and through its residual an implicit measure of intervention the paper tests the prediction that increases in desired size increase aggregate supply and that ex post measures of fiscal intervention can be recovered and tested for their effect on aggregate output the test uses citibase

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

electoral uncertainty fiscal policy and macroeconomic fluctuations abstract in this paper we study the link between elections fiscal policy and aggregate fluctuations the setup is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re election shocks the latter are incorporated via a two party model with elections the main theoretical prediction is that forward looking incumbents with uncertain prospects of re election find it optimal to follow relatively shortsighted fiscal policies and that this hurts capital accumulation our econometric estimation using u s data finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes

endogenous markups and the effects of income taxation theory and evidence from oecd countries abstract existing studies on the effects of fiscal policy under imperfect competition typically treat each firm s price cost markup as fixed this paper examines the implications of endogenising the markup in a simple model of income taxation under monopolistic competition it is demonstrated that an increase in income tax reduces the number of firms lessens competition among surviving firms and raises the optimal markups in the new steady state through this channel the effects of income taxation on the key macroeconomic variables as well as on consumer welfare are unambiguously enlarged the simple model prediction is largely supported by cross section regressions with data from oecd countries

on the impossibility of informationally efficient markets comment in a recent paper in this review sanford grossman and joseph stiglitz challenge the efficient markets notion that in an asset market at any time prices fully reflect all available information p 404 the purpose of this comment is to argue that certain theorems and comments of grossman and stiglitz do not necessarily follow when an error in the specification of the informed trader s demand function for the risky asset is corrected in theorem 5 b p 401 grossman and stiglitz show that when informed traders have perfect information concerning a risky asset s yield no overall equilibrium will exist that is there will be no equilibrium value for the proportion of informed traders x inspection of equations 8 8 and 9 p 396 helps to give intuitive reasons why this is so if no individual purchases an observation of the information point 0 that is if x 0 then for a sufficiently small value of c the cost of obtaining an observation of the information point 0 an individual could increase his expected utility by purchasing the information if some fraction of traders purchase the information point 0 that is if x 0 from equation 8 it is seen that as 0 2 0 as informed traders obtain better information small movements in 0 have a nearly infinite effect upon the informed trader s demand for the risky asset and hence upon the asset s price thus according to grossman and stiglitz for a fixed x 0 as q2 0 the price system becomes perfectly informative as to the informed trader s observation of 0 thus for x 0 and a 2 0 no individual will wish to purchase 0 at cost c but for xa c2 0 and small c it pays an individual to purchase 0 clearly then for q 2 0 no equilibrium exists equation 8 plays a crucial role in theorem 5 b however equation 8 ignores the fact that x1i the ith informed trader s demand for the risky asset is constrained by his wealth woi in fact if the informed trader has perfect information so that 0 is the return on the risky asset then the informed trader simply invests in the asset with the higher yield thus for ue2 0 equation 8 ought to read

does neoclassical theory account for the effects of big fiscal shocks evidence from world war ii much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks we test the theory using data from world war ii which is by far the largest fiscal shock in the history of the united states we take observed changes in fiscal policy during the war as inputs into a parameterized dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock

business cycles with distorting taxes and disaggregated capital markets abstract this paper studies a neoclassical growth model to examine the linkages between distorting corporate and personal taxes and cyclical movements of aggregates such as investments in equipment and structures suppose tax variables vary stochastically and annually we solve quarterly individual and aggregate decision rules by recursive methods and quantify the dynamic impacts on aggregates from unit changes in tax structures and individual and joint tax specifications the findings suggest that corporate income tax is the major factor leading to substantial tax effects on business cycles moreover the impact of investment tax credit for equipment on disaggregated investments is equally significant

nobel lecture the transformation of macroeconomic policy and research what i am going to describe for you is a revolution in macroeconomics a transformation in methodology that has reshaped how we conduct our science prior to the transformation macroeconomics was largely separate from the rest of economics indeed some considered the study of macroeconomics fundamentally different and thought there was no hope of integrating macroeconomics with the rest of economics that is with neoclassical economics others held the view that neoclassical foundations for the empirically determined macro relations would in time be developed neither view proved correct finn kydland and i have been lucky to be a part of this revolution and my address will focus heavily on our role in advancing this transformation now all stories about transformation have three essential parts the time prior to the key change the transformative era and the new period that has been affected by the change and that is the story i am going to tell how macroeconomic policy and research changed as a result of the transformation of macroeconomics from constructing a system of equations of the national accounts to an investigation of dynamic stochastic model economies

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

tales of fiscal adjustment fiscal adjustments why they can be expansionary this paper examines the evidence on fiscal adjustments in oecd countries from the early 1960s to today the results shed light on the recently observed phenomenon of fiscal tightening that produces non keynesian expansionary effects one interpretation is that a serious fiscal tightening increases demand wealth rises when future tax burdens decline and when interest rates decline credibility is restored and inflation or default risks abate both consumption and investment rise for this effect to produce an expansion the tightening must be sizeable and occur after a period of stress when the budget is quickly deteriorating and public debt is building up another interpretation emphasizes the supply side typically a fiscal consolidation based on tax increases is short lived to be long lasting it must include cuts in public employment transfers and government wages to be politically possible such a policy must be supported by trade unions these measures result in more efficient labour markets and boost the supply side based both on statistical evidence and on a detailed analysis of ten cases of major fiscal adjustment this article provides cautious support to the supply side view without denying a more limited role for the demand side channel alberto alesina and silvia ardagna

