estimates of effective marginal tax rates on factor incomes this chapter describes a method of calculating summary measures of effective factor income tax rates in the united states using readily available data the numbers resulting from application of this method in a study are reported in the chapter and some of their possible uses are discussed the estimated factor income tax rates behave over time in a manner quite consistent with the behavior of other broad measures of federal tax policy the postwar movement in the tax rate on income from labor relative to that on income from capital or more accurately the relevant components of these tax rates provides suggestive support for the miller scholes hypothesis that the federal personal income tax has been moving in the direction of a pure consumption tax the tax rates reported in the chapter are consistent with other studies that show a decrease since the 1950s in rates of taxation at the corporate level of income from corporate held capital they are also consistent with the view that rates of taxation of such income at the noncorporate level have risen but not quite sufficiently to offset the decline in the corporate tax burden

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

the housing market macroeconomic activity and financial innovation an empirical analysis of u s data the relationship between macroeconomic activity and residential expenditure over the period 1959 i to 1991 i has been examined the analysis is conducted using varriance decompostions vdcs and historical decompostions hds the vdcs indicate that shocks to the money stock output and interest rates have significant impact on residental expenditure the hds indicate that shocks to macroeconomic variable are relatively unimportant in the determination of residential expenditure in the period following the extensive fiancial deregulation in the early 1980s

are consumption taxes really better than income taxes abstract we use political equilibrium theory and the neoclassical growth model to compare consumption and income tax systems if government outlays are used for redistribution through transfers then steady state equilibria in societies that use income taxes are not necessarily worse in welfare terms and may even be better income taxes are attractive precisely because they are more distortionary since this implies low equilibrium transfer levels we also find that switching tax systems typically does not benefit the median voter moreover a change from income to consumption taxes may make everybody worse off

supply side interventions and redistribution we evaluate the eect on welfare of shifting the burden of capi tal income taxes to labor taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates we calibrate and simu late the economy we nd that lowering capital taxes has two eects i it increases e ciency in terms of aggregate production and ii it redistributes wealth in favor of those agents with a low wage wealth ratio when the parameters of the model are calibrated to match the distribution of income in terms of the wage wealth ratio the redis tributive eect dominates and agents with a high wage wealth ratio would experience a large loss in utility if capital income taxes were eliminated

public debt discretionary policy and inflation persistence we describe a simple mechanism that generates inflation persistence in a standard sticky price model of optimal fiscal and monetary policy key to this mechanism is that policies are implemented under discretion the government s discretionary incentive to erode the real value of nominal public debt by means of surprise inflation renders inflation expectations and in further consequence equilibrium inflation rates highly correlated with the stock of public debt debt in turn is highly persistent allowing for tax smoothing in the face of disturbances due to the aforementioned correlation the persistence in debt carries over to inflation our analysis uncovers a non monotonic effect of nominal rigidities on inflation persistence and shows that government debt under discretion does not display the near random walk property familiar from the ramsey literature a calibrated version of the model that incorporates a moderate degree of monopolistic competition and price stickiness is quantitatively consistent with the inflation dynamics experienced in the usa since the volcker disinflation of the early 1980s

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

optimal taxes without commitment abstract in the problem of optimal taxation in an economy with labor and capital the optimal solution when the government can commit to a sequence of tax rates entails that the tax on capital tends to zero in the limit with all the tax burden on labor it is well known however that this solution is time inconsistent so if the commitment power is not perfect this second best tax plan will not be sustainable we model explicitly the trade off between the cost of revising the tax plan and the benefit of the revision as a result when commitment is not possible both the limit tax rate and the steady state capital are different from their levels in the second best solution limit taxes on capital may be strictly positive but it may also be the case that the only sustainable plan has subsidies to capital the subsidies induce an overaccumulation of capital which becomes a commitment device against revisions of the tax plan journal of economic literature classification numbers h21 c73