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

great expectations and the end of the depression what ended the great depression in the united states this paper suggests that the recovery was driven by a shift in expectations this shift was triggered by president franklin delano roosevelt s fdr policy actions on the monetary policy side roosevelt abolished the gold standard and announced an explicit policy objective of inflating the price level to pre depression levels on the fiscal policy side roosevelt expanded real and deficit spending which helped make his policy objective credible the key to the recovery was the successful management of expecta tions about future policy roosevelt s rise to power is modeled as a policy regime change as in thomas sargent 1983 and peter temin and barry wigmore 1990 this paper formalizes temin and wigmore s argu ment in a repeated game setting using a dynamic stochastic general equilibrium dsge model and argues that the regime change can account for the recovery in the model a regime change means the elimination of certain policy dogmas that constrain the actions of the government the regime change generates an endogenous shift in expectations due to a coordination of mon etary and fiscal policy this coordination ended the great depression by engineering a shift in expectations from contractionary i e the private sector expected future economic contrac tion and deflation to expansionary i e the public expected future economic expansion and inflation the expectation of higher future inflation lowered real interest rates thus stimulating demand while the expectation of higher future income stimulated demand by raising permanent income

private debt overhang and the government spending multiplier evidence for the united states using state dependent local projections and historical us data we find that government spending multipliers are considerably larger in periods of private debt overhang in particular while multipliers are below or close to one in low private debt states we find significant crowding in of private spending in periods of debt overhang resulting in multipliers that are much larger than one in high private debt episodes more government purchases even reduce the ratio of government debt to gross domestic product these results are robust for the type of shocks and when we control for the business cycle financial crises deleveraging episodes government debt overhang and the zero lower bound

determinants of the current account balance in the united states this article studies the role of public and private imbalances in the behaviour of the current account balance in the united states in the context of an intertemporal model the estimation evaluates the effects of public and private imbalances on the dynamics of the current account correlation coefficients support the ricardian equivalence higher budget deficit correlates with a reduction in private consumption and an increase in private savings government saving does not vary significantly with macroeconomic variables in the short or in the long run in contrast fluctuations in government investment vary significantly with a number of economic variables in the long and in the short run accordingly fluctuations in the budget deficit are likely to be driven by fluctuations in public investment in contrast to government savings private savings vary significantly with macro variables in the long and in the short run fluctuations in private investment appear less evident compared to that in privat

consumer durables and the real interest rate one important channel through which real interest rates affect aggregate demand is consumer expenditure on durable goods this paper examines empirically the link between interest rates and consumer durables solving for the decision rule relating income and interest rates to consumer demand is an intractable task this paper avoids this problem by examining the first order conditions necessary for maximization by the representative consumer structural parameters of there presentative utility function are thus recovered the estimated model suggests that expenditure on consumer durables is far more sensitive to changes in the interest rate than is expenditure on nondurables and services this abstract was borrowed from another version of this item

the dominant borrower syndrome abstractthe financing channel of a fiscal stimulus matters for the size and the sign of the fiscal multiplier we develop a general equilibrium model where a fiscal stimulus is partially bank funded and the government becomes the dominant borrower from banks relative to entrepreneurs this leads to a negative impact on credit spreads investment and a contraction in output we support our story with a structural vector autoregression for a sample of developing countries featuring the dominant borrower syndrome

cooperative and non cooperative harvesting in a stochastic sequential fishery abstract we examine cooperative harvesting in a sequential fishery with stochastic shocks in recruitment two fleets harvest in a stochastic interception fishery we analyze cooperative management as a non cooperative game where deviations from cooperative harvesting are deterred by the threat of harvesting at non cooperative levels for a fixed number of periods whenever the initial stock falls below a trigger level we illustrate the sequential harvesting game with an application to the northern baltic salmon fishery cooperative harvesting yields participants substantial gains in terms of expected payoffs the greatest gains accrue to the fleet harvesting the spawning stock the actions of which are not observed by the competitor an explanation for the prevalence of fish wars is provided even if a cooperative agreement is reached shocks in recruitment trigger phases of non cooperative harvesting further the cooperative solution can only be maintained when stock uncertainty is not too prevalent

a dynamic approach to voluntary environmental contributions in tourism abstract in an evolutionary game theoretical model of tourism firms that use an endogenous natural common pool resource cpr we show that stable equilibria with voluntary environmental initiatives may coexist with other equilibria where voluntary abatement is absent the basins of attraction of the equilibria are identified and a bifurcation analysis is carried out producing two results with policy implications first there is a highly non linear relationship between the cost of abatement required to be green and the share of green firms second increases in the number of the cpr s users will ultimately dissipate the incentives to make abatement beyond regulation

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

international interdependencies in fiscal stabilization policies abstract trade links imply that business cycle fluctuations are transmitted among trade partners to the extent that fiscal policy can mitigate business cycle fluctuations international interdependencies in stabilization policies arise we analyse in a two country general equilibrium model the role of fiscal policy in mitigating risk or providing implicit insurance in the presence of capital market imperfections and adjustment failures rigid wages it is shown that there is a welfare case for an active stabilization policy and that it is larger in the presence of adjustment failures rigid wages non cooperative policy decisions imply inefficiencies in fiscal stabilization policies which in the case of flexible wages may imply too much stabilization whereas stabilization is always insufficient in the case of rigid wages

why does private consumption rise after a government spending shock recent empirical evidence suggests that private consumption is crowded in by government spending this outcome violates existing macroeconomic theory according to which the negative wealth effect brought about by a rise in public expenditure should decrease consumption

speculation optimism and differential information speculative trading has for quite some time been an important question for at least two reasons firstly as a positive question of whether speculative behavior basically is caused by differences in information or by differences in aversion to risk secondly the question is related to the informational efficiency of decentralized market systems if access to information not currently available to the market makes possible a speculative profit the incentive to acquire information may be too excessive from a social point of view the aim of this paper is to clarify the relationship between information and speculation in his seminal article on information acquisition in decentralized market economies hirshleifer 12 showed that the private value of acquiring information depends critically on the speculative profits to be made from this information hirshleifer 12 distinguished between information foreknowledge which affects productive decisions and information which only has implications for exchange similarly fama and laffer 5 distinguish between operational information which improves a firms operating decisions and trading information which only affects trading decisions it is argued due to the speculative profits to be made from having access to information not available to the market that there are excessive private incentives to acquire information without any relevance for productive decisions

the elusive costs and the immaterial gains of fiscal constraints we study whether fiscal restrictions affect volatilities and correlations of macrovariables and the probability of excessive debt for a sample of 48 us states fiscal constraints are characterized with a number of indicators and volatilities and correlations are computed in several ways the second moments of macroeconomic variables in states with different fiscal constraints are economically and statistically similar excessive debt and the mechanism linking budget deficit and excessive debts are independent of whether tight or loose fiscal constraints are in place creative budget accounting may account for the results

collusion discounting and dynamic games abstract this paper investigates the following claims in a dynamic game i pareto optimal outcomes are sustainable only by patient players and ii the set of equilibrium outcomes expands in the discount factor the intuition for these results although immediate for purely repeated games is shown to be incomplete for dynamic games consequently there is no direct link between patience and the sustainability of pareto optimal outcomes in fact there are dynamic games arbitrarily close to a repeated game in which such collusion is facilitated by impatience however for a class of dynamic games any equilibrium outcome that is sustainable by less patient players is also an equilibrium outcome when players are more patient journal of economic literature classification numbers c73 d90

monetary fiscal policy interactions and fiscal stimulus abstract increases in government spending trigger substitution effects both inter and intra temporal and a wealth effect the ultimate impacts on the economy hinge on current and expected monetary and fiscal policy behavior studies that impose active monetary policy and passive fiscal policy typically find that government consumption crowds out private consumption higher future taxes create a strong negative wealth effect while the active monetary response increases the real interest rate this paper estimates markov switching policy rules for the united states and finds that monetary and fiscal policies fluctuate between active and passive behavior when the estimated joint policy process is imposed on a conventional new keynesian model government spending generates positive consumption multipliers in some policy regimes and in simulated data in which all policy regimes are realized the paper reports the model s predictions of the macroeconomic impacts of the american recovery and reinvestment act s implied path for government spending under alternative monetary fiscal policy combinations

liquidity constraints and the substitutability between private and government consumption the role of military and non military spending i introduction using data for a number of economies we investigate i the relationship between private consumption and two types of government spending military and non military and ii the severity of liquidity constraints because of their importance for macroeconomic modeling in theory and practice 1 both issues have been the subjects of considerable theoretical and empirical investigation on the issue of liquidity constraints the most influential research has relied on hall s 1978 euler equation approach to the permanent income hypothesis in an attempt to reconcile hall s and flavin s 1981 methodologies hayashi 1982 modified hall s martingale result to allow for the possibility that a subset of consumers are liquidity constrained and showed that liquidity constraints can result in consumption s excess sensitivity to current income campbell and mankiw 1989 1990 1991 and jappelli and pagano 1989 have applied hayashi s methodology using data from the u s and several other oecd countries on the substitutability issue aschauer 1985 has modified hall s euler equation to allow for substitutability between government spending and private consumption and found that the two are substitutes for the u s karras 1994 however using a similar approach and data for 30 countries concludes that private and government consumption are better described as complementary or unrelated liquidity constraints and substitutability have been combined in studies by graham and himarios 1991 cushing 1992 and graham 1993 using u s data and by evans and karras 1996 for a number of countries a crucial limitation of most of these studies is the use of aggregate government consumption data which counterintuitively imposes a common substitutability parameter on all components of government spending 2 using recently available time series data for a large number of countries the present paper relaxes this restriction by decomposing government consumption into military and non military components enabling us to separately identify their relationship to private consumption the allocation of government consumption between military and non military functions has varied greatly across countries the appendix reports the average size of military and non military government shares in gdp as well as the military non military ratio by country over the 1970 1989 period average military expenditure as a fraction of gdp for example has ranged in our sample from 0 11 in mexico to 12 30 in jordan similarly the fraction of government consumption absorbed by military expenditure has ranged from 1 09 in mauritius to 66 82 in poland this sizable variability is promising in terms of cross sectional identification power but it also suggests that the estimated parameters must not be assumed to be common across countries the estimated model is derived in section ii which combines liquidity constraints and substitutability by nesting the approaches of hayashi 1982 and aschauer 1985 in the same section we discuss data sources and the estimation strategy which permits the estimated parameters to vary by country in a way that helps determine how they are influenced by country specific factors section iii estimates the model for a panel of the 66 countries for which annual data on all series are available for the 1970 1989 period the paper s main conclusions are given in section iv ii methodology and data we assume that consumers in economy i at time t derive utility from effective consumption c sup which we define as 1 mathematical expression omitted where c is private consumption g sup m and g sup nm are the military and non military components of government consumption the parameters theta sup m and theta sup nm measure the degree of substitutability between c and g sup m and c and g sup nm respectively