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

on the optimal timing of capital taxes for many kinds of capital depreciation rates change systematically with the age of the capital consider an example that captures essential aspects of human capital both regarding its accumulation and its depreciation a worker obtains knowledge in period 0 then uses this knowledge in production in periods 1 and 2 and thereafter retires here depreciation accelerates it occurs at a 100 rate after period 2 and at a lower perhaps zero rate before that the present paper analyzes the implications of non constant depreciation rates for the optimal timing of taxes on capital income the main finding is that under natural assumptions the path of tax rates over time must be oscillatory oscillatory tax rates are optimal when depreciation rates accelerate with the age of the capital as in the above example and provided that the government can commit to the path of future tax rates but cannot apply different tax rates in a given year to different vintages of capital

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

optimal taxation in life cycle economies abstract we use a very standard life cycle growth model in which individuals have a labor leisure choice in each period of their lives to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income the intuition for our result is straightforward in a life cycle model the individual s optimal consumption work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual s lifetime one way to achieve this goal is to use capital and labor income taxes that vary with age if tax rates cannot be conditioned on age a nonzero tax on capital income is also optimal as it can imperfectly mimic age conditioned consumption and labor income tax rates journal of economic literature classification numbers e62 h21

expenditures and receipts in state and local government finances comment the aim of this note has been to show that marlow and manage s 1987 paper suffers from serious methodological problems due to the non stationary data series used and the arbitrary lag lengths employed use of appropriate stationarity tests and optimal lag lengths of the variables change some of the basic conclusions of their paper contrary to their suggestion the presence of a feedback between local tax receipts and expenditures imply that local governments should be concerned with the implication of their spending and revenue enhancing decisions on their budget decisions to increase current expenditures may lead to higher future taxes similarly efforts to impose higher taxes to reduce budget deficits at the local government level may be futile due to a subsequent increase in spending

trade policy in burundi reform without political stability this paper evaluates burundi s progress with trade policy reform by comparing earlier analyses of burundi s trade policies undertaken in the 1980s with that of the wto s recent trade policy review since the mid 1980s burundi has been trying to reform its trade and macroeconomic policies against the background of continuous socio political tensions and periodic outbreaks of violent tribal conflict a then and now comparison allows us to assess both the extent of the trade reforms and of the economic return to those reforms it is evident that there has been a significant rationalisation and simplification of trade policy burundi has eliminated most quantitative import restrictions and reduced the average level and range of its tariffs the scope for allocative distortions undesirable redistributive effects and for impediments to investment and growth has been substantially reduced however a return to reform in terms of export growth or diversification and of overall economic growth is not discernible yet this is unsurprising given the scale of the economic disruption sustained socio political stability among other things will be required to induce the investment in human and physical capital needed for a positive return to trade policy reform

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

politico economic equilibrium and economic growth abstract we propose a notion of dynamic politico economic equilibrium which builds on two key assumptions policies are determined sequentially and agents are fully rational in their roles as both consumers and voters we examine a simple model of endogenous growth and infinitely lived agents where taxes on income are endogenous and where growth critically depends on the initial distribution of asset holdings we relate our equilibrium definition and results to existing literature on time consistency and on political economy and growth we show that our equilibria are time consistent and we argue that the choice of equilibrium concept might have important quantitative implications

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

redistributive taxation in a simple perfect foresight model abstract we investigate the redistributive potential of capital taxation in an intertemporal maximizing model of capital formation first even unanticipated redistributive capital taxation is severely limited in its effectiveness since it depresses wages second under any convergent redistributive tax policy which maximizes a paretian social objective the capital income tax will converge to zero independent of the factor supply elasticities these results are independent of workers holdings of capital

credible monetary policy in an infinite horizon model recursive approaches abstract this paper develops recursive methods to study optimal and time consistent policy in dynamic models we analyze a version of calvo s 1978 monetary model and show that its time consistent outcomes can be completely characterized as the largest fixed point of either of two operators recursive application of these operators provides a computing algorithm which always converges to the set of time consistent outcomes finally we obtain valuable information about the nature of time consistent outcomes it is discovered in particular that all such outcomes are markovian the methods obtained are intuitive and should be useful for many applications journal of economic literatureclassification numbers e61 e52 c61