habit formation and fiscal transmission in open economies in this paper we analyze the ability of an open economy version of the neoclassical model to account for the time series evidence on fiscal policy transmission revisiting the evidence we find that i government spending raises output while inducing a simultaneous decline of investment and the current account and ii the responses of output and investment are more muted in more open economies while current account deficits tend to be larger turning to the model we explore the role of habit formation for fiscal policy transmission specifically we show that the model can account for the evidence if consumption behavior is characterized by habit formation and the terms of trade adjust endogenously

fiscal policy in an unemployment crisis this paper shows that large scal multipliers arise naturally from equilibrium unemployment dynamics in response to a shock that brings the economy into a liquidity trap an expansion in government spending increases output and causes a fall in the unemployment rate since movements in unemployment are persistent the eects of current spending linger into the future leading to an enduring rise in income as an enduring rise in income boosts private demand even a temporary increase in government spending sets in motion a virtuous employment spending spiral with a large associated multiplier this transmission mechanism contrasts with the conventional view in which scal policy may be ecacious only under a prolonged and committed rise in government spending which engineers a spiral of increasing ination

future fiscal and budgetary shocks abstract we study the effects of future tax and budgetary shocks in a non monetary and possibly non ricardian economy an unanticipated temporary labor tax cut to be effective on a given future date a delayed debt bomb causes at once a drop in the unit value placed on the firms business asset the customer with the result that share prices the hourly wage and employment drop in tandem this paradox of reduced activity through announcement of future stimulus does not hinge on an upward jump of long interest rates a future tax rate cut lacking a sunset provision has the same negative effects

imperfect mobility of labor across sectors and fiscal transmission abstract our paper investigates the sectoral effects of government spending shocks and highlights the role of labor mobility our var evidence for sixteen oecd countries reveals that a shock to government consumption by 1 of gdp increases non traded value added by 0 7 of gdp and generates a decline in traded value added the value added share of non tradables rises by 0 35 of gdp thus implying that the reallocation of resources accounts for 50 of the sectoral fiscal multiplier consistently our estimates show that the non traded sector is highly intensive in the government spending shock and experiences a labor inflow the shift of hours worked toward the non traded sector is however subject to mobility costs which vary across countries when we explore quantitatively the sectoral effects of a shock to government consumption that is highly intensive in non traded goods we find that the model can replicate the magnitude of the rise in the share of non tradables we document empirically once we allow for both labor mobility and capital installation costs financial openness also matters as it further biases the demand shock toward non tradables to account for the cross country dispersion in the responses of sectoral shares we estimate empirically we have to let the degree of labor mobility vary across countries

fishery management under multiple uncertainty abstract among others who point to environmental variability and managerial uncertainty as causes of fishery collapse roughgarden and smith proc natl acad sci 93 1996 5078 argue that three sources of uncertainty are important for fisheries management variability in fish dynamics inaccurate stock size estimates and inaccurate implementation of harvest quotas we develop a bioeconomic model with these three sources of uncertainty and solve for optimal escapement based on measurements of fish stock in a discrete time model among other results we find 1 when uncertainties are high we generally reject the constant escapement rule advocated in much of the existing literature 2 inaccurate stock estimation affects policy in a fundamentally different way than the other sources of uncertainty and 3 the optimal policy leads to significantly higher commercial profits and lower extinction risk than the optimal constant escapement policy by 42 and 56 respectively

fishing as a supergame abstract this paper considers how cooperative solutions to games of sharing fish resources can be supported by threat strategies with highly mobile fish stocks the number of agents compatible with a cooperative self enforcing solution is not very high for reasonable values of the discount rate but sensitive to changes in the discount rate and costs and to cost heterogeneity with migrating stocks where growth and reproduction depend on how much all agents leave behind after harvesting the likelihood of a cooperative self enforcing equilibrium is increased with a dominant player and a competitive fringe the rents and optimum stock level of the dominant player fall quickly as the share of the competitive fringe increases

addressing global environmental externalities transaction costs considerations is there a way to understand why some global environmental externalities are addressed effectively whereas others are not the transaction costs of defining the property rights to mitigation benefits and costs is a useful framework for such analysis this approach views international cooperation as a contractual process among country leaders to assign those property rights leaders cooperate when it serves domestic interests to do so the demand for property rights comes from those who value and stand to gain from multilateral action property rights are supplied by international agreements that specify resource access and use assign costs and benefits including outlining the size and duration of compensating transfer payments and determining who will pay and who will receive them four factors raise the transaction costs of assigning property rights i scientific uncertainty regarding mitigation benefits and costs ii varying preferences and perceptions across heterogeneous populations iii asymmetric information and iv the extent of compliance and new entry these factors are used to examine the role of transaction costs in the establishment and allocation of property rights to provide globally valued national parks implement the convention on the international trade in endangered species of wild fauna and flora execute the montreal protocol to manage emissions that damage the stratospheric ozone layer set limits on harvest of highly migratory ocean fish stocks and control greenhouse gas emissions jel d23 p14 q22 q51 q54 q58

cooperation on climate change mitigation abstract we analyze conditions under which it is possible to achieve efficient mitigation of greenhouse gas emissions with a self enforcing international agreement in which all countries find it in their self interest to abide by the agreement we model the choice of emissions by countries as a dynamic game we use a two part punishment scheme for deviations from an agreement that is renegotiation proof and show when this scheme supports the efficient outcome as a subgame perfect equilibrium using numerical examples we show that an efficient subgame perfect equilibrium exists for a range of reasonable parameter values the existence of such equilibrium may be non monotonic in the discount rate and the ratio of slope of marginal abatement cost and marginal damages

can government purchases stimulate the economy this essay briefly reviews the state of knowledge about the government spending multiplier drawing on theoretical work aggregate empirical estimates from the united states as well as cross locality estimates i assess the likely range of multiplier values for the experiment most relevant to the stimulus package debate a temporary deficit financed increase in government purchases i conclude that the multiplier for this type of spending is probably between 0 8 and 1 5 jel e23 e62 h50

anticipated fiscal policy and adaptive learning abstract the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations is considered agents are assumed to combine limited structural knowledge with a standard adaptive learning rule these issues are analyzed using two well known set ups an endowment economy and the ramsey model in our scenario there are important deviations from both rational expectations and purely adaptive learning the approach could be applied to other frameworks

infrastructure provision and macroeconomic performance this paper studies the differences between private and government provision of infrastructure capital utilization decisions and their differential role in determining market prices for capital goods under the two regimes of infrastructure provision serve as a critical transmission mechanism for fiscal policy a subsidy to private providers of infrastructure is preferable to direct government provision irrespective of how the subsidy or expenditure is financed the case for private provision is much stronger in economies characterized by high levels of congestion the choice between private and government provision also has a crucial effect on the design of optimal fiscal policy 2011 elsevier b v all rights reserved

on the long run neutrality of demand shocks we revisit the seminal paper by blanchard and quah 1989 and investigate their long run identification scheme we use a structural var model with smoothly changing covariances for the identification of shocks formal testing rejects the long run neutrality of demand shocks

fiscal policy and occupational employment dynamics we document substantial heterogeneity in occupational employment dynamics in response to government spending shocks in the united states employment rises most strongly in service sales and office pink collar occupations by contrast employment in blue collar occupations is hardly affected by fiscal policy we provide evidence that occupation specific changes in labor demand are key for understanding these findings we develop a business cycle model that explains the heterogeneous occupational employment dynamics as a consequence of composition effects due to heterogeneous employment changes across industries and occupation specific within industry employment shifts due to differences in the short run substitutability between labor and capital services across occupations

optimal cartel equilibria with imperfect monitoring abstract there exist optimal symmetric equilibria in the green porter model 4 8 having an elementary intertemporal structure such an equilibrium is described entirely by two subsets of price space and two quantities the only production levels used by firms in any contingency the central technique employed in the analysis is the reduction of the repeated game to a family of static games

excludable and non excludable public inputs consequences for economic growth non excludable and excludable public inputs are introduced into an endogenous growth model we derive the equilibrium growth rate and design the optimal tax and user cost structure emphasizing the role of congestion and its consequences for the government s budget the latter comprises fee and tax revenues that are used to finance the public inputs although they may generate insufficient revenue to do so entirely we extend the model to allow for monopoly pricing of the user fee by the government most of the analysis is conducted for general production functions consistent with endogenous growth but the ces technology is also considered a vast literature has evolved emphasizing the role of public investment as a determinant of economic growth among the earliest contributions arrow and kurz 1970 is particularly significant while the seminal work of barro 1990 has been especially influential with respect to the contemporary endogenous growth literature stimulated by aschauer s 1989 findings pertaining to the high rate of return on public capital several authors have explored various aspects of the role of public capital in stimulating economic growth for example baxter and king 1993 and fisher and turnovsky 1998 examine the interaction between public and private capital in a ramsey type growth model while futagami et al 1993 perform a similar type of analysis in an endogenous growth context glomm and ravikumar 1997 analyse the growth effects of productive public spending in an overlapping generations setup extending the framework to include majority voting and alternative compositions of publicly provided goods and services they also indicate private alternatives to public provision but do not pursue this in detail cassou and lansing 1998 focus on the relationship between private and public capital showing how the evolution of the ratio between the two in the us economy since 1925 is broadly consistent with the predictions of a simple ramsey growth model they also show how the productivity slowdown in the us economy since the 1970s is more likely due to increasing tax rates than to non optimal public investment policy much of the literature including barro treats the public input as a pure public good freely available without restrictions or impediments to all agents in the economy but the public goods literature identifies many different characteristics that most public goods in fact exhibit notably the presence of rivalry and or excludability see e g cornes and sandler 1996 thus the treatment of a public