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

causality analysis and multivariate autoregressive modelling with an application to supermarket sales analysis abstract this paper describes a modelling methodology for multivariate stochastic processes the concept of multiple causality is discussed and a procedure to detect multiple causality is suggested the data of a major canadian supermarket is analyzed and a multivariate autoregressive model for this supermarket is constructed and estimated several empirical findings are reported

short and long run incidence of protection the case of madagascar the effects of trade policy interventions within a general equilibrium framework are examined the short and long term incidence of protection for a particular low income developing country were measured using time series data on relative prices for the period 1974 84 the results based on cointegration techniques establish that nominal protection of importables was substantially lower than true protection that true protection was lower in the long run that in the short term and that the adjustment to equilibrium relative prices was fairly rapid in this period

policy commitment and the welfare gains from capital market liberalization this paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment time consistent policies the transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent as a consequence of this taxation shift welfare increases by about 1 percent the reduction in capital taxation induced by capital market liberalization is welfare improving because in the absence of capital mobility the time consistent policies over tax capital

optimal fiscal and monetary policy some recent results this paper studies the quantitative properties of fiscal and monetary policy in business cycle models in terms of fiscal policy optimal labor tax rates are virtually constant and optimal capital income tax rates are close to zero on average in terms of monetary policy the friedman rule is optimal nominal interest rates are zero and optimal monetary policy is activist in the sense that it responds to shocks to the economy

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

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

on the accuracy of economic observations do sub saharan trade statistics mean anything matching exporters freight on board fob trade statistics with the corresponding importers cost inventory and freight cif data this paper studies the quality of official information on trade between 36 african countries the author found the disparities in data so great as to make the official trade statistics almost useless for most empirical and policy studies he concluded that a statistics on matching exports and imports vary so much that the data cannot be used to assess the level of trade between african countries b the data are probably equally useless for assessing the direction of trade since the countries that exporters report as the destination of trade often fail to report corresponding imports c the data are inadequate for determining the composition of trade because countries report on different levels of detail and d large persistent apparent differences in trends in intra african trade may simply reflect different degrees of accuracy in country trade data finally the fact that reported fob exports often exceed the corresponding reported imports suggests either that smuggling is widespread or that importers are intentionally underinvoicing because of high african tariffs or quotas

ramsey policies in a small open economy with sticky prices and capital this paper analyzes jointly optimal fiscal and monetary policies in a small open economy with capital and sticky prices we allow for trade in consumption goods under perfect international risk sharing we consider balanced budget fiscal policies where authorities use distortionary taxes on labor and capital together with monetary policy using the nominal interest rate first as long as a symmetric equilibrium is considered the steady state in an open economy is isomorphic to that of a closed economy second whereas sticky prices allocations are almost indistinguishable from flexible prices allocations the open economydimension delivers results that are qualitatively similar to those of a closed economy but with significant quantitative changes fluctuations in terms of trade implied by complete international financial markets affect i consumption through changes in the consumption price index cpi ii hours through changes in the cpi based real wage and iii capital accumulation through the relative price of capital goods these wedges affect the volatility and persistence of optimal tax rates and resulting allocations are quite different as compared to a closed economy

central bank independence and the monetary instrument problem we study the monetary instrument problem in a dynamic noncooperative game between separate discretionary fiscal and monetary policy makers we show that monetary instruments are equivalent only if the policy makers objectives are perfectly aligned otherwise an instrument problem exists when the central bank is benevolent while the fiscal authority is short sighted relative to the private sector excessive public spending and debt emerge under a money growth policy but not under an interest rate policy despite this property the interest rate is not necessarily the optimal instrument

nonlinear capital taxation without commitment we study efficient nonlinear taxation of labor and capital in a dynamic mirrleesian model incorporating political economy constraints policies are chosen sequentially over time without commitment our main result is that the marginal tax on capital income is progressive in the sense that richer agents face higher marginal tax rates