regulation of fisheries bycatch with common pool output quotas abstract many fisheries around the world are plagued with the problem of bycatch the inadvertent harvesting and discard of non targeted species bycatch occurs when targeted and non targeted species coincide in the same habitat and gear is imperfectly selective one of the prevailing methods of controlling bycatch is the common pool quota system under this system biologists set total allowable catches tacs for both the targeted and non targeted species and the fishing season is closed when one of these tacs binds we develop a predictive model of a renewable resource that is regulated with this kind of common pool quota system the model demonstrates that the equilibrium will generally be characterized by excessive discards shortened seasons and foregone target species harvest these results occur even with very efficient low bycatch fishing gear we examine the sensitivity of our predictions to changes in technological parameters and degrees of spatial correlation of target and non target species finally we derive the optimal bycatch penalty function and describe its significance in light of various policy options available to regulators

laffer strikes again dynamic scoring of capital taxes abstract we set up a neoclassical growth model extended by a corporate sector an investment and finance decision of firms and a set of taxes on capital income we provide analytical dynamic scoring of taxes on corporate income dividends capital gains other private capital income and depreciation allowances and identify the intricate ways through which capital taxation affects tax revenue in general equilibrium we then calibrate the model for the us and explore quantitatively the revenue effects from capital taxation we take adjustment dynamics after a tax change explicitly into account and compare with steady state effects we find among other results a self financing degree of corporate tax cuts of about 70 90 and a very flat laffer curve for all capital taxes as well as for tax depreciation allowances results are strongest for the tax on capital gains the model predicts for the us that total tax revenue increases by about 0 3 1 2 after abolishment of the tax

prosperity and depression prosperity and depression are relative concepts today both france and japan are depressed relative to the united states equivalently the united states is prosperous relative to these countries i say these countries are depressed relative to the united states because their output per working age person is 30 percent less than the u s level an interesting and important policy question is why are these countries depressed the answers for these two countries turn out to be very different the united states is prosperous relative to france because the u s intratemporal tax wedge that distorts the trade off between consumption and leisure is much smaller than the french wedge i will show that if france modified its intratemporal tax wedge so that its value was the same as the u s value french welfare in consumption equivalents would increase by 19 percent consumption would have to increase by 19 percent now and in all future periods to achieve as large a welfare gain as that resulting from this tax reform the united states is prosperous relative to japan because production efficiency is higher in the united states in the united states total factor productivity is approximately 20 percent higher than in japan if japan suddenly became as efficient in production as the united states its welfare gain in consumption equivalents would be 39 percent equally interesting and important are big changes over time in relative output per working age person across countries why are new zealand s and switzerland s economies depressed by over 30 percent relative to their 1970 trend corrected levels both of these countries have small populations but depressions are not restricted to small countries japan with its 125 million people is now depressed by 20 percent relative to its 1991 trend corrected level on the prosperity side why are ireland and south korea so prosperous now relative to their 1970 trend corrected levels this lecture is concerned primarily with big international differences among relatively rich industrial countries and changes in these differences over time the countries that receive primary attention all have market economies and healthy well educated populations in the countries considered the variations in aggregate output per working age person are large and reasonably good measures of the factor inputs are available this permits in many cases the identification of the change in policy or the difference in policy that gave rise to prosperity or depression this is in contrast to business cycle theory which provides little guidance to policy except for the important policy implication that a stabilization effort will have either no effect or a perverse effect the output variations studied and analyzed in this lecture are big an order of magnitude larger than the much studied business cycle fluctuations the variations studied however are an order of magnitude smaller than the muchstudied differences between the richest and poorest countries surprisingly only recently have depressions been systematically studied from the perspective of growth theory which is the theory used university of minnesota and federal reserve bank of minneapolis i thank my colleagues at the university of minnesota and the federal reserve bank of minneapolis for helpful discussions and comments in particular i thank tim kehoe ellen mcgrattan and nancy stokey for their help i also thank martin weale and franck portier for providing some british and french tax information used in this lecture thanks also go to sami alpanda and james macgee for research assistance and helpful discussions this lecture draws heavily on collaborative research with fumio hayashi i thank the economic and social research institute cabinet office government of japan and the u s national science foundation for financial support the views expressed herein are those of the author and not necessarily those of the federal reserve bank of minneapolis or the federal reserve system