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

optimal fiscal policy in the neoclassical growth model revisited this paper studies optimal taxation in a version of the neoclassical growth model in which investment becomes productive within the period thereby making the supply of capital elastic in the short run because taxing capital is distortionary in the short run the government s ability desire to raise revenues through capital income taxation in the initial period or when the economy is hit with a bad shock is greatly curtailed our timing assumption also leads to a tractable ramsey problem without state contingent debt which can give rise to debt financed budget deficits during recessions

trade strategy and revealed trade bias an evaluation for a small industrializing economy abstract the traditional classification of trade strategies into import substitution is and export promotion ep is based on the traditional two sector trade model in the context of a three sector model including nontradeables there is potentially greater analytical richness and apparently greater possibility of a wider range of ex ante trade strategies included among these possibilities is a mixed is ep strategy which generates a protradeable bias this paper investigates the properties of a general equilibrium model and the necessary commercial policy interventions required to bring about particular changes in relative prices detailed evidence on revealed trade regime biases within the tradeables good sectors and between tradeables and nontradeables is provided for barbados the evidence indicates that ex post classification of trade strategy may differ significantly from the ex ante or intended strategy and that use of partial equilibrium estimates of effective protection of tradeables alone is likely to be an inappropriate means of classifying trade strategies

markov perfect capital and labor taxes abstract this paper analyzes the markov perfect equilibrium of an economy were a benevolent government that lacks the ability to commit to future policy choices uses taxes on capital and labor income to finance the provision of a public good the main finding is that the government taxes capital and subsidizes labor so that only the dynamic inefficiency of future capital taxes remains if agents preference for the public good is sufficiently high then capital is confiscated setting bounds on taxes alleviates the dynamic inefficiency inherent in capital taxation but some implementations carry a high welfare cost allowing for endogenous capital utilization makes the current capital tax distortionary and implies capital and labor tax rates that are relatively close to those measured for the u s economy

demographics and the politics of capital taxation in a life cycle economy this article studies the effects of demographics on the mix of tax rates on labor and capital it uses a quantitative general equilibrium overlapping generations model where tax rates are voted without past commitments in every period and characterized as a markov equilibrium in the united states the younger voting age population in 1990 compared to 1965 accounts for the observed decline in the relative capital tax rate between those two years a younger population raises the net return to capital leads voters to increase their savings and results in a preference for lower taxes on capital conversely aging might increase capital taxation

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

be careful what you calibrate for social discounting in general equilibrium abstract concerns about intergenerational equity have led to an influential practice of setting social utility discount rates based on ethical considerations rather than to match household behavior particularly in climate change economics e g stern 2006 this paper formalizes the broader policy implications of this approach in general equilibrium by characterizing jointly optimal environmental and fiscal policies in a climate economy model with differential planner household discounting first i show that decentralizing the optimal allocation requires not only high carbon prices but also fundamental changes to tax policy if the government discounts the future less than households implementing the optimal allocation requires an effective capital income subsidy a negative intertemporal wedge and in a setting with distortionary taxation an effective labor consumption tax wedge that is decreasing over time second if the government cannot subsidize capital income the constrained optimal carbon tax may be up to 50 below the present value of marginal damages the social cost of carbon due to the general equilibrium effects of climate policy on household savings third given the choice to optimize either carbon capital or labor income taxes the socially discounting planner s welfare ranking is ambiguous over a standard range of parameters overall in general equilibrium a policy maker s choice to adopt differential social discounting may thus overturn conventional recommendations for both environmental and fiscal policy

optimal dynamic carbon taxes in a climate economy model with distortionary fiscal policy how should carbon be taxed as a part of fiscal policy the literature on optimal carbon pricing often abstracts from other taxes however when governments raise revenues with distortionary taxes carbon levies have fiscal impacts while they raise revenues directly they may shrink the bases of other taxes e g by decreasing employment this article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate economy model with distortionary fiscal policy first this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income this link arises because carbon emissions destroy natural capital they accumulate in the atmosphere and decrease future output consequently this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments second this article characterizes optimal climate policy in sub optimal fiscal settings where income taxes are constrained to remain at their observed levels third this article presents a detailed calibration that builds on the seminal dice approach but adds features essential for a setting with distortionary taxes such as a differentiation between climate change production impacts e g on agriculture and direct utility impacts e g on biodiversity existence value the central quantitative finding is that optimal carbon tax schedules are 8 24 lower when there are distortionary taxes compared to the setting with lump sum taxes considered in the literature

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

policy inference using var models policy inference using var models i introduction macroeconomics has a long tradition of examining the response of macroeconomic variables to shocks in alternative policy measures much recent work in this area has been based on the empirical regularities between variables found in vector autoregressive var models the var results in turn have been used to investigate the impact of changes in different policy variables var modeling procedures have been used to test the relative effects of changes in money interest rates broad credit measures and fiscal actions on economic activity 1 moreover because var analysis does not require the specification of an underlying theoretical model it also has been used to study the linkages among macroeconomic variables across national borders 2 although debate over the alleged atheoretical nature of vars continues for example see cooley and leroy 1985 leamer 1985 and braun and mittnik 1985 var models are frequently used for policy analysis how the dynamic specification of a var model is generated and how the dynamics may influence the resulting policy recommendation is the subject of this study while modeling the dynamic relationship among macro variables is a longstanding subject relatively few studies have tested for the effects of alternative lag structures on a given model to our knowledge there has been little systematic analysis of the sensitivity of policy effects to changes in the lag structure of a given var model 3 in this paper we investigate this specification problem using a simple four variable var model similar in spirit to sims s 1980b 4 this model consists of quarterly observations for money real output prices and nominal short term interest rates for the period 1960 through 1985 in selecting this model we opt to focus on the impacts of lag specification on policy inferences derived from a given var model in doing so we ignore the effects of altering the specification in terms of variables included or excluded this approach seems reasonable however since our purpose is to investigate the effects of lag structure not specification problems in general to compare the policy conclusions derived from the alternative dynamic structures we use six different lag selection criteria these criteria briefly described in section ii vary the bias efficiency tradeoff inherent in such statistical procedures section iii discusses the estimation of the var model using the alternative dynamic structures comparison of policy recommendations derived from the models is presented in section iv using variance decompositions anticipating that discussion the evidence from our model suggests that policy recommendations are very sensitive to changes in the dynamic structure conclusions close the paper in section v ii lag length selection procedures many previous researchers have chosen to impose equal lag lengths on each of the variables in their models 5 this approach produces parameter estimates that may suffer from bias or inefficiency depending on whether the model is under or over parameterized we use six different approaches to determine the lag specification five are based on statistical criteria with the exact criteria listed in table i for comparability we also employ the nonstatistical ad hoc procedure of arbitrarily fixing the maximum lag on all variables to be four quarters one of the statistical approaches used is the standard f test 6 the f test imposes zero restrictions on lags beyond some point and tests this restricted model against a more general lag structure the f statistic is calculated sequentially until adding another lag does not statistically improve the fit of the model two of the selection procedures use a mean squared error criterion these are mallows s 1973 c sub p statistic and akaike s 1970

inflation default and sovereign debt the role of denomination and ownership abstract emerging market governments hold mixed debt portfolios they borrow at home and abroad in both nominal and real terms this paper incorporates such a mixed debt structure into a theory of sovereign debt default and inflation the government optimally uses both default and inflation to balance its budget the portfolio structure affects the relative benefits of inflation default and incentives to accumulate debt a calibrated version of the model can account for key features of the mexican economy we use the model to study if portfolio shifts away from purely real and external debt contributed to emerging market disinflation in the mid 1990s we find that the answer depends on the distinction between ownership and denomination increasingly nominal debt is inflationary if held abroad but lowers inflation if held at home

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

who wants a good reputation we examine a market in which long lived firms face a short term incentive to exert low effort but could earn higher profits if it were possible to commit to high effort there are two types of firms inept firms who can only exert low effort and competent firms who have a choice between high and low effort there is occasional exit and competent and inept potential entrants compete for the right to inherit the departing firm s reputation consumers receive noisy signals of effort choice and so competent firms choose high effort in an attempt to distinguish themselves from inept firms a competent firm is most likely to enter the market by purchasing an average reputation in the hopes of building it into a good reputation than either a very low reputation or a very high reputation inept firms in contrast find it more profitable to either buy high reputations and deplete them or buy low reputations

true protection concepts and their role in evaluating trade policies in ldcs in many ldcs it is not uncommon to find incentives designed to encourage import substitution activities coexisting alongside incentives aimed at encouraging export activities this article evaluates a recent approach to evaluating commercial policy which among other things highlights some of the implications of simultaneously pursuing import substitution and export promotion the study develops a model which emphasises the incidence of protection and identifies the concept of true protection empirical results for a number of ldcs are discussed and the implications of these results evaluated in addition the article contrasts this approach with the effective protection approach to evaluating commercial policy

sequential equilibria in a ramsey tax model this paper presents a full characterization of the equilibrium value set of a ramsey tax model more generally it develops a dynamic programming method for a class of policy games between the government and a continuum of households by selectively incorporating euler conditions into a strategic dynamic programming framework we wed two technologies that are usually considered competing alternatives resulting in a substantial simplification of the problem