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

a free lunch in the commons we derive conditions under which raising costs through a regulatory constraint or a fully expropriated tax can increase the profits arising from a common pool resource the basic model assumes a fixed number of identical agents with linear costs selling in a single period at an exogenous price a necessary and sufficient condition for a cost increase to be profitable is that aggregate output from the resource be locally convex in aggregate effort we also show that cost increases can be profitable even if price is endogenous agents are heterogeneous entry is costless or agents are playing a markov perfect equilibrium of a dynamic game we also discuss more general welfare implications of the result along with its relation to existing results for a cournot oligopoly

habit formation adjustment costs and international transmission of fiscal policy abstract the paper studies the effects of fiscal policy in an integrated world economy the setup is one with habit forming endogenous rates of time preference and adjustment costs in investment most of the predictions of the model are in line with the recent empirical literature on fiscal policy for instance in response to a balanced fiscal expansion we obtain positive long run output multipliers long run increases in employment short and medium run increases in wages and decreases in investment our results suggest that short run government spending multipliers are smaller than tax multipliers most importantly we show that the model can generate positive short and medium run consumption responses to a positive fiscal shock this is relevant as negative consumption responses are considered to be one of the main challenges facing neo classical models of fiscal policy

fiscal policy in good times and bad in the 1980s several countries with large government debt or deficit implemented substantial and in some cases drastic deficit cuts contrary to widespread expectations in many cases private consumption boomed rather than contracted this paper shows that in times of fiscal stress shocks to government revenues and especially expenditure have very different effects on private consumption than in normal times

decentralized management of common property resources experiments with a centuries old institution for centuries villages in the alps employed a special system for managing their common properties individual users could inspect other users at their own cost and impose a predetermined sanction a fine when a free rider was discovered the fine was paid to the user who found a violator experiments with the institutions demonstrate that this mechanism considerably improves efficiency of resource use the classical model of identical selfish agents does not capture the data as well as a model with heterogeneous and linear other regarding preferences altruism and especially potentially dysfunctional behavior such as spite and mistake play important positive roles

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

interactions of monetary and fiscal policy via open market operations we examine interactions of monetary and fiscal policy in a sticky price model where public debt is non neutral as it provides transaction services this property is brought about by a legal restriction on open market operations by which only government bonds are eligible debt creation eases access to money and can therefore induce households to increase purchases of goods government expenditures which are not completely tax financed and deficit financed tax cuts then tend to stimulate private consumption however for these fiscal impulses to raise real activity monetary policy should not too aggressively aim at stabilising the economy

is the political business cycle for real abstract this paper constructs and examines a macroeconomic model which combines features from both real and political business cycle models we augment a standard real business cycle tax model by allowing for varying levels of government partisanship and competence in order to replicate two important empirical regularities first that on average the economy expands early under democratic presidents and contracts early under republican presidents second that presidents whose parties successfully retain the presidency have stronger than average growth in the second half of their terms the model generates both of these features that conform to u s post world war ii data

cooperation in the commons with unobservable actions we model a dynamic common property resource game with unobservable actions and non linear stock dependent costs we propose a strategy profile that generates a worst perfect equilibrium in the punishment phase thereby supporting cooperation under the widest set of conditions we show under what set of parameter values for the discount rate resource growth rate harvest price and the number of resource users this strategy supports cooperation in the commons as a subgame perfect equilibrium the strategy profile that we propose which involves harsh punishment after a defection followed by forgiveness is consistent with human behavior observed in experiments and common property resource case studies

externality in labor supply and government spending standard business cycle models face difficulties generating i government spending multipliers exceeding unity and ii stabilizing effects of government size using a simple model with externality in labor supply we show that a sufficient degree of complementarity between aggregate and private labor supplies is key to reproducing these stylized facts

can public spending boost private consumption this paper analyses the effects on private consumption from an increase in productive and unproductive public spending a new keynesian model incorporating price and wage rigidities monetary policy and various fiscal rules is developed and estimated using bayesian techniques to capture the key cyclical characteristics of the us economy we find that price and wage rigidities along with a positive shock to the part of public spending that is productive are suficient to boost private consumption moreover we show that this initial positive reaction of private consumption is adequate to create a positive present value consumption multiplier for more than five years finally we show that our main results remain robust to changes in the monetary rule and the various methods of deficit financing

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

mitigating the tragedy of the commons through cooperation an experimental evaluation abstract in a commons each firm s costs rise with industry output this externality can be mitigated if firms jointly restrict harvests but higher prices result repeated interaction usually facilitates cooperation that lowers harvest rates increased cooperation suggests there should be more firms in the socially optimal market structure using experimental markets with two to five firms we observe the influence of industry size on harvest rates cooperation increases the socially optimal number of firms in markets when there are static externalities but not for dynamic externalities finally even when the initial stock is low there is little tendency toward resource extinction

the optimal number of firms in the commons a dynamic approach we consider a common property resource sold in imperfectly competitive markets there is a dynamic externality current harvests lower future stocks raising future harvest costs and a static crowding externality increasing industry size raises costs but lowers prices thus it has ambiguous welfare effects the optimal industry size typically changes over time so that a first best outcome cannot be obtained with a fixed number of firms single firm exploitation is optimal only under special circumstances the socially optimal open loop steady state industry size corresponds to the static optimum both generally differ from the closed loop steady state optimum