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

fiscal policy under loose commitment due to time inconsistency or political turnover policymakers promises are not always fulfilled we analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised in this loose commitment setting the properties of labor and capital income taxes are significantly different than under the full commitment and no commitment assumptions because of the occasional reoptimizations the average capital income tax is positive even in the long run also the autocorrelation of taxes is lower their volatility with respect to output increases and the correlation between capital income taxes and output changes sign our method can be used to analyze the plausibility and the importance of commitment in a wide class of dynamic problems

policy appraisal and the structure of protection in a low income developing country problems of measurement and evaluation in burundi the article provides estimates of the structure of nominal and effective tariffs and the tariff equivalents of a set of quantitative import restrictions for burundi a low income data deficient developing country it carefully indicates the assumptions and limitations of the analysis the overall conclusion of the article is that not much significance can be attached to the estimates in a cardinal sense nevertheless recommendations about altering the structure of relative incentives can be justified where these are directed at increasing transparency and uniformity

monetary vs credit aggregates an evaluation of monetary policy targets the past decade was characterized by increased emphasis upon monetary aggregates as intermediate targets for monetary policy although growth rate ranges were specified for both narrow and broad monetary aggegates as well as for bank credit the primary focus of the federal reserve was on the growth rate of narrow money however some policy makers 19 have recently expressed doubt about the viability of using narrow money as an intermediate target in particular it has been argued that recent financial innovations such as the introduction of the various now accounts the proliferation of money market mutual funds and the adoption of cash management techniques by both firms and consumers to name a few have distorted the ml1 gnp relationship thereby raising the question of whether broader monetary aggegates or even credit aggregates might bear a closer relationship to income furthermore the federal reserve has recently announced growth rate target ranges for a broad credit aggregate in addition to growth rate ranges for ml and m2 2 friedman 7 8 provides a general discussion of these issues while modiglianipapademos 18 provide a theoretical analysis of the conditions under which a credit aggregate is preferred to a monetary aggregate as an intermediate target however nothing conclusive can be said at the theoretical level since the choice between money and credit aggregates depends upon the true underlying structure of the macroeconomy hence the choice among money and credit aggregates is an empirical issue the aim of this paper is to provide evidence on the issue of credit aggregates versus monetary aggregates as intermediate targets for monetary policy the paper evaluates the characteristics of several monetary and credit aggregates in terms of two attributes of a

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

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

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

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

optimal fiscal policy in a stochastic growth model although most neoclassical growth models focus on competitive equilibria which are pareto optimal and ignore the role of government recent works by romer 28 29 judd 20 baxter and king s and bizer and judd 7 have shown that government can be introduced into and suboptimal equilibria can be studied in these models as well their studies however are positive analyses of the effects of fiscal policy in competitive equilibria the purpose of this paper is to apply ramsey s 27 theory of optimal taxation to the normative study of fiscal policy in a stocastic growth model ramsey studied a static representative consumer economy with many goods in his formulation a government consumes a fixed amount of these goods which it purchases at market prices and finances by levying flat rate excise taxes prices and quantities are determined in a competitive equilibrium the government is benevolent and its objective is to choose the optimal tax rates to maximize the representative consumer s utility a number of economists among them kydland and prescott 23 barro 3 turnovsky and brock 31 and lucas and stockey 26 have noted that ramsey s formulation can be applied to dynamic economies with uncertainty if one reinterprets the goods in static problems as dated state contingent goods in this framework a fiscal policy is a rule which specifies state contingent tax rates and the amount of public debt issue in each date the optimal fiscal policy is defined as the one which leads to a quantity