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

fiscal policy and asset prices with incomplete markets we study the simultaneous impact of fiscal policy decisions on macroeconomic activity wealth distribution and asset prices we consider a general equilibrium overlapping generations model with incomplete markets and heterogeneous agents where government debt and capital are imperfect substitutes increases in public debt lead to significant increases in the riskless rate and to a reduction in the equity premium while higher capital income tax rates lead to a higher equity premium the crowding out effects on capital and output are much higher than in models where government debt and capital are perfect substitutes which thus ignore households portfolio reallocation decisions the author 2012 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oup com oxford university press

accounting for the great depression economists have offered many theories for the u s great depression but no consensus has formed on the main forces behind it here we describe and demonstrate a simple methodology for determining which theories are the most promising we show that a large class of models including models with various frictions are equivalent to a prototype growth model with time varying efficiency labor and investment wedges that at least on face value look like timevarying productivity labor taxes and investment taxes we use u s data to measure these wedges feed them back into the prototype growth model and assess the fraction of the fluctuations in 1929 39 that they account for we find that the efficiency and labor wedges account for essentially all of the decline and subsequent recovery investment wedges play at best a minor role this article originally appeared in the american economic review american economic association

the output effect of fiscal consolidation plans abstract we show that the correct experiment to evaluate the effects of a fiscal adjustment is the simulation of a multi year fiscal plan rather than of individual fiscal shocks simulation of fiscal plans adopted by 16 oecd countries over a 30 year period supports the hypothesis that the effects of consolidations depend on their design fiscal adjustments based upon spending cuts are much less costly in terms of output losses than tax based ones and have especially low output costs when they consist of permanent rather than stop and go changes in taxes and spending the difference between tax based and spending based adjustments appears not to be explained by accompanying policies including monetary policy it is mainly due to the different responses of business confidence and private investment

sources and propagation of international output cycles common shocks or transmission abstract this paper studies the generation and transmission of international cycles in a multi country model with production and consumption interdependencies two sources of disturbance are considered and three channels of propagation are compared technology disturbances which are mildly correlated across countries are more successful than government expenditure disturbances in reproducing actual data the presence of a common component to the shocks and of production interdependencies appear to be crucial in quantitatively matching the properties of the data

fiscal spending shocks endogenous government spending and real business cycles abstract we analyze a real business cycle model in which the government optimally chooses public investment and nonmilitary current expenditures to maximize the welfare of the representative private agent we characterize the optimal response of endogenous spending to shocks to technology and to military expenditures comovements between the components of government spending and other macroeconomic aggregates predicted by the model are compared with the corresponding comovements in the u s data the model captures the qualitative features of the relative volatilities of the components of government spending quite well but predicts too high correlations between the components of government spending and output

government spending entry and the consumption crowding in puzzle this article documents empirically that net firm entry robustly rises after a u s government spending expansion we use this new finding to test the empirical validity of various model features that have been proposed to generate consumption crowding in after positive expenditure shocks endogenous entry models typically fail to generate the observed joint increase in consumption and entry model features that dampen the wealth effect such as rule of thumb households or complementarity between labor and consumption in preferences tend to reduce entry we show that utility or productivity enhancing public spending can reconcile the model with our documented fact and performs well empirically

new keynesian versus old keynesian government spending multipliers renewed interest in fiscal policy has increased the use of quantitative models to evaluate policy because of modelling uncertainty it is essential that policy evaluations be robust to alternative assumptions we find that models currently being used in practice to evaluate fiscal policy stimulus proposals are not robust government spending multipliers in an alternative empirically estimated and widely cited new keynesian model are much smaller than in these old keynesian models the estimated stimulus is extremely small with gdp and employment effects only one sixth as large and with private sector employment impacts likely to be even smaller we investigate the sensitivity of our findings with regard to the response of monetary policy the zero bound on nominal interest rates and the inclusion of an empirically relevant degree of rule of thumb behaviour in the new keynesian model in addition we relate our findings using estimated structural macroeconomic models to the recent literature using reduced form regression techniques

fiscal policy pricing frictions and monetary accommodation this paper empirically investigates whether the theoretical conditions for government expenditure expansions to be effective hold for the data we ask whether the necessary conditions for fiscal effectiveness are relevant on average and in special circumstances that capture features of the recent crisis fiscal policy can be an effective countercyclical tool if monetary policy accommodates the fiscal expansion if expectations about future output growth and inflation are constant and if structural relationships are invariant to the policy change recent expansions are unlikely to produce large output multipliers or have important debt or inflation effects credible deficit and debt reduction schemes can produce sizeable output multipliers fabio canova and evi pappa

the international ramifications of tax reforms supply side economics in a global economy this paper studies tax reforms in a dynamic model of a global economy calibrated to current u s and european tax policies world capital markets add consumption smoothing and income redistribution effects that alter closed economy predictions in the absence of taxes on foreign interest welfare gains of eliminating u s income taxes are enlarged by up to 34 percent at the expense of european losses caused by transitional declines in consumption and leisure and a permanent capital outflow in contrast if foreign interest is taxed the same tax reform reduces u s welfare 0 7 percent and increases european welfare 1 8 percent copyright 1998 by american economic association